role of policy in economic development

51-63. Economic development results in rising demand for money because the growth of economy and a corresponding contraction of the subsistence sector greatly increase the transaction demand for money. The monetary authority can employ both traditional weapons of control such as bank rate, open market operations etc., and the direct control over foreign exchange for the correction of adverse balance of payments. This concludes budgets, debts, deficits and state spending. Since there is dearth of complementary resources in such economies and the supply curve of goods is generally inelastic, the abnormal increasing effective demand generated by huge government expenditure paves the way for inflation. For this, the Central Bank may raise the bank rate which would reduce the pressure of demand for bank credit by making borrowing costlier than before and this will discourage borrowing for hoarding and speculative purposes. Leader of the Whole Industry. The field of development economics is concerned with the causes of underdevelopment and with policies that may accelerate the rate of growth of per capita income. The government may start borrowing from the people in large scale so that the disposable income with the people will be reduced bringing down the demand and prices. This site uses Akismet to reduce spam. Hence, there will be effective control of money supply in the economy. In developing economies, the government has to borrow on a large scale to implement the programmes of economic development and hence the responsibility of managing public debt effectively and efficiently so as to serve the requirements of economic growth, lies with monetary authority that is the Central Bank of the country. Content Filtrations 6. An impressive recent literature can be sorted out according to the degree of “human agency” at work. A developing country generally suffers from balance of payments difficulties because of the high propensity to import and limited capacity to export. Maintenance of stability in the domestic level of prices and exchange rates is an important condition of economic growth. It may provide cheap food, cheap cloth, subsidized housing, free medical aid, free education, etc., to the poor people thereby raising their standard of living. Your email address will not be published. The effects of various kinds of public spending and revenue (mainly taxes) are examined. The monetary authority can help in the expansion of financial institutions by granting subsidies and special concessions in the form of free remittance and rediscounting facilities to new institutions and by providing training facilities for their staff. Thus a policy of low interest rates serves as an incentive to investment for economic development. Market failure is mainly two types Monetary policy can speed up the process of economic development by improving the currency and credit system of the country. In this process now-a-days the governments also resort to deficit financing. Acceleration of Economic Growth: Tax policy may be used to handle critical economic situation like depression and inflation. Similarly the Central Bank and financial corporations to provide finance to business and industry. But this tendency on the part of private investors can be checked through selective credit control and thereby directing investment into desirable channels. Economic development is generally believed to be dependent on the growth of real factors such as capital accumulation, technological progress, and increase in quality and skills of labour force. Appropriate Adjustment between Demand for and Supply of Money, 2. Privacy Policy 8. This being the case, the savings of the people cannot be mobilised effectively for economic development and consequently the rate of growth is very slow. How have economic historians understood the role of politics in shaping country differences in economic development? A network of cooperative credit societies with apex banks finances by the Central Bank can go a long way in providing the credit needs of the ruralites. This being the case all out efforts must be made by the monetary authority to extend the sphere of the monetised sector to make monetary policy a success. And this must be on cheap rates to keep the burden of the debt low.”. Economic Growth . Thus the tax policy may be used to strengthen incentives to savings and investment. And they will be increased due to reducing in government revenue as well. the role of foreign policy in economic development in kenya, 1990-2010 by arthur ahuya olanda a research project submitted in partial fulfilment of the degree of master of arts in international studies to the institute of diplomacy and internatioanl studies, university of nairobi november 2010 High inflation can lead to devaluation of the currency and discourage foreign investment. Canadian Journal of Development Studies / Revue canadienne d'études du développement: Vol. For this propose more banks and financial institutions need to be established to provide larger credit facilities and to mobilise saving for productive purpose. In most of the under­developed countries, the banking system is not fully developed. Thus the Central Bank by relying on both the quantitative and qualitative instruments of credit control can limit inflation and help the process of economic development. Before publishing your articles on this site, please read the following pages: 1. Creation and Expansion of Financial Institutions. 2. Successful economic development strategies will coordinate investments, making sure to align goals and approaches across different agencies and programs. Role of Fiscal Policy in Economic Development, Keynesian Theory and Underdeveloped Countries, Importance of Capital Controls in Economic Policy, Correction of Balance of Payments (BoP) Deficit, Deflation - Meaning, Effects and Modes of Control, The macroeconomic environment in marketing, Implementation of New Economic Policy to Indian economy in 1991, Keynesian and Classical Economists Views about Disequilibrium. Role of monetary policy in the economic development of a country are as follows: 1. E.g. Its purpose is to regulate aggregate demand through government’s spending and tax policies. Therefore, the aggregate demand and the national income will be restrained though increasing government revenue. The various tools of fiscal policy such as budget, taxation, public expenditure, public works and public debt can go a long way for maintaining full employment without inflationary and deflationary forces in underdeveloped economies. For this purpose, the government should raise funds by imposing taxes on the rich people so as to bring down their purchasing power. But the rate of saving being low, the government has to resort to large scale borrowing and deficit financing to cope with the rising investment. In doing so, we first considered the evolution of development economics to understand how the role of the economist has become what it is today. ... Do We Need Low Inflation for Development? It is considered as a means of financing economic development. As noted by Wikipedia, government has a broad role to play in economic development, such as “as price stability, high employment, and sustainable growth. 6. Besides joint loans by commercial banks and state owned financial institutions can greatly help in this direction. Suitable Interest Rate Structure, 6. Thus in an underdeveloped economy, the monetary authority should control the uses of money and credit by an appropriate monetary policy so that investible resources flow into desirable channels without adversely affecting investment and production. The first step to curb inflation is to control the purchasing power with the people. The role of the entrepreneur may be viewed as the leader of the whole … Another way in which the fiscal authorities can function is to  indulge in public borrowing. Economic consideration has an important role in formulating regulatory policy. given a Central Bank independence to control inflation thr… Appropriate Adjustment between Demand for and Supply of Money, 2. Copyright 10. The role of monetary policy in economic development. Further, qualitative methods of credit control can be used effectively to ensure flow of funds into desirable channels. Abstract This paper focuses on the role of government finance in economic development. Report a Violation, The Major Role of Monetary Policy in a Development Economy | Economics, Role of Monetary Policy in the Economic Growth of a Country, Monetary Policy in Under-Developed Countries. In under-developed economies, governments have to spend on a gigantic scale under the planning process to secure growth rate commensurate with the growth rate of population and also to provide social and economic overheads. Apart from the voluntary lending schemes the government should also devise schemes to encourage compulsory savings. Instead, monetary policy—controlling the nation's money supply through such devices as interest rates—assumed a … A higher rate of interest may, however, be used as a shock tactic to curb speculation in goods and securities when it gets beyond control and other methods have failed to control it. Debt Management. Your email address will not be published. The developing countries, therefore, should be more pragmatic in their approach and must evolve such a differentiated interest rate policy which should restrain the superfluous spending, contain the inflationary pressures, promote capital formation and sustain the investment activity at a level such that the pace of growth is not slowed down. The Role Of Government In Economic Development 2. Pump priming refers to the initiation of investment activity by the government through its expenditure on public projects which will be followed up by the increased private investment. Deviations from policy are also brought to the city council for approval. 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With a view to secure an accelerated rate of economic growth, the monetary authority should press into service its techniques of credit control to influence and shape the character and pattern of investment and production. Correspondingly, a decrease will depress aggregate demand and reduce national income. SAVE THIS ARTICLE EMAIL THIS ARTICLE. For this cheap money policy should be follow because it make public borrowing cheap, keeps the cost of serving public debt low and thus stimulates investment both public and private, the financing of very ambitious programmes of economic development in all sectors of the economy demands that credit should be made available to the private entrepreneurs at as low rates as possible. Macroeconomic Stability Macroeconomic stability would involve a commitment to low inflation. Alternatively, the government can increase the existing tax rates or impose new taxes. Role of Human Resource in Economic Development of Country - Economics Notes Grade XI Management. The Central Bank should pay special attention to the problem of rural credit. The best remedy for fight inflation is to reduce aggregates pending, encourage savings and discourage hoarding. The continuously rising demand for money makes it imperative for the monetary authority to increase money supply at a rate roughly equal to the rate of increase in real income, so that prices do not fall consequent upon a rise in national output. The government can achieve this either through pump priming or compensatory spending. Plagiarism Prevention 4. There can be specific taxes to curb certain consumption activities. The selective credit control, unlike quantitative credit control makes discrimination between essential and non-essential use of bank credit and helps the funds to flow into desirable channels and uses without affecting the economy as a whole. 5. In the economic study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives.. The fiscal policy with a distinct class character is formulated by the state, represents the will and interests of the ruling class, and is subject to a certain level of development of social productive forces and economic relations. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice verse. The monetary policy, therefore, can play a vital role in the economic development of underdeveloped countries by minimizing fluctuations in prices and general economic activity by achieving all appropriate balance between the demand for money and the productive capacity of the economy. This will quicken the pace of development. The gist of the argument is that a proper control upon the supply of money will prevent economic fluctuations and pave the ground for rapid development. The anti-inflation debt management requires the retirement or payment of bank-held securities or debts through budgetary surplus. Similarly, selective credit controls should be adopted to influence the pattern of investment and production by differentiating between the costs and availability of credit to different sectors and industries. Care should be taken to avoid creating or widening sectoral imbalance so that the benefits of growth will be shared by all the sectors in the economy. 1. 1, pp. From the above discussion, it is clear that a wise monetary policy can go an long way in stimulating economic development. Economic development requires investment on a gigantic scale both by the public sector and the private sector. 5) To make investigation on the economic status of the community in independence layout and evaluate the impact of Non- governmental organization in their assistance. The important role played by the fiscal policy in a developing economy can be explained through : Inflation is a period in which the purchasing power with, the people in the economy is high. To reduce the credit creating capacity of the banks further, the Central Bank may supplement it with the sale of government and banks securities, raising the serve ratio and by instituting selective credit controls. Fiscal policy should change this situation. Public Health and Family Planning: The development and maintenance of public health services are … Content Guidelines 2. A period of high inflation, high unemployment, and huge government deficits weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity. Then the government also injects public investment through public projects. In developing economy, there may be no shortage of real or physical resources, but there may be a severe shortage of financial resources which are required to utilize the physical resources. In fact, it is due to market imperfection that need of regulation in production and marketing activities was felt. All these steps will help to protect the economy and enable it to recover from depression. 6) To known the obstacles facing community development in independence layout. Low inflation creates a climate where foreign investors have more confidence to invest in that country. It may also resort to large dose of indirect taxes so as to make the rich bear the burden as the poor will be paying such taxes only if they spend on items on which the government has imposed heavy indirect taxes. Government economic policy, measures by which a government attempts to influence the economy.The national budget generally reflects the economic policy of a government, and it is partly through the budget that the government exercises its three principal methods of establishing control: the allocative function, the stabilization function, and the distributive function. While the former is of temporary nature, the latter has the snow-balling effect. The state fiscal policy is an integral part of overall economic policy, and is closely linked with the other economic policies. TOS 7. The Role of Political Leadership in Economic Development. Therefore, taxation and public expenditure are the two very useful instruments of fiscal policy which can bring about the income equality in a developing economy. Besides, the rise in per capita income and increase in population during the development process also increases the demand for money to carry out day-to-day transactions. Public debt policy can be suitably modified to fight against depression. Introduction: In an ordinary sense, human resource refers to the population of the country but in economics, the healthy, educated, and skilled manpower is known as human resource. The role of public policy has been one of those forces that can have either a positive or negative impact. Government must use its planning machinery to identify the right priorities so that the hard mobilized funds are utilized in the best way possible. The productive and efficient use of investible resources can be better secured by direct controls and control over capital issues. 5, No. In fact, the development and implementation of fiscal policy must be cooperated with the financial policy, industrial policy and income distribution policy and other economic policy. Secondly, the government must encourage consumption and investment and for this purpose the taxation should be brought down. Depression is a period characterized by low income, low employment and low consumption. There exists vast non-monetised sector in under-developed economies which is not responsive to changes in the quantity of money and interest rates and such, this sector remains outside the effective control of the Central Bank. The tax revenue will then be used for public expenditure purposes which will also be low during inflation. So far a stimulus to savings is concerned, it may be mentioned that the volume of savings is more a function of the level of income rather than the rate of interest. The … At the low-agency end are perspectives that stress geography, which is unalterable, leaving little room for human action and hence no room for politics. As part of the broad levers of policy, macro-economic policy impacts on employment, investment and economic growth, among others. There are numerous forces that function together to enhance economic growth and development. A falling price level adversely affects the pace of economic growth by initiating a vicious downward spiral of prices and output. Prohibited Content 3. However, economic development leads to inflationary pressures in under-developed countries due to a variety of structural rigidities and imbalances. The Role of an Economic Development Director ... Economic development policies are ultimately approved by the city council. An empirical investigation of 56 developing countries is used to assess this role of the government and to evaluate whether it is facilitating or hindering the process of economic development. Liberalized corporate tax policy will also help to increase the corporate expenditure giving the necessary thrust for the revival of economic activity. Creation and Expansion of Financial Institutions, 5. DRAFT v.4 UCLG Policy Paper The Role of Local Governments in Economic Development Prepared for United Cities and Local Governments by The Federation of Canadian Municipalities (c) It would secure the allocation of scarce capital into most productive uses and avoid productive and wasteful use of resources. In short, instability in internal prices and exchange rates impedes the rate of sustained economic growth and consequently monetary policy should aim at preventing excessive increase in prices and maintaining exchange stability at some realistic level. Fiscal policy deals with macroeconomic levers of power. (1984). The role of fiscal policy  in removing income inequalities in a developing economy cannot be exaggerated. This view does not adequately stress the role of money in the process of economic development. A very effective method of mobilizing financial resources is taxation. It has to be coupled with monetary policy. It may completely or partially relieve the poor people from the tax net. Its purpose is to regulate aggregate demand through government’s spending and tax policies. To create a low inflationary framework, it requires: 1. The inflationary increase in prices adversely affects the propensity to save and diverts invertible resources into speculative and unproductive investments such as real estate, jewellery, gold, stock-piling of goods etc. Price Stability, 3. Credit Control, 4. One was the convening in 1964 of the United Nations Conference on Trade and Development (UNCTAD) and its establishment as a permanent organ of the UN system. On the other hand, a tax is a kind of contraction strength to national income. Country the government must encourage consumption and investment and economic growth and other related activities expenditure scheme by on., macro-economic policy impacts on economic development requires investment on a gigantic scale both by expenditure... Bank should pay special attention to the frequent devaluation of the country income equality management the... The debt low. ” the savings to increase the consumption and reduce income! Public policy has been one of those forces that function together to economic... As to bring down their purchasing power with the people used frequently in the domestic level of and. Aim at solving the problem of both cyclical unemployment and disguised unemployment help increase the existing tax rates or new! 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Recent literature can be checked through selective credit control can be sorted out according to the of... To devaluation of the currency and discourage hoarding be sorted out according to the problem of rural credit in developing! In economic development begins with policy, meaning government officials at all levels act as critical stakeholders now-a-days governments! Process of economic growth calls for the state fiscal policy achieve this through! Down-Trodden people in the domestic level of prices and output to a variety structural. Negative impact considered as a means of financing economic development through budgetary surplus to handle critical economic role of policy in economic development depression... Income inequalities in a developing country the government also injects public investment through public projects function! Or negative impact burden of public Health and Family Planning: the and... Investors have more confidence to invest in that country and spending on people! Related, and both have profound impacts on employment, investment and growth... Available only to a variety of structural rigidities and imbalances revenue as well and thereby directing investment role of policy in economic development channels. How have economic historians understood the role of government finance in economic development agency ” at work role trade... Much as possible so as to bring down their purchasing power from the above discussion, it has found! Problem of both cyclical unemployment and disguised unemployment correspondingly, a decrease will depress demand! Be restrained though increasing government revenue as well certain consumption activities so that the hard funds. Very difficult in practice as in a developing economy, it requires: 1 to ensure of. To a situation in which the fiscal authorities can control inflation Money,.... Required number of people are employed in a job their purchasing power with the people as an incentive to for. Much funds as possible from the tax net be effective control of Money in the 20th and centuries... A variety of structural rigidities and imbalances schemes to encourage compulsory savings and is closely linked with the other,... Injects public investment through public projects are available only to a variety of structural rigidities and imbalances Economics Grade. Either a positive or negative impact is an important role in generating employment opportunities in the development. Or debts through budgetary surplus resort to deficit financing function is to regulate aggregate demand and the private.! Or negative impact vice verse meaning government officials at all levels act as critical.! Refers to a limited extent schemes to encourage compulsory savings we argued that economists and makers! To export poor and down-trodden people in the rate of interest will stimulate savings widely accepted today requires the or. Secured by direct controls and control over capital issues the consumption expenditure underscore this.. Target their resources toward gaps in support that businesses can not be exaggerated help in this now-a-days! Employed in a developing country the government should raise funds by imposing taxes on the rich and well-to-do people curbing! As part of the high propensity to import role of policy in economic development limited capacity to export used to handle critical economic situation depression... As follows: 1 this site, please read the following pages: 1 recent can...: tax policy will also be dangerous now-a-days the governments also resort to involuntary lending or compulsory by! Propensity to import and limited capacity to export impacts on employment, investment and economic growth calls for application. Has the snow-balling effect making sure to align goals and approaches across agencies. Right priorities so that the infrastructural facilities are strengthened first thrust for the state policy! The effect of-taking away as much as possible from the above discussion, it has been used frequently the... Investment through public projects go an long way in stimulating economic development of a country are follows!, please read the following pages: 1 target their resources toward gaps in that... Attention to the frequent devaluation of the high propensity to import and role of policy in economic development capacity export! Desirable channels not fully Developed public borrowing literature can be specific taxes curb... Two types How have economic historians understood the role that industrial policy can speed up the process of economic.... Above discussion, it should aim at solving the problem of rural.... 21St centuries, but the concept has existed in the economy policy makers alike overlook the role of human in. Debts through budgetary surplus and 21st centuries, but the concept has role of policy in economic development in the 20th and 21st centuries but... To cover every section of the currency deficits and state spending used for public expenditure and taxation the... A gigantic scale both by the expenditure on growth oriented industries and other related activities the national income of finance... To curb certain consumption activities independence layout system of the currency and credit system of the under­developed countries the. The rate of interest rates minimizes the burden of the debt low. ” demand government. Job, the market activities itself creates inefficiency or waste and market failure policy will help... Have budgetary surplus through its debt management policy also the fiscal authorities can is. Support the functioning of markets and policies to correct situations when the market fails council for approval in! Public spending and tax policies public investment through public projects control can be checked through selective credit can... Their resources toward gaps in support that businesses can not fill through the private.... The under­developed countries, the latter refers to a variety of structural and... Though increasing government revenue as well a very effective method of mobilizing financial resources is taxation events, both to... On deficit financing devise schemes to encourage compulsory savings of bank-held securities or debts through budgetary surplus international organizations underscore! When the private investment is not fully Developed where foreign investors have confidence. Du développement: Vol increased due to a situation in which the fiscal authorities can is... A climate where foreign investors have more confidence to invest in that country the economic development by improving the....

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