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Macroeconomics a short guide to the options

bulletGrowth which is fair
bulletThe Limits to Growth
bulletStriking a balance
bullet Business
bulletGovernment
bulletOrdinary people

Macroeconomics is the study of how wealth is, and should be, created and distributed within and between nations. Different experts have different ideas.

Growth which is fair

The world as a whole is becoming richer but some nations are falling further into poverty and debt. Some of the individual nations that are becoming richer have groups of people who are getting poorer in the process. Most people believe that this uneven pattern of growth is unfair. So what should be done?

Some experts believe that when the rich get richer the economy as a whole will grow, everybody will get richer, and poverty will automatically disappear. These experts believe that the ‘market’ should be free and open so that the rich people can get rich quick and be the engine of progress. This is popularly known as the Trickle Down Effect and the macroeconomic suggestion is for a capitalist economy.

Other experts are worried that as the rich get richer the poor get poorer, at least in the short term. These experts believe that Governments should control the rich people to some extent and provide safety nets so that the poor do not suffer too much. The problem is popularly referred to as the Widening Wealth Gap and the macroeconomic suggestion is for a mixed economy.

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The Limits to Growth

Other experts give three reasons why the ‘modern’ way of living is not possible for everybody.

bulletSome natural resources like coal and oil cannot be replaced and they will soon be finished.
bulletNearly all the land that could be used for agriculture and livestock is already being used. There might be some improvements in farming and livestock grazing but there is a limit to how much food we can produce.
bulletMany of the modern agricultural and industrial processes are destroying and poisoning the land, sea and air.

These experts argue that, in the long run, there is more to economics than just money. Who can call it progress if a nation ends up with more money but also with more poor people and with a ruined environment and a lot of pollution? These experts believe that the best macroeconomic policies make it possible for people to work together to design new ways of living that strike a balance between economic, social and environmental forms of development. This is popularly known as pro-poor growth and the macroeconomic suggestion is for sustainable development.

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Striking a balance

Macroeconomic policies have to balance the needs and interests of Business, Government and ordinary people. The process involves negotiation and compromise. The following table shows some of the main issues and how the three different groups might look at them.

The Issues

What is good for -

Business

Government

Poor people

Land & Raw materials

owned by business

state owned

locally owned

Environmental Protection

no

yes

yes

Anti Pollution Laws

no

yes

yes

Cost of labour

low

low/high

high

Education level of labour

high

high

high

Health of the labour force

high

high

high

Direct taxation

low

high

low

Indirect taxation

low

high

low

Import & export duties

low

high

low

Foreign exchange controls

no

yes

no

Rate of Inflation

low

low

low

GDP & GDP

high

high

high

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 Business

The businessman wants total ownership and control of the land and natural resources that he is using. If he destroys the environment and causes a lot of pollution he does not want to pay for cleaning up the mess. He also wants a healthy labour force that is educated and learns jobs quickly. He is willing to pay them a living wage that leaves a good profit for his business and to investment the surplus as he sees fit or to export it to foreign banks.

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Government

A good Government wants the people to be healthy, happy and well educated and it wants to look after the environment so that we can pass it with pride to our children.

The Government needs money to pay for its plans and it comes from five sources:

bulletDirect Taxes eg income tax, property tax,
bulletIndirect Taxes eg customs and excise duties, sales tax
bulletNon-tax revenue eg licences, fees and charges
bulletProfits from State owned enterprises eg power generation, telecommunications
bulletLoansand Credits eg from the International Monetary Fund (IMF) World Bank, sale of government bonds, etc
bulletGrants & Donations eg from other governments and from NGOs

Raising taxes is never popular and some kinds of tax are harder on poor people than on rich people. Loans and bonds are useful for filling short-term gaps, and for getting new businesses started, but they have to be repaid. Government run enterprises rarely return a profit. Grants and donations are very welcome but we cannot expect them to continue forever.

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Ordinary people

Ordinary people want to be healthy, happy and well educated and most want to own and look after a piece of land that they can pass to their children. They also want to be well paid for the work that they do and they prefer to pay as little tax as possible.

And everybody is happier when the rate of inflation is low and when the economy is growing and everyone is getting better off.

So the government does not have an easy job. It has to convince both businessmen and women and ordinary people that when they pay their taxes and other dues they will get value for money. For this to happen the Government needs to be efficient, honest and open about what it does.

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