Macroeconomics a short guide to the options
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.
The Limits to Growth
Other experts give three reasons why the ‘modern’ way of living is not possible for
everybody.
 | Some natural resources like coal and oil cannot be replaced and they will soon be
finished. |
| Nearly 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. |
| Many 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.
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 |
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.
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:
| Direct Taxes eg income tax, property tax, |
| Indirect Taxes eg customs and excise duties, sales tax |
| Non-tax revenue eg licences, fees and charges |
| Profits from State owned enterprises eg power generation, telecommunications |
| Loansand Credits eg from the International Monetary Fund (IMF) World Bank, sale of
government bonds, etc |
| Grants & 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.
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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