The economic policy of any country is a set of norms laid down by the government to attain its economic objectives. Based on these norms or regulations the government adopts actions to reach the economic goals. The economic policies have a major impact on the society and the economy.
Policies govern to a large extent, the average earning and expenditure level of the people, the consumption patterns, the saving habits, investments etc. In others words the economic policies of a country determines the magnitude and direction of economic activities in that country.
Generally the major constituents of economic policy are –
Economic Policy Reforms
Reforms are undertaken by governments or other regulatory or decision making bodies to bring about desired changes in the economic system of a country. While in most countries the government itself undertakes policy reforms, in some countries, apex economic institutions like Central Bank, Planning bodies, Finance Commissions etc. are empowered to structure reforms which are generally passed by the government.
The changes in economic system brought about by economic policy reforms are generally major in nature. While minor changes in the economic system can be brought about by changes in the tax structures, price control measures, etc., major changes as to the way of functioning of the overall economy can be brought about by economic policy reforms.
It is desirable that economic policy reforms are not radical in nature. Mostly, reforms are adopted on a step by step or cumulative basis. This helps the economy to gradually adjust and acquaint itself with the changes. It also helps to sustain the initial temporary crisis that generally accompanies the reforms. Once the dust settles down a new economic equilibrium comes into play.
Key constituents of economic policy reforms are Fiscal policy reforms, monetary policy reforms and regulatory reforms.
Fiscal policy reforms
Fiscal policy reforms are the reforms in the taxation policies and government expenditure policies. These are major factors in the economic policy reforms. The government can boost up or slow down an economy by fiscal policy reforms.
The following measures can be taken with respect to fiscal policy reforms –
Taxes – If the government wants to boost up the level of economic activities substantially, they can cut down the rates of direct taxes like income tax, etc. and indirect taxes like sales tax, toll tax, excise duties, entertainment tax, etc. On the other hand, if due to inflation, or some other reason, the government decides to slow down the level of economic activities they can do so by hiking up direct and/or indirect taxes.
Government spending – Increasing government spending by means of subsidies, grants, etc. would help to boost up economic activities. On the contrary, cutting down government expenditure would low down economic activities.
Monetary policy reforms
Monetary policy reforms are carried out by bringing about changes in interest rates, volume of money supply etc.
Again the motive of the reforms would determine the approach of the government –
Interest rates – Interest rates can be brought down to boost the level of economic activity. However, if a slow-down approach is adopted, then higher interest rates should be introduced in the economy.
Supply of Money – The money supply growth rate in the economy can be reduced to slow down the economy or increased to boost it up.
Regulatory policy reforms
Regulatory policy reforms determine the extent of government control over the economy. While socialist economies may have strong regulations to control economic activities, liberal laissez-fare economies follow lesser regulation and open market policies. An economy that wishes to open up its economy will pursue deregulatory reforms to ease the regulations on the economic agents. On the other hand if an economy wishes to move towards a centrally controlled economy, it will carry out regulatory reforms aimed at exercising more control on the economic activities.
In the last two decades, since early 1990s a lot of countries have adopted significant economic policy reforms. Third world countries feature prominently in this list. Economies like China and India have made significant economic policy reforms and have ensured high growth rates for their economies.
Last Updated on : 26th June 2013