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Economic policy, as simple as it may sound is actually much more widespread and complicated than that. People actually imply two things when they are talking about ‘Economic Policy’. Sometimes they mean the attainment of economic ends by means of political techniques: the ‘economic’ aspect of economic policy or they mean the attainment of non-economic political ends by means of economic techniques: the ‘political’ concept of economic policy. The two concepts are perhaps incompatible with each other since one establishes the dominance of economics over politics whereas the other claims politics to be a stronger factor. It is the relation between the two that acts as a central factor in economic policy making. 

This article talks about the extent to which domestic and international factors affect economic policy making. It, therefore, becomes very important to first identify the factors that play a role in determining economic policy. Hence we need to understand the relationship between political and economic forces in order to have a clear picture about economic policy. What makes it interesting to answer the question is that the factors are so connected that it becomes really tough to know the exact impact of one factor. We shall analyse individually the factors associated with various areas of economic policy making.

Economic Regulation

The ideal economic policy is a simple one - Government should protect and defend the rights of the people and otherwise allow them to pursue their goals and ideas. This thought goes hand in hand with those of the classical economists who call for minimal government intervention and a free and fair market. However governments today do not follow such approaches. More and more intervention by the government can be seen these days. It is asked to control and regulate production, raise and reduce prices, fix wages and also regulate trade. Economic Regulation has become a rather important aspect of economic policy these days. There are various theories that influence such policy change – public interest theories, interest group theories, ideological shifts and institutional theories (Baldwin, 2011). Public interest theories revolve around public interest objectives. It is based on immense trust over the public spiritedness and efficiency of expert regulators. The interest group theory, on the other hand, stresses that regulation is not driven by public but self-interest. The regulator’s interest lies in re-election and hence he will reward those who shall support it in the election. There are other theories which state that policy change towards regulation can also be an ideological or an institutional shift. Ideas stress the importance of wider intellectual and political climate in shaping regulation.

Economic Liberalisation

In the past few decades, we have seen governments opening up the national economy to global market. This has been characterised by the removal of rules and regulations that block free trade between nations. Such policy change might be due to immediate economic issues (currency crisis, economic recession) rather than the result of interdependent state behaviour. Economic liberalisation may also be due to preferences of liberal democracies. Such preferences may alone lead governments to respond similarly, but independently to the conditions they face (Simmons and Elkins, 2004). It may also be a result of independent decision making which is due to domestic factors like interest groups, ideology and parties and political institutions. Another factor that plays a role in liberalisation policies is called policy diffusion. Countries that liberalised experienced higher average growth and investment rates than before liberalisation. This resulted in policy diffusion as other countries started implementing such policies as well.  Liberalisation may also be as a result competition between nations in order to attract capital and export market share to boost their aggregate growth. Liberalisation makes economies a more attractive capital and trade destination. Sometimes the governments are in a state where they are not completely sure of what policies to implement. As a result, they choose policies which have been successfully implemented by other nations.

Privatisation

Privatisation shifts the responsibility from government to the private sector thus causing an institutional shift and thereby changing the way in which the entire sector or industry operates and also the way in which consumers interact with it. Some groups in a privatised sector have their interests more clearly defined than the other thus showing that privatisation is an intensely political phenomenon rather than an economic one as emphasized by most literature. Privatisation is often undertaken to fulfil short term political objectives of particular parties, politicians or interest groups. It is done to reward groups that had supported the particular party in the election and also to attract potential supporters. It shows a strong interaction between corporate sector and party political activities. Privatisation can also be done by the government to reduce its debt and improve its fiscal space.

Taxation

It is perhaps the most important aspect of the economic policy – the revenue source of the government. Earlier there used to be very high tax rates along with a lot of relaxations in investments and controls regulating capital exports. However, post-1990s there was various changes in tax policies. Tax rates dropped significantly along with the removal of a number of relaxations which were earlier granted.

Such changes in taxation policy may be as a result of capital being increasingly mobile. This possesses substantial problems for governments who seek to tax these mobile capital. Mobile asset holders are open to moving their asset to international markets where they shall get the best possible return. Governments of all ideological complexions not only have to consider the domestic environment of business investment decisions but in a world of high capital mobility, they also have to consider international investment climates and policy assessments of international market actors and mobile enterprises. Thus the governments have to reduce tax rates to the lowest possible level. (Swank and Steinmo, 2002). Taxation policies are often used as tools by politicians who seek to please voters in order to increase their chances of re-election. Politicians are well aware of the preferences of the voters and hence frame taxation policies in a manner that it shall satisfy certain interest groups. Policies are sometimes biased, in favour of certain businesses who are expected to support the party in the election. Tax policies need to be framed such that they encourage people to work, to invest and to take risk.

Conclusion

The changes in the policy are a result of factors acting interdependently rather than independently. The factors can be largely divided into three areas – political, economic and social. Political factors largely include the interest of the politicians for re-election which is why particular policies are framed prior to elections to woo voters. This, however, has adverse long term effects on the economy. Economic factors include both short and long term economic issues. Certain policies are announced in order solve immediate economic problems while others have long term aim. Social factors mainly include ideological shifts of the masses. Economic Policy is thus affected by various factors which have been analysed with respect to individual areas of the policy.

References –

Baldwin, R., 2011. Explaining Regulation. Understanding Regulation: Theory, Strategy and Practice. London: Oxford University Press

Simmons, Beth A., and Elkins, Z., 2004. The globalization of liberalization: policy diffusion in the international political economy. American Political Science Review [online] 98(1): 171-189. Available at http://nrs.harvard.edu/urn-3:HUL.InstRepos:3157884

Swank, D. and Steinmo, S., 2002. The New Political Economy of Taxation in Advanced Capitalist Democracies. Midwest Political Science Association [online] 46(3): 642-655. Available at http://www.jstor.org/stable/3088405

Hall, Peter. A., 1997. The Role of Interests, Institutions and Ideas in the Comparative Political Economy of the Industrialized Nations

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Written By Purushottam Mohanty

Economics Undergrad | Delhi University

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