The recent financial and sovereign debt crises triggered calls for bold structural policies in several euro area countries, while declining growth in many developed and developing countries pointed to a need for fiscal, financial, institutional, and regulatory reforms to enhance productivity and raise growth and employment. Structural policies not only help raise economic growth; they also set the stage for successful implementation of stabilization policies.
1 Governments in some countries set the prices for certain goods and services—such as electricity, gas, and communication services—below production costs, particularly when the goods or services are produced by government-owned companies. These price controls lead to losses that the government must make up—which can cause budget and stabilization problems. Moreover, controls encourage higher consumption than would be the case if the prices of goods and services reflected the true cost of production. Price controls lead to missallocation of resources.
2. Complex tax laws and inefficient systems of tax administration, can make it difficult to raise sufficient public revenue, which often leads to large budget deficits and accumulation of debt (a stabilization problem). That in turn can restrict a government’s ability to finance development needs such as health care services, education, and infrastructure projects. Tax reforms can facilitate taxpayer compliance and raise revenue by removing exemptions, requiring advance payment of estimated tax liabilities, and simplifying the tax rate structure. Improved tax administration can also increase revenue.
3. Government-owned enterprises make up a considerable share of the economy in some countries. Some operate efficiently and in the best interest of consumers. But often, because there is little if any competition, government-owned businesses deliver low-quality goods and services. Public businesses that compete with private firms often operate at a loss because of political influence or higher operating costs (as a result of unneeded workers, for example), and the government must make up the losses. Stabilization problems can arise if these government enterprises have to borrow from commercial banks to cover the losses. The loans are usually guaranteed by the government, which imposes contingent liabilities on the government budget because the government will have to pay if the enterprises don’t.Countries with large state-owned enterprises could sell them to private individuals or firms. Or they could appoint efficient management an run them as private firms operating with profits and in the best interest of the economy.
4.Underdeveloped or poorly regulated financial systems in some developing countries could hamper economic growth and make it more difficult to conduct stabilization policies.
Regulated interest rates produces missallocation of resources,these should be market rates.
Underdeveloped or poorly regulated financial systems in some developing countries could hamper economic growth and make it more difficult to conduct stabilization policies.
Inadequately regulated banks may engage in risky behavior that leads to banking crises—such as a “run,” when worried depositors rush en masse to take out their funds, or a failure, which is generally the result of bad lending practices. But even sound banks can fail if they get caught up in a systemwide run that exhausts the cash they have to pay depositors. Banking crises can interrupt the flow of funds to borrowers, discourage saving, and lead to higher government deficits if the state guarantees deposits or recapitalizes.
To mitigate crises, policymakers must shore up the financial system through effective regulation and supervision.
5.Governments often have programs designed to safeguard a minimum standard of living for the poor and other vulnerable groups. But in many developing countries some costly programs—like fuel and food subsidies—are poorly targeted and benefit the rich more than the poor.
To focus on the needy, governments could give low-income households vouchers for basic food items or distribute food only in areas where the poor live. The government could also replace food and fuel subsidies with cash transfers. Pension programs can be changed so that benefits are aligned with projected revenues by raising the retirement age or fully funding pension systems.
Source: IMF Finance and Development. Back to basics.
1 Governments in some countries set the prices for certain goods and services—such as electricity, gas, and communication services—below production costs, particularly when the goods or services are produced by government-owned companies. These price controls lead to losses that the government must make up—which can cause budget and stabilization problems. Moreover, controls encourage higher consumption than would be the case if the prices of goods and services reflected the true cost of production. Price controls lead to missallocation of resources.
2. Complex tax laws and inefficient systems of tax administration, can make it difficult to raise sufficient public revenue, which often leads to large budget deficits and accumulation of debt (a stabilization problem). That in turn can restrict a government’s ability to finance development needs such as health care services, education, and infrastructure projects. Tax reforms can facilitate taxpayer compliance and raise revenue by removing exemptions, requiring advance payment of estimated tax liabilities, and simplifying the tax rate structure. Improved tax administration can also increase revenue.
3. Government-owned enterprises make up a considerable share of the economy in some countries. Some operate efficiently and in the best interest of consumers. But often, because there is little if any competition, government-owned businesses deliver low-quality goods and services. Public businesses that compete with private firms often operate at a loss because of political influence or higher operating costs (as a result of unneeded workers, for example), and the government must make up the losses. Stabilization problems can arise if these government enterprises have to borrow from commercial banks to cover the losses. The loans are usually guaranteed by the government, which imposes contingent liabilities on the government budget because the government will have to pay if the enterprises don’t.Countries with large state-owned enterprises could sell them to private individuals or firms. Or they could appoint efficient management an run them as private firms operating with profits and in the best interest of the economy.
4.Underdeveloped or poorly regulated financial systems in some developing countries could hamper economic growth and make it more difficult to conduct stabilization policies.
Regulated interest rates produces missallocation of resources,these should be market rates.
Underdeveloped or poorly regulated financial systems in some developing countries could hamper economic growth and make it more difficult to conduct stabilization policies.
Inadequately regulated banks may engage in risky behavior that leads to banking crises—such as a “run,” when worried depositors rush en masse to take out their funds, or a failure, which is generally the result of bad lending practices. But even sound banks can fail if they get caught up in a systemwide run that exhausts the cash they have to pay depositors. Banking crises can interrupt the flow of funds to borrowers, discourage saving, and lead to higher government deficits if the state guarantees deposits or recapitalizes.
To mitigate crises, policymakers must shore up the financial system through effective regulation and supervision.
5.Governments often have programs designed to safeguard a minimum standard of living for the poor and other vulnerable groups. But in many developing countries some costly programs—like fuel and food subsidies—are poorly targeted and benefit the rich more than the poor.
To focus on the needy, governments could give low-income households vouchers for basic food items or distribute food only in areas where the poor live. The government could also replace food and fuel subsidies with cash transfers. Pension programs can be changed so that benefits are aligned with projected revenues by raising the retirement age or fully funding pension systems.
Source: IMF Finance and Development. Back to basics.
