Macroeconomic Policy in Open Economies - Essay Example

Running Head: Economic for Business Economics for Business Insert name: Unit name: Unit code: Instructor Institution Date: Introduction The Ireland government and European Central Bank have contributed to successful growth of Irish economy into ‘‘Celtic Tiger’’ in the recent years. The economy has grown rapidly, with a double digit growth in Gross Domestic Product, before coming to a dramatic halt on 2008 because of the global recession which caused Irish GDP to contract ever since early 1980s; but last year saw the economic recovery from recession due to sound economic policies put in place by European Central Bank and government, such as friendly industrial policy, low tax rate, monetary support from European Central Bank and the cuts in government spending. The double digit growth in Irish GDP is traced after the post global economic slowdown of 2004-2007; the economic growth was averagely at 5% per annum (Artis & Nixson 265). The period marked Ireland to be the only country among the European Union members with outstanding economic growth. The Irish Real Gross Domestic Product growth as at 1997 to 2009 financial years is clearly shown (Economic and Social Research Institute). Contributors to economic success of Ireland The Ireland economy is believed to be open and trade-dependent economy within the Euro zone. Its economic openness is made known in the global mobility of its labour and capital, created by the immigration influx and high levels of Foreign Direct Investment (Hennigan 1). The other causes of economic success of Ireland include; a) Tax system Many individuals have credited the Irish economic growth to be based good tax system. The taxation rate has been very low, for both domestic and foreign investors hence creating conducive environment for businesses. The low taxation policies have been pursued by successive governments in Ireland history. b) European Union Aids The financial support from European Union has helped the Ireland government to invest heavily in key infrastructures such as road network, industries and learning institutions. The investments in infrastructures have boosted the productive capacity of Ireland economy by attracting technologically advanced businesses (Artis & Nixson 268). Its devotion to the EU has made it gain access to Europe large market, as had formerly been mostly with the UK in business partnership. c) Loan borrowing Borrowing of loans and Grants from European Central Bank and other financial institutions have helped Ireland to develop and complete other key infrastructures that were left pending. d) Industrial policies The provision of good industrial policies, for example giving of subsidies and business capital by government as well as its state corporations like IDA Ireland attracted high-tech firms (Dell and Microsoft) to relocate in the country. Many foreign companies were encourage to invest in Ireland because of low wages and tax rate, in addition to grants that were being offered by the government to support businesses. State Corporation like Enterprise Ireland availed financial and technical support to individuals with start-up ventures. Establishment of International Financial Service Centre (IFSC) in Dublin created more jobs for Ireland citizens and foreigners. e) Geographical location and population of employees Ireland is strategically placed with a favourable time zone variation that makes Irish employees work part of the day while their counter parts in United State sleep. Many U.S. corporations have been attracted to Ireland because of availability of cheap labour as compared to other European nations and the fact that government has less intervention to businesses as long as guiding principles and rules are being adhered to. The growing stability in the country that was initiated by Good Friday Agreement has continued to support a stable working environment for both domestic and foreign businesses. According to BEEA (1) the ability of Irish employees to communicate efficiently with American investors as compared to citizens from Portugal and Spain who are deeply engrossed in their national language, Portuguese and Spanish respectively has been an added advantage. This forced American investors in Europe to establish their companies’ headquarters in Ireland. Experts have argued that current per capita income in Ireland is attributed to demographic dividend of the country, where increasing ratio of employees to dependents as a result of declining fertility rate. The table below shows the national minimum wage for experienced adult employees and young people in the recent two years: Employee    Minimum hourly rate of pay % of minimum wage Experienced adult worker       €8.65 100% Aged under 18 €6.06 70% First year from date of first employment aged over 18 €6.92 80% Second year from date of first employment aged over 18 €7.79 90% Employee aged over 18, in structured training during working hours     1st one third period €6.49               75% 2nd one third period €6.92 80% 3rd one third period €7.79 90%   Other roles of ECB and government to Ireland success European Central Bank (ECB) is the establishment of the European Union responsible for administering monetary policy to the member state. The bank is one of the world’s key central banks with head office located in Frankfurt, Germany.  The primary function of the European Central Bank has been to maintain price stability within the Euro zone. The bank has helped keep inflation rate much lower in the EU states by identifying and implementing sound monetary policies, carrying out foreign exchange procedures and taking into account the foreign reserves of Ireland. The ECB practices have always been in line with the country’s central bank and have helped to boost the smooth running of the financial market of Ireland. This can be envisaged where ECB intervention in 2007 economic downturned, where it loaned billions of Euros to Irelands banks to solve credit crisis they were facing during that time. That move helped many Irish banks to stabilize their financial system.  The double digit growth in Irish economy has also been supported by sound policies of government, like no tolerance to corruption and good governance practices from political leaders. The political and economic systems are interdependent; they interact and influence each other. The sound political economy of Ireland has initiated a good working environment. The good management policies by the government have helped attracts foreign investors. The Irish government has also streamlined legal structure to speed the establishment and supervision of new and existing businesses respectively. The country’s political and economic policies was inclined in the direction of foreign direct investment; given that FDI are believed to be element that stimulate economic growth and development, through economic globalization, a move that was always planned and initiated by government through mergers, acquisitions and incorporation of new companies as well as joint venture. The labor market in Ireland has been more of government regulated as compared to other states in the Euro zone. This has created flexibility in the market for the investors, for example the labor contracts that were introduced at the market were found to be more efficient. The amendments of labor contracts by government have led to instant replacement of conventional centralized labor allocation system from the market. Under the new law all employees regardless of their status are supposed to be hired on contract basis, thus creating more job opportunities at the labor market (Economic and Social Research Institute). The incorporation of fresh graduates into the business market has boosted economic growth of Ireland. Government support of foreign direct investment is believed to have boosted the economic growth at a rate of 9.9%, attracting more foreigners to come to Ireland to establish businesses while others to work. Macro economic policies These are microeconomic policies that are pursued by government or central bank to stabilize the economy. Monetary policy This is a central bank intervention in a country, employed to control the circulation money, its cost and related interest rate into the economy. All these are geared toward bringing stability into the economy. European Central Bank in conjunction with Ireland central bank has played a major role in stabilizing the Irish economy. The use of monetary policy encompasses two key parameters, expansionary and contractionary. Fratianni et al (67) argues that expansionary policy is pursued where there is need to increase money supply into the economy, by lowering the interest rate while constractionary policy is used to cut money supply by hiking the interest rate. The regulation of circulation of money helps to control inflation rate, as failure to control may result to a severe inflation rate and extreme unemployment level. Sound monetary policy boost economic growth and exchange rate of a country. The ability of central bank to take care of the circulation of euro currency has greatly contributed to success of Ireland’s trade with overseas nations like U.S. This has been exercised based on the ECB’s exclusive right to approve the issuance of euro currencies in exchange of foreign currencies. A variety of tools have been used by the European Central Bank to control circulation of money. They comprise of an increase in interest rate, cut of monetary base and increase in reserve requirements. The deliberation and implementation of monetary policy by ECB has mostly been reached after the consultation with the Ireland Central Bank and the government agencies, although most of European Central Bank decisions have always been independent among the EU members. Such interventions are thought to create a conducive environment for economic growth. Fiscal policy Fiscal policy has always been administered by government and relates with running of country’s budget. Fiscal policy sometimes refers to government borrowing, spending and taxation. Ireland’s fiscal policy has helped to boost infrastructural facilities, hence greatly contributing to economic success. The Irish government has sometimes increased taxes to finance its expenditures and budget deficit. Although, economists have argued that increase in tax slows down GDP growth, as it increase the prices of products and consequently reducing household spending. A change in taxation and government spending is believed to have effect on aggregate demand, resource allocation and general distribution of income. Irish government has applied different mechanism of fiscal policy to regulate the economy, they comprise of neutral, expansionary and contractionary policies. Neutral policy has applied where government spending equals to tax revenue (G=T). This indicates that the outcome of government budget has a neutral effect on economic related activities. Expansionary policy has always indicated that government spending exceeds tax revenue (G>T). This results into budget deficit, forcing the government to borrow or use previous budget surplus to finance the deficit. For Irish government, budget deficit has been financed through borrowings from its development partners like U.S. and European Central Bank. The government has also financed its budget deficit by sale of its bonds and treasury bills. Contractionary policy has been implemented where tax revenue surpasses government spending, an attribute of high taxation and reduced spending by the government. This causes a surplus in the economy. Instances of surplus in the Irish budget were experienced during the ‘Celtic Tiger’’ economic growth. The surplus was used to build more infrastructures in the country while others were saved for future use, especially in situation of economic slump. The fiscal policy has been used to influence extend of aggregate demand in economy. For the case of Ireland, this has helped in the attainment of financial viable goals like price stability, full employment and economic growth. According to Keynesian theory on levels of unemployment that appear to be beyond natural rate is believed to be as a result of insufficient demand in the economy, as seen experienced by Ireland during the economic downturn. Economists argue that aggregate demand of labor or commodity may be in short supply during recession resulting to unreasonably high employment intensity as well as losses of possible production output (Fratianni et al 84). This could be the reasons why Ireland is experiencing some levels of unemployment especially after 2008. Conclusion The economy of Ireland has soured to a double digit as a result of good economic policies that are being pursued by the government and European Central Bank. The monetary policy instigated by central bank has helped to monitor and control the circulation of euro and other foreign currencies within the country. This process has assisted in regulating the shortages and surpluses experienced within the economy. The fiscal policy pursued by government has been crucial in regulating taxation and government spending. It has also attracted foreign investors in the country, thus boosting the economic growth through creation of jobs and establishment of companies. Reference Artis J. Michael & Nixson Frederick. The Economics of the European Union, 3rd edn. Oxford University Press, 2007, pp.263-314. Bureau of European and Eurasian Affairs (BEEA). U.S. Department of State Diplomacy in Action: BACKGROUND NOTE: IRELAND, 2009. Retrieved on March 14, 2010. From: http://www.state.gov/r/pa/ei/bgn/3180.htm Economic and Social Research Institute (ESRI). Irish Economy. ESRE@50, 2009. Retrieved on 24th April, 2010, on http:// http://www.esri.ie/irish_economy/ Fratianni Michele, Dominick Salvatore and Jürgen von Hagen. Macroeconomic policy in open economies. Westport: Greenwood press, 1997, pp.63-107. Hennigan Michael. Irish Economy: Achieving economic success requires more than investing in creativity. Finfacts Ireland Business & Finance Portal, June 5, 2009. Retrieved on 25th April, 2010, from http:// http://www.finfacts.ie/irishfinancenews/article_1016844.shtml Read More