The Government's Role in Formulation and Implementation of Economic Policy - Literature review Example

Student Name: Instructor’s Name: Title: Government and Economic Policy Course: Institution: Government and Economic Policy Introduction Over the past years, the roles of government in economic development has been changing steadily with a paradigm shift towards more focus on defining the general direction of the economy through different policy strategies, on encouraging participation of all stakeholders and citizens to deliver programs and services. Successive governments in many parts of the world have actively pursued various economic reforms with a wide agreement about the major goals of these reforms including high employment, stable prices, and rapid growth. However, there is less agreement that these goals are mutually compatible or, among those who regard them as incompatible, about the terms at which they can and should be substituted for one another. There is least agreement about the role that various instruments of policy can and should play in achieving the several goals. This paper discusses the economic policy, in particular the issues around fair work Australia, funding higher education and emission trading as well as the carbon tax. It is limited to microeconomic approaches as opposed to macroeconomic. The rest of the paper is divided into three sections. The first section is conceptualization of key terms. This is immediately followed by discussion on the role of government in specified areas highlighting the various reasons as well as policy instruments used. The third section is a review of the policy instrument. The final section is conclusion drawn from the entire work. Definition of Key Concepts Policy is a multifaceted concept which embodies numerous different meaning and dimensions. According to Hart & Vromen (2008), a policy concerns not only the conservative but also the liberal ideologies of the actors involved (Tableman, 2005). It is believed that a good policy must start with the identification of pertinent issues in formulating or defining a specific policy objective (Bridgman & Davis, 2004). Most policies are usually formulated with the aim of achieving a desired goal which is regarded as the best and in the interest of all members of nation. Some of these include but not limited to clean environment, good health, job opportunities, an innovative based economy, higher educational achievements, low levels of poverty rates, high and improved literacy composition, among others (ibid). Taken from the preceding definition, an economic policy imply a specific course of actions implemented by concerned parties especially the government and which are aimed at influencing or controlling the economic behavior. Examples include the government decisions on spending and taxation, income redistribution from rich to poor just to name but a few. Since the paper is focused on microeconomic approach, it is worth defining it. The term, microeconomic has a lot to do with issues of scarcity and choices. It mainly focuses on individual decision making or groups engagements in particular course of action in an economic sector or area , often described as market, an arrangement where different people involve in voluntary exchange , with a basic assumption or premise that there are perceived gains from their engagement (Tisdell and Hartley2008:6). In the paragraphs that follow, specific areas of government involvement is discussed under: Fair work Australia Fair work is the national workplace relations tribunal, made up of an independent body comprising of unions, business and government aimed at assisting. Individual agreements were abolished and replaced with the requirements for parties to engage in collective bargaining in ‘good faith’, and restores the ‘no disadvantage’ test in the form of a ‘better overall’ test. From a microeconomic point of view, fair work benefits accrue from the fact that real economic development of any country calls for fairness and security in the work environment.  The government promotion of Fair work strategies is based on the premise that a system that is ‘fair to employees, flexible for investments business encourages productivity and economic growth for the future prosperity of the Australian nation (Rudd & Gillard, 2007). The Fair Work Act 2009 is the legal instrument and it sets out the rules and responsibilities for employees and employers under the national workplace relations system. Under the act, introduced in the late 2000s, a business agreement is needed to maintain a certain compulsory terms and that each agreement us required to be flexible in allowing individual flexibility arrangements (Fair Work Act 2009). There is an acceptable a process of reward modernization in order to establish standardized awards systems which are consistent with a series of Common National Employment Standards (NES). Also important is that the Fair Work Australia’s has a powers more broader or wide in scope relative to the Australian Industrial Relations Commission and include the power to amend the existing wages and make minimum wages which are consistent to the better off overall test approve agreements. This also goes a long way in helping employees and employers to resolve work related conflicts. Funding higher education Education especially higher education is an essential aspect of economic policy. Various researches have affirmed that higher education spur development and that there cannot be an economic growth without an educated workforce (Barr and Johnston, 2010; Carnoy, 2006). This is partly one of the motivations for government involvement in education based policy. For many countries, funding forms one the most realistic ways of supplementing public finance. From a microeconomic school of thought, higher education is not only associated with social advantages (supporting government continued taxpayer subsidy) but also considerable individual benefits, hence the need for a role from the beneficiary (Barr and Johnston, 2010). Social benefits and the justification for government involvement in funding the higher education is based on the premise on offering the needed education to less privileged but gifted/bright children. These children may not afford the higher education except when it is free or based on some kind of subsidies or low cost. It is argued that “gifted children will generate higher positive external benefits for society following their education attainment” (Tisdell and Hartley, 2008:72). On the same breadth , Government involvement in Funding of higher education can be said to assist in reducing the private marginal cost of education and in so doing, individual students/pupils can consume more (Sandmo, 1998). This eventually will lead to the overall economic growth of a country. The benefits associated with the funding of higher education from the perspective of individual are that it enhances a person’s chances of securing a job and promote productivity since the higher the skills of an individual, the more productive he is in their respective employments which, when based on a competitive labour market, is reflected in their salaries/ wages (BIS, 2011:29). This is because an increase in educated labor force in a country promotes economic output and substantial levels of growth rates. According to Dahlin (n.y), an increased earning of an individual and increased learning results in learning that increases a worker’s productivity. Carnoy (2006) argues that if an employee is paid the value of their marginal product, then it follows that more educated employees warrant higher wages. The relatively higher earning of educated individuals they command on the job market represents not only the capital interest they have invested in education but also from their improved. For any individual, accumulating human capital is consistent with his or her initial investment and endowment thus encouraging his/her productivity. An estimate valuation of this increased productivity may be measured by the individual’s increased earnings (Chevalier, 2000). Funding through university loans is one of the main policy instrument or mechanism to support higher education. According to Chapman (cited in Tisdell and Hartley 2008:6), this form of scheme or strategy has operated with some level of success in Australia universities fees especially for Australian students enrolled in undergraduate programs. The government pays part of the school fees or tuition which is expected to be reapid after the student’s graduation based on their income tax return. In some like Canada, there has been very little success where some tertiary students depend on the bank or similar financial institutions for sponsor their university. This has failed because of the imperfect capital market in financing education as most gifted children from poor or less privileged households are unable to gather enough collateral or security to the potential private lenders. This form of shortcoming in term of the Private capital market failures is one reason why most governments including Australia has continue to support students through public loans for their students (Tisdell and Hartley, 2008). Emission trading and the carbon tax Emission trading and the carbon tax relate to tax levied on green houses gasses for instance carbon based fuels. Consequently, carbon carbon tax is shorthand for carbon dioxide tax (Australia’s Low Pollution Future, 2008). The microeconomic basis of the government’s support for carbon tax is based on the argument that the tax will discourage development of emissions-intensive industries but instead enhance growth in zero and low emissions sectors. In addition, the implementation of carbon tax tend to change the relative prices of goods and services, thus resulting in a more expensive emissions-intensive goods compared to the less emissions intensive. This is more likely to offer a significant motivation for consumers and business entrepreneurs to change their behavior, which in the long run will lead to a high reduction of emissions (Australia’s Low Pollution Future, 2008). Hence carbon tax is an economically efficient way of conveying essential price signals that spur carbon-reducing investment. A different way of looking at the microeconomic effect of carbon tax is that is related to externalities, simply defined as market failure which takes place when a cost is imposed on a third party that is not directly involved in a given economic venture or others that are not reflected in the prices for the goods and services being produced (Discussion Paper For Public Comment, 2010). An external cost is usually called a negative externality; the benefits are referred as positive externality. Taken from this, excessive production or emissions carbon represent a negative externality. The best solution is to have a tax on the externality so that the social cost of carbon is represented in ones consumer's decision. Furthermore, unlike other policy instruments, emission trading and carbon tax has unique benefit in that it triggers or generates government revenues that can be applied to counter the undesirable side-effects of greenhouse gas emission reduction strategies. This can be achieved especially if the necessary arrangements are made in targeting the purchasing power of families’ through income taxes and, since the negative impacts of a carbon tax are concentrated in the lower income- social welfare payments (Callan, et al 2008). The economic benefits from carbon tax as a policy instrument can also be based on the grounds that it is a suitable measure to the green house effect and allows or encourages people to get involved in reduction of carbon emissions. This by no means is one of the most suitable and economical policy responses to the current climate change. Although with a net increase in the costs of production, the average living standards in Australia may seem to grow more slowly for some time, increased efficiencies and the avoided consequences of climate changes will lead to financial savings, and ultimately the greater well-being of all current and future Australians and citizens worldwide, in the longer term. Review of the policy Instruments Almost all the preceding policy instruments consist of two basic elements/components. That is, the identification of the general goal/aim and the means of achieving it. For instance, in higher education, the overall aim is education for all especially the talented but less privileged children. The means to this end is through funding the higher education. Also the general aim towards environmental integrity, free from climate threats coincided with imposition of carbon tax aimed at discouraging excessive emission of carbon. At the same time, the two basic developments policy instruments, that is, the aim and means, are often closely linked with the political process. This is partly attributed to the fact that both the choice of objective, and the strategy towards the stated aims, has important political implications (Stavins, 1998). The other similarities in the policy instruments are that they all command some degree of control and regulation where a standard performance is defined and enforceable by the legal framework. Faith in the desirability and efficacy of these policies instruments tend to unite a number of economists especially those concerned with issues of economic growth (Rodrik, 1996). Last but not least, the discussed instruments are market based (microeconomic approach) and are aimed at encouraging certain desirable behaviors (Hockenstein, et al, 1997). The policy instruments, such as carbon tax are often viewed as encouraging market forces especially when designed and implemented appropriately and motivate companies (and/or individuals) to implement certain control measures in the interests of both employees and that of a collective achievement of the policy goals. Conclusion The government plays a major role in both the formulation and implementation of economic policy which in the long run in aimed at the overall development of the country (including improved standard of living for its citizens). Bibliography Australia’s Low Pollution Future” (2008) White Paper Volume 1, December 2008, Carbon Pollution Reduction Scheme. Barr, N., and Johnston, A. (2010). Interest Subsidies on Student Loans: A Better Class of Drain, Centre for the Economics of Education, London School of Economics, London BIS (2011). Supporting Analysis for the Higher Education White Paper: BIS Economics Paper No.4, Crown: London Bridgman, P., & Davis, G. (2004). A policy cycle. Australian policy handbook.3rd ed, pp. 22-33.Sydney: Callan, T., Lyons, S., Scott, S., Richard S.J. Tol, and Verde, S.(2008). The Distributional Implications of a Carbon Tax in Ireland, Working Paper No. 250, ISRI Carnoy, M (2006).Higher Education and Economic Development: India, China, and the 21st Century, Working Paper No. 297, Paper to be presented at the Pan Asia Conference: Focus on Economic Challenges Stanford Center for International Development May 31- June 3, 2006Stanford University Chevalier, A. (2000). Graduate Over-Education in the UK. London, Centre for the Economics of Education - London School of Economics Dahlin, B. G. (n.y). The Impact of Education on Economic Growth Theory, Findings, and Policy Implications Discussion Paper for Public Comment (2010). Reducing Greenhouse Gas Emissions: The Carbon Tax Option, Department of National Treasury, South Africa. Fair Work Act 2009 (Cth) s202. Hart, P. & Vromen, A. (2008). A new era for think tanks in public policy? International Trends, Australian realities. The Australian Journal of Public Administration, 67 (2). Pp 135-148 Hockenstein, J. B., Robert N. S., and Bradley W. W. (1997).Creating the Next Generation of Market-Based Environmental Tools." Environment 39, number 4 (1997), pp. 12-20, 30-33. Kirchner, S (2010). Why Does Government Grow? CIS policy monographsPM117.Political science. Centre for Independent Studies (Australia) Rodrik, D. (1996). Understanding Economic Policy Reforms, journal of Economic literature, vol 34, pp9-41 Sachs, J.D., and Warmer, M.A (2002) Economic Convergence and Economic Policies NBER Working Paper No. 5039 Sadoulet, E. and de Janvry, A. (1995). Quantitative Development Policy Analysis, The Johns Hopkins University Press, Baltimore And London Sandmo, A (1998).Redistribution and the marginal cost of public funds, Journal of Public Economics, Volume 70, Issue 3, 1Pages 365–382 Stavins, R. N (1998). Market-Based Environmental Policies, Discussion Paper 98-26, Resources for the Future, Washington DC. Tableman, B (2005). How Governmental Policy is Made, Best Practice Briefs, No.34 Michigan State University, USA Tisdell, C.A. and Hartley, K (2008). Microeconomic Policy: A New Perspective, Edward Elga Publishing Ltd, UK. Read More