13.05.2007

An Economic Model: Making Economic Policy in UK

_ By Khin Ma Ma Myo

Introduction

Economic Reform in the future Federal Democratic Burma will be the most important priority after Burma has been liberated from despotic military dictatorship. So here, I would like to mention about how economic policy is important in public policy making, the basics of economic policies and the major characteristics of economic policies using the UK as a model. 

Economic Policy as a Public Policy

Public Policy is a general plan of action adopted by a government to solve a social problem, counter a threat, or pursue an objective.

There are different kinds of public policies, mainly categorized as distributed policies that are designed to confer a benefit on a particular institution or group; redistributional policies that take government resources such as tax funds from one sector of society and transfer them to another and regulation that takes a form of government intervention in the workings of a business market to promote some socially desired goal. (Berry, Goldman, 2005:555)

Different objectives can occur in these policies so that various kinds of policy tools are required to achieve these objectives. Whatever the policies, the basic common tools are incentives and disincentives, direct provision of services and rule setting.

To apply the policy tools, there must be a model of policy making process. The most distinct model applied in US has four policy-making stages, such as

1. Agenda setting- the stage of the policymaking process during which problems get defined as political issues.
2. Policy formulation-the stage of the policymaking process during which formal proposals are developed and adopted.
3. Implementation- the stage of the process of putting specific policies into operation
4. Policy Evaluation- the stage of the analysis of a public policy so as to determine how well it is working (Janda,2005: 563)

Among the public policies, making economic policy is the master policy area because the level and quality of government depends on public spending which depends on the ways governments manage the economy.

Economic Policy: The Basics

Generally speaking, economy can be categorized as market economy and non-market economy. In a market economy, prices of goods and services are determined through the interaction of sellers and buyers (demand and supply). The major means of production are in the hands of the people. In contrast, a non-market economy relies on government planners to determine the prices and goods. Otherwise, the government owns and operates the major means of production. (Old Soviet economy is an example).

Market economies are usually known as capitalist economies where capital refers to wealth. In these economies, individuals are allowed to own property and sell goods and services for profit in free markets to accumulate wealth.

The most fundamental distinction in economic policy is between macroeconomic policy and microeconomic policy. Macroeconomic policy is the branch of economic policy that deals with total or aggregate performance of the national economy, including money in circulation, interest rates, inflation, exchange rates, capital and labor. Microeconomic policy is the branch of economic policy that deals with the performance and behavior of individual economic actors, including firms, trade unions, consumers and regional or local governments. (Newton, 2004:603)

Many free market economists believe that most of the economic policy should be confined to macro economic management, even though some governments as like British local governments involve in labor markets (employee safety, job security, equal opportunity) and production environment (environmental controls, the provision of roads and utilities) of the manufacturing firms.

In a free market economy, the governments have to obey the economic laws. A government cannot command use over real resources. In a short run, they must either tax or borrow for their spending from private individuals and firms. In a long run, they must raise taxes sufficient amount to cover its expenditures to repay loans. It is an important fact in the conduct of monetary and fiscal policy. (Two types of macroeconomic policies)

Monetary Policies are economic policies that involve control of and changes in the supply of money. Fiscal Policies are economic policies that involve changes in government spending and taxation. According to Keynesian theory, the government can stabilize the economy by controlling the level of aggregate demand by means of fiscal and monetary policies. Various kinds of institutions and actors are involved in these policies making processes.

British economic policy characteristics

I.                     Monetary Policy (interest rates, money supply, exchange rates)

• Institutions

The Bank of England

The Treasury

International financial markets

• Actors

Monetary Policy Committee chaired by the Governor of the Bank of England

Chancellor of the Exchequer

The Prime Minister

The Treasury

Market Investors and speculators

II.                   Fiscal and Spending Policy (taxation, government spending)

• Institutions

The Treasury

The Cabinet and Cabinet departments

The Public Accounts Committee and Parliament

The European Union

International financial markets

• Actors

The Prime Minister

The Chancellor and First Secretary to the Treasurer

Treasury officials

Cabinet ministers

spending department officials

Members of Parliament

Organized interests

Local governments

EU officials

Market investors and speculators

III.                  Microeconomic policies (labor market, industrial, regional, environmental, health and safety and competition)

• Institutions

The Cabinet

Cabinet departments

The EU

Organized interests

Parliament

Local authorities

• Actors

The Prime Minister and Cabinet

Ministers

Department officials

EU officials

Interest group spokespersons and officials

Members of Parliament

Local government councilors and officials

(Budge, 2004:604)

In brief, the Bank of England has a dominant role in setting interest rates.  The Prime Minister, Chancellor and the Treasury are the key players in setting the levels of government spending and taxation. Cabinet ministers play a reactive rather than a proactive part. Parliament’s role is confined to decisions and a limited form of supervision. Other interests such as business and the unions play in indirect role.

Conclusion

By looking at the above British economic policy making process, it is clear that various actors involve in different areas so that appropriate policies can be adopted for national interests. It is contrary to the current economic policy making process in Burma with the lack of dominant role for central bank to set interest rates, overwhelming corruption, poor knowledge of the key players, non-existence of Parliament and trade unions and the command nature of the military government.

 References

¨       Gordon, R.J. (1978) Macroeconomics, Little, Brown ISE, Canada

¨       Budge, I.; Crewe, I.; McKay, D. & Newton, K. (2004) The New British Politics, third edition, Pearson/Longman, London

¨       Janda, Berry, Goldman (2005) The Challenge of Democracy, Eighth edition, Houghton Mifflin, New York

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