At times, we can all become frustrated by political agendas, misfortunes and perceived lack of planning by various governments around the world thus quite often not seeing the bigger picture – or the economics of how countries work.
Naturally, the political fracases provide fuel for media companies who in turn bombard us with their 24-hour news cycles. But we need to understand that politicians are only temporary custodians of the country and its economy – and each economic model is built on the same premise that started many hundreds of years ago – that of bartering.
There are two main mandates or rather tasks that a ruling party is assigned by the electorate when it comes to governing and those are: controlling the country’s fiscal and monetary policy.
Fiscal policy involves the internal running of the country and basically deals with tax and how it is allocated. The fiscal budget is then awarded to the various sectors of any economy. These include education, transport, healthcare, finance, trade and industry, defence, agriculture, water urban development and many other building blocks of a nation.
How the government prioritises the spending on each of these sectors will determine its policy priorities and will also be a signal of its wider political intentions not only to its supporters/voters but also to its neighbouring countries in regard to international trade and security – which we will touch on again later.
A nation concerned with information and its human capital will prioritise education in its budget. There are however other approaches to budgetary allocation such as funding trade and industrial activities thus enabling job creation that will, in turn, drive a need for tradesmen and women to diversify and obtain the new skills required.
This will also provide the incentive for state-run schools, privately funded schools and institutions to develop new skill sets. Doing both is ideal – as governments must foster innovation by promoting and funding higher learning institutions where top talent can be nurtured and developed.
Fiscal policy forms the larger mandate as this budget is derived from the collective taxation of income, capital gains, trading and customs, sin taxes, corporate, and simple public services. That way allocation of the fiscal budget to finance will pave the way for monetary policy to function.
International trade is the key to generating further income as a government cannot rely on an internally driven economy to sustain wealth – the same can be said for business so an agreed trade policy would need to accommodate all aspects of the country’s economy.
Every thriving nation has been built on either skilfully utilising internal resources or have created global demand for a service or industry: The UK has strong financial and corporate offerings plus its geo-positioning (GMT) allows it to be a central commercial trading point for the world.
Germany has always had a rich source of steel enabling the production of cars, rail brands and manufacturing. In addition, it continues to be a market leader in developing technologies to compliment those industries thus allowing the country to thrive as a major European power.
The Nordic countries are rich in mineral resources of which they have converted the revenues into national trust funds to aid its citizens many of whom develop skills in trade, innovation and finance (and now Fintech).
Though Japan is a geographically smaller and is made up of two islands it continues to prosper by becoming a global leader in the exporting of innovation, artificial intelligence (robotics), fishing stocks and even ‘exports’ financial aid (loans) to other countries due to strong and disciplined monetary policy.
Russia is mineral-rich and has outsourced its intelligence gathering skills, military technology and training for years. The US has invested heavily in services, human capital and innovation – to a large extent immigration has played a major role in these areas of growth.
China continues to grow and subsidises its agriculture and manufacturing industries fully utilising the abundance of manual labour at its disposal. China even exports this labour thus gaining influence and soft power enabling Chinese goods and services to be exported more freely to other economies.
The ability to offer the global economy a form of expertise or goods/service can attribute hugely to each country’s economic wealth: Israel – military and intelligence; Brazil agriculture and tourism not to mention countries in the Far East – oil and fossil fuels.
Most African countries obtain their sources of income (though not as much as they should) from natural minerals, agriculture and tourism. Ghana has gold and cocoa; Nigeria – oil; South Africa – Gold and many mineral resources; Kenya and Tanzania – tourism. Even a poor country like Zambia has survived because of its coal and coffee reserves.
Any country without resources or the ability to offer goods and services would have to be more subsistence-like which usually means having to rely on aid or import goods and services, which comes at a price and leads to the country functioning with an unsustainable debt burden.
Americans spend, save little. Also US imports more than it exports.Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.The Japanese on a contrary, save a lot. They do not spend much. Also, Japan exports far more than it imports, has an annual trade surplus of over 100 billion. Yet Japanese economy is considered weak, even collapsing.Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers. Even then the Japanese did not spend (habits don’t change, even with taxes, do they?). Their traditional postal savings alone is over $1.2 trillion.Thus, savings, far from being the strength of Japan, has become its pain.
This then gives way to various trading blocs, which over time have been built, broken or renegotiated when it was not suiting either of the participants.
The strength of a country’s currency is primarily determined by supply and demand for its sovereign currency – but demand can only be fostered by trade. The more the demand for a countries commodity the greater the demand for its currency – which is the medium used to compensate for transactions.
In terms of a country’s monetary policy, it is more of a singular relationship between a government and its banks.
Banking is the system to which people can place their disposable income (gross income after tax). The central (reserve) bank regulates the money supply into the economy ensuring that locally, inflation does not corrode the value of its currency. The central bank controls how much it lends to banks and at which payable interest rate.
The central bank is independent of government, have their policies shaped by fiscal influences and is under obligation to impact the strength of the economy through its interest rates and exchange rates – So, the central bank sets the mandate by which banks offer security interest, loans and building deposits to aid its citizens to benefit from their hard-earned cash.
Banks, however, have a wide range of consumer charges so transacting doesn’t offer much protection against inflation, and in some cases, banks offer zero interest on savings deposited.
You can thus understand the frustration of citizens who would like to see increased corporate taxes for banks considering the fact that it’s a system that rewards executives’ excessive remuneration packages even in a failing economy.
The new wave of Cryptocurrency aims to shake-up these long-standing benefits banks have enjoyed – including the bailouts from taxpayers’ money which stemmed from risk-taking behaviour by banks that nearly brought the global economy to its knees.
Like a petulant child knowing well that its parents will only mildly reprimand but ultimately still allow the continuation of behaviour with a slap on the wrist, governments continue to tolerate excessive wage packets and risk-taking due to the fact banks play a strategic role in the stability and growth of an economy.
This is just a tip of the iceberg and paints a big picture of how a country is managed – or indeed can be mismanaged. The links will provide further insights into each component but I hope this piece got the mind ticking 😊