ICT-ED INSTITUTE OF SCIENCE AND TECHNOLOGY LIPA

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(043) 757-4445 / (043) 757-5944

COLLEGE DEPARTMENT

Learning Module
In
MANAGERIAL ECONOMICS
(SY. 2020-2021)

Prepared by:

Mr. Jojie R. De Ramos

Week 14. Role of Government in the Economy

Government

 A government is the system or group of people governing an organized community, generally a state. In the
case of its broad associative definition, government normally consists of legislature, executive, and judiciary
 organizations of individuals

o particular set of institutions and people

 authorized by formal documents

o legally empowered

 make binding decisions on behalf of a particular community

o Externally: war, trade, border control,...

o Internally: tax, education, health, welfare,...

Good Governance

 Rule of law
o government can take no action that has not been authorized by law
o citizens can be punished only for actions that violate an existing law
 Property rights
 Regulatory regime
 Macroeconomic policies
 Absence of corruption

Government’s Power

 Power
o ability to get people or groups to do what they otherwise would not do
 Government’s power
o to develop institutions
o to carry out policies
o sometimes unpopular
o has to be sufficiently strong

 James Madison: oblige the government to control itself

 restraints to check arbitrary and corrupt behavior by the government

 Key: building effective political institutions

Political Institutions

 Organizations, individuals, and agencies

 Electoral rules

o single-member district and first-past-the-post

o proportional representation system

MANAGERIAL ECONOMICS Role of Government in the Economy

  Constitutional rules

o division and limit of power

o between branches of government

o between central and local governments

 Constrain arbitrary exercise of power by politicians and bureaucrats

o delineate property rights between state and private sector

o enforce property rights

o influence competition in political process

o hold public officials accountable for their actions

Economic Policy Outcomes

 Political institutions play important role

 Resolve redistribution conflict from economy policies

 Three examples of policy choices

o budget deficit

o financial market

o trade policy

Budget Deficit

 Difference between revenue and expenditure

 Government influence on budget

o muster political support for taxation

o resist demands for expansion of spending

 Political institutions of budget procedures

o balanced budget rules

o power of finance ministry

Influence of Electoral Rules

 Minority (coalition) governments tend to have higher budget deficit than majority government
 States with systems of proportional representation tend to have higher budget deficit than states with
majoritarian systems.
 Budget deficit tends to rise in election year

MANAGERIAL ECONOMICS Role of Government in the Economy

Financial Market Regulation

 Influence of political institutions

o independent financial regulatory agencies

 central bank independence

o checks and balances in political process

 Among developing countries, central bank independence doesn’t seem to affect inflation outcomes

International Trade Liberalization

 Government’s trade policy influenced by domestic political conflict between gainers and losers from trade
liberalization
 Industries that tend to have tariff protection
o industries in decline
o industries that are highly unionized
o make substantial campaign contributions
o more geographically dispersed

Corruption

 Exercise of public power for private gain

 has large costs for economic development
 undermines well-functioning markets
o a tax that distorts competition & lower returns
o a barrier to new entries in market competition
o subvert state’s legitimacy
o weakens state capacity to provide institutions to support markets

Causes of Corruption

 Distorted policy environment (opportunity)

 Weak judiciary (credible threat to punish)
 Poor civil service management
 Low public sector pay (not evident)
 Other factors
o Openness to international trade
o Complexity of regulatory environment
o High and variable inflation

Political Institutions

 Political institutions can help reduce the opportunities and incentives for corruption
o Restrain politicians from arbitrary actions
o Hold politicians accountable for their action
 Decentralization
 Electoral rules

MANAGERIAL ECONOMICS Role of Government in the Economy

  Press freedom
 Civil society

Taxation Institutions & Policies

 Tax provides the state with resources to build market-supporting institutions

 Weak tax collection institutions lead to disproportionate reliance on tax revenue from more visible and
easier sources
o international trade
o large firms

Conclusions

 Political institutions matter

 Good governance is essential to economic development
 Effective State
o plays a catalytic, facilitating role
o encourage and complement the activities of private businesses and individuals

Activity 10
1. Write a message to any Government Official. First, address the economic issue that you think needs government
intervention then personally recommend action plans to solve this issue.

Specific Instruction
*Write it as a formal letter.
*Submit the letter in pdf format in my email.

MANAGERIAL ECONOMICS Role of Government in the Economy