UNIT 1.

4 THE GOVERNMENT IN BUSINESS

GOVERNMENT ECONOMIC OBJECTIVE

THE REASONS FOR THE GOVERNMENT INTERVENTION IN BUSINESS

- To ensure that sufficient goods and services are available in the community to meet the
needs of people.
- To prevent the production of shoddy goods and demerit goods due to profit motive
- To protect employees and their rights
- To protect the environment
- To prevent misunderstanding of society scarce resources
- To protect the producers.
- Some goods and services from which everyone benefits can be provided adequately
only if they are funded and organized at national level e.g. The army force [soldiers and
policemen]
- The government tries to reduce inequality in the society by the use of tax in some
people at a higher rate than others on their incomes by the use of indirect tax e.g. value
added tax [VAT]
- The government can also try to make the economic system run more smoothly by
passing laws to protect customers. Governments accept same of the responsibility for
consumer’s protection and demonstrate this in a variety of ways including the following;
1. By contributing to consumer education
2. By establishing and enforcing appropriate legislation
3. by control of quality weights and measures
4. by monitoring and control of prices
5. Promotion of fair trading practices.

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GORVERNMENT ECONOMIC OBJECTIVES

1. LOW LEVELS OF INFLATION / STABLE PRICES

Inflation occurs when price rises of goods and services rise to the point that the
money that you use to spend on them is no longer enough to pay for the same
products. Low inflation is an important aim.

The following are the problems of inflation;

- Workers’ wages will not buy as many as before i.e. people’s real income will
fall
- Prices of the goods produced in a country will be higher than those in other
countries, therefore people prefer to buy foreign produced goods which are cheap.
- The business in home country will suffer losses due to the fall in demand
forcing them to retrench some of their workers.
- Businesses will be unlikely to expand & create more jobs in the future. And the
standards of living are likely to fall eg Zimbabwe.
- Therefore low inflation tends to encourage businesses to expand and makes it
easier for a country to sell its goods and services abroad.

2. LOW LEVELS OF UNEMPLOYMENT

- When people want to work but cannot find jobs, they are unemployed in a
country.
- Unemployment people do not produce any goods and services. The total level
of output in a country will be lower than it could be
- An increase in unemployment may result in increased government spending in
the form of unemployment benefits to those without jobs. A high rate of
unemployment will cost the government a great deal of money.
- So low unemployment will help increase the output of a country and improve
living standards.

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3. ECONOMIC GROWTH
- An economy is said to grow when the total output of goods and services in a
country increases.
The value of goods and services produced in a country in one year is called
Gross Domestic product (GDP).
- When a country is experiencing economic growth, the standards of living of the
population is likely to increase.
- When the GDP of Botswana is falling, it has no economic growth
The following are problems caused by this;
- As the output of Botswana is falling, fewer workers are needed and
unemployment will occur.
- The average standard of living of people in a country - the goods and
services they can afford to buy in one year will decline and most people
will become poorer.
- Business people will not expand their firms as people will have less
money to spend on the product they make.
NB; Economic growth makes the country richer and allows living
standards to rise.

ECONOMIC GROWTH & TRADE CYCLE

Economic growth is not achieved every year. The following diagram shows
changes in the economy.

Boom

Recession
Growth Slump

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The trade has 4 main types and they are growth, boom, recession and slump

a. Growth
This is when the GDP is rising, unemployment is generally falling i.e. the country
is enjoying higher living standards.

b. Boom
This is caused by too much spending. Prices start to rise quickly & there will be
shortage of skilled workers. Business costs will be rising and firms become
uncertain about the future.

c. Recession
It is often caused by too little spending .This is where the GDP actually falls,
businesses experience falling demand and profits and workers may lose their jobs.

d. Slump
This is when unemployment will reach very high levels and prices may fall. And
many businesses will fail to survive this period.

4. MAINTAINING A SATISFACTORY BALANCE OF PAYMENT

- This is difference between a country’s exports and imports.

EXPORTS
- Are goods and services sold by country to people in another country, this bring
money to the country (Foreign currency).

IMPORTS
- Are goods bought from other countries.
- If the country is importing more goods than it is exporting, it means that there is
more foreign currency going out of the country than the foreign currency coming
in. This leads to a balance of trade deficit.

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 - A balance of payment deficit may result in the exchange rate of the
currency depreciating or the country may be forced to devalue its currency
- Also the country is going to have less foreign currency to pay for what
they do not produce.
- Government want to maintain a satisfactory balance of payment
equilibrium to avoid being indebted, as repaying the debt will put much
financial pressure on the country.

GOVERNMENT SOCIAL OBJECTIVES

- Providing decent residential accommodation
- Reduction in poverty
- Increase in literacy level
- Providing health care facilities
- Provision of clean drinking water
- Employment creation.

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GOVERNMENT ECONOMIC POLICIES
- There are so many ways in which government can influence the economy of the nation.
- The business can be affected by the influence of the government as the government has the
power to make policies and enforce them on business in a country.
- Government can pass laws which have an impact on the economy such as law on minimum
wage, location of business etc.
- The policies are designed to control undesirable business activities that will be harmful to
individuals and the economy.
The main ways in which government can influence the economy, sometimes called economic
policies are; Fiscal policy
Monetary policy
Supply side policy

1. FISCAL POLICY (Taxes and government spending)

a. Government spending
- All government spends money on buildings schools, roads, hospitals, and defense. The
expenditure is very important to some businesses.
e.g. - Construction firms will benefit from new road
- Bus manufactures will benefit from government spending of public transport.

Effects of government spending

- An increase in government spending boosts the economy because individuals have
more money to spend on goods and services.
- The increase in total demand causes business to increase their production.
- More resources, including labour are employed for production and so businesses
expand.

- A fall in government spending contracts the economy

- Individuals have less money to spend so total demand falls.

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 - Business respond to fall in demand by cutting down on the goods and services they
produce.
- As production falls, business tends to lay off workers.

b. Taxation
- Taxes refer to the amount levied on either income or consumption by the government.
- Taxation is the main source of income for the government.
- Business are expected to pay taxes to the government on the profits they make.
- Consumers are also sometimes required to pay taxes on some of the products they
consume.
- Taxes may be direct or indirect.

i. direct taxes
- These are taxes paid on income earned by either an individual or a business.
- Direct taxes are unavoidable
E.g. income tax, profit tax

ii. Indirect taxes

- These are taxes on consumption
- They are levied on goods or services
- One can avoid paying the tax by not consuming the product
E.g. value added tax and import duties

THE TYPES OF TAXES

- Income tax
- Profit tax or corporation tax
- Indirect taxes
- Import duties &tariff

i. INCOME TAX
- Commonly used by the government.

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- This is tax on people’s income.
- Usually the higher a person‘s income the greater will be the amount of tax they have to
pay to the government.
- It is a set of certain %
- In many countries like Botswana income tax is progressive this means that the rich pay
tax at a higher rate than the poor.

How businesses would be affected by an increase in the rate of income tax

- Individuals tax payers would have a lower disposable income.
- They would have less money to spend and save.
- Businesses will have to experience a fall in sales.
- Some workers could lose their jobs.
NB: The businesses which are most likely to be affected by an increase in income tax are
producing luxury goods and services.

ii. PROFIT/CORPORATION
- This is tax on the profits made by businesses, usually companies.
- These businesses will have lower profit after tax.
- Lower profit is also bad news for the owners of the business. There will be fewer
money to pay back the owners i.e few people will want to start their own
businesses if they consider that the government will take a large shares of the profit
made .

iii. VALUE ADDED TAX

Eg Vat is added to the prices of products we all buy. They make goods and
services expensive for customers.
How would businesses be affected by an increase tax?
- Prices of goods in the shops would rise and customers may buy few
items as a result.
- This would reduce demand for product made by businesses.

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 - As prices rise, the workers employed by firm will notice that their
wages reduces, it is said that their real incomes have declined.

iv. IMPORT TARIFFS & QUOTAS

- Government tries to reduce the import of products from other countries by
putting special taxes on them
- These are called duties or import tariffs and they raise money for the
government.

TYPES OF TAXATION
i. progressive taxation
ii. Regressive taxation
iii. Proportional taxation

How would businesses be affected if government put tariffs on imports?

i. Firms will benefit if they are competing with imported goods.
ii. Imported goods will now become more expensive, leading to an increase in sales of home
produced goods.
iii. Businesses will surfer a lot if they have to import raw materials for their factories.
iv. Other countries may now take the same action and introduce import tariffs. This can lead to
exports being expensive.
v. Another method that government can use to limit imports is to introduce an Import Quota
which is a physical limit on the quantity of goods that can be bought outside the country.

EFFECTS OF TAXES ON THE ECONOMIC ACTIVITIES

i.
ii.
iii.
iv.

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2. THE MONETORY POLICY
- Monetary policy refers to the regulation of money supply which includes control of the banking
system.
- There are different measure used in controlling money supply and one way is through interest
rate.

i. INTEREST RATE
- Interest is the cost of borrowing money.
- The government through bank of Botswana usually influences rate of interest offered by
commercial banks.

What impact would higher interest rate imposed by the government have on businesses in
acountry?
i. Firms with existing loans will have to pay more interest to the banks.
- This will reduce their profits. Lower profit means less is available to
distribute to the owners and less is retained for business expansion.

ii. New investment in business activity will be reduced .Fewer new factories
and offices will be built.
iii. Demand for all goods and services could fall as consumers have less
money to spend.
iv. Demand for expensive items like houses and car will go down as it will be
expensive to get a loan.
v. Higher interest rate in one country will encourage foreign banks and
individuals to deposit their capital. This will lead to currency appreciation
and now imports will be expensive.
vi. If interest are low, business may borrow more to expand their activities,
more goods and services will be provided an d more people will also be
employed.

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3. SUPPLY SIDE POLICIES
- Governments want the businesses in their countries to expand, produce more and employ more
workers.
- The following are some of the policies which are being used to achieve this aim and they are;

a. Privatization
- This is when the government sells off its businesses to private buyers. The aim is to use
the profit motive to improve efficiency.
b. Improve training and education
- Government plan to improve the skills of the country’s workers
- In this way business benefit from using skilled staff and so productivity is increased.

c. Increase competition in all industries

- This may be done by reducing government controls over industries so that output may
be increased.

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GOVERNMENT IN PRODUCTION

NATIONALISATON
- It’s a situation where by the government takes over the management control of public Ltd
companies.
OR
- Is the purchase by the state of private sector businesses.

- Such decision may be taken over by the government because that company may not be
providing the services according to the expectations of the government.

Advantages
 It provides secure employment to the population.
 To protect national interest.
 To facilitate implementation of certain government policies.
 Government has the resources to better finance industries; profits realized goes to the
state coffers. This helps fund developments.

Disadvantages
 Lack of profit motive in their operations leads to wastage of resources.
 It would be run by politicians who may not have necessary business enterprise.
 Nationalized industries often become too large and difficult to manage.
 Centralized controls mean too much bureaucracy.
 Inefficiency due to monopoly power. It eliminates competition.
 Political aspects e.g too much interference by parliament makes it difficult to make profit.

PRIVATISATION
- Is the selling off the state owned enterprises such as the public corporations to private buyers
because of different reasons and one being that the corporation maybe operating at loss for
consecutive of years.

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 ADVANTAGES
 It reduces prices and increases quality of goods and services.
 Improves efficiency because of competition & the profit motive.
 Removes political interference in business operations.
 It helps to empower citizens.

DISAVANTAGES
 It leads to massive job losses. This is why it is always being opposed by trade
unions.
 The profits go to the private individuals not to the whole nation.
 Some government policies may become difficult to implement.
 Privatization can be abused by corrupt politicians who will sell companies to
themselves and at a given away prices.

COMMERCIALISATION
- It means turning a public enterprise into a profit making business.
- It actually means cutting costs and increasing efficiency and production in order to produce
profits.

Advantage
 Improve efficiency means costs effectiveness.
 Higher profit motive means better utilization of resources.
 Better quality products and services are made as companies’ faces of competition.
 Workers become more committed and responsible as their salaries depends on the
profitability of the enterprise.

Disadvatage
 Essential goods and services become too expensive for the poor.
 Profit drive leads to over exploitation of natural resources.
 Emphasis on profits will lead to ignorance of staff welfare.

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 If a commercialized enterprise fails, is a danger that some vital services will not be
available and public can suffer.

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GORVERNMENT CONTROL OF BUSINESS
- Business plays some important functions such as creating employment.
- Inspite of the positive role of the business they may also have some negative impact and this is
why the government intervenes in business.
-The government controls the business through licensing, laws establishment of regulatory
bodies

Reasons for the government‘s intervention in business are as follows;

i. To ensure that sufficient goods and services are available in the community.
ii. To prevent the production of shoddy goods and demerit goods due to profit motive.
iii. To protect employees and their rights.
iv. To protect the environment.
v. To promote competition.
vi. To prevent misunderstanding of society scarce resources .

WAYS IN WHICH THE GOVERNMENT CONTROLS PROUCTION OF GOODS AND

SERVICES
- As we have found out earlier, the reasons why the government control business is to protect the
community which involves the consumer & workers.
- The following are some of the ways the government controls production of goods and services
(Business activities).

a. Production of some certain goods

Government controls production of goods that may be harmful to the environment and
that will benefit few people.
- In this way society is protected from such kind of business

b. Consumer protection
- There are times that you have purchased a product which did not perform the way you
expected due to misleading information given by the seller.
- The consumer affair division is available to assist consumers to seek redress.

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 - There are also laws to protect consumers and these are;
- Weights and measures act
- Trade description act
- Consumers credit act
- Sales of goods act
- Consumer protection act
- Unsolicited goods and services act

c. Control of monopolies
- Monopoly occurs when one firm controls the market or dominates the market for the
product.

Disadvantages of monopolies
 Since they do not have any competitors the prices charged are high.
 Due to the absence of competition they do not see the need to improve goods and
services.
 They discourage new firms entering the market by using entry barriers eg very low
prices.

d. Protection of employees
- Those who are not employed have to be protected from unfair discrimination due race,
religion etc.
- Those who are employed should be protected in the following areas;
- From low wages and be guaranteed payment.
- From dangers that might affect their health and safety at work.
- From unfair discrimination while at work.
- From being dismissed unfairly.
- Female employees should be allowed to go for on paid maternity
leave.

e. Wages protection (minimum wage legislation)

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 - When an employee is offered a job, he has to be given a written agreement called a
contract of employment which contains;
- Wage rate to be paid
- Deduction to be made

- Also the government may also request employers to pay a certain minimum wage.

f. Protection against unfair discrimination

- Unfair discrimination occurs in different ways which are;
1. Being of a different race or colour.
2. Belonging to a particular religion.
3. Marital status.
4. Gender
5. Age etc.
In some countries government have enacted some acts to protect individuals from unfair
discrimination and these acts are;
i. Sex discrimination act
ii. Race retention act
iii. Disabled person act

WAYS HOW GOVERNMENT PROTECTS HIV/AIDS EMPLOYES

i. An HIV/AIDS person has to be treated as other person in an organization.
ii. Laws that are established to protect employees do not discriminate anybody because of
their status.
iii. Government through the ministry of health conducted AIDS seminars where employees
from private sector have been invited to participate for more education on how to treat
HIV employees.

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GOVERNMENT ASSISTANCE TO BUSINESS
a. Finance assistance
- Government has set up organs like CEDA, BDC, BEC, where citizens owned businesses can
obtain financial at low rates of interests.

b. Management training
- Organizations like enterprise Botswana, CEDA, BOCCIM, UB etc. provide training and
advisory services to businesses.

c. Trade fairs &exhibitions

- Government through the ministry of trade and commerce organizes trade fairs and exhibition
where local businesses can showcase their products to create more demand.

d. Growth in the financial sectors

- The government have granted licenses to other financial institutions to operate in the country,
the increase in financial services has increased the sources of the finance to businesses.

e. Other facilities & legislation

- There is no surcharge on machines and equipment’s imported by businesses that produce
mainly for the export market.

f. Link of pula & rand

- This was done to make sure that the local currency is not too strong to disadvantage exports
from Botswana.

REASONS FOR GOVERNMENT ASSISTANCE TO EXPORTERS

a. Lack of knowledge of the foreign market.
b. Risk of non-payment by the exporters.
c. Documentation
- Number of documents are used in international trade therefore the
exporter needs assistance in

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 order to prevent his goods being refused entry in foreign market.
d. Language problems
- Exporters need assistance to be able to communicate efficiently with
other business in other countries.

e. Measurements & standards

- Different countries use different measures which might not be known
to the exporters, so the exporters need assistance to evaluate these
measurements.

HOW THE BOTSWANA GOVERNMENT ASSISTS EXPORTERS

- We have already discussed government assistance to small, medium and large businesses
- Some of the government agencies discussed previously are also involved in assisting
exporters.

- Some of these agencies are;

i. Botswana Export Credit Insurance Guarantee Company
- It ensures exporters against the risk of non-payment by the importers.
- This gives confidence to the exporters in doing business because if the exporters fail to pay for
the goods BECI will compensate him.
- Also it assists exporters to break into new markets.

ii. BEDIA
- It provides information on foreign markets to assist exporters.
- They have also displayed Botswana products to international buyer to expand the market to
exporters.

iii. Exporters Directory

The government has developed exporter’s directory to advise and assist exporters on external
market etc.

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vi. Ministry of Foreign Affairs & International Cooperation
- The government has commercial attaches in the Botswana foreign missions in a number of
countries .
- They provide market update & other relevant information to local exporters.
- They also provide information to potential importers in the countries they are located in about
business opportunities in Botswana.

vi. Bi Lateral Trade Agreement

- The government of Botswana has signed bi lateral trade agreement with certain countries
including China, Russia, South Korea etc open more markets for Botswana goods.

vii. CEDA
- CEDA provides low interests loans to businesses, so exporters can borrow money to finance
their activities.

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