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Government Policy

The Fourth Pillar Driving The New Global: Government Policy

Best-for-BusinessHow significant is government for the economic growth of a country? Should we have more government or less government? These are some of the most contested questions these days and there are no clear answers. But what is clear and undeniable is that an effective government is critical for facilitating economic progress. There can be little argument about the crucial role of a national or regional government in creating a conducive environment for businesses to thrive.

The most basic and visible economic role of government is in the regulation of businesses and financial markets, and the relative effectiveness of that role can lift or ruin the economic progress of a country. Stifling controls that crimp operational and Govt-Spendinginvestment decisions of businesses have held back the economic potential of many countries during the last century. The wave of economic and financial liberalization that swept most parts of the globe during the last three decades of the 20th century has been instrumental in driving the progress of globalization. If not for the path breaking reforms initiated by governments in China, India, and elsewhere, hundreds of millions of people would likely have remained in extreme poverty.

At the same time, weak regulatory frameworks could potentially be equally harmful by elevating systemic risks and eroding consumer confidence. While successive financial crises in different parts of the world over the last couple of decades have focused much attention on financial regulators, regulators in areas such as drug control and food safety are no less crucial in ensuring public safety and the smooth functioning of the economy. In addition, subjective and haphazard regulatory efforts could hamper business confidence and hurt efficiency. It could also lead to crony capitalism, where connections with and influence over regulators and policymakers become the critical elements of business success.

Public-Debt-and-GrowthIn the emerging economies, governments have an important role in facilitating the growth of capital markets. While their industrial capabilities have grown leaps and bounds, and corporations from these countries are expanding globally, the capital markets even in the large emerging countries are relatively underdeveloped. These markets are often too tightly controlled, and lack depth due to poor investor participation as well as the absence of mature institutional investors and intermediaries. As a result, equity and corporate debt securities remain less popular among retail investors. If they remain so, fast growing companies in these countries will have to continue relying on costlier domestic financing or overseas capital to fund their expansion plans.

The unconventional fiscal and monetary measures rolled out in recent years at an unprecedented scale have fundamentally transformed the role of regulators and the dynamics of economic policy interventions in much of the developed world. Despite continuing criticism of specific policies, it is now broadly accepted that the bold monetary and fiscal approach has been mostly beneficial and has prevented the global economy from a deeper economic downturn. Even then, it remains to be seen if policymakers will be equally adept in winding down the extraordinary measures when their utility is no longer obvious. Nevertheless, it appears that governments have to necessarily play an important role in recalibrating the regulatory environment to accommodate the structural changes in the global economy.