Title: Passive and anticipatory industry policies Essay Example

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Title: Passive and anticipatory industry policies

Introduction

The Global Financial Crisis caught many countries unawares hence leading to panic measures to try and make the situation better. In the collapse of Lehman Brothers company in the United States shocked the country and ensured the government guarantees bailout to all financial institutions. Many banks were saved from collapsing through the bailout plan and some governments in the Eurozone were also adversely affected. Industry policies implemented either worsened the situation or made it better. The nature of industry policies determines their effectiveness in an economic environment. Passive, reactive and anticipatory policies have been applied in different economic situations (Wade, 2010). The Global Financial Crisis to act through both reactive and anticipatory industry policies. This essay discusses the effectiveness of anticipatory and passive industry policies arguing that anticipatory policies were more effective the wake of the recent Global Financial Crisis.

Discussion

Industry policy plan for a given country refers to the official strategic effort to encourage enhance the growth and development of the economy. The government employs measures that targeting to improve capabilities and competitiveness of domestic firms while at the same time promoting structural transformation. Industry policy can be used in stimulating the macro-economic environment. Industry policies results in outcomes in the medium as in the long term; it is not able to correct the negative influence of restrictive fiscal policies (Lin & Chang, 2009). In the absence of expansionary economic policies the economy of Europe would stick in low growth and low inflation that would result in recession. The impact of the global financial crisis could not be dealt with passive industry policies. Where there were minimum effects of the global financial crisis passive industry policies would be implemented if there was no imminence of recession.

Passive industry policies do not react to activities in the market or take any action but rather do not respond. Passive industry policies wait for the solutions to come from self-adjustments in the market. Passive industry policies are effective if the economy experiencing normal growth as projected and there is no need to alter anything to stimulate growth. Policies which target to insulate or protect the industry from the exercise of adjusting or which try to shield the industry from competitive outside pressures are defined as reactive (Reinhart & Rogoff, 2009). Policies that aim at promoting change in the industry and assist to adapt industry to any impending competitive pressures are referred to as anticipatory industry policies. Anticipatory approach places great focus on the coordination of policy responses with regard to an overall planned framework targeting the entire industry policy process.

The Global Financial Crisis (GFC) had its epicenter in the laxity in economic policy and enormous errors made by the banks. Aided by weak regulation and propelled by biased incentives, the financial institutions (banks) borrowed and lend beyond limit with regard to their low capital bases, and were caught unawares when the housing price bubble burst resulting in massive defaults (Fried, 2012). The widespread of this behavior globally was made worse by the purchase and sale of opaque mortgage-based collaterals as well as derivatives among financial institutions. Consequently the Global Financial Crisis came into being. Many governments did not employ passing industry policies during this financial crisis time (Ciro, 2013). Reactive measures were implemented while also designing anticipatory industry policies that would avoid such situations that led to the global financial crisis. Regulations in the financial sector that led to banks lending without proper securities have been revised to ensure loopholes are sealed. The effects of the global financial crisis were devastating.

Industry policy can be referred to as a process of ‘self-discovery’. The government prevails upon economic actors to look for new opportunities but this essentially mean trial and error. Failure of some policy experiments supported by the government does not render the search futile. In many circumstances it is not easy to determine whether industry policies have been instrumental in attaining certain desired outcomes. With regard to the GFC, industry anticipatory policies are better than passive industry policies. Anticipatory policies would have averted the Global Financial Crisis from happening (Nayak, 2013). Passive industry policies would not have done anything to mitigate the effects of the global financial crisis. In the course of the global financial crisis the United States federal government started a bail-out plan for financial institutions and companies. The news of the Lehman collapse was the exceptional case that pushed further the government guarantee. The impacts of the collapse were very awful that made the federal government to continue the bailout plan.

Many austerity policies were implemented in Europe to try and mitigate the impact of global financial crisis. The scaring pace of economic collapse stirred many governments to action despite doctrinal misgivings by economists. In the year 2009 majority of countries initiated huge packages of tax cuts and ensured extra spending with the anticipating of simulating growth. The stimulus resulted into 2% of GDP on average in the members of the G20 club of huge economies (Krugman, Obstfeld & Melitz, 2012). Barrack Obama signed the American Recovery and Reinvestment Act in 2009 that was a stimulus plan worth $831billion representing 6% of the year’s GDP. The anticipation of the bailout plan occasioned a moral hazard that inclined decisions towards risk taking. If the United States federal government would have come up to the rescue of banks, many would have collapse due to the effects of the global financial crisis. It is apparent that the Europe Union will not be able to attain the seventy five percent employment target of the EU 2020 strategy requiring the creation of 17.6 million jobs (Lin & Chang, 2009). While long term fiscal deficit have to be reduced, it is not easy to reduce the deficits without implementing policies that support economic growth and result in job creation. Workers need hope and confidence to be restored after the global financial crisis.

Passive industry policies would not have made the situation better during the global financial crisis and instead many banks would have collapsed without the bailout plans by the government. Countries like Ireland, Greece, Turkey, and Portugal needed bailout plans to mitigate the impact of the global financial crisis (Chen, 2009). Some of this bailout plans ended up being a huge tax burden on innocent taxpayers. The Baltic states of Estonia, Latvia, and Lithuania were hard hit by the global financial crisis. Unemployment rates escalated and emigration was triggered. Austerity measures taken in Baltic States resulted into the countries retaining their fixed exchange rate policies as well as embarking on significant consolidation for 2009 (Aggarwal & Evenett, 2012). This included spending cuts and tax increases. Most enterprises were privatized in order to cut down the size of the public sector. Without austerity measures many countries would slide into recession. Industry-reliance for self-adjustment sometimes does not bring out the required results. Therefore, fiscal and monetary policies have to be implemented by governments to get the economy back to where it was and stimulate growth. Some governments have made it difficult to manipulate the market as some anticipatory industry policies aimed at avoiding major financial crisis again.

The prevailing economic climate in the European Union has placed substantial pressure on government public spending whereby many governments have implemented cost cutting initiatives. 73% of healthcare in 2010 was publicly funded according to OECD data. Global employment recovery remains the most disturbing challenge. In spite of improvements in several countries once positive growth in the economy resumed by 2010, the slowdown of global growth in 2011 posed new challenges for creation of employments (Elson, 2011). During the global financial crisis passive industry policies are not the best since nothing is done to try and stimulate growth and create new jobs. Indebted countries will be tempted to implement stimulus programmes to help foster economic growth and create job for its citizens. Anticipatory industry policies are likely to be effective in cases of crisis like the global financial crisis. Passive industry policies can be good during normal growth in the economy.

Conclusion

Many governments in the world implement industry policies to deal with different situation in the economy. Crises have called for institution both reactive and anticipatory industry policies to reduce chance of a repeat and stimulate economic growth. Many countries responded differently to the Global Economic Crisis depending on how they were affected. Largely bailout plans were rolled out to prevent financial institutions and companies from collapse. Anticipatory industry policies prevent future pressures from having adverse impact on the economic stability. Passive industry policy call be applied where the economy is experiencing normal growth and not during crisis like the global financial crisis.

References

Aggarwal, V.K., & Evenett, S.J. 2012, Industrial policy choice during the crisis era, Oxford Review of Economic Policy, 28 (2), 261–283.

Chen, J., 2009, Essentials of Foreign Exchange Trading. Hoboken, NJ: John Wiley & Sons.

Ciro, T. 2013, The Global Financial Crisis: Triggers, Responses and Aftermath, Ashgate Publishing, Ltd, London.

Elson, A. 2011, Governing Global Finance: The Evolution and Reform of the International Financial Architecture. New York, NY: Palgrave Macmillan.

Fried, J. 2012, Who Really Drove the Economy into the Ditch?
Algora Publishing, New York, NY.

Krugman, P.R., Obstfeld, M., & Melitz, M.J. 2012, International Economics: Theory & Policy, 9th Edition, Addison-Wesley, MA, Boston.

Lin, J., & Chang, H. J. 2009, Should Industrial Policy in Developing Countries Conform to Comparative Advantage of Defy It? A Debate between Justin Lin and Ha-Joon Chang, Development Policy Review, 27(5), 483–502.

Nayak, S. 2013, The Global Financial Crisis: Genesis, Policy Response and Road Ahead, Springer, New Mexico.

Reinhart, C. & Rogoff, K., 2009, This time is different: Eight centuries of financial folly, Princeton University Press, Princeton.

Wade, R. 2010, After the Crisis: Industrial Policy and the Developmental State in Low-income Countries, Global Policy, 1(2).