Essay one (China’s financial system)
Introduction and Thesis Statement
The restoration of an economy from a depression requires a careful adoption of strategies. Various measures that governments use to promote the growth of key sectors as wells the entire economy have severe outcomes which must be considered before they are put in practice. Fundamentally, governments implement different fiscal and monetary strategies to solve economic problems, which may be successful or not. Thus, the analysis of the strategy to be deployed becomes essential to achieve the desired objectives. The financial sector in an economy is of central importance. As such, public policies that impact on it must be implemented with great considerations. The restoration of the economy may involve both internal and external borrowing by the government, but the impacts of such policy on other sectors of the economy must be considered. Also, economic activities of other agents in the economy must be regulated to achieve the desired government’s objectives. The analysis of various government policies and activities of different economic agents reveal that government policies intended to stimulate the economy, as well as the undertakings by different economic agents do not always produce the desired effects on the economy. This essay will analyze various effects of government policies in attempts to restore and promote economic growth with reference to China.
Analysis
The government may consider borrowing internally using various instruments such as the sale of bonds and other securities in the financial markets. The primary objective of borrowing is to facilitate various developmental projects within the economy. Also, governments may turn to borrowing as a strategy to restore the economy from depression. However, borrowing has various implications for the economy, and governments should consider the impacts of this policy as well as its effectiveness in creating desired economic stimulus.
The global crisis of 2008 resulted in collapse and stagnation of many economies in the world (Yang, Li, and Kuhn 55). After the crisis, governments of different countries employed various restoration mechanisms to bring their economies to their initial positions. Borrowing is one the strategies widely applied by governments to obtain revenue for emergencies and some long- term growth strategy. However, the contribution of the debts to the country’s GDP is of central importance. Borrowing from financial institutions within the economy normally results in increased demand for loans, leading to increased interest rates (Krugman et al. 43). High- interest rates tend to crowd out private investors, resulting in low level of investments and increased unemployment rates. As a result, the value of GDP reduces leading to poverty.
Government borrowing from financial institutions has significant impacts on their lending capacity and liquidity (Rambures 61). Additionally, the control of financial institutions by the government results in poor performance due to their perception of the government bail-out. International borrowing results in increased foreign liabilities and high level of capital flight through loan resettlement. A high ratio of debt to GDP is detrimental to an economy. In severe cases, governments borrow to pay the accumulated interests on the previously borrowed money, thereby putting little financial support on economic growth projects. Therefore, government borrowing can be destructive to an economy if not carefully managed.
Devaluation of currency to promote exports is another strategy for economic growth and restoration. However, this policy has different implications for the main sectors of the economy. The stock markets are adversely affected by currency devaluation (Yang, Li, and Kuhn 113). This may result in government spending more funds to prop them up. The poor performance of financial institutions in the economy stimulates the development of non-formal institutions if the financial markets are not well regulated. These institutions constitute shadow banks, and they pose severe threats to formal financial institutions in terms of loss of liquidity and cash as a result of the issuance of unsecured loans due to high competition.
Possible strategies to remedy the situation
The adoption of effective debt management strategies is instrumental to ensuring that the government achieves the desired objectives through borrowing. Consideration of debt contributions to the GDP and the sources from which loans are obtained is also crucial. The balance between borrowing from financial institutions and the public is more effective than entirely borrowing from the banks. Also, adopting regulatory measures to control the financial markets is essential to prevent the development of destructive non-formal institutions that put the financial market at risk of failure. Implementation of effective fiscal and monetary policy to stimulate the economy is also instrumental for growth and economic recovery.
Conclusion
The coordination of public policy is essential to achieve the desired economic objectives. The failure to address economic problems effectively may lead to economic stagnation and poverty. Excessive government borrowing is detrimental to an economy in terms of its impact on the main economic sectors and exogenous shocks due to foreign controls. Currency devaluation tends to promote exports by lowering the value of the local currency relative to other currencies. However, its implications for foreign investors in stock markets are quite grave. The failure to regulate financial markets may lead to the development of financial intermediaries who carelessly lend money to the public, putting the formal financial sector at risk of loss of liquidity as well as cash as they strive to attract customers by offering unsecured loans. Therefore, governments should consider more efficient economic management strategies that will not have severe impacts on the development of their economies.
Essay two (Russia’s central-bank governor)
Introduction and Thesis Statement
Many economies of the world strive to enhance their revenue generation strategies to improve financial independence. Revenue generation requires careful management of the existing resources as well as exercising effective control of country’s internal sources of revenue. However, the challenge of enacting effective revenue generation and management policies has led to the failure of many economies, forcing them to turn to international monetary institutions for support. Effective management of forex facilitates the protection of the domestic currencies from external shocks. Also, the management of the central monetary authorities is instrumental to the capacity of an economy to raise and manage revenue. Internal revenue generation helps an economy to be self-reliant, which is important to protect a country against foreign controls. Economic analysis shows that many economies have not been successful in internal revenue generation and management due to limitations of the strategies they use. This essay will analyze strategies that countries implement to facilitate revenue generation to achieve financial stability with particular reference to Russia.
Analysis
Adoption of policies for revenue generation and management
Achieving financial stability is an objective that has been met with many challenges, and only a few economies can claim to be financially stable. Even the economies with high levels of financial stability, raising the revenue required to sustain the economy becomes a problem. Governments deploy various approaches for managing sources of funds for their countries. However, careful management of revenue generation strategies is necessary to achieve the set economic objectives.
Government revenue comes from various sources which must be carefully managed if governments must realize a high level of revenues. Obtaining revenue from a diversity of sources can put a country in a good position in terms of ability to generate capital (Bobo 93). However, the size of an economy tends to limit the amount of revenue that a country can raise. The value of the GDP and the performance of the existing sectors determine the capability of the economy to generate revenue.
Efficient management of key areas that contribute more to the GDP is fundamental to sustain the internal sources of funds. If we look at the private sector in Russia, it is apparent that although GDP value deteriorated, a 4% decrease in 2015 shows better economic performance than 2008-2009 when there was economic depression. Effective management of the private sector resulted in less capital flight. Fluctuations in energy prices were the major limitation to revenue generation between 2008 and 2009.
The strategic management of a country’s international reserves constitutes a major source of revenue that can save an economy from an economic downturn. Thus, countries seeking to achieve financial independence may consider maintaining a higher level of international reserves. For example, Russia changed its policy in the management of its international reserves to align its revenue needs with its capacity to raise revenue (Bobo 126). Export promotion strategies are important considerations when it comes to growth of international reserves. For instance, promotion of oil prices resulted in an increase in Russia’s international reserves between 2009 and 2013. Such economic management strategy contributes to the capacity of an economy to generate the required revenue even in times of emergencies. However, some strategies for export promotion are ineffective due to low demand for some products as well as the development of strategies to substitute imports by the developed countries. This put a limit on the level of level of international reserves that a country can attain. Thus, raising as much revenue as the country requires becomes a challenge.
The management of currency exchange is crucial to solving some economic problems that retard the income generation capacity of various countries. The use of floated system of the exchange rate is instrumental in the management of international trade (Krugman et al. 246). If export prices are falling, an appropriate strategy is to use a more flexible exchange rate. For example, the CBR (The Central Bank of Russia) allowed its currency to float and reduced it by about 40% relative to the value of Dollar in 2015. This helped in maintaining the reserves in the midst of falling export prices. Such currency devaluation strategy helps to manage inflation by making imports relatively expensive. Inflation management helps to maintain economic stability, an important instrument for sustaining the sources of revenue.
The level of interest rates in a country has different implications for its capacity to raise the revenue. Also, the central monetary authorities like CBR use the interest rates to maintain the stability of domestic currency which is fundamental to the economic management. Low level of inflation and strategic exchange rates promote investments, resulting in the improved capacity of the country to raise revenue. For example, the CBR raised the interest rates to protect the deterioration of the domestic currency, although this was hazardous to the investors. A high rate of interest rates also helps to curb inflation. However, the use of interest rates to manage the economy requires careful analysis of its impacts. Raising the interest rates helps in maintaining the country’s reserves while at the same time affect investments. This limits the capacity to increase revenue since the country might lose more from the investors as it strives to manage the reserves.
Conclusion
Strategic management of the economy is a fundamental instrument to achieve independence and stability. Raising the revenue enough to sustain the economy is a challenge to many countries since it requires the analysis of the effectiveness of the approach to be deployed and the impacts of such approach. Diversification of sources of funds is crucial for raising the revenue. However, the limitations associated with it tend to limit its efficiency. Other strategies such as currency devaluation and interest rates have significant impacts on the ability of an economy to generate revenue, but they are constrained by lack of harmony between the strategy and its impacts. Therefore, governments should consider the effects of their policies on other areas in the economy before implementing them.
Works Cited
Bobo, Lo. Russia and the New World Disorder. United States: Brookings Institution, 2015. Print.
Krugman, Paul R, Maurice Obstfeld, and Marc Melitz. International Economics: Theory and Policy. 10th ed. United States: Prentice Hall, 2014. Print.
Rambures, Dominique. China’s Financial System: Growth and Inefficiency: 2017. Switzerland: Springer International Publishing AG, 2016. Print.
Yang, Li, and Robert Lawrence Kuhn. China’s Banking and Financial Markets: The Internal Research Report of the Chinese Government. United Kingdom: John Wiley & Sons, 2007. Print.
