Practical Economic Policy: Goals, Tools and Borders

Revaz Gvelesiani, Director, Full Professor TSU, The Georgian-German Institute of Economic Policy

Analysis of Economic condition provides economic and policy- makers with important information on current situation, its causes and confronts them against expected development in future.

If estimating views play an important role, borders of Positive Economics will be approached. So, the question rises the other way. The focus of researches moves from the description and explanation of existing situation to economic policy goals.
Normative Economics incorporates value judgments about what the economy should be like. It is an ethics, adjusted to economy. If we relate positive economics’ expressions to each other, we will get from ethic principles stable system of more or less concrete goals: conception of economic policy.
Economic and political conception is a frame of general orientation, which also presents to be a guide for those who carry out economic and political actions while making and realizing decisions. Economic and political conception is a catalogue of grounded and long term goals; it identifies purposeful and conformal order principles in order to define separate economic resolutions and place of activity.
The basic issue of Normative Economics is analysis of society’s goals` system.
That way of rising question automatically puts the role of value judgments in economic science. Therefore, the views generally considered to be positive economics’ belonging, should be considered from the value judgment point of view. But, as the value judgment can be found in every economic expression (especially while analyzing reasons) making sharp estimation is often impossible. Value Judgment depends on norms and not on their existence in economic science.
Defining economic and political goals may depend on society’s goals. Every attempt till today to get economic policy purely from economic point of view failed.
This failure concerns welfare economics as well, that attempts to formulate and quantify major goal of Economic policy. Welfare economics could not succeed to define correctly the aim of Social Welfare maximization and show possible closing to the goal.
There is no general social welfare function to be measure of economic policy.
Instead, we have plurality of goals of practical economic policy, following from social values (such as freedom, guarantees etc ;). Formulation of social values seems to be general condition. In order to transit to economic and political sphere (for instance, to taxpaying and social policy) they should be more concrete and precise. Economic and political goals are closely connected to social values, but they compulsorily follow from them. Connection between social values and economic goals are better explained with goal-tools problematic. Practical economic policy needs to implement number of goals. Besides, economic policy is rational only in case politicians take into consideration possible results and negative impacts of their decisions on other goals of economy. The precondition of the issue is the knowledge of goals` interdependence. Goals are not isolated from one another. Considering hierarchical aspects, two general groups might be separated: horizontal and vertical dependence of goals.
Horizontal dependence exists between the goals, that are equal by rank. They are located on one flatness. There are five horizontal goal- relationship in the Theory of Economic Policy (identity, harmony, neutrality, conflict and contradiction). Their features are typical for the relationship of goals and means. We would like to debate on three basic relationships, because of their importance for practical economic policy:
1. Neutrality of the goal means implementation of one goal without any opposition stimulation to other goals` realization. Therefore, reaching one goal does not influence other goals, and they (goals) are not interdependent. Although, neutrality of the goals in the practice of economy is only possible in relation to two, separate goals. In the complex system of goals there is no goal, having no connection to other goals.
2. In case of goal Harmony (Complementarity of goals) reaching one goal makes a positive impact on other goals. Therefore, it ensures (to a certain degree) implementation of other goals. Goal –tools relationship maintains sub –goal tool to ensure up-goal realization.
3. Conflict of goals (competitiveness of the goals) exists when reaching one goal is possible on the expense of other several other goals. Solving of the conflict becomes possible by means of political and economic compromises. Surplus production of any exact commodity is always possible on the expenditure of other sort of commodity. Optimal production of the commodity should take place on the basis of economic and political compromises. Namely, possible (optimal) amount combinations of commodity producing should be determined.
Obvious example of horizontal goal- relationships is a Magic polygon. We rely on four alike economic goals: stable level of prices, high level of employment, foreign policy equilibrium, constant and moderate growth of economy. They, as goals of economic policy, equally “stand” next to each other. This “magic” quadrangle with addition of other rank of goals may be transformed into “magic” polygon. Filling in traditional catalogue of goals with other goals such as environment protection, marks perspective relationship of goals and goal system, existing among these multi- angle goals. They have various and separately resistance characteristics.
Constant and moderate growth of economy and high level of employment might be characterized as harmonious goals. As a result economic growth brought us to reduction of unemployment. It seems, this “compulsory” connection does not exist today. Small economic growth could not reduce the level of unemployment. On the contrary, the level increased. As it becomes clear, unemployment reduction requires high rates of economic growth.
Stable level of prices obviously assists coming closer to the goal of distribution. Besides, negative effects of distribution that can be caused as a result of inflation (opposite break of prices’ stability goal) should be taken into consideration.
Conflicts of goals appear more frequently than harmony of goals. Conflict of goals is often considered between full employment and prices level stability, besides empirically shown connection between price growth rate and level of unemployment.
Conflicts may also emerge between the following conflicts: environment prevention, environment protection and economic growth or between foreign economic equilibrium, level of employment and stability of prices. It’s worth noting, that slogans about rising demands (taxation balance sheet deficit while stable exchange rate) and at the same time necessary arrangements of contractive economic policy may lead to difficulties on labor market. Keeping stable exchange rate by increasing internal amount of money creates a conflict between foreign economic balance and stability of prices.
In vertical goal- relationship (goal-means) goals do not exist on one flatness. They are not of the equal rank. Relationships are more hierarchical (hierarchy of the goals). Submitted goals are more intermediate comparing with the high goals. As a result, it seems better to name vertical goal- relationships –goal-tools relationship. Submitted goals (low and /or intermediate goals), might be approached only when higher goals (supreme goal) are approached.
Our fundamental goal is to increase economic welfare. Implementation of the following goals (intermediary goals) are necessary to reach the fundamental one: increasing real income per person, that causes rising employment level and/ or decreasing taxes.
Theory of Economic policy not just describes and explains economic condition, but is apprehended as a Study on art, determining practical economic policy goals and tools (means). Ideal of such sort of art theory takes all propose goal –tool relationships into consideration and is ready for any alternatives with its economic and political prescription.
Study on art tries to answer the question concerning bringing optimal means (combination of goal and means). It concerns the means, existing between given and eligible conditions for facing difference (economy –political goals) and the second is the effectiveness of usage of means.
On the basis of comparing existed and desired conditions economic and political program is created, that opposite to economic and political conception, presents precise plan of action. The plan covers goals for the given period and means of reaching them.
In order to correspond to the needs of rational economic policy, economic and political program should meet at least three criteria. First of all it should follow corresponding economic and political conception. On the other hand, conformity of goals` arrangements should be solid, and the third – operationalization of the goals should be provided. But, before economic and political program is created, analysis of alternative goal-means combination (analyze of influence) should be implemented.
Condition analysis and status–quo prognoses provide information on current situation and expected results (in case of action rejecting). Goal comparison interrupts demand necessity of action. If during comparing these existing and expected results potential demand of the action is confirmed, then following rational economic policy interest means of alternative action need more precise discussion. While selecting means (tools of economic policy) possible limitations, that may appear as a result of goals’ conflict should be taken into consideration. Back effects and result events should be added to the list of selected tools estimation. Conformity of these tools should be checked.
It has often been tired to analyse possible goal-mean combinations by means of econometric models.
In this case economic politicians should determine their goals exactly on the basis of preferences. Following the “programming model”, type of the tool, part of the time and doze that will provide optimal maintenance of goal implementation, become clear.
On the opposite of it, the result of quantified tools while forecasting an event is determined by means of certain economic and political goals. Models of programs and forecasting may greatly contribute to the matter of solving economic and political issues, but, as we have already shown, number of problems limit their practical value.
In the phase of program formation, we create economic and political program, relying on the results of action analysis. The task does not belong to the theory of economic policy. It moves into the sphere of practical economic policy. Economic politician should select
different alternatives of action and make a decision according to concrete catalogue of actions, in which the usage (therapy) of tools and goals is finally determined. Newly created challenges and obstacles (critics of interests` unity, rejecting arrangements by foreign partners, changing majority in government and parliament, not existing legislature etc;) often act in the phase. In that circumstances, economic and political programs should be able to realize themselves economically and politically.
As soon as economic and political program, in spite of all problems, is approved, arrangements regarding program realization takes place. Challenges and obstacles may be created in this phase as well. In program realization phase, result control should be maintained. It essentially covers two aspects. First of all, quality of goal` s implementation should be defined. The final discussion on economic and political arrangements’ success and failure is possible only after this. All these should serve as a guide for economic policy providers. The second is that preliminary control of the results gives possibility to define mistakes (deviation statements) on time. Its goals is to improve possible deviations by experianced economic political tools (pragmatic version), and to slow unexpected side events. In case of deviation, reasons of incorrect development (deviation analysis) should be determined.
Control of the results comes into the accordance to the task just in case of clear formulation of economic and political goals. Data of general purposes of desired development (for instance, reduction of unemployment, increasing rate of economic growth) is not enough. Economic goals should be measurable. That means that content, volume (dosage) and time correlation should be precisely defined. Detailing of goals that way is called —operationalization. Let` s take as an example operationalization with the purpose of employment. Formulation of high quality employment requires to be detailed and foresee the following three aspects:
– Qualitative operationalization or submitting important indicators to goal` s pithiness definition;
– Quantity operationalization;
– Time operationalization i. e. ascertainment of time when goals scheduled to be realized.
Politicians consider operationalization data to have the primary importance, as it controls results of economic policy, but only measure goals can define a degree of reaching a goal.
Economic Policy-makers are state officials and institutions, who, on the basis of competence conferred to them by society (voters), are responsible to make economic and political decisions and who have legitimate state power to implement the mentioned decisions.
Economic policy of a country is formed not only by local decision makers. International institutions gain more and more importance through the process of economic and political integration. It is especially obvious when speaking of European integrating. In thit case EU member states reject several national rights and transform them on supranational branches (such as Council of European Ministers, European Central Bank).
Debates are under the way concerning reforms of European Constitution, and repeated allocation of competentions among EU and its member counties.
Regional Committee of European Parliament claims EU to deal just with competences and defining details, as well as usage of already existed maintaining tools capacity deal to be considered by EU member countries. We should just wait and see if it is considered at all and how other aspect of Europe integration are considered.
Practical economic policy implies popularity of economic and political goals. Achievement of separate goals still remains to be vague.
For example, fair separation of income and property within society is opposed by unequal separation of other things (intelligence, adroitness, capacity of inculcation and so on) that in case of success leads us to rise of incomes and purchasing property.
As a result of conflict of goals, they are not always realized immediately and together.
That is why within the framework of system, priorities should be set. Although what should serve as a background? Broad society consensus would certainly be most desirable, what should maintain economic and political goals to become most profitable. Every one should decide himself/herself what sort of goal he/she wishes to reach quickly, but providing a comparison of interpersonal profitableness is impossible, as every subject of economy domains individual / subjective professional structure. Sum of individual profitableness should not compulsorily bring us to maximum of society’s profitableness. So, the issue concerning broad society consensus still remains unclear.
Attention of Economic politicians are often drawn to the goals, that reflect wrong way of development best of all. Such sharp politics compulsorily rejects conceptual aspect. Complementary and stronger influence is provided by political parties and society interested teams. This creates a danger, that political Opportunism is dominant in relation to rational economic policy.
Politics, while using economic and political tools, meets border lines. Theoretical connections and relationships are not properly analyzed (deficit of theory). There is often a lack of adaptation with the new environment. Assimilation of economic and political tools is partly debatable (for instance, rejecting fiscal tools with monetary). Economic and political goals might be irreversible. If tools are not used in right time with right quantity, they will be less effective. For example, further increasing of taxes during high taxpaying condition may lead to widening of shadow economy. For these economic and political arrangements reaction of private sector is of a great importance. It can be prevented with confrontation of the damaged. For instance, while reducing taxes, it` s possible that complementary profits in manufactories and interior economies might be used not for investitions and consumer commodity rising, but for meeting credit liabilities or financial resources creating.
Internationalization of economic relationship influences national economic politics, more and more meeting border lines. Within European integration sphere of national activities are limited. Many fields of politics (agrarian politics, fishing politics, coal and steel politics, foreign trade politics) follow united European economic policy. Within European Union, member states passed their national competence to European Central Bank. Economics is additionally depended on international norms and needs (liabilities in International Monetary Fund, International trade Organizations and so on).
Autonomy of European Central Bank, which’s main task first of all is to strengthen money value stability, may lead to conflict with federal government. Therefore, economic policy meets legal border lines. The second example may be employers and employee’s tariff autonomy presented in constitution.
Conflicts of interests among economic policy-makers may arise at some level. Serious problems may arise due to financial limits, when for example state debt limits the formation of budget.
And finally, state apparatus non-effectiveness as well as personal interests of bureaucracy (active and passive resistance) hinder economic policy development. Consciousness and flexibility of state administration is the most important condition for effective realization of economic policy.