Essays on Economics: By an Amateur

Essay One: Monetary and Fiscal Policy to keep cash in the county

Prompt: Country X has a fixed exchange rate regime and is facing a sharp rise in capital outflows. Provide specific policy recommendations to mitigate the situation and explain the economic implications of these policy choices:

Depending on the economic status of Country X, there are a few different policy approaches that can be utilized to address this capital outflow issue.

The first recommendation I would give Country X to mitigate this issue is implementing a revised fiscal policy. Regardless of its economic status, it is paramount that a country with a capital flight problem must incentivize citizens to keep their money and assets in the domestic economy. The country can do this by lowering taxes--whether it be on the wealthiest citizens, all citizens, or corporations.

This is what both conservative Donald Trump of the U.S.A and liberal Emmanuel Macron of France have done in their respective countries to prevent capital from leaving illegally/secretly to avoid taxation. A country must not inadvertently cause its citizens to feel they must move their capital abroad in order to save it from taxation.

The second recommendation I would make to Country X to mitigate its capital outflow issue is revising its monetary policy so that it aligns to the strength of its national economy. A reason that citizens may be moving money abroad may be because of Countries X’s fixed exchange rate. If Country X is relatively developed and affluent, this fixed exchange rate intentionally pushes down the value of the domestic currency and therefore causes a depreciation of individuals’ assets, especially if a large sum of their capital assets is cash (currency). A countertactic would be to convert its fixed system to a free-floating currency system. If the national economy is robust, this free-floating system would allow the currency to match its natural market value. The benefit of this transition would be that Country X can, both, better guard against debt and inflation and keep capital within its borders; but it will reduce the competitive trade advantage that undervalued currency grants.

If country X has a less affluent and underdeveloped economy, it could continue to aggressively push down and devalue its currency further. They will not impede its current capital outflows but instead will attract more foreign capital inward, though trade and investments. Although, the obvious potential peril of this method is risking untamable inflation.

In addition, Country X can revise its regulations in order to encourage more domestic investment opportunities; hence, domestic investors will have the option to invest more and keep their capital in domestic financial markets.

Essay Two: Path for poor nations to achieve economic grow

Prompt: Country A is a low income country seeking to shift to middle income with a 10-year economic growth plan. Please describe the major components that should be included in this plan.

The first and most immediate step Country A must take is the action of identifying what its nation's comparative advantage is. In essence, what is something that Country A does/produces relatively more efficiently than other states, and/or what resource does it have that other states lack? For example, does the country have large reserves of rare earth materials like the African and Australian continents? Does it have a large pool of low-wage and low-skilled workers in the workforce, like China and Vietnam?

This step is paramount to achieving economic growth in a globally competitive world. In modern society, wealth is created not found and annexed. To attract and create value, your country must possess and produce something of value. For example, 1970 Japan and 2000s China had a cheap labor force to seduce foreign capital and investment. Furthermore, Scandinavian countries like Norway and middle eastern countries like Saudi-Arabia used their large oil reserves to leverage auspicious trade-deals.

In addition, Country A should couple their economic comparative advantage with an artificially devalued national currency. This will gift them a competitive advantage in international trade. It will force the prices of their good and production to be lower than competing states; hence, complementing their comparative advantage by keeping prices attractively low--both domestically and abroad. This would allow Country A to protect domestic markets by decreasing imports, by making them more expensive for domestic consumers, and increasing exports, by making them less expensive for foreign consumers. Although, this cannot continue indefinitely, because you will eventually begin to flirt with inflation.

The next component Country A must include in their plan is economic diversification. This step happens after the country has already benefited from its comparative advantage and has begun an impressive period of economic growth. Country A must eventually begin to diversify its economy away from its competitive advantage to create a robust and lasting economy; an economy that does not become dependent on one stream of revenue. If a country encounters this scenario, its economy will not be able to combat fluctuations of that competitive advantage.

For example, Venezuela was once a rich state that profited from its oil production, but once consumers began turning to cheaper competitors/alternatives, Venezuela could no longer afford its bills (government spending) and begun printing money to sustain its country’s lifestyle. This led to hyperinflation and, consequently, its current economic state--a depleted and poor economy on the verge of civil war.