Numerous literature has expressed the fact that towering levels of investment and proficient investment allotment need a perfect investment climate. Most policy issues and questions have centered on identifying the appropriate conditions that are healthy to a good investment climate. For instance, in most societies, the current investment climate is characterized by, “standard good governance requirements together with the adequate supply of certain types of infrastructure, such as electricity and telephone line” (Khan, 2005, p.1).
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Further, in such societies, good governance is determined by the prevailing stability of property rights and, to some extent, by the depth of democracy and public accountability. According to this theory of investment climate, demonstration of stability in property rights can encourage high investment rates while at the same time guarantee effectiveness in investment allotment (Khan, 2005, p.1).
Generally, when these factors together with good governance are observed and pursued, the certain argument is that they stimulate and encourage rapid growth and sustained poverty reduction. Therefore, the essence of this paper will be to look at the investment climate and how various market forces accelerate or inhibit the investment climate in general. Further, the role of government in creating a conducive investment climate will be investigated.
Why do some people believe that the market system is the best mechanism for allocating scarce resources and thereby encouraging a positive ‘investment climate’? Explain your reasoning
For a long time in history, many societies have been confronted by vital fundamental economic questions concerning, “what to produce and for whom to produce it in a world of limited resources” (Caldwell, Davis and Gallagher, 2004, p.112). As a result, starting from the second half of the 20th century two unique and different economic systems rose and gained ground as a response to the above questions. The economic systems include the command system of economies which in large scale are directed by a centralized government and characterized by limited choices on the part of buyers and sellers” (Caldwell, Davis and Gallagher 2004, p.112).
On its part, the market system of economies is, “based on private enterprise and consumer and producer choice” (Caldwell, Davis and Gallagher 2004, p.112). Evidence indicates that there is no existence of pure market economies; nevertheless, a market economy has been seen to answer the three basic questions of “what is to be produced how is it going to be produced and who gets what is produced” (Anonymous n.d, p.1). Generally, the market system depends on the demand and supply of products and services whereby demand and supply establish prices, and in turn, prices function as signals to both the producers and consumers (Anonymous n.d, p.1).
To function in the right way market system depends on some particular factors which include: “the profit motive, the incentive for a reward for enterprise; good levels of information being available to both producers and consumers; price accurately reflecting the costs and benefits of consumption and production; and the ease with which resources can move to different uses” (Anonymous n.d, p.1). The major motivational aspect of the market system is the profit motive whereby numerous entrepreneurs get encouraged to participate in investment ventures by the prospects of perceiving some returns on their overall efforts (Anonymous n.d, p.1).
The economic literature is of the view that the economic value of scarce resources is ultimately determined by consumer preferences and in general consumer preferences are best expressed by a market economy hence the market system is the preferred institution for allocating scarce resources (Bartelmus 2002). A market economy is linked with decentralized decision-making and ex-post coordination, events that have promoted the system to be the best with regards to the allocation of scarce resources for the benefit and welfare of people. A market economy is seen to be more efficient and encourage stimulation of individual interests through competition.
The market economy operates basically within the rules of market prices which act as the main indicators for economic bottlenecks (Bartelmus 2002). Prices constitute the principal instruments upon which efficient allocation of limited resources takes place while at the same time they determine the direction of science and research towards the development of new technologies with aim of eliminating bottlenecks.
The market system is seen to encourage a positive investment climate in many ways. First, the market economy provides economic freedom that allows individuals and firms to produce trade and consume their preferred products without any interference, coercion, or misrepresentation. To achieve this, the market system operates within the confines of the law, property privileges, and freedom of contract; thus, the system operates within a secure system of private property rights, which in turn translates into a crucial part of economic freedom.
The system constitutes two major forms of rights, which are “the right to organize and profit from property and also the right to shift property by voluntary means” (Bartelmus 2002). When property rights are secure and under protection, people enjoy the freedom to choose how to utilize their property, how to earn from it, and how to transfer it to another person. When such conditions prevail many people possess the ability to achieve greater own freedom and development than under a planned and controlled system.
At the same time market system with a secure system of property rights contributes to a reduction in uncertainty and stimulates investments establishing conducive and favorable conditions for the economy to succeed.
Why do some people believe that not everything can be left to the free market, but that governments also have a role to play in encouraging a positive ‘investment climate’? Explain your reasoning
A good investment climate has been regarded not only to be concerned with generating profits but also concerned with issues to improve the welfare of society. As competition intensifies and profit motive directs the market system of the economy, it becomes important for the government to take up the role of meeting some costs and risks through the implementation of appropriate policies.
The market system operates within a business environment that encourages property rights, is regulated, taxes are paid, finances exchange takes place, there is a need for appropriate infrastructures, corruption has to be checked and necessary government policies have to be formulated to direct the economy. All these issues facilitate and justify the need for government involvement in the market system of the economy. According to Smith, the pursuit of individual self-interest in business has resulted in collective prosperity for society, and the government was seen to play a great role in this prosperity (Brace 1994).
Smith was convinced that the voluntary market system required some government activity in that the government involvement is needed to set rules and conducive legal framework that facilitate the operation of market exchange. In this way, property rights must be guaranteed by the legal system (Brace 1994). Further, Smith noted that the government was needed in the market system economy to produce public goods that the larger market would fail to produce (Brace 1994).
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According to Jones and Bachelor politicians who constitute and form the government is always open to influence from the business community and the two authors argue that “through the public powers to tax and to incur debt, governments use the productive capacity of the private economy to generate the resources necessary to produce public services” (cited in Brace 1994,p.9) as a result government cannot be seen to be a barrier to growth but always act to encourage and promote prosperity generally for political reasons.
According to Joasil (2010), the biggest role of government in the market economy is to, “guarantee the fluidity and complete functioning of the world of business” (p.1). The government makes it possible for the fluidity and functioning of the business activities by, “enacting and implementing laws and policies that could guarantee the rights of the individuals to own properties and have these rights secured and respected.
Further, the government must strengthen the institutions that could guarantee the security of the physical aspect of all private investments in a stable political climate” (Joasil 2010, p.1). The views of the author suggest that the role of government in the market system of the economy should be limited to the provision of the necessary conducive environment for private investors to operate in. The author concludes that “the job of government in the market economy is to make sure that the democratic and institutional structures are in place and strong to guarantee a stable political and economic environment” (Joasil 2010, p.1).
When this happens, the investment climate becomes viable encouraging the inflow of both domestic and foreign investors since both security and political stability are guaranteed. Gemper (1990) summarizes the role of government in the market economy by noting that the government has to assume the role of guardian and has to put down and guarantee the general institutional conditions for providing back-up support and preserving social peace. As such the government is the custodian in protecting the abuse of freedom, especially behaviors not inline with real market conditions, violations of the market, and social laws. Further, the government should provide special provisions for guaranteeing economic competition as well as defending the economy against protectionism.
Suggest some actual government policies that might be used in your country (name the country) to improve the ‘investment climate’. Explain your reasoning
Northern Ireland constitutes part of the United Kingdom and for a long time has been governed by the UK tax and business regime (McKernan and McQuade 2005). Currently, Northern Ireland is increasingly becoming a location for people looking for avenues to establish businesses or expand their already existing businesses. The country has a youthful and well-educated population, a low-cost base, and one of the technologically advanced network infrastructures in Europe (McKernan and McQuade 2005).
According to 2004 statistics, UK was rated as the second-largest recipient of Foreign Direct Investment in the whole world and had 22.5 percent of all FDI stock in the EU and 9 per vent all over the world (McKernan and McQuade 2005). Therefore Northern Ireland has captured a proportional share of this investment. To create a more positive investment climate that matches that of the United Kingdom, the following government policies are suggested for adoption by Northern Ireland. First, Ireland’s government needs to lower-income corporate tax rates which can attract foreign investment.
Comparing earlier results when the country lowered its corporate tax rate to 12.5 percent thus becoming the lowest corporate tax rate in Europe, statistics show that FDI increased in the country spurring business growth (Organization for Security and Co-operation in Europe-OSCE 2006). Secondly, the government needs to formulate a strong policy of national investment in infrastructure; thus, with the integration of European countries into the EU, Ireland is seen to be in a strategic position about business growth if it gets access to EU countries. Key infrastructural developments in transport, communication, and training need to be undertaken.
The infrastructural policy would ensure the availability of structural funds, which should be applied to the targeted development plan efficiently; indeed, evidence from other EU countries indicates that development and improvement of infrastructures have resulted in accelerated economic growth since the investment climate become fertile. Third, Ireland’s government needs to formulate a sustainable fiscal policy that supports market growth and stimulate economic activities especially with regards to foreign investments.
Generally, macroeconomic stability is regarded as a prerequisite for economic growth and according to World Bank, macroeconomic stability consists of “current-account and fiscal balances consistent with low and declining debt levels, inflation in the low single digits, and rising per capita GDP” (Organization for Security and Co-operation in Europe-OSCE 2006). In an actual sense, a strong and stable macroeconomic environment is needed and important to provide support for long-term economic growth.
Why do some observers criticize companies that have monopoly power in a market while others argue that such power can be beneficial to consumer interests? Then, concerning a country of your choice, briefly discuss how the government of that country has introduced specific policies to counteract the abuses of monopoly power
For a long time, the monopoly has been viewed by numerous economists as a bane of markets one that has characteristically led to market failure (McKenzie and Lee 2008, p.1). At the same time economist have associated ‘evils’ of monopoly with theft and taxation because monopoly can impair an economy’s vigor just in the same way theft and taxation does. But looking at monopoly powers in most countries it is evident that they have been created and nurtured as a result of political intention.
Modern economies reflect monopoly as a source of ‘inefficiency’ or ‘deadweight loss’ (McKenzie and Lee 2008, p.1) whereby monopoly forces are seen to cause misallocation of resources where few resources are utilized in monopolized industries and too many resources utilized to lesser advantage in other competitive markets (McKenzie and Lee 2008, p.5).
According to Adam Smith in his book titled, ‘Wealth of Nations’ monopoly is a term that indicates a range of market structures, “with the critical feature being the capacity of a firm or firms within a protected industry to raise the selling price above the competitive or ‘natural’ price” (McKenzie and Lee 2008, p.5). Smith compared monopoly to grant trade secret that permitted the producer to have control over the supply of product or service hence its price.
When the supply of any product or service is controlled or regulated and not supplying the actual and effectual demand, Smith noted that “monopolists can sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profits, greatly above their natural rate” (McKenzie and Lee 2008, p.5).
Smith and his early school of thinking contended that monopoly applies more slackly to any firm that possesses the ability to uplift its price above cost which generates monopoly rent or an income over and above what is required to keep the resources in their current employment (McKenzie and Lee 2008). From Smith’s argument, monopoly is regarded to constitute any firm that has the capacity of restricting sales with the intent of increasing its price and also firms that are protected by import restrictions and as a result can increase their prices above competitive level (McKenzie and Lee 2008).
Refereeing to it as ‘wretched spirit of monopoly’ Smith detailed how monopoly practices resulted in import restrictions hence oppressing the poor and as the poor largely become victims of oppression, “the poor invariably gives rise to the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits” (McKenzie and Lee 2008, p.6). Smith further noted how monopolies had become, “great enemy to good management because protected as they are, monopolists do not have to work as hard at improving, as a matter of market self-defense, their management ways in response to free and universal competition” (McKenzie and Lee 2008, p.6).
Monopolies are at the same time seen to improve the overall profits of the protected industry but ineffective facilitate undercutting of state tax revenue solely because cumulative national income is diminished (McKenzie and Lee 2008).
Smith summarized the negative effects of monopoly by characterizing monopoly to possess one ‘fatal’ element, “the high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems to be a superfluous and expensive luxury to suit better the affluence of his situation. Because the protected ‘owners of great mercantile capitals’ are often political and commercial leaders of communities and hence set examples for others by how they act, a monopoly can also cause the masses of workers to be less parsimonious than they would be otherwise” (McKenzie and Lee 2008, p.6).
Nevertheless, the monopoly has found solace in other corners of economists who have reviewed the economic importance of monopoly. Such economic figure behind the important role of monopoly in the economy is Schumpeter who indicated that monopoly or prospects of monopoly, “is an engine of creative production, which necessarily undergirds economic progress” (McKenzie and Lee, 2008, p.2).
According to the author, market economies need some optimum level of monopoly to achieve maximum growth in consumer welfare over a given time. Monopoly profits have been regarded as the easiest and most effective way of collecting how to finance additional investment and Schumpeter’s understanding was that the prospects of monopoly profits would make the financing of initial forays into markets all the easier and cheaper (McKenzie and Lee, 2008). The conclusion of the author was that monopoly viewed to be pursued by a single firm or across an array of entrepreneurial investments could encourage the development of investment portfolios, which in turn can reduce investment risks and thereby encourage investments and innovations (McKenzie and Lee 2008).
The USA is a country that has moved to check the abuse of monopoly powers through the establishment of Anti-trust policies (Economies Junkies, 2008). The overall conviction has been that government needs to protect consumers from the injustices of monopolies. The government through the Anti-trust policy aims at intervening in monopolistic powers to foster free business and fair competition with the sole aim of shielding the poor and unfortunate from powerful monopolistic activities.
The Anti-trust policies in a broad sense seek to put some limitations on the production and supply of commodities by firms with aim of ensuring adequate supply in the market (Economies Junkies 2008). This has prevented companies from creating artificial shortages thus resulting in a price increase of some commodities. Monopolistic businesses that flout the requirements of this Anti0trust law are liable for punishment.
Although the policy has been disparaged by some economists and business people who note that it discourages competitive pressure thus ‘killing’ the market, the fact is that the policy has led to some ‘market sanity’ and firms with tendencies to exploit consumers in one way or the other have found it difficult to do so.
This paper can be summarized by noting that the market system of the economy has evolved to assume a vital role of stimulating and fostering a positive investment climate through personal ownership of property rights who in turn become motivated to invest more due to prospects of positive returns. At the same time, government involvement in the market economy has been appreciated especially with regards to the need to regulate and enforce necessary policies to guide the market.
Moreover, to spur economic growth the government needs to formulate effective fiscal policies that encourage a conducive investment climate thus attracting both domestic and foreign investment. Lastly, monopolistic powers have both negatives and positives but it is the negatives that have attracted most literature, nevertheless, various governments have intervened to protect consumers from abusive monopolists by legislating appropriate policies.
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