Economic Policy – What is it, instruments, objectives and characteristics

We explain what economic policy is, how it is classified according to its objectives, its instruments and other characteristics.

What is an economic policy?

An economic policy is the set of measures and decisions through which a government try to influence the direction of the economy of his country. It responds to a certain political-economic approach that the government wishes to implement, and is usually reflected in the budget National: the specific way in which a government invests its money.

Economic policies, thus, may be aimed at causing different effects in the productive and commercial circuit of a nation. A first classification would differentiate between the following types of economic policy:

  • Short or long term economic policies, depending on when you expect to obtain the desired effects: immediately or in the foreseeable future, respectively.
  • Short-term or structural economic policies, depending on whether they are, respectively, extraordinary measures designed to tackle a problem or a temporary situation, or if instead, they are permanent measures that are a constant part of the country’s economy.
  • Economic stabilization or development policies, depending on whether your goal is to reach a level of economic stability, that is, overcome a crisis or perpetuate financial and commercial peace, or rather they pursue the growth of the economy and are therefore ambitious policies.

However, economic policies are taken by the executive powers of legislative of a sovereign government, depending on the parties and interests that are governing.

Finally, economic policy should not be confused with political economy.

Objectives of an economic policy

Economic policies can be very different from each other and have objectives other than short, medium or long term. In that sense, we can talk about, for example:

  • Protectionist policies. Those who seek to protect or favour some sector of the national economy, scrutinizing it from the free competition versus products from another country or another region.
  • Liberal policies. They aim to liberalize the economy, that is, reduce or restrict the factors involved in it, allowing the market to “self-regulate,” that is, impose conditions on its own.
  • Welfare policies. Those who seek to improve the socioeconomic situation of the stocks most vulnerable in the country, through plans and assignments that allow them to alleviate their socioeconomic weakness.

In general, all economic policies have the task of benefiting the local economy, by solving problems, that is, the stimulation of certain economic behaviours and the inhibition of others. Of course, there is no consensus on how to achieve these goals, but there we are already entering the fields of political economy or economic philosophy.

Characteristics of an economic policy

Economic policies are characterized by:

  • They are implemented by the government of a country or by the group of governments of a region (when it obeys international agreements).
  • They consist of different types of measures (called instruments) that allow the State influence the functioning of the economy, stimulating some sectors and inhibiting others, as appropriate.
  • Its purpose is adapt the economic and productive circuit to the needs of the nation, thus contributing to the short, medium or long term with the improvement of quality of life in the same.
  • They usually obey at ideological, economic and political considerations of the party that controls the executive and / or legislative power.

Instruments of an economic policy

Economic policies can be implemented through various mechanisms, which have a specific effect on the economic and financial functioning of the country.

These instruments can broadly be fiscal (tax management), monetary (money issuance management), social (tax management) expenditure public), commercial (management of incentives or loans) or exchange (management of the international value of the currency).

For example:

  • Taxes and tariffs. The State may impose a surcharge on the price of products from other countries or from powerful sectors of the industry national, to increase its cost and discourage its purchase, thus artificially favouring competing sectors, for example, nationals. Likewise, the State can tariff the products that it considers harmful, discouraging its massive purchase, or it can exempt from taxes the industries that it wishes to stimulate, making them more profitable and encouraging the purchase of its products.
  • Issuance or monetary restriction. The State can increase or decrease the amount of cash that circulates in the country, to stimulate or discourage the consumption, which in turn has an impact on inflation and other aspects of the microeconomics.
  • Subsidies. The State can invest part of its budget in helping various Economic sectors, injecting capital to assume part of their expenses, thus relieving all the economic actors involved, especially those consumers, which enjoy a better price.
  • Exchange Controls. These are radical measures in which a State “freezes” the exchange rate within its currency with respect to those of other countries, artificially sustaining its price, assuming the difference in cost. This measure can serve as an emergency mechanism to curb currency leaks or encourage tourism and import, but they usually have a high cost of sustaining themselves in the long term.
  • Social helps. These are monies invested in sustaining the standard of living of the least economically favoured, whether through study grants, school plans feeding, social allowances, etc., all of which is paid from the state budget.

Importance of economic policies

The economic policy of the countries is one of the main factors that intervene in their economic and commercial performance. An assertive economic policy it gives the productive sectors the incentive and the necessary help to generate wealth and grow, thus regaining its independence and manufacturing more wealth, more work and more well-being.

On the contrary, a disastrous economic policy can cause the opposite, hindering the economic dynamics until it becomes unfeasible, which would have a huge cost in the quality of life of the inhabitants of that country.

Economic policy and political economy

We must not confuse these two terms, whose similarity can be misleading. Economic policy is the economic philosophy behind the measures that a government takes to control or drive the economy, even if it means trying not to influence or drive it as little as possible.

Instead, political economy is an academic discipline dedicated to the study of the productive circuit and its relationship with institutions policies, from a multiple or transdisciplinary perspective, leveraging the anthropology, sociology, history, right and Political Sciences.

Thus, professionals in the political economy study and understand the economic policies of the countries.