A political leader and his role in setting the economic policy

The word Politician, a political leader, originated from the Greek word “Polis”. A politician is an individual who affects public decisions, such as decisions on the economic policy. A politician is either an individual who already serves in a government or which seeks to be elected to serve their nation or community.

The role of a politician in setting the economic policy is very prominent. According to standard economic theory, technocrats (e.g. economists) provide recommendations on the economic policy choices to a political leader who, in turn, make economic policy choices which are implemented by a bureaucrat.

Therefore, a politican is actually involved in making the economic policy choices. This is different from bureaucrats who implement the policy choices of politicians.

A politician, as a role player in the government, earns some resentment from the general public due to the perception that politicians are driven by desire to maximize votes for their next election rather than by serving the interests of the public. This is, of course, true in some cases and not in others.

Political business cycle theories (models)


A politician is a human being and has feelings, dreams, goals, desires and agendas, like any other person from any walk of life. Therefore, it is only natural that a politician may be driven by a personal agenda. This must always be kept in mind. Especially since standard economic theory assumes that a political leader is driven by the goal of enhancing the well-being of a nation rather than by desire of personal gains.

Some economic theories, however, attempt to explain a politician’s actions as guided by attempt to maximize votes. Such theories are called political business cycle theories. Political business cycle theories are further subdivided into the partisan model and opportunistic model.

PARTISAN MODEL

Based on a politician being a “partisan” of the party that he or she belongs to. Each party has different priorities and those priorities will significantly influence the economic policy decisions.

OPPORTUNISTIC MODEL

This theory was first proposed by Nordhaus. Nordhaus suggests that his proposed theory rests on 3 assumptions:

1 – The main goal of a politician is to stay in the office

2 – The current performance of the economy will affect election

3 – A politician has strong incentives to make economic policy decisions which will lead to expansionary monetary and fiscal policy to expand performance of the economy in the short run. This will be followed by contractionary monetary and fiscal policies to combat inflation (which occurred due to expansionary policies).

The criticism of the opportunistic model arises because it is unlikely that a political leader will be able to effectively manipulate economic performance in the short-term.

Empirical evidence does not explicitly and completely support models of the political business cycle.

 

The economic policy

The economic policy is a purposeful action (or purposeful non-action) by government with the intent to affect economic behavior with the goal of achieving certain outcomes which will improve the material well-being of society.

Policy, according to the Oxford Dictionary, is defined as the “course or general plan of action adopted by government”.

There are active and passive elements in economic policy:

Active element occurs when purposeful action is planned and implemented.

Passive element occurs when policy makers purposefully decide not to take any action with regards to specific economic problems.

Three types of objectives are important for economic policy.

These objectives are macroeconomic, sectoral or microeconomic in nature. Because of the scarcity of resources available, only some of the goals can be achieved and, therefore, ranking of the goals in terms of priority may be necessary when making choices with regards to economic policy.

Macroeconomic objectives of economic policy attend to issues that affect economy as a whole. Examples are combating unemployment, poverty and inflation, enhancing economic growth and achieving balance of payments stability.

Microeconomic objectives of economic policy attend to issues that affect specific individual entities within the economy, such as individual organizations. Microeconomic objectives of economic policy also attend to issues which affect particular markets. An example of the microeconomic objective of economic policy may be addressing negative externalities in the market.

Sectoral objectives of economic policy may include:

1 – Development of economic and social sectors. Economic sectors include such sectors as manufacturing, mining and construction and social sectors include health and education.

2 – Cross-sectoral development (eg promoting foreign trade) and multi-sectoral development (developing regions of the country).