Economic policies are very important for the well-being of any economy and hence needs to be formulated with keen interest. Therefore,to influence the outcome of any microeconomic policies, there is the need for a government to put in place monetary and fiscal directives as one of the basic and primary stimulators of economic growth. To demonstrate how important fiscal policy is to an economy, it is important to examine the monetary and fiscal policies and how they influence the grown or decline of a country in comparison to the situation in China and the United Arab Emirates (UAE).
Monetary policies involve the management of the supply of money as well as the interest rates, majorly by the Central Banks of countries. Normally, the Central Bank cuts the rates of interests so that borrowing is made cheaper and hence money supply is increased. It is through this undertaking that a government can stimulate the faltering of the economy of a country. In an economy that is growing fast, the government, through the Central Bank can introduce tight policies to raise interest rates and therefore reduce the amount of money in circulation. The aim of all these measures is to achieve the objectives of the microeconomic policies of a country at any given point. In some countries, there is a set level of inflation which is expected to be achieved by the Central Bank in an attempt to set the monetary policies in the right direction. If interest rates are high then the cost of borrowing money also goes high, reducing inflation. However, the reverse of these actions leads to inflation in a country. Inflation results in price hikes in the market and reduces commodity purchases because the willingness of traders to buy is negatively affected by the high borrowing rates. Market operations are thus influenced by the supply of money in an economy. High money supply opens the market while a low supply reduces the market operations. These fluctuations affect the growth trends in an economy, regardless of whether it is a closed or an open economy.
On the other hand, fiscal policies refer to regulations that deal with spending as well as the taxation of a given government. Tight policies therefore, involve reductions in federal spending and the raising of taxes, while the reverse is true for the expansion effect of these fiscal policies. These tools are based on the Keynesian theories which have an aim of raising the aggregate demands in a marketing environment. In other words, fiscal policies entail the ways in which governments get their funds through the taxation process and how they spend the finances in an economy. Stimulating the economy would thus mean that taxes are cut down while increasing the spending. At the same time, to tame an economy, taxes would be raised, and spending reduced. Fiscal policy involves the functions of allocating resources, the distribution of finances, stabilization, and developments which majorly deal with finances in an economy. High tax rates in a country reduce the disposable income and reduce the aggregate demand. Money to be spent becomes less in such economies and hence lowering prices of commodities to boost the economic activity in the market.
Of late, there has been a debate about which, between the fiscal and monetary policies, is better suited for an economy. The bottom line is that both are applicable in the stabilization process of an economy for growth purposes. The process works through low levels of unemployment, inflation, and stabilization of the commodity prices in the market. These policies, however, have their own merits and demerits thus, none is sufficient on its own in any economy. If effectively used, the policies will have positive effects in stimulating demand in times of crisis.
China is a country in the Eastern-Asian continent that borders Korea Bay and exists between Vietnam and North Korea. According to Moreno-Dodson and the World Bank (2013), it has a population of 1,355,692,576 people as of July 2014. Some of the main economic activities in the country include mining, especially oil and agriculture. As per the estimates of the year 2012 and 2013, the rate of unemployment in the country stood at 4.1%. At the same time, sources of income accounting for taxes and other revenues sources totaled 19.4% of the nation’s GDP as of 2013.
The United Arab Emirates is a country in the Middle East which borders the Gulf of Oman and Persia. It is located between Saudi Arabia and Oman. The population size of the country stood at 5,628,805 people as per the estimations of the 2005 census presented by the National Bureau of Statistics. Its major economic activity is mining, and is some way closely related to the situation in China. In terms of taxes and other revenue sources, the two sectors account for 35.4% of the total GDP of the country from the 2013 estimated data. It has a lower rate of employment as compared to China.
Comparing the Fiscal and Monetary Policies of China and United Arab Emirates
The UAE has an economy that is open in per capita income and the surpluses that result from the financial well-being of the country. The GDP has been reduced by the production of oil as well as the gas that the country mines as a natural resource. This case also concurs with the current situation in China it moved from a closed economy to an open-market economy. Present, China is market oriented, and in 2010, it was top rated in product export worldwide. The two countries have similar market structures and operations and the reason why both have been successful.
The high standards of living in the UAE have been caused by the increased government spending to create jobs and expand the infrastructure network in the country. This policy has been opening utilities so that the private sector involvement is improved within the country. China, on the other hand, has been supporting enterprises which are state- owned as opposed to the UAE. China does this with a view to foster competition in various industries within the country. The two different approaches to market economics have facilitated growth in the various environments as per the prevailing conditions.
In the UAE, the free trade zones policy offers zero taxation and 100% ownership to foreign investors. The policy has attracted more investors into the country in a bid to take advantage of the favorable business regulations and a conducive investment climate within the country. In 2009, the tight international credits regime, fluctuating prices of assets, and the financial crisis made the country to opt for the adoption of free trade. It had to react during such times by increasing spending so that liquidity could be boosted. In China, the reform process began by the liberalization of prices, autonomy increment of the state enterprises in the private sector development. Such reforms also facilitated the facilitation of investments in foreign trade, stock market investments with the view of improving the working conditions of the economy in the country. This implementation took place gradually in China as compared to the UAE in which it happened simultaneously and rather quickly.
The dependence on oil extraction in the UAE has been a challenge to the economy. This situation has been complicated by a large workforce consisting of expatriates and the growing pressure of inflation within the country which destroys the rate at which the market operates. Diversification and opportunity creation due to increased levels of education facilitate the rates of employment in the private sector so that more jobs can be created in the country. The Chinese government, on the other hand, faces various economic challenges (International Monetary Fund Staff. 2011). The first challenge regards the reduction of the high domestic saving rates and the low consumption in the country. At the same time, the government faces a serious challenge in creating more wage job opportunities both for the middle class and the rural immigrants. The findings make it clear that the challenges faced by the various departments are of diverse nature. The situation is brought about by the different environmental conditions in both countries.
It can be concluded that the fiscal and monetary policies are very helpful in China as well as in the UAE since it is what helps determine the nature and the direction of any economy. These policies dictate the flow of money within the economy of these two countries. This rate of dynamic activity is achieved because the low taxation helps to determine the disposable income of the citizens. At the same time, the rates of interest affect the borrowing and investments of the people in both countries. Through this, it can be possible to monitor and evaluate the nature of growth that can be realized in a country. It is thus true that both monetary and fiscal policies influence growth of an economy.