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How countries operate

At times, we can all become frustrated by political agendas, misfortunes, and perceived lack of planning by various governments around the world. As a result, not quite often see the bigger picture – or the economics of how countries work.

Naturally, the political fracases provide fuel for media companies who in turn bombard us with their 24-hour news cycles. But we need to understand that politicians are only temporary custodians of the country and its economy. Each economic model is built on the same premise that started many hundreds of years ago – that of bartering.

Two pillars of government

There are two main mandates or rather tasks that a ruling party is assigned by the electorate when it comes to governing. These are: controlling the country’s fiscal and monetary policy.

Fiscal policy is the internal running of the country and basically deals with tax and how it is allocated. The fiscal budget is then awarded to the various sectors of any economy.

These include education, transport, healthcare, finance, trade and industry, defense, agriculture, and many other building blocks of your country.
How the government prioritizes the spending on each of these sectors will determine its policy priorities.

It will also be a signal of its wider political intentions. And this not only to voters but also to its neighbouring countries in regard to international trade and security.

A nation concerned with information and its human capital will prioritize education in its budget. There are however other approaches to budgetary allocation such as funding trade and industrial activities.
This leads to job creation that will, in turn, drive a need for tradesmen and women to diversify and obtain the new skills required.

This also provides an incentive for state-run schools, privately funded schools, and institutions to develop new skill sets. Doing both is ideal – as governments must foster innovation by promoting and funding higher learning institutions where top talent can be nurtured and developed.

Fiscal policy forms the larger mandate as this budget is derived from the collective taxation of income, capital gains, trading and customs, sin taxes, corporate, and simple public services.
That way allocation of the fiscal budget to finance will pave the way for monetary policy to function.

International trade is the key to generating further income as a government cannot rely on an internally driven economy to sustain wealth. The same applies to business so an agreed trade policy would need to accommodate all aspects of the country’s economy.

National specialization

Every thriving nation has been built on either skilfully utilizing internal resources or have created global demand for a service or industry.
The UK has strong financial and corporate offerings plus its geo-positioning (GMT) allows it to be a central commercial trading point for the world.
Germany has always had a rich source of steel enabling the production of cars, rail brands, and manufacturing.

In addition, it continues to be a market leader in developing technologies to complement those industries thus allowing the country to thrive as a major European power.

The Nordic countries are rich in mineral resources of which they have converted the revenues into national trust funds. These are used to aid its citizens; many of whom develop skills in trade, innovation, and finance (and now Fintech).

Though Japan is geographically smaller and is made up of two islands it continues to prosper by becoming a global leader. This comes from its exports of tech innovation, artificial intelligence (robotics), and fishing stocks.
It even ‘exports’ financial aid (loans) to other countries due to its strong and disciplined monetary policy.

The US has invested heavily in services, human capital, and innovation – to large extent immigration has played a major role in these areas of growth.

The emerging economies

Russia is mineral-rich and has outsourced its intelligence gathering skills, military technology, and training for years.

China continues to grow and subsidizes its agriculture and manufacturing industries fully utilizing the abundance of manual labour at its disposal.

China even exports this labour thus gaining influence and soft power enabling Chinese goods and services to be exported more freely to other economies.

The ability to offer the global economy a form of expertise or goods/service can attribute hugely to each country’s economic wealth.  Israel – military and intelligence; Brazil agriculture and tourism not to mention countries in the Far East – oil and fossil fuels.

Most African countries obtain their sources of income (though not as much as they should) from natural minerals, agriculture, and tourism.

Ghana has gold and cocoa; Nigeria – oil; South Africa – gold and many mineral resources; Kenya and Tanzania – tourism. Even a poor country like Zambia has survived because of its coal and coffee reserves.

Any country without resources or the ability to offer goods and services would have to be more subsistence-like. This usually means having to rely on aid or import goods and services.

That, however, comes at a price and leads to the country functioning with an unsustainable debt burden.

Application of policies

Interesting food for thought by Dr. Jagdish Bhagwati, a famous Indian-born economist in the US:
Americans spend, save little. Also US imports more than it exports.
Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.
The Japanese on a contrary, save a lot. They do not spend much. Also, Japan exports far more than it imports, has an annual trade surplus of over 100 billion. Yet Japanese economy is considered weak, even collapsing.
Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers. Even then the Japanese did not spend (habits don’t change, even with taxes, do they?). Their traditional postal savings alone is over $1.2 trillion.
Thus, savings, far from being the strength of Japan, has become its pain.

International trade

This then gives way to various trading blocs, which over time have been built, broken, or renegotiated when it was not suiting either of the participants.

The strength of a country’s currency is primarily determined by supply and demand for its sovereign currency. This demand can only be fostered by trade.

The more the demand for a countries commodity the greater the demand for its currency. This is the medium we use to compensate for transactions. In terms of a country’s monetary policy, it is more of a singular relationship between a government and its banks.

The banking system

Banking is the system to which you can place your disposable income (gross income after-tax) in a digital repository. The central (reserve) bank regulates the money supply into the economy ensuring that locally, inflation does not corrode the value of its currency. The central bank controls how much it lends to local banks and at which payable interest rate.

The central bank is independent of the government. They have their policies shaped by fiscal influences and are under obligation to impact the strength of the economy through its interest rates and exchange rates.
So, the central bank sets the mandate by which banks offer security interest, loans, and building deposits to help you benefit from their hard-earned cash.

Banks, however, have a wide range of consumer charges so transacting doesn’t offer much protection against inflation. In some cases, banks offer you zero interest on savings deposited!

You can therefore understand the frustration of citizens who would like to see increased corporate taxes, especially for banks. This especially as they reward executives with excessive remuneration packages even in a failing economy.

Financial governance and regulations

The new wave of Cryptocurrency aims to shake-up these long-standing benefits banks have enjoyed. Benefits such as the bailouts from taxpayers’ money from risk-taking behaviour that nearly brought the global economy to its knees.

Banks behave like a petulant child knowing well that their ‘parents’ will only mildly reprimand them. This ultimately enables the continuation of behaviour with as they get away with only a slap on the wrist.

Governments tolerate bank’s excessive salary packages and risk-taking because they play a strategic role in the stability and growth of an economy.

This is just the tip of the iceberg and paints a big picture of how a country is managed – or indeed can be mismanaged.

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