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Discuss whether solving the problem of unemployment should be the mam policy objective for the
government of a developing country. [13]

Cambridge A level June 2021 Paper 4

Quick Answer:

The main macro-economic aims of government policy can be seen as the achievement of full employment, price stability, economic growth and a balance of payments equilibrium In addition to these governments also aim at achieving high degree of efficiency in the use of nation’s scarce resources and an equitable distribution of income and wealth.

Though not all governments in devel oping countries will share these objectives, yet it is also true that there will be trade-offs and poten tial conflicts between the objectives, and different governments will attach differing priorities to them.

So far as reducing unemployment is concerned it is important for developing countries to keep the levels as low as possible.

High unemployment is expensive for the government and for the taxpayers or every unemployed person, there arc two costs to the government first, the unemployed workers will be entitled to benefit.

Secondly, there is the less obvious cost of the loss of tax revenues.

both from direct and indirect taxes, which the workers would have paid in work.

Then there is the cost to the whole economy as unemploy ment involves a loss of potential output and hence it lower living standard in general.

Young unem ployed workers may inflict other external costs on the society, crime for example, for all of these reasons governments of many developing coun tries target low unemployment as a mam long run macroeconomic objective.

However, in different times and situations these governments switch to alternative objectives.

Con trol of inflation, for instance, is also important be cause if inflation gets out of control, the economy stops growing The authorities are forced to raise interest rates to counter inflation At higher inter est rale consumers slop borrowing to spend and firms also reduce borrowing to invest.

Exports become less competitive and the economy may well drop into a recession.

Economic growth is another mam objective It is a measure of rate of change of real GDP over a period of time High rale of growth can be achieved by bringing unemployed resources al work or alterna tively, by improving productivity of existing re sources.

Governments seek to achieve high but sustainable growth rate mainly because it leads to improved living standards and stability.

Lastly, governments aim to achieve a favourable balance of payment BOP is a summary' of all eco nomic transactions of a country with other nations over one year time period A persistent BOP deficit initially results in a decline of a nation's foreign currency reserves and a run on its exchange rate Ultimately, it necessitates borrowing and the coun try accumulates foreign debts, which have to be repaid with interest in future.

The ideal situation represents a position where, at least over a number of years, the nation spends and invests abroad no more than other nations spend or invest in it.

However, the problem is that there exist a conflicts and therefore potential trade-offs between unem ployment and a number of other important aims of government such as price stability, a favorable trade balance, conservation of resources and en vironment and fair distribution of income.

Low unemployment and low inflation have always been the main objectives of governments of devel oping countries.

Without increasing employment, peoples' standard of living will not improve, and if inflation is too high then the value of money falls negating any improvement in living standards Hence, these two present a classic conflict in eco nomic theory because they have an inverse rela tionship If a government tries to decrease unem ployment rate through rctlationary measures, such as lower interest rates or increased public spend ing, then the resulting reduction in unemployment will push wages higher, as employers try to attract workers from a diminishing pool of the unem ployed.

'I bis will lead to higher prices On the other hand, when the government tries to control high inflation with higher interest rates and reduced spending, the resulting reduced consumer spend ing and lower investment will result in job losses.

Although it is considered that growth and employ ment do not conflict and therefore can be achieved as a pair but there could be a conflict between economic growth and unemployment particularly if growth was attained by substituting capital for labour It therefore follows that in normal circumstances governments of developing countries can achieve growth and employment as a pair.

In that process, however, they must compromise on rising rate of inflation, worsening of its trade balance position and income inequalities.

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