Business Environment

Impact of government policies on business

Impact of government policies on business

 Md. Joynal Abdin

THE Financial Express on April 17, 2009

ONCE upon a time economists thought government policies has no impact on business. But after the Great Depression of the 1930s, Keynes, the great economist, showed government policies could effect business. For example, if a government imposes more taxes and duties on a particular sector than is justified by its profit margin, it would go down or the businessmen in it can lose their interest in the sector and can give up their business. Similarly, tax and duty exemption for a particular sector would encourage businessmen to invest in it. As a result the sector will grow. If a country’s monetary policy ensures availability of loans at reasonable rates, investment will go up.

The prevailing global order has a tremendous impact on a country’s business. It may be legal or illegal. For example, the USA manipulate the UN to impose sanctions on Iraq in the 1990s. The sanctions destroyed Iraqi business for which it lost business worth billions of dollars as well as its money in the banks of the USA and its allies. Iran is another example. The impact of government policy on business can be explained from the political and technical perspective.

From the political pint of view, political parties, their ideologies as well as world politics are relevant.

From the technical perspective, the following policies of a government can impact business directly or indirectly: (a) taxation, (b) subsidies, (c) interest rates, (d) exchange rates, and (e) public-private partnerships.

The government policy of a country depends upon its political culture. It can also vary depending on the form of government. Policy in a communist country will be different from that in a democracy or monarchy. The government policy in a politically stable country will also be different from an unstable country. In a stable political system, a government can take sustained business-friendly decisions to strengthen local business. The government, in this situation, gets the help of the opposition. But in an unstable political system in which the opposition boycotts parliament and takes to street agitations businesses and investment would suffer.

In such a negative political culture, a country cannot have a sustained business-friendly environment or policy. In an unstable system, a government finds it difficult to maintain law and order which affects the business environment. It hampers business. Foreign investors do not invest in such an environment.

Taxation policy can affect businesses. High tax rate on imported products would encourage local entrepreneurs to produce goods at home. But high tax rate on raw materials will discourage domestic production and encourage imports.

Lending rates of the banks and the financial policy of a government can affect the economy. If interest rate rises, investment falls because businessmen would not borrow at unviable rates. 

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