Macro Environment

Definition of 'Macro Environment'

The conditions that exist in the economy as a whole, rather than in a particular sector or
region. In general, the macro environment will include trends in gross domestic product
(GDP), inflation, employment, spending, and monetary and fiscal policy. The macro
environment is closely lined to the general !usiness cycle, as opposed to the performance
of an individual !usiness sector.
Macroeconomics and Sustainable Development
It is an honor for me to "oin you today, five years after #io, and five years after the nations
of the earth made a pledge that, together, they would change the way we live on this planet.
The hope was to halt and reverse the effects of environmental degradation and to promote
environmentally sound and sustaina!le development.
This definition fits nicely with the I$%&s concept of 'high (uality growth,' which we !elieve is
central to sustaina!le development. )e define such growth as 'economic growth that
!rings lasting employment gains and poverty reduction* provides greater e(uality of income
through greater e(uality of opportunity, including for women* and protects the environment.'
The third element, 'protects the environment,' may sound odd coming from an institution so
concerned with macro economy sta!ility. +o let me first say something a!out this lin, and
then reflect on how the necessary resources can !e raised for sustaina!le development
and how the I$% can help countries pursue high (uality growth.
Link Between Macroeconomics and the Environment
,t the time of the #io -arth +ummit, the lin !etween macroeconomics and the
environment was largely unexplored. .ut since then, a lot of research has !een carried out,
and we now now, without dou!t, that macroeconomics and the environment are
inextrica!ly lined. The old concept of environment as a constraint to development has
given way to one of environment as a partner in growth and development.
/ow does this lin wor0 +tudies show that macroeconomic sta!ility is a minimum and
necessary condition for preserving the environment. +ta!ility enhances growth prospects,
increases employment and incomes, and ensures that the right price incentives wor to
preserve the environment. %urthermore, any strategy to preserve the environment will !e
undermined !y macroeconomic insta!ility. It is true that macroeconomic policy reforms may
hurt the environment, !ut the only time this occurs is when sound environmental policies
are lacing. Thus the answer is not to forgo the necessary macroeconomic policy reforms,
!ut to ensure that sound environmental policies are in place.
)e also now that environmental pro!lems, including those relating to specific regions and
the world as a whole, hurt growth. /uman welfare is reduced !y ill health and premature
mortality caused !y environmental pro!lems. $oreover, health pro!lems can lead to higher
outlays aimed at mitigating or avoiding the health and other direct welfare impacts of
environmental degradation1further constraining growth. +tudies also give a!undant
evidence of lost la!or productivity resulting from ill health, forgone crop output from soil
degradation, and lost fisheries output and tourism receipts from coastal erosion.
)here %inancing +tands
.ut where are we going to find the money to finance sustaina!le development0 The -arth
+ummit&s ,genda 23 puts the annual cost for developing countries at a!out 4566 !illion,
with a!out 4327 !illion of this amount needed as grants or concessional external financing.
8an such resources !e found0 9n this score, we are optimistic.
,genda 23 had emphasi:ed official development assistance as the main source of external
financing for developing countries. ;et despite the pledges made !y developed countries in
3<<2 to increase 9D, to 6.= percent of G>P from 6.?@ percent, 9D, has languished well
!elow, reaching an historical low of 6.27 percent in 3<<5.
The first area, raising additional fiscal revenues, !uilds on the reality that developing
countries typically have complex tax systems with a narrow tax !ase. ,dd in poor tax and
customs administration and the result is high collection costs, high rates of tax evasion, and
low tax revenues. )hile the taxa!le !ase is typically limited, there is scope for increasing
taxAtoAGDP ratios. >ot, as a rule, !y raising tax rates. .ut !y a comprehensive reform of
existing tax systems to !roaden the tax !ase, simplify the tax structure, and improve tax
and customs administration. If developing countries raised their taxAtoAGDP ratios !y
perhaps 3 percent1and this would not !e unrealistic, given that several lowAincome su!A
+aharan ,frican countries did so in the early 3<<6s1it could yield some 457 !illion, a sum
somewhat larger than total 9D,.
,nother way to raise revenues is !y levying appropriate levels of user fees and charges for
energy, water, forests, fisheries, and mining resources. In many countries, these fees are
set too low, leading to rentAseeing, excessive exploitation of natural and environmental
assets, and low government revenue.
;et another way to raise revenues is !y imposing environmental taxes, always mindful that
should the incidence of some of these taxes !e regressive, a portion of the revenues would
need to !e used to compensate the poor and the needy. Industrial countries and some
developing countries have started down this road with the imposition of taxes on the use of
energy and car!on emissions1although progress is extremely slow. /armoni:ing these
taxes across countries would facilitate adoption and improve glo!al welfare.
The second area where we see potential for !oosting finances is increasing public saving
through rationalizing expenditures. This could !e done in several waysB
Cnproductive expenditures need to !e reduced, in particular military expenditures. It
is well nown that in too many countries, government !ureaucracies remain
excessively large. 8urtailing the share of the costs of government !y even a small
margin could release large amounts of resources.
Policymaers could also remove or reduce su!sidies that are costly to the !udget
and detrimental to environmental or social o!"ectives. The )orld .an estimates
that the glo!al resource cost of su!sidies for energy, transportation, water,
agriculture, and fisheries exceeds 4D=6 !illion1split 76A76 !etween developed and
developing countries. This is not small change.
%inally, let me turn to the third area for raising finances, macroeconomic and structural
reforms. This is more of an indirect path that aims at redirecting existing availa!le financial
resources towards the private sector and allowing it to generate additional savings. 9ver
the years, a growing num!er of countries have shown that sound macroeconomic policies
often result in higher economic growth. +tructural reforms can also help redirect financial
resources and improve efficiency, !ut they are most effective when undertaen along with
macroeconomic sta!ili:ation.
/ow the I$% %its In
/ow does the I$% fit into this picture0 8ertainly, we see our main contri!ution to
sustaina!le development in the economic arena. That is, encouraging countries to adopt
policies that foster a sta!le macroeconomic environment. In recent years, taing note of the
new glo!ali:ed world, we have !roadened the reform agenda, as was evident at our
recently concluded ,nnual $eetings in /ong Eong.
9ur new agenda sees the orderly li!erali:ation of capital marets, in the interest of
!etter allocating saving and investment, there!y ena!ling countries to grow more
rapidly in a more sustaina!le manner*
9ur new agenda encourages countries to pursue good governance1and !y that I
mean transparency, accounta!ility, and the rule of law1which is a!solutely
essential if countries are to reali:e the !enefits of the glo!al economy and manage
its riss* and
9ur new agenda is one that emphasi:es 'second generation' reforms as essential
ingredients of high (uality growth. These include comprehensive trade reform,
restructuring and privati:ing pu!lic enterprises, reforming the financial sector, and
improving the environment for private investment. )ithout them, the poorest
countries ris !eing marginali:ed. .ut with them, they stand to !enefit !y fully
integrating into a glo!ali:ed world.
,t the same time, we remain mindful of the social objectives, which is why social issues are
increasingly entering into our policy dialogue. )e are conscious that, too often, the criticism
is voiced that structural ad"ustment is harming human development. /owever, the evidence
1even allowing for pro!lems with the (uality of the data, such as the failure to capture the
efficiency of spending1spea to the contrary. )hile the range of experience across
countries is considera!le, availa!le data in 2= countries that have used our concessional
facilities show that, on average, real spending on education and health increased !y 7
percent per year and !y =.7 percent per year, respectively, during the program period.
+ocial indicators1such as literacy, primary and secondary school enrollments, infant
mortality, life expectancy, and access to health care and safe water1have also shown
gains.
.ut we now we can do more. )e need to focus on the level and (uality of social spending
in a more systematic manner, in close colla!oration with the )orld .an. )e also need to
!etter understand and improve the lins !etween social spending and social indicators. ,nd
this we are moving to do. I am pleased to note that the %und is giving more attention to
helping countries improve data on government spending on health and education. It is
alsostrengthening the monitoring of social policies and !asic social indicators, including
through social spending targets in %undAsupported programs. In particular, programs for
countries (ualifying under the /IP8 initiative will incorporate monitora!le targets for social
spending and social indicators. The $anaging Director has also recently issued guidelines
to I$% staff specifying ways to strengthen our wor on health and education outlays, given
the crucial lins !etween efficient health and education outlays and growth.
,s for environmental objectives, many I$%Asupported programs involve the adoption of
'winAwin' policies that !enefit !oth the economy and the environment1for example,
cur!ing environmentally damaging su!sidies and sta!ili:ing farm prices. >onetheless, in
certain countries, especially in the developing world, we reali:e that environmental issues1
such as wea forestry management and severe air and water pollution1can have
significant macroeconomic implications.
NATIONAL INCOME
>ational income is a measure of the total flow of earnings of the factorAowners
through the production of goods F services. In a simple way, it is the total amount of
income earned !y the citi:ens of a nation.
,ll incomes are !ased on production. In this sense, national income reflects the level
of
aggregate output.
The term national income carries at least 2 meaning in economics.
The total value of the level of aggregate output is called Gross >ational Product or
G.>.P.
G.>.P. is a measure of the total maret value of all final goods F services currently
produced
!y all the citi:ens of a nation within a period, usually a year.
There are a few points important hereB
G It measures how much people produce.
G It counts current production only.
G It counts the level of output with a maret value.
G It relies on the maret prices of goods F services as a measure.
II. Measurement of National Income
There are mainly ? approaches to measure G>P.
The relationship of the ? approaches is shown !y the diagram !elow.
The 8ircular %low of -conomic ,ctivities
Expenditures ($) Product
Market
$
Output
Household
s
Firms
Income by
production
$ Factor
Costs
The ? arrows in the diagram show the overall level of economic activities.
.ased on these ? directions of flows, i.e. a flow of income, a flow of output, F a flow
of
expenditures, economists develop ? approaches to measure G>P.
3. Output or Value-Added Approach
The total value of all final goods F services ( i.e. outputs ) can !e found !y adding up
the total values of outputs produced at different stages of production.
This method is to avoid the soAcalled dou!leAcounting or an overAestimation of G>P.
/owever, there are difficulties in the collection and calculation of data o!tained. It is
from 3<D6 that the /.E. government started to collect data !y this approach.
In 3<<7, the government started to release G>P data.
2. Expenditure Approach
The amount of expenditures refers to all those spending on currentlyAproduced final
goods F services only.
In an economy, there are ? main agencies which !uy goods F services. They are the
households, firms and the government.
In economics, we have the following termsB
8 H Private 8onsumption -xpenditure ( of all households )
I H Investment -xpenditure ( of all firms)
G H Government 8onsumption -xpenditure ( of the local government )
The expenditure approach is to measure the G>P. )e could not !uy all our outputs
!ecause some are exported to overseas. +imilarly, our consumption expenditures
may include the purchases of some imports. In order to find the G>P, the value of
exports must !e added to 8, I F G whereas the value of imports must !e deducted
from the a!ove amount.
%inally, we have B
G N at mar!et prices " C # I # G # $ - M
Gross Domestic Product ( GDP )
In /E, the government is difficult to now a!out the amount of income earned
through production !y / E citi:ens outside / E and the income earned !y foreign
citi:ens within /E !ecause of free trade policy. +o we can only find the amount of
outputs produced within our domestic !oundary.
GDP is an aggregate measure of the total value of net output produced within the
domestic !oundary of an economy in a specific period, say a year.
Income from a!road H Income earned !y local citi:ens ( / E ) from the provision
of factor services a!road
Income to a!road H Income earned !y foreign citi:ens from the provision of
factor services locally ( in / E )
>et income from a!road H Income earned from a!road A Income sent to a!road
G N " G % # Net Income from a&road
'.Income Approach
The income approach tries to measure the total flows of income earned !y the factorA
owners in the provision of final goods F services in a current period.
There are @ types of factors of production and @ types of factor incomes
accordingly.
National Income " (a)es # Interest Income # *ental Income # rofit
The term profit can !e further su!Adivided into B Profit Tax * Dividend to all those
shareholders * F #etained Profit ( or retained earnings ).
*ele+ant Concepts of National Income
Net National roduct , N N -
The investment expenditure of the firms is made up of 2 parts. 9ne part is to !uy
new capital goods F machinery for production. It is called net investment !ecause the
production capacity of the firms can !e expanded.
,nother part A consumption allowance or depreciation A is spent on replacing the
usedAup capital goods or the maintenance of existing capital goods !ecause capital
goods will wear and tear out over time..
Depreciation refers to all those expenses to replace physical capital due to wear and
tear, o!solscence, destruction and accidential loss etc.
The sum of these 2 amounts is called Gross Investment in economics.
Gross Investment = Net Investment + Depreciation
>et investment will increase the production capacity and output of a nation, !ut not
!y depreciation expenditure. +o we have,
> > P H G > P A Depreciation
G N at factor cost
The amount of national income found !y the income approach will not !e the same as the
amount of G > P at maret prices found !y the expenditure approach. In the expenditure
approach, the value of G > P includes some types of expenses which are >9T factor
incomes earned !y the citi:ens. They include depreciation, indirect !usiness taxes, and
government su!sidies.
G > P at factor cost H GN at mar!et prices - Indirect .usiness Taxes # /u&sidies
" GN at mar!et prices - Indirect .usiness Taxes less su&sidies
G>P at factor cost carries the meaning that we are measuring the total output !y
their costs of
production. ,s output generates income to the factorAowners, it is also related with
the value
of national income.
G N at factor cost " National Income # %epreciation
Depreciation is also a type of costs of production !ut will not !ecome a source of
income directly. +o, it is included in the factor cost !ut excluded in the value of
national income.
Nominal G N , G N at Current Mar!et rices -
G>P is a measure !ased on maret prices which are expressed in terms of money. In
reality, maret prices change all the time. The same amount of outputs may have different
total maret values provided that prices change.In order to isolate the effect of price
changes on the value of G>P, economists have developed theconcept and techni(ue of
constant maret prices.
0ses of National Income /tatistics
+tandard of Iiving
The per capita G>P allows us to compare the standard of living of different nations. In
general, a nation has a higher standard of living if its per capita G>P is greater than that of
another nation.
Policy %ormulation
In the compilation of G>P statistics, the government had already gathered a lot of
information of the economy. The government can !ase on these figures to plan and decide
its policies.
International 8omparison
.y converting the local G>P figures into a common unit ( usually in C+4 ), we can compare
the standard of living of different nations. It helps to show the rate of growth or
development of different nations.
.usiness Decision
The G>P figures can show the level of development of different industries and sectors of
an economy. It helps the !usinessmen to plan for production.
Limitations of National Income /tatistics
G>P is a measure of the overall flow of goods F services, as well as to show the general
welfare of the people.
It aims not only at the level of cost of living !ut also the standard of living. It is (uite correct
to show the cost of living !ut there are some limitations on the G>P statistics to indicate the
standard of living of an economy.
1.rice Chan)es
, higher nominal G>P of a nation may not mean that the standard of living is !etter. If the
prices increase at a high rate, the real G>P may even fall.
2.Omittion or 0nder-estimation
Voluntar3 /er+ices
G>P figures do not include the contri!ution of the voluntary agencies which raise the
general welfare, e.g. the Tung )ah group of hospitals.
In this respect, the G>P figures underAestimate the level of welfare.
The voluntary wor of housewives is also neglected !y the G>P figures. It again underA
estimates our welfare or standard of living.
Leisure
It is also a source of welfare and raises our standard of living, e.g. the welfare en"oyed with
a 8hinese >ew ;ear /oliday. /owever, the monetary value is difficult to calculate.
Ille)al Acti+ities
Drug trafficing and illegal gam!ling are activities omitted in the value of G>P. It is difficult
to determine its effect on the welfare of an economy.
0ndesira&le Effects of roduction
G>P figures had not considered the effects of pollution, traffic congestion on the economy.
They have lowered our standard of living.
'.ro&lem of Comparison
Output Composition
>ations with the same G>P may have different living standard !ecause their output
composition may !e different. In general, a higher level of consumer goods F services in
the G>P indicates a higher current level of living standard.
%istri&ution of Income 4 (ealth
If income is o!tained !y a small rate of people in a nation, the general living standard is still
low compared with a nation having a more evenly distri!uted income or G>P.
5.Other Limitations
opulation /i6e
, large population has a lower living standard even if its G>P is the same as that of a small
population. The per capita G>P is more useful to compare the 2 nations.
National %efense
If a nation has spent a lot of resources in the production of weapons and so on, its living
standard may not !e improved.