State Intervention and Economic Globalization
State Intervention in the Economy
Objectives
- Establish the legal and regulatory framework.
- Determine macroeconomic objectives: controlling public deficits and inflation.
- Facilitate efficient and socially optimal resource allocation.
Tools
- Founding and purchase of goods and services.
- Intervention in income allocation mechanisms.
- Regulating wealth.
Externalities
Definition
Benefits or damages to a third party due to economic activity.
Types
- Negative: Pollution
- Positive: Public services, scientific research
Addressing Externalities
- Criminalizing negative externalities.
- Subsidizing positive externalities.
Assessing the Effects of State Welfare: The 3 Pillars
Health
- Health care and medical education.
Pensions
- Capitalization and distribution systems.
- Debate: Can we sustain current pension systems?
- Creation of a reserve fund for social security: INSS, TGSS, ISM.
Economic Policy
Objectives
- Enhance economic growth.
- Promote full employment.
- Create conditions of macroeconomic stability.
- Facilitate the redistribution of wealth.
Challenges
- Privacy demands.
- Political influence on consumer policy and supply.
Public Sector and the State Budget
The State
- Organizes the coexistence of citizens.
- Components: General State Administration (central government), regional governments (CCAA), local governments (Town Halls), autonomous bodies and institutions of the CCAA and municipalities, and public companies.
The State Budget (PGE)
- Organizes public sector performance.
- Revenues: Tax collection.
- Expenditures: Personnel, purchase of goods and services, transfers, etc.
Public Finances and the PGE
Financial Reports
- The tax system used to raise funds for the public sector is reflected in the PGE.
- Government actions are discussed and approved in parliament.
Public Revenues
Sources
- Tax revenue: Taxes, special contributions.
- Non-tax revenue: Profits of public enterprises, lotteries, sale of state property, transfers from the European Union.
Classification
Public revenues are classified into 7 chapters:
- Direct and indirect taxes.
- Fees.
- Current transfers.
- Property income.
- Sale of capital assets of the state.
- EU funds.
- Other revenues.
Expenditure Governance and Decentralization
Classification Criteria
- Economic: How is money spent? (Current expenditure, capital expenditure, financial expenditure)
- Organic: Who spends? (Social security administration, government departments, regional governments)
- Functional: What is it spent on? (Social spending, public services, investments)
Decentralization
- Decentralization in both tax collection and expenditure.
- Regional governments have their own tax rates but must contribute to inter-regional solidarity through a territorial fund.
Public Deficit
Causes
- Decreased revenue: Labor instability, reduced business profits.
- Increased expenditure: Higher costs due to increased unemployment, early retirement, falling demand.
Consequences
- Increased state government deficit financing needs.
- Issuance of public debt.
Protectionism
Definition
A set of measures to defend national industries and penalize foreign competition.
Arguments in Favor
- Protection of the living standards of workers.
- Protection of the health of consumers.
- Protection of new industries.
- Protection of domestic industries from the competence of foreign enterprises.
- Non-economic considerations arising from political philosophy, such as self-sufficiency.
Globalization and International Organizations
Definition
The process of growing relations between countries, making them increasingly interdependent and forming a global economic system.
Factors
- Advances in transportation.
- Technological progress.
- Advances in finance, simplifying international money exchange.
- Political awareness to avoid social isolation.
International Monetary Fund (IMF) (1945)
Objective
- Ensure the effective functioning of the global economy, particularly in international finance.
- Combat economic crises that affect the international payment system.
Functions
- Manages a fund that lends money to member countries in need during crises.
- Monitors the economic and financial policies of member countries.
Structure
- Has 184 member states.
- Headquartered in Washington, D.C.
- Voting power depends on the weight of each member’s GDP.
Balance of Payments
Definition
The systematic recording of all economic transactions over a period of time between residents of a country and other countries.
Key Concepts
- Surplus: When a country receives more payments than it makes.
- Deficit: When a country makes more payments than it receives.
Components
The balance of payments is composed of three balances:
- Current account
- Capital account
- Financial account
A country with a surplus contributes to the growth of other countries because it purchases goods and services from them, and allows other countries to invest in its territory.
Currency and Exchange Rate Changes
Currencies
The currencies of each country are the means of payment for goods and services. Currencies of other countries are called foreign exchange.
Exchange Rate
The exchange rate is the price of one country’s currency in terms of another.
Demand for Foreign Exchange
There is a natural demand for foreign exchange to carry out international transactions, such as:
- Paying for goods and services from other countries.
- Investing in financial products issued in foreign currencies.