Achieving Economic Stability in a Country – By Dr. Gnana Sankaralingam
Economic stability is a situation where all economic resources of a country are available to its citizens. An economy with a fairly constant output growth and low and stable inflation will be considered stable. It helps achieving objectives like price stability, reducing unemployment, sustainable growth and balance of payment. Disruptions in economy affect the stability through fiscal deficits, recessions, political upheavals, policy changes and global markets. Government constantly monitors and eliminates deviations in an economy to keep it stable and growing. Common indicators of economic stability are gross domestic product (GDP), human development index (HDI), consumer prices, trade deficits, employment rate, fiscal deficit, rate of inflation, public expenditure, interest rate and level of debt.
Maintaining economic stability contributes to growth and development, raises living standard, improves job opportunities and creates confidence in the minds of investors who are looking for human capital and technological resources. Monetary policies to revive and stabilise economy and keep it on its track are implemented by government and certain banks. Factors affecting the economic stability are:
Financial – which is the prime factor relating to the financial system in the country.
Political – such as rift between parties, corruption and civil disturbances (riots and strikes).
Social – variables affecting society as a whole like Covid pandemic, not confined to groups.
Legal – changes in laws enacted by government that encourage or prohibit certain activities like employment and businesses.
Technological – automation and digital cash causing loss of jobs for skilled workers
As economic growth and stability are related, any growing economy should be stable first and then progress forwards. Indicators for economic stabilty are:
Gross Domestic Product (GDP) – a crucial macro-economic indicator that depicts the level of national income, higher GDP reflecting higher growth.
Consumer Prices – indicators for shortage or surplus of resources influencing the response of consumers and institutions to changing markets, where if consumer price is stable it will lead to economic stability and growth.
Employment or Unemployment Rate – shows the degree of economic activity and accounts for the number of people sitting idle without contributing to the economy.
Rate of Inflation – It is a more reliable indicator of stability. While mild inflation is necessary for an economy, higher rate can put the economy at risk hindering foreigners from investing as money and assets lose value.
Interest Rates – Low rates on borrowing promote consumer spending and encourage money supply which help to maintain economic stability.
Level of Debt – National debt shows health of an economy. Debt is necessary as it ensures government spending, but too much debt could disrupt economic stability.
Public Expenditure – Effects of it on economic stability are numerous and government must spend adequately in areas where focus is required to sustain financial stability.
Fiscal Deficit – It arises when government expenditure exceeds revenue, which can harm the economy as it will reduce spending and the government needs to borrow money to finance the deficit. Lower deficit implies better stability.
Trade Deficit – It refers to the value of imports over exports. A healthy economy should have higher exports than imports to have more money flow into the country.
Human Development Index (HDI) – gives living standards such as education (literacy), health care (infant mortality rate and life expectancy) and general development like housing.
Conditions necessary for achieving economic stability are:
Monetary Policies – Central banks try to achieve stability through Implementation of policies managing inflation, price stabilisation, money supply and control over interest rates.
Regulation of Financial Institutions – by keeping a close watch on their workings to control the extent of risk that they take.
Skills Development – Advanced skills of work force could contribute more to the economy.
Supporting Research and Innovation – so that domestic products can compete with other countries and gain higher market share.
Fiscal Responsibility – Maintaining a balance between funds available for spending and the funds borrowed, as excess of debt would put pressure on repayments and disturb budget planning leading to more borrowing.
Consistency – Economic policy should be designed in such manner that target of investment and financial stability are achieved constantly.
International Trade – Economy should be strong and flexible to attract global companies for investment and trade purposes.
Benefits of stable economy in promoting economic stability are :
Reduces Unemployment – It increases demand for labour creating more job opportunities.
Increases Public Expenditure – It contributes to monetary gains which allows government to spend more on its citizens to provide free education and health and other public services.
Improves Living Standards – offers better life for citizens, jobs for everyone and easy access to public goods. It helps to bring people out of poverty by giving them a fair chance.
Attracts Foreign Direct Investments (FDI) – Foreign investors and businesses wish to invest in a stable economy where they could make profit and repatriate the earnings abroad.
Income Equality – It focuses on equal distribution of incomes and wealth which is essential because collective inclusive growth of citizens amounts to growth of the economy.
Balance of Payments – More money will be flowing into the country than that going out.
Price Stability – No large swings on the prices, increasing purchasing power of consumers.
Sustainable Economic Growth – Supports growth without depletion of resources.
Achieving economic stability is not a one time process. It should be constantly monitored and corrective action taken by the government. An economy with frequent large recessions or fluctuating recessions and expansions (business cycles), a very high or variable inflation or frequent financial crises would be considered economically unstable.
