Macroeconomic policy levers for MSME development

Macroeconomic theory studies a country’s general economic activities and the policy factors that impact them. The economic policy aims to grease the wheel of economic activity, ensuring productivity and job quality while maintaining financial stability.  John Maynard Keynes suggested that the economy was not self-balancing; hence government intervention could be used successfully to counteract disruptive economic fluctuations58. Keynes added that economic cycles were driven by investment booms and busts59, resulting in workers’ consumption changes. Thus, the government can use policy levers to stabilize the economic cycles in optimizing its economic performance. Government can apply various tools and measures to achieve these purposes. It has the power to tax and spend (fiscal policy). Similarly, it has authority over the central bank, which sets the interest rates that influence credit (monetary policy).

Macroeconomic policy refers to how governments and other policymakers intervene to improve economic performance and well-being.60 It starts with setting policy objectives to achieve sustainable economic growth and development, stable prices, and full employment. Macroeconomic policy is critical for businesses, including MSMEs, due to its influence on business performance and growth.  Macroeconomic policymaking targets economic variables such as inflation, exchange rates and employment levels, changes in policy settings at the macro level also filter down to the level of MSMEs.  Therefore, macroeconomic stability is one of the primary issues of economic policymaking and among the usual objectives of a country’s central bank.61

Macroeconomic policy intervention, however, is a challenging task as some of the objectives set potentially conflict with each other. For example, a central bank could set inflation targets that often run counter to reaching full employment. This is because the tools used to reduce price inflation are usually increased interest rates or restricted credit — these slow down economic activity.62 Further, assuming a “one-size-fits-all” macroeconomic stimulus plan aimed at the business will not have the same effect on all industries.

Keeping the aforementioned in mind, policymakers need to choose between different policy tools or instruments once policy objectives and targets are established. These instruments are the levers of control of the macro-economy. They include monetary instruments, such as interest rates set by the central bank, and fiscal instruments like tax rates and government spending. For example, government infrastructure programmes or a policy of low-interest rates will induce employment growth through increased spending by government and private actors.63

Long-held beliefs often shape macroeconomic policy. These influence the choice of objectives, targets and instruments. For example, some economists put the eradication of poverty above the maximisation of corporate profits. This will significantly impact their views about the use of the tax system. Also, different economists may use other economic models and forecasting techniques. This may lead them to disagree about the need, size or timing of policy changes.

Further, MSMEs can be critical to realizing the macroeconomic objectives of a government.  If the policy environment incentivises MSMEs, the government will benefit in the long run by revenue from tax (personal and corporate tax). The economy will witness new investments, growth and development. MSMEs play a crucial role in the transition and developing countries and constitute a significant source of employment and generate significant domestic and export earnings.64 Therefore, MSME development emerges as a critical instrument in poverty reduction efforts.

Addressing MSME concerns tackles a considerable part of any country’s economic and social objectives. MSMEs are often tagged as playing a critical role in economic growth and can create a stable economy arising from their flexibility and capacity to absorb labour, both skilled and unskilled, easily. In addition, the viability of MSMEs is essential for creating competitive and efficient markets. A vibrant MSME sector is also acknowledged as being a dynamic source of growth and innovation.

Resources

58 IMF, What Is Keynesian Economics? Finance & Development, September 2014, Vol. 51, No. 3
Sarwat Jahan, Ahmed Saber Mahmud, and Chris Papageorgiou

59 Ibid.

60 ILO (2015) National employment policies: A guide for workers’ organisations. How do macroeconomic and sectoral policies affect employment?

61 Perry Mehrling, “Why central banking should be reimagined,” BIS Papers #79: Re-thinking the lender of last resort, September 2014: 109.

62 Atkin T and G La Cava (2017), ‘The Transmission of Monetary Policy: How does it work ?’, RBA Bulletin, September, pp 1–8.

63 Bivens J., Economic policy Institute (2014) Briefing Paper #374, The Short – and Long-Term Impact of Infrastructure Investments on Employment and Economic Activity in the US Economy.

64OECD (2017), Enhancing the Contributions of SMEs in a Global and Digitalised Economy