Title: Executive Development Programme for Senior Government Officers
1Executive Development Programme for Senior
Government Officers
- The Economic Basis of Public Policy
- Microeconomic perspective
2EDPSGO 2005
PART ONE AN INTRODUCTION TO ECONOMICS AND THE
ECONOMY OF BRUNEI
3EDPSGO 2005
- Part One An Introduction to Economics and to the
Brunei Economy - Part Two The Economic Basis of Public Policy
- Part Three The Economic Rationale for
Privatisation in Brunei
4What is Economics?
- Political Economy or Economics is a study of
mankind in the ordinary business of life it
examines that part of individual and social
action which is most closely connected with the
attainment and with the use of the material
requisites of wellbeing" - Alfred Marshall
5The most fundamental concept
- Because resources (time, money, oil etc) are
limited, using them in one way precludes using
them in any other way. - Opportunity cost is the forgone benefit from
not using a resource in its best alternative use.
6What is economic welfare?
- Somewhat philosophical, but generally to do with
the well-being achieved from economic activity. - Economic welfare could include
- Real Gross Domestic Product (GDP), household
production, leisure time, economic equality
(absence of poverty), environmental quality.
7What is GDP?
- The market value of all final goods and services
produced in an economy in one year. - Real GDP GDP adjusted for inflation so that it
reflects changes in production, not just prices - Real GDP per capita GDP divided by population.
8Trend real GDP
- Over the long-run real GDP increases because
- Growing population
- But this will put downward pressure on per capita
GDP - Growing stock of capital equipment
- Growing stock of human capital
- Advancing technology
9Brunei per capita GDP at current prices
- 1983 - B39,629
- 1984 - B38,167
- 1985 - B35,544
- 1986 - B22,805
- 1992 - B24,570
- 1998 - B21,111
- 2003 - B23,615
- Problem 1.
- Volatility of oil prices
- Problem 2.
- Calculations
- Problem 3.
- Over-reliance on oil and gas
10Brunei Citizen and PR only
Note this is unofficial data. The participation
rate is the percentage of the population that is
employed or actively seeking work
11Brunei Citizen and PR only
Note these are my calculations, not official.
Everyone is 10 years older in 2011 than in 2001.
The 15-24 age group shown here was 5-14 at the
2001 census. We will need nearly 28,000 more jobs
in 2011 than in 2001.
12The Brunei Public Sector
- For year 2003 (Department of Economic Planning
and Development, Prime Ministers Office (2003)
Brunei Darussalam Statistical Yearbook)
Provisional data. - 2003 GDP 8,236.9 million
- 2002 GDP 7,651.7 million
- Government expenditure 2002
- 4,736.14 million 62 of GDP
13The Brunei Public Sector
- Public Expenditure 2002 (Four largest
departments) - Education 10.4
- Defence 8.6
- Health 4.4
- Public works 3.1
14The Brunei Public Sector
- Revenue (2002)
- 4,267.83 million of which
- Duties, taxes and licenses 54.6
- Revenue from government property 38.3
- Commercial activities 6.7
- Other 0.4
15The Brunei Public Sector
- Revenue breakdown (Department of Economic
Planning and Development, Prime Ministers Office
(2004) Brunei Economic Bulletin Volume 3, Issue
1) - Data for Q1, 2004
- Total revenue 1,398 million
- Oil and Gas contribution 1,240.5 million of
which - taxes 758.4 million
- royalties 160 million
- dividends 322.1 million
16EDPSGO 2005
PART TWO THE ECONOMIC BASIS OF PUBLIC POLICY
17What is social welfare?
- Social welfare is the concept of the general
level of well-being of an individual, family or
society. It includes economic welfare, plus
health, peace, justice etc. - If economic welfare increases and there are no
other negative effects, social welfare will also
increase.
18In practical terms
- Thinking economically means thinking about how we
can increase economic welfare - Because resources are, usually, limited, actions
will have both benefits and costs, even if these
are opportunity costs
19In practical terms
- Think in terms of maximizing net benefits
- Think at the margin.
- Incremental benefits and incremental costs of a
change - JPMC
- Short-run and long-run decisions
20The case for policy intervention
- National Development Plans
- Promoting and controlling development that is not
happening in a free market - Market failure
- When markets dont maximize economic welfare
- Monopoly, other forms of market power,
externalities, public goods.
21The basis for policy recommendations
- If a problem is perceived to exist (markets have
failed, maximum net benefit is not being
achieved) then government should intervene. - Economics is then concerned with finding the
best, most efficient solution.
22Some policy instruments
- Regulations backed by penalties
- Control of prices, volume of production,
imports/exports, rates of return on investment,
entry of firms to an industry, licensing, output
of pollutants - Public enterprises/direct provision
23. Policy instruments
- Criteria for evaluation of policy instruments
(Field 1995) - Efficiency (and cost effectiveness)
- Fairness (equity)
- Incentives to innovate
- Enforceability
- Morality
24Three examples
- Externalities
- Public goods
- Natural monopolies
- Externalities are effects from economic activity
that are external to all the direct parties of
the activity. - A negative externality imposes an external cost
- Pollution
- A positive externality results in an external
benefit - Education
25Externalities
- Pollution is a cost of economic activity borne by
those not involved in the activity - The result
- Too much output of the polluting good at too low
a price - The solution?
- Regulation, taxes, property rights/permits
26Public goods
Rivalry (exhaustiveness)
High
Low
Excludability
Toll good
Private good
High
Common Pool good
Public good
Low
27Toll goods
- These goods can be provided by the market because
they are excludable. It may be unfair to provide
them out of general government revenue
(everyones tax payments) when only some people
use them. User pays principle.
28Common pool goods
- The danger is that, unregulated, these good will
be depleted. There will be over use. - The solution is to make them private goods by
issuing licenses, quotas etc as a form of
property right. This gives owners the incentive
to conserve.
29Public goods
- Pure public goods will not be provided by the
market because they are - non-excludable (provide for one and you provide
for all) - non-exhaustible (one persons consumption does
not reduce amount available for others) - Examples.
- Community service obligations
30Natural monopolies.
- Defined as having continually declining costs
over the whole range of output covered by the
market demand curve.
Per unit cost of production
Quantity
31. Natural monopoly
- Examples of natural monopolies are firms with
large fixed costs such as water, telephony and
electric utilities.
32. Natural monopoly
- What is the rationale for government ownership or
control of natural monopolies? - To avoid wasteful duplication of facilities
- One supplier has lower costs than two or more
suppliers - Because without government involvement the
industry would monopoly price
33. Natural monopoly
- Is this monopoly pricing desirable from societys
point of view? - No,
- supernormal profits may be made
- too little output
34. Natural monopoly
- So, with natural monopolies, traditionally
governments have either left them privately owned
but heavily regulated (US, Canada) - or had them owned and operated by government -
public ownership (UK, Europe, Australia, Brunei)
35EDPSGO 2005
PART THREE AN ECONOMIC PERSPECTIVE ON
PRIVATISATION
36Negative aspects of government ownership
- Crowds out private sector
- Legislated monopoly
- State-owned enterprises get preferential
treatment from government - Output subsidized so private firms cannot compete
- Incomplete accounting of costs and revenues
- Poor performance (low productivity)
37Privatization
- What is the rationale for privatization?
- Improve efficiency by exposure to competition
- Improve government fiscal position
- Allow use of private sector capital
- Less natural monopoly than imagined. For example,
electricity generation - Access to natural monopoly facilities without
duplication.
38Efficiency
- Technical efficiency refers to getting the most
output per unit of input. Production efficiency
refers to producing at lowest per unit cost - Does private ownership on its own result in
efficiency? - What about competition?
- What impact does greater efficiency have on costs
per unit?
39Government fiscal position
- Fiscal considerations may be just short-term.
- Price should reflect future earnings
- low earnings low price
- high earnings high price but future earnings
are forgone - Can private firm transform low earnings into high
earnings?
40Private sector capital
- Private firms can tap huge global financial
markets, which may be needed for investment - Government agencies may be restricted to applying
for government funds
41Natural monopoly or not?
- The extent of natural monopoly may have been
exaggerated. - Some aspects of industries may be natural
monopolies and others not, e.g. in electricity,
only the transmission and distribution networks
are now considered natural monopolies
42Duplication?
- An appropriate access regime allows competitors
access to essential facilities without
duplication, e.g. telephone lines.
43Negative aspects of privatization
- Private monopoly may be worse than government
monopoly (regulation) - Country may lose control of the pace and
direction of development - Prices may increase
- Jobs may be lost
- Maintenance may be insufficient to meet profit
targets (see Energex)
44The Brunei case
- Is competition possible?
- Is regulation
- feasible?
- economical?
- Is increased efficiency possible with government
ownership?
45Contracting out or internal organisation?
- Costs of internal organization
- Offices,
- secretaries,
- administrators,
- human resource managers
- pensions
- bureaucracy, inefficiency?
46Internal organisation
- Benefits
- workers have no direct claim to profit (2
divisions of same firm) - less self-interested behaviour?
- Feeling of belonging to organisation may induce
cooperative behaviour - Internal auditing
- Management can resolve disputes between divisions
47Contracting out
- Costs
- costs of searching for suitable suppliers and
choosing between them - lack of performance due to incomplete
specification of contracts - breaking a contract and subsequent actions
- monitoring costs
- loss of knowledge by not learning by doing
- potential for corruption
48Contracting out
- Benefits
- cost of internal organisation saved
- promotion of private enterprise
- development of other related skills
- entrepreneurial, managerial
- secondary effects may be greater than those when
a function is done internally
49The value of an enterprise to society
- Society the enterprise, consumers, the
government - The enterprise variable is net profit
- The consumer variables are price and output
(quantity and quality) - The government variables are required subsidies
or net tax revenue - Jobs?