Question

Give me some examples of the crowding-out effect and how it affected the economy.

Answer 1

Ans : Crowding effect refers to reduction of expenditure by pvt sector due to high spending/expenditure by government as high govt spending is usually financed by highn taxes and borrowings , which increases the interest rates and hence increase the cost of borrowing for private sector.

Example -1 : Post Asian Crisis , Malaysia has faced a crowding - out effect of private investment due to widespread presence of government linked corporations . Due to high investment by government in industries , the private sector investment in such industries have been negatively affected.

Result -: As a consequence , Malaysian economy is experiencing high fiscal deficit (due to increased spending) ,high debt obligations (due to high borrowings for such investments) and fleeing of domestic investors into other countries . Malaysia has become a net exporter of capital since 2005.

Example - 2 : In pre-1991 period in India , the govt invested heavily in manufacturing industries favoring public ownership of companies for economic growth. This bailed out the private sector from having shareholdings in such industries . This led to crowding out of private players and majority of the economy became govt owned.

Result -: Inefficiencies started to creep in . The Governement was unable to bear the expenses of the industries . The fiscal deficit increased . Also red tapism was on rise .

Then , the govt decided to reform the economy in 1991 and privatised majority industries.