Question

A rapidly developing country has hired you to present a specific strategy for keeping their inflation and unemployment rates low while maintaining a healthy rate of GDP growth. Please describe in detail at least four things that can be done to accomplish this.

Answer 1

Below are the things that a developing country can do to keep their inflation and unemployment rates low -

1. Encourage financial institution: Having more financial institutions will encourage the process of capital formation as the savings from household sector gets channelized towards capital formation. The financial institution such as banks serve as an intermediary in this respect.

2. Investment in social sector: Social sectors such as Health and Education carry positive externality that can last for years. A strong health sector improves productivity of labor as less working hours are lost due to a sickness. A good education sector improves labor productivity and also produces labor stock for private sector.

3. Inflation rate targetting: The central bank of this country can adopt an inflation targetting regime so that whenever the economy overheats, the central bank can act by taking appropriate measures and hence tinker with interest rates.

4. Discourage consumption driven govt debt and fiscal spending- Excessive govt spending that is not financed by the tax receipts crowds out the private investment. This can result in accumulation of debt which has intergenerational effects in terms of higher taxes in future.