The Effects of Government Intervention Essay Example
The Effects of Government Intervention Essay Example

The Effects of Government Intervention Essay Example

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  • Pages: 9 (2273 words)
  • Published: August 7, 2017
  • Type: Essay
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The role and impact of authorities on Romania's economic system, as well as the selection and organization of government officials, are important considerations that directly affect our lives and economy. Understanding how taxes, import and export limitations, duties, and interest rates are determined, as well as how government funds are spent, should concern us as citizens. Romania's economic system is closely linked to the European economy, with the government playing a significant role in shaping these connections.

Despite criticism towards the president, authorities, and parliament due to the fragility of our economic system, it is crucial to remember that their effectiveness is influenced by actions taken by both our nation and the global community. In this text, we present subjective and objective thoughts on how government influence impacts Romania's economy starting with an explanation of their role in the economic syst



The term "government" refers to legislators, decision makers,and administrators in bureaucracy who control a state at a given time along with their organized system of governance.The government, which serves as a means of enforcing state policy and determining overall state policy, is a form of government or state administration that refers to political institutions organizing governance within a particular state. "Regime type" and "system of government" are synonyms for this term. The word "government" originates from the Latin verb "gubernare", which means "to govern" or "to manage". The government is a public authority with executive power and operates based on Parliament's vote of confidence. Its main objectives include ensuring the fulfillment of domestic and foreign policies, as well as providing overall leadership in public administration.

After receiving a vote of confidence from Parliament, the President of Romania

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appoints the Government. The Government aims to achieve balanced operation and development of the national economic and social system while promoting national interests within the global economy. Its actions align with constitutional provisions and the approved Government plan by Parliament.

The Government consists of the Prime Minister and Ministers who work together under the guidance and coordination of the Prime Minister according to their legal responsibilities. This working setup involves various organizational structures such as sections, Secretariat-General of the Government, along with other similar entities assigned specific tasks through Government Decision.

Decisions and regulations are adopted by the Government;Decisions made by law enforcement organizations have specific purposes, while regulations adhere to predetermined limits and conditions within enabling laws. The Prime Minister is responsible for signing these decisions and regulations made by the Government. Curates are tasked with implementing and publishing decisions in the Official Gazette. It should be noted that if a determination or regulation is not published, it is deemed invalid. Decisions concerning military matters are only shared with relevant establishments.

Various public sectors, including ministries and independent administrative bodies, hold the authority to create draft public policy documents and legislative acts. However, government approval is required based on their respective responsibilities and areas of operation. The Romanian government plays a significant role in the economy, impacting consumers and manufacturers alike. Its activities influence five key areas: stabilization and growth, maintaining steady economic activity, high employment rates, and price stability.

Through the implementation of financial or monetary policies such as adjusting disbursement and revenue enhancement rates, controlling money supply, and managing credit usage, the government can affect the rate of economic growth which subsequently impacts prices and employment

levels. Additionally, taxes, import restrictions, interest rate adjustments, and its own spending habits all contribute to how the government can impact the economy in various ways.Taxes have a direct impact on consumer spending as they redistribute money from consumers and manufacturers to governmental funds, thus negatively affecting aggregate demand. Import restrictions, such as quotas or duties, provide protection for domestic producers against foreign competition. Quotas limit the amount of imported goods while duties impose additional taxes on imports in order to discourage price-sensitive consumers. The effectiveness of these measures varies depending on the specific quotas and duties that are implemented. However, imposing higher penalties on high-value goods can have a detrimental effect on aggregate demand within the economic system.

Sweeping interest rates refer to the rates at which the central bank lends money to retail banks, who then lend it to consumers and manufacturers at higher rates. When sweeping interest rates increase, retail banks are also required to raise their rates in order to maintain profitability. This has an impact on significant purchases like investments and home buying since individuals may not have enough cash available and rely on loans. Interest rates play a role in GDP through consumption and investment components as they determine the cost of borrowing money.

Government spending is funded by taxes, as mentioned earlier, and it creates what is known as the "Spending Multiplier" by stimulating demand for goods and services in the economy. This generates more demand than an individual consumer would generate alone. It should be noted that central banks operate independently from the government and are not influenced by political agendas.Government spending has a significant impact on aggregate demand

overall due to its size and type of demand. Compared to individuals, the government has more funds that can be used for constructing public infrastructure, benefiting everyone. The expenditure multiplier calculates how much additional demand is generated from each dollar of government spending by dividing the equilibrium change by the investment change.

A case study on Romania highlights its potential with abundant agricultural lands, diverse energy sources (coal, oil, natural gas, hydro, and atomic), a wide range of manufacturing activities, an educated workforce, and opportunities for tourism development in the Black Sea and Carpathian Mountains. During the 1970s, Romania heavily relied on borrowing from Western countries to establish a large state-owned industrial base. However, challenges such as the 1979 oil price shock and debt rescheduling in 1981 led Ceausescu to reduce Romania's dependence on foreign creditors.

By the end of 1989, Romania managed to repay around $10.5 billion of foreign debt but at a cost. Severe measures were implemented that greatly impacted the economy and people's living standards. These measures included reducing critical imports, implementing strict rationing for food and fuel consumption, and prioritizing exports to earn foreign currency. Consequently, investment decreased significantly.Compared to its Balkan neighbors, Romania had less developed infrastructure. After the fall of the Ceausescu government in 1989, subsequent governments aimed to establish a market economy similar to Western countries. However, the restructuring process was slow and it wasn't until 1994 that most of the legal framework for a market economy was in place.

Following elections in 1996, the coalition government implemented measures such as reducing consumer subsidies, deregulating prices, liberalizing exchange rates, and adopting a strict monetary policy. To attract more foreign investment into

Romania, laws were passed allowing foreign entities incorporated in Romania to buy land. Foreign capital investment steadily increased until 2008 but remained lower per capita compared to some other Eastern and Central European countries.

Previously, Romania used to be the United States' largest trading partner in Eastern Europe before Ceausescu rejected most favored nation (MFN) trading status in 1988. As a result of this decision, Romanian products faced high duties when traded with the United States. However, Congress reinstated MFN status for Romania on November 8, 1993 through a new bilateral trade agreement. In February 1994, duties on most Romanian products were eliminated as Romania became part of the Generalized System of Preferences (GSP). Notably, major exports from Romania to the United States include homes, clothing, steel,
and chemicalsIn addition to these developments, Romania signed an Association Agreement with the European Union (EU) in 1992 and a free trade agreement with the European Free Trade Association (EFTA) in 1993. These agreements paved the way for Romania's access to European markets and set the stage for further economic integration.

The pre-accession talks between Romania and the EU concluded with the European Commission in December 2004. Subsequently, in April 2005, Romania and Bulgaria signed an accession pact with the EU. As a result of this pact, both countries became EU members in January 2007.

Despite experiencing a deep economic recession after the global financial crisis of 2008, Romania is expected to achieve modest growth by the end of 2011. To address these challenging economic conditions that included a growing budget deficit and external instabilities, the Romanian Government entered into a fiscal aid package worth $27 billion with international organizations such as

the International Monetary Fund (IMF), the European Commission, and World Bank in March 2009.

Romania implemented an austerity program to reduce its budget deficit by cutting public sector employment and restructuring government agencies at local and national levels. This included reducing public sector salaries by 25%, increasing the national value-added tax rate from 19% to 24%, and laying off many employees. These measures resulted in a decline of 7.1% in GDP in 2009, followed by another decline of 1.3% in 2010Romania successfully met deficit targets agreed upon with the IMF, despite opposition from labor unions. The government implemented important reform laws, including pension reforms and updates to the labor code, leading to stabilization of the economy and paving the way for growth. In March 2011, a new two-year "precautionary" agreement with the IMF was established, focusing on structural reforms and privatization or restructuring of unprofitable state-owned enterprises. Privatization efforts began in 1992, with private ownership funds receiving around 30% of shares in approximately 6,000 state-owned enterprises. Ownership certificates were given to every adult citizen while 70% ownership remained under state ownership. With support from the World Bank, European Union, and IMF, most industrial state-owned enterprises were successfully privatized, including large energy companies like BCR (completed in 2006). Romania currently has two remaining state-owned banks - Eximbank and CEC National Savings Bank. However, CEC Bank's privatization was indefinitely postponed in 2006. Progress has been made in privatizing four out of eight regional electricity distributors and denationalization efforts for natural gas distribution companies are also underway.Distrigaz Nord was acquired by E.ON Ruhrgas from Germany, while Distrigaz Sud was acquired by Gaz de France. However, the process of privatizing

the energy sector has been delayed as the government considers creating two state-owned energy producers. The Romanian Competition Council and the European Commission's competition authorities are currently reviewing this strategy. Romania is home to a nuclear power plant called Cernavoda, which has had one operational reactor since 1996 and commissioned a second one in 2007.

After the revolution in December 1989, collectivized farming land was returned to its original owners or their heirs. This led to a temporary decline in agricultural production as approximately four million small plots (representing 80% of cultivable area) were returned to elderly or urban residents who may not have been actively involved in farming. The slow progress in providing formal land titles continues to hinder the renting or selling of land to active farmers.

To support Romania's reintegration into the global economy, it receives financial and technical assistance from various sources including the U.S., European Union, other industrial states, and international financial institutions such as IMF, World Bank, EBRD (European Bank for Reconstruction and Development), and EIB (European Investment Bank). These institutions have programs and resident representatives dedicated to assisting Romania.USAID programs, with the exception of Small Project Assistance Grants provided by the Peace Corps, were phased out in 2008. Between 1990 and November 2010, Romania received $37.91 billion in foreign direct investment, with the U.S. accounting for 2.59% of this total. However, a significant portion of U.S. investment in Romania is channeled through European subsidiaries and is not accurately reported.

Inflation in Romania experienced a steady decline until 2004 following years of high inflation during the 1990s. This trend reversed as GDP growth rates reached between 4% and 8% through 2008, leading

to an increase in inflationary pressures. The severe recession that began late that year significantly reduced these pressures.

Nevertheless, by the end of 2010, annual inflation had risen to 8%, making it the highest among EU member states due to increased VAT revenue and rising global prices for food and energy. The IMF has criticized Romania for its low tax collection rate and ineffective enforcement mechanisms which hinder long-term economic growth; only 33% of GDP was collected as revenues in 2010.

Furthermore, concerns have been raised regarding the current account deficit which peaked at approximately13.6% of GDP in both2007and2008but later dropped to4%. The future economic growth is jeopardized by deteriorating education and healthcare services as well as aging and inadequate infrastructure within the country.
Government intervention in the market can have positive and negative effects, leading to unintended consequences that affect specific policies. This is because government actions may not always align with consumer behavior and concerns. Government failure serves as evidence of this phenomenon. It is important to recognize that different forms of government intervention always have impacts that are not neutral. Therefore, when financial support favors one group of producers over another or when certain products are taxed more than others, there will be winners and losers among various groups of consumers.

During a recession, excessive government intervention can occur when the government collaborates with banks to lower interest rates. This stimulates purchases made on loans for houses and other goods. However, this approach ultimately leads to an increase in government debt and money printing, negatively impacting inflation rates and diminishing the value of money. Furthermore, once the recession ends, interest rates rise again, causing individuals to

lose the goods they had previously acquired.

Nevertheless, it is widely acknowledged that government intervention has been successful and beneficial for the market economy. The effectiveness of such interventions depends on decision-makers who consider multiple factors that can influence their outcomes.The European Union provides a great chance for me to connect with people in Europe and improve my communication abilities. I firmly believe that engaging with individuals from diverse cultures and countries is incredibly important.

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