The crowding
out effect occurs when public sector spending reduces private sector expenditure. It is an
economic principle that happens when a government borrows more money that it usually does to
cater to its needs. Governments pay for this type of spending by increasing taxes or borrowing
more money. Increased borrowing leads to a spike in interest rates resulting in private
companies reducing their spending. The private sector will be hesitant to borrow money because
of the costs associated with paying the loan; therefore, it will reduce its spending.
An example of a country experiencing the crowding out effect is Malaysia. The countrys
government focused on making investments in a number of companies, which reduced private sector
involvement in the economy. Increased government investments have seen the country having many
debt obligations. As it stands, the government is working towards reducing this
effect.
No comments:
Post a Comment