Construction Economics: Government Economic Policy - Term Paper Example

Table of Contents Construction Economics: Government Economic Policy Introduction A policy refers to any rule or principle used in guiding decision making and achieving rational results (Jenkins 1978). The intended goals to be achieved by a policy widely vary with the organization and the context to which it was made. Policies are basically made to prevent negative effects noticed in an organization or promote positive benefits according to Howard (2005). Government economic policy refers to the actions that a government takes to influence its economy. The economic policy covers the methods of setting interest rates and the national budget as well as the national ownership, the labor market and many other areas. The economic policy of a government is generally reflected in its national budget (Jenkins 1978). Partly, it is through the budget that the government exercises its three principal methods of establishing control: the stabilization function, the allocative function and the distributive function. In some cases, economic policies are usually influenced by international institutions such as the World Bank or International Monetary Fund as well as policies of political parties and their beliefs. Discussion Factors Affecting the Economics of a Construction Related Business The business environment within which most housing and construction companies operate has continued to change rapidly throughout the world. Construction companies that fail to adapt or respond to these changes have problems in their survival. Therefore, contractors must be capable of improving their performances continuously in order to out smart their competitors. In nature, the construction company is complex because it consists of a large number of parties as contractors, stakeholders, clients, consultants and regulators. However, despite its complexity, it plays a great role in the achievement and development of the goals of a society. Economic growth refers to the rise of per capita gross domestic product (GDP) or other measures of total income. It is usually represented in annual basis as the rate of change in real GDP. The economic growth of a country depends on the ability of that country to improve its productivity, that is, its ability to produce more goods and services using similar inputs of labor, materials, energy and capital. According to most economists, there are two types of economic growths: the long-term economic growth and short-term economic stabilization. However, economic growth is usually concerned with the long-term type. The short-term type is rather deemed as the business cycle. The leading indicator of the state of economy in a given country is the housing and construction industry. This is because it usually begins to falter prior to the beginning of a recession. This was evident during the United States recession in 2008 when the construction and housing industries started to struggle as early as 2006. The economic growth of a country will determine the success of the construction company. If an economy of a certain country is collapsing it is very hard for a construction company to survive. The income level of nationals will determine the number of customers the company have. A flowering economy will make people to be interested in modern housing and by this construction companies will be making profits and maintaining its budget. Stable economic growth creates a good environment for business and enough labour to sustain their activities in a particular country. The economic factors affecting housing materials and construction activities can give industries a warning on what to expect in future. The economic factors affecting the housing and construction industries are discussed in the following sections: Employment Statistics The personal wealth of individuals increases with increase in employment. The dream of citizens irrespective of every nation is to own homes and as employment increases most of them are able to afford this option and engage in building these homes (Seymour 1987). This in turn affects the construction industries in that as new companies open and new jobs are created, their production increase dramatically. However, if employment rate decreases their production also decrease drastically. The Price of Raw Materials Raw materials such as timber and steel for lumber and nail industries increase and decrease based on their availability, demand and labor costs. Any increase or decrease in these materials will cause price fluctuations for construction materials hence affect the production of most housing and construction industries (Cassimatis 1969). New Housing Starts Any increase in new housing starts leads to an increase in the prices of home materials since suppliers expect a good building season (Seymour 1987). This indicator is somehow a self-fulfilling prophecy because as housing starts increase, the housing industry must have already experienced increased revenue. The suppliers are usually optimistic as long as the housing starts are increasing. Consumer Confidence The expectations of consumers about the future also affect the construction and housing industries. Consumers’ decision to build now or in future based on their confidence affects the economy by increasing or decreasing consumer spending and investments (Seymour 1987). Money and Banking Banking facilitates the fiscal and monetary policies that influence businesses and the customers of the businesses (Jenkins 1978). The demand or paying power of consumers is usually dictated by the amount of money in circulation. Therefore, consumers will only demand for more houses if there is a lot of money in circulation. Banking facilities dictate business and individual capacity of borrowing. Hence if the borrowing capacity is increased, the demand for houses is likely to increase. Construction companies face a lot of economic hardships in many countries in terms of exchange rates. Exchange rates are very different from a country to another. It is very difficult and challenging for an international company to come up with a well balanced budget, they are affected by unstable economies this being the case mostly in developing countries. Exchange rates can be controlled by some government without consultation of investors leading to a loss in most cases. Exchange rates affect the way a company will pay its workers in case it is based in a foreign country and they must follow international labour laws. How Government Economic Activity Affects the Construction Industry The fiscal policy is a policy in which a government uses its expenditure and revenue collections or taxation to influence its economy. The two main tools of fiscal policy are taxation and government expenditure. Any changes in the government spending and level of taxation may affect the following variables in the economy: aggregate demand and level of economic activity, the distribution of income and the pattern of resource allocation. Governments usually use the fiscal policy in influencing the level of aggregate demand in the economy. By increasing government spending and reducing the tax rates, a government is able to stimulate aggregate demand. Therefore, an increase in aggregate demand will increase the operations of construction companies and the reverse is true. Taxations in most countries are high making some construction company shun investing in them. If a country’s taxation is above that of other countries, the expenses a construction company will likely incur will be higher. Taxation on products and services will never motivate companies to invest in some countries. Some countries are not ready to wave taxes imposed on the machines used for construction. Tax policies in many countries are not business friendly to investors in the construction industry. Monetary policy is the process by which the monetary authority or the central bank of a country controls money supply, availability of money or interest rates with the aim of promoting its economic growth and stability (Jenkins 1978). This implies that if the interest rates are low, people are likely to take more loans and invest in building and constructions thus promoting the construction industry. However, if the reverse occurs people shy from investments thus reducing the operations of construction industries. Any squeeze on the government spending affects the real economy with the construction industry being largely affected (Jameson and Rossiter 2008). For instance when the UK government tightened its budget, Kier which is one of the biggest constructions and house building companies in Britain reported a reduction in its productions because there was a decline in demand for social housing construction (Jameson and Rossiter 2008). Increased government spending on hospitals, schools, houses and roads boosts the operations of construction companies. Inflation usually has a negative impact on the construction companies. Many economies with high inflation rates have few companies interested in investing in them. Inflation will require the company to pay high wages to workers for them to be satisfied. Inflation may lead to poor competition among the construction companies on the international scene. The large amount to be handled might lead to insecurity. A lot of cash in circulation may lead to people opting to buy products from a broad and not from their own countries. Governments impose unnecessary unemployment policies to construction companies. They tend to regulate how a company will carry out its recruitment. They set the minimum salaries whether the company can achieve or not. They set the number of workers to be employed. They force companies to employ their workers on permanent basis. Employment policies have not been reviewed in some countries straining the company’s budget. Construction companies are forced to pay for worker’s medical care even if they were injured else where. Insurance and medical fees are left in the hands of the companies. Government spending usually affects all industries in the country. Every country should control its budget to avoid unnecessary spending and borrowing. Countries might want to rely on construction companies to sponsor their activities. A lot of money in circulation will definitely affect companies whose intention is to make profit and improve the living standard of the people. Poor interest rate affects the morale of the company where a government is to determine the amount of interest to be made. Consumer confidence on the products and services affects the construction company. Many construction companies have been rated according to their performance. This makes it hard for some companies to build confidence in consumers. Recommendations: How to Create a Stable Environment in the Construction Industry A stable environment in construction industry can be created in various ways: first, establishment of the regulator issues, laws, regulations and/ or guidelines to which a building should comply with becomes the prerequisite (Luff 2007). Generally, the regulator plays a fundamental role for inspection of the compliance with these rules. The objective of the regulator is to create safe and healthy buildings that are sustainable and make economic growth from the point of view of environment and society possible. The regulator can also have an important role as an inspector and as a supplier of land, and therefore largely has contact with the initiator or the project developer. Depending upon the municipality, the local regulator interferes with the design in contact with architect and the planner. The regulator also has to inspect during the actual construction thus having a contact with the contractor. However, two broad levels of regulators that control environmental stability in construction industry can be distinguished. These are national and local authorities as noted by Luff (2007). They are purposely meant create environmental stability in the construction industry as well as minimizing on the risks incurred during construction (Bluyssen, 2009). National authorities are concerned with ensuring the basic needs that include: security, safety, hygiene, comfort, habitability, and durability among others. These needs are basically for the direct and indirect end users and small owners who do not participate in the design and construction stages of the building facility, but are the main group affected by its performance. Its main concern is the duty to of care that is; addressing true needs, which market forces may neglect to care of properly or to an adequate extent. For some industrial occupancies, where building performance may affect the products manufactured in the building that may subsequently have an impact upon the health of people using them. The people most likely affected are those working in food production industry and pharmaceutical industries, among others as stated by Luff (2007). National authorities play a fundamental role in stabilizing the construction industry’s environment through involvement in cleanliness and hygiene activities. In addition, national authorities are also concerned with the long-term protection of the environment as a result of the building’s direct and indirect impacts during its entire life cycle, from cradle to grave. This comprises of effects streaming from the depletion of the resources, emissions, and energy consumption among others. Besides protecting the needy, national authorities create a stable environment in construction industry through maintaining a vital and economically stable building marker, in promoting export, and in preventing raised building costs due to unjustified barriers on imports, excessive mandatory demands of complex regulatory procedures. However, local authorities on the other hand, as the second level of regulator, play fundamental roles in creating a stable environment for the construction industries (Luff 2007). This is done through controlling the overall aspects of the built environment, and putting precautionary measures on health with the direct effects of the building on the public infrastructure and service systems like; water and gas supply, sewerage transportation, and parking among others, and on other buildings and public areas in its vicinity, and with the effect of the built environment on the general public as suggested by Standing (2001). Consequently, concepts embedded in the zoning ordinance and urban planning documents issued by the municipality and the environment conservative organizations may affect the performance of the construction industry in terms of orientation, size of the land lots, as well as the aesthetic requirements for building facades to traffic-carrying roads affects the acoustic criteria for the building envelope; the distance between buildings affects the fire resistance required for the exterior walls and the maximal dimensions of wind. Reference List Bluyssen P M (2009). The Indoor Environment Handbook: How to Make Buildings Healthy and Comfortable. London, UK: Earthscan Publishers. Cassimatis P. (1969) “Economics of the construction industry”. Conference Board. Studies in business economics, no. 111, Issue 111 of Studies in business economics Volume 111 of National Industrial Conference Board. National Industrial Conference Board. Howard, C. (2005) "The Policy Cycle: a Model of Post-Machiavellian Policy Making?" The Australian Journal of Public Administration. Jameson A. and Rossiter J. (May 17, 2008) “Construction industry feeling the squeeze”. The Sunday Times. Viewed from http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3949903.ece [Accessed 19th March, 2011] Jenkins, W. (1978). Policy Analysis: A Political and Organizational Perspective. London: Martin Robertson. Luff P (2007). HC Paper 127-II House of Commons Business and Enterprise Committee: Construction Matters, Volume II. London, UK: The Stationery Office. Seymour H. (1987) The multinational construction industry. Routledge. Standing N (2001). Value Management Incentive Program: Innovations in Delivering Value. London: Thomas Telford Read More