sector and the private sector and its reflection on economic activity
Agricultural Economics
Crowding-out means the economic situation in which both the government and the private sector compete to obtain the same money or other financial resources, and since the economy is unable to meet this aggregate demand for money, interest rates will rise dramatically and this rise in turn can cause a slowdown in economic activity. Crowding -out can occur more clearly in certain economic and political conditions such as wars, when the government borrows large amounts of money to finance military campaigns, this can lead to higher interest rates and inflation, or when the government suffers from a large deficit in the general budget.
Money is a commodity in the economic market. Its price is determined by the interaction of the forces of supply and demand, as is the case with any other commodity. The crowding out occurs when both the private sector and the government demand additional financing, and the provision of loans is not sufficient to meet this demand when there is a shortage in the supply of capital, this situation will increase the interest rates to create a new equilibrium in the market. Lenders often tend to lend more to the government than to the private sector because the government has tax authority to pay its obligations, and this makes government credit safer than the risks of private sector lending. In other words, when both the government and the private sector want to take out a loan, the government generally is able to obtain financing first, here the private sector companies that would have borrowed money to expand their factories and production lines (which could have increased employment) may have to abandon those plans because the cost of capital has become too high and these proposed projects are no longer profitable .
There are types of the crowding out - financial exclusion is the most common form as explained above - of which resource crowding out can occur when the government buys a large part of the supply of raw materials, making it difficult for the private sector to achieve the planned production levels. This often happens during war when the government gives priority to building weapons and other military equipment. This may cause shortages of commodities such as iron, steel or copper, etc.
Infrastructure crowding out – countries that adopt a market economy – where both the government and the private sector provide certain infrastructure services. This can discourage private companies from providing these services because it may be difficult to compete with a government-run provider that has a lower profit motive when managing its operations. There is also a specialized form of crowding out, where the government is the primary buyer of a particular product, i.e. contracting to purchase from the main suppliers, which leads to a shortage of commodity supply, for example, contracting to purchase a specific drug or vaccine for the benefit of the Ministry of Health, which makes the private sector weak in competition
The opposite concept of crowding out is the Crowding-In effect, which is the situation in which increased government spending leads to a multiplier effect that leads to more activity for the private sector. If the government builds a new airport in an area, it is likely that this will lead to an increase in industrial and commercial activity around the airport to take advantage of the increased business opportunities , which leads to an increase in general economic activity, then there are certain types of strategic government investments that can have a crowding in effect beneficial to the economy.
The distinction between the negative impact of crowding out and the positive impact can be observed through economic cycles. During a recession, the government can act as a buyer of last resort to prevent the economy from entering a general depression, here the government does not compete with the private sector for access to capital because the private sector is in recession and the demand for money declines, but then when the economy grows rapidly, the additional spending is more likely to crowd out productive private investment than to have a beneficial effect.