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SUPPLY-SIDE POLICIES:
Policies aimed to increase potential o/p and hence…
SUPPLY-SIDE POLICIES:
- Policies aimed to increase potential o/p and hence lead to sustained or faster economic growth
Market-Oriented Policies: focus on allowing mkts to operate more freely w/ min. govt intervention to achieve growth in potential o/p
1. Cut Tax Rates
Lower Personal Income Tax
- Increase attractiveness for existing wkforce to work longer hrs as Yd increases
- Attracts housewives and elderly to enter wkforce, increasing SS of lbr
- Larger lbr force = productive capacity increase
Lowering corporate tax
- Cut in corporate tax increases after-tax profits, leaves more funds available for investment and R&D for innovation
- Higher after-tax return on investment increase rewards to entrepreneurs for risk-taking, encourage I
- Through innovation and investment, productive capacity/pdtivity can increase (some expn required)
Limitations
- Effects on potential o/p not guaranteed, people may not work more
- instead, as they can work less hrs and afford same amt of G&S
- might discourage work instead
- If econ. outlook is bleak, I might not increase despite corporate tax cut
SG
- SG tax policy keeps corporate and personal tax rates competitive (low) to attract FDI and encourage work effort and promote risk taking
- Hence alrd very low, not good idea to decrease further
2. Privatisation
- Transfer of ownership of firm from public to private sector
- Govt enterprises inefficient due to bureaucratic procedures, high admin costs and unpdtive wkrs, as they do not face incentive to lower costs and max. profits
- Govt is motivated by political pressures rather than sound econ. business sense
- Increases efficiency due to improved management and operation of privatised firm, hence priv sector more efficient
- Increases pdtion capacity
Limitations
- If state monopolies were replaced by private monopolies/oligo, the change in ownership does not improve the way they are run
- No significant change to Px, efficiency or o/p
- If priv mono. becomes too concerned with achieving profit targets/abuses mono. power, it is against public interest
- Also boosts govt. rev, but is only a one-off boost and may still be overall loss to rev in the future
SG
- SG privatised many companies e.g. SIA, Singtel, Singapore Power etc.
- Reducing dominant role of govt. will introduce greater comp. in the mkt
3. Liberalisation and Deregulation
- Libn: Removal of BTE into an industry (i.e. remove monopoly)
- Dereg: Elimination/Reduction of govt. regulation of private sector activities
- bc govt regulation stifles competition and increase inefficiency
- Greater comp. among firms forces them to reduce costs, hence greater efficiency in pdtion and improve in allocation of resources
- Possibly increase qly of G&S too
- This amounts to releasing resources that were being used unproductively and putting them to use in more pdtive activities
- increases potential o/p
Limitations
- Diff. for govt to implement anti-monopoly policies
- Allowing more competition may lead to lower efficiency as EOS not fully exploited, leads to higher costs
- Also, deregulation = greater freedom for industry = possible pollution, damage to env. and misallocation of resources
SG
- SG liberalised banking, telecommunications and power SS sectors
- SG ended Singtel's monopoly in 2000 to attract new competitors, lower px, and provide larger range of services
- Energy Mkt Authory (EMA) plans to fully open up electricity retail mkt in late 2018, giving conrs choice to buy electricity under customised plans from different retailers
4. Labour Mkt Reforms
- aka. increasing lbr mkt flexibility, reducing rigidities
- Intended to make lbr mkt more competitive, wages more responsive to force of SS and DD (usually lower)
- And lower lbr costs
- Lower COP = increased profits, more willingness in investment, hiring and R&D
- Increased potential o/p
Abolishing Min. wage legislation
- Show price floor diagram (bc. wage is price of lbr)
- Recall: price floor leads to excess SS (i.e. unN)
- Elimination/reduction of min. wage allows wages to fall, allowing unN to fall
- Leads to greater profits, firms more willing to increase pdtion and investment
- Potential o/p increase
Weaken power of lbr (trade unions)
- Lbr unions often succeed in securing higher wages
- By weakening lbr unions, wage will be more responsive to mkt forces and can fall
- Note: usually weakening of union leads to slower rate of wage growth, not fall. Rate of wage growth will be slower than pdtivity growth, leading to overall fall in unit lbr cost
Reduce UnN benefits
- UnN benefits may reduce incentive to search for a new job
- Reducing unN benefits likely lowers unN
- As it encourages them to look for work
- increase potential o/p as lbr force increase
Limitations
- Resistance to reforms as fall in wages of wkrs (esp. low-paid) goes against govt. goal of equity
SG
- SG has no min. wage
- Has National Wages Council (NWC) that ensures wage increases are proportionate to pdtivity growth and economic conditions
Benefits
- Sustained vs Faster Growth
- Effects on Inflation and Employment
Dampen inflation and increase employment
- Both contribute to higher material SOL
- Reduces natural rate of unN
Exceptions
- Depends on state of economy
- e.g. in severe recession, SS-side policies are not enough
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Comments
Timelags
- SS-side policies only work aft significant time lags
- Bc these policies, e.g. increase competition and lbr mkt reforms, need time to materialise and affect pot. o/p
- Interventionist policies also have ST effect on AD
- Increase G, which can help recession or worsen inflation
Interventionist vs Mkt-Oriented
- Interventionist: Targeted govt support in investment, R&D allows them to support particular industries w/ greatest possibilities for growth in future
- Mkt-oriented: Govt interference leads to inefficiency and misallocation of resources
- Govt failure due to political pressures and lack of info.
- Mix of policies required; I and M should complement each other according to each cty's socio-econ. conditions
Gradual Implementation
- SS-Side policies usually introduced gradually so that firms can have more time to make the necessary adjustments
- e.g. improving pdtion techniques/retraining
- e.g. foreign wkr levy increase, min wage and union power
Effect on SRAS
- SSP can have effects on SRAS too
- mostly Y policies and price ceiling etc
- that keeps cost of lbr (ie wages) and raw materials (like commodities) low
- Hence lower COP, increase SRAS