Supply Side Policies 2012
Transcript of Supply Side Policies 2012
Supply Side PoliciesTypes – Effects - Limitations
History of Economics Thought
1930s 1960s 1970s current
Classical economics dominatesLaissez – faire, short term problems
Fiscal policy dominates thinking as people recognizes the need for govt intervention
Stagflation persists! Slow/negative growth with high inflation
Monetarist movement – Controlling money supply and i/r
Supply side policies begin to considered seriously
Supply Side Policies - Introduction
Aims to increase Aggregate Supply
What are supply – side policies?
Makes economy
more conducive
to production
and growth
Supply Side Policies - Introduction
Diagrammatically
Y10
P1
AS1 AS2
GPL
AD Real NY
P2
Y2
Supply Side Policies - Introduction
But sustainable growth requires more than just
potential growth
Y30
P3
AS1 AS2
GPL
AD
Real NY
P2
Y2
AD2
Types of Supply Side Policies
Interventionist
Market Oriented
Types of Supply Side Policies
Labour MarketMarket
Oriented
Product Market
Types of Supply Side Policies
Market Oriented
Deregulation and
Competition
Encourage Small
businesses and
Enterprise
Product Market
Types of Supply Side Policies
Market Oriented
Deregulation and
Competition
Dynamic effects of greater competition
Competition forces prices down as business need to be more efficient in the usage of scarce resources. Prevent complacency encourages innovation
Product Market
Deregulation and
Competition
1. Anti-Trust laws – US law to prevent monopoly power and promote competitive behaviour
Deregulation and
Competition
1. Competition Act – Singapore law to prevent 3 key forms of anti-competitive behaviour
i. Agreements that prevent competition
ii. Abuse of monopoly position
iii. Mergers that substantially reduces competition
Deregulation and
Competition
2. Deregulation – Removing barriers to entry for certain regulated industries
So that firms can become more efficient and decrease price with the entry of more innovative firms.
Deregulation and
Competition
2. Deregulation – Removing barriers to entry for certain regulated industries
Banking Sector in SingaporeHow many banks are there in
Singapore?112 commerical banks. 108 are foreign,
4 are localOf these, only 27 banks are authorised
to do retail banking services. Banking Sector in
Singapore
Local Full banks
1. DBS2. UOB3. OCBC
Overseas Union Bank 2002 Merged into United Overseas
BankKeppel Bank Limited 1998 Merged with Keppel TatLee Bank
Tat Lee Bank Limited 1998 Merged with Keppel TatLee Bank
Keppel TatLee Bank 2001 Merged into Oversea-Chinese Banking Corporation
Industrial and Commercial Bank 2002 Merged into United Overseas
Bank
International Bank of Singapore
-Merged into Overseas Union Bank
Bank of Singapore -
Belongs to Oversea-Chinese Banking Corporation as parent company and subsequently renamed into Singapore Island Bank.
List of Foreign Full Banks in SingaporeAmerican Express Bank Limited (Now under Standard
Chartered Bank)Bangkok Bank Public Company LimitedBank of America, National Association
Bank of China LimitedBank of East Asia Limited,
The Bank of IndiaBank of Tokyo-Mitsubishi Limited,
CalyonCitibank,
Hong Leong Bank BerhadIndian Bank
Indian Overseas BankJPMorgan Chase Bank, National AssociationPT Bank Negara Indonesia (Persero) Tbk.
RHB Bank BerhadSouthern Bank Berhad **Now CIMB Bank
Sumitomo Mitsui Banking CorporationUCO Bank
Deregulation and
Competition
2. Deregulation – Removing barriers to entry for certain regulated industries
Telecommunications Sector in SingaporeFull liberalisation in 2000.
Deregulation and
Competition
3. Reduce/eliminate Tariffs/non tariffs – Allowing imports to come in at lower price. Increase competition on domestic producers.
In long term, industry may re-concentrate as firms go bankrupt. Or the cost of deregulation may increase.
2001 – SPH Media Works launched
2005 – Mediaworks to ceased. Operation of Channel U to be under Media Corp.
However
Types of Supply Side Policies
Market Oriented
Extension of loans. Provide technical expertise and support.
Seed funding and joint ventures.
Encourage Small
businesses and
Enterprise
Product Market
Types of Supply Side Policies
Labour Market
Market Oriented
Reduce power of trade unions
Wage guidelines
Reduce Income Tax
Reduce Unemploymen
t benefits
Types of Supply Side Policies
Labour Market
Market Oriented
i) Reduce power of trade unions
Trade unions in some countries are aggressive and may bargain for wages above the market clearing rate.
Disputes may also lead to strikes and political problems too.
… more substantial increase in the city’s minimum wage …
Reduce union strength: bring wage increases in line with national productivity growth.
Types of Supply Side Policies
Labour Market
Market Oriented
ii) Introduce Wage guidelines / Flexible wages / freeze wages
Wage rates should be flexible
Wage rises Increase in productivity
If wage increase > productivity rise, then unit labour cost will rise and producers may increase prices of goods/ services.
… pay increments
should be made
according to the
companies’
performance and
prospects…
Types of Supply Side Policies
Labour Market
Market Oriented
ii) Introduce Wage guidelines / Flexible wages / freeze wages
In certain situations, freeze wages.
In Singapore, there were voluntary wage restraints such as the 2-year wage freeze for civil servants, and the reduction in employers’ CPF contribution rate from 25% to 20% during the 1985–6 recession faced by Singapore.
“ In 2003, SM Lee Kuan Yew spoke in length about the downturn of the economy and how meeting the competition from China and India is a long term problem.
The NWC has in fact recommended most companies to freeze their wage levels that year on top of other cost cutting measures such as lowering of rents, fees and taxes (especially company income tax). “
For these policies to succeed, reasons must be clearly explained to the workers for them to accept short term cost in view of long term benefits.
Employers must show willingness to reinstate or increase wages in times of growth.
Singapore, one of few countries who can actually pull this off. Tripartite relation btw employers, workers and government
Types of Supply Side Policies
Labour Market
Market Oriented
iii) Reduce Income Tax Rates
Personal income tax rates can be reduced to increase incentives to work, to save and to invest.
Substitute work for leisure (Substitution effect) since you are paid more for additional hours work.
Postpone retirement
Work harder
More to enter
workforce
Types of Supply Side Policies
Labour Market
Market Oriented
iv) Reduce social welfare
High welfare benefits erodes incentives to work. While benefiting in reducing the hardship of being unemployed, too generous a welfare benefit will cause the unemployed to spend longer time finding the ‘right’ job.
Danes who have worked 52 weeks over the previous 3 years are eligible
to receive 90% of their average earnings for up to
4 years
Types of Supply Side Policies
Market Oriented
Labour Market
Reducing trade
unions
Wage guidelines
Reduce Income tax
Cut social welfare
Product Market
Deregulation
Encourage enterprise
Types of Supply Side Policies
Interventionist
Market Oriented
Types of Supply Side Policies
Interventionist
Education and Training
Encourage R&D
Types of Supply Side Policies
Interventionist
Education and Training
Investment/subsidies for improving human capital – education, training and entrepreneurship programs
Retraining and skills upgrading of workers can raise productivity – shift LRAS curve to the right.
Makes it attractive for foreign investment
Skills Programme for Upgrading and Resilience (SPUR)
The objectives of SPUR are:• Cut costs and save jobs- Help companies to manage excess manpower and reduce retrenchment • Reskill and upskill - Help local workers including those retrenched, upgrade skills and convert to new jobs; and • Build capabilities for recovery- Strengthen our manpower capabilities to better position our workforce for the upturn
However, success
depends on the attitude of the
workers undergoing
training. Not always
successful with older or less
educated workers
Types of Supply Side Policies
Interventionist
Encourage R&D
Investment/subsidies for improving physical capital – R&D, infrastructure
Government sponsorship for R&D in certain industries – life science, aerospace.
Tax incentives given to encourage adoption of new technology.
Aim to increase R&D spending to
3.5% of GDP.
Types of Supply Side Policies
Interventionist
Improve Job Information
Frictional unemployment due mainly to imperfect information.
By organising job fairs and highlighting industries which are expanding, this can connect unemployed workers with potential employers.
Effects of Supply Side Policies
Output / Price
For sustainable growth (without rise in inflation), it is necessary to combine supply
side policies with demand side
policies.
EmploymentBalance of Payment
Targets frictional and structural
unemployment. Training and upgrading of
skills keep the workers relevant
and mobile in the industry.
Policy helps to keep their products
competitive in the global market.
Improves BOP. Countries with
poor supply side policies find
increasing levels of imports.
Limitations of Supply Side Policies
Depends on accuracy and
reliability of the information for
the government.
Long term in nature. E.g. good
industrial relations among
workers and employers. Re-
training of workers also takes time.
Depends on how acceptable the
policies are. Trade unions and people can resist
the schemes.
A quick SummaryProblems arise in an
economy1. slow/negative economic
growth2. Rising unemployment3. Rising inflation4. Worsening BOP
Government action required. Need to decide on type of
policies to solve the problem
Demand Management Policies Supply Side PoliciesFiscal Policy
Govt Expdt / Tax
Monetary PolicyInterest rates or
Exchange Rate Policy in Spore context
Product Mkt or Labour Mkt
Necessary: Ability to explain the policy used and with relevant examples
Limitations of the various PoliciesPossibilities: 1. Conflict of Macro goals2. Context – Small multiplier (FP)3. High opportunity cost
4. Time Lag5. Question assumption:
Marshall- Lerner condition6. Identify if root cause is solved
H1 Common Test Format
Date: 25th June 2012
Paper format:
2 Case study Questions
Duration: 2hrs 15 mins
All topics covered.