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


Diagrammatically

Y10

P1

AS1 AS2

GPL

AD Real NY

P2

Y2


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


Labour MarketMarket

Oriented

Product Market


Market Oriented

Deregulation and

Competition

Encourage Small

businesses and

Enterprise

Product Market


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


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


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


Market Oriented

Extension of loans. Provide technical expertise and support.

Seed funding and joint ventures.

Encourage Small

businesses and

Enterprise

Product Market


Labour Market

Market Oriented

Reduce power of trade unions

Wage guidelines

Reduce Income Tax

Reduce Unemploymen

t benefits


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.


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…


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


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


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


Market Oriented

Labour Market

Reducing trade

unions

Wage guidelines

Reduce Income tax

Cut social welfare

Product Market

Deregulation

Encourage enterprise


Interventionist

Market Oriented


Interventionist

Education and Training

Encourage R&D


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


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.


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.

Supply Side Policies 2012

Documents

overseas union

encourage

deregulation

long term

reduce power

banking sector

regulated

labour market