The OECD (Organisation for Economic Co-operation and Development) was formed in 1961 as an economic organization bringing together a number of governments for economic progress and trade. The two main objectives are met through a promotion of the market economy and democracy by the member countries. The OECD provides a forum for member countries to find answers to common issues, compare their experiences in policy formulation and implementation, coordinate international and domestic policies of its member states and identify the most appropriate practices for economic growth. Most of the OECD member states have developed economies. Their collective GDP comprised 62% of the total world GDP as per the figures in the first quarter of 2018 (International Monetary Fund 2018, n.p). OECD has called on its rich members to agree upon spending on infrastructure projects as a way of stimulating economic growth. The world has been in a race to promote economic growth and the less developed nations seem to be winning. The developed countries in Africa and Asia are experiencing some of the fastest economic development rates in the world. Therefore, OECD is trying to lobby its members towards adopting the policies and practices that can stimulate growth that matches that of the developing nations. This paper is an evaluation of OECD’s proposals on the use of supply side policies, such as increased expenditure on infrastructure, to boost economic growth.
Supply Side Policies and Economic Growth
Supply side policies are usually aimed at improving production potential of an economy. Infrastructure is a supply side policy, because it creates an incentive for work and investment into the skills of the people. OECD believes that investors can only direct their capital towards economies that have the basic organizational and physical structures (Siciliani and Hurst 2005, P. 203). Infrastructure eases operations for investors and other parties that contribute towards economic growth, for instance, expatriates will consider factors like ease in transportation and logistics of the equipment and material used in the course of their work.
Economic growth generally refers to an increase in the quantity of goods and services produced per person within a specified period of time. Supply side objectives enhance economic growth by increasing the productivity of capital and labour. Economic growth also relies on geographical and occupational mobility of labour. The UK, for instance, has been giving increased attention towards the issue of traffic congestion, especially during rush hours. Studies have been conducted to quantify the amount of time that people lose in traffic jams. A study conducted by Inrix in 2016, showed that drivers and their passengers lost 73 hours on A406 Northbound - Chiswick Roundabout to Hanger Lane, London (BBC 2017, n.p), rating it as the most congested road in the UK. In the 2017/2018 financial year, the city of London allocated £11.5 billion towards infrastructure. This was an increase from £10.4 billion the previous financial year. Wingham (2017, n.p) notes that despite the constant improvements on the road, rail and air transport infrastructure, London’s population has been stretching these facilities. The targeted transport capacities are aimed at reducing the rate of movement, thus reducing the rate of unemployment.
Transport infrastructure has been given vast attention as a supply side policy by OECD. The UK has demonstrated its commitment towards this policy through the launch of UK National Infrastructure Plan. The plan runs from 2016 to 2012. It is underpinned by a both public and private investment in infrastructure, estimated at £480 billion. 50% of the plan is being financed, but the private sector, as the government, has shown its commitment to ensure that the private partners get returns on their investment within a reasonable length of time (UK Government Digital service 2016, n.p). Similar plans have been drawn up by other countries in OECD in an effort to keep up with their partners. Traditionally, such plans would have been formulated and implemented by governments and financed through intergovernmental borrowing and taxation. However, public-private partnerships (PPP) have become popular, and many governments are coming up with long-term plans that attract private investors by ensuring that they establish common goals between the private and public sectors.
The UK National Infrastructure Plan has facilitated successful completion of projects in key sectors such as energy generation, energy supply network, flood control and drainage systems, rail, high-speed rail, roads, waste management and water. The plan also includes social infrastructure such as health, water, justice, housing, education and regeneration. The social infrastructure haw worked towards improving welfare of the population, thus increasing its productivity as an input factor in the production process (UK Government Digital service 2016, n.p). Sailable resources for the improvement of infrastructure have been balanced among these key areas as each contributes towards economic growth in a unique way.
There are a number of alternative supply side policies that OECD countries should strengthen to stimulate economic growth further. They include lowering of taxes, promoting flexibility of labour markets, strengthening relations with unions, deregulation and privatisation. Privatization improves incentives on capital by selling state-owned assets to private owners. Such moves boost productivity and cut costs. Low taxation, especially income taxes, give the population an incentive to work for longer hours and accumulate more earnings. Deregulation allows more firms to enter the market (Fernández-Villaverde 2014, p. 252). This action opens up monopolies for competition from even the smallest firms. Flexible labour markets reduce the power of labour unions as the workers have more voice as individuals. Minimum wage limits and labour market regulations become unnecessary, as the workers can negotiate for what they feel is right remuneration and working conditions as individuals. The autonomy motivates individuals to work harder and accumulate more earnings. In other situations, unionized workers should be empowered by strengthening the relationship between the regulators and the labour unions. OECD has created an avenue of free-trade agreements between its members. Such agreements reduce tariff barriers and make it easier for labour, capital, other factors of production and finished goods and services to move across borders. The free trade agreements stimulate both demand and supply, resulting in economic growth due to increased production (Hays 2005, p. 495). The policies discussed in this paragraph are collectively regarded as free-market oriented. The government gets involved only to a limited extent, then leaves the free market to work with the stimulated effects.
Investment in infrastructure is classified as an interventionist supply. Other policies under this category include increasing funding towards education to enhance labour productivity and health spending on health to reduce the number of hours lost to ill health (Fernández-Villaverde 2014, p. 249). In the UK, health is devolved to the individual governments. In England, healthcare is provided by England public health service. The government can increase funding towards healthcare as a way of ensuring that there is an uninterrupted supply of labour.
Economic Analysis of Effectiveness of Supply Side Policies
The impact of supply side policies can be demonstrated using the long-run aggregate supply. Aggregate supply is usually graphed vertically on the supply curve. It reflects the belief by economists that aggregate demand changes temporarily in line with total output within the economy (Harrisson 1992, p. 9). Therefore, short-run effects of supply-side policies should not be used when evaluating their appropriateness. Everything in the economy is considered as having been utilized optimally. Therefore, only labour, capital and technology affects aggregate supply. Infrastructure is directly related to technology. Countries in the OECD upgrade and maintain their technology using direct allocations towards infrastructure. The efficiency of labour and capital is directly influenced by allocations towards infrastructure as explained above. The long-run aggregate supply curve is the slowest among supply curves, and thus, is considered static.
Figure 1: Impact of supply-side policies on Real GDP
From the graph, supply-side policies are effective in stimulating growth in real GDP. However, OECD countries should also explore other avenues, such as monetary and fiscal policies. Cutting taxes and increasing government expenditure can help in encouraging consumer spending and increasing available disposable income (Harrison 1992, p. 15). By encouraging member countries to invest more in infrastructure, OECD may be indirectly encouraging its members to borrow more as a way of financing increased expenditure. The main opportunity cost for this strategy comes with crowding out of the private sector (Ganelli 2003, p. 9). A fall in private sector spending and investment comes with risks such as collapse of sectors that are not considered highly profitable. Many private investors may be drawn towards PPP’s that involve public infrastructure, resulting in loss of jobs in other sectors.
Conclusion
Supply-side policies are appropriate for stimulating economic growth. However, there is a need for a balance with demand-side policies to ensure that aggregate demand is also increased as a stimulant of economic growth. The main limitation in increasing expenditure on infrastructure in OECD countries is crowding out of the private sector when the governments increase incentives on PPPs. The government can explore other options, such as external borrowing. However, the ultimate solution to issues created by supply-side policies is balancing them with demand-side polices, such as monetary and fiscal policies.
References
British Broadcasting Corporation. (2017). Traffic jams: UK's worst motorway disruption revealed. Available at: < http://www.bbc.com/news/uk-england-41651246> [Accessed Aug. 5, 2015].
Fernández-Villaverde, J., Guerrón-Quintana, P. and Rubio-Ramírez, J.F., 2014. Supply-side policies and the zero lower bound. IMF Economic Review, 62(2), pp.248-260.
Ganelli, G., 2003. Useful government spending, direct crowding-out and fiscal policy interdependence. Journal of international money and finance, 22(1), pp.87-103.
Harrison, B., Smith, C. and Davies, B., 1992. Supply-side Policies in the UK. In Introductory Economics (pp. 359-372). Palgrave, London.
Hays, J.C., Ehrlich, S.D. and Peinhardt, C., 2005. Government spending and public support for trade in the OECD: An empirical test of the embedded liberalism thesis. International Organization, 59(2), pp.473-494.
International Monetary Fund. (2004). "Report for Selected Country Groups and Subjects (PPP valuation of country GDP)". Available at: [Accessed Aug. 5, 2015].
International Monetary Fund. (2004). "Report for Selected Country Groups and Subjects (PPP valuation of country GDP)". Available at: [Accessed Aug. 5, 2015].
Siciliani, L. and Hurst, J., 2005. Tackling excessive waiting times for elective surgery: a comparative analysis of policies in 12 OECD countries. Health policy,72(2), pp.201-215.
UK Government Digital service. (2016). Policy Paper: National Infrastructure Delivery Plan 2016 to 2021. Available at: < https://www.gov.uk/government/publications/national-infrastructure-delivery-plan-2016-to-2021> [Accessed Aug. 5, 2015].
Wingham, M. (2017). Transport expenditure in London. Current Issues Note 54. Available at: < https://www.london.gov.uk/sites/default/files/transportexpenditure_final_cin54.pdf> [Accessed Aug. 5, 2015].
