Most scholars in the field of economy agree that effective policies contribute to economic growth. On the other hand, ill-advised stipulations lead to economic stagnation. Kerr and Lincoln (2010) noted that growth- and output-enhancing economic policies initially considered suitable are now considered damaging to growth. Hence, the issue of most suitable economic policies has led to contrasting opinions among experts. For instance, much has been discussed about incentive provision policies that are most appropriate for a particular economy.
According to Guerzoni and Raiteri (2015), economic policies related to incentives are considered to influence a region's economic stability due suppression of market outcomes. However, in recent years, the Organization for Economic Co-operation and Development has urged developed countries to increase their spending on infrastructure projects collectively to boost economic growth under the supply side policies. The supply side policies are quite different from the incentive provision policies since they assume the role of outer-oriented trade policies rather than rely on import licensing and quantitative restriction techniques (Asheim, 2013). The paper will conduct an in-depth study on supply side policies and determine how effective they would be in addressing the weak economic growth in the U.K.
Supply Side Policies
The concept of supply side economics is derived from Say's Law of Markets that argue that commodities are eventually paid for using other items. Sinn (2008) adduced that the theory explains that encouraging consumption is of little benefit to the economy compared to the expansion of means of income. One of the main reason behind development of the supply side policies was inefficiency, which led to progress observed with incentive provision policies.
The former policies led to import substitution, increased smuggling, corruption, and rent seeking. Notably, the formulations also resulted to an increase in illegal activities such as smuggling, under-invoicing and increased procurement costs (Arnold, 2011). Therefore, due to the above problems, some governments decided to change their approach towards the outer-oriented trade strategies (supply side policies) that sought to liberalize trade and reduce tariff barriers to almost zero digits (Perales, 2018). The supply side policies focus on improving capital and labor productivity, increasing development (infrastructure) spending, promote competition and stimulate innovation and inventions, encourage startups, create a foundation for non-inflationary growth, etc. (Canto, Joines " Laffer, 2014). The term supply side economics is usually confusing to many people. However, in simple terms, it contrasts the Keynesian initiative, which sensitizes on government dependence to fully operate country's monetary and fiscal policies to create employment. Supply side economists argue that no government can create a situation. Rather, they view a nation's economy from the ground level, that is, from an investor or entrepreneur perspective.
Infrastructure Projects as a Key Supply Side Policy
The effective revision and implementation of the proposed U.K. National Infrastructure plan purposed to includes more development projects. Hence, additional people would spur economic growth. The idea of investing more in infrastructure is supported by most economists since it has two primary benefits. One, it decreases the cost of private production by boosting productivity, and two, it improves welfare and income of individuals since it supports the agglomeration of economies and accumulation of human capital. The move decreases costs incurred in accessing markets and improves the returns obtained from the existing assets (Voß " Simons, 2014). Infrastructure investments are divided into two major categories, social and economic infrastructure. While social infrastructure involves allocation of capital incentives to enable provision of service such as health and education, economic infrastructure includes the provision of energy (electricity), transport (airports, roads, seaports, and railway) telecommunication services, and water (Fernández-Villaverde, Guerrón-Quintana " Rubio-Ramírez, 2014). In a particular study, it was stated that a 10% increase in infrastructure developments accounted for 0.7 to 1 growth in GDP per capita (Calderon, Moral-Benito " Serven, 2009). Improving an infrastructural asset such as the transport network leads to improved accessibility, speedy delivery of goods, and creation of new markets (Klump, McAdam " Willman, 2007). Implementation of public-private partnerships (PPP) is also a form of supply side policy that contributes to development of private public infrastructure. Through provision of equal and high investments in both categories of infrastructure, it is possible for the U.K. government to boost its national production capacity by influencing volume of aggregate supply. However, this study has focused much on economic infrastructure by analyzing four specific supply side policies: investments in education and training, spending on national infrastructure, R&D grants, and selective allocation of subsidies (Reinhardt, Ricci " Tressel, 2013).
Economic analysis of the effectiveness of supply side policies in improving weak economic growth. Supply side policies results to feasible rates of economic growth and development in a country's aggregate supply. By investing in economic infrastructure, entrepreneurs and suppliers have necessary inputs and resources for production of services and goods. For example, increasing U.K.s capital resources would play a huge role in improving the intertemporal efficiency required for production (Bade " Parkin, 2007). Superior technology boosts production efficiency of firms and production expenses associated with telecommunications services. Utilities and transport are effectively reduced or eliminated thereby increasing innovation and invention owing to increased competition. The social side policies in infrastructure investment reduce level of inflation due to improved efficiency that leads to lower per unit production expenses. In addition, the improved aggregate supply status of the nation leads to increased production of goods that also mounts to lower prices (Murfin, 2012). Reduced costs of transportation, favorable fuel prices, easy availability of resources and lower maintenance costs also translate to lower expenses in production, thus leading to an overall reduction in inflation since prices of services and goods are quite favorable.
The level of unemployment is also reduced since new firms are established and existing ones expanded. The low costs associated with production improve the economic strength of companies hence enabling them to diversify their market to new regions ultimately expanding their businesses and increasing employment opportunities. Therefore, Lazarus, Erickson and Tempest (2015) expostulated that structural unemployment is effectively reduced through aggregation of demand. Social side policies promote high standards of living by creating a sustainable GDP growth rate, increasing employment opportunities, creating favorable conditions for good material living standards, decreased inflationary pressure, low levels of crimes, etc. (Cohen-Setton, Hausman, " Wieland, 2017). In addition, underproduction of public goods and services is compensated by the private sector thereby meeting society needs through effective distribution of resources.
An Evaluation of Supply Side Policies
There is need for the government to address the current limitations and weakness experienced in the U.K. economy. Such faults include declining returns on investments, rising levels of national debt, production overcapacities in certain factories and reducing local government collection. Application of effective supply side policies would play a huge role in moving the country from the current difficult and critical phase (Singh, 2003). Felbab-Brown, (2014) explained that the policies insist on the application of market based reforms to improve the technological capability and production factors in the long-term. The changes will streamline the public administrative functions, reform state-owned organization through privatization, promote innovation and tax reforms to improve the economic situation of the nation. The shift of the U.K. market from manufacturing to services is not likely to be reversed since it is already backed by strong economic forces. However, creation of a better investment and trade climate through supply side economics would result to improvement in investment and trade environment thereby streamlining competitiveness of the manufacturing industry (Giannitsarou, 2006). Additionally, the supply side policies will enable the U.K. to overcome the current competitive pressure experienced in the medium skill intensive traded sectors. Specialization of the U.K. in the publishing, communications, IT, finance, and business services sectors is likely to expand due to increased global demand for the services. The supply side policies will contribute to more specialization and lower production costs.
Conclusively, effective application of the supply side policies is observed as a robust drive for change since it will improve U.K. specialization in knowledge-intensive services and improved growth in the manufacturing sector. Global competitiveness will spur innovations and inventions. More investments will be directed towards intangible assists such as skills hence increasing the rate of employment substantially.
Bibliography
Arnold, J.M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C. and Vartia, L., 2011. Tax policy for economic recovery and growth. The Economic Journal, 121(550).
Asheim, G.B., 2013. A distributional argument for supply-side climate policies. Environmental and Resource Economics, 56(2), pp.239-254.
Bade, R. and Parkin, M., 2007. Foundations of economics. Pearson/Addison Wesley.
Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press.
Cohen‐Setton, J., Hausman, J.K. and Wieland, J.F., 2017. Supply‐Side Policies in the Depression: Evidence from France. Journal of Money, Credit and Banking, 49(2-3), pp.273-317.
Felbab-Brown, V., 2014. Improving supply-side policies: Smarter eradication. Interdiction and alternative livelihoods—and the possibility of licensing. In Ending the Drug Wars. London (pp. 41-48). London School of Economics, London.
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.
Giannitsarou, C., 2006. Supply-side reforms and learning dynamics. Journal of Monetary Economics, 53(2), pp.291-309.
Guerzoni, M. and Raiteri, E., 2015. Demand-side vs. supply-side technology policies: Hidden treatment and new empirical evidence on the policy mix. Research Policy, 44(3), pp.726 747.
Kerr, W.R. and Lincoln, W.F., 2010. The supply side of innovation: H-1B visa reforms and US ethnic invention. Journal of Labor Economics, 28(3), pp.473-508.
Klump, R., McAdam, P. and Willman, A., 2007. Factor substitution and factor-augmenting technical progress in the United States: a normalized supply-side system approach. The Review of Economics and Statistics, 89(1), pp.183-192.
Lazarus, M., Erickson, P. and Tempest, K., 2015. Supply-side climate policy: the road less taken. Stockholm Environment Institute, Working Paper,, no. SEI-WP-2015-13 (October), pp.1 24.
Murfin, J., 2012. The supply-side determinants of loan contract strictness. The Journal of Finance, 67(5), pp.1565-1601.
Perales, J.R., 2018. A supply-side theory of international economic institutions for the Mercosur. In Comparative Regional Integration (pp. 95-122). Routledge.
Reinhardt, D., Ricci, L.A. and Tressel, T., 2013. International capital flows and development: Financial openness matters. Journal of International Economics, 91(2), pp.235-251.
Singh, A., 2003. Capital account liberalization, free long-term capital flows, financial crises and economic development. Eastern Economic Journal, 29(2), pp.191-216.
Sinn, H.W., 2008. Public policies against global warming: a supply side approach. International Tax and Public Finance, 15(4), pp.360-394.
Voß, J.P. and Simons, A., 2014. Instrument constituencies and the supply side of policy innovation: the social life of emissions trading. Environmental Politics, 23(5), pp.735 754.
