eBusiness Weekly
Blessing Nyatanga
Market-based policies focus on the power of the free market and allows the forces of supply and demand to curtail equilibrium imbalances.
Market-based policies entail privatisation, deregulation free trade and immigration. The role of the government in market-based policies is limited since it tends to interfere with the market mechanism.
Conversely, interventionist policies focus on the need for the Government to intervene in markets to achieve the objectives of the macro-economic environment. Interventionist policies include industrial policies and infrastructure improvements.
Interventionist supply side policies
Increased education and training
Better education can improve labour productivity and increase Aggregate Supply. In most cases there is under-provision of education in a free market, leading to market failure.
Therefore, the Government may need to subsidise suitable education and training schemes. Government intervention is fund intensive.
Improving transport and infrastructure
With transport, there is usually a degree of market failure congestion and pollution. Government spending on improved transport links can help reduce congestion and overcome this market failure.
Improved transport provision helps reduce the cost of transport and will encourage firms to invest.
Transport bottlenecks on the road, rail and air are often cited as a major stumbling block of economic progress.
Construct more affordable homes
Building affordable council homes in expensive areas can make it easier for workers to move and find jobs in expensive areas, reducing geographical immobility. Firms can suffer from labour shortages in areas that have become very expensive to live in.
Improved healthcare
Business can face substantial costs from time lost to ill-health. Health care spending which improves a nation’s health can improve labour productivity. Improved health can also come from discouraging unhealthy habits.
For example, tax on cigarettes, alcohol and sugar can reduce health care costs associated with drunkenness, obesity and polluted environments.
Investment in human capital
Governments might invest in education and training of people. Improve the level of schools or make education free. Also, provide various training schemes. In the short run, such policies increase aggregate demand, but importantly – shift the LRAS curve to the right.
This happens because people’s skills improve. Hence, productivity increases.
Investment in new technology
Governments could invest in research and development of new technologies. Again, that would increase aggregate demand in the short run, however, in the long run LRAS would increase.
That happens because new technology can increase productivity: e.g. 3D printers made modelling or even production of various products quicker than ever.
Investment in infrastructure
The Government expenditure might go towards infrastructure. Improving logistics could decrease transfer times and costs in turn increasing productivity and shifting the Long Run Aggregate Supply to the right.
Industrial policies
Governments might target specific economic areas through tax cuts, tax allowances and subsidised borrowing which would promote growth of those areas.
A typical example is useful start-ups which could improve the efficiency of other areas of the economy.
Market-based supply side policies
Privatisation
This involves selling state-owned assets to the private sector. It is argued that the private sector is more efficient in running businesses because they have a profit motive to reduce costs and develop better services.
Deregulation
This involves reducing barriers to entry to allow new firms to enter the market. This will make the market more competitive.
Competition tends to lead to lower prices and better quality of goods and services.
Reducing income tax rates
A cut in corporation tax gives firms more retained profit they can use for investment.
Lower taxes harness the power to increase work incentives
Reducing unemployment benefits
Lower benefits may encourage the unemployed to take jobs. Lower means-tested benefits for those in work may increase the incentive to work longer hours.
Deregulate financial markets
Deregulating the financial markets has the potential to pave way for economic progress.
For example, building societies were allowed to become for profit-making banks.
Deregulation should allow more competition and, in theory, lead to lower borrowing costs for consumers and firms.
Increase free-trade
Lower tariff barriers this will increase trade and provide an incentive for export firms to invest. Increasingly important are non-tariff barriers.
Conclusion
The concept of market based or interventionist policies in running economies is poised for a balance as far as the more efficient approach is concerned.
What remains imperative is for the government to employ both policies albeit striking a balance and ensuring that equilibrium imbalances are curtailed while societal welfare is guarded.
