Supply Side policies - With Examples

What is supply-side policy?

Definition of supply side polices/ supply side reforms

Supply side economic policies refer to the economic policies that can be used to stronger or weaken the aggregate supply of a nation. In other words, supply-side economic policies (supply side reforms) mean economic policies to improve the productivity and efficiency of a nation.

What are supply and demand-side policies?

Using these economic policies, we can influence the output level of an economy. There are two major types of economic policies. They are,

1. Demand side policies

Demand-side economic policies refer to the economic policies that can be used to stronger or weaken the aggregate demand sector of a nation.

2. Supply side policies.

Supply-side economic policies refer to the economic policies that can be used to stronger or weaken the aggregate supply of a nation. In other words, supply-side economic policies mean economic policies to improve the productivity and efficiency of a nation.

What are two types of supply-side policies?

There are two major types of supply-side economic policies. They are,

1. free-market supply-side economic policies / market based supply side policies

and

2. Interventionist supply-side economic policies.

Free market supply-side economic policies are used to increase the efficiency and competitiveness of the free market while interventionist supply-side economic policies are used by the government to remove the free market failures.

Let’s consider them separately.

Free market supply-side policies/ Market based supply side policies

i. Privatization

Privatization means sell the state’s businesses and properties to the private sector. Because the private sector always tries to maximize the profit than the government. So, privatization improves the efficiency of the businesses.

Supply side policies examples

Malaysia engages in privatization policies to improve the productivity of the country for a long period of time. As an example, Cement Industries of Malaysia, Sports Toto Malaysia, and Malaysian International Shipping Corporation, Tenaga Nasional Berhad, Malaysian Airline System are more tend to be aligned with the privatization policies. (Dholakia and Dholakia, 1994). By aligning with privatization policy, Malaysia could improve productivity to reduce the negative effect of the COVID 19 pandemic. Also, the health sector of Malaysia comprises many private hospitals. During the COVID 19 pandemic contribution of them, were very important.

But there is an argument from some researchers toward the privatization of the health sector. That is, although privatization of the health sector can reduce the cost, it can increase the spread of the pandemic. (Assa and Calderon, 2020). According to the view of the Owain David Williams, private sector healthcare is unstable with the COVID 19 pandemic. (Williams, 2020).

ii. Deregulation

Deregulation means the government removes the rules and regulations toward a particular industry with the intention of make it easier for businesses to operate and enter the market. It increases the competitiveness of the industry.

Supply side policies examples

The government of Malaysia has reduced the rules and regulations for some industries that are highly beaten by the COVID 19 pandemic. As examples, we can see the airline industry and tourism and hospitality industry. (Khan and Hashim, 2020). Because of the movement restrictions and losing foreign clients, these industries have been temporally closed. Resource owners of these industries have lost income. So, the government of Malaysia applied deregulation policies to improve the productivity of these industries.

iii. Reduce the income tax and corporate tax

Reducing income tax motivates people to work. Because then people receive more incentives for their effort than earlier. Reducing corporate tax is beneficial for business organizations. Because businesses can earn more profit than earlier.

Supply side policies examples

The government of Malaysia has given many tax reliefs to both individuals and companies. When we think about the income tax reliefs, we can see that government has given two months income tax extension period to the people within the time period of March 2020 to June 2020. The government has given an extended period up to 30th April 2020 to the people for the income tax audit and investigation queries. (www.conventuslaw.com, 2020).

On the other hand, government of the Malaysia has provided many corporate tax reliefs to business organizations. As examples, we can say, according to the findings of the KPMG, the government has given RM0.05 billion of tax incentives to attract foreign companies. (KPMG, 2020). Especially, when we consider the tourism industry, the government has given special tax reliefs to improve the efficiency of it. As examples, government has given RM 1.8 billion of tax incentives to the tourism industry. (KPMG, 2020). Also, additional service tax easements have been provided to the tourism sector. That is, tourism businesses can delay their tax payment installments up to 31st December and they want not to pay taxes from the 1st July 2020 to 30th June 2021. (Asquith, 2020).

The tax relief policy of Malaysia can support the production of the nation, boost the economy, and can generate more fiscal revenues. (FERLITO, 2020).

iv. Increase the free trade

An increase of the free trade means reduces the tariff and non-tariff barriers toward the trade. Then parties can trade more freely by increasing their specialization level. Free trade gives benefits to both exporters and importers.

Supply side policies examples from Malaysia

Malaysia operates a free trade agreement (FTA) with 12 countries including Australia, Canada, Brunei Darussalam, Vietnam, and the USA. (Oxford Business Group, 2016). But Ahamed Kameel Mydin Meera, chairman of the Movement for Monetary Justice argued that Malaysia has less productive capacity regarding agricultural foods. Since many countries did not export food to Malaysia in the COVID 19 pandemic, Malaysia has faced to a very difficult situation. So, according to him, free trade policy cannot be completely applied to Malaysia. (Yildiz, 2020).

Supply side policies examples from United Kingdom

The Australia-United Kingdom Free Trade Agreement (A-UKFTA) is a gold standard trade agreement that represents a once in a generation deal for Australia and an historic moment in our relationship with the UK

A-UKFTA contains commercially significant commitments that will create new export opportunities and reduce input costs for business, strengthen trade diversification and help ease cost-of-living pressures for consumers. The agreement entered into force on 31 May 2023 (see 31 May 2023 media release from Trade and Tourism Minister Farrell) it will eliminate tariffs on over 99 per cent of Australian goods exports to the UK.

v. Deregulation of the labour market

This means reduce the rules and regulations toward the labour market. Deregulation of the labour market improves labour market flexibility. It encourages businesses to hire more employees. Because businesses need to less pay to the employees and businesses are less responsible toward the employees.

Supply side policies examples

The government of Malaysia has spent RM 0.8 billion to improve the work from home policies with the intention of improving labour market flexibility. The work from home concept is beneficial to both employees and employers. (KPMG, 2020).

Deregulation of UK labour market

The (mini) Budget might get the headlines today, but this is potentially more significant for the UK HR / employment community.

As part of the Truss government’s aim to deregulate markets, they published yesterday what could be the most significant piece of UK employment legislation since the 1970s.

The Retained EU Law (Revocation and Reform) Bill will automatically repeal any EU law which had previously been retained following Brexit with effect from 31 December 2023 (or a later date if specified), unless specific legislation is introduced to retain particular laws. Whilst we don’t yet know exactly what will be retained, the Bill could remove the following protections:
– The right to equal pay
– TUPE
– Paid annual holiday
– 48 hour working week
– Part-time and Fixed-term Worker Regulations
– Agency Worker Regulations

Interventionist supply-side policies

i. Increase the labour education and training

Increasing labour education and training programs can improve the labour market productivity. But in a free market, there is a less investment in labor education and training than the social requirement. So, the government should more consider about labour education and training programs.

Supply side policies examples from Malaysia

For a long period of time, the government of Malaysia has been improving the educational system of the country. There are many rules, regulations, and reports to shape the Malaysian education system for more than 60 years. As examples we can say the Fenn-Wu Report (1951); Barnes Report (1951); Razak Report (1956); Rahman Talib Report (1960); Education Act 1961 (and subsequent revisions); the New Economic Policy (1971); Universities and University Colleges Act 1971 (and subsequent revisions); and Private Higher Education Institutions Act 1996 (Act 555). (Da et al., 2018). Also, the government of Malaysia has improved educational programs such as “11MP”. 11MP is a program to improve the labor productivity and develop human capital.

As a supply-side economic policy, the government of Malaysia, after the COVID pandemic also highly concerned about the education of the country. Because education is a very important factor for the economic development of any country. As an example, the government encouraged and provided funds to the schools, universities, and students to continue their education using online platforms.

In the COVID 19 pandemic period, not only for the education programs but also for the employee training programs, the government of Malaysia has invested. As an example, the government has conducted reskilling and upskilling programs by spending RM 2 billion to enhance employability. The government has provided Hiring and Training Assistance by spending RM 1.5 billion to encourage employers to hire employees. (KPMG, 2020).

Supply side policies examples from United kingdom

Government of United Kingdom conducts many labour education and training programs to encourage the knowledge and skills. Some of the labour education and training programs as follows.

Search for courses and training online and get advice on qualifications and funding from:

ii. Improve the infrastructure

Infrastructure includes the facilities such as transport, communication, electricity, and so on. Usually, the private sector less interested to invest in infrastructure facilities. So, there is a failure in a free market. The government should more invest on infrastructure facilities. Because well-developed infrastructure is necessary to stimulate economic growth.

Supply side policies examples from Malaysia

When we concern about the infrastructure improvement activities of the government of Malaysia, the digitalization of the business activities is highlighted. For example, the government has allocated RM 9.655 billion for business digitalization. This will be an activity that can enhance the productivity of the business organizations and improving consumer confidence while reducing social distance. (KPMG, 2020). Also, the government of Malaysia has spent to improve the medical infrastructure by constructing and expanding new hospitals, improving the ambulance services, upgrading the clinic facilities, and so on. (Ting, 2020).

Supply side policies examples from United Kingdom

In UK, the Infrastructure and Projects Authority (IPA) is the government’s centre of expertise for infrastructure and major projects. It sits at the heart of government, reporting to the Cabinet Office and HM Treasury (HMT). The IPA in UK works across government to support the successful delivery of all types of major projects, ranging from railways, roads, schools, hospitals and housing, to energy, telecommunications, defence, IT and major transformation programmes.

iii. Improve the healthcare

If people of a nation are healthy, they can improve the productivity of the business organizations. Because healthy people can more work and think more creatively than ill people. So, a government should more invest in healthcare.

Supply side policies examples

The government of Malaysia especially spent on the healthcare sector. Initially, the government of Malaysia allocated RM 30.6 million for the healthcare sector. But, with the spread of the COVID 19 pandemic, the government has further allocated RM 600 million. Because having a healthy labour force is very important to increase the productivity of the country. Also, the government has provided import tax exemptions for some kind of personal protective equipment such as laboratory equipment, face mask, medical devices, and so on. This also can be considered as spending on the healthcare sector.

Supply side policies graph

A government wishes to apply economic policies to achieve long-term economic Sustainability. According to the theories of the economists, to achieve long-term economic growth, supply-side economic policies are the most suitable. I will analyze this as follows.

As we discussed in the above parts, when a country applies the supply-side economic policies, it can shift the long-run supply curve to the right. So, economy can fulfill the higher level of aggregate demand at the same price.

Supply side policies reduce inflation and unemployment

Supply-side economic policies can improve the productivity of a country. Production possibility of the country can be shifted to the right. Also, supply-side economic policies achieve economic growth by reducing the cost-push inflation and reducing unemployment as graphed above. Because shifting the aggregate supply curve to the right will lower the general price level and increase the output level.

Disadvantages of supply side policies

1. Supply-side policies do not give short-term results

Usually, supply-side policies do not give short-term results. They take considerable time to show the results. For example, sometimes we have to see 20 -30 years to see results of the education. To achieve the short run economic growth, government of the Malaysia apply the demand side economic policies. Demand side economic policies stimulate the aggregate demand and then increase equilibrium output of the country.

But demand side economic policies always increase the general price level in other words, create an inflation situation.

2. Implementing supply-side economic policies takes a higher cost

Also, not like the demand-side economic policies, implementing supply-side economic policies takes a higher cost. As an example, to improve the infrastructure of a country, to improve education and training, higher costs should be bearded.

3. The government can monitor the supply-side economic policies only up to some extent.

The private sector has a higher responsibility for the effectiveness of the supply-side economic policies. As an example, although if the government allows free trade, if business organizations import more and export less, there will be a deficit in the trade account.

4. Supply-side economic policies can increase the government deficit

For example, cutting taxes will lose the income of the government.

Supply Side policies – With Examples

What is supply-side policy?

Definition of supply side polices/ supply side reforms