SS side policy

- aimed at increasing AS curve

- causes prices to fall
- output (NY increase) -> more goods/ services demanded -> firms more output -> lower
unemployment

- productive capacity increases

SS-side effects

- Decreases cop
- Increases productive capacity
- Decreases cop + increases productive capacity

Market oriented SS side policy

(reduce role of government + enable market to work freely)
1) PRODUCT MARKET
- Privatisation
- Profit making incentive
- Threat of contestability
- INCENTIVE TO REDUCE COP
- Also increasing willingness and ability to respond efficiently to changes in consumer DD
(increasing allocative efficiency)
- Liberalisation
- Increases contest and competition
- INCENTIVE TO REDUCE COP
- Pro competition policies: Tough competition policy (anti trust laws aka Competition Act/ LTA
regulations oligopolistic SBS and SMRT)/ Removal of BTE (liberalising telecomm -> OMG
Line a new entry into the telco license/ market and public transport)/ Free trade (remove
regulations preventing trade)
- Enterprise and Innovation
- Nurturing start ups
- Business Angel Scheme (SPRING matches dollar to dollar up to $2m, where funds are
donated)
- Spring SEEDS (Start up Enterprise Development Scheme), SPRING co financing startups
with innovative products/ processes
- WIL decrease risk and increase willingness, increase financial ability
- INCREASE INNOVATION INCREASE PRODUCTIVITY
- Growing Businesses
- PIC (Productivity and Innovation Credit): if makes $10,000 PIC Investment, Bonus of
$10,000 given and either $40,000 tax deduction/$6000 payout)
- PIC Investment depends on: Acquisition and lease of IT and automation equipment/
Training of employees/ R&D activities/ Acquisition or in-licensing or Intellectual Property
Rights
2) LABOUR MARKET
- Reducing power of trade unions
- Makes labor market more competitive, each worker lowers the wages he asks for in order to
be hired by firms
- REDUCES COP (theory)
- PREVENTS THE RISE IN COP by preventing higher wages (reality)
- Incomes Policy
- Productivity leads to Increase in wages
- Improvements in productivity should be rewarded with rise in wages
- However rise in wages must not exceed rise in productivity
- If productivity increases more than wages, than unit cop falls

- REDUCES COP
- Flexibility of wages: Voluntary wage restraints/ pay cuts/ annual wage supplement (bonuses)/
monthly variable component

- Tax Reforms and Welfare Reductions

- Lower corporate Tax
- Post tax profits increase
- INCREASES INVESTMENT AND PRODUCTIVITY
- Lower personal income tax
- Increases opportunity cost of leisure
- Increases incentive to work
- Reduction in unemployment benefits
- INCREASES FOREIGN TALENT + INCREASES LABOR SUPPLY
EFFECT
PRIVATISATION AND
LIBERALISATION

Increases incentive to be cost

efficient
Decreases COP

Monopoly: Allctve inefficiency

Private Competition: Lack of scale
Possible market reconcentration
foreign firms vs domestic firms

ENCOURAGING INNOVATION
AND ENTERPRISE

Improvements in productivity with

new technology
Increases Productivity

Other factors affecting willingness

to innovate and enterprise (risk/
business confidence/ availability
of alt ways to reduce costs)

REDUCTING MONOPOLY
POWER OF TRADE UNIONS

Prevents Increase in wages

May increase competition in labor
market
May encourage investments due
to lower costs
Prevents rise in COP, decreases
COP
Increases Productivity

Unions non compliance to wage

guides
Power of wage union depends
heavily on relationship between
government and its people (labor

INCOME POLICIES

Allows wage freezes/ downward

flexibility of wages
Prevents increase in COP
Decreases COP

TAX REFORMS AND

REDUCTION IN WELFARE

Increases investments by firms

Increases supply of labor
resources
Increases Productivity
Lowers COP

Other factors affect Investment

and work decisions
Income effect > Substitution effect
when Income tax reduced
Unemployment benefits important
for social cohesion

Interventionist SS side policy

(Direct government intervention)
1) Manpower Policies (Education and training)
- Derived from the fact that education/ training is a merit good and is under consumed (market
failure
- Limits the growth of AS
- Improves Skills and Quality of Workforce
- QUALITY OF FACTOR INPUTS INCREASES - PRODUCTIVE CAPACITY INCREASES
- PEOPLE WITH LESS SKILLS CAN JOIN WORKFORCE - QUANTITY OF FACTOR INPUTS
INCREASES - PRODUCTIVE CAPACITY INCREASES
- IF INCREASE IN PRODUCTIVITY > WAGES INCREASE

lowers COP
INCREASES SRAS
Can lead to MNCS to INVEST (FDI
LRAS INCREASES
(Shell, Nissan)
- Singapore
- Lower cost of education, Increase education level, align education with economic
development goals, increase relevance of future workforce
- INCREASES PRODUCTIVITY
- MAY lower COP IN THE FUTURE
- Singapore
- Workfare Training Support Scheme (WTS)
- Continuing Education and Training (CET) Masterplan
- Skills Training for Excellence Programme (STEP)
- Improve occupational mobility
2) Nationalisation
- Scale
- Privatised economies may have insufficient scale to reap iEOS (due to higher competition)
- NATIONALISED will have scale (functions like a monopoly)
- Funds and Investment
- May not have enough funds to Invest/ expertise to invest, may be inadequate Investment in
capital
- NATIONALISED will have funds/ skilled workers (Singapore has government funds and has a
skilled workforce)
- Collaborations and Coordination
- Lack of collaborations and coordinations (especially across government ministries)
- Competition between firms
- NATIONALISED will have ability to easily collaborate across ministries
- Examples of NATIONALISATION
- Rolls - Royce nationalised to access enough funds to improve technology in jet planes
- (subsequently privatised)-> government failure
- Singapore: PUB and Port of Singapore Authority (PSA) due to the scales (cross island
pipelines/ freights/ vessels shipyard) required and funds + large amounts of collaborations
required (Nparks/ A Star) and
- LOWERS COP AND INCREASES PRODUCTIVITY (I) and hence leads to LRAS and SRAS
increasing
3) Grants to encourage R&D
- Merit good + Firms may not be able to invest -> MARKET FAILURE
- Supports BASIC RESEARCH, Scholarship and fellowships, Support Private R&D, Competitive
research funding
- Basic Research VS Specific Research
- LOWERS COP/ GOVT PROVISION OF BASIC RESEARCH/ ALIGN RESEARCH WITH NEEDS
OF ECONOMY/ INCREASES QTY OF RESEARCH
- INCREASES TECHNOLOGY + LOWERS COP
- SINGAPORE
- Biomedical Sciences
- Physical Sciences and Engineering
- Joint council research
- National Research Foundation
- A STAR

EFFECT
Education and Training

Increases productivity of
workforce
Increases Productive capacity
If Productivity increases >
Increase in wages
Lowers COP

Other factors affect willingness of

firms to send employees for
training/ willingness of workers to
get trained
Gestation time for training
Training doesn't guarantee
increases in productivity

Nationalisation

Increases Investment and

productive capacity
Increases Productive capacity

Lack of profit motive

Decreases incentive to be
efficient/ innovative
Depends on civil service
Depends on funds

Encouraging R&D

Increases Investment and

productive capacity
Increases Productive capacity

ESENTIALLY DEPENDS ON
THE GOVERNMENT

OVERALL EFFECTS
1) Can lead to Sustained Economic Growth
2) Lower Inflationary Pressures
3) Lower unemployment
1) Retraining -> Occupational mobility -> Decreases STRUCTURAL UNEMPLOYMENT
2) Cutting unemployment benefits -> Increases incentive to find work -> Decreases
FRICTIONAL UNEMPLOYMENT
3) Increase levels of production -> Increases demand for labor -> Decreases CYCLICAL
UNEMPLOYMENT
4) BOP
1) GPL fall -> Relatively lower X px, X competitive -> BOP improves
2) Technology improves product quality -> X increases -> BOP improves
3) Foreign firms attracted to invest in home country -> FDI increases -> BOP improves

GENERAL CONSIDERATIONS
1) Willingness and Ability of the economic agents
1) Firms to invest
2) Hh to provide labor
3) Governments ability to intervene
2) Certainty
1) Risks involved (basic vs specific research)
3) Time lags
1) Needed for restructuring