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Home Field Trips Copper Tour Supply Side Approaches

Theories

Supply Side Approaches

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Supply side policies are government microeconomic polices which aim to change the underlying structure of the economy and improve the economic performance of markets and industries and of individual workers and firms within markets. Supply side economists argue that government policy should attempt to focus on the level of total or aggregate supply of goods and services rather that attempting to directly manipulate the aggregate demand for goods and services. They maintain that the role of government is to create an environment in which free enterprise and competition will flourish and that market forces will allocate resources most efficiently.

In the 1980s and 90s many MDCs operated a supply side approach in conjunction with monetarism. Monetarism was aimed at controlling inflation and supply side policy was aimed at stimulating output. Although it has become a central part of the free market approach to economic management economists and politicians of wide political persuasions have advocated policies that promote the growth of aggregate supply.

Many of the multilateral organisations such as the IMF, World Bank . The Lome Convention supported the implementation of supply side measures. As a consequence the conditions laid down in the structural adjustment programmes required by these bodies have required Zambia and other LDCs to introduce supply side approaches if funding is to occur.

Typically supply side economic policy can be divided into two categories:

• General supply side measures
• Labour market supply side measures

General Supply Side Measures
General supply side measures aim to increase the overall efficiency of the economy and thus increase aggregate supply. This would be achieved by restructuring production through privatisation by any of the following:

• Denationalisation - the transfer of public sector enterprises such as the parastatals (often monopolies) to the private sector
• Deregulation- removal of barriers to entry and allowing competition
• Contracting out - allowing public sector enterprises to buy services from the private sector by putting services out to tender

The Labour Market Supply Side
Labour market supply side measures are aimed at reducing the levels of unemployment. They argue that unemployment exists primarily because labour markets are not allowed to operate through the free movements of supply and demand for labour. In a free market excess supply of labour (unemployment) would clear itself through a fall in the wage rate of labour. If wages are prevented from falling by the existence of trade unions or minimum wages then the labour market will fail to clear and unemployment continues. Supply side economists would reduce the power of trade unions and abolish minimum wages. Hardship and poverty they argue is unfortunate but necessary in the short term if the market is to operate freely and bring about long-term prosperity.

In addition they also see the need to increase incentives to work, even if necessary, at lower wages. Lowering the rate of income tax and increasing peoples' disposable income is seen as being very important in helping to increase incentives to work.

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Related Glossary Items:
Parastatals
Supply Side Policies
Aggregate Supply
Monetarists

Related Issues:
Lome Convention