2019 Nov (Supply-Side, Growth) Paper 1 HL

 2019 Nov (Supply-Side, Growth) Paper 1 HL

(4) (b) Discuss the view that interventionist supply-side policies are the most effective way for a government to achieve economic growth.

 

Definition

 

Supply-Side Policies – aim at positively affecting the production side of the economy.

 

Interventionist Supply-Side Policies – means the government directly participates in improving the quantity and quality of factors of production to improve total productive capacity.

 

Economic Growth – is the increase in real output in an economy over a period of time.

 

Diagram

 

Show either an increase in both AD & LRAS or the PPC (shifting out) to show economic growth.

 

Interventionist Supply-Side Policies

 

(1)  Investment in Human Capital – The government can invest in education and training and raise the productivity level of its workers. (More educated workers tend to produce more) Ex. Singapore has focused on developing its human capital from its establishment, through mandatory education and incentives for firms to train their employees.

 

(2)  Investment in New Technology – The government can have policies to encourage research and development or to invest in new technology. Ex. During the Cold War era in 1960, the US invested heavily in space technology as it was falling behind the Soviet Union. Due to governmental policy, there was a rapid advance in aerospace technology.

 

(3)  Investment in Infrastructure – The government can invest in essential facilities and services such as roads, airports, and sewage treatment that add to the capital stock of the economy and are necessary for successful economic activities. Ex. Heavy investment in high-speed broadband networks during the dot-com bubble in the early 2000s has provided the necessary infrastructure for data-heavy internet uses today such as video-streaming and cloud computing.

 

(4)  Investment in Industrial Policies – The government may use targeted industrial policies to promote in key growth areas of the economy through the use of tax allowance, tax credits or subsidized lease programs. Ex. Korea and Taiwan have used active government support and directives in strategic industries (such as shipbuilding and microchip manufacturing) to drive economic growth.) The Hong Kong government has offered incentives e.g. rental subsidies to IT startups.

 

Strengths of Interventionist Supply-Side Policies

 

(1)  Addressing market failures resulting from positive externalities – Certain types of investment (such as education and infrastructure) have large positive externalities and would be unprovided under a market system. Government involvement would address the under-provision of the investments.

 

(2)  Creation of Employment – Most interventionist policies have an element of increased government spending and this has the dual effect of creating employment during the use of the policy (jobs provided by construction projects) and after the implementation policy (increased business demand with better roads).

 

(3)  Impact on Economic Growth – Investment in factors of production is essential for sustained growth in the long-term. Policies that directly increase such investment, or encourage private investment, have a positive impact on economic growth.

 

Weaknesses of Interventionist Supply-Side Policies

 

(1)  Impact on Government Budget – Interventionist policies involve higher government spending which increases the government’s budget. Increased government spending has to either come from increased taxes, selling of state owned enterprises, or raising debts.

 

(2)  Time Lag – It takes time to implement interventionist polices and it takes time for these policies to be fully realized. Ex. The construction of hospitals and ports obviously have benefits to society but might not be realized for a number of years.