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Demand-side Policies for Short-term Economic Stability

Discuss about the Political Economy Of the Democratic Transitions.

Gaining long term economic growth and stability in economy during the short run is one of the essential factors that influence the governmental policies by a large extent. In order to gain the same, government around the world utilise differentiated policies which are mainly dependable upon the demand and supply side of economy (Agénor and Montiel 2015). This report is aimed to provide a detailed overview of the economic policies that the respective government need to utilise in order to gain long run economic growth and short run economic stability. In addition to this, explain the policies taken by the respective government for the same, this report will focus on the Singaporean economy in order to trace the implication of the policies so as to enhance the stability and growth of the economy during short run and long run respectively.

Governmental policies in order to enhance the economic growth in long run and stability of the economy during shot run government focus on aggregate demand and aggregate supply. With enhancement in these two essential factors for the growth and stability of the economy, government utilise the supply and demand side policies. Various type of demand and supply side policies that are being utilised by the government are as follows (Haggard and Kaufman 2018):

  • Monetary policy
  • Fiscal policy
  • Tax cut, Free Trade Agreements (FTA), privatisation, deregulation and others
  • Enhanced infrastructure, improved training and education

In order to enhance the short run stability, demand side policies are beneficial and when it comes to keep the long run growth higher, then supply side policies can be provided to be beneficial. As the recessionary period came in during the short run, enhancing the aggregate demand would increase the price level higher, which in turn will lead to rise in incentive of the producers to produce additional units of the goods and services (Lardy 2016). With higher price of the goods and service, producers will produce higher output that will inherently aid the economy to move forward because, higher output will lead the economy to have higher employment level.

Now, government of the respective economy can bring in the surge in the aggregate demand with the effective monetary and fiscal policy. With the cut in the interest rates government can influence consumer spending. In addition to this, lower interest rate will eventually reduce the incentive to save in the banks that will enhance the liquidity in the market. Enhanced liquidity will eventually improve the demand of goods and services in the economy (Leigh and Blakely 2016).

Monetary and Fiscal Policy

Contrary to this, government can aid the economic crunch during the short run through the fiscal policies. With the reduction in the tax rate, enhancement in the government expenditure, import substitution and export promotion, government can enhance the economic performance that will stabilise the market during the short run. As the government will take expansionary policy through the tax cut or additional governmental expenditure, it will influence the investors to invest more in the market (Rose-Ackerman and Palifka 2016). Repercussion effect of the same will enhance the employment and the market demand of the goods and services. Thus it will aid the economy to stabilise its deteriorating demand situation.

Though there is huge amount of benefit of utilising the demand side policies in order to enhance the economic stabilisation, however, in certain cases, it can be seen that rise in the demand of goods and services in an economy has enhanced the inflation rate and eventually turned an economy in an unsustainable economy in long run. Under this situation, supply side policies can be beneficial for enhancing the economic growth during the long run and economic stability during the short run (O’connor 2017). With rise in the aggregate demand, during the next period, there will be rise in the labour demand and it will further influence the supply. With additional supply, price of the goods and services will be reduced and more amount of the produce can be purchased by the consumer with same amount of money during the successive periods.  

As one of the main policies to bring in the growth during the long run, government often reduce the income taxes in order to boost the incentive to the workers and enhance the labour supply. With better incentive to work additional hour of work, labour supply will be enhanced and the productivity of the economy will be enhanced. It will eventually reduce the price of the goods and services and the demand of the same will be enhanced. On other instance, government often deregulate the organisations in order to enhance the efficiency of the same (Mazzucato et al. 2015). With better efficiency, comes the scope of better productivity and in addition to this it has also been found that it reduces the effect of market crunch on the overall economy. Thus supply side economy can be utilised by the government in order to keep the market grow during the long run.

Expansionary Fiscal Policy

However, in the case of the supply side policies, it has often been observed that it takes much amount of time in order to prove to be fruitful. Considering the case of the educational program from the government, it can be seen that, if the government stars initiative to enhance the educational level of the economy and increase the vocational training so as to increase the productivity, then it will take almost a decade or more to prove to be fruitful (O’connor 2017).  On the other hand, during the recessionary period, supply side policies fails to entice the market crunches and eventually the economy deteriorates from the growth path of the same.

Considering the case of the Singapore, it can be seen that the state unlike other Asian tigers has utilised expansionary fiscal policies in order to deal with the long term growth and short term economic stability. As the measurement of the same, government of Singapore, during the last four decades has focused on the medium to long term objectives of the state. Due to the large amount of reliance on the imports, Singaporean economy opts out itself from utilising from Keynesian model of demand stimulus option, rather it focused on the supply side policies. Government of the Singapore provides direct cost cutting to the goods and services that has aided the consumer of the state to consumer more at a considerable price (Gomulya et al. 2015). In addition to this, keeping the interest rate higher than the peer states, Singapore has enjoyed much amount of foreign investment that has aided it to become where it is now. As cyclical growth practice, in case of the fall in the personal and corporate income taxes, goods and services tax is increased in order to keep the growth path intact even during the slow growth years like 2000s (Tang and Tan 2015).

Conclusion:

From the above discussion it has been observed that the growth of the economy during the long run and stability of the same depends largely on the supply and demand side policies from the government. With the rise in the aggregate demand, government during the short run tries to tackle the market crunch and when it comes to the long run growth, then the government emphasise on the supply side policies so as to enhance the growth path of the economy. Considering the case of the Singapore, it has been found that, government since the last four decades has utilised the mixture of the supply and demand side policies in order to keep the growth path of the economy intact and let the market move forward in spite of the market crunches during the short run.

Reference:

Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University Press.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Gomulya, D., Chernyshenko, O., Uy, M.A., Francis, W.L.K., Moon-Ho, R.H., Yin, C.K. and Ong, H.L.C., 2015. Entrepreneurship in Singapore: Growth and challenges. In The Entrepreneurial Rise in Southeast Asia (pp. 35-67). Palgrave Macmillan, New York.

Haggard, S. and Kaufman, R.R., 2018. The political economy of democratic transitions. Princeton University Press.

Juncker, J.C., Tusk, D., Dijsselbloem, J., Draghi, M. and Schulz, M., 2015. Completing Europe's Economic and Monetary Union.

Lardy, N.R., 2016. China: Toward a consumption-driven growth path. In SEEKING CHANGES: The Economic Development in Contemporary China (pp. 85-111).

Leigh, N.G. and Blakely, E.J., 2016. Planning local economic development: Theory and practice. Sage Publications.

Mazzucato, M., Perez, C., Fageburg, J., Laestadius, S. and Martin, B.R., 2015. Innovation as growth policy. The Triple Challenge for Europe: Economic Development, Climate Change, and Governance. Oxford: OUP, pp.229-264.

O'connor, J., 2017. The fiscal crisis of the state. Routledge.

Rose-Ackerman, S. and Palifka, B.J., 2016. Corruption and government: Causes, consequences, and reform. Cambridge university press.

Tang, C.F. and Tan, E.C., 2015. Does tourism effectively stimulate Malaysia's economic growth?. Tourism management, 46, pp.158-163.

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