Impact of Privatization induced by Supply Side Economics on Development
After the Second World War, Keynesian theories on Economics developed in the United States and Europe. In the post-war economies, it was believed that development could occur if demand was boosted and more people had money to spend. This is the classical view of Keynesian school of thought in Economics. Thus, idea was to ensure that everyone was employed and everyone had enough money to spend to keep the economy going.
However, the focus of Keynesian economics was focused on demand and said very little about supply. In the 1970s, free market economists like Milton Friedman came up with the argument that the state must only play the role of smoothening the flow of money in the economy to enable supply to increase with little intervention to promote demand in a laissez faire manner. This means that the state will focus more on production by taxing businesses less and allowing production to go on as a means of enhancing productivity. Thus, the state spends very little on welfare and avoids intervention. One of the features of supply side economics is that it promotes privatization and free enterprises with little or no emphasis on welfare-based policies.
The United States and the United Kingdom moved towards supply side economics in the 1980s under President Ronald Reagan and Prime Minister Margaret Thatcher respectively. Other nations in the developed world did the same. However, the end of the Cold War led to the rapid development and modernization of other nations in the Third World. This included nations in Latin America, parts of Eastern Europe and Asia. Now, most of these countries are intermediate economies. This happened after a period of structural reforms that were meant to shift the nations from a Keynesian model to the supply side model of governance, usually under the pressure of international agencies like the International Monetary Fund.
The purpose of this research is to examine the extent to which privatization helped in economic growth in countries socialist and third world countries.
This research is going to examine the two main variables of significance which are:
Dependent Variable: Privatization &
Independent Variable: Economic Growth
Privatization in this study will be measured by the examination of the percentage of a nation’s economy that has been privatized as opposed to the percentage which is controlled by the government and its agencies. Studies show that there are some countries in the 21st Century that operate a sector that is based on Keynesian economics than free market principles and examples include Brazil and Greece. On the other hand, Chile and Slovakia embarked on the path of high levels of privatization.
The dependent variable will examine the extent to which the countries’ economies are privatized. This will be done on the basis of the overall level of privatization and the percentages of privatization of some key sectors and industries.
On the other hand, the independent variable, economic growth can be examined by the extent to which the economy has improved over the years. This will include the assessment of some of the key indicators and pointers related to the growth and expansion of a nation’s economy. The three indicators to be examined are:
Gross Domestic Product;
Money Supply and
Consumer Price Index
The central argument is that privatization causes the nation and the economy to grow and this allows more money to circulate and with time, people find better opportunities to improve themselves.
Figure 1: Privatization & Economic Growth
This is because privatization is a process through which individuals get to own and run their business. Driven by the desire to achieve more profits and optimize their resources, business owners cut down on cost and improve productivity. In the short-run, the cost cuts lead to unemployment and more sacrifice by workers. However, in the long-run, there is more prosperity for business owners and this translates into better remuneration at the company level and more capital and profits in the macroeconomic level.
On the other hand, public-sector control creates the very opposite. It involves a lot of protocols and bureaucracy and this causes so much waste. Although there is the short-term guarantee of full employment under the Keynesian model of economics, public sector based and welfarist based governments tend to be less productive. There is slack and resources are not put to optimal use. Decision making is slow and there is a limited motivation for people to work hard and put resources to optimal use. Therefore, there is a slower economic growth and people do not really get what they desire out of life. There is a general fall and reduction in the long-term earning and developmental capability of the economy.
In order to confirm whether privatization promotes economic growth, there is the need for a fieldwork to be done to gather information and data about nations that have different systems of governments. To this end, there will be the examination of a sample of two former third world countries that are operated by a public-sector model; Brazil and Greece. They will be studied alongside two rapidly privatized third world countries, Chile and Slovakia. These countries and their trends in economic growth will be observed and analyzed.
First of all, there will be the examination of the extent of privatization in both countries. This can be done by studying the relative percentage of the economies of these two countries and whether they are privatized or not. This will show the percentage of the economy is ran by the government or public sector entities and which ones are ran by private sector entities.
The second aspect will be to figure out the level of GDP, Money Supply and Consumer Price index in these countries over a period of time, say 10 years. This will show how the economies of these two countries have changed over the period of time and wither the economies are growing or retracting. This will show how money is injected into the economy and how expensive products in the economies are. This will show the kind of life people have in these two sets of countries.
Implications of Findings
The findings will be used as the basis for proving whether or not privatization helps a country or not. It will prove whether indeed privatization gets businesses to become more productive and hence assists in promoting better levels of outputs or not. This will show whether the life in Greece and Brazil are as bad as it might be for Chile and Slovakia or not. The findings will provide an objective reality of the claims that supports supply-side economics and privatization which is part of supply-side economics. The findings can be used as a basis and evidence to support or reject further application of supply side economics to other nations in the third world.
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