The Supply Side Policies

Abstract

Austerity and structural readjustment are not necessarily the same. There can be austerity aimed at lowering the debt to GDP ratio or, more generally, the net international investment position (NIIP) to GDP. There can be structural readjustment aimed at altering the business model of an economy by lifting rigidities in its functioning and increasing its supply potential. Alternatively, there may be a combination of both. By the same token, there can be austerity aimed at sustainably rebalancing the internal public sector, or there can be austerity aimed at rebalancing the external position of the country and putting the NIIP to GDP on a sustainable path. Abolishing structural rigidities can take different formats and is dependent on policy priorities. However, austerity and structural readjustment as described tend to overlook policy targeting interactions. Hence, there may be a lifting of market rigidities thus creating a NIIP to GDP sustainable path, combined with the sustainable evolution of a low debt to GDP ratio. This chapter presents the supply side rationale, analyzes the structural reforms and describes the required adjustment and the speed of adjustment. Finally, after summarizing the synchronized implementation of austerity and supply side policies, it assesses their effectiveness.