Question

Talk on the policies to improve an un-competitiveness deficit

Answer 1

1. Improving labour productivity

Labour productivity can be improved by increasing spending on education and training to help develop skills and close any skills gap. Government may also promote a more flexible labour market, such as reducing trade union power, encouraging part-time work, and encouraging new business start-ups.

2. Improving competition in product markets

The level of competition in product markets can also be improved by deregulation to reduce barriers to entry, though this has its limits as some regulation is needed to protect consumers and employees from unfair practices. In addition, privatisation of industry is also likely to improve competitiveness, but there are few industries left in the UK to privatise. Finally, reducing monopoly power through regulation and competition policy are strategies that can be effective in creating a more dynamic and competitive micro-economy. However, it can be argued that monopoly power helps generate some dynamic efficiency, and the advantages of economies of scale might be lost if monopolies are broken up.

3. Improving the level of investment

Competition may be increased by investment grants and subsidies, and by tax incentives to encourage new product development. Keeping interest rates low is also a strategy that would encourage investment. In addition, keeping them as stable as possible would increase certainty and reduce risk. However, the danger with too low interest rates is that they could trigger an increase in household spending (C) causing demand pull inflation which would worsen, rather than improve, competitiveness. The Bank of England does not directly target UK competitiveness. Finally, investment may be stimulated by reducing the interest rate elasticity of investment, which means it is easier to raise interest rates without a negative effect on investment. This could be achieved by investment grants and tax relief on investment.

4. Creating a stable macro-economic environment

Also central to an effective strategy to improve competitiveness, is strategy inflation under control. This can be achived through a combination of monetary and fiscal measures. However, higher interest rates can also deter investment, and could damage competitiveness in the long run. A stable exchange rate would also create less uncertainty, and would give firms more confidence to invest

5. Review the latest trends in financial innovation

6. Raise awareness among policy makers about the importance of these innovations

7. Consider the role of governments and international organizations in replicating best practices in developing countries

8. Analyse ways to combine financial with non-financial support as a means to reduce transaction costs and risks

9. Identify future actions to be taken by Governments, public and private sector development agencies, international financial institution in order to improve an un-competitiveness deficit