Supply-side economics has played a significant role in the global South, contributing to economic growth and uneven benefits. To build on this foundation, a more comprehensive strategy is necessary, one that leverages market dynamics and incentives while prioritising broad-based development, poverty reduction, and long-term productivity growth. By implementing the right balance of policies, countries in the global South can work towards achieving a more inclusive and sustainable development path.
Many countries in the Global South have embraced supply-side economics, often as part of structural adjustment programs. Supply-side economics has been a significant driver of economic policy in the Global South in recent decades. It emphasises increasing economic growth and productivity through policies encouraging production, investment, and innovation. These policies usually involve lowering tax rates, reducing regulations, privatising state-owned enterprises, liberalising trade, and attracting foreign investment (Bauer, 2000). The rationale is that by improving the business environment and incentives on the supply side, economies can expand their productive capacity and efficiency, leading to sustained growth and development.
Many countries in the global South have embraced supply-side economics, often as part of structural adjustment programs mandated by international financial institutions like the International Monetary Fund (IMF) and World Bank. In Latin America, countries like Chile, Mexico, and Brazil undertook extensive market reforms and liberalisation starting in the 1980s (Williamson, 1990). Chile, in particular, became known for its aggressive, free-market policies under the guidance of the “Chicago Boys” economists. As a result, Chile’s economy grew by an average of 7% per year between 1985 and 1997 (Kurtz, 2001).
In Asia, India launched major economic reforms in 1991 to open up to global trade and investment, deregulate industries, and reduce the state’s economic role. These reforms have been credited with unleashing India’s entrepreneurial potential and enabling the country to achieve an average GDP growth rate of around 7% since the mid-1990s (Ahluwalia, 2002). China’s economic miracle has also been underpinned by supply-side policies like creating special economic zones, liberalisation of agriculture, and massive infrastructure investments. Between 1978 and 2010, China achieved an average annual GDP growth rate of 10% (Morrison, 2014).
However, the impact of supply-side economics in the global South has been mixed. While some countries have seen significant economic growth and poverty reduction, the gains have often been uneven. In many cases, the benefits of growth have accrued disproportionately to urban elites and the owners of capital, while large segments of the population remain stuck in poverty. Income inequality has risen in many countries pursuing supply-side policies. For example, despite China’s impressive growth, income inequality, as measured by the Gini coefficient, has increased from 0.30 in 1980 to 0.55 in 2012 (World Bank, 2014). In 2022, China reached a score of 46.7 (0.467) points. (Textor, 2024)
Moreover, the focus on export-led growth and foreign investment has left many countries vulnerable to global economic shocks. The 2008 financial crisis, for instance, had a severe impact on export-dependent economies in the global South. In Mexico, GDP contracted 6.5% in 2009 as demand for its manufacturing exports plummeted (Villarreal, 2010). Supply-side policies have also often failed to create enough jobs to keep pace with the rapid growth of the labour force in developing countries. For example, the economy has struggled to generate sufficient employment in India, with the labour force participation rate declining from 58% in 2004 to 53% in 2012 (Mehrotra et al., 2014). In 2023, the labour force participation rate (LFPR) in urban areas increased to 50.4 per cent (Rathore, M. 2024).
Critics argue that supply-side economics neglect the importance of domestic demand and human capital development. Policies that suppress wages and fail to invest adequately in education and health may boost short-term competitiveness but undermine long-term productivity and innovation (Stiglitz, 2002). A study by Barro (2001) found that human capital, as measured by years of schooling and health indicators, was a significant determinant of long-term economic growth.
To achieve more inclusive and sustainable development, countries in the global South may need to adopt a more balanced approach that combines supply-side reforms with demand-side policies and investments in human capital. Progressive taxation and social safety nets can help reduce inequality and expand domestic markets. Industrial policy and government support for research and development can foster innovation and technological upgrading. Investing in quality education and healthcare can build the skilled and healthy workforce to move up the value chain.
References
- Ahluwalia, M. S. (2002). Economic Reforms in India Since 1991: Has Gradualism Worked? Journal of Economic Perspectives, 16(3), 67-88.
- Barro, R. J. (2001). Human Capital and Growth. American Economic Review, 91(2), 12–17.
- Bauer, P. T. (2000). From Subsistence to Exchange and Other Essays. Princeton University Press.
- Kurtz, M. J. (2001). State Developmentalism Without a Developmental State: The Public Foundations of the “Free Market Miracle” in Chile. Latin American Politics and Society, 43(2), 1–25.
- Mehrotra, S., Gandhi, A., & Sahoo, B. K. (2014). Is India’s Long-Term Trend of Low-Quality Employment Growth Reversing? Economic & Political Weekly, 49(7), 83-91.
- Morrison, W. M. (2014). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. Congressional Research Service.
- Rathore, M. (2024). Rate of labour participation across India 2023
- Stiglitz, J. E. (2002). Globalisation and Its Discontents. W. W. Norton & Company.
- Textor, C. (2024). Gini index: inequality of income distribution in China 2012-2022
- Villarreal, M. A. (2010). The Mexican Economy After the Global Financial Crisis. Congressional Research Service.
- Williamson, J. (1990). What Washington Means by Policy Reform. In J. Williamson (Ed.), Latin American Adjustment: How Much Has Happened? (pp. 7–20). Institute for International Economics.
- World Bank. (2014). World Development Indicators. Retrieved from http://data.worldbank.org/indicator