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Choosing the right policy depends on identifying the cause of the lack of competitiveness. The causes of poor competitiveness vary between countries and over time.
Labour productivity can be improved by increasing spending on education and training to help develop skills and close any skills gap. However, this is expensive and takes time. 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. However, this also takes time and the increase in flexibility can reduce worker security and lead to lower wages.
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.
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.
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.
Perhaps the best way to improve UK competitiveness is through a mixture of policies designed to help improve labour productivity, product market competitiveness and long term investment. All of these measures will improve both price and non-price competitiveness. In addition, the macro-economy also needs to be stabilised to create the right environment for investment.
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