© 2011 Economics Cafe All rights reserved.

Written by: Edmund Quek

Explain the four macroeconomic goals of high economic growth, low unemployment,

low inflation and a balance of payments equilibrium of the Singapore government and

discuss the policies that can be used to solve the most significant macroeconomic

problem that the Singapore economy currently faces.

[25]

The Singapore government has four macroeconomic goals: high economic growth,

low unemployment, low inflation and a balance of payments equilibrium. The most

significant macroeconomic problem that the Singapore economy currently faces is

negative economic growth and the policies that can be used to solve the problem are

fiscal policy, exchange rate policy, short-term supply-side measures and manpower

policy.

Economic growth is an increase in real national income or real national

output. Although there is no standard measure of the standard of living, it is commonly

believed that the welfare of the people depends to a large extent on the amount of goods

and services available for consumption and this is directly, though not perfectly, related

to national output. Therefore, high economic growth will lead to a rapid rise in the

standard of living. High economic growth will also help the economy achieve full

employment and will put the government in a good position to redistribute income from

high income groups to low income groups. Due to the global recession and hence the

falling external demand for Singapore’s goods and services, the national income of

Singapore was forecasted to fall by between 2 and 2.5 per cent for 2009.

Unemployment is the state of the economy in which some workers are not

employed in the production of goods and services. The unemployed are people who

are able and willing to work at current wage rates but who are without jobs. High

unemployment will cause the economy to lose a large amount of output. It will cause a

large number of people to lose their income. Further, if the unemployed remain

unemployed for a long period of time, they may lose their skills and knowledge. When

unemployment is high, the employed will lose some of their income in the form of a pay

cut. High unemployment will cause firms to lose a large amount of profit. When

unemployment is high, the government will lose a large amount of tax revenue. High

unemployment will lead to a high crime rate, high divorce rate, high suicide rate and

social unrest. Low unemployment helps the economy avoid the adverse effects of high

unemployment. Due to the global recession and hence the falling external demand for

Singapore’s goods and services, unemployment in Singapore had risen to 5 per cent, as of

30 September 2009.

Inflation is a rise in the general price level over a period of time. Monetary

economists, however, define inflation as a sustained rise in the general price level and

refer to a one-off rise as a price shock. When inflation is high, nominal interest rates will

not fully compensate for the rise in the general price level which will reduce the amount

of goods and services that can be purchased with any given amount of savings. When

inflation is high, domestic goods and services may become relatively more expensive

© 2011 Economics Cafe All rights reserved.

Written by: Edmund Quek

than foreign goods and services. If this happens, net exports will fall. Since high inflation

tends to be less stable, firms will find it harder to estimate the costs and revenues of

investments when inflation is high which will lead to a decrease in investment

expenditure. High inflation will lead to a high menu cost and a high shoe-leather cost of

inflation. Low inflation helps the economy avoid the adverse effects of high inflation.

Due to the global recession and hence the falling external demand for Singapore’s goods

and services, the inflation rate in Singapore is forecasted to be between negative 0.5 and

0.5 per cent for 2009.

The balance of payments is a record of all the transactions between the

residents of the economy and the rest of the world over a period of time. A persistent

balance of payments deficit, which occurs when money outflows persistently exceed

money inflows, may lead to adverse consequences such as high imported inflation, high

cost-push inflation, falling national income, rising unemployment or rising foreign debt,

depending on the exchange rate system. A persistent balance of payments surplus is also

undesirable because if the surplus had been used to purchase imports, the standard of

living would have been higher. A balance of payments equilibrium helps the economy

avoid the adverse effects of a persistent balance of payments disequilibrium. Due to the

global recession and hence the falling external demand for Singapore’s goods and

services, the balance of payments of Singapore has been deteriorating dramatically since

the second half of 2008.

The most significant macroeconomic problem that the Singapore economy

currently faces is negative economic growth. Singapore usually runs a balance of

payments surplus. Therefore, the decrease in the exports of Singapore may not lead to a

balance of payments deficit. Further, even if a balance of payments deficit occurs in

Singapore, it is unlikely to be persistent as the global recession is unlikely to last more

than a few years.. Therefore, the negative economic growth in Singapore is the most

serious macroeconomic problem as it is the cause of the high unemployment.

Expansionary fiscal policy can be used to reduce negative economic growth

in Singapore. Fiscal policy is a demand-side policy that is used to control government

expenditure or taxation to influence aggregate demand. The Singapore government can

increase expenditure on goods and services, decrease direct taxes or increase transfer

payments to increase the aggregate demand and hence the national income in Singapore.

However, due to the small government expenditure in Singapore relative to the exports,

the increase in the government expenditure is likely to only partially offset the decrease

in the exports resulting in a lower negative economic growth.

Exchange rate policy can be used to reduce negative economic growth in

Singapore. Exchange rate policy is a policy that is used to control the exchange rate to

influence aggregate demand or aggregate supply. The MAS can lower the policy band

within which the exchange rate of the Singapore dollar is maintained to allow the

Singapore dollar more room to depreciate. A weaker Singapore dollar will make

Singapore’s goods and services relatively cheaper than foreign goods and services which

will increase the exports and hence the aggregate demand in Singapore resulting in an

© 2011 Economics Cafe All rights reserved.

Written by: Edmund Quek

increase in the national income. However, as the MAS cannot devalue the Singapore

dollar dramatically to prevent high imported inflation and high cost-push inflation in

Singapore, the modestly weaker Singapore dollar will only lead to a smaller decrease in

the exports resulting in a lower negative economic growth.

Short-term supply-side measures can be used to reduce negative economic

growth in Singapore. The Singapore government can reduce employers’ CPF

contribution or help firms pay a certain percentage of their workers’ salaries to reduce the

labour cost in Singapore. When the cost of production in Singapore falls, the aggregate

supply will rise which will lead to a smaller decrease in the national income that occurs

due to the decrease in aggregate demand. However, if reducing the cost of production in

the Singapore economy leads to an increase in the profits of the firms, the distribution of

income will be less equitable.

The Singapore government can use manpower policy such as increasing

course fee subsidies and absentee payroll rates to reduce negative economic growth. In a recession, firms will have excess workers and the normal practice is to retrench them

to cut costs. Higher course fee subsidies and absentee payroll rates will induce some

firms to send their excess workers for training instead of laying them off. When this

happens, the reverse multiplier effect will decrease which means a smaller fall in national

income given any fall in aggregate demand. However, increasing course fee subsidies and

absentee payroll rates will cause the Singapore government to run a budget deficit.

In the final analysis, due to the larger external sector of the Singapore economy,

exchange rate policy is the most effective policy for cushioning the negative impact of

the global recession on economic growth in Singapore. In addition, the Singapore

government should use expansionary fiscal policy, short-term supply-side measures and

manpower policy in conjunction with exchange rate policy to produce a greater

expansionary effect on the economy. However, in a small economy like Singapore which

depends more on the external sector, unless exports pick up with an economic recovery in

large economies, economic growth is likely to remain sluggish. In a recession, exchange

rate policy, expansionary fiscal policy, short-term supply-side measures and manpower

policy can only go some way towards increasing economic growth in Singapore.