2007 Essay Question 6

Question

Discuss whether Singapore is among the economies that have most to gain from globalisation. [25]

Answer

For this question, apart from the benefits and costs of globalisation in Singapore, students should also explain why the benefits and costs may be greater than those in other economies.

Globalisation has led to an improvement in the balance of payments of Singapore. Globalisation has increased the imports of Singapore substantially over the last few decades and this is largely due to lack of factor endowments and the embracement of free trade. Singapore’s imports are now close to 200 per cent of its national income. The production of low value-added goods such as disk drives requires low-skilled labour. Singapore has a comparative disadvantage in producing low value-added goods due to the small amount of low-skilled labour. Therefore, Singapore imports mainly low value-added goods. However, globalisation has increased the exports of Singapore by a larger amount in the same period and this is largely due to the signing of many free trade agreements and control over the exchange rate. Singapore’s exports are now over 200 per cent of its national income. The production of high value-added goods such as pharmaceuticals requires high-skilled labour. Singapore has a comparative advantage in producing high value-added goods due to the large amount of high-skilled labour. Therefore, Singapore exports mainly high value-added goods. The larger increase in exports than imports in Singapore has led to an improvement in the current account and hence the balance of payments. Globalisation has led to a substantial increase in outward foreign direct investments in Singapore and this is largely due to the increase in investment opportunities in emerging economies such as China and the efforts of the Singapore government to increase outward foreign direct investments in order to increase inward income remittances. However, globalisation has led to a larger increase in inward foreign direct investments in Singapore and this is largely due to the high quality of labour, the low corporate income tax and the good infrastructure. The larger increase in inward foreign direct investments than outward foreign direct investments in Singapore has led to an improvement in the capital and financial account and hence the balance of payments.

Aggregate demand in Singapore has risen due to globalisation which has led to an increase in national output and hence national income. Due to limited overlap between imports and domestic goods in Singapore, the increase in imports has not led to a large decrease in the demand for domestic goods and hence has not led to a large decrease in aggregate demand. In contrast, as Singapore is a small economy that is highly dependent on external demand with the domestic exports accounting for a large proportion of the aggregate demand, the increase in exports and investment expenditure has led to a substantial increase in aggregate demand. Therefore, globalisation has led to an increase in aggregate demand in Singapore which has induced firms to increase production resulting in an increase in national output. When firms increase production, they will employ more factor inputs from households and hence will pay them more factor income which will lead to an increase in national income. The increase in national output has created many jobs for the expanding labour force which has led to lower unemployment.

The demand-side benefits of globalisation are greater in Singapore than in many other economies. As Singapore is a small economy that is highly dependent on external demand with the domestic exports accounting for a large proportion of the aggregate demand, the increase in exports due to globalisation has led to a substantial increase in aggregate demand. Furthermore, domestic firms in Singapore are small and hence lack the financial resources to make large investments. Therefore, the increase in foreign direct investments made by multinational corporations due to globalisation has also increased aggregate demand quite substantially. Large economies like the United States, by contrast, are more dependent on domestic demand and have large firms with the financial resources to make large investments and hence have benefited from the increase in exports and foreign direct investments due to globalisation to a smaller extent.

Globalisation has led to an increase in aggregate supply in Singapore. Globalisation has led to an increase in the amount of imported capital goods and intermediate goods and a rise in the number of foreign workers and immigrants in Singapore which have resulted in a more rapid increase in the production capacity in the economy and hence aggregate supply. Furthermore, the increase in foreign direct investments has also led to a more rapid increase in the production capacity in the economy and hence aggregate supply. Due to the larger increase in aggregate supply, national output and hence national income has risen by a larger extent which has led to lower unemployment. Furthermore, the general price level has risen by a smaller extent resulting in lower inflation.

Globalisation has led to an increase in aggregate supply in Singapore. Globalisation has led to an increase in the amount of imported capital and intermediate goods and a rise in the number of foreign workers and immigrants in Singapore which have resulted in a more rapid increase in the production capacity in the economy and hence aggregate supply. Furthermore, the increase in foreign direct investments has also led to a more rapid increase in the production capacity in the economy and hence aggregate supply. Due to the larger increase in aggregate supply, national income has risen by a larger amount, unemployment is lower and the general price level has risen by a smaller amount.

The supply-side benefits of globalisation are greater in Singapore than in many other economies. Singapore virtually does not have factor endowments. Therefore, the increase in the amount of imported intermediate goods due to globalisation has increased aggregate supply substantially. Furthermore, Singapore has a small labour force due to the small population. Therefore, the rise in the number of foreign workers due to globalisation has also increased aggregate supply substantially. Large economies like Japan, by contrast, have more factor endowments and a larger labour force and hence have benefited from the increase in the amount of imported intermediate goods and the rise in the number of foreign workers due to globalisation to a smaller extent.

Although Singapore has benefited more from globalisation than many other economies, it has also suffered more from globalisation than many other economies which may have resulted in lower net benefits.

Globalisation has led to high susceptibility of the Singapore economy to a recession in other economies. A recession in other economies will lead to a decrease in the external demand for Singapore’s goods and services. When this happens, as globalisation has led to high dependence of the Singapore economy on external demand with the domestic exports accounting for a large proportion of the aggregate demand, aggregate demand in Singapore is likely to fall substantially which is likely to lead to a large decrease in national output and hence national income resulting in a substantial rise in unemployment. For example, the 2008-2009 Global Financial Crisis caused by the Subprime Mortgage Crisis in the United States led to a fall in exports in Singapore resulting in a large decrease in aggregate demand which led to a large decrease in national output and hence national income. In contrast, globalisation has increased the susceptibility of large economies such as the United States to a recession in other economies to a lesser extent.

Globalisation has led to high susceptibility of the Singapore economy to high inflation in other economies. High inflation in other economies will lead to a substantial rise in the prices of imports in Singapore. When this happens, as globalisation has led to high imports in Singapore, Singapore will experience high imported inflation. For example, the high inflation in other economies in 2008 due to the oil price shock was a major factor which caused inflation in Singapore to soar to 6.6 per cent which was a level not seen since 1981. In contrast, globalisation has increased the susceptibility of large economies such as Japan to high inflation in other economies to a lesser extent.

Globalisation has increased structural unemployment in Singapore. The production of low value-added goods such as disk drives requires low-skilled labour. Singapore has a comparative disadvantage in producing low value-added goods due to the small amount of low-skilled labour. Due to this reason, among other factors, globalisation has led to a more rapid decline in the low value-added industries. For example, the relocation of manufacturing plants by firms that produced low value-added goods in Singapore, such as Hitachi, Sanyo and Seagate, to China where the cost of production was lower caused the low value-added industries in Singapore to decline at a faster rate. As a result, the rate at which low-skilled workers are laid off has increased which has led to a rise in structural unemployment. In contrast, globalisation has led to a more rapid decline in the low value-added industries in many other economies to a lesser extent.

Globalisation has worsened income inequity in Singapore. The production of high value-added goods such as pharmaceuticals requires high-skilled labour. Singapore has a comparative advantage in producing high value-added goods due to the large amount of high-skilled labour. Therefore, globalisation which has increased the export market has led to an expansion of the high value-added industries and this has increased the demand for high-skilled workers resulting in a rise in the wages. However, as Singapore has a comparative disadvantage in producing low value-added goods, globalisation has led to a contraction of the low value-added industries and this has decreased the demand for low-skilled workers resulting in a fall in the wages. The rise in the wages of high-skilled workers and the fall in the wages of low-skilled workers due to globalisation have caused income inequity to worsen. The Gini coefficient in Singapore, which is a measure of inequality of income distribution, is above the internationally recognised alarming level of 0.4 and is one of the highest among developed countries. Even after taking into consideration taxes and transfer payments, the Gini coefficient in Singapore still remains above 0.4 while those of other developed countries all fall below 0.35. In contrast, globalisation has worsened income inequity in many other economies to a lesser extent.

Evaluation

Point 1: Singapore is likely to have benefited more from globalisation than other economies. Although globalisation has caused some problems in Singapore, with the use of exchange rate policy, and to a lesser extent, expansionary fiscal policy and short-term supply-side policies, the government has managed the problems well. Furthermore, measures to reduce income inequity, such as transfer payments, progressive taxes, education and training, tightening restrictions on low-skilled foreign workers, have been put in place by the government. In addition, with education and training, structural unemployment will fall in the long run. When this happens, resources will be channelled from less productive uses where the economy has a comparative disadvantage to more productive uses where the economy has a comparative advantage.

Point 1: Due to the small domestic demand of the Singapore economy, the small size of domestic firms, lack of factor endowments and the small labour force, globalisation has benefited Singapore substantially. Coupled with an export-driven economic growth strategy, a loose foreign worker policy and FDI-friendly policies, globalisation has helped Singapore achieve a high rate of economic growth over the last few decades, propelling it to near the top of the world ranking of GDP per capita. According to the International Monetary Fund, Singapore now has the third highest GDP per capita in the world, behind Qatar and Luxembourg. Furthermore, in the absence of globalisation, economic growth in Singapore would have been substantially lower as consumption expenditure had not increased substantially due to the culture of thrift, the compulsory savings scheme and the absence of a generous welfare system.

A more elaborate answer to 2007 Essay Question 6 will be provided in the economics tuition class.

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