Economics Model Essay 17

Discuss the policies that the Singapore government should use to achieve a high standard of living. [25]

Introduction

The standard of living refers to the material and non-material welfare of the people. There are several policies that the Singapore government should use to achieve a high standard of living which include trade policy, supply-side policies, the Workfare Income Supplement Scheme, the Workfare Training Support Scheme, direct provision of national defence and a quota system for cars.

Body

To achieve a high standard of living, the Singapore government should achieve sustained high economic growth. A rapid increase in national output for a long period of time will lead to a large amount of goods and services available to the average person for consumption which will lead to a high material standard of living. Sustained high economic growth requires high actual economic growth and high potential economic growth. The Singapore government can use trade policy to achieve high actual economic growth. A free trade agreement (FTA) is an agreement between two or more economies to remove or reduce barriers to trade with the objective of increasing the cross-border movement of goods and services between the economies. Aggregate demand is the total demand for the goods and services produced in the economy over a period of time and is comprised of consumption expenditure, investment expenditure, government expenditure on goods and services and net exports. When tariffs on Singapore’s goods are removed or reduced in the FTA member countries, firms in the FTA member countries that import and sell Singapore’s goods will experience a fall in their costs of production which will induce them to decrease prices to maintain competitiveness. When this happens, Singapore’s goods will become cheaper in the FTA member countries. Therefore, signing more FTAs in Singapore will lead to an increase in exports which will lead to an increase in aggregate demand. For example, the USSFTA which came into effect in 2004 led to an increase in Singapore’s exports. Furthermore, firms in non-FTA member countries that export goods to the FTA member countries and want to circumvent the tariffs will invest in Singapore. By setting up production facilities in Singapore, the goods that they produce in Singapore and export to the FTA member countries, which will be subject to lower or no tariffs, will be cheaper than those that they produce in non-FTA member countries and export to the FTA member countries, and this will lead to an increase in their sales and hence their profits. Therefore, signing more FTAs in Singapore will lead to an increase in foreign direct investments which will lead to an increase in aggregate demand. For example, apart from an increase in exports, the USSFTA also led to an increase in foreign direct investments in Singapore. An increase in exports and investment expenditure will lead to an increase in aggregate demand which will induce 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. Furthermore, due to the multiplier effect, the initial increase in aggregate demand due to the increase in exports and investment expenditure will lead to a larger increase in national output and hence national income. However, it takes a long time to negotiate FTAs with the potential partners. For example, the USSFTA was only concluded in May 2003, about two and a half years after negotiations began in November 2000. The Singapore government can use supply-side policies to achieve high potential economic growth. Aggregate supply is the total supply of goods and services in the economy over a period of time and is determined by the production capacity and the cost of production in the economy. Supply-side policies are policies that are used to increase the production capacity in the economy and hence aggregate supply. For example, education and training will lead to greater human capital which will increase the skills and knowledge of labour in the economy. The government can provide education and training directly, by setting up educational institutes, or indirectly, by giving subsidies or tax incentives to firms to encourage them to send their workers for education and training. Research and development will lead to technological advancement which will increase the efficiency of capital in the economy. The government can engage in research and development directly, by setting up research institutes, or indirectly, by giving subsidies or tax incentives to firms to encourage them to engage in research and development. To achieve high potential economic growth, the Singapore government can use supply-side policies to increase aggregate supply and hence potential output. For example, it has set up the Institute of Technical Education, polytechnics and Continuing Education and Training campuses to provide education and training. It has also set up the Biomedical Research Council (BMRC) and the Science and Engineering Research Council (SERC) under the Agency for Science, Technology and Research (A*STAR) to engage in research and development. However, the effects of supply-side policies will be realised only in the long run and this long effectiveness time lag makes them ineffective in the short run. For example, it takes time for education and training to increase the skills and knowledge of labour in the economy.

To achieve a high standard of living, apart from achieving sustained high economic growth, the Singapore government should also ensure that the increase in national income is not concentrated in the hands of high income individuals. If the increase in national income resulting from sustained high economic growth is concentrated in the hands of high income individuals, although the high income minority will enjoy a high standard of living, the low income majority may suffer from a low standard of living. The Singapore government can use transfer payments and education and training to reduce income inequity. Transfer payments are payments made by the government to the recipients not in exchange for any goods or services. The Singapore government can provide transfer payments to low income individuals to supplement their income to reduce income inequity. For example, under the Workfare Income Supplement (WIS) Scheme, the Singapore government will supplement the wages of older low-wage workers who are 35 years of age and above and who earn $2000 and below a month, provided they meet certain eligibility criteria. These workers will receive a monthly payout from the Singapore government of up to $3600 per year, depending on their age and income, 40 per cent in cash and 60 per cent in Central Provident Fund contribution. However, transfer payment schemes put a strain on the government budget which may compel the government to decrease expenditure on other important areas such as education and infrastructure to avoid a budget deficit and this may result in adverse consequences for the economy in the long run. Furthermore, transfer payment schemes may decrease the incentive for low income individuals to upgrade their skills which will negatively affect the growth of labour productivity in the economy. The Singapore government can provide education and training to low-skilled workers to increase their income earning power to reduce income inequity. An increase in the skills and knowledge of low-skilled workers will lead to an increase in their productivity. When the productivity of low-skilled workers rises, firms that employ these workers will experience a fall in their costs of production. When this happens, they will be able to increase the wages of the workers which will lead to a decrease in income inequity. For example, under the Workfare Training Support (WTS) Scheme, the Singapore government will subsidise older low-wage workers 95 per cent of the course fees for approved training courses. This means that older low-wage workers, or their employers, will need to pay only 5 per cent of the course fees for approved training courses which will increase the incentive for them to engage in skills upgrading. However, low-skilled workers are generally less willing and able to expend effort on education and training and hence such a training funding scheme may not reduce income inequity significantly. Furthermore, education and training will increase the skills and knowledge of workers only in the long run and this long effectiveness time lag makes it ineffective for reducing income inequity in the short run.

To achieve a high standard of living, apart from a high material standard of living, the Singapore government should also achieve a high non-material standard of living. The demand for private cars is high in Singapore due to the high level of income. According to the International Monetary Fund, Singapore has the third highest GDP per capita in the world, behind Qatar and Luxembourg. However, there is a small of road space in Singapore due to the small size of the country. The land area of Singapore is only about 720 square kilometres. In the absence of government measures to control the number of cars, a high demand for private cars coupled with a small amount of road space is likely to lead to severe traffic congestion in the country. If this happens, the people in Singapore may need to spend a lot of time commuting which may lead to little time for leisure resulting in a low non-material standard of living. Therefore, the Singapore government should control the number of cars by implementing measures such as a quota system to avoid severe traffic congestion. For example, it has implemented the Certificate of Entitlement (COE) system to restrict the number of cars. However, implementing a quota system for cars will lead to a rise in the price which may induce motorists to drive more frequently to justify the higher cost of car ownership. If this happens, the fall in the number of cars may not lead to a significant fall in the number of car journeys.

Evalutaion

In the final analysis, the policies used by the Singapore government to achieve a high standard of living have been effective. 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. Therefore, an export-driven economic growth strategy is more effective for achieving a high standard of living. Over the last few decades, the Singapore government has indeed been pursuing an export-driven economic growth strategy mainly with the use of trade policy and exchange rate policy in the form of undervaluation. Coupled with the use of supply-side policies, this has helped Singapore achieve a high rate of economic growth, 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. Although 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, the measures used by the government to deal with the effects have been effective to a large extent. For example, the home ownership rate in Singapore is over 90 per cent, the literacy rate among residents aged 15 years and over is over 96 per cent and the life expectancy at birth is over 82 years. These statistics on home ownership, literacy rate and life expectancy in Singapore are among the highest in the world which indicate that people in Singapore generally are able to afford necessities such as housing, education and healthcare, despite the high Gini coefficient.

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