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Economic Crises
The Global Economic Crisis of 2008/2009
During this period the global economy experienced many hits in terms of a
series of events. There was an oil conflict that resulted from political reasons.
It sparked off the destruction of some oil manufacturing plants. This affected
the worldwide economy as most economies are reliant on oil or oil-related
products. There was a fall in consumer confidence after the 9/11 terrorist
attacks on the US that shocked the American economy. Shortly after, there
was the subprime mortgage crisis, which resulted in people defaulting on
their bank loans, which caused the closure of many banks.
Cost-push Inflation
Oil is an important factor input for production. In Singapores case, rising
global oil prices has a significant impact n its economy due to it being an oilrefining centre. The higher cost of oil implies a higher cost of production,
which affects the revenue earned. Higher oil prices also increase overall
costs of production, leading to cost-push inflation in Singapore. This is shown
by the shift of the aggregate supply curve to the left. As a result the general
price level rises. This increase may result in an inflationary spiral to develop,
which further increases prices. An inflationary spiral occurs as the increase in
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cost of production, due to the rising oil prices, leads to a rise in the price of
goods and services. AS a result, trade unionists demand for higher wages,
driving up costs of production again. This chain effect further drives up the
general price level, leading to a high inflation rate.
Fall in consumption
Consumption may fall as consumers become more cautious about the
adverse economic outlook, which is likely to increase the chances of
retrenchment and unemployment. Hence consumers may instead increase
precautionary savings.
Fall in investment
Investment falls, as with lower expected profitability from higher oil prices
and firms invest less. Investment also falls as investors avoid making longterm deals in the face of uncertainty in price and cost.
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Evaluation
However, the extent of the above economic problems faced by the Singapore
economy depends on the extent of the oil price increase. If this is
substantial, the impact can be great. Since Singapore is an open economy
that is heavily dependent on imported oil, it is likely that with higher oil
prices can have a large impact on the economy. The only consolation is that
with globalisation and the competition from emerging countries such as
China and India, producers are more subdued in wanting to pass on the
higher costs to consumers. Instead, they may mitigate this by being more
efficient in their usage of oil, even switching to alternative energy sources.
Suggested Policies
Fiscal policy (subsidies)
In the face of the above problems of cost-push inflation and a slowdown in
growth, the government can use fiscal policies to overcome them. Fiscal
policy refers to a deliberate attempt by the government to adjust
macroeconomic variables by adjusting government expenditure and revenue
to help lower costs of production. The government can use fiscal spending to
subsidise oil importers on the condition that they do not pass on higher
energy costs to the rest of the economy and consumers. Limitations
This benefits oil consumers in the short run. Moreover, the Singapore
government has the means to subsidise because it has accumulated
substantial fiscal reserves over many years. However, in the long run, the
appropriateness and sustainability of continuing to use taxpayers money to
compensate a few oil-importing firms becomes questionable.
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increasing AD via the multiplier effect in the short run as well as the increase
in the long-run aggregate supply (LRAS) in the long run.
While the fiscal policy does bring about improvement in economic growth
and cyclical unemployment, the nature of the monetary injection could be
restricted to the construction sector. AS the source of crisis comes from the
financial sector, mismatch in skills between the retrenched from financial
sector and construction sector may mean that the problem of cyclical
unemployment may not be resolved.
Limitation: A fiscal policy may not be the most appropriate in managing most
harmful effects of the recent global financial crisis in Singapore. Other
policies must be implemented to work hand-in-hand with it to achieve the
objective of resolving the harmful effects of the recent global financial crisis
in Singapore.
Exchange-rate Policy
Singapore has always relied on its exchange-rate policy to fight imported
inflation as it has very few monetary tool to work with. Allowing the SGD to
undergo modest and gradual appreciation helps to cushion the impact of
higher energy import prices to some extent. By allowing the SGD to
appreciate gradually, imports become cheaper in terms of the local currency
and this helps to negate the higher prices of oil in terms of US dollar.
However, it can be costly on Singapores foreign reserves if the government
is required to intervene in the foreign exchange market often to buy
Singapore dollars in order to assist the currency to appreciate. Hence it is
important the fundamentals of the Singapore economy are strong so that
market forces can increase the exchange rate without much government
intervention to buy SGD all the time. While a stronger exchange rate seems
to be able to ward off imported inflation, one also has to be mindful of its
adverse effects on exports as a higher exchange rate makes prices of
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Supply-side Policies
Hence, to solve cost-push inflation and the slowdown of the economy due to
higher oil prices, it is more appropriate to use supply-side policies.
Government funding on education and training and greater expenditure on
research and development can increase the productivity of workers.
Government funding on infrastructural development to raise Singapores
long-run productive capacity .This increase in aggregate supply, ceteris
paribus, lowers the cost of production and hence increases Singapores
export competitiveness in the long run. Such policies can directly increase
efficiency and productivity, resulting in a reduction of cost of production and
hence attacking the root cause of inflation. One supply-side policy that has
been used in Singapore is the reduction of costs by reducing the CPF
contribution rates by the employers. Others include reduction in rental and
port charges.
Job Credit Scheme: To sustain jobs for Singaporeans, the government
introduced the Jobs Credit Scheme, which encourages businesses to preserve
jobs in a downturn. This is a temporary scheme to help companies through
an exceptional downturn. Details of the scheme are as follows:
1. Employers receive a 12% cash grant on the first $2500 of each
months wages for each employee on their CPF payroll.
2. The Jobs Credit Scheme lasts for one year, and employers receive the
jobs credit in four payment: March, June, September and December
2009. For each payment, employers receive jobs credits on the
employees in the previous quarter becomes the qualifying wages used
to calculate the 12% cash credit that employers would receive.
3. For the first payment received at the end of March 2009, businesses
would receive jobs credit on the employees that were on their payrolls
in January 2009. The wages paid to these employees in October to
December 2008 were the qualifying wages used to calculate the 12%
cash credit that employers received.
4. Anchoring on the AD/AS framework, this would result in a rightward
shift of the SRAS due to a fall in unit Cop, given the wage subsidy. Jobs
can be preserved as during the downturn and cyclical unemployment
can be resolved. This is an appropriate policy targeted at resolving
cyclical unemployment. Ass compared to one that provides a cash
subsidy of the firm to tide over a difficult time, this specifically
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Trade Policy
To help the growth of the Singapore economy in the midst of rising oil prices,
the government can also use trade policies. Free trade agreements can help
Singapore negotiate for the removal or reduction in tariffs and other forms of
protectionist measures imposed by other countries and help make
Singapores exports more competitive and better able to penetrate foreign
markets. Removing the obstacles for foreign investment would also help to
encourage more capital inflow into countries. In addition, trade fairs can be
enhanced to increase the size of Singapores export market. However, local
industries must also be ready for foreign competition, as foreign goods and
investment can also flood the local markets and squeeze out inefficient firms.
Conclusion
Combination of policies
In conclusion, fiscal policies by themselves are not the best policies to fight
economic problems that arise in Singapore due to higher oil prices. A
combination of policies is needed to aggress the root cause of such
problems.
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was to reduce the budget deficit. The fall in government expenditure came
from a reduction of the public-sector pay. This caused a severe knock-on
effect, as unemployment rose and caused the crisis to not only affect Greece
but also other European nations. While the short-term goal of the austerity
were meant to improve the economy, it also caused as series of economic
problems for the Eurozone. The increase in corporate tax rates decreases the
after-tax profits of firms and hence investments decreased. An increase in
personal income tax caused a fall in disposable income, leading to a fall in
consumption. A fall in government expenditure, investment and consumption
had the direct impact of causing a fall in aggregate demand, and hence
economic growth, output and employment fell by a multiple due to the
reverse multiplier. With globalisation, the economies around the world had
been integrated through trade, capital flows and international movement of
labour.
Conclusion
The extent of fall in export is unlikely to be significant if there is relatively
less exposure to the EU economies. A fall in exports from the EU may be
offset by a rise in exports demanded from other economies. Since Singapore
is a very open economy, the more vulnerable the country is to fall in external
demand, since exports takes up a large percentage of its AD. Even with the
governments deliberate attempt to increase the components in Singapores
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