MACROECONOMIC OBJECTIVES IN SINGAPORE

Sustained Economic Growth

Economic growth
Economic growth means a rise in real Gross Domestic Product (GDP) per
capita. There are two concepts of economic growth: actual and potential
growth. Actual growth refers to the increase in real GDP. Potential growth
refers to the increase in the full employment level of national output. This
can occur when there is an increase in the productive capacity of the
economy due to an increase in quantity and quality of factors of production
as well as improvement in technology. Economic growth is important
because sit can raise the standard of living of the population. Ceteris paribus,
economic growth means that national income increases. This means that the
population has a greater ability to purchase goods and services and thus is
able to enjoy higher material well-being. Economic growth is also necessary
to improve income distribution. Singapore has been experiencing a widening
income gap in recent years. The government is actively giving out subsidies
and rebates to help the low-income group. In all its efforts to narrow this gap,
it needs more funds. Hence, when there is economic growth, there will be an
increase in tax revenue to be used for this purpose. In other words, economic
growth means that there is a bigger pie to be shared among the people.

Benefits
Increase in the standard of living
Economic growth can bring about a rise in living standards, provided that
economic growth exceeds the population growth. Real GDP per capital will
rise, resulting in a higher level of consumption of goods and services. This
translates into greater quantity and better quality of goods and services such
as better housing and more efficient public transport for the general
population.

Increase in employment and foreign direct

investment.
Growth brings about business confidence and raises employment. Through
higher investments, there will be more jobs created. In addition, a growing
economy signifies a stable economy. Hence, it will attract a greater inflow of
FDI and generate greater long-term growth.

Increase in tax revenue

MACROECONOMIC OBJECTIVES IN SINGAPORE

Growth can bring about more equitable income distribution. Economic

growth leads to rising national income, the government can hence
redistribute income from the upper income group to the lower income group
without the need to raise tax rates. In addition, economic growth causes
firms profit level to rise. Hence firms then pay more corporate tax, leading to
a positive effect on government finances. This boosts tax revenues and
provides the government with extra funds to spend on programmes to
alleviate poverty and close the income gap between the rich and the poor.
Costs
Widening income gap
Structural unemployment affects low-skilled workers, who are less well off.
Hence some Singaporeans may find that their skills are no longer relevant
and they may be forced to take up employment with lower pay. If the means
to higher growth are greater incentives (such as higher cuts in income tax),
then the rich may get richer and the poor receive little benefits. AS seen in
Singapore, it is getting increasingly difficult for the poor to get by on their
low salaries and the government has to step in to provide subsidies for their
basic necessities. However, many people believe that the government is not
doing enough for the poor as the focus seem to be on the main profitgenerating working population. An example of government failure in this
aspect is the elderly who are holding jobs as cleaners, not being able to
make ends meet. Instead, they rely on community organisations to aid them
in food provisions. While such organisations are funded by the government,
not all are. Hence, such organisations feel the heavy burden in having to fork
out even more money to sustain their operations.
Negative externalities
Rising incomes make it possible for more people to own cars but this can
lead to problems of pollution and traffic congestion. The most prevalent of
these problems are seen during peak periods such as during the morning
rush hour where cars can be at a complete standstill. Hence, the government
has to put in place various measures like ERP and COE in order to mitigate
car ownership and car usage.
Lower quality of life
The material standard of living may have improved but the quality of life can
deteriorate overall due to non-monetary factors. Singapore is highly stressful
environment to be in as workers always have to remain efficient or their
companies may let them go. Furthermore, since education is such an integral
part of doing well in the future, it has led to an increase in suicidal rates from

MACROECONOMIC OBJECTIVES IN SINGAPORE

children as some felt that they could not cope with the mounting pressure to
excel.
Increase in demand-pull inflation.
If there is a short-term economic growth, there may be higher price levels
due to a rising aggregate demand. The intensity of the use of resources as a
result of increasing aggregate demand leads to higher output and higher
general price level, where inflation rate rises. This may cause the economy
to overheat.
Deficit in balance in payment.
As aggregate demand keeps rising, national income rises and the level of
import expenditure rises due to the rise in consumer goods and/or imported
resources such as fuel, raw materials and capital goods for domestic
production, if export revenue does not rise sufficiently, the deficit in the
balance of trade may lead to a possible current account deficit. However, this
is not really a cause of concern for Singapore as the government has put in
place various policies to ensure that the economy rarely experiences deficits
in its balance of payment.
Suggested policies
Expansionary fiscal policy
Expansionary fiscal policies can be used to increase economic growth in
Singapore. Fiscal policy is a demand-side management policy that is used to
control government expenditure or taxation to influence aggregate demand.
If the Singapore government increases expenditure on goods and services,
decreases direct taxes or increases transfer payments, then the aggregate
demand in Singapore will rise, which will in turn lead to a multiple increase in
the national income due to the multiplier effect, resulting in higher economic
growth. Furthermore, if the increase in expenditure is made on education,
training or research and development and not from cuts in corporate taxes,
then Singapore aggregate supply (AS) will rise more rapidly. Assuming that
the aggregate demand is also rising, then a more rapid increase in aggregate
supply will also lead to a fast increase in national income, and hence higher
economic growth.
Exchange rate policy
Exchange rate policies can be used to increase economic growth in
Singapore. An exchange rate policy is used to control the exchange rate to
influence aggregate demand or aggregate supply. When the external
economic environment is weak, the Monetary Authority of Singapore (MAS)
can lower the policy band within which the Singapore dollar is allowed to

MACROECONOMIC OBJECTIVES IN SINGAPORE

fluctuate. It is also likely that the government will allow for some
depreciation in the face of an economic crisis instead of the usual
appreciation approach that Singapore usually takes. A weaker Singapore
dollar will make Singapores goods and services relatively cheaper in terms
of foreign currency as compared to foreign goods and services. Hence, this
will help increase the exports and lead to a rise in aggregate demand in
Singapore and a rise in the national income.
However, the Monetary Authority of Singapore cannot depreciate the
Singapore dollar drastically as it may lead to high imported inflation.
Supply side policies
Supply-side policies can also be used to increase economic growth in
Singapore. These are policies that are used to increase the production
capacity in the economy and hence aggregate supply. In addition to
government expenditure on education, retaining and research and
development, supply-side policies such as labour policies can actually be
implemented to increase the aggregate supply. This can lead to a rise in
economic growth in Singapore. Furthermore, Singapores government has
also reduced CPF contributions of workers to reduce labour cost and
implemented the workfare supplement schemes to help support rising wages
for firms. When the cost of production in Singapore falls, the aggregate
supply rises, and this leads to higher economic growth.
However, the effect of supply-side policies is realised only in the long run.
Furthermore, if the schemes implemented by the government to cut costs
actually allow for firms to earn even more profits, it may actually worsen the
income distribution.
Free trade agreements
The Singapore government can sign more free trade agreements (FTA) to
increase economic growth in Singapore. An FTA is a legally binding
agreement between two or more economies to remove or reduce barriers to
trade, such as tariffs, with the objective of increasing cross-border movement
of goods and services between the signatory economies. Some examples of
FTAs signed by Singapore are those with ASEAN and NAFTA. IF Singapore
signs more FTAs, exports and investment will rise and the resultant increase
in the aggregate demand will lead to a multiple increase in the national
income due to the multiplier effect. This will result in higher economic
growth. Furthermore, if Singapore signs more FTAs, it may actually help to
decrease the price of imported gods and hence the cost of production will
fall, leading to an increase in the aggregate supply. Hence this leads to
higher economic growth. In addition, the increase in investment expenditure

MACROECONOMIC OBJECTIVES IN SINGAPORE

will lead to a more rapid increase in aggregate supply and hence higher
economic growth in the long run.
However, it takes times to negotiate and prepare agreements and to sign
FTAs.
Conclusion
Due to the importance of Singapores export markets, trade policies and
supply-side policies are the most effective policies for increasing economic
growth in Singapore. Singapore should continue to sign more FTAs to expand
its trade links to maintain high economic growth. This should be
supplemented by supply-side policies to increase productive capacity in
Singapore. However, depending on the economic situation, the government
can also put in place exchange rate policies to cushion any negative impact.