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Abstract:

This paper attempts to
explore two closely related articles on the economy of Singapore. The first
article is titled “Singapore Eases Monetary Policy as Growth Sputters” and
appeared on the The Wall Street Journal on 13 October 2015. The
second article is titled, “Singapore May Be in Recession, May Weaken
Currency, Economists Say” and appeared on the website of the
International Business Times on the same date. The paper will be approximately
divided into two sections, with the first section summarising the key points of
the article – an outline of the factors behind the economic struggle, an
understanding of how Singapore moderates its monetary policy as well as
Singapore’s response to this potential crisis. A brief discussion on the
historical/economic background of Singapore will also be interwoven with the
first section of the paper in order to provide context. In the second section
of the paper, I carefully analyse and evaluate the two articles.

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                                                                                      An Analysis of
Singapore’s Sputtering Growth

When Singapore was
expelled from the Federation of Malaysia in 1965, few thought it could survive.
Albert Winsemius, a Dutch economist, gloomily called it “a dark little corner in Asia”.
However, under Lee Kuan Yew, the country’s pragmatic, no-nonsense, and
forward-thinking leader, the country not only survived but thrived. Unlike
other countries emerging from colonialism back then, Singapore embraced the
free-market model, attracted multinational corporations to invest in Singapore,
and invested heavily in infrastructure, defence, education and healthcare. Singapore
subsequently became one of the world’s most prosperous societies and a global
financial and trading hub.

Recently, however,
Singapore has experienced an unprecedented period of weak economic growth.
Between July and September this year, the island city-state narrowly avoided
slipping into a technical recession. The reasons for the sputtering growth were
attributed to China’s recent economic slowdown and a tight labour market. The
economy expanded 0.1% on-quarter on a seasonally adjusted, annualised basis
between the July to September period, after contracting by 2.5% between April
and June this year. The results are troubling for a nation that frequently
reports much stronger results. Some analysts, such as Vishnu Varathan, an
economist with Mizuho Bank, have looked upon this worryingly. He has warned
that the economic weakness is unlikely to be temporary and is likely to persist
for some time.

Undoubtedly,
the economic slowdown in China has cast a dark shadow over Singapore. The slowdown
has been attributed to a slump in China’s imports, exports and industrial
output due to a stagnation in demand. Singapore is not the only country in the
region to feel the brunt of China’s slowdown. Many countries in the Asia-Pacific
region have begun to feel the weight of China’s gloomy economy and have decided
to adjust their monetary policies. For example, India and Taiwan, who are comprehensive
economic partners with China, have both eased their monetary policies to
bolster growth in their respective countries. The dilemma in most Asian countries
is between the the need to provide stimulus to boost growth and to protect
their currencies against the rising U.S. dollar.

Another
factor that has led to the less-than-stellar results in Singapore is a
tightening of the domestic labour market. While Singapore has achieved
extraordinary growth in their GDP since independence, productivity has not
improved significantly over the last few years. In fact, according to the
statistics reported by the Singapore government, productivity dropped by 0.8%
year-on-year for the whole of 2014. In addition, the cost of living in
Singapore has skyrocketed too. Singapore now ranks as the most expensive city
in the world. As a result, to compensate for the general increase in price
level, the average salary had to be raised as well. All of this has led to
reduced spending by businesses and consumers, which has culminated in reduced
economic activity and growth.

Singapore
is unique, in that unlike other high-income countries, its central bank, the
Monetary Authority of Singapore, manipulates its monetary policy via the
exchange rate, rather than through interest rates. It pegs the Singapore dollar
against a basket of currencies from its main trading partners and adjusts the
range at which the Singapore dollar trades with other currencies. Earlier this year,
in an attempt to boost exports, the MAS adjusted the rate to allow the
Singapore dollar to weaken. The MAS announced, in its half-yearly monetary
policy statement, that it would reduce the appreciation, but maintain a policy
of modest and gradual appreciation of the Singapore dollar’s nominal effective
exchange rate policy band. The response of the Singapore central bank did align
with the prediction of most analysts.

I
believe that, besides the monetary policy adjustments undertaken by the
Singapore government, very little could have been done to minimise
the impact on Singapore’s economy due to China’s economic slowdown. As a
country with no natural resource, Singapore has always remained heavily
dependent upon international trade to keep its economy afloat. Statistics from
the Singapore government show that the country’s total trade in 2014 amounted
to about US$ 700 billion. Ever since Deng Xiaoping initiated market reforms in
China back in the 1970s, Singapore has maintained a deep and comprehensive
relationship with China. Many of Singapore’s imports are from China, while
China continues to seek Singapore imports and investments. This makes China one
of Singapore’s largest trading partners, accounting for 15% of Singapore’s
total exports. Therefore, a stagnation in China’s imports/exports will
undoubtedly affect the Singapore economy. As the world’s second largest
economy, many of China’s regional partners now maintain China as one of their
largest trading partners. Singapore, for example, has also invested heavily in planning
and developing industrial parks in China. Singapore, therefore, needs to
maintain and even deepen economic and trading links with China as she continues
to grow.

I
disagree with the argument put forward by Vishnu Varathan, the economist with
Mizuho Bank, that the recession is unlikely to be temporary. In its economic
history, China has always undergone cycles of strong and weak economic growth.  China, from the news reports that I’ve come
across so far, is already looking at several ways of curbing stagnation by
cutting interest rates and increasing government spending. It is also in
China’s best interest that its imports and exports rise. Despite its slow
transition from a production-driven to a more service-oriented economy, China’s
economy is still very much dependent on its ability to mass-produce and export
goods. China, is also known, for its increasing consumption of foreign goods
such as European automobiles and American electronics. Consumer spending in
China, with the government stimulus, will eventually pick-up. I am confident,
therefore, that the Chinese economy will quickly bounce back, and clear the
clouds that currently loom over nations in the Asia-Pacific, like Singapore.

The
other factor behind the weak growth, a decrease in labour productivity, is a
cause for concern however. From 1965, Singapore’s GDP and its GDP per capita
have skyrocketed. However, for the past few years, the Singapore government has
maintained this growth by liberalising immigration policies by welcoming more
foreign, particularly white-collar workers, to its shores. Singapore is a
nation with an area of approximately 700 square kilometres, and therefore there
is a limit as to how many people
can live on this island. The government has recognised this
problem, and has decided to diversify its economy into new and emerging sectors
such as biotechnology and nanotechnology. The government has also launched an
ambitious plan to transform Singapore into a start-up and innovation hub. These
are all steps in the positive direction, as they will undoubtedly boost
productivity, which will increase economic output, and create value
respectively. This is a challenging task however. In a country that has
unknowingly fostered a risk-averse culture and in which talented Singaporeans
are drawn to bureaucratic jobs for their stability and lucrativeness, it is no
surprise that very few Singaporeans resort to entrepreneurship. The country is
desperately encouraging the young to do – to become job creators, rather than
just job seekers, and the effort, however, does seem to be gradually yielding
results. More and more Singaporeans are taking risks by launching new
businesses and organisations, aided by the government’s strong support through
financial assistance, excellent infrastructure, the ease in launching a
business, and low corporate taxes. Singapore has already achieved considerable
success in building up a reputable biotechnology sector. A report commissioned
by the UK Trade and Investment listed that the Singapore biotech industry is
likely to grow its output to approximately US$ 19 billion.  Only time can bell if it can achieve the same success
with transforming the country to become the “Silicon Valley of Asia.”

In
the face of the weak growth, Singapore has responded perfectly. As a country
that imports and exports significantly,
it cannot allow its currency, the Singapore dollar, to fluctuate too wildly. If
the currency weakens too significantly to boost exports, the cost of imports
will rise up. This will pose a problem to the economy as Singapore is heavily
dependent upon certain imports such as food and raw materials. Therefore, the
MAS’ policy of lowering the appreciation of the dollar but allowing a sustained
and gradual increase over time will allow Singapore to weather through this
crisis much better.

Overall,
both the articles effectively describe the weak growth in Singapore. They,
however, stress on the impact of China’s slowdown on Singapore. While that is
certainly the case, I believe, that the low productivity and the challenges in
making Singapore’s economy more innovative and dynamic for the future is a
greater cause for concern. China will eventually pick up, and so will Singapore.
Singapore, has been able to weather through crises far worse, such as the 1997
Asian Financial Crisis. The weak growth, I believe, will be temporary and
should subside once the Chinese economy picks up.

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