Abstract:This paper attempts toexplore two closely related articles on the economy of Singapore. The firstarticle is titled “Singapore Eases Monetary Policy as Growth Sputters” andappeared on the The Wall Street Journal on 13 October 2015. Thesecond article is titled, “Singapore May Be in Recession, May WeakenCurrency, Economists Say” and appeared on the website of theInternational Business Times on the same date.
The paper will be approximatelydivided into two sections, with the first section summarising the key points ofthe article – an outline of the factors behind the economic struggle, anunderstanding of how Singapore moderates its monetary policy as well asSingapore’s response to this potential crisis. A brief discussion on thehistorical/economic background of Singapore will also be interwoven with thefirst section of the paper in order to provide context. In the second sectionof the paper, I carefully analyse and evaluate the two articles. An Analysis ofSingapore’s Sputtering GrowthWhen Singapore wasexpelled 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, andforward-thinking leader, the country not only survived but thrived. Unlikeother countries emerging from colonialism back then, Singapore embraced thefree-market model, attracted multinational corporations to invest in Singapore,and invested heavily in infrastructure, defence, education and healthcare.
Singaporesubsequently became one of the world’s most prosperous societies and a globalfinancial 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 avoidedslipping into a technical recession. The reasons for the sputtering growth wereattributed to China’s recent economic slowdown and a tight labour market. Theeconomy expanded 0.
1% on-quarter on a seasonally adjusted, annualised basisbetween the July to September period, after contracting by 2.5% between Apriland June this year. The results are troubling for a nation that frequentlyreports much stronger results. Some analysts, such as Vishnu Varathan, aneconomist with Mizuho Bank, have looked upon this worryingly. He has warnedthat the economic weakness is unlikely to be temporary and is likely to persistfor some time.
Undoubtedly,the economic slowdown in China has cast a dark shadow over Singapore. The slowdownhas been attributed to a slump in China’s imports, exports and industrialoutput due to a stagnation in demand. Singapore is not the only country in theregion to feel the brunt of China’s slowdown. Many countries in the Asia-Pacificregion have begun to feel the weight of China’s gloomy economy and have decidedto adjust their monetary policies.
For example, India and Taiwan, who are comprehensiveeconomic partners with China, have both eased their monetary policies tobolster growth in their respective countries. The dilemma in most Asian countriesis between the the need to provide stimulus to boost growth and to protecttheir currencies against the rising U.S. dollar.
Anotherfactor that has led to the less-than-stellar results in Singapore is atightening of the domestic labour market. While Singapore has achievedextraordinary growth in their GDP since independence, productivity has notimproved significantly over the last few years. In fact, according to thestatistics reported by the Singapore government, productivity dropped by 0.8%year-on-year for the whole of 2014. In addition, the cost of living inSingapore has skyrocketed too. Singapore now ranks as the most expensive cityin the world.
As a result, to compensate for the general increase in pricelevel, the average salary had to be raised as well. All of this has led toreduced spending by businesses and consumers, which has culminated in reducedeconomic activity and growth.Singaporeis unique, in that unlike other high-income countries, its central bank, theMonetary Authority of Singapore, manipulates its monetary policy via theexchange rate, rather than through interest rates. It pegs the Singapore dollaragainst a basket of currencies from its main trading partners and adjusts therange 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 theSingapore dollar to weaken.
The MAS announced, in its half-yearly monetarypolicy statement, that it would reduce the appreciation, but maintain a policyof modest and gradual appreciation of the Singapore dollar’s nominal effectiveexchange rate policy band. The response of the Singapore central bank did alignwith the prediction of most analysts.Ibelieve that, besides the monetary policy adjustments undertaken by theSingapore government, very little could have been done to minimisethe impact on Singapore’s economy due to China’s economic slowdown.
As acountry with no natural resource, Singapore has always remained heavilydependent upon international trade to keep its economy afloat. Statistics fromthe Singapore government show that the country’s total trade in 2014 amountedto about US$ 700 billion. Ever since Deng Xiaoping initiated market reforms inChina back in the 1970s, Singapore has maintained a deep and comprehensiverelationship with China. Many of Singapore’s imports are from China, whileChina continues to seek Singapore imports and investments. This makes China oneof Singapore’s largest trading partners, accounting for 15% of Singapore’stotal exports. Therefore, a stagnation in China’s imports/exports willundoubtedly affect the Singapore economy. As the world’s second largesteconomy, many of China’s regional partners now maintain China as one of theirlargest trading partners. Singapore, for example, has also invested heavily in planningand developing industrial parks in China.
Singapore, therefore, needs tomaintain and even deepen economic and trading links with China as she continuesto grow.Idisagree with the argument put forward by Vishnu Varathan, the economist withMizuho Bank, that the recession is unlikely to be temporary. In its economichistory, China has always undergone cycles of strong and weak economic growth. China, from the news reports that I’ve comeacross so far, is already looking at several ways of curbing stagnation bycutting interest rates and increasing government spending. It is also inChina’s best interest that its imports and exports rise. Despite its slowtransition from a production-driven to a more service-oriented economy, China’seconomy is still very much dependent on its ability to mass-produce and exportgoods.
China, is also known, for its increasing consumption of foreign goodssuch as European automobiles and American electronics. Consumer spending inChina, with the government stimulus, will eventually pick-up. I am confident,therefore, that the Chinese economy will quickly bounce back, and clear theclouds that currently loom over nations in the Asia-Pacific, like Singapore.Theother factor behind the weak growth, a decrease in labour productivity, is acause for concern however. From 1965, Singapore’s GDP and its GDP per capitahave skyrocketed. However, for the past few years, the Singapore government hasmaintained this growth by liberalising immigration policies by welcoming moreforeign, particularly white-collar workers, to its shores. Singapore is anation with an area of approximately 700 square kilometres, and therefore thereis a limit as to how many peoplecan live on this island. The government has recognised thisproblem, and has decided to diversify its economy into new and emerging sectorssuch as biotechnology and nanotechnology.
The government has also launched anambitious plan to transform Singapore into a start-up and innovation hub. Theseare all steps in the positive direction, as they will undoubtedly boostproductivity, which will increase economic output, and create valuerespectively. This is a challenging task however. In a country that hasunknowingly fostered a risk-averse culture and in which talented Singaporeansare drawn to bureaucratic jobs for their stability and lucrativeness, it is nosurprise that very few Singaporeans resort to entrepreneurship. The country isdesperately encouraging the young to do – to become job creators, rather thanjust job seekers, and the effort, however, does seem to be gradually yieldingresults. More and more Singaporeans are taking risks by launching newbusinesses and organisations, aided by the government’s strong support throughfinancial assistance, excellent infrastructure, the ease in launching abusiness, and low corporate taxes. Singapore has already achieved considerablesuccess in building up a reputable biotechnology sector. A report commissionedby the UK Trade and Investment listed that the Singapore biotech industry islikely to grow its output to approximately US$ 19 billion.
Only time can bell if it can achieve the same successwith transforming the country to become the “Silicon Valley of Asia.”Inthe face of the weak growth, Singapore has responded perfectly. As a countrythat imports and exports significantly,it cannot allow its currency, the Singapore dollar, to fluctuate too wildly. Ifthe currency weakens too significantly to boost exports, the cost of importswill rise up. This will pose a problem to the economy as Singapore is heavilydependent upon certain imports such as food and raw materials. Therefore, theMAS’ policy of lowering the appreciation of the dollar but allowing a sustainedand gradual increase over time will allow Singapore to weather through thiscrisis 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 iscertainly the case, I believe, that the low productivity and the challenges inmaking Singapore’s economy more innovative and dynamic for the future is agreater 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 1997Asian Financial Crisis. The weak growth, I believe, will be temporary andshould subside once the Chinese economy picks up.