Describe the Advanced Microeconomics For Transformative National Development.
Singapore celebrated half a century of independence following the decades of hard work, innovation and strong policy direction that have lead to transformative national development. For several years, every higher productivity bought prosperity and growth which took the island state economy from the third world to the first world. Nevertheless the economy is maturing and this is slowing down. The question arises now is that what measures can Singapore adopt to revive the growth in productivity (Taussig, 2013). Furthermore, how could Singapore stay ahead of the economic curve and what measures should Singapore undertake to re-invent itself in prime position to be placed within the world fastest growing economy? The current study is surrounded with the issue of productivity and restructuring. The key measures and policy direction in the study is directed towards the outlook of the Singapore economy.
Productivity growth continued to languish:
Singapore in the year 2010 launched a program of ten year economic reformation however on the passing of halfway point of the economic reformation process the productivity growth is languishing. In the year 2014, the productivity growth has fallen by 0.8% which implies that the average productivity growth represented a negative -0.5% per annum ever since the reformation began in 2010 (Frank et al., 2015). This is well below the government target of 2-3% annually and was lower than 1.4% annual growth averaged between 2000-2009. It is argued that the headline productivity growth may not be considered as the best reflector of productivity gains in the near term.
Since productivity is widely defined as the GDP per worker, the small and open feature of Singapore economy implies that the productivity is largely a function of the global business cycle particularly in the short term (Bernanke et al., 2015). The efficiency gains is mainly distinguished by the short run swings in GDP. In particular gains get distinguished by the short run swings in GDP.
Real median income growth which the Economic Strategies Committee targets to raise by 30 percent over the span of ten years might be a better measure of reformation success. The real median income increased by 3.2 percent annually from 2011 to 2014 and with the help of this measure reformation seems to be on track.
Nonetheless, the productivity growth figure that is obtained represents a dismal scenario leading to concern that progress on productivity has been relatively slows (Frank, 2014). The panel of adjudicators is yet out on whether reformation is working however the pain felt by the Singapore firms because of the tightening in overseas manpower policies suggest that a review will be required.
The findings from the above stated figure states that from 2009 to 2014 the labour productivity of Singapore increased by 2.6 percent annually on average that reverses the declines of 1.0 percent annually in the previous five years. As shown in the above figure the productivity growth was supported by the higher productivity growth within the sectors which was dampen by the rise in employment shares from the less productive sectors relative to additional productivity sector.
Productivity improvements in the different sector have contributed 3.1 percent points on the overall productivity growth each year on the average period (Case et al., 2014). This is considered as the improvement from the last 5 year period which is still lower in comparison to the previous 5 year period. An increase in the share of employment of less productive sectors has reduced the overall growth in productivity by a 0.2 percentage points each year in average during the last five years. However in the earliest five year period it was the reversal of the trend with a positive increase of +0.7 percentage points every year.
An additional examination of the trends within the period of latest five year period ranging from 2009-2010 it revealed that the positive effect was largely due to the boost in the productivity in 2010 on the back of the economic recovery from the global financial crisis. The within effect ever since 2010 was less positive with an increase of +1 percentage in each year (Stiglitz et al., 2013). Even though the static shift effect remained negative it continued to create weight on the productivity growth.
From 2009 and 2014 Singapore experienced higher amount of the labour productivity growth in comparison to the previous period of 2004 to 2009. The overall productivity growth in the productivity was largely supported by the productivity growth in numerous sector within the export-oriented sectors experiencing higher productivity growth than the domestically oriented sectors (Patel et al., 2014). Though, the overall productivity growth was dampened due to the shift in the share of employment towards the sectors that are less productive namely construction sector.
The aggressive quest of the global city vision has transformed not only the physical outlook of the city but also the business environment and the structure of production. Due to such kind of changes the composition of the labour force has been significantly altered both in terms of the domestic-overseas mix and the mix of workers both in the old and the new industries. The policy of open door labour policy has introduced a variety of high skill workers, high wage overseas workers it has also resulted in high arrival of low skilled, low-skilled overseas workers (Rios et al., 2013). Influx of high skilled workers could result in high expansion of economy’s range of skill sets and increase its productivity level but with low skill workers it may substantially offset the positive effects of productivity. Indeed with the easy availability of the low wage overseas workers, companies in Singapore may not find incentives to upgrade the technology and structures of production or making investment in training or upgrading skills of their workers.
The overall effect on productivity growth is not considered to be encouraging. From the period of 2010 to 2011, the GDP of the Singapore economy increased on the average by 5.93% per year. However, the total factor productivity grew by only 1.80% annually on average basis. In recent years, the total factor productivity actually declined. Similarly, the labour productivity averaged a growth of only 0.57% per year from 2006 to 2011 with a decline effect in 2001, 2008 and 2009.
Aggregate expenditure model:
The relationship between the aggregate expenditure and real GDP is regarded as the simple but it is great importance. Consumer expenditure on also forms the largest element of aggregate spending for accounts that amounts to two-thirds of the total. Consumptions comparatively remain dependent on the household income. Nevertheless, at any level of income the willingness to consume is reliant on several factors which comprises of household wealth, rate of interest and consumer expectations.
The Singapore banks are also facing trouble due to the increasing loans of real estate which resulted in fall of the real estate market (Sunley, 2017). The drop in the consumption has resulted in fall of the aggregate demand which triggered Singapore fall in productivity from 2010-14.
Evolution of the service sector:
The service sector of Singapore has been traditionally dominant in the economy. In the yearly years of 1960, the service sector comprised of 70% of the total output in real terms and 80% in nominal terms. Similarly, the manufacturing sector witnessed a steady increase in the share of its total output (Bober, 2016). During 1960 and 1970 there was a period of rapid industrialisation in Singapore as manufacturing sector was aggressively promoted.
Trends estimates represents that after falling out in late 1970 to the early years of 1980, the service sector reflected a steady upwards trend in the share of output both in terms of real and nominal. In contrast to this, the manufacturing sector has experienced a decline in its share of output (Van, 2016). Particularly the share of nominal output terms has declined sharply from 1990 whereas Singapore share of real output has been moderated by a smaller extent. The rapid fall in nominal terms reflected falling price of the manufacturing goods.
The falling share of manufacturing output is relative to the services that have been underpinned by the slower rate of growth in the manufacturing sector. Trends estimates represents that since the late 1970 growth of the services sector has on average exceeded manufacturing growth by around half a percent.
The slower growth of manufacturing sectors has also been highlighted in the declining share of employment. The manufacturing sector employment declined from 30% to 23% during 1996. On the other hand, the share of employment in service sector increased from 61% to 70% over the same period. The growth of employment in the service sector aggregated around 3.6% between 1980-86 and rose to 1.9%, which is almost twice in the manufacturing sector. The foreign direct investment and business services sector alone have averaged higher than those going into the manufacturing sector which has widened the gap of productivity over the years (Buera & Shin, 2016).
Several studies have dedicated their explanation on shift in employment to the service sector. Shift in employment may have significant implications for productivity, output and growth of income in the economy. The most common explanation for shift in the share of employment was due to the increase in the demand for service which is proxied by real share of service is income elastic. The demand for service in the economy of Singapore was regressed on the real income and regular price of services was derived by using the national GDP deflator (Woon & Loo, 2016). The result represented that the income elasticity of demand was considerably lower than unity as an increase of 1% in income it leads to 0.6% increase in demand for service.
Aggregate demand and supply:
Taking into the considerations the aggregate demand and the aggregate supply model of economy of Singapore is assumed to be at full employment. If the income tax rate is increased in Singapore then the level of unemployment will increase. With higher instance of income taxes workers would be receiving less pay check. Consequently workers will be spending less and this will lead to fall in consumption in Singapore economy and investment with decreasing GDP Singapore (Tanna et al., 2017). Due to such decrease in GDP it will result in shift in aggregate demand curve to the left side. At new equilibrium point will be created with lower economic level and lower employment rate.
The productivity growth in services has generally not lagged the manufacturing sector until recently. Ranging from 1980-90, productivity growth in services aggregated 5.2% was marginally higher than in the manufacturing sector of 5.1%. This got reversed in 1990 as the productivity growth in the manufacturing sector comprised of 6.6% with significantly higher than the service sector of 3.4%. However, as evident from the trend estimates, the slowing of growth in productivity was attributable to the rapid decline in productivity growth and the plateuing of the commercial sector after a steady increase during the 1980.
Singapore’s Money Market:
In Singapore money market is usually used for investing a short term fixed income instruments. These typically take around 3 to 6 months to entirely mature and might include corporate bonds, government bonds, commercial bills and deposits with the financial instructions. The Singapore money market could not be considered fixed deposit accounts and can be used for commercial bills, corporate bonds and government bonds. Investors yet stand the chance to gain even higher interest of earnings if they had simply placed their money in the fixed deposit accounts or worse saving account (Chua, 2017). Singapore money market trading is characterised as the money that is spread over several different institutions and money instruments.
Government policy to improve productivity:
As the process of restructuring moves towards the halfway mark it is noteworthy to consider the old problems. There are two wide areas which could be enhanced, primarily more accurate and relevant productivity reflectors would be useful and secondly a shifting the focus of the policy towards the top-line growth.
Industry-Specific efficiency indices:
Having a highly accurate measurement of productivity would enable the policy makers to implement more targeted initiative to increase it (Farhadi et al., 2015). Besides headlining productivity growth and real median income growth one way would be implement a set of micro-based industry specific productivity indices. A wide range of indicators can be put into use to develop an industry specific composite productive index. For instance, the government can make the use of square metre per man-day can be implemented to measure the pace of construction in that sector. For food and beverage, table turnover rates can be used for better efficiency indicators (Anderson & Strutt, 2014). Each industry must have their own set of micro-economic indicators. This could be indexed and averaged to attain an economic wide efficiency measure. Policy makers will then be able to better measure the progress made and might appear arrive with better ways of improving the productivity.
Focusing on top line instead of input cost:
Wide range of measures such as increasing the levis of the foreign workers would no longer be required. Instead, probable reductions in levies might be considered at some point, but the productivity and Innovation Credit (PIC) scheme will expire in 2018. More significantly, greater emphasis can be placed on improving the productivity. Instead of taking carrot and stick approach of starving the organizations of foreign workers and ultimately subsiding the cost of investment in the technology (Samaniego & Sun, 2016). The focus of moving forward must be focused on assisting the local companies in improving their income. Regional expansion might be the best step forward for SME to avoid their current dilemma. Companies that are more innovative and efficient stand a fair chance of success in the region. The current ASEAN Free Trade Agreement and the upcoming formation of the ASEAN may help in offering the SME a platform to expand regionally. More policy measure would help in incentivising the partnering of SME with GLC to assist regional expansion as this will benefit the productivity of Singapore significantly.
From 2009 and 2014 the productivity growth has come within the target of 2-3 percent which is set by the Economic Strategies Committee. Nevertheless, apart from the 2010 rebound the productivity growth in the recent four years ranging from 2010-14 has been sluggish. To improve the overall productivity government must press on the efforts of restructuring the economy towards sector that are more productive. To equip the workforce with the skill required to undertake the higher value jobs in the economy. The government must help the company to invest in the capital and enhance their technological and business process capabilities.
Anderson, K., & Strutt, A. (2014). Emerging economies, productivity growth and trade with resource?rich economies by 2030. Australian Journal of Agricultural and Resource Economics, 58(4), 590-606.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.
Bober, S., 2016. Alternative principles of economics. Routledge.
Buera, F. J., & Shin, Y. (2016). Online Appendix for “Productivity Growth and Capital Flows: The Dynamics of Reforms”.
Case, K. E., Fair, R. C., & Oster, S. (2014). Principles of economics. Pearson Higher Ed.
Chua, H. B. (2017). Inclusive Growth and Restructuring. In SINGAPORE PERSPECTIVES 2016: We (pp. 143-147).
Farhadi, M., Islam, M. R., & Moslehi, S. (2015). Economic freedom and productivity growth in resource-rich economies. World Development, 72, 109-126.
Frank, R. (2014). Microeconomics and behavior. McGraw-Hill Higher Education.
Frank, R. H., Bernanke, B. S., & LUI, H. K. (2015). Principles of economics. McGraw-Hill Asia.
Patel, D., Al-Bahrani, A. A., & Sheridan, B. J. (2014). Evaluating Social Media and Its Impact on Engagement, Assessment, and Evaluation in Principles of Economics Courses. Recently, the use of social media as a pedagogical tool in economics has received increasing interest. Kassens.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Samaniego, R. M., & Sun, J. Y. (2016). Productivity growth and structural transformation. Review of Economic Dynamics, 21, 266-285.
Samaniego, R. M., & Sun, J. Y. (2016). Productivity growth and structural transformation. Review of Economic Dynamics, 21, 266-285.
Stiglitz, J. E., Walsh, C. E., Gow, J., Guest, R., Richmond, W., & Tani, M. (2013). Principles of economics. John Wiley & Sons.
Sunley, P., 2017. Principles of economics.
Tanna, S., Luo, Y., & De Vita, G. (2017). What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth. Journal of Financial Stability, 30, 67-78.
Taussig, F. W. (2013). Principles of economics (Vol. 2). Cosimo, Inc..
van Vliet, J., 2016. ECON 203: Principles of Economics-Macro.
Woon, K. C., & Loo, Y. L. (2016). 50 Years of Singapore Productivity Drive. World Scientific.
Yeo, P. (2017). Economic Planning for Productivity, Growth, and Prosperity. In 50 YEARS OF URBAN PLANNING IN SINGAPORE (pp. 45-57).