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Economic Development in Singapore

Question:

Describe about the Economics Performance of Singapore.
 

Singapore is one of the economies that have been able to move from third world country to the first world within a short period. The country experienced dire economic and political situations similar to those of many third world countries in the past (Felker et al.,2013). However, development of effective policies, a supportive government, and right economic conditions has made Singapore’s economy grow at a very fast rate. Singapore adopted and utilized free market economy where they promote international trade and is open to international investment through Foreign Direct investment. The economy of the Republic of Singapore relies heavily on Foreign Direct Investment. The country has invested in IT products, consumer electronics, financial services and pharmaceuticals. Singapore is ranked as the most open economy globally which his most pro-business and having low tax rates of roughly 14% of the overall Gross Domestic Product (GDP). 

Real Gross Domestic Product

Gross Domestic product (GDP), is a macroeconomic assessment that is utilized to evaluate the sum value of commodities and services that are produced by a nation within a particular time. Real GDP is arrived at after deduction of inflation from Gross Domestic Product and is a value that accounts for changes in price because of inflation (Burda & Wyplosz, 2012). GDP is an important tool because it is used to give an estimate of the total spending in the economy. However, inflation may increase the value of GDP doing the project a wrong figure of the actual growth economy, and is thus the reason why Gross Domestic Product (GDP) is adjusted by deducting inflation to arrive at the real GDP. 

The real GDP growth rate measures the performance of the economy by showing the speed at which the real GDP increases from one year to another. The value is often expressed as a percentage, and one can quickly identify if the economy is growing or declining by looking at the real GDP Growth rate over the years. The real GDP growth rate is considered to be a better measure of the performance of the economy as compared to nominal GDP growth rate because it takes into account the purchasing power and inflation.

Real GDP per capita analysis considers the population. Real GDP per capita is arrived at by dividing real GDP by the number of people living in the country (Goodwin et al., 2013). Real GDP per capita analysis measures the performance of the economy by analyzing the standards of living in the country. Real GDP per capita analysis is also critical in measuring economic performance as it can be used in comparing standards of living over time in the country or between different nations that share the same currency.

The economy of Singapore has been growing rapidly over the years since its independence in the year 1963. Currently, the country is among the ones with the highest GDP globally. The average GDP growth rate of Singapore since its independence in 1963 up to now is 6.88 percent with an all-time low of -13.50% in the year 2008 and an all-time high of 37.20% in the year 2010 (Baker, Bloom & Davis, 2015).

Gross Domestic product (GDP)

(Source Tradingeconomics.com, 2016)

Economic Performance since the Year 2005 to the year 2015

As at 2015, Singapore Gross Domestic Product was valued at 402.5 billion dollars and increase from 388.2 billion dollars (Department of Statistics Singapore, 2016). The GNP per capita also improved from 67,462 in the year 2014 to 69,283 in the year 2015. However, the real economic growth rate slightly decreased from 3.3 in the year 2014 to 2.0 in the year 2015 (Department of Statistics Singapore, 2016). 

Year

Nominal GDP

(Billion US $)

Nominal GDP per Capita

Real GDP

(Billion US$)

2005

127.417

212.074

29,866

49,715

2010

236.420

63498

46,569

63498

2011

275.369

346.353

53,122

66,816

342.371

2012

289.941

362.332

54578

68205

354.061

2013

302.245

378.200

55979

70047

324.592

2014

308.051

390.089

56319

71318

380.585

2015

388.2

402.5

67462

69283

392.147

(Department of Statistics Singapore, 2016)

Economic development in Singapore is attributed to sound macroeconomic policies developed with the objective of maintaining a good long-term investment environment as a result of openness to the market, limited government spending, the regulatory efficiency with little or no capital required and instituting of laws that deter corruption (Hall & Sambu, 2013). The fiscal policies are bound for fundamentally promoting long-term economic growth instead of distributing income or cyclical changes.

Singapore is also an advocate of free trade and has developed trade policies to promote international trade in the country. According to World Bank Group (2016), Singapore is ranked as at position ten regarding ease of starting a business in the country. Registering a business in Singapore is relatively easy and with taking even less time to complete. On the same note, the registration procedure can be done online via ACRA website.

Decreased unemployment is also an indicator of economic development. Unemployment takes place when a person who is aggressively searching for employment is not able find a job (Hall & Sambu, 2013).  As at 2012, the overall unemployment rate was 2.0 in Singapore which is lower compared to other countries such as Hong Kong (303%), South Korea (3.2%), United States (8.1%). Taiwan (7.5%), Spain (25%), and United Kingdom (8.1%) (Gov.sg, 2013).

Different types of unemployment exist in the economy. Some of the main types of unemployment comprise:

Structural Unemployment: This type of unemployment occurs because of mismatch of jobs and potential workers because of lack of requisite skills required to do available jobs (Weiss, 2014). That is the mismatch between skills that the workers in the economy have and what employers want. Structural unemployment is dependent on dynamic changes in the economy and the social needs of the economy. A good example is when advances in technology make skills of workers obsolete hence increasing the unemployment rate.

Frictional Unemployment: Frictional unemployment occurs in the economy because of transitions made by employers and workers having incomplete or inconsistent information (Chéron, Hairault & Langot, 2013). That is the typical turnover in the economy and the duration it takes for a person to hit upon new employment. Workers tend to take a lot of time to match up with new employers because of lack of information.

Frictional unemployment is perceived as a transactional cost of trying to get a new job because of imperfect information about the job market.

Cyclical Unemployment: This is a type of unemployment associated with economic contraction. Cyclical unemployment occurs because of up and downs that the economy undergoes (Gregg et al., 2014). An economy that is under recession has higher levels of unemployment as compared to an expanding economy that creates a lot of job opportunities.

Real GDP growth rate

Seasonal Unemployment: Seasonal unemployment occurs because of seasonality in production. They are mainly associated with industries such as tourism, farming, and construction.

Voluntary Unemployment: Voluntary unemployment occurs when a person decides not to take a job at the current equilibrium wage rate. Some of the reasons that contribute to voluntary unemployment include high levels of income tax, low pay, and excessively generous welfare benefits. According to Hall & Sambu (2013), voluntary unemployment tends to happen when the equilibrium wage rate is below the salary that individuals want to supply their labor. 

Cyclical Unemployment: The primary cause of joblessness in Singapore is Cyclical or demand-deficient unemployment. The reason is that Singapore has a large external sector which is the biggest source of economic growth. For example, Singapore manufactures and export electronics to other countries. Therefore, if the international demand for electronics falls employers may resort to reduce the number of people employed so as to lower the cost of production.

Frictional unemployment: Singapore also faces frictional unemployment because of people moving between jobs. Many people are unemployed while being involved in searching for employment in Singapore. There is imperfect information in Singapore labor market increasing the rate of frictional unemployment because people are not aware of the available job opportunities in the labor market.

Structural Unemployment: Globalization and advancement in technology have led to the restructuring in Singapore. Therefore, structural unemployment may happen in the economy. Singapore economy has transited from labor intensive to capital intensive economy meaning that many people may become unemployed because of lack of the necessary skills.

Frictional Unemployment: The government of Singapore can reduce labor immobility by disseminating information about available job opportunities to ensure that people are quickly and efficiently placed into the available job vacancies. The key measures adopted by Singapore to reduce unemployment include: Organizing job matching by Community Development Council to disseminate information concerning available jobs and match people in search of jobs to the most suitable jobs quickly, provision of job search services, labor market information, and networking.

Structural Unemployment: The government of Singapore has developed supply-side policies where workers are trained to gain the necessary skills that can make them ready for employment. Singapore’s Workforce Development Agency (WDA) runs the Skills Programme for Upgrading and Reliance with assistance from Employment & Employability Institute (E2I). The program is used to upgrade workers skills to ensure that workers are constantly updated with the current skills and knowledge demanded by the economy.

Inflation determines the purchasing power of a Currency. The inflation rate has been decreasing over the years in Singapore. The average annual inflation rate for the year 2015 was at -0.43 a decrease from 1.02 in the year 2014. Since 2011 the inflation rate decreased significantly from 5.24%.

(Source Kaiser, 2016)

Definition and Causes of Inflation

Inflation can be defined as the persistent increase in the general price level in the economy. Bresciani-Turroni (2013) defined inflation as the rate at which the general price levels of both goods and service is increasing and at the same time, the purchasing power of the currency in the economy decreasing. The causes of inflation can either be demand side factors or increased aggregate demand and cost-push factors.

Real GDP per capita analysis

Demand-pull inflation:  The underlying factor that cause demand pull inflation is the rise in aggregate demand. Increase in aggregate demand without a corresponding increase in supply could result in increasing price levels hence inflation (Carbaugh, 2013). Causes of demand pull inflation include depreciation of the exchange rates, monetary stimulus to the economy because of the decrease in interest rates, fast growth in other countries increasing the amount of income because of exports, and fiscal stimulus that may result in an increase in demand.

Cost-Push Inflation refers to inflation that occurs because of rising costs. The main causes of cost-push inflation include rising labor costs, increasing tax rates, increase in prices of raw materials, declining productivity, a decrease in exchange rates, and inflation because of monopoly powers (Cowen & Tabarrok, 2015). The expectation of inflation may result in further inflation because people will be concerned with rising prices triggering higher pay claims hence wage price effect. 

Inflation in Singapore is primarily caused by:

Immigration: Singapore is open to any persons who are interested in living there. Therefore, the country’s population has been increasing over the years. Many foreigners are immigrating to Singapore because of the countries friendliness. The economy is also rapidly increasing over the years. There is also an increase in international demand for domestically produced exports in Singapore resulting in an increase in aggregate demand hence demand-pull inflation.

The increasing cost of doing business because of hiking of prices: For example increase in Goods and Service Tax, increase in the cost of transportation, kindergarten fee, and utilities.

Growth in government spending: The government expenditure has grown over the years in Singapore.  For example, increase in budgetary allocation for Singapore police force or Salaries for Civil servants.

Monetary Policy: The Central Bank can use monetary policies to decrease inflation in Singapore, which can be achieved by increasing interest rates to reduce aggregate demand in the economy. Increasing interest rates decrease consumer spending because it becomes expensive to borrow. People will thus save money rather than spend money.

Supply Side Policies: The government of Singapore can reduce inflation by using supply side policies to increase the economy’s long-term productivity and competitiveness, for instance, privatization of public organizations to improve the country’s productivity.

Fiscal Policy: The government can also use economic policies to reduce the aggregate demand. Singapore government can cut its spending and increase taxes to curb inflation. 

Conclusion

Singapore is one of the economies that have been able to move from third world country to a first world within a short period. Singapore’s economic growth is attributed to the development of constructive policies, effective government and right economic conditions. Singapore adopted and utilized free market economy where they promote international trade and is open to international investment through Foreign Direct Investment (Cowen & Tabarrok, 2015). Singapore economy has been performing well with an increasing real GDP, decreasing levels of unemployment and low rates of inflation because of the development of sound macroeconomic policies. 

References

Felker, G., Jomo, K. S., & Rasiah, R. (Eds.). (2013). Industrial technology development in Malaysia: industry and firm studies. Routledge.

Gov.sg.(2013). Unemployment in Singapore. Gov.sg. Retrieved 24 July 2016, 

Singapore in figures 2016. (2016) (1st ed.). 

Kaiser, a. (2016). GDP Inflation | Economic Indicators of Countries: Inflation Rate in Singapore (from 1993 to 2016) | Forecast. 

Tradingeconomics.com. (2016).Singapore GDP Growth Rate | 1975-2016 | Data | Chart | Calendar | Forecast. Tradingeconomics.com. 

World Bank Group. (2016). Ranking of economies - Doing Business. Doingbusiness.org. 

Burda, M., & Wyplosz, C. (2012). Macroeconomics: a European text. Oxford university press. 

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning

Cleaver, T. (2013). Understanding the world economy. Routledge. 

Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context. ME Sharpe.

Baker, S. R., Bloom, N., & Davis, S. J. (2015). Measuring economic policy uncertainty (No. w21633). National Bureau of Economic Research.

Hall, K., & Sambu, W. (2013). Income poverty, unemployment and social grants. ChildGauge, 2010105

Weiss, A. (2014). Efficiency wages: Models of unemployment, layoffs, and wage dispersion. Princeton University Press.

Chéron, A., Hairault, J. O., & Langot, F. (2013). Life-cycle equilibrium unemployment. Journal of Labor Economics, 31(4), 843-882.

Gregg, P., Machin, S., & Fernández‐Salgado, M. (2014). Real wages and unemployment in the big squeeze. The Economic Journal, 124(576), 408-432.

Bresciani-Turroni, C. (2013). The Economics of Inflation: A study of currency depreciation in post-war Germany, 1914-1923. Routledge.

Carbaugh, R. J. (2013). Contemporary economics: an applications approach. ME Sharpe.

Cowen, T., & Tabarrok, A. (2015). Modern principles of economics. Palgrave Macmillan.

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