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Causes of GFC in Singapore

Discuss about the Impact of the Global Recession on the Singapore Economy and the Policy Implements

Singapore is a democratic state and is considered one of the most prosperous economies in the world (Heritage.org, 2017). Since it gained independence in 1965, it has been ruled by the People’s Action Party (PAP) (only a single party). The PAP has restricted the freedom of speech and that of assembly. However, it has embraced international trade and economic liberalization. The service sector has the highest contribution to its GDP although this economy is a major producer of chemicals and electronics. The major factor behind the success of the economy is that it’s legal and political environment has been stable and that it has implemented prudent macroeconomic policy. Most of the key sectors in this economy are state owned and the government’s involvement is substantial.

However, despite being considered a prosperous nation, this economy is still suffering from impact of the 2008-09 global recession (Todayonline.com, 2017). The recovery has not been an easy process; and this is the case for many other nations. According to Mason (2017), the investors’ mindset are still being shaped by the aftermaths of the global recession. In order to answer the question effectively, we shall analyze the impact of the GFC specifically on the Singaporean economy. We shall consider all the policies the government policy makers implemented to get this situation under control.  The GFC affected the Singaporean aggregate demand and led to a fall in the real output; the impacts shall be considered and policy actions shall be suggested. One of the policy actions announced in 2009 was the resilience package, we shall analyze the components of this package and its impacts on the economy.

The GFC started in the US and spread to almost every other nation in the world. It was fast spread owing to the interrelatedness and interconnectedness of nations due to globalization. International trade is one of the major ties that raise this interrelatedness. Singapore depends more on its export for manufactured goods. According to Balakrishnan (2017), the beginning of GFC in Singapore was after the US and Europe’s consumer demand for manufactured goods started falling; its export sector was greatly hammered. Gow (2008) pointed out that the US and Europe were already falling into a recession or rather on it and this is explaining the reason for their reduced demand for exports. He also noted that the only economy that was expected to have some continued growth was China because it had already put in place some regulatory measures and monetary policies.

The GFC Impact on the Singaporean Economy

When the impacts of the GFC were spread to Asia, Singapore was the first economy to be hit by the global economic slowdown owing to it’s over dependency on export to the developed economies (Loong, 2008). During that period, India and China were experiencing rampant growth and Asia was not expected to be hit much by the GFC; however, Singapore’s trade was much tied to the West economies that were experiencing slowing growth. The year 2009 was projected to be a difficult year for many economies. Min (2016) pointed out that this was the most difficult period for this economy.

In the 3rd quarter of 2008, the manufacturing sector in Singapore shrunk by 11.5% owing to the slump in pharmaceuticals. The GFC did not have a significant impact on the service and construction sector as there was a steady growth. Prime Minister Loong noted that the financial markets were gripped by fear and panic that would take long to subsidize. During the GFC, the Singapore’s unemployment rate rose to a high level, this is irrespective of over 200,000 job created in 2006-2007. The following graph shows the changes in unemployment rate in 2008-09.

The over 200,000 jobs created in Singapore in 2006-07 had led to the unemployment level falling to a low level of approximately 1.7% as can be observed above; this was on the 3rd quarter of 2007. However this was not sustained as the rate started rising again on the 4th quarter of the same year. The highest unemployment rate was reached in 2009 of approximately 3.8%. Through policy measures and regulations, the unemployment rate was lowered to approximately 2.2% in 2010 and has been maintained at an average rate of 2% since then.

The inflation rate during the global recession was too low indicating that there was insufficient demand. The economy thus had to be stimulated by using expansionary policies.

The Singaporean GDP growth rate was negative during the recession, but a recovery was achieved in 2010 when positive rates started being recorded. However, the rate has remained to be close to zero since then.

There are other domestic issues noted to have resulted as a result of the global recession as noted by Thangavelu (2008). One of such domestic issue is the decline in labor productivity growth from -0.9% in 2007 to -6.5% for the 2nd, 2rd and 4th quarter of 2008. The labor force has to be improved in order to level the unemployment impacts and strengthening the recovery of this economy. The second issue is that there were so many laid off workers who needed to be reemployed. The issue now was that businesses were willing to reemploy only the productive workers. This created a challenge for the low skilled workers to get a new job and thus required extended periods of upgrading specific skills and trainings.

Policies Implemented During the GFC

One of the policy implemented during the GFC by the Singapore’s Monetary Authority (Central Bank) was that of shifting its policy of foreign exchange rate on its dollar to “Zero per cent appreciation” in an attempt to promote the competitiveness of its exports; initially the appreciation of its dollar was modest and gradual. Hedrick-Wong said that the Singaporean dollar being strong was detrimental to the economy’s growth, especially the manufacturing sector (Balakrishnan, 2017). Thus, the only way to promote exports was to weaken the Singaporean dollar. The resilience package is a very important fiscal policy that was proposed in 2008 to help the economy in getting back to its initial position. The package had various components that will be discussed in this paper.

The aggregate demand is computed through the summation of four components; consumption, investment, spending by the government and net exports (Amadeo, 2017). AD = C + I + G + (X – M).

As have been noted earlier of the over dependency of Singapore on exports, the reduced demand for exports lowered its net export component. The export was lower whereas the import level was higher; the net export recorded was therefore negative and thus played a part in lowering the Aggregate Demand. The investment sector was impacted because the willingness for the lending institutions had gone down owing to the increased risk of defaulting; thus, there was a challenge in obtaining capital for investment which caused the spending on investment to fall. The consumption component also fell because many people had no jobs and wages were lowered for many others which made the income available for consumption to decrease. The only component that increased in the government spending on various attempts to stimulate some recovery.

The Singaporean government should have looked for a newer markets for its manufactured goods on the economies experiencing rampant growth during that period such as China and India. This is because weakening of the Singaporean dollar could inculcate some inflation issues that could worsen the situation. During the period of prolonged recession, economy’s become more innovative and technologically-intensive and thus industries gets restructured with new technologies which can bring about a robust growth. Since the US and Europe were bound to restructure their industries, the Singapore policy makers should have had a close look on the actions taken by these economies so that they could also restructure its industries in line with those restructured so as to maintain the competitive nature of the Singapore industries in those markets. New industries should also be introduced to link up the new production networks.

The GFC Impact on the Singaporean Aggregate Demand

Also on the side of local businesses and households, the government should have considered moderating the government service fees in order to ease the pain that was being experienced during the crisis. The government should also have considered making the labor market flexible and subsequently encourage businesses to lower the wages for their employees and maintain the actual number of employees. This would have helped in stopping the acceleration of the unemployment rate which became a major challenge to many workers. External shocks could have been driven more effectively by smoothing out the global shocks which could be achieved through incorporating the ASEAN to be a single market. The government could also have eased the barriers to investment on services and on trade so as to stimulate some growth of the aggregate demand.

The resilience package advanced by the Singaporean government as a fiscal policy instrument had five components amounting to $20 billion (Singaporebudget.gov.sg, 2009). The five components according to Hwang (2011) were; $5.1 billion on jobs preservation; SG$5.8 billion on Bank lending stimulation; SG$2.6 billion on ensuring that businesses maintain their cash flows through tax measures and grants; SG$2.6 billion on helping families; and SG$4.4 billion on infrastructure development, expansion of the provision for education and healthcare. On the jobs preservation the government had planned to issue cash grants on employers for them to retain their workers; this was a subsidy given by the government for the employers to pay wages. The other theme is Workfare Income Supplement (WIS) for encouraging those low-paid workers to continue working. Another theme is Skills Programme for Upgrading and Resilience (SPUR) to enable workers to be absent and undertake various trainings (Basu, 2010). The last theme is the public sector expansion for recruitment.

On bank lending stimulation, the government aimed at enhancing a special Risk-Sharing Initiative (SRI) where the government had to take 75% risk of trade loan to ensure that investors were able to acquire loans. On tax measures and grants, the government was aiming at providing various tax rebates, relief and exemptions. On supporting families, the government aimed at assisting households directly and helping the vulnerable groups. The last component was to make Singapore a better home in the future by improving infrastructure, education, healthcare and funding development programs.

Fig: The Keynesian cross diagram

Curve AD = Y shows all possible combinations for AD = output and income. The model assumes that firms can only influence their output but not their price. During a recession, there is a deficiency in spending and thus the economy operates at point C. with a deficiency in demand, the firm fails to have an incentive to produce more. The changes in the AD component shifts the AD = C +I + G + (X-M). The AD curve will shift upward owing to the success of the Fiscal and monetary policies the Singaporean government implemented (The shift will be from AD1 to AD2) (Frank, Bernanke, Osberg, Cross & MacLean, 2017).

All the policies implemented during the GFC were meant to stimulate the Singaporean economic growth. In fact, these policies can be argued to have really helped the Singapore economy to achieve its recovery. The resilience package played an important role in ensuring that people kept their jobs, ensured that people were able to demand goods and services by subsidizing their income. The unemployment rate fell in 2010 as an impact of this resilience package. The negative economic growth experienced during the recession was eliminated and as at 2010, a positive economic growth was projected. Thanks to the policies implemented that the Singaporean economy was able to recover within a short period compared to other nations

References

Amadeo, K. (2017). What Is Aggregate Demand? The Balance. Retrieved 4 September 2017, from https://www.thebalance.com/aggregate-demand-definition-formula-components-3305703

Balakrishnan, A. (2017). Singapore slides into recession. The Guardian. Retrieved 4 September 2017, from https://www.theguardian.com/business/2008/oct/10/creditcrunch-marketturmoil1.

Basu, S. (2010). Road to recovery: Singapore's journey through the global crisis. Singapore: Institute of Southeast Asian Studies.

Frank, R., Bernanke, B., Osberg, L., Cross, M., & MacLean, B. (2017).  Principles of Macroeconomics, 1st Canadian Edition. Novellaqalive2.mhhe.com. Retrieved 4 September 2017, from https://novellaqalive2.mhhe.com/sites/0070889775/student_view0/chapter14/cyberlecture.html.

Gow, D. (2008). The new masters of the universe. The Guardian. Retrieved 4 September 2017, from https://www.theguardian.com/business/2008/oct/02/creditcrunch.china.

Heritage.org. (2017). Singapore Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. Heritage.org. Retrieved 3 September 2017, from https://www.heritage.org/index/country/singapore.

Hwang, G. (2011). New welfare states in East Asia: Global challenges and restructuring. Cheltenham, UK: Edward Elgar.

Loong, L. (2008). Singapore is first East Asian country to slip into recession. Eresources.nlb.gov.sg. Retrieved 4 September 2017, from https://eresources.nlb.gov.sg/history/events/3cacf256-82cc-4776-b7f8-83757723b502.

Mason, L. (2017). Global Asset Management: Legg Mason 2017 Global Investment Survey. Ww2.leggmason.com. Retrieved 4 September 2017, from https://ww2.leggmason.com/gis/.

Min, C. (2016). Singapore economy's lingering slowdown. The Straits Times. Retrieved 4 September 2017, from https://www.straitstimes.com/business/economy/a-lingering-slowdown.

Singaporebudget.gov.sg. (2009). Budget 2009: Resilience Package. Singaporebudget.gov.sg. Retrieved 4 September 2017, from https://www.singaporebudget.gov.sg/budget_2009/resilience.html.

Thangavelu, S. (2008). Global financial crisis: impact on Singapore and ASEAN. Eldis.org. Retrieved 4 September 2017, from https://www.eldis.org/document/A41502.

Todayonline.com. (2017). Global financial crisis a decade ago still casts shadow over Singaporean investors: Survey. Todayonline. Retrieved 4 September 2017, from https://www.todayonline.com/business/global-financial-crisis-decade-ago-still-casts-shadow-over-singaporean-investors-survey.

Tradingeconomics.com. (2017). Singapore Unemployment Rate. Tradingeconomics.com. Retrieved 4 September 2017, from https://tradingeconomics.com/singapore/unemployment-rate.

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