(2022) A Level H2 Econs Paper 2 Essay Q6

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6. Singapore’s Prime Minister has stated that ‘Globalisation will be under pressure, but it is imperative for countries to cooperate, for businesses to operate across many geographies, to tap resources, to bring skills and talents and experiences together, and then serve markets all across the world.’

Source: pmo.gov.sg/Newsroom/PM-interview-with-BBC-for-Talking-Business-Asia, 2 March 2021

(a) Explain the benefits and costs of globalisation to Singapore. [10]

• Impacts of increase in trade flows

  Increased trade

1. Globalisation → greater access to global markets → increased trade → increase (X-M) → increase AD → increase real NY → higher economic growth (increased production → increased hiring of inputs such as labour → lower cyclical unemployment

2. Increase (X-M) → improved BOT

Increased vulnerability to external shocks

1. As trade (& Investments) becomes a larger part of Singapore’s GDP → any recession or negative impacts felt by trading partners will affect demand for Singapore’s exports (& investments in SG) → fall in (X-M) when trading partners are facing a recession → fall in real NY (and associated impacts on unemployment / BOT)

2. Our dependence on trade also applies to imports → Singapore imports most of its necessities and raw materials for production → higher prices or inflation in other countries / unfavourable trade policies can impact prices of imported goods / raw materials → higher imported / imported cost push inflation

• Impacts of increase in capital flows

Knowledge & technology transfer

1. Increased inflows of FDI → creates technology and knowledge transfers → increase in quality of labour force & industry capabilities → improve productive capacity → rightward shift of LRAS → higher potential growth

• Impacts of increase in labour flows

Ability to tap on cheap cost labour

1. Ability to tap on cheap cost labour → keep labour cost low & competitive → maintain competitiveness of Singapore’s exports → increase (X-M) → increase in AD → increase real NY → higher economic growth (and associated impacts on unemployment / BOT)

2. Inflow of cheap low cost labour → increase supply of low skilled workers → keeps wages of low skilled workers stagnant / decrease → income gap widens when wages of higher skilled workers continues to go up

(b) Discuss the most appropriate policy measures that the Singapore government should take to increase the benefits and reduce the costs of globalisation. [15]

Summary of negative impacts from globalisation

1. Fall in (X-M) & therefore growth, unemployment & BOT due to vulnerability to external shocks

2. Higher income inequality due to increase in inflow of cheap low skilled workers

How prudent fiscal policy can address negative impacts

1. SG adopts a prudent fiscal policy with various principles whereby

   • Fiscal policy is planned based on improving long term potential economic growth as opposed to a pure reactionary policy adjustment to short term cyclical changes

   • Spending is on what is necessary

   • Maintenance of a balanced budget position, and if possible, accumulation of budgetary surpluses

2. Such a policy has allowed SG to accumulate significant reserves which are then invested. 50% of the annual long term projected returns are then reinvested, with the other half directed to the budget for increased funds available for spending.

3. The significant reserves also function as a ‘rainy day’ fund

4. In times where the economy suffers ‘sudden’ & ‘significant’ shocks due to plummeting of incomes of trading partners or a global recession, such as that seen in the Global Financial Crisis of 2008 and the ongoing COVID-19 pandemic, the Singapore government is able to tap on the reserves to fund significant and substantial expansionary fiscal policy to address the negative economic impacts from a global recession.

5. E.g. SG spent close to $100 billion funding Jobs Support Scheme / Self-employed Income Relief Scheme / COVID-19 Recovery Grant / Enterprise Finance Scheme / Singapore Rediscover vouchers with various impacts

   • Lower COP for firms with JSS → shift SRAS rightwards → increase growth / lower unemployment

   • Various transfer payments → increase C → increase AD → increase real NY → higher growth / lower unemployment

   • Enterprise Financing Scheme → encourage increase in I → increase AD → increase real NY → higher economic growth

6. This was only possible without substantial opportunity costs (higher debt → higher interest payments in future) due to the prudent fiscal policy

What prudent fiscal policy does not address

1. Does not directly address income inequality

2. Does not directly address imported inflation

What other policies can help address negative impacts

1. Modest & gradual appreciation

   • Modest and gradual appreciation via recentering or shifting bands upwards / increasing the slope of the bands → stronger SGD → imported goods cheaper → reduced imported inflation

   • Stronger SGD → lower prices of imported raw materials → reduced imported cost push inflation

   • Downside: affects export competitiveness

2. Supply side policies

   • Discussion of any supply side policies that addresses imported / cost push inflation / income inequality

   • E.g. training / education of low skilled workers

   • E.g. Diversification of import sources

Conclusion

The use of prudent fiscal policy, a modest and gradual appreciation of the SGD & supply side policies will help Singapore reduce the negative impacts of globalisation while increasing the benefits

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