Discuss the effectiveness of the policy measures adopted by the Singapore government to address inflation.
Singapore is expected to face rising inflation due to a combination of external and local factors — including a strong global economic rebound driven by the rollout of Covid-19 vaccines, geopolitical tensions pushing up food and energy prices, and a tight labour market. In response, the Monetary Authority of Singapore has permitted the Singapore dollar to strengthen and urged businesses to adopt technology to manage costs more efficiently.
b. Discuss the effectiveness of the policy measures adopted by the Singapore government to address inflation. [10]
Introduction
Singapore’s inflationary pressures have risen due to a combination of external and domestic factors, including a strong global economic recovery following the rollout of COVID-19 vaccines, geopolitical tensions driving up food and energy prices, and a tight labour market. In response, the Monetary Authority of Singapore (MAS) has allowed the Singapore dollar (SGD) to appreciate to curb inflation, while the government has encouraged firms to adopt technology to improve productivity and lower costs. While these policies aim to mitigate inflationary pressures, their effectiveness depends on various factors, such as the scale of inflation, the time lag of policy implementation, and their broader economic impact.
How modest and gradual appreciation help address inflation
The MAS typically adopts a policy of modest and gradual appreciation of the SGD by adjusting the slope of the exchange rate policy band. This strategy can be effective in reducing different types of inflation.
Reducing Imported Inflation: A stronger SGD makes imported goods cheaper, which directly lowers the cost of imported consumer products, raw materials, and essential goods. This helps to mitigate imported inflation, which is particularly important for Singapore as it imports a significant portion of its food, energy, and raw materials.
Reducing Cost-Push Inflation: Since many firms rely on imported inputs such as fuel, machinery, and intermediate goods, a stronger SGD reduces production costs. This leads to a rightward shift in the Short-Run Aggregate Supply (SRAS) curve from AS0 to AS1, lowering the general price level in the economy from P0 to P1.
Reducing Demand-Pull Inflation: An appreciation of the SGD makes Singapore’s exports more expensive for foreign buyers, reducing external demand for Singapore’s goods and services. Consequently, net exports (X-M) fall, leading to a decrease in aggregate demand (AD) from AD0 to AD1, which in turn helps to lower inflationary pressures when general price level falls from P0 to P1.
How it might cause difficulties for the Singapore economy
While a modest and gradual appreciation of the SGD helps to contain inflation, it has certain limitations:
If global inflationary pressures are severe—such as sharp increases in oil and food prices due to geopolitical conflicts—moderate exchange rate adjustments may be insufficient to fully offset rising costs. Singapore’s small and open economy remains highly vulnerable to external price shocks.
Since Singapore relies heavily on exports as a key driver of economic growth, a stronger SGD makes Singaporean goods and services more expensive in foreign markets. As a result, demand for exports falls, leading to a contraction in net exports (X-M), which reduces aggregate demand and lowers real national income (NY).
As export demand declines, firms may scale back production and reduce hiring, leading to higher unemployment, especially in export-driven industries such as manufacturing and trade-related services. A worsening balance of trade (BOT) could also weaken economic stability in the long run.
Supply-side policy : Encouraging use of technology
In addition to exchange rate management, the Singapore government has adopted supply-side policies that focus on increasing productivity to address inflation in a sustainable manner. A key strategy is providing subsidies and incentives for firms to invest in technology and automation.
When firms adopt automation and advanced technology, they can produce goods and services more efficiently, lowering production costs. This enhances cost competitiveness and shifts the Long-Run Aggregate Supply (LRAS) curve to the right, leading to lower inflationary pressures in the long run.
By increasing productive capacity, supply-side policies help the economy meet rising demand without excessive price increases, thereby controlling demand-pull inflation.
Investing in technology-driven productivity improvements strengthens Singapore’s long-term economic resilience by ensuring that businesses remain competitive despite labour shortages and rising global costs.
How it might cause difficulties for the Singapore economy
While supply-side policies offer long-term solutions to inflation, they also come with challenges:
Long Implementation Timeframe
Unlike monetary policy, which can have an immediate impact on exchange rates and inflation, supply-side policies take time to yield results. The adoption of technology and automation requires significant capital investment, workforce retraining, and gradual adjustments in business processes.Structural Unemployment
The increased use of automation and advanced technology may lead to job displacement, particularly among low-skilled workers whose tasks are easily replaced by machines. While demand for high-skilled workers such as software engineers and data analysts may rise, the transition period could result in higher structural unemployment, exacerbating income inequality and social issues.Potential Misallocation of Government Funds
Providing subsidies for technology adoption requires significant public expenditure, which could otherwise be allocated to other pressing needs such as healthcare or social security. Additionally, if firms do not fully utilize government grants for intended productivity improvements, there is a risk of inefficiency and wastage of public resources.
Conclusion
The Singapore government’s policy measures to address inflation—through exchange rate appreciation and supply-side initiatives—are generally effective but have certain trade-offs. A modest and gradual appreciation of the SGD helps to mitigate imported and cost-push inflation but may weaken export competitiveness and economic growth. Supply-side policies that encourage technological adoption improve productivity and curb inflation in the long run but require time to take effect and may lead to structural unemployment. Therefore, a balanced approach that combines exchange rate management for short-term inflation control with long-term productivity enhancements through supply-side policies is necessary to ensure economic stability and sustainable growth.
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