Discuss whether efforts to curb inflation may create economic trade-offs or problems for Singapore.
Singapore is expected to face rising inflation due to a combination of global and local factors—these include a robust global economic rebound following the rollout of COVID-19 vaccines, geopolitical tensions pushing up food and energy prices, and a tightening labour market. In response, the Monetary Authority of Singapore has allowed the Singapore dollar to strengthen and has urged businesses to adopt technology to help manage and reduce costs.
b. Discuss whether efforts to curb inflation may create economic trade-offs or problems for Singapore. [15]
Introduction
Singapore’s current inflationary pressures are driven by both external and domestic factors—including a strong global economic rebound, surging global commodity prices due to geopolitical tensions, and tightening conditions in the domestic labour market. To curb inflation, Singapore relies primarily on a modest and gradual appreciation of the Singapore dollar via its exchange rate-centred monetary policy, alongside supply-side efforts such as encouraging technological adoption to lower production costs. While these policies can help stabilise prices, they are not without trade-offs. In attempting to tackle inflation, Singapore may experience unintended consequences in other areas of economic performance, such as growth, employment, and equity.
How Exchange Rate Appreciation Helps Address Inflation
The Monetary Authority of Singapore (MAS) manages inflation primarily through its exchange rate policy, rather than adjusting interest rates. MAS adopts a managed float system, allowing the Singapore dollar (SGD) to appreciate modestly and gradually over time by adjusting the slope of the policy band.
A stronger SGD helps curb inflation in several ways:
Lower imported inflation: An appreciating currency makes foreign goods cheaper in SGD terms. Since Singapore imports the vast majority of its food, energy, and raw materials, a stronger SGD directly reduces the cost of imports, helping to rein in imported inflation.
Lower cost-push inflation: With cheaper imported inputs, firms face lower costs of production, resulting in a rightward shift of the Short-Run Aggregate Supply (SRAS) curve. This helps stabilise the general price level.
Curbing demand-pull inflation: As the SGD appreciates, Singaporean exports become more expensive to foreign buyers, reducing export demand. This causes a fall in net exports (X – M), a component of Aggregate Demand (AD), leading to a leftward shift in AD, which eases demand-pull inflation.
Thus, currency appreciation acts on both the demand and supply sides of inflation control.
While effective in controlling inflation, exchange rate appreciation is not without significant economic trade-offs, particularly for a small, open, export-driven economy like Singapore:
Lower export competitiveness: A stronger SGD makes Singapore’s exports relatively more expensive in foreign currency terms. This reduces export demand, causing a fall in (X – M) and a leftward shift in AD, which can lower real national income and lead to slower economic growth.
Rising unemployment: As demand for exports falls, export-oriented industries may experience lower revenues and reduce hiring. This leads to increased unemployment, especially among workers in sectors such as electronics, precision engineering, and logistics.
Inadequacy in addressing severe cost shocks: A modest and gradual appreciation may be insufficient to counter large and sudden surges in global prices, such as oil or food, especially if caused by external shocks like geopolitical tensions. In such cases, imported inflation may persist despite currency appreciation, limiting the effectiveness of MAS’s policy tool.
Worsening balance of trade: As export volumes fall and import demand remains stable or increases (due to lower import prices), the trade balance may deteriorate, weakening Singapore’s current account position.
Supply-Side Measures
In addition to monetary policy, the government has promoted supply-side strategies to control inflation and boost productivity. One such strategy involves encouraging firms to adopt technology and automation, often supported through grants and subsidies.
Lower long-run production costs: Automation and digitalisation help firms produce more output with the same or fewer inputs, which increases productivity. This causes a rightward shift of the Long-Run Aggregate Supply (LRAS), expanding the economy’s productive capacity and reducing inflationary pressures in the long run.
Improved cost competitiveness: With lower unit costs, firms are less reliant on wage growth to drive output, which helps reduce cost-push inflation, especially in sectors where labour costs are rising due to tight labour market conditions.
Despite their long-term benefits, supply-side policies also present short- to medium-term challenges:
Structural unemployment: As firms adopt automation and digital technologies, many low-skilled and routine jobs may be displaced. For example, warehouse workers, clerks, and even service staff could be replaced by machines or software. If displaced workers do not have the skills to transition into higher-skilled roles, structural unemployment may rise.
Skill mismatches and inequality: While demand for high-skilled workers (e.g., software engineers, data analysts) may rise, not all workers can immediately meet these demands. This creates a skills gap and may worsen income inequality, as wage growth becomes concentrated among higher-skilled individuals.
Time lag: The benefits of supply-side reforms are often not immediate. It takes time for technology adoption to translate into measurable productivity gains, and firms may face short-run adjustment costs. As such, these policies are not well-suited for addressing inflationary spikes in the short term.
Conclusion
Efforts to curb inflation in Singapore through currency appreciation and supply-side reforms are well-targeted given the economy’s openness and dependence on imports. However, both strategies come with important trade-offs. Exchange rate appreciation, while effective against inflation, can dampen export competitiveness, reduce economic growth, and lead to higher unemployment. Similarly, supply-side measures aimed at boosting productivity and reducing production costs may cause structural unemployment and increase labour market inequality, especially in the short term. Policymakers must therefore strike a careful balance—containing inflation without undermining growth, equity, and employment—by coordinating monetary, fiscal, and structural policies to ensure overall macroeconomic stability.
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