Discuss policies that Singapore can adopt to address adverse impacts from deglobalisation.
b. Discuss policies that Singapore can adopt to address adverse impacts from deglobalisation. [15]
Introduction
Deglobalisation refers to the trend of declining cross-border trade, investment, and economic integration. For a small and open economy like Singapore, which relies heavily on trade, foreign investment, and imported goods and services, deglobalisation poses several economic threats. Chief among these are imported inflation and cost-push inflation as global supply chains become more fragmented and protectionist measures drive up the cost of imports. In addition, Singapore faces the risk of weaker external demand for its exports as global trade volumes fall. To manage these challenges, the Singapore government can adopt a range of monetary, supply-side, and strategic trade policies to mitigate inflationary pressures and maintain export competitiveness.
Modest and Gradual Appreciation of the SGD
One key tool the Monetary Authority of Singapore (MAS) uses is its exchange-rate based monetary policy. In the context of deglobalisation, the MAS can continue its stance of allowing a modest and gradual appreciation of the Singapore dollar (SGD) to cushion the economy from rising import prices. As the SGD strengthens, the prices of imported goods and raw materials in SGD terms become cheaper. This helps reduce imported inflation and cost-push inflation, especially for a country like Singapore which imports over 90% of its food and all of its energy needs.
For instance, if global food or energy prices rise due to trade disruptions or protectionist export bans, a stronger currency can offset some of the increase. The fall in cost of imported inputs can shift the short-run aggregate supply (SRAS) curve downwards (or to the right), lowering the general price level from P₀ to P₁ and thereby containing inflationary pressures.
However, the extent of the appreciation is typically modest and gradual to avoid harming export competitiveness. A sharp appreciation may reduce the price competitiveness of Singapore’s exports, leading to a fall in net exports (X–M), a decrease in aggregate demand (AD), and slower economic growth. Therefore, this policy offers partial relief from inflationary pressures but cannot fully eliminate them, especially in the face of large global supply shocks.
Supply-Side Policies to Strengthen Economic Resilience
Given the structural nature of deglobalisation, supply-side policies are necessary to strengthen Singapore’s longer-term resilience. These policies focus on increasing the economy’s productive capacity, lowering costs of production, and ensuring sustainable sources of growth even in a less integrated global economy.
1. Diversifying Import Sources
One approach is to diversify the sources of imports to avoid overdependence on a few countries. For example, Singapore previously relied heavily on Malaysia for its supply of fresh chickens. When Malaysia imposed an export ban in 2022, Singapore faced a temporary supply crunch. The government responded swiftly by opening up new supply lines from countries like Indonesia, Thailand, and Brazil. By having a wider network of trade partners, Singapore can reduce the vulnerability to price shocks and supply disruptions, keeping inflation and food security risks in check.
However, diversification is not without limitations. Sourcing from further afield may increase transportation costs, and establishing food safety protocols and diplomatic arrangements with new suppliers takes time. Additionally, not all goods and raw materials are equally substitutable or available from alternative sources.
2. Increasing Domestic Production of Strategic Goods
To complement diversification, Singapore has also invested in increasing its domestic production capacity, particularly for essentials such as food. Under the “30 by 30” goal, Singapore aims to produce 30% of its nutritional needs locally by 2030. This involves investing in high-tech urban farming, hydroponics, and vertical agriculture. Such initiatives reduce dependence on volatile global supply chains and enhance self-sufficiency in times of crisis.
Nonetheless, given Singapore’s limited land and water resources, this strategy is inherently constrained in scope. It can supplement but not replace global trade, especially for non-essential or resource-intensive goods.
3. Investing in R&D to Boost Export Competitiveness
To counter falling global demand, Singapore must ensure that its exports remain highly competitive and differentiated. This can be achieved through increased investment in Research and Development (R&D). By promoting innovation in sectors such as advanced manufacturing, biotechnology, financial technology, and green energy, Singapore can create high-value, niche products and services that are less sensitive to global price competition.
Such a move can help shift the aggregate supply curve rightwards over time, increasing potential output and helping to restore export demand even in a fragmented global economy. Moreover, high-value exports are often less price-sensitive, making them less vulnerable to exchange rate fluctuations or rising wages.
However, R&D takes time to bear fruit and requires significant government support, both in terms of financing and human capital development. There is also no guarantee that all R&D efforts will succeed commercially, so careful prioritisation of sectors is essential.
Conclusion
In facing the challenges posed by deglobalisation, Singapore cannot rely on a single policy tool. A modest and gradual appreciation of the SGD can provide short-term relief against imported and cost-push inflation, but it cannot fully mitigate rising prices. A comprehensive suite of supply-side policies—ranging from diversifying import sources and increasing domestic production to boosting R&D and export competitiveness—is essential to build long-term resilience.
While these measures may not fully reverse the economic effects of deglobalisation, they reduce the vulnerabilities associated with external shocks and provide a more stable foundation for sustained growth. Ultimately, for a small open economy like Singapore, the goal is not to turn inward, but to adapt proactively to a more fragmented world while continuing to leverage global opportunities where possible.
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