Explain the possible economic effects of these structural changes on Singapore’s economy.
In June 2022, Deputy Prime Minister Lawrence Wong stated that inflation is just one of several challenges confronting Singapore. He highlighted that both domestic and global structural changes—such as an ageing population, rising geopolitical tensions, and climate change—also pose significant concerns. As a result, he emphasised the need to speed up economic reforms to enhance productivity.
a. Explain the possible economic effects of these structural changes on Singapore’s economy. [10]
Introduction
Structural changes—such as an ageing population, rising geopolitical tensions, and climate change—pose long-term, often irreversible shifts in the foundations of an economy. These developments go beyond short-term fluctuations in aggregate demand and have significant implications for a country’s long-run aggregate supply (LRAS), fiscal position, and price stability. In the context of Singapore—a small, open, and resource-constrained economy—these challenges are particularly acute and warrant urgent policy responses.
Ageing Population
One of the most pressing structural changes facing Singapore is demographic ageing. As the population ages and birth rates remain low, the proportion of working-age individuals relative to the total population is expected to decline over time.
This has direct implications for Singapore’s labour force. A shrinking labour pool leads to a fall in productive labour hours, which reduces the economy’s potential output. From an Aggregate Supply perspective, this results in a leftward shift of the LRAS curve, reflecting a contraction in the economy’s long-run productive capacity. Consequently, even if aggregate demand remains stable, the reduced capacity to produce goods and services will lead to slower long-term economic growth and could contribute to structural unemployment if older workers exit the workforce faster than new ones enter.
In addition, an ageing population increases pressure on public finances. Government spending on healthcare, eldercare services, and retirement-related transfers such as CPF payouts is expected to rise significantly. At the same time, the tax base may shrink, as fewer people remain in the workforce contributing to income and consumption taxes. This mismatch between rising expenditure and falling revenue can lead to a worsening of the budget position, unless offset by productivity gains or tax reforms.
Geopolitical Risks
Rising geopolitical tensions—such as the ongoing Russia-Ukraine conflict, U.S.-China trade frictions, and instability in key supply regions—can trigger supply-side shocks that affect both global and domestic economies.
Singapore is highly dependent on imported food, fuel, and raw materials. Geopolitical risks disrupt global supply chains and reduce the availability of these inputs, resulting in a higher cost of production for local firms. For instance, oil price volatility directly raises transportation and electricity costs across sectors, while food import disruptions raise costs for consumers and food-related businesses. This leads to a leftward shift in the Short-Run Aggregate Supply (SRAS) curve, causing cost-push inflation, where firms pass on higher costs in the form of increased prices to consumers.
While some of these supply shocks may be temporary, prolonged geopolitical instability could lead to persistently higher prices, eroding consumer purchasing power and raising inflation expectations, which in turn may require contractionary policy responses that further slow down growth. For a trade-reliant country like Singapore, geopolitical fragmentation also poses risks to trade volumes and foreign direct investment flows.
Climate Change
The effects of climate change represent another long-term structural threat to economic stability. As extreme weather events become more frequent—such as heatwaves, droughts, and flooding—there are serious consequences for food security, infrastructure resilience, and the overall productivity of the economy.
In terms of external trade, climate change can cause agricultural production shocks in key supplier countries. As crop yields decline due to droughts or floods, global food prices rise. For Singapore, which imports over 90% of its food, such disruptions translate into imported inflation. As the prices of food and other essential goods rise, the general price level increases, further fuelling inflationary pressures.
Domestically, Singapore is highly exposed to rising sea levels and erratic rainfall patterns. Much of the country lies close to sea level, making it vulnerable to coastal flooding. Floods can damage infrastructure, disrupt business operations, and reduce capital stock, thereby reducing potential output. This again results in a leftward shift of the LRAS curve, especially if adaptation investments are not made in time. Moreover, extreme weather can disrupt transport and logistics networks, affecting supply chains and reducing economic efficiency.
In the longer term, if climate-related disruptions persist or worsen, business costs may rise, global investor confidence may be affected, and Singapore’s competitiveness as a global hub could be undermined unless decisive mitigation and adaptation policies are undertaken.
Conclusion
In summary, the structural changes identified—an ageing population, geopolitical instability, and climate change—pose substantial risks to Singapore’s long-term economic stability. Each of these factors can reduce productive capacity, raise prices, and weaken public finances, either by shifting LRAS and SRAS leftward or by distorting resource allocation in the economy. As such, they not only threaten economic growth and inflation control, but also constrain the government’s ability to meet future challenges. Addressing these issues will require deep structural reforms, particularly in areas of productivity enhancement, fiscal resilience, and climate adaptation.
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