Explain the trade-off between efficiency and resilience that globalisation has created in modern economies.

Rare but high-impact events—like the COVID-19 pandemic, which led to a global recession, and the Suez Canal blockage, which disrupted global supply chains—have highlighted how a highly globalised world can enhance economic efficiency while reducing resilience. In response, many governments have begun taking steps to increase self-sufficiency.

a. Explain the trade-off between efficiency and resilience that globalisation has created in modern economies.[10]

More efficient due to globalisation

One of the clearest gains from globalisation stems from specialisation according to comparative advantage, as introduced by David Ricardo. When countries focus on producing goods and services in which they have the lowest opportunity cost, global output increases. For instance, Singapore can focus on high-end services like logistics and finance, while importing food or raw materials from countries with agricultural advantages. This efficient allocation of resources allows countries to consume beyond their domestic production possibilities curve (PPC), improving overall welfare.

Globalisation also grants firms access to larger markets, allowing them to produce at higher volumes and lower per-unit costs. Through economies of scale, businesses like Apple or Samsung are able to optimise supply chains and reduce marginal costs, increasing productive efficiency. Consumers benefit from cheaper and more diverse products, while firms can invest in R&D and innovation using the profits generated from global sales.


Less resilience due to globalisation

Despite these efficiency gains, globalisation makes economies more exposed to external shocks, and less capable of withstanding disruptions without significant cost.

Highly globalised economies, especially small open economies like Singapore, are heavily dependent on global trade and foreign direct investment. This makes them vulnerable when global demand contracts, as seen during the COVID-19 pandemic. For example, a fall in global income levels led to a sharp decline in demand for exports such as electronics and travel services. In AD-AS terms, this translates into a leftward shift of Aggregate Demand (AD), causing a fall in real national income (Y) and higher unemployment—typical of a negative external shock.

Global interdependence also means that domestic inflation can be heavily influenced by external cost shocks. During the 2021–2022 period, supply disruptions due to geopolitical tensions (e.g. the Russia-Ukraine war) and transport bottlenecks (e.g. the Suez Canal blockage) caused sharp rises in commodity prices. Countries like Singapore, which import almost all their food and energy, experienced imported inflation, which shifted the Short-Run Aggregate Supply (SRAS) curve leftward—raising the general price level (P) and eroding purchasing power.

Conclusion

In summary, globalisation has delivered significant efficiency gains through comparative advantage, specialisation, and economies of scale. However, it has also created vulnerabilities by increasing interdependence and exposure to external shocks. The trade-off between efficiency and resilience is thus a central challenge for modern economies. In an era of rising geopolitical tensions, climate risk, and pandemic uncertainty, governments may need to shift towards policies that balance economic efficiency with the ability to withstand, absorb, and recover from global disruptions—acknowledging that greater resilience often comes at the cost of efficiency.

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