Assess the reasons for Singapore to focus on supply side policies rather than demand management policies to achieve sustained economic growth.
“We have made skills, innovation and productivity the basis for economic growth. This is key to keeping our economy vibrant, with a strong core of Singapore-based companies where every Singaporean is in well-paying and meaningful jobs by managing foreign workforce growth.”
Source: Singapore Budget Speech 2014
Assess the reasons for Singapore to focus on supply side policies rather than demand management policies to achieve sustained economic growth. [25]
Introduction
Sustained economic growth refers to a rate of growth that can be achieved over long periods of time.
For a country to experience sustained economic growth, there must be both actual growth and potential growth, which means that there must be both a simultaneous increase in aggregate demand (AD) and in aggregate supply (AS).
While many countries use expansionary demand management policies to achieve greater economic growth, demand management policies are of little use in Singapore.
Briefly explain expansionary fiscal policy
For instance, an expansionary fiscal policy works by either increasing government expenditure or cutting personal / corporate income taxes to stimulate greater consumer and investment spending. This increases AD, bringing about a multiplied increase in national income and therefore economic growth will increase. Firms will hire more factor inputs to produce the higher level of output, thereby reducing unemployment.
Briefly explain expansionary monetary policy
The central bank can increase money supply by carrying out open market operations and asset purchases exercises via buying of government bonds. As money supply increases, this will reduce interest rates. Lower interest rates will encourage greater consumer spending since there is now a lower opportunity cost of spending. In addition, based on the MEI curve, we understand that lower interest rates will encourage a higher volume of investments since there are higher returns on investments with lower interest rates. Since Consumption and Investment will both increase, AD will increase, bringing about a multiplied increase in national income and therefore economic growth will increase. Firms will hire more factor inputs to produce the higher level of output, thereby reducing unemployment.
Explain limitations of using such demand management policies in Singapore
1. Trade dependence of Singapore
· Expansionary monetary and fiscal policies mainly try to influence AD via targeting C, I and G which are largely domestic sectors. However, the largest component of our AD is (X – M) due to our dependence on trade.
2. Singapore has a small multiplier value
· The multiplier value k is inversely proportional to the marginal propensity to withdraw which comprises of MPC, MPT and MPM. MPS is high due to our high savings (largely due to CPF which makes savings compulsory in Singapore). MPM is also high due to the lack of natural resources, making it absolutely necessary to import most of our goods and services. This results in a large MPW value, and therefore a small k value. This means that any increase in aggregate demand will not bring about a significant multiplied increase in our real national income, as opposed to countries with large multiplier value like the U.S.
Why Singapore government should focus on supply side policies to achieve sustained economic growth
1. Supply side policies can increase potential growth
· (RWA) Supply side policies can include policies that target the labour market such as providing subsidies for retraining and education such as the Continuing Education and Training scheme, or the SkillsFuture scheme. These provide subsidies for workers who seek to upgrade or improve their skills. Such schemes can increase workers’ productivity and therefore increase the productive capacity of the economy, shifting AS to the right.
· Since Singapore’s economy is often operating at full or near full employment level, there is a need to use supply side policies to increase AS so as to achieve sustained economic growth. Failing which, any increase in AD will simply bring about inflation rather than economic growth.
2. Supply side policies can also increase aggregate demand
· Supply side policies can also work to increase aggregate demand indirectly. Supply side policies can be used to target an improvement in exports competitiveness either in terms of price or quality. This can increase the demand for our exports.
3. Supply side policies can also be used to attract foreign direct investments or increase investments. This can come in the form of building infrastructure or providing tax incentives for investors.
Conclusion
While supply side policies may seem to be able to help Singapore achieve all of its macroeconomic objectives, they may only be able to do so in the long run. A mix of policies, including demand management policies, would have to complement supply side policies to help Singapore achieve a healthy economy.