Mar 11 2010
Helping Singapore become an advanced economy
Singapore is an economy which is operating at a level which is very close to its full potential. The island has no natural resources, very little spare land and a small but educated workforce. The recent global financial crisis, highlighted Singapore’s vulnerability to changes in the global economy. Singapore is very export dependent country with a large positive trade balance.
The latest government budget was announced here last week and the focus has shifted towards improving productivity in the economy to make it more resilient to these external shocks in the future. The shift has been from Demand Side Policies a year ago, at the depths of the recession, to Supply Side policies in the recovery phase.
Singapore has always been considered one of the original Four Asian Tigers. The four tigers (Hong Kong, South Korea, Taiwan and Singapore) were economies, which shared the free market policies and outward looking, export orientated philosophies. All four countries were newly industrialized, and throughout the period between the 1960’s and 1990’s they all experienced exceptionally high rates of economic growth. More recently other countries tried to follow this model on a road to development.
A picture of the CBD from near my apartment.
A full description of the budget is here. Most of this is copied below, along with my comments. When you read the article think about the four discussion questions at the end of this post.
S’pore unveils Budget aimed at helping country become advanced economy: By Imelda Saad, Channel NewsAsia | Posted: 22 February 2010 link
SINGAPORE: Finance Minister Tharman Shanmugaratnam has unveiled a Budget aimed at helping Singapore become an advanced economy.
A key theme of the Budget: raising the quality of jobs, skills and the workforce so that workers can continue to earn higher incomes, and the economy, grow.
Singapore emerged from the global financial crisis better than expected, with an overall budget deficit of S$2.9 billion for FY 2009 – much lower than the original S$8.7 billion shortfall projected a year ago. This year, it is expecting a deficit of S$3 billion, as it spends on areas to boost productivity. The government’s key focus is to raise productivity by 2 to 3 per cent a year over the next decade. This will allow Singapore to maintain a healthy rate of economic growth of 3 to 5 per cent a year, even with a slower growth in the labour force.
The government has therefore managed its spending and revenues in the previous 12 months so is now in a position to spend money to boost the future prospects of the economy. This is unlike some other nations such as the United Kingdom which is searching to cut spending to reduce future budget deficits.
The finance minister said the Budget 2010 set out ways to help Singapore succeed with new growth strategies. Hence the plans seemed to focus more on the long-term growth and health of the economy, and not just the short-term position. The government has set aside S$5.5 billion over the next five years to help enterprises and workers raise productivity.
Mr Tharman said: “Raising skills and productivity is the only viable way we can achieve higher wages and is the best way to help citizens with low incomes. If we achieve this goal, we can raise real incomes by one-third in 10 years.”
The Finance Minster is focusing on long-term growth and the health of the economy. This suggests that Singapore is using supply side policies to increase the potential capacity of the economy and shift the Long Run Aggregate Supply curves towards the right. From a Keynesian perspective, supply side policies are effective when the economy is approaching it’s full potential. The policies are considered ineffective when the economy is a recession with depressed aggregate demand. This idea is illustrated below. (note: the same policies can also be illustrated slightly differently, using a neoclassical perspective of LRAS)
The minister signalled that some painful decisions may have to be taken. Less-efficient industries may have to exit Singapore, as the economy continues to restructure. Mr Tharman said the government must rely on the market to achieve this restructuring. Industries and companies will be given help to upgrade through tax benefits and grants to help to innovate and raise productivity, and invest in R&D and automation.
More will be pumped into raising the skills and tapping the potential of every worker. But this will have to be offset by reducing Singapore’s dependence on cheap foreign labour. To encourage companies to rely less on foreign workers, the government is imposing higher levies on foreign workers in phases over the next three years.
The government will pump in S$2.5 billion in over 5 years to enhance Continuing Education and Training.
It will also set up a high-level National Productivity and Continuing Education Council – to be headed by Deputy Prime Minister Teo Chee Hean – to develop a comprehensive system for lifelong learning. In addition, there will be help for older and low-wage workers in a new Workfare Training Scheme. The scheme is aimed at incentivising employers to send older workers for training by providing companies with up to 95 per cent funding for absentee payroll and course fee outlays.
For companies, there will be a Productivity and Innovation Credit so they can get tax deductions for investments in R&D and automation. There are also a slew of measures to help grow more globally competitive Singapore companies. These include tax deductions for angel investors, growth capital for SMEs and incentives to expand sectors with high growth potential.
The government also wants to ensure that no one is left out as it pushes for more inclusive growth, by taking care of the lower and middle income. For example, property tax will be tweaked to be more reflective of the annual values of homes.
Mr Tharman said: “Taking all our measures together, we will be spending S$1.4 billion this year in direct transfers for households. While most Singaporeans will receive some benefits, more will go to those with lower and middle incomes.”
In wrapping up the nearly two-hour speech, Mr Tharman said while the government will commit substantial resources to support the national effort of restructuring the economy and improving the quality of jobs, the success of this will depend very much on the ingenuity and drive of Singaporeans and companies here.
Discussion Questions:
- Explain why in Singapore demand side policies were favoured during the recession, but now Supply Side policies are being introduced.
- Explain how one of the suggested policies will affect the labour market and therefore the level of aggregate supply in the economy.
- What does the finance minister mean by the phrase “no one is left out as we push for inclusive growth” and how does the government support inclusive growth?
- Evaluate the short run and long run effectiveness of supply side policies to increase the level of Real GDP in Singapore.
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pply curve, downward sloping demand curve), the consequences of a change the price of a currency (the exchange rate) is far more powerful than a change in the price of a particular good or service in a product market.

of a recovery, but will wait until they see it,” said Jonas Prising, an executive vice president at Manpower, the giant employment services firm. “In a normal recession, people would now start to feel more comfortable and start hiring, but nobody is doing that today. They’ll do it when they see real orders and real business.”









To me, the experience of drinking a latte, machiato, cappuccino, or simply a “coffee of the week” encapsulates the smells, soft decor and friendly greetings from the barista at my favorite coffee shop. Living overseas, I have turned to Starbucks over and over for a taste of Seattle and a feeling of home.


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