Discuss the impact of globalisation on Singapore and the policy measures that the government could adopt in response to globalisation.

  • Globalisation leads to increased integration of countries with the global economy through greater trade, capital flows and labour movement across countries. There are potential gains and costs of globalisation.
  • For a small economy like Singapore, globalisation allows it to overcome the small domestic market by providing greater opportunities to venture into overseas markets. Singapore specialises in the production of products based on the theory of comparative advantage. The increase in production also allows firms to enjoy cost-savings of internal economies of scale. On the other hand, the increase in the value of exports raises aggregate demand and leads to a multiple increase in national income via the multiplier process.
  • Globalisation and free trade have also allowed Singapore to consume beyond its production possibility curve despite the lack of natural resources of the economy.  There are more opportunities for Singapore to source cheaper and better quality imports from other countries. Therefore, standard of living tends to improve and the price competitiveness of exports that uses much imported raw materials is maintained.
  • Globalisation encourages both long-term and short-term capital flows across countries. The inflow of foreign direct investment (FDI) into Singapore creates job opportunities and results in multiplier effect on the national income, achieving actual economic growth and potential economic growth. On the other hand, the inflow of short-term capital enables local firms to gain access to foreign funds for their businesses.
  • The greater labour mobility due to globalisation has also helped Singapore to overcome its constraint of small local labour force to attain economic growth.
  • However, the potential gains of globalisation are accompanied by potential costs. As the comparative advantage of countries changes over time, some industries start to move out from Singapore to low-cost countries. This will result in structural unemployment if the retrenched workers do not have the relevant skills to take up other jobs in the labour market.
  • The influx of low-skilled foreign workers into Singapore also tends to compete with the low-skilled local labour. The increase in the overall supply of low-skilled labour tends to reduce the wages of these workers. On the other hand, the increase in demand for high-skilled labour relative to the limited supply raises their wages. Thus, income disparity problem tends to worsen.
  • As countries become more interconnected and integrated, small and open economy like Singapore tends to be more vulnerable. It experiences increased threats  to external shocks such as the global financial crisis and increase in global prices of oil and food.
  • Singapore’s economic growth is highly dependent on trade instead of domestic demand. The dearth of local entrepreneurs also partly explains the dependence on multinational companies. The small local labour force is also not able to support sustained economic growth so the economy is dependent on foreign workers. Hence, the potential gains of globalisation tend to outweigh the potential costs for a small and open Singapore economy  that  lacks natural resources.    Moreover, the Singapore government could implement policy measures to enhance the benefits and reduce the costs of globalisation.
  • Supply-side policies could be used to train workers and subsidise research and development to further improve the efficiency of the production process as well as the quality of products. However, huge funding is required.
  • Expansionary fiscal policy through the reduction in corporate tax will increase after-tax profit, helping to attract FDI. The government could also increase spending to provide excellent infrastructure to improve business expectations, thus attracting FDI. However,

other countries are also cutting corporate taxes and improving infrastructure to compete for the FDI.

  • Besides using fiscal policy such as a reduction in personal income tax to increase disposable income and attract foreign talent to Singapore, the government could also consider adopting supply-side policies to attract the people needed by the economy through a good education system and the development of world-class research facilities. The supply-side policies are long-term measures that aim to make Singapore more competitive while moving towards a knowledge-based economy in the era of globalisation.
  • On the other hand, policy measures could be adopted to reduce the potential costs of globalisation. To reduce structural unemployment, workers need to be retrained in  order to acquire the skills required in the growth industries. However, the success of skills upgrading depends on the receptiveness of the workforce to retraining as workers may not have the abilities to learn new skills or they are resistant to the idea of changing jobs.
  • There is a need to provide assistance to the lower-income households to reduce the widening income gap. Instead of encouraging reliance on the government for financial assistance, policy measures that help workers to upgrade their skills and the Workfare Income Supplement scheme could be adopted to provide incentives for workers to remain employed and acquire better skills that enable them to earn more. This requires funding and time to see positive results.
  • A relatively strong Singapore’s exchange rate has to be maintained to cushion the impact of rising costs of imported raw materials and final goods and services due to rising prices of oil and food. A modest and gradual appreciation of the Singapore’s exchange rate causes the prices of imports to become relatively cheaper and this will help to reduce imported inflation. However, a significant appreciation of the exchange rate tends to erode the price competitiveness of the exports and worsen the current account balance.
  • To reduce the vulnerability to an external shock such as global recession, expansionary fiscal policy could be adopted to reduce the negative impact on economic growth and employment. However, the expansionary effect of fiscal policy is limited as the recession is caused by external factors and Singapore is a small and open economy that is highly dependent on trade. On the other hand, free trade agreements could be signed with various countries to eliminate tariffs on Singapore’s exports, thus boosting the export earnings. However, free trade agreements can at  best  diversify our risks. As the global economy is interconnected, a recession in one country tends to affect the economic performance of other countries.
  • In view of the nature of the Singapore economy, Singapore has gained much from globalisation. A combination of policy measures is required to ride on the waves of globalisation to attain the various economic goals and reduce any possible trade-offs. The Singapore government needs to constantly review the current policies in order to maximise the potential gains and minimise the potential costs of globalisation. Protectionism is not a choice to protect the local industries or Singaporeans. The Singapore economy can only thrive on its openness while using appropriate policies to reduce the costs of globalisation.

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