Explain how globalisation may be a cause of inflation in Singapore.

Introduction:

  • Globalisation is defined as the increasing integration of economies around the world, through the movement of goods, services and capital across countries. Sometimes, it involves movement of labour, investments and technology as well.
  • Inflation – sustained and inordinate increase in general price level of goods and services. The main sources of inflation are demand pull and cost push inflation in Singapore, driven mainly by price of oil and other commodities, rising labour cost and rising consumption or exports.
  • Globalisation has a part to play in driving the factors that cause inflation.

Body:

1) Effects of globalisation that could cause demand pull inflation.

•      With globalisation, Singapore experiences an increase in trade volume. Access to a larger market allows exporting firms to reap economies of scale and with lower cost; exports can be priced more competitively. With a rise in net exports, it will lead to rise in AD and since Singapore operates near or at full employment, GPL will rise.  If AD continues to increase further due to further demand for exports from Singapore’s trading partners, this creates sustained excess AD resulting in demand pull inflation.

•      Globalisation promotes greater investment flow between countries and as Singapore opens up to more establishments of MNCs; increased in FDI leads to a rise in AD. With rise in national income, more jobs are created, hence with a rise in the level of income of Singaporeans, induced consumption will rise alongside, and AD will rise even further, causing demand pull inflation. 

2) Effects of globalisation that could cause cost push inflation

•      Singapore’s high inflation rates could be due to cost-push inflation which could have arisen mainly from imported inflation due to high commodities prices. With increasing inter-connectedness between economies around the world, globalization has resulted in relatively open and import-reliant economies like Singapore to be more susceptible to imported inflation.

•      Extreme weather in the form of droughts and floods in major grain producing countries like Australia, together with rising demand from developing countries have caused food prices to spike, contributing to imported inflation in Singapore.

•      Globalisation, which has led to increase trade and production levels, has also led to increases in demand for crude oil. These have resulted in rising imported inflation in Singapore, as seen from the higher food and transport prices which were a result of the higher price of crude oil.

•      On-going structural changes in the economy due to globalization may also increase the competition for main factor inputs hence pushing up factor prices in the economy that causes cost push inflation.

Conclusion:  With Singapore opening up to globalisation, the effects of this trend will make Singapore more susceptible to rise in demand pull inflation and especially imported inflation.