Explain the key macroeconomic aims of the Singapore government and discuss which policy measures might best be used to overcome the most significant macroeconomic problem that is currently being experienced by the Singapore economy.           

Explain and elaborate on the key macroeconomic aims of the Singapore government and explain the consequences of not achieving these aims

  • High employment
  • Low inflation
  • Stable economic growth
  • Satisfactory balance of payments
  • Stable exchange rates

High level of employment

  • A high level of employment has a number of advantages:
    • When employment is high, economy’s output and hence standard of living are also usually high
    • Employment provides opportunity to keep up with developments in technology
  • Unemployment imposes costs on the unemployed and society:
    • Unemployed likely to have lower incomes and more prone to illness and miss out on training
    • Whole economy suffers loss of potential output
    • Actual living standards below potential living standards

Low inflation

  • Low inflation rate of 1-2% reflects a dynamic and buoyant economy – quality and quantity of output tend to rise
  • If inflation rate  is equal or below rival countries, the country can maintain international price competitiveness
  • High inflation is undesirable – can reduce country’s international price competitiveness, reduce real incomes of some groups, create uncertainty and makes it difficult for firms to plan and undertake investments

Steady rate of economic growth

  • Economic growth gives rise to greater output over time
  • Can occur if
    • previously unemployed resources are employed;
    • there are more resources, or existing resources improve in quality
  • However, if resources are fully employed, economic growth relies on increases in resources, in quality of resources through improvements in technology and education
  • Government prefers steady rate of economic growth because fluctuations in economic activity create uncertainty, discourage investment and leads to reduced economic growth

Satisfactory balance of payments position

  • It is often regarded as undesirable for country to have a current account deficit
  • Although this brings short term benefit of greater level of consumption through imports and hence a higher standard of living, this will lead to greater outflows in future

Minimum fluctuations in exchange rate

  • Government is unwilling to let its currency float freely in foreign exchange market
  • Frequent shifts in demand and supply of currency in foreign exchange market cause frequent changes in exchange rates leading to uncertainty for business – might adversely affect country’s trade and investment

Discuss which policy measures might best be used to overcome the most significant macro-economic problem that is currently being experienced by the Singapore economy.

  • In the last few years, the Singapore economy has experienced more volatility and uncertainty in its economic growth than it had encountered over the last 30 years. The vulnerability is worsened by the openness its economy.
  • Beginning with the Asian financial crisis in 1997, the Singapore economy went through a series of external shocks, although the economy did show signs of turning around quickly after each of the crisis. 
  • Both manufacturing and services were always hit, yet these two sectors benefited from an increasingly favourable environment as recoveries in the US, Europe and Japan gained momentum and these countries increased their imports of goods from Singapore.
  • After the global financial crisis of 2008 Singapore recovered showing its resilience but inflation remained high, a big contrast to the period prior to 2007. The exchange rate had strengthened in the last 9 nine years to around S$1.24 to US$1 today. Singapore has been recording a merchandise trade surplus of most of the period since 2009 but faces a risk of a slide presently. The key scenario is one of Europe and North America in severe crisis with emerging markets such as China, India and South Africa showing signs of weakening. Many of our competitors are also experiencing depreciating currencies yet the Singapore dollar remains strong in the near future.
  • Based on this scenario, the most significant current macro-economic problem in Singapore today is slow or negative growth and unemployment. Optimism and confidence is waning while exchange rate implications may add to our woes.
  • The government has mainly used fiscal and monetary policies and supply-side policies to overcome the problems of slow growth and unemployment
  • Fiscal policy – use of government’s tax and spending policies to raise the level of economic activity in the economy.
  • The government could raise its expenditure and/or cut tax rates
  • These measures will shift economy’s AD curve to the right. The multiplier process will magnify this initial increase by a few times and hence output and employment will increase
  • Monetary policy – the monetary authority may try to influence aggregate expenditure by influencing the money supply or interest rates or through manipulating the exchange rates.
  • E.g. a reduction in interest rates will tend to increase aggregate demand and hence income and employment
  • Supply side policies – are used to increase aggregate supply by improving the efficiency and productivity of the product and factor market
  • E.g. through education and training, labour market reforms
  • First, using fiscal and supply-side policies, the government could raise its expenditure and promote higher-value added activities in the manufacturing and services sectors.
  • Thus the government will continue to grow the manufacturing and service sectors, strengthening Singapore’s positions as a global business hub and one of the most attractive places in the region for investments and talent.
  • However, overall the manufacturing sector is not likely to create more jobs. This is because MNCs are shifting to higher value-added and less labour-intensive activities.
  • These will increase labour productivity (i.e. output per worker) rather than employ more workers.
  • So, in order to create more jobs in the economy, we need to put strong emphasis on the service sectors.
  • The way to do this is to continue to develop the established services such as trading and logistics, info-communications technology, bio-technology, pharmaceuticals, financial services and tourism
  • We also need to develop emerging services such as education, healthcare and the creative sector
  • Second, the government could pursue cost-cutting measures, including wage and rent reductions, to lower the cost of doing business in Singapore.
  • E.g. the government could reform the labour markets so that firms and workers can respond to fast-changing conditions.
  • Changes could be made to the CPF scheme – employer contribution rates could be reduced – to lighten the burden on employers and make Singapore workers more competitive
  • Have a flexible wage structure so that companies can respond quickly to changes in the business environment
  • This will help to preserve jobs in a severe downturn while also giving them the confidence to reward workers and increase employment in good times
  • The government also must continue to retrain and upgrade skills of workers – to enable workers to adapt to changing needs of the economy
  • The Singapore Workforce Development Agency (WDA) will strive to upgrade skills of workers, especially those with secondary education or less, so that they can stay employable and take on higher-skilled jobs
  • Third, the government could increase its expenditure to boost entrepreneurship.
  • This process takes time in order to foster a conducive environment for entrepreneurship.
  • A government agency (Action Community for Entrepreneurship, ACE) is nurturing entrepreneurship, pursuing entrepreneurship promotion programmes
  • Fourth, the government could promote competition and free markets in all sectors of the economy.
  • Competition spurs firms to be more efficient and innovative, and more responsive to customer needs. It prepares firms to be internationally competitive.
  • E.g. the government has privatized statutory boards, deregulated industries and opened them up to competition. The financial sector too has been liberalized.
  • Fifth, the strong Singapore dollar, due to the policy of gradual appreciation, could become a liability and needs to be addressed balancing the nation’s interests. Slowing down the appreciation or even allowing a small depreciation could favour the economic climate.


  • For fiscal policy to be effective it is important that the government is accurate in its estimation of the value of the multiplier in order to avoid e.g., overshooting the target and lead to inflation and balance of payments problems
  • For monetary policy – Like fiscal policy, there is a time lag between implementing interest rate policy and the effect to take place
  • There is also some uncertainty in lowering interest rates
  • E.g. if the government reduces interest rates to induce firms and households to spend, it may not be successful because firms and households may be worried about their future demands, and job prospects
  • supply-side policies – the effectiveness of supply-side policies e.g. labour market reforms and other measures may be rather uncertain.
  • Privatization may not result in increase in efficiency if industries do not take account of external costs and benefits.
  • Supply side policies tend to be long-term and uncertain in their measurable outcomes
  • Exchange rate manipulations will lead to competitive devaluation among countries and could spark a crisis.
  • The growth policies must not allow inflation to continue unabated.

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