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"Singapore is among economies worldwide that have the most to gain from globalisation." Discuss. [25]

"Singapore is among economies worldwide that have the most to gain from globalisation." Discuss. [25]

Economics Tutor's Note: This Economics A level examination question has been modified; it was attempted in 2009 by one of my MJC students. 

Globalisation refers to the rising volume of economic activities taking place across countries worldwide, which includes the exchange of goods and services through trade, capital through capital flows, labour as well as technology. These impacts are most often than not far reaching which means that the spatial extent to which these exchange occur is fairly wide and dense. This paper discusses whether Singapore is among the countries worldwide that have the most to gain from globalisation. 

Looking at Singapore’s economy, its nature is small and open – Singapore’s resources are scarce, therefore she depends heavily upon the trade of goods and services, and the international flow of labour and capital. Since the 1980s, Singapore has been faced with strong economic growth, low unemployment with some structural unemployment and generally low inflation rates accompanied by a healthy balance of payment surpluses. Such attributes allow Singapore to gain from globalization.

Firstly, Singapore gains from globalization due to its increase in the market reach as market size increases. With an increase in market size, exports will also increase as more goods are traded to more countries, leading to an increase in the net exports. Using the AD-AS analysis, with an increase in the net exports, the AD will increase because AD = C + I + G + (X-M). This will lead to actual growth, as AD shifts to the right.

Insert the AD-AS diagram. Think: how would it look like, and what lines, labels, and other details would you need to draw this? 

Therefore, as such, the increase in the AD from AD1 to AD2 results in economic growth through actual growth and also resulting in a decrease in unemployment rates. In addition, balance of payments improves, assuming that the Marshall-Lerner condition holds. However, due to Singapore’s small multiplier, because of her high savings rate due to the compulsory savings scheme leading to a high MPS (Central Provident Fund) and because of her lack of natural resources resulting in a high MPM, the increase in economic growth or national income may not be that significant and thus its gains are arguably small.

Via globalization, Singapore also gains as firms here can now find cheaper factors of production overseas, for example, China is set upon as a good premise for investments as it has comparative advantage in land, which is abundant and labour, which are cheap. This will therefore reduce the cost of production resulting in the savings achieved by the producers to pass on the savings to the consumers. In addition, firms can also import cheap foreign labour as well as import foreign machinery to boost the levels of factors of production in Singapore. The improvement in the quality and the quantity of factors of production allow the inflation to be kept at a low level as cost push inflation is prevented.

Cheaper production costs which results in cheaper domestic products improves Singapore’s export competitiveness and therefore encourages economic growth. Also the balance of payment position may also improve from globalization due to increased investments, which would likely boost the capital account. With foreign investment overseas, this could improve Singapore's current account. Furthermore, with globalization, investment levels in export-oriented industries could increase, attributed to an increase in the inflow of foreign direct investment. As such, both the quality and quantity of exports is affected. Quality is improved due to more advanced technology, which increases the quality of capital together with more capable human resources which improves the quality of labour. This will increase Singapore's long run productive capacity, resulting in possible potential growth. This is especially important seeing that FDI has been the main engine of long run potential economic growth in Singapore.

However, while Singapore gains from globalization, it also experience some losses or costs. Firstly, Singapore can potentially face demand-pull inflation because of an increase in export numbers, heavily accentuated with over increase in investment and consumption levels. This leads to an increase in the levels of aggregate demand and demand pull inflation could occur shortly after. This will lead to detrimental effects in Singapore, for example, the housing prices could soar. With increases in capital inflows, there could be possible asset bubbles from loose monetary policies in other countries. Hence, inflation could be a possible issue. 

Besides demand pull inflation, Singapore might experience a loss in comparative advantage. Comparative advantage is when a country produces and trades a good which it produces at a lower opportunity cost than another country. This might be seen in the sunset industries where there is low value added-ness, and low skilled and low waged jobs. The closing down of these industries, together with labour immobility, causes structural unemployment, leading to income inequity.

Lastly, Singapore may also face volatile external shocks. If our main trading partners experiences recession, Singapore’s macroeconomic goals may be affected, particularly economic growth, employment and balance of payment as trade may decrease and result in decreased exports. Also, the imposing of protectionism and establishment of barriers of trade due to political turmoil may also result in the aforementioned effects. Hence, it can be seen that Singapore may be made more vulnerable to external events.  

Therefore, while Singapore gains from international trade and global factor mobility in the long run, there may be limitations. This highlights the need for policies to be established, such as Singapore's focus on the managed exchange rate and supply side policies in general, to come up with strategies so that Singapore can gain most from globalization while reducing losses. Singapore's use of exchange-rate focused monetary policy ameliorates inflation because of its gradual appreciation, whilst Singapore's supply side policies effectively address retraining and skills-upgrading to target structural unemployment and maintaining flexibility in the face of a volatile external environment. 

JC ECONOMICS ESSAYS - Economics Tutor's Comments: There are many aspects of this economics essay that can be improved on, but overall this is a very well written economics paper, interesting and well-thought out; overall, this is a really good effort in Economics! NOTE: This economics question is an amended version of the H2 A level Economics paper. This economics response written by my student was recently edited for flow and made more relevant to the 2014, 2015 context, as it was written in 2009. Grammatical and spelling errors were also changed, from the original submission. Most importantly, the initial original conclusion has been made and modified into the evaluative conclusion required for the highest evaluation grade in the current 2014 economics A level essay paper section. Thanks for reading and cheers. 

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