View: Income Inequality is NOT the Real Problem

This economics viewpoint is contributed by a former economics lecturer, and is inspired by his former economics students XB and ZB

Introduction to the View

This paper argues that, while many economists and journalists argue that income inequality is a problem in the world today, it is not fundamentally a real issue or problem, but the lack of economic growth and issues with social mobility are the larger problem. This paper takes a meandering view around various theories, ideas, and opinions surrounding this challenging and often controversial topic.

Income Inequality

What is income inequality? Income inequality is about the extent to which income is being distributed unevenly among a group of people. Economic inequalities are shown by people’s different economic positions within a distribution, in terms of wages, non-wage income, and wealth, for example. However, people’s economic positions are also related to other characteristics, for example, their level of disability, ethnic background, or gender.

Measurements of Income Inequality

And there are various ways of measuring economic inequality. 

While there is no systematic economic measure, and econometric statistics differ, there are some common measures, for instance, the Gini coefficient, which measures inequality across the whole of society. According to economic theory, if all the income went to one person and everyone else got nothing, the Gini coefficient would be equal to 1 (meaning maximum inequality). On the other hand, if income was shared equally, the Gini coefficient would equal 0 (maximum equality). In other words, the lower the Gini coefficient, the more equal a society, the coefficient itself being between 0 and 1, for those who are interested in mathematics.

And the Gini coefficient can measure inequality before or after tax and before or after housing or other related costs, and, most importantly for our purposes, will vary depending on what is actually being measured.

The Gini coefficient is also related to what is known as the Lorenz curve, another method of measuring income inequality. Basically, a Lorenz curve shows the percentage of income earned by a given percentage of the population. A ‘perfect’ income distribution would be one where each percentage received the same percentage of income. Perfect equality would be, for example, where 60 percent of the population gain 60 percent of national income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income. It might be interesting to know that the Lorenz curve is directly related to the Gini coefficient and the area under the curve can be used in calculations of the coefficient itself.

Issue of Poverty

Another related economic issue that has to be discussed when it comes to discussing income inequality is the issue of poverty.

What is it, really? People in poverty are those who are considerably worse-off than the majority of the population. Their level of economic deprivation means they are unable to access goods and services that most people consider necessary to an acceptable material standard of living, or to borrow an academic term, they lack economic affordances.

Absolute vs Relative Poverty

There are two main types of poverty that we can consider here. Poverty can be absolute, where absolute poverty refers to a level of deprivation that does not change over time, or a relative term in which relative poverty means that the definition fluctuates in line with changes in the general material living standard.

Inequality, by contrast, is always a relative economic term: it refers to the difference between levels of material living standards and/or income, across the whole economic distribution. In practice, poverty and inequality are correlated and often rise and fall together, but this need not always be so. For example, income inequality can be high in a society without high levels of poverty due to a large difference between the top and the middle of the income spectrum, especially in cities that are small and dependent on trade, such as coastal cities.

Technological Disruptions and Income Inequality? 

What causes income disparity? 

There are many reasons. It is my view, and the view of some respectable economists, that fundamentally, technological disruptions are right at the centre of income inequality. For example, some have argued that changing and evolving technology is the primary reason for the increasing income gap in the USA. For several decades after WWII, new technology was a great leveller in the US, providing good jobs for workers. In the 20th century, US income inequality reached its low point in the 1950s, when technological change was rapid and material living standards increased dramatically. But around the 1970s, technology’s economic impact began to change. It went from being an equaliser to a factor that became complementary to people who were highly trained and highly skilled. And, in that transition, less-skilled workers were left behind. This was also the time of globalisation, and in a related vein as we approached the financial crisis, there was massive deregulation, liberalisation, and lowering of corporate and income taxes which favoured the rich, wealthy, and skilled, vis-à-vis the poor, asset-poor, and unskilled workers who could not take advantage of these wonderful economic conditions that were propitious for those who could. (In this link, we discuss the economic impact of disruptive technology on Singapore.) 

Social and Economic Mobility 

Another related issue is one about social (and economic) mobility. In his very controversial tome Capital in the Twenty-First Century, Thomas Piketty noted that Napoleon justified concentrations of wealth and high levels of inequality in France because the nation was a meritocracy. If you worked hard and had talent, you could rise to the top of the metaphorical economic ladder. 

Some people say that such claims about income mobility have been made by the privileged at the top of the economic ladder. In fact, the American dream is similarly built on this central assertion. First used by the US historian James T. Adams in his book The Epic of America in 1931, the American dream is a term to describe the complex beliefs, religious promises, and political and social expectations in the US, and for a lot of people this American dream is connected to becoming wealthy and the ability to achieve everything if one only works hard enough for it. And for yet others, the dream is about liberty (not limited to economic liberty but certainly also making references to it) and the US being the country of unlimited economic opportunities.

What did Piketty say, Anyhow?

As an aside, who is Piketty in the first case, and what are his economic ideas? He has been rather famous for a few years now. 

According to The Economist, Capital in the Twenty-First Century was published in French in 2013 and in English in 2014. The English version became a bestseller, and prompted a debate on global inequality. Some economists even believe it caused a shift in the focus of economic policy toward distributional questions. 

According to Piketty, in the 18th and 19th centuries, western Europe was highly unequal. Private wealth dwarfed national income, concentrated in rich families who sat atop a rigid class structure. Only the chaos of WWI and WWII and the Great Depression in between disrupted this economic pattern of control. High taxes, rising inflation, and the growth of welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in egalitarian fashion. (Do note the Eurocentric slant of his analysis and the provenance of his data.)

But the economic and political shocks of the early 20th century faded and wealth is now reasserting itself. On many economic measures, Piketty reckoned that the importance of wealth in modern economies was approaching levels seen before WWI. From this economic history, Piketty derives an economic theory of capital and inequality: other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it, and demographic change that slows global economic growth will make capital more dominant. 

But there are no natural economic forces pushing against the steady concentration of wealth. Only a burst of rapid economic growth, for him, either from technological progress or rising population, or government intervention can keep economies from returning to patrimonial capitalism. 

Piketty in fact recommended adopting a global tax on wealth to prevent soaring inequality contributing to economic or political instability. The book has attracted plenty of criticism. Some wonder whether Piketty is right to extrapolate about the future from past data. And economic theory suggests that it should become harder to earn a good return on wealth the more there is of it, because of diminishing marginal returns. Also, today’s rich, such as Gates or Zuckerberg, come by wealth through work rather than inheritance. Piketty’s policy recommendations are likely ideologically than economically driven.

Is There a Problem with the US' Social and Economic Mobility?

But many of the economic sceptics nonetheless have kind words for the book’s contributions. And since the last few years nonetheless, however, the findings of Piketty and other economists have entered mainstream debate, challenging long-held assumptions. From examples in the USA, bringing into focus how lopsided US income distribution is, findings have not only shown that inequality is widespread, they have also demonstrated that there is relatively little opportunity for those in the lower quintiles of earners to move up to a higher bracket.

Economic conservatives have long argued that inequality is fine as long as income mobility is robust. However, economic data gathered since the early 2000s have shown that US social mobility is low and has been so for half a century, and indeed, it is considerably lower than the US’ European competitors, where social safety nets are much larger and taxes much higher.

In response, many economic commentators and journalists have decried the unequal distribution of income and wealth and argued that governments should limit inequality at the top and make it easier for people to climb the economic ladder. There is an economic problem with this, however. Think about it. For every poor kid who rises to the top fifth in income, someone must fall out of the top fifth. And the proportion of those who rose was never robust, even in the nineteenth century. Some go up, and others go down.

What matters more is absolute social mobility: the degree to which the economy can produce rising wages for all. In other words, the American dream should be built on expanding opportunities for society, which can only come about if average real wages go up. Earning more than your parents is as much or even more a result of the rise of wages after inflation across the economy as it is a reflection of income mobility. In other words, if you are born into the bottom quintile but real wages rise, you will likely exceed your parents’ income even if you remain in that quintile.

Possible Solutions

What we now know is that we cannot rely purely on social mobility to solve these economic problems. Because there has been economic growth, about two out of three children these days are doing better than their parents. But many of them are not doing much better, and about half of this group remain in the same quintile they were born into. Indeed, rising income inequality also makes it harder to move from one quintile to another: the rungs on the economic ladder are farther apart.

Redistribution is not a sustainable solution to the whole complicated issue: For two decades, the inequality lobby tended to focus on a tax solution – how the rich can be taxed more and how that tax can be better spent on reducing the gap between rich and poor. It is not a good way to solve the economic problem, although it is definitely a fast way of creating flatter income graphs. 

Social and Economic Policies

And the main point for all of us is that a combination of social policies and economic growth policies are needed to produce wages for all. They could include a higher minimum wage (but not necessarily a Universal Basic Income or universal income), child allowances, and more and higher level educational programmes. 

But they should also include serious economic stimulus measures by governments to promote economic growth. And for example, government spending programmes should aim to sustain decent income levels through unemployment insurance, expanded earned income and child tax credits, and outright cash allowances. The government should also aim at foundational projects that facilitate long-term economic growth, including expansion of transportation and online infrastructure.

Have Faster and More Economic Growth

There is simply no escaping the central fact here that welfare depends on faster economic growth. In fact, there is always some inequality in any vibrant economy. 

The focus should rightly be on the vitality of the overall economy. And to that end, equality of opportunity which gives workers chances to succeed, is the bigger and more important concern that all governments should address. Give more economic chances - but how can the economy create more economic opportunities?

Entrepreneurship

The answer could be entrepreneurship. In a related issue, this whole issue is related to the fact that we need more entrepreneurs in society as a whole. When entrepreneurship drops, job creation drops, dragging economic growth with it. Perhaps, economic innovation, creativity, and the willingness to take risks will reduce and ameliorate income inequality and produce economic growth for all – so perhaps in the final analysis pro-growth entrepreneurship is the real economic answer to income inequality.

JC Economics Essays - We aim to be an economics blog with opinions, views, and perspectives. The article was contributed by S and he worked in conjunction with XB and ZB. The rest of the research came from academic articles. (XB once raised some of these important economic issues at a forum and some of the views are his.) Thank you for reading and cheers. 

Evaluate the view that full employment should be the primary macro-economic objective of governments. [25]

The main macro-economic objectives of governments include ensuring stable prices and low inflation; promoting economic growth, both in terms of actual and potential growth; full employment (or conversely low unemployment), and ensuring a healthy balance of payments (BOP). This paper argues that, on the one hand, while governments should aim for full employment, full employment should not just be their primary macro-economic objective.   

Unemployment is defined as the situation where those who are able and willing to work are not able to get jobs, and full employment involves zero or very low unemployment. (In economic theory, there are many types of unemployment, such as frictional unemployment and demand-deficient unemployment, among other examples.) In practice, there will always be some frictional unemployment as people are looking for new jobs or leaving school. It can be argued that an unemployment rate of around three percent is close to full employment. However, it is difficult to determine the full employment level precisely. Full employment implies that the economy is operating at its full capacity and there is no output gap or demand-deficient unemployment.

One of the most important reasons that governments target full employment is that because high unemployment has various social and economic costs. First, unemployed citizens will earn little income, enabling little consumption as they do not have much disposable income. Also, the unemployed may become less motivated and less skilled, losing their human capital, which makes it more difficult to find employment in the future, and with a lack of skills, even with economic opportunities, they cannot get jobs. Also, during periods of high unemployment, the government will have to spend more on unemployment benefits and other transfer payments, which may increase government borrowing. Finally, unemployment may exacerbate social problems such as crime, vandalism and social alienation, especially if unemployment is concentrated among young people, for example in Spain during the financial crisis, when youth unemployment rose massively. Therefore, given the social and economic costs of unemployment, there are many benefits to achieving full employment.

To achieve full employment, Keynesian economists will argue that it is necessary to increase AD when the economy is in a recession. For example, this can be achieved by expansionary fiscal or expansionary monetary policy, which means increasing government spending and reducing direct taxes, and increasing money supply and reducing interest rates respectively. These expansionary policies will cause AD to increase and shift to the right, increasing inflation if the economy is at or near the full employment level, but if there is spare capacity or un-utilised resources there should only be a limited increase in inflation. Therefore, there is a strong economic case for aiming for full employment through demand management policies. And the Phillips curve suggests there is a trade-off between inflation. Therefore, achieving full employment may cause the side effect of demand-pull inflation.

On the other hand, not all economists agree that full employment should be the primary objective of governments. They argue that unemployment cannot be reduced below the natural rate of unemployment (or NAIRU, or Non Accelerating Inflation Rate of Unemployment) without causing inflation. Keeping inflation low is also another objective of governments. Also, any reduction in unemployment below the natural rate, due to demand management policies, will just be temporary. This is because the economy will return to the equilibrium level of national output. Therefore, monetarist economists do not believe there is any point in reducing unemployment below the natural rate because the only effect will be to increase inflation. Therefore, according to monetarist economists, attempts to achieve ‘full employment’ of three percent may conflict with other macro-economic objectives, such as higher inflation. For example, many economies have an inflation target as the primary objective of their Central Bank, such as the Federal Reserve, and the economic argument here is that if low inflation is achieved, it will enable economic stability and encourage investment and sustainable growth in the long term. This is preferable to a government using demand-management policies and causing economic boom and bust cycles.

However, another way of aiming for full employment is to use long run supply side policies to try and reduce the natural rate of unemployment. For example, increased training opportunities and better education can upgrade the skills of workers and reduce structural unemployment, which is what initiatives such as SkillsFuture aim to achieve. However, these economic policies will take time and it may not be possible for the government to reduce all unemployment because of imperfect information and bounded rationality on the part of government agents.

And low unemployment can also be achieved through keeping inflation low and maintaining steady and sustainable growth. For example, in the 1990s, both unemployment and inflation fell due to supply side policies and effective demand management. Therefore, this suggests that a low inflation target can also be effective in meeting other objectives. 

In conclusion, overall, low unemployment is a desirable objective, but the economic policies to achieve this need careful examination because of their limitations and alternative macro-economic objectives. Increasing AD will only be effective if there is a recession and spare capacity in the economy. To reduce the natural rate, long run supply side policies will also be needed. In addition, full employment does not necessarily have to be inflationary too, as economic growth is sustainable, we could get close to full employment without inflationary pressures.

JC Economics Essays – This A level economics essay was based on lecture material from a UK economics tutor. It was in response to an adapted question from the A level Economics syllabus. Also, it was written during examination conditions of time pressure. What did you learn from this response, and what economic theories did it tap on to addressing the economics essay question? However, this economics paper is not very strong in the anti-thesis arguments - what could be done better? How could the other side of the story or narrative be made even better? In addition, there were some economics terms which were mentioned - did the writer define the terms? How could the writer have woven the definition of the terms into the sentences? These critical thinking questions should be asked when you read economics essays. 

At JC Economics Essays, we focus on strong economic writing skills, clear and direct explanations of core economic concepts, and the use of relevant, real-world examples to strengthen arguments. And we also strengthen students’ understanding of economics as a subject. We also focus on critical thinking and evaluating economic arguments. Thank you for supporting us, and cheers! 

What is the economic impact of Brexit — what happens now that Britain has voted to leave the European Union (EU)?

This economics post discusses how economic growth, trade, immigration, international politics, and more would be affected by a split with the EU - today's historical Brexit

The immediate economic impact of today’s historical event was that Britain’s exit from the European Union shocked global economic assets and financial markets and unleashed massive economic uncertainty.

First, the pound plunged to its lowest level since 1985.

Second, investors fled risky economic assets and turned to the dollar and the yen, sending them soaring.

Third, the Bank of England earmarked £250 billion, about US$344 billion, for potential stability measures, which definitely means that the economic experts expect some turmoil in the near future.

Of most immediate economic consequence, Britain’s vote to leave Europe sent global markets on a wild descent. 

Investors gasped at this major damage to the global economic landscape and decided it looked dangerous and uncertain, and that they preferred to pull their money out of riskier places, and place their money in safe havens, for example Japan which saw the soaring of the yen today (24 Jun, Singapore time).

However, it has to be said that few economists expect that Britain’s departure from Europe will set off a full global financial crisis like the particular economic disaster seen soon after the collapse of the investment banking giant Lehman Brothers in 2008. 

Yet, it should also be said that at the time, that situation was not seen as a major economic blow to the world, and it turned out that the economic situation worsened rather terribly later leading to the global financial crisis.

Economic growth or lack thereof?

Nonetheless, most economists think that leaving the bloc would slow the UK’s economic growth. In a detailed assessment, professor Nick Crafts estimated that the EU directly raised UK’s economic prosperity by about 10 per cent, mainly due to increased economic competition and better access to the single European economic market. 

Many economic questions now linger: what would a new Ministry of trade have to do after the UK broke off with the EU to replace current trade networks and economic relationships? Sign a trade deal with the remaining 27 members of the EU each? 

Should the UK now come to an arrangement with about 50 additional countries with which the EU has preferential deals, or all the remaining 161 members of the World Trade Organisation (WTO)?

Apparently, the Leave campaigners started their campaign suggesting that the UK could maintain access to the European single market, they now think the UK could still trade with the EU under WTO rules and eventually strike a bilateral deal with the trade bloc, and yet not be a part of the EU’s custom union. Such an accord is likely to take years to negotiate, say experienced economic negotiators.

Economic impact of migration? Immigration as an issue?

Britain’s net migration stood at 333,000 in 2015, the second highest figure on record and more than PM David Cameron’s pledge to bring the figure down to the tens of thousands.

It has to be said that net immigration from EU countries, particularly central and eastern European member states, rose rapidly after their accession to the EU and recently when citizens of Bulgaria and Romania also acquired the economic right to work and settle in the UK.

Only by leaving the EU can the government reduce the numbers of EU migrants. That would be fair to say. 

However, the issue is that even if EU net migration was cut to zero, Britain would have far more migrants from non-EU countries than the prime minister’s tens of thousands pledge. Globalisation is by far the bigger issue. 

As long as Britain’s economy is doing well internationally, it attracts immigrants. But now that Britain has left, its economic growth may slow or even fall, thus leading to a decrease in migration - in that particular sense!

What does the future bring? No one knows?

Brexit hurts economically speaking.

The main groups of economists who have published economic studies in the campaign use different economic models and different datasets but speak with unanimity on this subject.

There are many negative economic results: the UK erecting trade barriers with the EU would hit economic prosperity very badly, which is not easily replaced by greater economic free trade elsewhere in the world. Leaving the economic bloc would afford the UK little additional regulatory freedom and there could be negative long-term economic consequences from the short-term upheaval of Brexit. 

On balance, experts and economists overwhelmingly think leaving the EU is bad for the UK economy.

One final point – on that 350 million pounds claim…

However, in the final analysis, no one really knows what happens now. The collective imagination leads to dark places.

In particular, as a final note on this sad day, one major piece of news that is making the rounds is the fact that some of the Leave camp's economic claims turned out to be not true. One major example is:

“The EU now costs the UK over £350 million every week – nearly £20 billion a year”

- by the Vote Leave campaigners

Well, yes it turns out that EU membership does come at a cost. Sure it does! 

Nothing is free in the world; there is no free lunch. 

Yes, the UK pays more into the EU budget than it gets back, but it turns out that the UK does not pay £350 million a week. In fact, the UK’s discount, or rebate, reduces what the UK should pay. Some of the so-called given away money came back in EU payments funnelled through the government, so the government’s ‘net contribution’ was around £8.5 billion, or £160 million a week. The EU also spends money directly in the UK (many economic articles show where EU grants go, especially to some poorer cities in the UK) – well, since this is an academic article, especially in grants to British researchers, for instance.

Therefore, it turns out that one of the major claims by the Leave camp was fradulent, fake, false, inaccurate. 

Maybe Brexit is a mistake. Only time will tell.

JC Economics Essays – Today’s post is a special news report on a historical economic issue. It is a huge and momentous event in the world’s economic history. 

Special thanks to FT, ST, HP, and SS for synthesising this news report on Brexit and its economic impact. 

JC Economics Essays is an economics website has a wide range of economics resources, such as economics essays at the A level standard (H1, H2, H3, and A level standards), and undergraduate and masters economics essays. In particular, JC Economics Essays has model A level economics essays and responses that students could use as a reference for learning, as well as tips and techniques for writing strong and well-argued essays. Thank you for reading, and cheers.

"What difference did China’s high-yield agriculture make in China’s long-term growth and development?"

Shared master's students economics essays for LSE (London School of Economics and Political Science) MSc. 

EH446 Economic Development in East and Southeast Asia series 

For over two thousand years, the Chinese Empire was able to survive almost exclusively on its high-yielding agricultural sector. While many scholars have highlighted the short-term benefits, it is of equal importance to look at the long-term effects that high-yield agriculture had on the growth and development of the Chinese economy. When looking at the microeconomic side of Chinese growth and development, high-yield agriculture created prosperous conditions that had positive effects on the society. However, when looking at the macro aspect of Chinese economics, a different conclusion can be drawn. Many scholars have argued that while growth occurred throughout Imperial China, an emphasis on agriculture over any other sector ultimately stifled further economic development. Before delving into the question of whether long term economic growth and development occurred as a result of China’s high-yielding agriculture, one should first look at the social and economic conditions that allowed for and perpetuated the agrarian sector that is emblematic of Imperial Chinese economics. 

According to Deng, Imperial China was a physiocratic state whose society and economy were heavily impacted by their ability to harness and develop agricultural exploits.  Based upon a peasant-state relationship that was cultivated during the Qin dynasty, the majority peasant population was given land in exchange for loyalty and service to the emperor. That is to say, in order to expand territorial boundaries the Qin emperor employed rural peasants as soldiers and, in exchange for their services, they were rewarded a plot of land. This resulted in a system of ‘Chinese private land ownership’; an institutionalized sense of peasant entitlement linked directly to land ownership. Empire building in the early imperial period was based upon land proliferation and created pareto optimal conditions where the empire increased territory and tax revenue and the peasant class gained land and private property. As a result, Imperial China was largely rural and based on an agrarian or a  ‘customary’ economy.    As explained in his article Development and Its Deadlock in Imperial China, Deng explains that the Chinese socioeconomic structure had “three distinctive economic types - customary, market, and command - […and that] there were three main macrocomponents in the Chinese system” namely a rural sector, an urban sector and a combination rural/urban sector which contained amalgamations of the aforementioned three distinctive economic types. The rural sector made up the largest component of the Chinese economy and was marked predominantly by the customary type of economic activities with a smaller mercantile element.  The latter two, the urban and semi rural/semi urban types, made up smaller components of the economy. The urban type was predominantly mercantilist but also relied heavily on the customary sector for its survival.  The semi urban/semi rural sector was the state-run sector, which exemplified a command economy that “control[led] a considerable proportion of key commodities and their prices.”  It should be noted that, as a result of having a predominantly rural type economy, institutions that would protect private property and land holding would be of paramount importance in the Chinese social-state contract. In this way, land holding becomes part of the peasant endowment and the mass population becomes irrevocably linked to the land and her exploits. Together with institutions and an emphasis on the rural customary economy, the advent of a high-yielding agricultural economy as a hallmark of Imperial China is not surprising. With this framework of the Chinese economy in mind, it is now possible to explain how Chinese high-yield agriculture effected Chinese growth and development from a micro and macro standpoint. 

For the purpose of this paper, I will focus on two main elements that were greatly affected by high-yield agriculture. The first is that, due to an emphasis on agriculture, commercialization at the macro economic level was not able to evolve. At the micro economic level, commercialization did exist but was always overshadowed by the political, social and economic institutions that allowed for and maintained high yielding agriculture.

Throughout Imperial China, China’s economy was “fundamentally private and autonomous.”  That meant that while the state did collect taxes on agriculture, “[they] were normally low and predictable.”   In addition, the state was not responsible for providing welfare nets for its population. Therefore, individuals had to rely on their own productive capabilities to sustain themselves and their families. As a result, extensive land ownership and ipso facto high-yielding agriculture made it possible for peasants to support themselves. This is linked fundamentally with the idea of rational choice. As Deng explains:

“Any equilibrium [of a mixed economy between commerce and agriculture] could only be reached voluntarily by the choices of the majority in society. If voluntary, such choices had to be rational and if rational, then guided by economic incentives. These incentives had to be derived from particular institutions. The Chinese landholding system generated strong incentives for the farmer to stay in agriculture as his lifetime employment.” 

In other words, economic incentives were based upon the Chinese landholding system. In this way, people were tied to their land and would use their productive capacity to favor economic activities that took advantage of their land endowment. Since they did not rely on the state for their welfare, they had to be able to provide for it themselves through farming. 

While agriculture came first, farmers at the village level still needed to buy tools and purchase commodities. This facilitated the existence of local or micro level commodity markets and for proto-industrialization. Due to the ability to produce high yielding crops, many peasants found themselves with leisure time thus allowing them to participate in a wide range of non-agricultural activities. In essence, it was high yielding agriculture that “supported commercial activities in Imperial China whether spare time driven or spare produce driven. Here what the peasants aimed at was not economies of scale but economies of scope.”   While diverse commercial markets did exist at local levels, it should be noted that they did not exist beyond that because there were many disincentives for a peasant to completely rely on commercial activities. Since the livelihood of the peasantry relied so heavily on owning property and farming on it, rational choice pushed people away from becoming merchants or relying on commercial markets. The peasantry was greatly risk adverse and since there was little to no institutional security in sectors beyond agriculture, it discouraged people from increasing their productive capacity in something other than farming. As Deng explains, “to conceptualize this hyper propensity for land ownership, the opportunity costs for peasants to lose land [and hence, to leave agriculture] must have been very high - so high that only extra economic force was able to separate a peasant from his land.”   As a result, despite having entrepreneurial prowess, the peasantry would not leave agriculture and so, China would not see an integrated single market economy. 

Moreover, those that were in the merchant sector were also greatly affected by the emphasis on land ownership. Merchants would use their capital investing in land or education but not on continued commercial enterprise, as this was not seen as honorable. In this way, at the microeconomic level, there was a commercial market or mercantile element to the economic system based upon high yielding agriculture; “Chinese land ownership […] encouraged production, supported commercialization and induced urbanization but only to a degree.”  However, at a macro level, “China’s loosely connected localized markets [did not] converg[e] enough to be integrated into a single market.”   That is to say that the peasant, while being active in local markets, and gaining a surplus wage as a result, had no incentive to fully commercialize and give up the security they had intrinsic in the land ownership system. The opportunity cost of losing their endowment for potential high salaries was too high a risk since the state and economy did not readily support broad commercialization and merchants did not have the same assurances of sustainability, as did the rural agrarian society. In other words, linkages to land ownership pushed would be merchants away from creating larger, more diversified markets and forces the mass population to remain in agrarian modes of production. In this sense, high-yielding agriculture had a long run macro economic tendency to stifle increased and diversified commercialization. This had a profound effect on China’s long run development trajectory. 

The second element being addressed is the effect that a predominantly agrarian economy had on innovative technology as population increased. Due to a rural sector that could produce high levels of staple crops, the Chinese population grew at an alarming rate throughout the imperial period. However, as Myers points out, the “Chinese economy, after the eleventh century, merely grew larger in size”  but did not result in the development of a new production system based in something other than the agrarian model. The macro economic implication for the Chinese economy is that it did achieve growth but actually stifled technological development in that and other sectors. 

Before delving into this discussion further, it is useful to look at the Malthusian analysis of population growth and the subsequent work by Mark Elvin. First, Malthus observed that “a complex relationship among technology, population and available resources in any society inevitably produces two distinct trends.”  The first trend is that, a society’s capability to produce goods and services from a given resource base is directly correlated to the society’s use of increased technology and will cause an increase in living standards. It follows that as living standards increase, this will encourage growth in the population. At a given point, population “presses against the available resource base and the productivity of new entrants into the labor force steadily decline […] gradually lowering living standards.”  From here, Mark Elvin expanded upon the Malthus model to explain “the remarkable market organization and institutional changes that occurred [after the 17th century] and that supported huge population growth without fundamental economic development [could be conceptualized] as a high level equilibrium trap.”   

In other words, when placed in the Chinese perspective, the economy had “achieved impressive improvements in traditional technology alone” so much so that the Chinese economy had achieved very high productivity through the agriculture sector. The Chinese high-yield agricultural system had provided the population with its subsistent needs. At this point, it would follow that as the population grew, this sector would no longer be able to support the population at a subsistent level and this would necessitate a transformation in the technological capacities of the sector to allow for new sustainable capacities. However, as we see, population over growth did not cause for an institutional change nor did it bring about the traditional Malthusian checks on population, i.e. famine, disease - to limit the population growth. Due to the propensity of high yielding agriculture to produce a large enough food supply, the rural sector was able to postpone Elvin’s high-level equilibrium. This creates a situation where, in the macro economy, China saw growth but not an increase in development. By the end of the imperial period, high-yielding agriculture had created a population of subsistence farms.

At the crux of this second element lies the fact that high-yield agriculture truly stifled innovative technologies and prevented Chinese productive capacities to go beyond labor-intensive production. Bray, for example, speaks of Chinese “agriculture in late imperial [period] in terms of stagnation, involution or growth without development. [She] holds that although improvements in the micro-management of farming continued to produce small increases in crop yield, this was at the expense of the productivity of labor.”   

Magnus, via Perkins highlights this reality by explaining that while total grain output did rise in the same proportion as population,  the increase in agricultural yield was not due to technical innovation in the late imperial period. Rather, he, like Bray, characterizes this period as one of “technical stagnation mainly because there was little change in farm tools.”  Perkins attributes this high yield, rather, to the fact that land was under constant cultivation and that this sector was still riding on successful cultivating advancements of highly successful innovative technologies implemented in the Tang and Song periods through institutionalized adjustments. During that time, innovations in hydraulics, diffusion of agrarian practices, and official development of early ripening seeds, allowed for such high-yielding agriculture such as multi cropping of rice. So while these innovations occurred early on, there were no significant changes in the way that the peasantry farmed over several centuries. As Bray explains, by simply adding more labor inputs, agriculture was able to yield more without significant changes in the type of labor technology employed. This is not to say that farming did not undergo transformation, the key is that high-yielding agriculture perpetuated a system that allowed farmers to continue the type of labor they had successfully mastered for centuries without significant change in the skill set required to yield continued surplus. 

To further this argument, Boserup explained, “a distinction may be made between two types of innovations in farming technology - labor saving and labor using.”  In the case of Imperial China, it is clear that we are looking at a case of labor using innovations. Boserup points out that the two types of innovations differ in three important ways, first, “innovations of labor saving technology tend to raise the returns per unit of labor whereas opposite is true of with new labor using technology.”  Second, you would need to use greater amounts of labor to offset the initial disadvantage.  Thirdly, while new labor saving technology required invention in other areas, such as engineering, Boserup explains, “labor using technologies may be first invented in a few pockets of high population density.”  As such, we see that this is compatible with the fact that as the population grew, it was simply implemented into the production of high-yielding agriculture.  So while there was transformation in the cropping systems, Chinese farmers relied on labor intensity and not innovations of mechanized tools to support the growing population. With this emphasis on the use of labor and not on innovative technologies, high yield agriculture led to long run diminishing returns in labor, and diminishing standards of living. 

The high-yield agricultural system perpetuated an ever-resilient rural economy that significantly prevented long run development. While in the short run, “institutions that supported high yield agriculture [were] capable of alleviating short run human suffering, [but] China’s [agricultural…] resiliency prolonged its economic stagnation.”  The first element expresses that, while high yield agriculture did allow for localized markets, it did not allow for further development of commercial markets or non-agrarian sectors.  The effect was that there were no unified Chinese commercial markets and a very limited merchant class. In the long run, high yield agriculture forestalled significant development in non-agrarian markets.  The second element furthers the idea that long run development was not achieved as a result of high yield agriculture. As a result of production being so robust, high yield agriculture was able to support very large populations without necessitating extensive technological innovation. Moreover, since the peasantry could increase crop productivity by adding labor instead of introducing new technologies, there was no incentive to either change the methods of production or improve upon mechanical technology. While in the long run, high-yield agriculture allowed for population growth, it did not allow for technological innovations in this sector and prevented the population from shifting to another sector to sustain itself. In this way, long run development was significantly curtailed. As a result, reliance on high yield agriculture had a two-fold detrimental effect on Chinese long run development in terms of sector (especially commercial) diversity and technological development.  

Chinese high yield agriculture was ultimately more disadvantageous to Chinese long run growth and development. 

JC Economics Essays - This short series on JC Economics Essays is a set of shared economics essays on economic development, shared by my former classmates KVL and TZ with me when we were reading our MSc. at LSE, London, United Kingdom. We shared essays so that we could gain additional perspectives on how to craft good essays to get a high grade for the Master's degree at LSE, and that was a good way of sharing information and material. All the essays were graded highly by Dr Kent Deng, a very excellent and inspirational tutor and lecturer at the LSE when I was studying there. I hope you find the essays on economic development interesting or useful. Special thanks to KVL and TZ (both from the United States of America) for their kind sharing.

EH446 Economic Development of East and Southeast Asia

"In your opinion, was China capable of nurturing its indigenous Industrial Revolution?"

Shared master's students economics essays for LSE (London School of Economics and Political Science) MSc. 

EH446 Economic Development in East and Southeast Asia series 

Introduction

This essay aims to evaluate whether or not China was capable of nurturing its indigenous Industrial Revolution. In order to answer this question, it is important to first clarify the question by defining ‘indigenous Industrial Revolution’ and explaining what is meant by ‘capable.’ This essay will treat China’s ‘indigenous Industrial Revolution’ as the great achievements in science and technology during the Northern Song period.  ‘Capable’ is considered to mean China’s inherent ability to maintain and invigorate its technological momentum in the absence of outside forces (most notably, the pressure from Tatars and the Mongol invasion in the thirteenth century).

This analysis begins with a summary of the product and process innovations leading up to the thirteenth century, followed by the shift towards extensive-type growth in agriculture, transportation, and economics. An explanation of the role of the state will follow, highlighting the differing roles of ideology, competition, and science in order to compare the Chinese and British cases. Using the structure defined above, this essay finds that China possessed both inherent strengths and weaknesses for cultivating its indigenous Industrial Revolution. The positive factors that led to significant technological advancements in the Northern Song period persisted, as did economic (extensive) growth in the years that followed. China lost its ‘edge’ when intensive growth slowed due to government (dis)incentives and a lack of competition. By considering the debilitating impacts of these internal factors , this essay concludes that it would have been difficult for China to foster its own Industrial Revolution, even in the absence of foreign struggles.

Intensive Growth during the Northern Song

China’s great achievements during the Northern Song period did not happen overnight. Song success was the result of a long period in which a “well-functioning” system developed; by 300 B.C., China “had many characteristics of a market economy.”  From that point through the early twelfth century, an industrial revolution was in the making. Scholars point to China’s early arrival on the scene, predating the British Industrial Revolution by centuries. 

The Northern Song period witnessed the invention of many products including massive ships, the compass, and military tools.  As John Hobson points out in his critique of Eurocentric writers, objects designed for large-scale conflict and exploration were not the only innovations during this time period. While useful for military technology, iron was also used to produce commonplace items such as shovels, stoves, and nails.  Iron was not alone in its versatility; paper was also used widely in China before reaching the West, for such disparate functions as wallpaper, money, shoes, and even military armour. 

In addition to the various new products that surfaced during the incubation of China’s Song Revolution, many process innovations also occurred. Metal treatment technologies such as smelting, confusion, oxidisation, and decarbonisation were mastered during this period, rendering Chinese cast iron production and metallurgy practices less expensive and more diverse.  In the textile industry, the introduction of spinning wheels using hemp and silk marked a great procedural improvement in this field.  It was these technological innovations in products and methods that stimulated China’s economic growth through the Northern Song period.

Extensive Growth during the Southern Song and Later

During the transition from the Northern Song to Southern Song period (in the early twelfth century), economic growth continued but its foundation shifted; society was no longer propelled by the innovative vigour of the preceding years. By the time the Ming Dynasty came to power in 1368, a new trend had emerged. In The Lever of Riches, Joel Mokyr identifies the sources of this new kind of growth as the “expansion of internal commerce, monetization, and the colonization of the southern provinces,” also noting the growing population and agricultural “intensification” that continued through the nineteenth century.  

Agricultural “intensification” efforts differed from the agricultural inventions of the Northern Song period in that they were not unique, novel creations. In most cases, such efforts were manifested in the form of small improvements to existing products or practices.  In his article, ‘The Needham Puzzle: Why the Industrial Revolution did not Originate in China’, Justin Yifu Lin cites some examples, including the share plow for creating furrows in soil and the introduction of Champa rice to be grown in the southern provinces.  Seed drills, weeding tools, fertilizers, and pest control also emerged during this time. 

As the population shifted southwards and agriculture adapted to gain the most from this territory, transportation capabilities were also bolstered. The Chinese used internal waterways to send coal, iron, and steel south to meet the demand from these provinces.  In addition to the physical infrastructure, fiscal systems were also created to tax and regulate internal and international commercial activity.  The change from China’s intensive economic growth during the Song technology boom to the more extensive pattern in the years that followed was not simply a function of northern aggression and natural conditions. Institutions, ideologies, and methods of innovation also played a role in determining why China’s Song Revolution did not follow the same trajectory as the later British Industrial Revolution.

Institutions, Ideologies, and Incentives

The Chinese government played an integral part in the state’s economic development. Agriculture flourished in part because of government incentives and advantageous loan conditions.  The close alignment of the state apparatus with the economy created a kind of symbiotic relationship between the Chinese government and science and technology: when the state was strong, innovation thrived. In their essay, ‘The Evolution of Chinese Science and Technology’, Jin Guantao, Fan Dainian, Fan Hongye and Liu Qingfeng cite an example of this in the textile industry – noting that textile technology blossomed during the successful Song period, but then “degenerated as the dynasty collapsed and upheaval and destruction set in.” 

Scholars who attribute the stagnation of the Chinese Industrial Revolution to restrictive state action have been criticized for exhibiting a Eurocentric bias.  While this may be a valid contention, it is important to note the shift in ideology when the Ming Dynasty came to power. “Obedience” and “conformism” have been used to describe key values that prevailed during their rule.  John Hobson attributes the 1434 Ming ban on foreign trade to a return to Confucian principles; he asserts that it was more important for the Ming rulers to maintain the ban in theory in order to retain regime legitimacy, while the ban was loosely enforced in practice.  

One critical difference between the political climate of the technology revolutions in China and Britain was the lack of competition in the Chinese case.  The absence of public debate and a competitive market during the Ming slowed the type of accelerated growth that had been achieved during the Song and that was later seen in the British case. The strong state and its roots in Confucianism also stifled the kinds of scientific experiments that led to significant discoveries later in Europe. Confucianism valued knowledge learned from direct experiences over experiments, going so far as to deem the latter to be “witchcraft.”  The benefits of a system that intertwined science and technology were realized in Britain during the Scientific Revolution. In China, these remained discrete concepts and thus lacked the benefits of this kind of synergetic “feedback” mechanism. 

Conclusion

To answer the original question, was China capable of nurturing its indigenous Industrial Revolution, this essay has raised several points. First, although economic growth remained positive, there was a shift from intensive to extensive growth after the fall of the Song Dynasty, which was significant for the future of technological innovation. When this shift is considered in conjunction with state Confucian ideology, a lack of competition and the limited interaction between scientific methods and technology, China’s ability to maintain the technological strength of the Song Revolution even in the absence of external threats seems relatively weak. 

JC Economics Essays - This short series on JC Economics Essays is a set of shared economics essays on economic development, shared by my former economic history classmates KVL and TZ with me when we were reading our MSc. (Masters of Science) at the London School of Economics (LSE), London, United Kingdom. We shared our economic history essays so that we could gain additional perspectives on how to craft good essays to get a high grade for the Master's degree at LSE, and that was a good way of sharing information and material. All the economic history essays were graded highly by Dr Kent Deng, a very excellent and inspirational tutor and lecturer at the LSE when I was studying there. I hope you find the essays on economic development interesting or useful. Special thanks to KVL and TZ (both from the United States of America) for their kind sharing. Thank you for reading and cheers. 

EH446 Economic Development of East and Southeast Asia

Explain the possible conflicts in the achievement of macroeconomic aims when using demand-management policies. [10]

This paper explains possible conflicts in the achievement of macroeconomic aims. When governments utilise demand management policies, there may be conflicts or trade offs amongst those goals. The most common conflict is the conflict between achieving full employment and price stability. There are also other conflicts such as those between achieving internal and external stability. This paper explains various possible conflicts in the achievement of macroeconomic aims when governments use demand management policies, such as fiscal and monetary policies.

First, demand management policies such as expansionary fiscal and monetary policies are often used to achieve full employment. For example, when there is an increase in government spending as governments spend on building infrastructure to boost economic activity, there is an increase in AD and hence an increase in real national income. As more resources are employed, the economy operates closer to full employment. However, there is a trade off as the economy will also face demand pull inflation as demand rises and bids up costs of factors of production. Demand pull inflation is defined as a persistent, sustained, and inordinate increase in the general price level due to increases in AD near or at the full employment level. Many fast developing countries like China with fast-rising AD and increasingly less spare capacity will likely face this conflict. On the other hand, contractionary fiscal and monetary policies can be used to reduce demand pull inflation, but this in turn conflicts with economic growth and employment, thus posing yet another trade off.

Second, as expansionary demand management policies are used to achieve economic growth, the balance of payments may worsen. For example, if interest rates are lowered to reduce costs of borrowing, households will borrow more to spend on consumer durables and firms may also invest more as expected net profitability increases. This leads to an increase in AD and real national income. However, the demand for imports and hence import expenditure increases too. This is because many consumer durables may be imported and firms may also import raw materials and machineries for their investments. Assuming that export revenue does not rise as quickly, the balance of trade worsens. Ceteris paribus, the current account and hence balance of payments worsens. Thus countries like Singapore with high MPM will be more likely to suffer from this conflict. This is because the increase in import expenditure is larger when national income increases. Vice versa, contractionary demand management policies to correct or address a balance of trade deficit can conflict with economic growth and employment.

If a country wants to achieve economic growth, it may choose to use expansionary monetary policy to increase AD. When interest rates are lowered, the cost of borrowing is lowered. This causes households to borrow more to purchase consumer durables such as televisions and refrigerators. This causes C to increase. Firms will also find that expected profitability of investment increases as costs of borrowing falls, given that economic conditions remain the same and returns on investments do not change. Thus I increases. Since C and I are components of AD, AD will increase, resulting in an increase in real national output and hence actual economic growth. However, in an open economy, the lower interest rates would likely result in capital outflow. If there is massive capital outflow as funds move to countries which offer higher interest rates, the capital and financial account will worsen. This leads to a worsening balance of payments. Hence, the desire to achieve actual growth via expansionary monetary policy can conflict with the desire to achieve a healthy balance of payments.

Furthermore, there is also a conflict between achieving a healthy balance of payments and price stability. If a country is facing a deficit in its current account and balance of payments, it may make use of demand management policies to improve the current account. For example, an expenditure switching policy of currency depreciation would help decrease the price of exports in terms of foreign currency and increase the price of imports in terms of domestic currency. As export competitiveness increases, the demand for exports and hence export revenue increases. At the same time as imports become more expensive, consumers switch to purchasing domestic goods instead. Assuming that Marshall Lerner condition holds, when IPEDx + PEDmI >1, balance of trade improves. Since X-M increases, AD increases and general price levels increase too.  However, if the economy is import-reliant, the depreciation of the currency could lead to imported inflation as the prices of imported raw materials increase. This causes the SRAS to fall and the general price level to increase. Thus a healthy balance of payments is achieved at the expense of price stability. An example of this would be Singapore, where imported inflation is likely to happen if the currency depreciates. This explains why Singapore is reluctant to depreciate its currency even when BOT is worsening.

In conclusion, there is a need to consider the use of supply side policies in some cases to minimise these trade-offs, conflicts in macroeconomic goals. Alternatively, a suitable mix of government policies may be considered to mitigate possible unintended consequences which may arise.

JC Economics Essays: Special thanks to W for her contribution of this well-written economics essay. However, this economics essay was not done under timed examination conditions. 

This paper explains the possible conflicts amongst macroeconomic goals of governments, and is basically about explaining the various trade offs and conflicts: inflation versus economic growth, internal versus external stability, and other such conflicts. 

There are many good points to learn from this paper. First, it directly addresses the question. It also has many definitions and examples, which suggests that the candidate has learnt her economics material well. The essay is also very well written, and is clear cut, accurate, and to the point; however, perhaps some diagrams could have been drawn. What economics diagrams would you have drawn in this case, and why? Economics essays often benefit from a relevant, well labelled, and accurate diagram that illustrates and analyses a point. Thanks for reading and cheers!

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

Globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased trade and greater international mobility of factors of production like capital, labour, and enterprise. In other words, globalisation is an extension of international trade, where in addition to increasing trade in goods and services, it also involves rising mobility of resources like labour and capital. Generally, the forces driving globalisation can be linked to improvements in technology resulting in the significant lowering of transport costs and communication costs, and the historical movement away from protectionism after the Second World War. To discuss to what extent a country gains from globalisation, there is a need to analyse the economic benefits and costs of increased trade in products as well as the benefits and costs of increased geographical mobility of labour and capital. This paper argues that, on the one hand, Singapore benefits from international trade and increased labour and capital mobility, but on the other hand these benefits come at a cost, with their limitations and negative impacts.

First, there are benefits from international trade, which many countries can enjoy, but Singapore can arguably enjoy to a greater degree given her small size and openness to free trade. First, Singapore, just like most other countries, can benefit from higher consumption possibilities arising from specialisation and trade according to comparative advantage, which would increase her material living standard. A country is said to have comparative advantage in the production of a good when it can produce the good at lower opportunity cost compared to another country. In this context, the opportunity cost of a good is the amount of another good forgone to produce an additional unit of the good. It can be argued that a rise in the consumption possibilities allows Singaporeans to enjoy a higher material living standard, by having a larger bundle of goods and services to consume, and hence, Singapore stands to benefit economically from globalisation.

Second, trade can be an “engine of growth” – trade enables small or developing economies to overcome the lack of domestic demand in order to achieve fuller utilisation of its resources, and Singapore in its early days was one of the main beneficiaries of this situation. For example, Singapore pursued a policy of Export Oriented Industrialisation (EOI) and reaped economies of scale for producing exports for the world market, which led to low unemployment and high economic growth for many decades in Singapore. In addition, increased efficiency of domestic producers arising from greater competition from imports and also the exploitation of economies of scale are also other benefits of trade. This increase in both AD and AS, leading to long run sustained, and non-inflationary economic growth, was possible because of trade. Conversely, it can be argued that countries such as Latin America after WWII which were inward-looking and focused on Import Substitution Industrialisation (ISI) were amongst economies which did not benefit from globalisation.

However, there are costs of increased free trade which Singapore has to deal with, which may not affect much larger economies. First, there is the danger of potential over-reliance on external demand resulting in greater macroeconomic instability. Singapore’s macroeconomic goals of low and stable inflation rates, economic growth, and low unemployment may easily be adversely affected or suddenly impacted by worldwide recessions or worldwide booms. This, however, is inevitable given that Singapore is a small and open economy which is highly dependent on trade as an engine of growth, and therefore when incomes fall in other countries, Singapore can be rapidly and adversely affected by falling export revenue, which lowers AD and results in unemployment and falling growth, while conversely booms in other countries may lead to rising demand-pull inflation in Singapore. Larger economies, conversely, may not be as affected as Singapore.

Furthermore, rising structural unemployment is another cost of international trade, as trade causes less competitive sectors to decline and more competitive sectors to expand. Structural unemployment refers to the situation of a mismatch of skills in the economy, where workers in the declining sunset industries are unable to find jobs in the new, rising sunrise industries due to a lack of requisite skills and training. For example, due to rapid structural changes in Singapore’s economy as a result of trade, there are many older and relatively unskilled workers who are unable or unwilling to upgrade their skills, and therefore cannot take up many of the new jobs that are available. Hence, there are real and pressing costs to the benefits of greater free trade arising from globalisation.

In addition to more global free trade, globalisation also impacts factor mobility – it can benefit Singapore in terms of the increased flows of labour and increased capital mobility, all of which help Singapore’s long run potential growth. Let us first address labour. First and foremost, labour shortages in Singapore can easily be made up through increasing the numbers of Foreign Talent or foreign workers. For example, in fields such as construction and nursing in healthcare, local domestic shortages are easily made up through imports of foreign labour. Hence, it would seem that increased labour mobility benefits Singaporeans.

Second, with respect to capital, Singapore benefits from increased capital accumulation, arising from increased Foreign Direct Investment as well as short term financial capital inflows. Capital accumulation enhances long-run growth as it enables a country to increase the quantity and quality of capital, and countries like Singapore can increase their levels of capital, technology and skilled labour. For instance, MNCs investing in Singapore bring about capital investments, technology, and skilled labour to Singapore, increasing her potential capacity and thus raising her potential growth. Furthermore, capital owners in Singapore can earn higher returns through investing in developing countries, especially in neighbouring ASEAN countries, and lower skilled labour from developing countries could earn higher wages from working in Singapore. Therefore it would seem that while foreigners benefit from globalisation’s impact on Singapore, Singaporeans benefit much more.

However, there are also costs of increased labour mobility. First, it can be argued that there would arise a greater degree of structural unemployment in Singapore as domestic workers may be unable to compete with cheaper foreign workers. This applies to both skilled and unskilled labour in Singapore. For instance, the lower-skilled elderly workers would be hardest hit by the influx of cheaper foreign labour, who would depress wages.

This leads to greater income inequality in Singapore, and by extension to developed economies worldwide: while developed economies’ lower-skilled workers are often internationally immobile, poorly trained, and uneducated, and thus would face depressed wages due to a rapid influx of cheap low skilled foreign labour, most developed economies’ higher-skilled labour is internationally mobile, often headhunted and recruited worldwide, and hence face rising wages rise due to increase global competition for such labour. For instance, in Singapore, the lower-skilled elderly workers are often facing structural unemployment or employment in lower-end jobs, whereas affluent Singaporeans are able to accept jobs worldwide due to globalisation. The resultant consequence is that the Gini Coefficient in Singapore is consistently above 0.4, which suggests rather high income inequality. This inequality may be a major cost of globalisation.

Furthermore, compounding the issue of income inequality is the real and pervasive social cost of Singapore adapting to the influx of foreign labour, which could for example strain Singapore’s social amenities. For instance, housing, schools, hospitals, and recreational facilities are often overcrowded due to rising population growth; there has often been social discontent due to erosion of local culture, values, and way of life. Therefore labour mobility brings about costs and benefits to Singapore.

There are also real and pervasive costs of increased capital mobility. First, allowing free movement of short to medium term capital can result in exchange rate fluctuations, and, second, stock and property market bubbles which causes increased macroeconomic instability. For instance, because Singapore is a financial hub with free capital mobility, there are often rapid capital inflows leading to asset bubbles in the stock and property markets, especially due to the USA’s Quantitative Easing and expansionary monetary policy. In terms of exchange rate fluctuations, these are often smoothed out through the use of Singapore’s managed float policy which limits the volatility of free, flexible exchange rates. Therefore capital mobility brings out benefits and costs to Singapore.

In conclusion, Singapore has more to gain from globalisation compared to larger economies, because first and foremost, without trade, Singapore’s small yet open domestic market will be insufficient or inadequate to generate much national income, reap much economies of scale, and experience much product differentiation. Singapore therefore attains most of the benefits of trade while possessing the policy tools and strategies to minimise the costs of freer trade. Being geographically small, highly urbanised, having good transportation infrastructure, minimal social security support, and a relatively well educated workforce, it is comparatively easier for Singapore to retrain and re-skill its workers to counter structural unemployment arising from increased globalisation. Due to strong economic growth in the past, a prudent and efficient government and a high savings rate, Singapore arguably has more than sufficient resources to invest in social amenities in order to cope with the rising population caused by immigration. While unrestricted flow of short-term capital is necessary for Singapore to function as a financial centre, its substantial foreign currency reserves allow Singapore to be relatively safe from potentially destabilising speculative attacks on its currency. The downside is that being a developed economy, it is more likely to experience worsening income distribution than a developing economy and Singapore finds it hard to significantly improve income redistribution without negatively affecting the incentive to work and invest. Therefore it seems clear that Singapore has the correct, specifically targeted policy tools to ensure that it ameliorates the negative impacts of globalisation while maximising the gains. Overall, it seems Singapore has significantly much more to gain than lose from globalisation and thus could arguably be one of the countries which can gain most out of globalisation.

JC Economics Essays - This economics question is adapted from an actual H2 Economics A level examination question, and this is a specially crafted response to the question co-written by two economics tutors for an economics tutorial on international trade and globalisation. The main topic in this economics essay is globalisation. Looking at the essay response, what are good economics arguments that can be used for examinations? What is good about this economics paper that can be adapted and used in economics assignments and tests? What are areas that need to be explained further or further explicated clearly? Remember to always answer the question that is posed, and think of ways in which the question can be approached. Thank you for reading and cheers!