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!
