JC economic Essay Modest & Gradual Appreciation of S$ and Macroeconomic Issues Model Answers
When times are good, Monetary Authority of Singapore (MAS), the de-factor Central Bank of Singapore, has always aimed to maintain a modest & gradual appreciation of the Sing Dollar (S$). Termed as the anchor of economic and financial stability by MAS, S’pore’s exchanged-rate centred monetary policy has perennially been the strengthening of our currency, in order to achieve our macroeconomic aims.
Does a stronger S$ achieve most or all of our macro objectives? When happens when times are bad? This essay explores the workings and limitations of the S$ and also zero-rate appreciation of our domestic currency.
Explain the key macroeconomic objectives of the Singapore government and discuss how a modest and gradual appreciation of the Singapore dollar is part of Singapore’s strategy to achieve these objectives. (25)
Global Economic Crisis & Harmful Effects to SG Economy
The key macroeconomic aims of Singapore:
1. Price stability / low inflation
this helps to reduce speculation and unnecessary menu and shoe leather costs
– less wastage of resources
-reduces haphazard distribution of income against the lower income group.
-reduces uncertainties and make rate of returns more definite attract investment – maintain export competitiveness for the country
2. Full employment / low unemployment
greater productive use of resources (labour) especially in Singapore, reduce poverty and social tension
– reduces need for government to allocate resources to support the unemployed
-resources can be channelled for other programs
3. Steady rate of economic growth
– more goods and services available for consumption Improve SOL, enhances government’s ability to redistribute Income to the poor without negative impact on the higher income group (via progressive income taxes)
allows government to achieve other objectives such as creation of job opportunities with increase in productive capacity, keep inflation in check hence less need to turn to imports as alternatives
4. Balance of payments equilibrium and stable exchange rate
– Current account deficit will lead to drain of foreign reserves
– debt servicing which can reduce future SOL for the citizens loss of confidence in the economy , stable exchange rate gives confidence to investors increase investment as well as enhance trade possibilities
How a modest and gradual appreciation of SS can help achieve key macro aims
a. Price Stability
– Appreciation of the SS can help to dampen the impact of imported inflation
– Important as Singapore lacks resources and is highly dependent on imported raw materials and final goods (about 60% of C is imports).
– helps to keep costs of production and cost of living down.
b. Balance of payments equilibrium
– The strong 58 however would dampen export demand as exports are now relatively more expensive / less competitive compared to other similar foreign goods.
– may lead to a fall in export revenue
– net effect on the BOT and hence current account will depend on the relative fall in M expenditure compared to the fall in X revenue which turn will depend on whether Marshal-Lerner’s condition is satisfied.
However, BOT may not deteriorate much even if Marshall Lerner condition holds as exports dependent on Imported raw materials will have lower costs of production the lower price from the lower costs may help to offset some of the apparent loss of price competitiveness due to the strong S$.
The commitment by MAS to uphold the strong SS also gives confidence to investors
– future expected returns on I likely to retain its value; investment planning more definite
– increase in LT capital Inflow expected
– improve the capital account
– Overall BOP need not necessarily worsen
c. Economic growth (sustainable EG with price stability)
-The increase in FDI is expected to promote economic growth -Expansion of target industries as well as inflow of skills, technological knowledge and knowledge of International markets by Investors
– help to enhance competitiveness of export industries
-The Increase in I will increase AD
-expand output production, Increase NY and employment
“Limitations of strong S$
– A strong S$ alone is not enough to attract FDI. Need to consider the other factors such as relevant skills of labour, conducive business environment and government policies.
– Other business costs that cannot be influenced by a strong S$, e.g. utilities and rental.
– Service industries will not benefit from a strong S$, e.g. tourism need for the government to come up with other means that will make Singapore attractive as a tourist destination despite the strong S$.
– Structural unemployment may arise If workers do not have the relevant skills required by the expanding Industries solution is for government to identify the target Industries to expand and then actively engage in manpower planning ensure that workers have the relevant skills for these industries.
-Vulnerable to changes in world demand need to be flexible with the SS when world demand falls.
Government may not be able to do much under such a situation. – other policies are needed to support the strong S$ in order achieve the macro alms as well.
“…Singapore dollar is part of Singapore’s strategy…” implies other policies too
A. Fiscal policy with supply side intent
– Increase G_physical and social infrastructure, provide subsidies that encourages R&D, development of niche areas, enhancing financial services, education and retraining of labour
– Lower T_ more competitive business environment, higher expected returns all of which can encourage more investment (I).
B. Supply side policies
Keep business costs low via keeping labour costs under control and flexible wage adjustments in line with productivity growth, CPF adjustments, maintaining good tripartite relations, lower corporate; encourage entrepreneurship
C. Trade policy
Continue to support free trade (not required for CLT A-level topics in 2020 and 2021.)
L3: For an answer that demonstrates a clear explanation of the macroeconomic aims as well as a thorough discussion of the stated policy on these various objectives with relevant application to S’pore.
L2: For an undeveloped answer that explains the macroeconomic aims but the discussion of the stated policy and its effectiveness is limited – one sided analysis OR – brief analysis of both views with little application to SG.
L1: For an answer that shows only an ability to identify some relevant issues / concepts and provide brief explanations but not in context most of the time
E2: Evaluation that provides a Judgement on the given policy with clear consideration of the context
E1: Mainly unexplained evaluative comments with little or no consideration of context