JC Economics Essay Series #85 – Negative Growth Rate & Policy Measures

JC Econs Negative Growth Rate & Policy Measures Model Answers 

A typical question on the main macro economic goals of experiencing a negative economic growth rate, specifically recession, depression, and its application to macro econ performance. In addition, we explore the various policy options for the Singapore economy, when she faces a recession, due to global crisis such as COVID-19 health crisis, US Subprime mortgage crisis, Asian Financial crises, etc.

Note that, of course, a recession can be tested in any region or economy. For eg, Europe expects an entire decade of low to no economic growth. 


The COVID-19 pandemic caused massive global economic disruptions in 2020. Singapore was not spared as the economy recorded its worst full-year recession since independence. As the recession induced by the global health crisis deepens, retrenchments and unemployment are likely to rise, the Singapore governments aims to build on her training masterplan, ie the SkillsFuture plan, based on the recommendations of the Continuing Education and Training (CET) 2020 Masterplan.

Discuss the policy measures that might be used to overcome the macroeconomic problems that are currently being experienced by the Singapore economy of the twin health and economic crises. [25]


JC Economics – COVID-19 Induced Economic Crisis in Singapore

The Singapore economy is currently facing problems of negative and unemployment, due to fall in export demand as a result of the current global recession. Singapore is especially affected by this fall in global demand due to the openness of our economy and our heavy reliance on trade.


As recession deepens in Singapore, there will be negative economic growth, where there is a decrease in the national output produced. With recession, consumers and companies tend to have lower confidence in future incomes; hence consumption and investment will fall. FDI will also fall as foreign companies will be more cautious about investing. This will lead to a fall in AD and hence national income, leading to negative actual growth. The fall in investment may also affect the productive capacity, slowing potential growth in the long run. Furthermore, demand deficient unemployment will also surface due to the recession. When the economy moves into recession, consumer demand falls due to falling income, and firms will cut back on production and the amount of labour employed. The level of AD will be insufficient to ensure full employment of resources, causing demand deficient unemployment.


Singapore is also facing structural unemployment due to structural changes in the economy. Employment in the lower value added industries will fall as workers are made redundant due to firms moving to expanding markets like China and India which are able to provide a large pool of cheap labour. The problem is also accentuated by the current crisis as the rate of decline of speed up. Hence the Singapore workers who are retrenched from the labour sunset industries intensive manufacturing sector cannot take up jobs in other sectors immediately due to mismatch of their skills and the requirements of the current jobs available in the higher value-added industries.
(Cos of COVID-19, this issue is minimised, cos the threat is the same across all economies.)


To solve the problems mentioned, the Singapore government can adopt expansionary demand management policies like fiscal policy. Government can increase expenditure (G) or reduce income and corporate tax rates. The lower income tax leads to higher disposable income and will induce consumers to increase consumption. The reduction of corporate tax will result in higher after-tax profits and encourage more investment. The increase in G, consumption and investment will lead to an increase in AD and hence national income, which will help to solve both demand deficient unemployment and negative growth.


The supply-side effects of fiscal policy could also help to address the problems of structural unemployment in the long run. The government may increase expenditure on education to prepare future generations with the required skills to meet the demands of the knowledge-based industries. This will help to build up the skills of the future work force and help to reduce structural unemployment in the long run. The expenditure in education will also help to increase productivity of workers, and help raise the productive capacity of the economy in the long run, sustaining potential growth. The Singapore government can increase expenditure in new areas of growth, for instance, to encourage research and development or by providing infrastructure for research, such as the Biopolis. This will attract investment in the long run when the economy recovers and help to ensure continued potential growth. 


However, there are limitations to fiscal policy. Singapore has a small multiplier value due to high marginal propensity to save and high propensity to import. Hence the extent of the effect of increase in AD on national income may not be significant and hence not able to reduce demand deficient unemployment or lead to much growth. The supply-side effects of fiscal policy may be indeterminate as it depends largely of the mindset of employers and workers, which may take time to change.


As the current recession in Singapore is largely due to a fall in export demand as a result of the global recession, the government may also consider adopting expansionary monetary policy by depreciating the S$. With a depreciation, the foreign price of Singapore exports will decrease and domestic price of imports would increase. Assuming demand for export and imports are both price elastic, growth export revenue will rise and import expenditure will fall. Rise in net exports (X-M) demand will lead to a rise in AD, which will help to address the problems of demand deficient deficient unemployment and negative growth.


However, given Singapore’s dependence on imports for production due to lack of natural resources, the assumption of price elastic demand for exports may not hold. If the domestic price of imports increases due to depreciation, this may lead to increase in cost of production and hence higher export prices, negating the effect of the fall in price of exports due to depreciation. Moreover, even with S$ depreciation, quantity of exports demanded may not increase if there is no improvement in the economic conditions of our trading partners.


In summary, in the short run, the government should adopt demand management policies to solve the more pressing problems of negative growth and demand deficient unemployment. However, bearing in mind the limited effect of demand management policies in Singapore in bringing about growth due to our small multiplier value, this should be complemented with expansionary fiscal policy with supply side effects in the long run to solve structural unemployment and ensure continued potential growth while the economy recovers.


JC Econs Essay Markers’ Remarks:
1. H2 Econs students did better probably because they are more familiar with the content required for this question. Many students did not realize that an explanation of the problems is expected before the policy measures are discussed. A significant number of students also did not address the problem of structural unemployment the stimulus provided should have been an obvious clue that structural unemployment would need to be addressed. Weaker scripts tend not to be able to link the policies to the effects of problems, e.g. explaining how corporate tax would increase investment, and hence solve demand deficient unemployment, without first linking it to effect on AD, national income. Some answers were too supply-focused; current more pressing problems would require more demand management policies.

2. Only a handful of students attempted to assimilate the context of Singapore in their answer. Many gave evaluative comments on the need for multiple polices without explaining why there is a need.

3. Many students wrongly identified inflation as a current problem, or wasted time talking about frictional unemployment which is not an issue for Singapore (or any other country in general!)

4. Limitations should be addressed in the context of Singapore. A favourite limitation of fiscal policy cited was crowding out effect – but this is not applicable to Singapore because the government does i not borrow and compete with firms for funds, even if it does, the change in demand for loanable funds may not always lead to a change in interest rates. Recession should be linked with negative growth, NOT slow growth (which implies NY is still Incorrect definition of structural unemployment – it should be unemployment due to mismatch of skills increasing) of workers and requirements of jobs which are available.