JC Econs Recession in Singapore & Policy Options Essay Model Answers
A sample question on the main macro goal of economic growth, specifically recession & sustainable Growth and its application to macro economic performance. In addition, we explore the various policy options for the Singapore economy, when she faces a recession or depression.
Question
(a) Explain how the current global recession would impact Singapore’s economy. [10]
JC Economics – Economic Recession
Part A:
Briefly describe how the current global recession arises from the falling US demand. (Students are not required to explain the causes of COVID-19 in 2019 / 2020, SARS in 2003, S sub-prime mortgage crisis in 2008 / 2009, or Asian Finance crisis in 1998, etc) and impact of the current global recession on some macroeconomic goals of Singapore.
- Worsening of BOP and exchange rate Sharp decline in global demand, trade and investments has caused drastic fall in our exports. BOP surplus has shrunk and SGD exchange rate has depreciated.
- Unemployment and Negative Economic Growth- Last 5 years, Singapore has progressed towards a knowledge-based economy and encountered structural unemployment from 2004-2005@From 2008-2009, falling export demand results in demand deficient cyclical unemployment. Ec growth rate became negative (technical recession) in 2009.
Students to analyse the following and may use the AD/AS (no more AE diagram for new 9757 H2 Econs syllabus)
Explanation: The problem of demand deficient unemployment in Singapore was primarily caused by a fall in external demand (X-M), which via the reverse multiplier process resulted in a multiple fall in national income, sustained by contraction in consumption spending and reinforced further by contraction in domestic investments due to business pessimism. In the process, firms ceased operation leading to job losses and retrenchment in the country.
Econs teachers’ remarks:
If in a CSQ, the following questions are fairly common regarding recession:
- Define recession. [2]
Recession occurs when an economy experiences two consecutive quarters of negative economic growth.
2. Using AD-AS analysis, comment on the economic problems faced by Asian economies. [6]
Sample paragraph
The global recession impacted the Asian economies via the fall in the export earnings. As export sectors is one the key engine of growth for most Asian economies, the falling X caused a fall in the AD, leading to a fall in real output and employment. The lower real national income has further reduced the domestic consumption (C) which further reduced the AD. However, the degree of the negative impacts of falling X varied for different countries. As highlighted in the case, country like Singapore and Taiwan were affected more as compared to China due to the reliance on the X. China on the other hand has a greater domestic sector which will cushion off the falling X.
On top of these, China’s import of intermediate and raw materials has fallen due to less production for export sector. Also, Asian economies also suffered increasing cost pressure from rising food and oil prices. The cost push inflation shifted AS upwards, reducing real output further as well as higher unemployment. The impact was more severe for small and open economy like Singapore.
JC Economics – Policy Options to Manage Economic Recession in SG
(b) Discuss the appropriate policies that should be adopted by the Singapore government to reduce the most harmful effects of this impact. [15]
Identify Singapore’s most significant current macroeconomic problem: unemployment and substantiate your choice.
Fiscal Policy: Expansionary FP (budget deficit):
Rise in G stimulate job creation in public sector and prevent job loss in private sector. Fall in PIT → rise in disposable Income → encourage C spending → increase sales prevent rise in unemployment (UnN)
Fall in corporate income tax (CIT) → lowers business costs → prevent firm closure → prevent rise in unN
Evaluation: DD-side Fiscal policy as stabilisation policy – May not be effective because
-High import leakage, high MPS, small fiscal multiplier: Limited scope for active demand management through fiscal policy.
-If business sentiments continue to remain bleak, expansionary FP has minimal impact on creating significant income and jobs.
-If the global recession is prolonged, there is also a constraint on how much pump priming the government is able to support.
Monetary policy centred on exchange rate:
Allow zero appreciation stance for SGD → Price of X in foreign currency falls + price of M in local currency rises stimulate X DD + reduces M→ rise in AD→ rise in GDP (Marshall-Lerner Condition is satisfied)
Evaluation:
Monetary policy centred on exchange rate as stabilization policy – effectively regulated allow zero appreciation stance for SGD/some depreciation to stimulate exports only invites potential imported price push inflation. This depreciation stance should not be a LT measure as it will lead to higher COP and COL (X have high M content; price inelastic demand for imported basic necessities)
SS-Side Policy
They are LT measures, which would enable Singapore to maintain competitiveness in the global economy: costs
– Flexi-wage system helped to lower Training & Retraining programmes (SPUR) subsided by govt to help workers wage retain jobs or seek new jobs REAP (Re-employment Assistance Programme) helps unemployed Singaporeans, especially those less skilled workers who are at risk of structural unemployment, to find and retain jobs.
The SGUnited Skills Training, Continuous Education & Training, WSQ, WDA, SPUR, Skills Development Fund (SDF) also provides financial assistance to employers to encourage them to train and upgrade the skills of their workers.
Evaluation
Measure requires prolonged high government expenditure creating burden on budget. • Effects may not be realized in SR and may not be effective without the positive attitude from the labour force esp the elderly unskilled unemployed in Singapore’s aging population. [
Trade Policies
Singapore’s Trade policies geared towards further expansion of external ties, establishing broader and deeper trade and investment linkages with both developed countries like the European Union as well as emerging economies like China and India.
Evaluation:
Trade policies requires co-operation from trading partners in reducing tariff barriers. With the global recession, countries may undertake begin to step-up protectionist measures to help create jobs for their domestic industries. This will undermine the trade policies
Synthesis
Do Small and open, Singapore’s economic growth and employment situation is export led and affected by external circumstances. The challenge is to minimize the economic fluctuations.
Questions:
1. Which policy is the least favoured policy to choose to answer this question?
2. What higher evaluation can you think off, for 3-4 marks out of 5m?