JC Econs Essay SSP & Productivity Model Answers
In 2015, Singapore’s Ministry of Manpower (MOM) continued its approach of taking progressive steps to raise the quality of the workforce, promoting innovation and a business friendly environment. This is part of the Government’s effort to achieve quality economic growth driven by sustained productivity improvement.
However, due to the strike of COVID-19, overall labour productivity, rose by 1.7 per cent year-on-year in the second quarter of 2021, much slower than the 7.3% increase recorded in the previous quarter. (Productivity is measured by real value-added per actual hour worked)
Source: Economic Survey of Singapore, 2021
Discuss the view that supply-side policies implemented by the Singapore government are effective in achieving her macroeconomic goals. 
Singapore’s Supply-Side Policies & Macroeconomic Goals
Definition: Supply-side policies are designed to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate of potential growth which can lead to lower general price levels and higher employment. Supply-side policies influence aggregate supply (AS) so as to lower unit cost of production and / or increase the long-term productive capacity of an economy. Governments aim to achieve 4 key macroeconomic aims. They are sustained economic growth, low unemployment/full employment, low and stable prices/ price stability and external stability / Healthy BOP.
As Singapore lacks natural resources highly reliant on imports for both finished and semi finished goods and services. Any global supply shocks and import price hikes may have a significant impact on cost of production and prices in the country- Sg government seeks to ensure that price stability is achieved as a basis for sustainable growth.
The government can make use of interventionist or market-oriented supply-side policies to achieve the macroeconomic goals.
Thesis: Supply-side policies are effective in achieving the macroeconomic objectives for Singapore
Increase in quality of the workforce can be driven by improvements in the quality of inputs in the labour markets (e.g., quality of workforce can be raised through education and training), while policies. to promote innovation include both process and product innovations undertaken via R&D as well as the promotion of enterprise. Last but not least, tax reforms and other pro competition policies help to encourage a more business friendly environment. This will translate into better quality of inputs and or more inputs that increases the economy’s ability to produce.
1. Interventionist supply-side policies in the labour market via Manpower retraining, education and upgrading of skills (SkillsFuture)
The government may carry out or sponsor training activities through grants or subsidies. Assuming such training for labour turns out to be successful, there is an improvement in the skills and quality of the workforce, increasing labour productivity. Improving labour productivity can also potentially reduce unit labour costs, which reduce COP and ceteris paribus increase AS.
For example, the Singapore government set up Continuing Education and Training (CET) centres to help workers to acquire industry-relevant skills across various industries. Skills Development Fund (SDF) offers subsidies of up to 90% of training costs.
(Internal) Effect on economic growth, inflation & employment
Assuming that the rate of productivity growth exceeds the rate of wage growth, unit labour cost is lowered (COP falls). This causes a downward shift of AS curve. . This is especially helpful to Singapore given her tight domestic labour market which causes upwards pressure on wages in the domestic market.
GPL falls from Po to P, alleviate / dampens inflationary pressures, ceteris paribus. National income rises from Yo to Y₁ (actual growth) & unemployment falls as firms step up production and hire more workers (since labour is derived from the demand of final goods and services. There may also be a fall in structural unemployment if appropriate measures are taken to retrain workers, eg. Workfare Training Scheme (WTS) allowing workers to be equipped with relevant skill sets that are relevant to industries that require such labour.
In the long run, investments in human capital will lead to improvements in the levels of productivity in the Singapore economy raising the productive capacity as more output could be produced with the same amount of labour, shifting the AS to the right potential growth and reduce inflationary pressures since the increased spare capacity in the economy reduces need for firms to compete for limited resources. In addition, such investments in human capital would build up the talent pool in the economy. This would encourage both domestic and foreign firms to invest in Singapore. The increase in I →lead to increase in AD from AD to AD₁, via the multiplier effect. This results in sustained non-inflationary economic growth as real NY continues to increase to Y₂ as seen in Figure 1
(External) Effects on BOP (both Current A/C and Financial A/C)
If a country is able to keep its inflation rate relatively lower than other countries, it will increase the price competitiveness of its exports. Increased demand for exports: Due to low inflation, if Singapore’s exports are relatively more price competitive compared to its trading partners’ products → increase in X dd and X revenue. Since Singapore’s exports (eg. petrochemicals / microelectronics / pharmaceuticals, etc) are price elastic in demand, due to the availability of close substitutes produced by other countries, with a fall in price of exports, it will result in a more than proportionate increase in quantity demand for exports, ceteris paribus. There will be an increase in total revenue of exports. Ceteris paribus, balance of trade (BOT)improves.
Increased FDI: Low unit labour costs and highly skilled labour acts as a magnet for foreign investment in the country → Increased inflow of FDI → improve financial account of the BOP.
Interventionist supply side policies in the product markets eg. Grants for R&D / Innovation
Grants for R&D or subsidizing firms in taking up automation and innovation efforts will encourage firms to harness innovation in production processes, and increase their use of automation. (especially useful in Sg given her declining workforce due to an aging population and low fertility rate). For example, the Singapore government unveiled the new Research Innovation Enterprise (RIE) 2020 Plan with a $19 billion commitment to support R&D efforts.
(i) (Internal) Effect on economic growth, inflation & employment
Increases in productivity levels / process innovation → lower unit COP→ raise profitability and encourage firms to raise production increase in AS and lower inflationary pressures, raise employment levels and increase NY, achieving actual growth. In the long run, successful R&D efforts will lead to technology breakthroughs, raising the productive capacity with a more efficient utilization of existing resources actual and potential growth (AS shifts outwards) which creates spare capacity for the economy for further growth.
Lowered cop and increased productivity would also serve to encourage foreign firms to invest in Sg. More investment by firms → higher production to meet the higher demand and employ more factors of production, including labour, moving the economy closer to full employment. This will have the effect of lowering cyclical unemployment and achieving actual growth.
(ii) (External) Effects on BOP
In addition, improvements in quality of X through R&D (via product innovation)→ raise the competitiveness of X and maintain her comparative advantage in production of G&S→ increase X demand and improve BOP C/A position. Alternatively, market oriented policies in the product market such as the promotion of enterprise can also encourage innovation. This policy serves to encourage people to become entrepreneurs via extension of loans and provision of technical expertise and support for new start ups and small businesses. For example, cash grants are provided to firms which invest in productivity measures / automation/ R&D under the Productivity and Innovation Credit Scheme by SPRING in Singapore.
The entry of such innovative new firms injects more competition into the industry→ increased incentive to increase cost efficiency → fall in cop and increase in AS and henceforth on the macro goals. Furthermore, start-ups often bring with them new technology and newer methods of production which increase productivity and therefore the productive capacity of the economy a rightward shift of the AS curve, and given AD, achieving goals of sustained non inflationary growth.
3. Market oriented supply-side policies in the labour market eq. Tax reforms
Singapore’s tax policies, apart from providing a main source of funds for the Sg government, seeks to enhance its economic competitiveness and provide a more business friendly environment and attract foreign investments to Singapore
(i) (Internal) Effect on economic growth, inflation & employment
Lower income taxes help to encourage productivity and work effort as the opportunity cost of leisure is higher. In addition, it can attract and retain foreign talent and prevent brain drain while lower corporate tax rates encourage both foreign and local investments to take place since post-tax profits rise ⇒ increase labour supply skilled labour productivity and FDI spending ⇒ increase the productive capacity of an economy increase AS (rightward shift of the AS curve) → dampens inflation and achieves potential growth and allows for non inflationary sustained EG in the LR.
With globalization, such tax reforms are deemed necessary as human capital (talent and expertise) and investment tend to shift away from countries with a high tax burden. In addition, with more funds being ploughed back into investment increase in 1 increase in AD →→ via k effect increase in actual growth and higher employment levels.
ii) (External) Effects on BOP
Improvement in the financial a/c on the BOP due to greater foreign direct investment inflows.
4. Market oriented supply-side policies in the product market eg. Privatization
Privatization is the sale, whole or part, of public enterprises to the private sector. Restructuring and cost cutting usually occurs as firms aim to remain competitive to survive
i) (Internal) Effect on economic growth, inflation & employment
Privatization can lead to increased efficiency as privately-run firms, being profit-motivated, would be more cost conscious. Reduction in cost, ceteris paribus, will translate directly to higher profits. Hence, a more efficient use of resources by the private firms in key industries rather than the government sector will boost AS in an economy, via lowered cop in the economy in the case of industries like transport, telecommunications and power industries.
Unit cost of production falls dampening inflation and increasing actual growth and employment. The government can privatize a previously government-owned entity by transferring ownership to the private sector. Examples of previously public entities in Sg that were privatized included. strategic industries in the energy market which was corporatized as Singapore Power and further restructured to introduce greater levels of competition within the industry.
Anti-thesis: Supply-side policies are limited in achieving the macroeconomic objectives for Singapore
Time Lag ⇒ may result in SR trade off in terms of demand pull inflation Effects of supply-side policies may only be seen in the long run. This is because it takes time to train worker or deregulate industries or for the efforts put into R&D to be realized and increase productive capacity in the economy. Structural changes imply a complete revamp of the way things are done and change needs time to take effect. Hence, due to the LR nature of supply side policies → ineffective in the SR in reducing inflationary pressures. In fact, the increased spending on subsidizing R&D efforts among firms / training of workers could possibly result in dd-pull inflation in the SR, especially if the economy is operating close to Yf.
If the increase in AS is slower than the increase in AD, it will lead to inflationary pressures which will not be desirable for the economy. Supply-side policies could be costly as it may involve government spending which can incur high O.C as govt. funds could be spent on other merit or public goods. In addition, it has the potential to strain the government budget. Such spending may have to be financed by higher taxes in the future which will reduce work incentives. In addition, some supply side policies might not be effectively executed with its intended effects if the government is limited by its fiscal budget. Given Singapore’s consistent budget surpluses over the years due to her macro prudent policy stance, the latter point may not be as applicable, however, to ensure government spending in a sustainable manner, it may be compensated through a more resilient and diversified tax structure.
Uncertain outcome of policies increase in AS may not be actualized potential growth may not take root: Depends on the receptiveness of workers and firms to policies implemented and require both parties to respond to the government’s initiatives.
Eg: Success of these R&D measures may not be guaranteed as it is plagued with a high level of uncertainty in terms of its success. In addition, appetite for risk taking remains low for smaller firms with limited budget as they may be less incentivized to undertake R&D due to the high cost (risk) involved (albeit subsidized) and the uncertain expected returns on the investment.
Eg: Education and retraining policies towards improving productivity levels may be ineffective as it depends highly on the attitude and receptivity of workers towards education and retraining. Eg. older workers may be resistant to change or face a steeper learning curve, which hinders or prolongs the effectiveness of the policies. In addition, employers may be unwilling to send workers for training as it may mean a disruption to the production process and a loss in potential output.
Increased structural unemployment due to capital-labour substitution
Increased automation may come at the expense of higher unemployment as firms reduce employment as less labour is required for a given quantity of output. Eg. supply side policies that utilize automation in production techniques may come at the expense of job losses when firms restructure their production process. Hence, restructuring towards an innovative and productive economy may derail the macroeconomic aims of growth and employment in the short run as the economy adjusts to the changes in production methods or focus.
Other limitations pertaining to specific policies
In the case of tax reforms, having a low tax rate as well as a range of tax and financial incentives alone may not sufficient to encourage foreign direct investment to raise a country’s productive capacity due to competition from other countries as they compete fiercely for foreign investment and talent. Other factors such as political stability and having a conducive business environment \ are just as critical, if not more so.
Evaluation: there may be circumstances when there is a need for other policies to be used to increase AD and achieve the macroeconomic objectives
SSP on its own however is not enough under certain situations to achieve the 4 macroeconomic aims. It must also be supported by a high enough level of aggregate demand. If AS increases without a corresponding increase in AD or only results in secondary effects on AD, the economy may be faced with a situation of excess capacity and there will not be a sustained rise in real national income. As such, supply-side policies should be complemented with the use of demand-management policies that is more effective in stimulating actual growth and employment in the SR.
Demand-management policy like expansionary fiscal policy can help the economy to stimulate AD in the short run and AS in the long run. Eg. Increased G spending on infrastructure (eg. healthcare and transport infrastructure) can increase both AD and AS in the longer run. In the short term, increased G corresponds to an increase in AD. Via the multiplier effect, there will be an increase in real GDP and employment, assuming the economy is below full employment. In the long term, the increased spending on infrastructure will result in an outward shift of the AS due to the rise in productive capacity. As such, allowing sustained non-inflationary growth to be achieved, as illustrated in Figure 2 (sketch it yourself, as an exercise)
Alternatively, exchange rate policy is useful to SOE like Sg as it helps to tackle imported inflation, which the Sg economy is very prone to given her openness. For example, Singapore adopts a modest and gradual appreciation of the SGD to curb imported inflation and achieve price stability. Appreciation will lead to a fall in prices of imported goods and services in the domestic currency → lower cop firms will be incentivized to produce more increase AS and cause the AS curve to shift downwards achieve lower prices and growth and employment. In addition, it allows for X (with high M content) to be priced more competitively over time, allowing goals of a healthy BOP to achieved as well.
In summary, SSP are not solely effective in achieving the macroeconomic goals in Singapore due to their primary objective in increasing AS. While they may have some demand side effects, the policies take time to bear fruit. Demand management policies such as fiscal policy and exchange rate policy may be more effective in achieving the macroeconomic aims in the SR depending on the current economic climate. For example, in the case of a global recession leading to a fall in exports, there would be a significant fall in AD and hence national income in Singapore. This would stifle economic growth and employment in the short run. In this case, using supply side policies alone would not be enough to boost exports or attract FDI with weak business expectations.
Hence, supply side policies are only useful to the extent that the Singapore government also complements it with short-term policies such as exchange rate and fiscal policies to achieve the macroeconomic aims.
Marking Scheme for H2 Economics Essay:
L3 (1-9 marks): Answer lacks use of economics framework/concepts; No AD/AS framework. Descriptive rather than analytical answer; No application to the question; Did not link it to the macroeconomic aims. A one sided answer- did not include limitations of policies; Glaring conceptual errors.
L2 (10-15m): A balanced answer with use of appropriate framework/ concepts in analysis. Some scope of analysis include an explanation of how supply side policies (at least 2 types of supply side policies) can achieve the 4 macroeconomic aims BUT lacking in development of points or scope of analysis Some use of examples but little application to the Singapore economy
L3 (16-20): Strong approach with use of appropriate framework/concepts; Well labelled and correctly drawn AD-AS diagram Good scope and depth of analysis O Considered both usefulness and limitations of using supply side policies (applied to both the labour and product markets) on the various macroeconomic objectives; Explained effect on all 4 macroeconomic aims; Strong application to Singapore context
E2 (3-5m): Evaluative assessment supported by economic analysis Well explained synthesis / conclusion
E1 (1-2m): An unexplained evaluative conclusion/judgement, that is not supported analysis
JC Econs Teacher’s Comments:
In general, there were some relatively good answers which could identify specific supply side policies implemented by the Singapore government and accompany them with good economic explanation of ow they achieve the macroeconomic goals. However, it should be clear that simply citing the names of various Singapore supply-side policies is insufficient. Neither should the answer be a journalistic style of presentation including all the nitty-gritty details about each policy without any clear framework. Ideally, the types of each specific supply side policy, a simple account of what the policy is about and most importantly, and how it helps to enhance Singapore’s AS and in turn the macroeconomic goals either through lowering its COP or increasing its production capacity should be presented in the answers.
Strong A-level Economics students showed in-depth understanding of the effects of supply side policies on various macroeconomic goals and used appropriate economic framework (AD-AS) to support their answer. On the other hand, candidates who did not manage their time well (and hence only partially completed their answer), or had answers that were largely descriptive (did not use economic framework) and had one-sided answers mostly received a low L2 or L1 grade.
Areas for improvement:
Supply side policies suggested need to be clearly explained in terms of rigour and scope of analysis. Some students do not even distinguish types of supply side policies such as general education, re-training, skills upgrading or R&D. Others simply state them where there was weak or no attempt to explain what each of these policies is about.
In addition, the theoretical framework behind how the various types of supply side policies need to be addressed clearly For example, simply asserting that AS will increase due to R&D is insufficient. Answers need to be specific and explain each type of supply-side policy separately with a certain amount of elaboration Another common mistake was to state that when AS increase, the GPL would fall (without reference to diagram illustrated). A good script would have gone further and provided the mechanism for the fall in GPL. The fall in the costs of production which arise from the respective supply side policy (eg due to an increase in labour productivity and assumed exceeds that of any wage gains) shifts the AS downwards is passed on to consumers as lowered prices. Hence the GPL falls.
There were those who discussed secondary effects of supply side policies at great lengths. For example, many students simply claim as a statement of fact that when more capital investment is made, AD will increase. This is correct from the demand side. However, as the key word in this question is on supply side, it is necessary to discuss the impact on the supply side as a primary impact first. Increase in I or FDI results in an increase in capital formation and this means that more quantity of resources are now available and this will increase the ability of the economy to produce: AS increases. While there were attempts to explain the effects of an increase in AS on the macroeconomic goal, not many students made reference to the goal of BOP. Some incorrectly stated that it will not be affected via supply side policies even though the answers included some explanation of how export price/non price competitiveness may be increased and linked the argument to AD. Some students even confused the BOP with the government budget.
Several of the answers adopted a poor approach to this question, especially with regards to the anti-thesis (where the limitations of supply policies should be thoroughly explained and analysed and made referenced to with respect to the different types of supply side policies). Instead, the answers explained how other policies were necessary so that various goals could be achieve. These were awarded evaluative marks rather than credited for analysis.
Most conclusions simply gave general statements like how the government needs more than 1 policy to achieve the aims (Tinbergen-Theil theory), without specific links back to the question on the effectiveness of supply side policies. In addition, to make discussion of other policies relevant, it is necessary to start by explaining that under certain circumstances, it is felt that other policies are better than supply side policies. Thus, it is a judgment issue and marks are allocated under demonstration of evaluation skills. To simply reproduce learnt material on other policies without any attempt to link to supply side policies is not acceptable.
Econs Tuition teacher’s Remarks: Most students did not get 17 or more marks out of 25m, cos they didn’t highlight interventionist vs market-based types of SSP. More on this key point in our Econs revision lessons.)