Macroeconomic Development of Singapore - Essay Example

? Singapore's Macroeconomy of the of the Table of Contents Table of Contents 2 Introduction 3 Analysis of the country’s business cycle 3 GDP analysis by Expenditures 7 Labor market 9 Total population 9 The labor force 10 Inflation 12 Fiscal Policy 13 Monetary policy 16 External Sector 16 Conclusion 17 References 18 Introduction Established as a British colony in 1819, Singapore has come a long way in terms of development and growth that has placed it as par with the nations of Western Europe in terms of GDP growth. Singapore had Briefly joined the Malaysian Federation in 1963 and then a quick separation followed in the year 1965 (CIA, 2013). For a concise period in 1960s, Singapore followed a protectionist policy. Since 1970, it had followed a free trade policy enhancing market competitiveness and deregulation of government intervention (CIA, 2013). Singapore as a country is devoid of natural resources. In its foreign policy, Singapore has incorporated polices to strengthen its relation with the members of Association of South East Asian Nations (ASEAN). Singapore also maintains a strong association with the United Nations Forum for East Asia-Latin America Cooperation (FEALAC) to improve trade relations with Latin America and East Asia. So, from the very beginning, it had focused on the development of capital intensive methodologies for further growth (Australian Government, n.d.). The Nominal GDP of Singapore in the year 2012 was recorded as 276.52 billion dollars (International Monetary Fund, n.d.). This has even surpassed the prediction by IMF, which had forecasted the GDP to be around 270 billion dollars. Analysis of the country’s business cycle The GDP of the country is tabulated in the following table. Table 1: Real GDP of Singapore Year GDP current prices in US Dollars Growth Rate 2000 94.31 9.04 2001 87.70 -1.154 2002 90.64 4.202 2003 95.96 4.58 2004 112.70 9.159 2005 125.43 7.37 2006 145.75 8.764 2007 177.58 8.857 2008 189.96 1.701 2009 185.64 -0.98 2010 227.38 14.76 2011 259.85 4.889 Source: (Econ Stats, n.d.) The above table shows the GDP of Singapore at current prices in US Dollars. This paper has considered the GDP growth over the last ten years. The formula that has been used for the calculation of growth is: Rate of Growth of GDP in current year = (GDP value in current year – GDP value in base year)/ GDP value in year base year It can be clearly seen from the table that Singapore’s GDP has been following an upward trend throughout, except a little slump in 2009. The slump can be explained because of the adverse external environment in the World economy. Since then, the economy of Singapore has made a steady progress as can be seen from the rising trend in the GDP. Figure 1: Graphical presentation of GDP Source: (Authors creation) The graph above gives a visual representation of the GDP values. It can be seen from the figure that the economy of Singapore had faced a slump in the GDP growth in 2001. This is primarily because of the fact that the country went into recession in the middle of 2001. The chief reason behind this was the slower growth of the US economy, particularly in the electronic sector, which had slowed down the exports from Singapore to not only the US, but also the rest the European countries (Arnold, 2001). Since then, the economy of Singapore had shown a consistent performance. The main reason behind this exceptional growth was not the increase in total factor productivity, which had mainly driven the growth for other Asian countries. The root of growth and a stellar performance for the Singapore economy was the high level of capital accumulation. The growth can be mainly attributed to the mobilization of resources. The development strategies adopted by the government were strategic and vibrant which had mainly propelled the economy to its growth. In a research conducted by Professor Vu he, it was found that the contribution of the capital-input in the growth process has been around 47%, while labor contributed to around 36% of the growth (Arnold, 2001). The graph reveals that the growth again took a dip in the year 2008. This was primarily because the export oriented economy of Singapore had experienced a huge setback with the global financial crisis that had largely bruised the US Economy. Since then, the economy had sprang back to its performance, however, there remains signs of volatility due to the recessionary environment in the external world, the overall slackening of the aggregate demand from the trading partners and the volatility in the investment market. Table 2: Per capita GDP Year GDP per capita 2000 22790.80 2001 21001.23 2002 22027.88 2003 23029.40 2004 26418.80 2005 28497.52 2006 31762.62 2007 36694.54 2008 38087.23 2009 36566.60 2010 43864.74 Source: (Econ Stats, n.d.) Source: (Authors Creation) The table above shows the per capita GDP changes in the economy in the last decade. It shows a consistent increase in the performance of the country regardless of disturbed financial times. The per capita GDP growth is derived by dividing the real GDP by the population. A higher per-capita GDP acts as an indicator of the overall economic development of the country. This indicates a growth in the standards of living of the country. The main reason for the improvement in the per capita GDP is the rapid growth of GDP and the slow rate of growth in the population of the country. The main reasons responsible for the growth of the economy are the market-oriented growth strategy, high investments in physical-capital, human-capital and also, the social-capital and finally, the stable and efficient political government. GDP analysis by Expenditures The various components of GDP using the components of expenditure are consumption(C), Investment (I), government expenditure (G), imports (M) and exports (X). In this section, various components are analyzed in details (United Nations Statistics Division, 2013) Table 3: Expenditure Component of GDP Source: (United Nations Statistics Division, 2013) Figure 2: Graphical Presentation of GDP Source (Authors Creation) The graph above shows the trend lines of various components of the expenditure of GDP in the past decades. Analyzing this graph in details, we can see an overall increase in the expenditure components of GDP. This can be analyzed in the following way. The push had come from domestic demand and external demand. There was a significant increase in the external demand for the products produced in the country. This was mainly because of the performance of two of the major sectors of the economy. They are the heavy machinery and transport equipment. As far as domestic demand is concerned, there was also a huge boost. The domestic demand received a stimulus of 14% increase in the fourth quarter of 2010. Three major sectors were responsible for this buoyant performance. There was an increase in the inventories, combined with an increase in the consumption by the private sector and the public sector (Ministry of Trade and Finance, 2011). There has been a consistent increase in the private and public consumption, except for the slump in 2009. As has been explained, this was mainly due to the recessionary environment in the external economies. The graph also shows that the country has always managed to keep the exports well above the imports, which has chiefly been contributing to the overall growth. Gross fixed capital formation includes the investment made on construction, machinery and equipment and cultivated assets. The gross fixed capital formation has also experienced growth in the last decades, primarily because of the increase in expenditure of machinery, equipment, software and construction (Ministry of Trade and Finance, 2011). The country has also been experiencing a surge in the overall national savings. This has also led to a surge in the investments, thereby propelling to higher growth. Labor market Total population The total population in Singapore, as recorded in the year 2012, stands to be 5.3 million, which has risen steadily from 1.7 million from the 1960s. The average population in the years has been closely around 3.1 million during the time period (Ministry of Trade and Finance, 2011). The labor force Table 4: Labor force Indicators Source: (Ministry of Manpower, 2012) The key labor indicators are tabulated above. The aim is to focus on the changes in the variables within the ten years span starting from 2002 to 2012. The data can be divided into three components. The first part shows the total residents in the country and their composition according to the age, education, training and labor force participation. The second part deals with the number of persons who are employed and the employment rate, the distribution according to the population and the average income from their work. And the last part of the data focuses on the unemployment rate, both seasonally and non-seasonally adjusted. There has been a growth in the labor force of the country from 2002 to 2012. An additional 1.04 million people have been added to the labor force of the country in the last ten years. The rise in the labor force participation rate can be mainly attributed to the higher participation in the work force from the older segment of the population and also, from women. This has been the result of the government efforts to improve the education profile along with the participation ratio in the labor force. The rising labor force participation rate and the ability of the government to create new jobs, through its strategic decision-making have made the country achieve high levels of employment rate over the span of time. The data also reveals a strong rise in the number of the employed professionals in the higher age group bracket. This was primarily because of the attitude of the government and its policies aiming to include the older segment of the population in the formal labor market. The growth of income, based on median gross monthly income from work, had shown a slower rate of rise in 2011, when compared to 2012 annually. The annual growth rate for 2011 was 8.3% which had declined to 7.3% in the year 2012. The labor force participation ratio has risen to 66.6% from 63% (Ministry of Manpower, 2012). An analysis of the median age of the labor force shows a rise in the age of the people working in the labor force. This again was because of the increase in the age group of 50 and above in the work force. An analysis of the unemployment rate of labor also shows a decline in the overall rate of unemployment over the years. This clearly indicates the ability of the country to create new jobs and its success in combating unemployment. The employment ratio has been found to be rising in case of women, in the prime working years, which show that Singapore has been performing well in the area of improving gender gap in unemployment. Inflation Table 5: Consumer Price Index Source: (Government of Singapore, 2013) The consumer price index measures the inflation in the prices of the consumer goods for a chosen bundle of goods and commodities. This data only captures the price changes of consumption articles. Singapore has been able to maintain a control on the overall rate of inflation, which always averaged around 2.8% in the last forty years. An analysis of the historical data has revealed that the rate of inflation had reached its highest value in 1978 (Department of Statistics Singapore, 2012). The analysis of the data reveals that the country has been able to maintain the inflation within control, which bears a testimony to its robust performance. The PPI in Singapore had recently dropped to 97.47 index points in October 2013 from 98.08 in September (Department of Statistics Singapore, 2012). However, a falling producer price index cannot be taken as a proper measure for targeting inflation as they do not capture the changes in the price advanced by the consumers (Carson, Enoch & Dziobek, 2002). However, a falling producer price index implies a decreasing cost of production, thereby making production more cost efficient. The GDP deflator of the country for the last eight years has been tabulated below. Table 6: GDP Deflator of Singapore Year GDP Deflator 2004 98 2005 100 2006 102 2007 108.4 2008 107.2 2009 110.1 2010 110.3 2011 110.9 2012 113.2 Source: (The World Bank, 2013) Before understanding the impacts of inflationary pressure, it is important to understand the basic difference between the consumer price index and the GDP deflator. GDP deflator measures the price of one unit of GDP, if it has to be bought by the consumer. Firstly, the CPI does not consider the investment goods as they do not form a part of our consumption and secondly, the GDP only consists of those goods and services which are produced within the borders of the country and not the goods, which are imported from outside and included by CPI. The main purpose of the GDP deflator is to obtain the Real GDP from the Nominal GDP. So, the chief purpose of the GDP deflator is to obtain the understanding of the overall level of inflation in the economy, whereas the CPI gives the measure of the inflation faced by the consumer. The chief reasons for inflation in Singapore can be explained as follows (Singapore Government, 2012): Firstly, the inflation can be attributed to the supply side of the economy. This is the main driver of raising the cost pressure domestically. The imputed rentals on owner occupied accommodation have shown a rising trend with the tapering of the housing market. Secondly, the increase in transportation costs has also raised the inflation in the recent times as the Certificate of Entitlement premiums has been on a rise, owing to the supply side bottleneck. Finally, the rising wages in the labor market has raised the cost of hiring the laborers, thereby allowing the firms to charge higher prices for the goods and services produce by them. Despite these challenges, the government has been successful in maintain a close watch on the inflation through appropriate monetary policy (Singapore Government, 2012). Fiscal Policy Government Taxes by the various categories has been tabulated as: Table 7: Tax Types and their Shares Source: (Government of Singapore, 2013) Table 8: Government Expenditures by Heads Source: (Government of Singapore, 2013) The figure above shows the various categories of taxes and the various expenditure of the government in the fiscal year of 2008-2010. The government debt to GDP ratio of the country has been measured at 97.90% of the country’s GDP in 2012. Considering the time frame from 1990 to 2012, the average value of the government debt to GDP had stood at 85.5%. It had peaked during the period of 2009 when it had reached a value of 109.8% (Trading Economics, 2013a). The investors, for understanding the potency of the country to repay the debts in the future, use the government debt to GDP ratio. This would eventually affect the cost of borrowing of the country. Singapore’s policy makers have largely relied on the fiscal policy by the government for taking care of the external adverse financial conditions. Fiscal policies have the effect of improving the aggregate demand to relieve the economy out of the deflationary situation. However, the effect is only temporary. Numerous economic factors may be responsible for these short-lived effects. Singapore has followed a discretionary fiscal policy in the economic downturn which is targeted, timely and temporary. The discretionary policy is particularly successful for the economy because of the short term implantation lags and the effective tax system. Singapore manages its expenses from budget surplus, rather than borrowing (Government of Singapore, 2009). Monetary policy The central bank of the economy is the Monetary Authority of Singapore, which was established in 1971. This is the apex agency for monetary actions taken by the nation. The unique feature of the monetary policy of Singapore is that it centers on the controlling of the exchange rate. There is no exclusive policy management for controlling the supply of money or the value of the interest rates. This outlook by the central bank is based on the view that money will automatically adjust to the changes in the economic activity, as money is an endogenous variable. As the exchange rate is the main factor which is controlled, there are no separate controls on the interest rates or level of money supply (Monetary Authority of Singapore, 2012). The spot exchange rate has appreciated by 0.073% in the last month (Monetary Authority of Singapore, 2012). External Sector Singapore’s import volume index stood at 177.44 in 2010 (Trading Economics, 2013b). Import volume indexes are the ratio of import value indexes to unit value indexes. They are derived from UNCTAD’s volume index series. The export volume of Singapore has increased from 195.6 to 247.2 from the year 2009 to 2011 (Trading Economics, 2013c). The economy of Singapore depends largely on the foreign direct investments. It has been observed that the FDI inflows in the country have been quite strong in the last decade, peaking in 2007 at $ 37 billion dollars. Following the financial crisis in 2008-2009, this value had come down to around $ 8 billion US dollars. The economy had a rapid rebound when the value reached $ 38 billion in the year 2010. This has happened primarily because the country is now focusing on the creation of value added goods and a vibrant service sector attracting investment. It has also become the hub of value added industries and grouped activities like, R&D and scientific innovation (Hsu, 2012). Conclusion This paper has studied in details the various aspects of the macroeconomic parameters for the country of Singapore. This analysis has shown that the country has been following all the necessary steps required by a small developing country in achieving high level of growth and overall economic development. The analysis has revealed that the country has been able to sustain a high level of GDP for over the entire decade under study. Except for a slight slowdown in 2008 owing to the financial crisis, the country has otherwise been successful in maintaining its growth. The high level of per-capita GDP has positioned it among one of the countries with high living standards. This implies that the government policies have been successful by and large in controlling the inequality. The analysis of the labor market has also shown high level of employment and increasing overall labor force participation. The inflation has also been well reigned and just enough to stimulate aggregate demand. The country also has high level of FDI inflows required to cheer up the investment market, which has further contributed in its growth. The monetary policy is only concerned with the exchange rate for improving the terms of trade and thus, growth. The GDP of the country has been estimated to be around $ 385.40 billion dollars in the fiscal year 2014 (Econ Stats, n.d.). References Arnold, W. (2001, July 6). Singapore Says Economy Is in Recession. New York Times. Retrieved from Australian Government. (n.d.). Singapore country brief. Retreived from Carson, S.C., Enoch, C., & Dziobek, C.H. (2002). Statistical implications of inflation targeting: getting the right numbers and getting the numbers right. Washington D.C.: International Monetary Fund. CIA. (2013). The World Factbook. Retrieved from Department of Statistics Singapore. (2012). Singapore Consumer Price Index. Retrieved from Econ Stats, (n.d.) World Economic Outlook (WEO) data, IMF. Retrieved from Government of Singapore. (2009). Budget Highlights. Retrieved from Government of Singapore. (2013). Total Estimated Receipts For Fy2010 By Object Class. Retrieved from Hsu, L (2012). Inward FDI in Singapore and its policy context. Retrieved from International Monetary Fund. (2013). World Economic Outlook: Nominal GDP – Singapore. Retrieved from Ministry of Manpower. (2012). Labor Force in Singapore 2012. Retrieved from Ministry of Trade and Finance. (2011). Economic Survey of Singapore 2010. Retrieved from Monetary Authority of Singapore. (2012). Money, Interest Rates And Income In The Singapore Economy. Retrieved from Singapore Government. (2012). Inflation. Retreived from The World Bank. (2013). GDP deflator (base year varies by country). Retrieved from Trading Economics. (2013a). Singapore Government Debt To Gdp. Retrieved from Trading Economics. (2013b) Export Volume Index (2000 = 100) In Singapore. Retrieved from Trading Economics. (2013c) Import Volume Index (2000 = 100) In Singapore. Retrieved from United Nations Statistics Division. (2013). GDP by Type of Expenditure at current prices - National currency. UN Data. Retrieved from Read More