I feel sorry for Singapore’s Prime Minister Lee Hsien Loong. It may seem strange, an ordinary man feeling sympathy for arguably the highest paid leader in the world.
Human rights groups critical of Singapore may think I am naive.
But there must be something about Singapore that attracts investors and foreigners and has transformed this city state into one of the richest countries in Asia. The boom has gone out of the economy now, hit by the global downturn.
Yet, if the economy is sinking, it is doing so sedately. Unemployment is still low at 2.6 percent. And the government is doing what it can to prevent jobs and business from slipping away.
Nobody can accuse the prime minister of downplaying the crisis. He openly acknowledged Singapore cannot survive on its own when he said: “Walling ourselves in does not mean that we would be safe; it just means we will starve.”
Everyone knows the Singapore economy depends on export markets and foreign investments. But for a government as sensitive to criticism as Singapore’s, this was indeed eating humble pie.
Some say the government is not doing enough to stimulate the economy. Sceptics doubt that the government can save jobs by footing part of the employers’ wage bills under the Jobs Credit scheme. People would have benefited more from government handouts, it is said.
That would have been the Keynesian solution, according to a recent article in the New Republic. It says:
According to classical theory, if unemployment were to rise, consumption would decline, but savings would increase. The increase in savings would lead to lower interest rates, which would lead to greater investment, which would lead to the restoration of jobs–in short, back to full employment. But Keynes rejected this logic. During a recession, lost jobs and wage cuts would lead to a reduction in consumer demand, which meant less incentive for businesses to invest and banks to loan.
So, according to Keynes, the government has to stimulate demand by boosting consumption. And the way to do is through public investment and income transfer programmes designed to put money in the pockets of the poor–that is, the people most likely to spend, not save it.
It’s true the rich save more because they earn more.
But there is a problem with the Keynesian solution.
Singapore is a tiny city state with just about 4.8 million people. How much can they consume? Not enough to sustain a huge export-based economy like Singapore. The city state’s gross domestic product was 243.16 billion Singapore dollars ($159.1 billion) in 2007 when domestic exports – goods and services produced locally – totalled 234.9 billion Singapore dollars. The domestic market accounted for only 8.26 billion Singapore dollars or about 3.4 percent of the GDP.
I mentioned domestic exports because Singapore also re-exports foreign merchandise, earning another 215.7 billion Singapore dollars in 2007. (Figures not yet available for last year.)
Now this rich, export-based economy is threatened by the global downturn.
Bigger countries may be able to ease the recession by stimulating domestic demand. Countries like China, India, America, Germany, Japan, France and Britain have large populations. Not Singapore.
Singapore has to continue to depend on export markets for continued prosperity. In a global downturn, it is helpless.
This vulnerability does not make Singapore’s success any less remarkable. Whoever heard of a country where exports exceed the GDP? Singapore and Hong Kong are the only ones I know.
It is an incredible feat. That is the problem. Singapore’s future depends on an economic miracle.
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“Singapore is a tiny city state with just about 4.8 million people. How much can they consume?”
Ah here you are mistaking “gross consumption” from “net consumption”.
You see a balance must always be struck between what you produce for a domestic economy and what you export from domestic product. What has happen in Singapore is that the focus has shifted to aligning all the productive capital (i.e. people we got) from producing with an eye to domestic and export markets together to one that is totally export oriented.
Even in the construction sector, which logically should be for domestic consumption has also been geared to support an “export” (i.e. foreign investment) economy. Question, why do we need to have mega transport systems like MRT?
The answer is we want to attract “big” primarily export-oriented foreign investment, which in turns require more people than can be supplied by the indigenous population, which in turns has to import more and thus require big
which in turn requiring more people to use to justify its cost, which in turn requires to import more people and in turn requires big mega transport system, and the cycle goes on.
You see all of these is the result of being too export-oriented in too quickly instead of, say, having your domestic economy plus some foreign economy expand outward naturally.
So you see the problem isn’t because we are a small population that we inevitably have to depend almost entirely on export to run the economy! It is very much a policy driven situation not because we have no choice.