Singapore Productivity Growth

Question:

Write an essay on Singapore productivity growth sluggish.

Answer:

Thesis Statement: Analyses of the article “Singapore productivity growth sluggish: Nomura” by Grace Leong, to understand the linkage between the economic concepts and the discussion of the macroeconomic event in the article. 

Introduction

The article highlights the low economic growth of Singapore economy despite of the government efforts to raise productivity growth. The government has tried to restructure the economy through some prudent policies since 2010. But the restructuring policies do not show satisfactory results on the growth rate of the country. Norman Global Market Research has studied the effect of the government restructuring policies and warned that the low success rate of the policy may hamper the growth of the economy. According to his study, the growth rate has reduced to 3.8% since the restructuring efforts of the government from 2010 and further may reduce to 2.1 % in the next coming five years (Siddiqui 2016).

The articles highlight the macroeconomic event that may arise in future such as problems of debt-servicing may increase in future due to high corporate and household debt levels and the high interest rate may have future repercussion if it adversely affects the property market. The economy may also face recession in the future if the productivity remains low in the coming year. The employment will increase in lower productivity sectors and the cost of production will see an upward trend. Therefore, economy may face fall in investment in future as the investors will be uncertain to invest in productivity increasing capital investment projects

The article tries to seek reason for falling productivity. One of them is the process of restructuring was not widespread and the smaller firms were not getting its benefits. The moderate foreign demand plays another role for sluggish development through restructuring. Further stag-inflation may be one of the problems of future due to rising labour cost and low economic growth. Therefore, expected move of the government due to rising fiscal cost will be to raise taxes from higher income group people so that some short term fiscal surpluses can be earned by the government. However, the corporate growth may not see drastic fall in future as their major source of revenue is from overseas market.

Background Economic Theories

The growth in productivity increases the aggregate supply of the economy in the long run and helps the economy to go beyond its full-employment level. The supportive theory in this regard is the Classical and Keynesian theory of Aggregate supply in short run and long run.

The theory of economics have defined Aggregate Supply (AS) as the goods and services of total quantity  is produced and supplied, over a period of time ,by firms in an economy. The goods and services that are included are domestic capital goods, consumer goods, public good, goods that are exported and imported in international trade. The consumer goods include the goods that are consumed by households such as computers, clothes, entertainment, motor vehicles and others. The capital goods include plant and machinery, equipment other related goods supplied by the economy that is used to produce consumer goods (Siddiqui 2016)

Public goods and services refer to the goods and services produced by local or central government, such as healthcare along with education. Further the government also give contracts to private firms for goods and services related to information technology sector, pharmaceutical sectors and construction sector. The goods that are used for international trade in a country such as financial services, chemicals, entertainment and other exported and imported goods also are included in the components of aggregate supply (Siddiqui 2016)

According to the theory, the  law of supply states there is a positive relation between the goods supplied by the firms and its prices, provided that other factors affecting the aggregate supply remains constant, except its own price Hence the firms  in general, plans to develop  more output at high  price levels  and lower output at lower price level. Based on the basic law of supply, a simple aggregate supply curve is obtained as an upward sloping curve in output-price axis (Swee 2016).

The simple AS curve as upward sloping curve denoting positive relation between price level and national output. However, different theories on the shape of the  curve has been written supporting  different explanations about how  the changes in aggregate demand  makes the real output to responds  There are, essentially, three different views from three different school of economics. They are, Classical, Keynesian and modern views.

According to the Classical economy, Aggregate Supply of real output remains fixed at a specific level where all the inputs of production in the country would be fully employed. It is called as full employment level of output and beyond which output cannot be increased due to full utilization of resources and so no resource is left out to produce further output (Swee 2016). 

A vertical aggregate supply curve where national output Y is at full employment level, Q, and with increase in prices from P1 to P2, output does not increase. In this case, the when there is change in Aggregate demand due to any factor other than price level, then the effect on the real output is shown in the below diagram (Sidhu 2015).

According to classical view, when there is a upward shift in the aggregate demand cure due to increase in economy’s demand caused by the change in other factors affecting demand, besides the price level, it results in excess demand at the initial stage. The excess demand pushes the price up from P1 to P2 as the aggregate supply cannot be increased to meet the increasing demand due to its full employment level of output (Siddiqui 2016)

The Keynesian school of economics says that before reaching the full employment output level, there is excess resources in the economy and output increases with the increase in aggregate demand at constant prices and wages. However beyond the point of full employment  output level, any increase in aggregate demand leads to increase in prices at constant output creating inflationary pressure (Nevile 2016).

The aggregate supply curve of Keynesian economy which is horizontal below the full employment level of output Q, and vertical at full employment level of output. At the horizontal range of AS curve, any rise in aggregate demand curve will lead to rise in output at constant prices and wages due to the availability of unutilized resources. However, beyond full employment i.e. at the vertical part of aggregate supply curve, any changes in AD will bring about higher price levels with constant output as there is no resource left for producing more output (Michaillat and Saez 2013). 

The intemediate range of Aggregate Supply curve where with increase in aggregate demand the prices increases as well as the national output also increases. In the figure , it can be seen that when aggregate demand is at AD, otuput is Q1 and P1. When aggregate demand has shifted upward to AD1, output has increased from Q1 to Q2 and price has increased from P1 to P2. Further whwn agggregate demand has shifted to AD2, output has increased to full employment level Q and price has increased to P2. Beyond this any increae in aggregae demand does not increase output  and ther is only inflationary rise in price beyond P3 (Maitra 2016).

The intermediate rahge of upward sloping aggregate supply curve also shows the trade-off that can happen between unemployment and inflation as in this range as prices increases, output increases refers to fall in unemployment as people are employed to produce output (Ljungqvist and Sargent 2012). .

The modern economists have solved the problem of the Classical and Keynesian  AS curve by separating the short run AS curve (SAS) from the long run AS (LAS) curve. The short run aggregate supply curve is the upward sloping portion of the supply curve where with increase in price, production of output increases and supply increases The Long run Aggregate supply is the vertical portion of the supply curve where with increase in price, output does not change due to attainment of full-employment level of output (Kohler 2015)

Tthe modern economy approach of short run and long run aggregate supply curve. In short the curve is upward sloping showing a positive relation between price level and national output but in long run it is vertical straight line showing that output does not change due to increase in price level (Kohler 2015).

The movement in short run aggregate supply curve takes place due to change in other factors that affect supply of the good, such as price of inputs, change in tax rates and any other factors except its price level. Changes in other factor affect the cost of production and so when the cost increases, supply decreases and shifts upward. On the other hand, when the cost of production decreases, supply increases and the curve shifts downward (Hristov et al. 2012). 

However, output is determined in the long run by the price level as the long run AS curve is vertical. The aggregate supply curve of long run (LRAS) is the long run level of national output which is sustainable given the current quantity and quality of the economy’s scarce resources. Like in short run changes in the price level do not alter an economy’s long-term output. It’s given as a situation of full employment where all resources are optimally used and there are no spare resources available (Howitt 2012)

Under the situation the shift in  LAS can happen only if the  economy’s productivity changes by improving the quality of resources, such as through better education and training or  through a rise in the scarce resources quantity, such as organic population growth or inward migration  through adoption of advanced technology that enhance the productivity of the available resource and leads to higher production with the same level of factors (Griffiths and Rotheim 2013).

the quantity of human capital is increased by migration and population growth

the quality of human capital is increased by Education and training.

The efficiency and productivity is improves due to Competition in product and labour markets.

Inward investment, like domestic investment, increases an economy’s productive capacity. Long term inward investment from abroad, which enables increased production. 

the right environment for households to supply factors of production and for firms to produce output has been created by effective supply-side policy.

economy is able to  produce in greater volume or improved quality – even using the same quantity of scarce resources by increasing the spending on new technology, (Forder 2013).

Critical Analysis of the article

Singapore economy is confronting several macroeconomic problems such as low GDP growth rate, fall in employment especially fall in skilled labour force and rise in ageing population. Further, strict financial conditions shown in form of high interest rates and rising production cost discourage the business and firms to invest in the economy, a feeling of uncertainty has taken place in the mind of investors and the economy was shrinking in terms of new investment. As resources are getting fully used up, the economy needs to adopt policies that increase the productivity of resources and higher growth rate can be attained in future (Ekelund and Hébert 2013).

In this regard, the government of Singapore has tried to adopt policies for restricting the economy by increasing the productivity of resources. However, the restructuring policies have not been so successful and if the productivity continues to be slow then the economy may face several problems in future (Dinnie 2015)

The problems that may arise in future such as problems of debt-servicing may increase in future due to high corporate and household debt levels and the high interest rate may have future repercussion if it adversely affects the property market. The economy may also face recession in the future if the productivity remains low in the coming year. The employment will increase in lower productivity sectors and the cost of production will see an upward trend. The economy may face fall in investment in future as the investors will be uncertain to invest in productivity increasing capital investment projects. Further, economy may also face stag-inflation in future due to rising labour cost and low economic growth (David and Reder 2014).

The reason for falling productivity can be due to the fact that the process of restructuring was not widespread and the smaller firms were not getting its benefits. The moderate foreign demand plays another role for sluggish development through restructuring. The fall in foreign demand directly affects the income of the firms as Singapore economy major earning comes from foreign market. 20 to 30 percent of GDP share is contributed through foreign market. Any global recession or fall in demand has a greater impact on Singapore economic development and reduces the profit of the firms (Coddington 2013). 

On the other hand, the rising per unit labour cost compels the firm to raise its prices leading to a situation of stagflation where even during stagnant growth prices rise continuously. Singapore government restructuring policies show less positive results due to the unsupportive atmosphere of the country. The low growth rate even after the implementation of the restructuring policies may make the economy face several serious economic problems in future. Such as increase public debt, falling corporate profit, increase unemployment, falling income, falling demand and hence falling production. Hence economy may move to a state of depression if stringent actions are not taken to push the economy out of low growth rate situation (Case et al. 2012).

The expected move of the government due to rising fiscal cost will be to raise taxes from higher income group people so that some short term fiscal surpluses can be earned by the government. However, the corporate growth may not see drastic fall in future as their major source of revenue is from overseas market until and unless the overseas market faces recession (Brunnermeier and Sannikov 2014). 

Under the situation, there is a great necessity by the government to take some serious steps so that the anticipated recession does not come in the future. The economy requires great push financially and so flow of investment the economy should be encouraged. Therefore foreign direct investment and foreign portfolio investment should be given priorities and norms should be liberalised and lenient so that immediate FDI and FII starts flowing and encourage demand in the economy. The corporate sector needs to start joint venture with foreign investors to encourage investment in the country in the right manner as they understand the economy better than the foreigners (Bös 2015).   

The small and infant domestic industry should get the protection from the government against the large competitors in terms of subsidized inputs, price ceiling and flooring policies by the government and easy loan availability for the infant industry. All these will help them to develop competitive position in the market and instead of getting pushed out of the market by the rival firms; they will be able to survive with profit earning status. Therefore government need to take steps to develop the skills of the labour force by providing subsidized or free training and skill development programs so that the productivity of the labour force increases and they contribute more efficiently to the economy (Akerlof et al. 2014). 

Some of the relevant citation for the study is “The AS curve in a closed economy would then be upward sloping, with a decreasing elasticity approaching zero as full employment is reached. Madsen (1998) tests theories of aggregate supply using evidence from the OECD countries and concluded that the short-run AS curve was positively sloped due to sticky wages and prices. He could find no evidence in favor of the New Classical worker or producer misperception models. “as stated by Allan (2007).It supports the upward sloping AS in short run of modern theory. 

“The lack of short-run adjustment towards the long-run equilibrium is particularly serious in periods of low or negative inflation. The models of Ball et al. (1988) and Lucas (1973) predict that the speed of price adjustment to wage changes is an increasing function of the rate of inflation (Madsen, 1998c). Using panel data for OECD countries, Madsen (1998c) found that prices are completely insensitive to annual wage changes below 4 per cent, whereas inflation adjusts almost instantaneously to wage growth rates in excess of 16 per cent. “as stated by Jacob(2005).The author in his paper shows the with lower wage, prices are insensitive to the its change and price does not rise ,even when there is excess demand. The author is here discussing the movement of aggregate supply adjustment from short run to long run.

Conclusion

The paper discusses the article on “Singapore productivity growth sluggish: Nomura”. The article highlights the low economic growth of Singapore economy despite of the government efforts to raise productivity growth. The government has tried to restructure the economy through some prudent policies since 2010. But the restructuring policies do not show satisfactory results on the growth rate of the country. The paper tries to give the theoretical background for the issue discussed in the article which is attempted to increase productivity of the resource so that the economic growth can be increased at a faster rate. But the practice of restructuring was not that successful and the country was still facing low economic growth.

The article discusses the problems and gives some hints for the solutions. In this respect, the paper explains the long-run aggregate supply and short run aggregate supply curves and how long run aggregate supply curve can shift further due to enhancement of productivity.

Singapore was facing similar problem of full employment level where there was no spare resources to increase production despite the continuous rise in demand. Under the situation, the government had only one option to increase its productivity so that the same resource gives higher output. However, the implementation of the planning was not that successful due to which the country started facing economic problems. The paper provides the expected solutions to the problems in terms of implementation of prudent policies to protect the country from getting to recession state. The immediate action of the government is required to push the economy from the stagnant state by enhancing the productivity of resources which in turn will increase the income and generate higher growth to the economy.

References

Allan, G., Ashcroft, B.K. and Plotnikova, M., 2007. Public Spending and Scottish Devolution: crowding out, or crowding in?.

Akerlof, G.A., Blanchard, O., Romer, D. and Stiglitz, J.E., 2014. What Have We Learned?: Macroeconomic Policy After the Crisis. MIT Press.

Bös, D., 2015. Pricing and price regulation: an economic theory for public enterprises and public utilities (Vol. 34). Elsevier.

Brunnermeier, M.K. and Sannikov, Y., 2014. A macroeconomic model with a financial sector. The American Economic Review, 104(2), pp.379-421.

Case, K.E., Fair, R.C. and Oster, S.M., 2012. Principles of economics. Prentice Hall,.

Coddington, A., 2013. Keynesian Economics. Routledge.

David, P.A. and Reder, M.W. eds., 2014. Nations and households in economic growth: Essays in honor of Moses Abramovitz. Academic Press.

Dinnie, K., 2015. Nation branding: concepts, issues, practice. Routledge.

Ekelund Jr, R.B. and Hébert, R.F., 2013. A history of economic theory and method. Waveland Press.

Forder, J., 2013. Macroeconomics and the L-‐shaped aggregate supply curve. Handbook of Post-‐Keynesian Economics, 2, pp.245-264.

Griffiths, M. and Rotheim, R., 2013. Classical and Keynesian Economic Explanations for Unemployment. Dostopno prek: http://www. inscitia. com/wp-content/uploads/work/Michael_Griffiths_EC103H_Final_Essay. pdf (5.

Howitt, P., 2012. What have central bankers learned from modern macroeconomic theory?. Journal of Macroeconomics, 34(1), pp.11-22.

Hristov, N., Hülsewig, O. and Wollmershäuser, T., 2012. Loan supply shocks during the financial crisis: Evidence for the Euro area. Journal of International Money and Finance, 31(3), pp.569-592.

Kohler, G., 2015. Global Keynesianism and Beyond. journal of world-systems research, 5(2), pp.252-274.

Ljungqvist, L. and Sargent, T.J., 2012. Recursive macroeconomic theory. MIT press.

Madsen, J.B., 2005. Empirical estimates of the NAIRU. Labour, 19(3), pp.563-593.

Maitra, B., 2016. Investment in Human Capital and Economic Growth in Singapore. Global Business Review, 17(2), pp.425-437.

Michaillat, P. and Saez, E., 2013. A theory of aggregate supply and aggregate demand as functions of market tightness with prices as parameters. National Bureau of Economic Research.

Nevile, J.W., 2016. Notes on Keynes’ Aggregate Supply Curve. In Post-Keynesian Essays from Down Under Volume I: Essays on Keynes, Harrod and Kalecki (pp. 44-49). Palgrave Macmillan UK.

Siddiqui, K., 2016. A study of Singapore as a developmental state. InChinese Global Production Networks in ASEAN (pp. 157-188). Springer International Publishing.

Sidhu, R., 2015. Knowledge economies: the Singapore example.International higher education, (52).

Swee, G.K., 2016. The Singapore Economy in 2065: Returning to Our Roots.

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