Singapore should not continue to reply on export-led growth strategy as it causes much volatility to economic growth.

To what extent do you agree with the above statement? (13) Singapore is a small and open economy that has a small domestic market and therefore has to rely on exports for high sustained economic growth (1/3 of overall AD consists of net exports). With the global recession, demand for our exports and inflows of investment shrunk and has affected the economy to a large extent. Volatility refers to the large swings in aggregate demand and the general price level in the economy. The recession has caused a fall in disposable incomes and thus induced demand for our exports. Moreover, people with pessimistic outlooks about their jobs save more and spend a smaller proportion of income on our exports. This has caused a fall in demand for our exports which decreases aggregate demand (AD=C+I+G+X-M) output and actual economic growth. Moreover as overseas MNCs face lower revenues from decreased demand for their goods and have spare capacity, the demand for investment to expand production overseas decreases, which reduces demand for foreign direct investment into Singapore and hence a fall in demand for factors of production which decreases potential economic growth and aggregate supply. Given that Singapore mainly exports high end consumer goods such as tourism, refined oils and consumer electronics, demand for her exports is likely to be positively income elastic and this will reduce demand for exports by more than proportionate. Compound this with that our net exports constitute a big proportion of AD, this will cause a large demand shock and hence Singapore should not continue to rely on export led growth as it causes much volatility to economic growth. In addition, during periods of high growth, a surge of net exports have caused aggregate demand to exceed production capacity and at full employment levels, led to demand pull inflation in Singapore. As exports are based on the rate of economic growth in other countries, there is little that Singapore can do to control the increase in demand for exports and hence it has led to much volatility for economic growth in Singapore. Even if Singapore were to increase her exchange rates to decrease net exports (Assuming Marshall Lerner condition holds and that sum of price elasticities of exports and imports is greater than one) a appreciation of SGD will decrease net exports and hence mitigate the level of demand pull inflation caused by exports. However, Singapore also has little or no natural factor endowments (eg oil land) and therefore have to import raw materials (like food and oil) as factors of production and final goods and services for exports and consumption. A appreciation will cause the price of cost of imported factors of production to rise, increasing cost of production, if producers pass on increase in costs to consumers in the form of higher prices of final goods and services, the general price level will increase and cost push inflation is achieved. Therefore as Singapores exchange rate policy is limited in mitigating the level of demand pull inflation caused by surge of exports, Singapore should not continue to rely on export led growth as it causes much volatility to economic growth. However, Singapore must continue to rely on exports for economic growth as switching to domestic led growth (ie domestic consumption, investment and government expenditure) may prove unviable. Growth in domestic consumption is small as the marginal propensity to consume for Singaporeans is small as a big proportion of income is spent on savings (high compulsory savings scheme called CPF at 35.5% of disposable income) and payments for large assets (ie loans for houses and cars). The Singapore government employs one of the most competitive tax rates in the world (ie 14%? Corporate tax rate to ensure continued investments fo high sustained low inflationary economic growth) and hence tax revenues are low and budget balances are tight. To increase government expenditure may lead to a budget deficit and not prove as a long term solution for Singapore.

In conclusion, Singapore will experience much volatility to economic growth given her small and open characteristics. However, this does not mean that she must forgo export led growth. Her domestic factors are way too small to support any meaningful growth. She could diversify her exports to different countries to ensure that demand for exports are not too concentrated in one region should it experience a recession and hence mitigate the fall in demand for exports.