A Level H2 Econs

Essay Question 5b: To what extent have the main economic problems faced by Singapore in recent years been caused by strong economic growth. (15) Strong economic growth refers to high and sustained economic growth, which can be in terms of actual (an increase in Aggregate Demand – AD) and potential (an increase in Aggregate Supply – AS) growth. In recent years, Singapore has experienced a number of main economic problems such as negative externalities and failure to achieve equity (microeconomic), high inflation and a worsening balance of payments (BOP) (macroeconomic problems).

There is a causal relationship between strong economic growth and these problems but strong economic growth is not totally responsible for the emergence of these problems in Singapore. Firstly, strong economic growth can lead to negative externalities in Singapore. Negative externalities are costs arising from an economic transaction that fall on a third party and not taken into account by those who undertake the transactions. This is seen from the left diagramthat producer maximise profit where MPC (marginal private cost) equals MPB (marginal private benefit).

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However, there is an overproduction as the social optimum output where MSC (marginal social cost) equals MSB (marginal social benefit) is less than the profit maximising output. Hence there is a deadweight loss to society. Left: ext negativities Right: actual growth In Singapore, strong economic growth is characterised by an increase in the level of production as more goods and services are being produced in the economy. For example, electricity in Singapore is totally produced from fossil fuel; it is understandable that level of carbon emission is higher as the economy grows, leading to negative externality like air pollution.

Also, a strong actual economic growth leads to an increase in real national income (right diagram). A fraction of population receives higher income, hence, higher disposable income and higher ownership of automobiles. This, coupled with limited land area especially in the central business district, leads to traffic congestion in Singapore during peak hour. Such negative externality reduces the productivity of business and imposes other costs such as air and noise pollution. Hence strong economic growth does bring about economic problems to Singapore.

However, a strong economic growth is not necessarily the cause of negative externality as these negative externalities are inherent in Singapore economic structure due to her lack of natural resources and limited land. Thus, even when the economy is not undergoing a high growth, people still need to use electricity so air pollution is not a direct result of high economic growth. Rather, it would be fairer to say that high economic growth only worsen the pollution which is already present in Singapore.

Secondly, a strong economic growth can lead to high demand-pull inflation, which is the continuous and inordinate rise in the general price level over time. As seen in the diagram above, economic growth achieved via an increase in AD in the short run may encounter limited spare capacity or a non-responding AS curve. Hence demand-pull inflation is caused as producers bid up prices for factors of production in order to increase production. One example is the rising cost of construction materials such as sand in Singapore.

With a large number of concurrent big-scale projects such as the Integrated Resorts, Circle and Downtown MRT lines, demand for construction materials shot up high while supply for these materials are not responding as fast. However, strong economic growth is not always causing demand-pull inflation as AS curve can be shifted to the right in the long term. Hence, any increase in AD is met up with an increase in AS and hence inflation will not be as bad as in the short-run. Also, Singapore is actively engaging in economic diversification.

Singapore does not depend on only one source of raw materials so unless there is a global shortage of such factors of productions, demand-pull inflation in Singapore is not alarming. Singapore government also provides grants and funds to corporates, especially to small and medium enterprises to help increase investment that improves productivity so that production capacity is increased. This helps ease the effect of demand-pull inflation. Hence, even when economic growth is strong, the possibility of a high inflation is reduced.

Lastly, a strong economic growth can worsen the BOP in Singapore. As described above, an increased in real national income follows economic growth, so residents in Singapore has higher disposable income and higher purchasing power so there may be an increase in both domestic and foreign consumption. So import expenditure (M) may increase. Thus, if export revenue (X) remains the same, (X – M) falls and hence current account can go into a deficit so a BOP deficit is potential.

For example, there has been an on-going crave for high-tech gadgets such as Iphone and Ipad in Singapore and as these products are not domestically produced but must be imported, they add up to M in the current account. However, the disequilibrium of BOP due to changes to X and M depends on elasticity of X and M, meaning an increase in purchasing power does not necessarily lead to an increase in M if demand for domestic goods is inelastic, especially when tastes and preferences come in.

Furthermore, it is subjective to the current position of BOP to say whether it is worsening. If Singapore’s BOP is already in surplus, which may be the case due to Asian conservative habit of saving more than spending, a falling (X- M) can actually improve BOP. In short, whether an economic growth worsens the BOP equilibrium depends on the relative position of the present BOP. As a whole, it is more likely that economic growth is only a reason to make existing economic problems more serious but not a cause to these economic problems.

Considering Singapore’s small and open economy, it is obliged for the government to make economic growth a priority so that accumulated wealth can be used as cushion when unforeseen circumstances happen, like SARS and H1N1 outbreaks. Also, the benefit of having a strong economic growth outweighs the cost of arising problems. In microeconomic problems, the benefits of strong economic growth outweighs the negative externality such as air pollution as economic growth affects material aspects such as wages and costs of living more profoundly.

And people are generally more concerned about material aspects than non-material aspects such as quality of air and environment. In conclusion, even though strong economic growth does play a part in main economic problems, it is not the direct cause to these problems. Strong economic growth, as like many other economic phenomenon, has trade-offs. Thus, it is normal that a strong economic growth may but not always play a part in causing other economic problems.

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