Expenditure-reducing policies involve the reducing of level of expenditure on imports. This can be done using exchange rate policy whereby government depreciates Singapore currency which would make imports more expensive when converted to Singapore currency. Foreign imports are now more expensive in the eyes of Singaporeans due to its weaker currency. On the other hand, with a weaker exchange rate, there would be a surge in the world’s demand for Singapore’s export as Singapore’s export is now relative cheaper in the eyes of the world. Singaporeans may substitute local goods for foreign goods due to the higher import prices. As long as the sum of price elasticity of demand for exports and imports are greater than 1, there would be a rise in net exports which would then increases economic activity and hence raises the country’s national income.
However, as Singapore is heavily reliant on imported inputs as well as finished goods, it would raise the price of locally made goods. Singapore will then face the danger of inflation due to more expensive imports. Demand-pull inflation occurs when aggregate demand rises through higher demand for exports as well as domestically produced goods. As firms raise their level of production, they compete for raw materials as well as labour or factors of production. The higher demand for labour bids wages upward and causes an increase in production cost, resulting in cost-push inflation as well.
Expenditure-switching policies involve measures to switch domestic expenditures from foreign imports to domestic goods and foreign expenditure towards the country’s exports. This can be achieved by making imports relatively expensive and exports relatively cheaper. One of such ways is to use devaluation which is the deliberate lowering of the exchange rate of the home currency in terms of other countries’ currencies. Suppose Singapore suffers a balance of payment deficit because of globalization and hence devalues her currency from US$1=S$2 to US$1=S$4, Singapore exports to US in terms of US$ are now cheaper while her imports from US in terms of S$ are more expensive. Exports will be encouraged and this leads to an increase in export revenue. Meanwhile, imports will be discouraged, which leads to a fall in import expenditure. Thus balance of payment equilibrium may be restored. However, Singapore may face retaliation from other countries. When Singapore devalues its currency, other countries’ exports will fall and their imports will rise. They may retaliate by implementing various protectionist measures such as placing tariffs on imports and may even counter-devalue their currency.
Therefore, to counter balance of payment deficit, it would be wiser to use long term measures through improving the supply side of the economy. Business need to be more competitive in domestic and overseas markets by reducing costs. Investments in new growth sectors or in industries with large exporting potential should be encouraged and research and development promoted to increase productivity as this will reduce the productivity gap with other countries. If balance of payment deficit is due to erosion of comparative advantage, Singapore should develop new niche areas, but this requires time and the ability to pick winners on the part of the government.
Globalisation stimulates the growth of foreign direct investment. Higher foreign direct investment inflows have increased the demand for skilled labour in Singapore. With this rise in demand for skilled workers, the wages of these workers increases while the wages of the low-skilled workers either remain constant or decreases. Given the limited supply of such skilled workers in Singapore due to its small population size, this further increases the wages of such labour, thus widening the income gap, resulting in the widening of income inequality between the lowly-skilled and highly-skilled workers in Singapore. To achieve more income equality, there will be a need to provide financial assistance or any other forms of assistance to the poor to close the income gap. However, this may put strain on the limited budget funds and help the poor only in the short run. A better move is to make available opportunities to the low income groups such as job opportunities, training and help in starting own business.
Besides reducing the negative effects brought by globalization, there is also a need to enhance the benefits of globalization. One of such ways is to get Singapore involves in Free Trade Agreements (FTAs). A free trade agreement is a legally binding agreement between two or more countries to liberalise trade and bring about closer economic integration. FTAs aim to remove the barriers to trade and investment. They create a free flow of goods, services, investment and people. FTAs allow the partners to give each other preferential market access. Thus, FTAs help to foster and facilitate the flow of trade and investment between Singapore and its trading partners. Within its FTAs, Singapore businesses will find it easier to trade with our FTA partners and to invest in their markets. Export dependent Sinagpore will benefit greatly from lowered tariffs in member countries as it means our exports will be cheaper and more price competitive. The demand for our exports will increase, leading to improved balance of trade which in turn translates to more job opportunities and promote economic growth. Therefore, there is trade creation. However, with FTAs, local firms, especially the small and medium enterprises will now have to face greater competition from foreign firms and may be forced out of the industry, resulting in unemployment. Strong competition may also deter potential local investment from taking place, leading to market domination by foreign firms.Trade diversion may occur too whereby trading activities move away from the pattern of comparative advantage due to distortion created by FTAs, resulting in inefficient allocation of resources.
There has always been a sharing of goods, services, knowledge and cultures between people and countries, but in recent years improved technologies and a reduction of barriers means the speed of exchange is much faster. Globalisation provides opportunities and challenges, benefits and costs. Bigger markets can mean bigger profits which leads to greater wealth for investing in development and reducing poverty in many countries. Weak domestic policies, institutions and infrastructure and trade barriers can restrict a country’s ability to take advantages of the changes. Singapore should make decisions and policies that position them well to maximize the benefits and minimize the challenges presented by globalization. Singapore must strive to be more competitive and be ready with appropriate government policies to take advantage of the situation, and to minimize the costs through attempts to foster greater economic integration with other countries so as to fully benefit from globalization.