However, if Singapore’s economy is near full employment, the increase in aggregate demand may lead to demand-pull inflation. Singapore may experience imported cost-push inflation too due to rise in cost of production since prices of imported goods increased from the competition for scarce raw materials like oil and steel by many countries. In addition, free trade makes Singapore’s economy more vulnerable to external shocks such as current global financial crisis, as well as exposes Singapore to unfair trading practices which can impede its economic growth. The greater competition from similar low-cost foreign producers may not result in more exports. Consumers may substitute domestic goods with the cheaper and a wider variety of foreign goods. Domestic firms may close down with the increase in imports as they may not be able to compete. As a result, aggregate demand may not rise and may even fall. Not only that, trading partners may prefer exports of other better and cost effective countries, resulting in lower domestic output. Moreover, multinational enterprises tend to have a ‘trojan horse’ effect whereby they take over or destroy local competitors using their economies of scale. Governments are often unable to protect local firms due to risk of the multinational enterprises leaving. Therefore, the closing down of domestic firms causes the level of unemployment rate to rise which in turn affects the economic growth. There is also a tendency for import expenditure to rise with the availability of cheap imports and increased variety. This worsens the balance of trade.
Another characteristic of globalisation is free flow of capital whereby it involves liquid funds moving around financial centres freely, searching for higher interest rates and safety of capital. Globalisation allows for the inflow of foreign direct investments which enables firms to get better capital equipment that can facilitate growth from an increase in research and development activities. The level of investments may increase due to free trade agreements which allows easy flow of investments into the country with fewer restrictions as well as influenced by the potential returns that are higher in Singapore than domestically. The expansion of exports via low or absence of barriers also increases investments in export-oriented industries. As such, the inflow of foreign direct investments and foreign talent raises the aggregate demand, leading to multiplier effects on employment and income. The inflow of foreign direct investments into domestic financial institutions may improve liquidity, making more funds available at lower interest rates, promoting domestic consumption. There is increase in productive capacity in the long run and potential growth is promoted. The inward foreign direct investments, caused by the desire of multinational companies to set up facilities in Singapore so as to be nearer to their customers, helps to improve the capital and financial account balance.
Nevertheless, there is also outward foreign direct investment which may relocate to cheaper destinations and hence result in ‘hollowing out’ of Singapore’s economy. This may worsen the condition of structural unemployment. Though inward foreign direct investment may increase aggregate demand, it can be argued that such companies are firmly rooted in the country from which they originated and are parked in Singapore as a tax haven. There is no guarantee how long they remain and it is likely that they may relocate if elsewhere offers cheaper cost of production, including cheaper tax rates. Therefore, it results in having a negative impact on Singapore’s economic growth. Hot money also creates fluctuations in exchange rate which will cause uncertainty to trade.
Globalisation also involves free flow of factors of production. The improvements in labour mobility and skills of workers help increase productive capacity and employment, leading to greater economic growth. An example will be the relaxation of immigration policy in Singapore, where foreign talents are encouraged. Other than supplementing the Singapore’s small labour force, these foreign talents tend to transfer their specialized skills and knowledge to the locals, raising the level of productivity of the country. As such, other than increasing the quantity of labour, the quality of labour will be raised to higher level. This increases the productive capacity of Singapore, enhancing the country’s potential growth. Domestic labour has more opportunities both locally and in overseas. Therefore they may move to overseas in search of better job prospects and better career development. Unemployment rate will thus be reduced. With globalization, Singapore can increase its labour force by attracting foreign talents to resolve the problems brought by its small population size. The access to cheaper sources of labour and raw materials reduce production and attracts investments, thus promoting economic growth.
However, labour is a derived demand, so when demand for exports fall, demand for workers falls too, leading to structural unemployment. Globalisation has also leads to greater labour mobility, off-shoring and out-shoring which may result in local labour being displaced by foreign labour whom demand for lower wages, impoverishing low-skilled workers, hence raising domestic unemployment. Brain drain may occur too due to greater labour mobility. There will be increasing social inequalities with the unequal income distribution within the economy due to differing skills. Those workers with unique marketable skills will command higher wages while those without relevant skills will have lower wages.
Globalisation also involves a significant exchange of technology and ideas between countries. Singapore can tap on foreign resources and technology to promote economic growth. With cheaper imported raw materials, short run aggregate supply curve will shift down. With technology transfer, research and development and increased skills of labour, long run aggregate supply curve will rise. Technology transfer and economies of scale reaped help lower average production costs, leading to lower price for consumers. This helps to reduce inflation rate. The exchange of technology and ideas improve innovation and raises the level and quality of technology. Being more productive efficient with better technology and ideas, productive efficiency is promoted, therefore cost of production is lowered. Potential growth is hence being stimulated.
However, technology often causes negative externalities such as pollution from increased air and sea freight transport. The carbon footprint of Singapore will increase. There may be possible increased pollution from increase in production due to the need to increase provision of increasingly sophisticated entertainment, recreational and social activities to satisfy the needs of a more cosmopolitan labour force. Pollution due to higher levels of industrial pollution, clearing of land for production facilities, discharge of toxic wastes into environment have affected Singaporean’s standard of living.
Singapore’s rapid growth may be attributed, to a large extent, to relatively free trade, free capital flows, free movement of labour and exchange of technology and ideas. Globalisation actually provides more opportunities than threats, just that it requires governments to adopt appropriate policies to mediate the adverse impacts of globalization such as structural unemployment due to the restructuring of the economy and mergers of firms. In the case of Singapore, the government consistently restructures the economy to cope with the challenges of globalization. In all, globalization has been of benefit to the Singapore economy.