Has globalization been of benefit to the Singapore economy?

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Has globalization been of benefit to the Singapore economy?  

     Globalisation is the integration of national economies with the international economy through trade, foreign direct investment, capital flows, migration and the spread of technology. There is reduction and removal of barriers between national borders in order to facilitate the flow of goods and services, investments, financial capital, labour and technology.

One of the characteristics of globalization is free trade, whereby flow of goods and services across borders is not restricted. Global trade allows for an enormous variety of resources to be made more widely accessible in Singapore. With free trade, foreign goods which are cheaper than domestic products can be imported. At the same time, the existence of foreign competition provides incentive for domestic firms to engage in research and development that will lead to product improvement. With each country trading based on comparative advantage, trade promotes economic efficiency by providing a wider variety of goods, often at a lower cost. As a result, consumers are able to enjoy more variety of goods of better quality at lower costs from the wages they earn. Hence, the consumer welfare is improved and their standard of living is raised. The purchase of cheaper imported raw materials and goods from countries that are more cost efficient helps to lower domestic inflation rate.

On the other hand, Singapore faces higher demand for its domestically produced goods due to comparative advantage. Domestic firms in Singapore are able to sell their domestic goods abroad to enjoy economies of scale which is cost savings enjoyed by the firms due to expansion of output. This lowers the cost of production for the firms and improves the country’s export competitiveness. In addition, its export markets increase, allowing it to raise its export revenue. Accordingly, it leads to rise in job creation and increase level of employment. There will also be improvement in the balance of payments due to higher net exports via free trade that raise its current account. Balance of payments and exchange rate are inter-related. Higher balance of payments would result in an appreciation in Singapore’s currency that would mean a stronger exchange rate for Singapore. Export-led growth especially in goods where Singapore has comparative advantage in will cause aggregate demand to rise and raise national income via the multiplier effect too. This provided the economy excess capacity to sustain economic growth. In all, the productive and allocative efficiency of the economy improves.

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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. ...

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