Singapore Economy

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reviewed the CPF in order to help it citizen’s burden allowing them to access to pay for their housing, medical and etc. Not just by letting the citizen to use the fund at the age of their retirement as it was started.

Singapore government also uses taxes to manage the economy. The government receives tax revenue from personal and corporate income taxes, GST, foreign workers levy, property taxes, etc. They then spend expenditure on four different sectors – social development, security, economic development and government administration. For business, the government focuses on using taxes to boost productivity in the long run and support small and medium companies. For example, they encourage R & D using the Productivity and Innovation (PIC) scheme. For household and individuals, their main objective is to redistribute income from the rich to the poor and medium income by providing various rebates and subsidies for them such as the GST offset package.

Singapore has maintained a lean government. By focussing spending on essentials, they have kept total government spending below 20 per cent of GDP, as compared to 40 per cent or 50 per cent in many developed countries. This has minimised the overall burden on the economy, and allowed the government to progressively reduce tax rates. (Ministry of Trade and Industry 2003)

Monetary Policies

Since 1981, monetary policy in Singapore has been centred on the management of the exchange rate. The primary objective has been to promote price stability as a sound basis for sustainable economic growth.

As Singapore is a small and open economy, our external sector is around four times of our GDP, we are highly dependant on the external sector. Singapore has such scarcity of resources such as natural resources that all our resources are imported means we need to import and domestic prices are influenced by foreign prices. As a location for “processing exports”, the movement of currency can influence Singapore’s export competitiveness. Singapore as an international financial centre, Singapore is open to capital flows. Small difference between domestic and foreign interest rates will lead to large and quick movement of capital. Hence, it is difficult to target money supply and interest rate.

In the result, Singapore does not employ a monetary policy, it employs exchange rate policy. Exercising monetary policy and manipulating the domestic interest rate risks making domestic interest rate different from other countries. There will be the inflow and outflow of money that severely impacts our exchange rates. Singapore is heavily dependent on imports and exports, a fluctuating exchange rate caused by the inflow and outflow of money is damaging for both domestic consumers exporting businesses. Hence, Singapore prefers to let the domestic interest rate float to match the equilibrium interest rate internationally so that there will be no inflow and outflow of money. Secondly, a huge inflow and outflow will be damaging on its own to the economy. This money cannot be depended on for investment. It withdraws way too quickly. A small economy like Singapore cannot sustain sudden withdrawals of capital.

Singapore as a small domestic sector, hence having a traditional monetary policies is ineffective such as using interest rates. In a theory of Open Economy Trilemma stated that as it is impossible for a nation to achieve all the three following variables, fixed exchange rate, free capital movement and independent monetary policy. According to the theory, a country can only choose two of the three variables. In Singapore, as it desire to be a financial hub which required to have a high capital of mobility in a result Singapore has chosen to have fixed exchange rate and free capital movement.

The Monetary Authority of Singapore (MAS) has committed to Price Stability. This monetary policy is very well-suited to a small, open economy, like Singapore. Price stability was committed by the MAS to achieve a low and stable inflation rate, promotes consumer and investor certainty and enhances export competitiveness. Hence, when the exchange rate is strong, it will expose Singapore to high degree of openness to trade and high degree of openness to capital flows.

Having Price Stability has resulted in a significant impact on economy activity and addition since Singapore imported so many relatively to our GDP altering the exchange rate also have a significant impact on price level.

The exchange rate has emerged as an effective anti-inflation tool for the Singapore economy. Domestic inflation has been relatively low, averaging 1.9% per annum from 1981 to 2010. The exchange rate has able to allow Singapore to have price stability over the years and to curb short term volatility on the economy. (MAS)

For the past years, Singapore has able to achieve a healthy and low inflation rate using exchange rate policy. The success of the system owes much to the strong economic fundamentals of Singapore. These include the fiscal policy that the government has impleaded, flexible product and factor markets.

Conclusions

Singapore governments have played a huge role in Singapore’s economy today, and able to achieve long-term economic growth over the past