The Story of Economic Growth — Trade, Stimulus, Exchange Rates and Productivity

Answers

(a) [1]

The Thailand–USA trade balance is in surplus; the Thailand–China trade balance is in deficit.

(b) [4]

Income elasticity of demand (YED) measures the responsiveness of demand to a change in income. Diversification works through both sign and magnitude of YED across products. To survive a recession, a country wants exports whose demand holds up when trading partners’ incomes fall: inferior goods (negative YED, demand rises as foreign income falls) or necessities (low positive YED, demand falls less than proportionately) limit the fall in export revenue and so in AD. To rebound on recovery, it wants exports with high, income-elastic demand (YED > 1, e.g. superior-quality differentiated goods), whose demand rises more than proportionately when foreign incomes recover, driving a strong rise in AD. Holding both types — a diversified range — lets a country cushion downturns and capture upturns.

(c) [8]

The thesis is that fiscal stimulus is a valuable complement to rate cuts in Asia’s emerging markets, but its merit depends on each country’s fiscal space and the cause of the slowdown.

Merits. Both policies raise AD and, via the multiplier, national income and growth. Rate cuts alone may be insufficient: with business confidence hit by the trade war, investment is interest-inelastic, so lower rates raise investment little. Fiscal stimulus — higher government spending and tax cuts — acts more directly and certainly on AD, and Extracts 7–8 show East Asian emerging markets have the fiscal space (low deficits and debt) to use it. Running fiscal expansion during monetary easing is also cheaper, since low borrowing costs limit the debt burden.

Limitations. Not all emerging markets are alike — those with weaker budgets cannot raise G or cut taxes. Fiscal stimulus carries an opportunity cost, and where the government must borrow, higher interest rates can crowd out private investment, blunting the AD rise. And neither policy addresses structural problems (low skills, lost export competitiveness).

Judgement. Fiscal stimulus is a worthwhile complement rather than a substitute: two policies working through more channels are more effective than rate cuts alone, especially where investment is interest-inelastic and fiscal space exists. But whether the combination sparks growth depends on the cause of the slowdown (demand-side weakness, which stimulus addresses, versus structural problems, which it does not), the country’s fiscal space, and the magnitude of the rate cut. The defensible stand is that for emerging markets with strong fiscal positions facing a confidence-driven demand slowdown, fiscal stimulus is an effective complement; for those with weak budgets or structural weakness, it is less so.

(d)(i) [3]

The external value of the SGD is set by the demand for and supply of the currency in the foreign-exchange market.

Global uncertainty (Extract 9) lowers demand for Singapore’s exports, so demand for the SGD falls; the SGD depreciates against the USD. (Equivalently, hot-money outflow could raise the supply of SGD, with the same effect.)

(d)(ii) [4]

In theory, a fall in the external value of the SGD lowers its internal value. A depreciation raises the SGD price of imports, raising imported input costs and so cost-push inflation; it also makes exports cheaper abroad and imports dearer at home, raising net exports and AD, generating demand-pull inflation. The resulting rise in the general price level lowers domestic purchasing power — the internal value of the SGD falls. This might not occur in reality because (i) MAS operates a managed float and would intervene to prevent excessive depreciation, or (ii) in a recession with excess capacity, weak AD prevents demand-pull inflation and idle resources limit cost-push pass-through, so the price level need not rise.

(e) [10]

The thesis is that closing the productivity gap is likely to be of overall benefit to Singapore, provided complementary policies manage the transition’s costs.

Benefits. Raising non-tradable-sector productivity — via a lower Dependency Ratio Ceiling forcing firms to automate and re-skill — raises productive capacity (AS) and, by improving competitiveness and attracting investment and exports, also AD. The result is both actual and potential growth and an improved balance of payments.

Costs. In the short run, cutting reliance on cheaper foreign workers raises firms’ unit costs, lowering short-run AS and real national income, with mixed effects on resident employment, and risks displacing lower-skilled workers (the IMF’s social-impact concern).

Judgement. The drive is likely to benefit Singapore overall, but conditionally. The decisive consideration is managing the transition: the long-run gains in capacity, competitiveness and sustainable growth are real and necessary given Singapore’s reliance on domestic productivity drivers, but they come only after short-run cost increases and displacement risk. Whether the net effect is positive therefore depends on accompanying supply-side and redistributive policies — skills training and support for displaced workers — that reduce structural unemployment and close the income gap, converting the productivity drive into inclusive growth. With such support, the drive is of overall benefit; without it, the short-run costs and social strain could outweigh the gains.