Factors Determining Singapore's Low Multiplier

Question

Singapore’s south-east Asian culture places great emphasis on prudence — children are taught the value of saving from young. Being a small island nation, Singapore lacks natural resources like coal and oil, and does not have enough land to produce its own agriculture. As a result, the multiplier in Singapore is rather low.

Explain the factors that determine Singapore’s low multiplier. [10]

Answer

The multiplier (k) is the number of times national income expands as a result of an initial injection, and its size is governed by the marginal propensity to withdraw (MPW): $k = \dfrac{1}{MPW}$, where $MPW = MPS + MPT + MPM$. There is an inverse relationship between the MPW and k — the larger the share of each extra dollar of income that leaks out as saving, taxation or imports, the less is re-spent as induced consumption in each round of the multiplier effect, and so the smaller the final expansion. Singapore’s multiplier is low because two of these marginal propensities — the propensity to save and the propensity to import — are high. A high propensity to tax reinforces the result.

A high marginal propensity to save. Singapore has a strong culture of prudence, so its households save a relatively large share of any rise in income rather than spending it. Saved income is placed with financial institutions and does not immediately recirculate, so it does not contribute to the multiplier process. This raises the marginal propensity to save (MPS) and hence the MPW. The effect is reinforced by policy: the Central Provident Fund (CPF) is a mandatory savings scheme requiring both employer and employee to set aside a fixed percentage of monthly income, which the state holds until the citizen makes a large purchase such as housing or retires. This compulsory saving raises the national MPS further, lifting the MPW and lowering k.

A high marginal propensity to import. Lacking natural resources and land, Singapore relies heavily on imports — for agriculture, utilities such as water, and fuels such as petrol and diesel — so a large share of any rise in income is spent abroad rather than on domestic output. Moreover, with one of the world’s highest GDPs and high average household disposable income, Singaporean consumers are also willing and able to spend on relatively expensive luxury imports such as imported beauty products and luxury fashion. Both effects raise the marginal propensity to import (MPM), adding to the MPW and so depressing the multiplier.

A high marginal propensity to tax (a reinforcing factor). Singapore imposes some of the world’s highest tax rates on goods such as cigarettes, alcohol, cars and fuel. High taxation raises the marginal propensity to tax (MPT), reducing the disposable income available for induced consumption at each round, which lowers the effective marginal propensity to consume, raises the MPW, and further reduces k.

In sum, Singapore’s multiplier is low chiefly because its culture of prudence — augmented by compulsory CPF saving — produces a high MPS, and its small, open, resource-scarce economy produces a high MPM; together these give Singapore a high MPW and therefore a small multiplier.