Economy of Singapore Global Financial Crisis

Question: Discuss about theEconomy of Singaporefor Global Financial Crisis. Answer: Introduction As the article by Balakrishnan (2016), suggests, the economy of Singapore officially slid into recession which was indirectly caused by the Global Financial Crisis of 2007 - 08. The economy of the country mostly relies on exporting manufactured products and services to the western countries like the United States of America, the United Kingdom, and others. The financial crisis hit the economy of the western countries which in turn hit the demand oriented economy of Singapore. The situation led to a contraction by 6.3 percent of the economy. The report will show the causes of the recession in the country and the consequences of it. It will also analyse the government policies regarded to this situation. Economic Concepts and Models To analyse the article several economic concepts are required like Gross Domestic Product (GDP), unemployment, recession, fiscal and monetary policies, and others. The Gross Domestic Product is the total value of all the final products of a country in a year. It will be used as an indicator of improvement for the countrys economy. The concept of unemployment will be used in order to find the results and causes of the fluctuation in Singapores Gross Domestic Product. As stated by Barfield (2013), the situation where a person looks for a job and failing to get absorbed in the production process is called unemployment. There are three types of unemployment which are connected to an economy namely cyclical, frictional, and seasonal unemployment. In the case of cyclical unemployment, people lose employment due to economic fluctuations. Frictional unemployment is that type of unemployment where people are between two jobs and are unemployed for a short period. In the view of Islam (2014), the structural unemployment occurs when the skill required by the employer and the skill set provided by the employee do not match. Recession occurs when the Gross Domestic Product falls for a certain period and the decline hits the economy of the country negatively. Using fiscal and monetary policies the government of a country controls the economy. As stated by Dixon (2016), there can be two types of policy measures namely, expansionary policy and contractionary policy. The fiscal policies include tax and government spending, whereas monetary policy includes money supply and interest rate. A government uses these as tools and instruments for expanding and reducing the capacity of an economy. These economic concepts will help one to understand the situation of the Singaporean economy regarding how the country faced recession and how it came out of it. The macroeconomic variables which were affected by the Global Financial Crisis and which were used in order to improve the situation of the economy, are discussed here. Application and Analysis In the second quarter of 2008 the economy of Singapore shrunk by 5.7 percent. In the view of McGilvray (2016), it caused the government reduce its growth forecast to three percent. The reason behind this is the reduced demand from the developed western countries. Due to the financial crisis in the western countries, the demand for the products produced by the Singaporean manufacturing industry fell rapidly. The trade situation of the country deteriorated. Figure 1: Year over year GDP growth of Singapore and World trade. Source: Developed by the author. As the figure above shows, the financial crisis affected the country by reducing its growth rate due to the reduction in the world trade. This situation resulted in recession in the country after the consumer demand for the manufacturing exports of Singapore fell significantly. As stated by Rodan (2016), the regression resulted in unemployment in the country. Those people who were operating in the trade sector lose their jobs due to the fall in demand for the exports. The manufacturing companies had to let their employees go as they were facing inventory accumulation. The unemployment rate was about to increase rapidly. The government of Singapore assessed the situation and before the country fell in the trap of low employment, the government policy measures were introduced which restricted the unemployment rate to go beyond 3 percent. Those who were unemployed because of the recession fell under the category of cyclical unemployment. Figure 2: Unemployment rate (in percentage) of Singapore since 2006. Source: As created by the author. As the figure above shows, the unemployment rate increased to 3 percent in 2009, which later fell again due to the government policies, which will be discussed next. Government Policies and their Effects As stated by Quah (2013), the government of Singapore understood the problems that Singapore was about to face before it happened as the western countries were already suffering from the financial crisis. For improvement of the economic condition of the country the government took the following measures: In the view of Harvie and Van (2016), the government of Singapore took expansionary monetary policy by reducing the interest rate in the country to increase the investment. Foreign Direct Investment (FDI) was increased by a large margin due to the foreign policies of the country. To reduce the unemployment rate the production in the manufacturing sector had to go on. The investments in the production processes of the country kept the production process rolling. This restricted the unemployment rate within 3 percent. This was followed by a fiscal expansionary policy directed towards tax. The tax rate was reduced to protect the profit margin of the companies operating in the market of Singapore. Due to the low tax rate, the production did not fell as it was supposed to following the Global Financial Crisis. As stated by Claessens et al. (2014), it increased production in some sectors of the manufacturing industry. This resulted in consistent reduction in the unemployment rate since the financial crisis. It also ensured a consistent growth rate. These government policies were introduced in the economy to save it from going into deeper recession and for a longer period. As stated by Ng and Yang (2016), due to the quick recovery of the economy through increasing Gross Domestic Product and the societal situation did not deteriorated much. In general unemployment slows down an economy. But due to the policy prescriptions of the government and the steps taken by the authorities, the manufacturing sector revived. The financial situation of the western countries was getting better at that moment. New demand was rising from the markets in the west. The increased production of Singapore met new demand and the Gross Domestic Product increased in the future Conclusion The economy of Singapore faced a recession following the Global Financial Crisis of 2007 in the developed countries like America, Britain, and others. The article has been critically analyzed here with proper economic concepts like Gross Domestic Product, unemployment, recession, fiscal and monetary policies. The trade sector of the country got affected due to the financial crisis. It resulted in an increasing unemployment rate. The government of Singapore countered this situation with expansionary policy measures from both fiscal and monetary categories. The rate of interest and the tax rate were reduced by the government to counter the situation. It increased the investment in the economy and increased Gross Domestic Product and employment in return. References Balakrishnan, A. (2016). Singapore slides into recession. the Guardian. Retrieved 7 December 2016, from https://www.theguardian.com/business/2008/oct/10/creditcrunch-marketturmoil1 Barfield, C. (2013). Struggling with Success: Challenges Facing the International Economy by Anne O. Krueger Singapore: World Scientific Publishing, 2012. World Trade Review, 12(03), 607-610. Claessens, S., Kose, M. M. A., Laeven, M. L., Valencia, F. (2014). Financial crises: Causes, consequences, and policy responses. International Monetary Fund. Dixon, C. (2016). Why the Global Financial Crisis Had So Little Impact on the Banking Systems of Emergent East Asia. Journal of Self-Governance and Management Economics, 4(2), 28-62. Harvie, C., Van Hoa, T. (2016). The causes and impact of the Asian financial crisis. Springer. Islam, R. (2014). Comparing Financial Contagion and Volatility Spill over and Structural Break Within Major Asian Economies Pre and Post Global Recession to that of Asian Crisis. The Journal of Applied Business and Economics, 16(4), 92. McGilvray, A. (2016). Singapore: The brain-gain game. Nature, 537(7618), S16-S17. Ng, V. F. A., YANG, S. (2016). Changing Strategies of Manufactured Export Expansion in Singapore. Manufactured Exports of East Asian Industrializing Economies and Possible Regional Cooperation, 150. Quah, J. S. (2013). Ensuring good governance in Singapore: is this experience transferable to other Asian countries?. International Journal of Public Sector Management, 26(5), 401-420. Rodan, G. (2016). The political economy of Singapore's industrialization: national state and international capital. Springer.