Discuss the extent to which the characteristics of being

small and open have influenced policy options of the

Singapore govt.
As of most of the governments in the world, Singapore
government would want to achieve the 4 macroeconomic goals
for the country, namely sustained economic growth, low
inflation rate, low unemployment rate and an improving
balance of payment.
Singapore is small and open for some reasons, and these will
necessitate the need for Singapore to carry out trading with the
other countries. Firstly, since Singapore has a small domestic
market for the goods and services that it produces, these goods
and services have to be exported out for earning revenue.
Similarly, for the firms in Singapore, they also have to obtain
their factors of production in terms of the inputs such as raw
materials from abroad, due to the lack of natural resources.
Hence, this necessitates trading for local firms to obtain
imported inputs, in order to produce goods and services, which
will then be sold abroad for exports revenue. Thus, Singapore
has a small and open economy.
There are some policies adopted by the Singapore government,
which include fiscal, monetary and supply side policies, and the
government implement these measures in times of economic
boom or recession.
When there is a recession in the country, Singapores
government may consider on using an expansionary monetary
policy, where the central banks will lower the interest rate. By
lowering the interest rate, this will discourage people from
saving their money due to the lowered expected rate of returns
from savings. Hence, this will encourage more consumption
among the people on domestically produced goods and
services. Also, as a result of this, the expected rate of returns
from investment will be higher due to the increase in supply of
loanable funds from the central bank. Hence, there will be an
increase in investment in the forms of local investment and
foreign direct investment in the local properties. When there is
an rise in C and I, it will lead to a rise in AD (Aggregate

Demand), thus leading to a rise in national output and

employment.
Monetary Policy through interest rate is not so effective for
Singapore in countering economic recession as Singapore has a
small and open economy. Hence, with very little domestic
market compared to other nations like US, the interest rate can
fluctuate and is controlled by the bigger nations (Singapore is
an interest rate taker). Also, since Singapore has a high MPS
due to compulsory savings such as CPF and high MPM due to
our high reliance on imports in the form of imported inputs and
imported goods due to our open economy, our multiplier effect,
k has a small value. Hence, any attempts to increase the AD
will lead to a less than desired multiplied increase in the
national output, thus Singapore should not adopt monetary
policy.
Another policy that the government can adopt is the fiscal
policy. For instance, during times of recession in Singapore, the
government would adopt an expansionary fiscal policy, which
will increase government spending on public projects and cut
down on tax rates to stimulate the economy. During a global
recession, it is believed that the increase in C due to the
lowering of taxes and people having more disposable income
and the increase in I due to higher expected rate of returns
from investment and the increase in government expenditure
will lead to an increase in AD.
In a major global recession, the small and open economy of
Singapore make the policy rather useless, as other countries
foreigners demand for our exports will fall drastically. The
increase in G,C and I would not be sufficient to boost the local
output back to its original levels, as Singapore is heavily reliant
on external demand and FDIs. Hence, for a small and open
economy like Singapores, fiscal policy will only have a minimal
effect, since trade accounts for more than 300% of the GDP and
the domestic sectors form only a small part of the GDP. Hence,
the counter-cyclical role of fiscal policy to manage AD is very
limited in a small and open economy like Singapore.

To counter recession or further accelerating economic boom,

Singapore government can also consider the use of supply side
policies in the form of increasing potential growth. Since
Singapore has a small and open economy, Singapore is heavily
reliant on trade to sell its manufactured goods abroad and to
import imported goods and raw materials to manufacture into
products. Hence, in order to make Singapore a trading centre,
we must have sufficiently advanced and complete facilities, as
well as enough skilled labour to attract foreign investors to
invest in Singapore.
Due to the strong Singaporean dollar, it makes the cost of
production in our country very high. Hence, to ensure that our
exports could be sold abroad, we have to ensure that these
goods produced have to be of high quality and value-adding.
Hence, the government can provide subsidies to firms trying to
upgrade their machines to make it more efficient. Subsidies can
also be provided for the research and development in the
improvements of capitals and how to make the capital more
productive. In the labour aspect, to further make use of our
large labour force, the Singapore government can provide retrainings for the labour force, especially those people who are
in the midst of switching jobs. In this way, they will be more
prepared and adept in the job that they are going to take up.
The workers will also become more efficient and productive in
work and thus lowering the cost of production per unit, as
efficiency is improved.
All in all, I think that the supply side policies will work best for
Singapore because this can increase the potential growth of our
country in the long run. Since we have abundant supply of
capital and labour, it is important for us to utilise them fully and
efficiently to attract more foreign direct investments to our
country, so as to sustain the status of Singapore as a global
financial hub. Fiscal policy will not work well due to the small
domestic sector of Singapore as we are small and open, and
monetary policy through interest rate will not work well either,
since Singapore is a small economy compared to other
countries and hence we are just a price taker in the world
market of funds. Hence, we do not really have much control

over the interest rates. Thus, coupled with monetary policy

through exchange rate which can ensure that our exports
remain relatively price competitive and imported inflation for
inputs will not occur, supply side policies should be focused on
by the Singapore government to counter recession or further
strengthen the economic boom.