Question:

In 2013, the Singapore’s Ministry of Manpower (MOM) continued its approach of taking
progressive steps to raise the quality of the foreign workforce and moderate foreign
employment growth. This is part of the Government’s effort to achieve quality economic
growth driven by sustained productivity improvement.
Source: Ministry of Manpower Website

(a) Explain how the nature of the Singapore’s economy affects the government policy
decision to focus on supply-side rather than demand-side policies. [10]
(b) Assess the impact of Singapore’s approach to foreign labour on the macroeconomic aims
of the economy. [15]

Interpret the Question – Part (a)

a) Explain how the nature of the Singapore’s economy affects the government policy
decision to focus on supply-side rather than demand-side policies. [10]

What is the cue word? What is the concept word? What is the context word?
(what are the skills (what are the concepts (what is the context for this question?)
required for this question?) required to answer this
question?)
Explain Nature of Singapore Singapore
economy
Supply-side policies
Demand-side policies
Schematic Plan

Demand-side policies and Supply-side policies

Define

Explain how dd-side and ss-side policies works

Explain why ss-side policy has a strong effect to

achieve sustained growth given her small and open
economy

Benefits of supply policy

3. High degree of openness to trade
Limitations of demand policy
=> Ss-side policy increase
1. Small domestic demand =>
productivity reduce avg COP
small +C and +I => +AD is
ensure competitive X in global mkt =>
limited
large impact on AD and NY
2. Lack of natural resources =>
High degree of openness to capital
high leakages i.e. high mpm,
flows => Ss-side policy -> skilled
so high mpw -> small multiplier
workforce, well-developed
effect -> limited +NY
infrastructure -> +productivity -> attract
FDI inflows -> +AD and +AS

Link back to Qn

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 Introduction (GIST)
Introduction The Singapore government aims to achieve sustained non-inflationary
economic growth using both demand-side and supply-side policies. Due
to the nature of Singapore’s economy -- small with limited resources,
her government focus more on supply-side than demand-side policies.
Demand-side policies refer to policies that increase her aggregate
demand. They include fiscal policies and exchange rate centered on
exchange rate. Supply side policies are policies refer to policies to
increase her AS.

Body (PEEL)
What is the first most important point?
State the Point (P) P: Supply side policies increase Singapore’s ability to enjoy sustainable non-
inflationary growth.
Explain the point As Singapore is a small economy which lacks resources, she has very limited
with clear causal quantity of factor of production. She has a very small land mass and workforce
links (E) which restricts her ability to produce a high number of outputs. It is easy to run
up to the limits of her economy if her aggregate demand increases without
Elaborate the point increasing her aggregate supply. The economy will then have actual growth with
with high inflation. This is detrimental to her export competitiveness. However, with
examples/diagram supply-side policies, Singapore can augment the size of her factors of
production or increase their quality, thereby allowing her economy to increase
the maximum amount of output.

Singapore is open to trade and capital flows. The economy relies heavily on
export for her growth. Thus, it is pertinent that Singapore’s exports are
competitive in the international market. Supply-side policies allow Singapore to
increase the quality of her products through R & D. It also increase the
productivity of her workforce which enable her to produce goods higher up in
the value chain (e.g. pharmaceutical products) or reduces the average cost of
production through schemes like the enhanced Productivity and Innovation
Credit Scheme (PIC) which provides tax benefits to businesses which invest in
productivity improvements and training for their workers. All these increase
Singapore’s international competitiveness of goods allowing her to bring in
greater export revenue. With labour taking up a large proportion of most firm’s
cost of production, specially service sectors that Singapore rely quite heavily for
her growth, schemes to reduce labour cost is especially important. Moderating
the foreign employment flow forces firms in Singapore to tap more on
technology to increase their factor productivity and lower per unit cost of
Singapore’s export. With a lower price of export, assuming Singapore’s exports
are price elastic, Singapore should enjoy an increase in net exports and
aggregate demand. Greater productivity in the country also attracts FDI inflows,
leading AD and AS. Hence, with the increase in aggregate supply, Singapore
can enjoy a rise in output in the long run with little increase in general price
levels.

Link back to Qn Supply-side policies allow Singapore to have sustainable non-inflationary

2
 growth.
What is the second most important point?
P P: Demand-side policy is limited in bringing about growth for Singapore due to
her smallness, openness and small multiplier.

Explain the point As Singapore is small and open, she cannot rely on her small domestic sector
with clear causal for growth. Demand-side policies like fiscal policy can only increase
links (E) consumption and investment expenditure, stimulating growth to a small extent
as C and I are a smaller proportion of her GDP. Thus, Singapore relies on the
Elaborate the point external sector for her growth and sells her goods to the world market.
with Employing expansionary monetary policy centered on exchange rate can
examples/diagram stimulate a rise in her net exports through lowering of the price of her exports in
foreign currency.
But it has limited effectiveness on expanding growth due to Singapore’s small
size of multiplier. Being heavily reliant on imports, Singapore has a high
marginal propensity to import. For every round of increase in income, a large
part of it flow out of the circular flow in the form of import expenditure thereby
reducing the extent of increase in national income. Singapore enjoys a smaller
economic growth from any attempt on demand-side policies to stimulate
aggregate demand due to her small multiplier. In addition, focusing on
stimulating Singapore export using her demand-side policy cannot reduce the
vulnerability faced from income change of the world economies. When major
economies like America and Europe are in recessions, Singapore’s export also
fell, reducing her AD and national income. An expansionary monetary policy
centered on exchange rate of reducing in price of Singapore’s export can
reduce some fall in export but it cannot fully reverse the fall in Singapore
economic growth. Focusing on providing goods that are income-inelastic
through supply-side policy might be more apt.

Link back to Qn Demand-side policy has many limitations in stimulating growth in Singapore and
thus Singapore government focus on supply-side policies to boost her growth in
the long run.

Conclusion (SR)
Conclusion S: Due to the nature of Singapore economy being small and open, she has
a small multiplier and faced increased vulnerability from changes in external
sector. Focusing on using demand-side policies to boost aggregate demand
and growth magnified these problems. By diverting her resources to raise
aggregate supply through supply-side policies allow her to augment her
increase her productivity and productive capacity as well as enjoy
sustainable non-inflation growth in the long run

R: Thus, Singapore focuses on supply-side policies than demand-side

policies to promote growth in her economy. However, supply side policies
can bring along some negative impact on her economy.

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 Interpret the Question – Part (b)
b) Assess the impact of Singapore’s approach to foreign labour on the macroeconomic aims
of the economy. [15]

What is the cue word? What is the concept word? What is the context word?
(what are the skills required (what are the concepts (what is the context for this question?)
for this question?) required to answer this
question?)
Assess Macroeconomic impact; Singapore
AD/AS;

Schematic Plan
Approach on foreign lab

Overall depends on (i) how S’pore govt intervene to minimize (-) impact (ii) time dimension

Moderate foreign lab growth Raise the quality of the foreign workforce

T: Moderate foreign lab growth increase pdtivity T: Needed high quality workforce to
reduce avg COP+ASincrease LT growth; X restructure economy in accordance to
competitiveBOP+ in the long run. Resident changing CA achieve sustainable non-
(Sporean and PR) employment rate can increase. inflationary growth. X can become more
competitive-> improve BOP position.
E:However, it really depends on how adaptable
firms are to change. E: ability to reap benefits depends on ability to
attract the right workers & successful
restructuring of economy
AT: Short run (SR) Moderate foreign lab
growth firms face lab crunch
increasinglyincrease COP in SRcost push AT: SR suffer from structural
inflation, growth. Higher priced X X rev fall unemployment, raising income disparity.
BOP fall Economy still need foreign lab of low skills
SRLess C from foreigners, less investment from shortage of low skilled worker (in absence of
MNCs & local firms (I) less output  fall in Y adopting tech) inflationary

E: govt has put in policies to offset cost increase E: govt has implement training of wkers to
ie min impact on firms’ profits reduce structural unN.

LR- if restructuring is successful long term sustainable non-inflationary growth, increase in quality
jobs, (+) BOP
SR- slower growth, inflation and worsening BOP

Impact depends on time dimension, govt intervention and firm’s adaptability to change.

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 Introduction (GIST)
Introduction Singapore’s approach towards foreign workforce is to raise the quality
of foreign workforce and moderate foreign employment. It is an
approach to support Singapore’s restructuring effort towards a high-
value, productive economy so that Singapore can enjoy sustainable
non-inflationary growth, low unemployment and favourable balance of
payments position. However, in the short run, there are some trade-offs
in terms of slower growth and a higher inflation. The overall impact of
Singapore’s approach to foreign labour depends on the time dimension
and Singapore’s government effort at minimizing any unfavourable
impact on her economy.

Body (PEEL)
What is the most important point? (thesis 1)
State the Point (P) Raising the quality of foreign labour allows Singapore to restructure her
economy towards higher-value added industries to enjoy long term growth and
create more employment.
Explain the point With increasing globalization, Singapore has to develop new niche industries
with clear causal that are higher up the value chain to enjoy long term economic growth. These
links (E) industries include aerospace engineering, biomedical engineering and digital
media. Raising the quality of foreign workforce supports firms and attract MNCs
Elaborate the point to adopt higher-value activities in Singapore as such industries require
with specialised skills set, especially when local workforce may not possess such
examples/diagram skills yet. In the absence of such talent in local workforce, Singapore cannot
develop these new industries which can augment her productive capacity and
aggregate supply, bringing about long term economic growth. In addition, the
high quality workforce can transfer the specialised skills to the local workforce.
More diversified job opportunities can also be created for our increasingly well-
educated Singaporeans over the longer term, reducing unemployment rate (and
resident unemployment rate). Wage can increase with quality jobs bringing
about a rise in consumption and aggregate demand. The new niche industries
can promote export growth and increase the net export revenue for Singapore
in the long run and boosts her balance of payments position.

E: However, the extent in which Singapore can reap long term sustainable
growth depends a lot on the ability to attract the right foreign talent to develop
these new industries to be relatively more competitive than other countries.

Link back to Qn Hence, raising quality of foreign labour is crucial in Singapore’s long term
growth and job creation.

What is the second most important point? (Anti-thesis)

P However, increasing the quality of the labour force could be detrimental to
Singapore economy as well.

5
Explain the point Increasing the quality of foreign workforce could result in increasing structural
with clear causal unemployment (for local workers) where these highly skilled foreign worker fill
links (E) the newly created job opportunities in new sunrise industries leaving local
workers who were laid off in the sunset industries without job.
Elaborate the point
with E: However, with more transfer of specialized skills from the foreign highly-
examples/diagram skilled foreign labour and training provided by government to the local
workforce, the extent of structural unemployment can be reduced over time.
However, if the laid-off workers are unwilling to receive training and not
susceptible to changes in work requirement, structural unemployment may
continue to be a concern in Singapore.

Link back to Qn Improving the quality of foreign labour force could increase structural
unemployment, increase income disparity between the skilled and unskilled as
well as create shortage of low skills labour.

What is the third most important point? (thesis 2)

P Moderating foreign employment growth allows Singapore economy to be more
productive in the long run to enjoy sustainable non-inflationary growth, lower
unemployment and improved balance of payments position in the future.

Explain the point To overcome the constraints of small size of workforce and greying population,
with clear causal Singapore has to bring in foreign labour to augment her labour force. But there
links (E) is a need to calibrate the foreign labour force to support her towards a more
productive and higher value society. Measures like higher levies, lower
Elaborate the point Dependency Ratio Ceiling were progressively phased in to reduce the rate of
with growth of foreign labour. With progressively less foreign labour, firms have tap
examples/diagram on technology and innovation to increase the productivity of their existing
labour. Some firms outsource their work while other made use of technology in
the production processes. This reduces the average cost of production shifting
the economy’s aggregate supply curve downwards. The rise in productive
capacity also causes AS curve to be shift outwards, increasing Singapore’s long
term economic growth. At the same time, it reduces cost-push inflation and
make Singapore export more competitive, thereby improving her balance of
payments position. With a lower Dependency Ratio Ceiling to reduce the ratio of
foreign labour, resident (Singaporean and Permanent Resident) unemployment
rate will fall. With a more productive workforce, sustained wage increase can
also be achieved to bring about further increase in consumption and aggregate
demand. Together with the rise in AS, AD rise will cause a non-inflationary
sustainable growth in Singapore. In June 2014, it was reported by Ministry of
Manpower that resident long-term unemployment remained among the lowest
globally at 0.6 per cent while foreign employment growth continued to slow with
a lower on-year total employment growth of 3.8 per cent. A more productive
economy can also be a pull factor for more FDIs into Singapore, further
increasing her ability to enjoy sustainable non-inflationary growth.

E: However, the extent to which Singapore can reap the positive

macroeconomic effects depends on how adaptable firms are to the new rules
aimed at moderating foreign employment. If firms are unable to shift their
methods of production towards embracing greater use of technology and utilise
less labour, Singapore will face greater challenge in its drive towards a more
productive and higher value economy, reaping less or taking a longer period of

6
 time to reap the full macroeconomic benefits.

Link back to Qn Singapore should expect a sustainable noninflationary growth in the long run,
with a rise in employment and improvement in balance of payment position with
a successful restructuring of her economy by improving the quality of her foreign
labour.

What is the third most fourth point? (anti-thesis 2)

P The trade-off of the approach towards moderating foreign employment is higher
inflation and lower economic growth in the short run due to higher cost of
production.

Explain the point When Singapore government moderates foreign employment, local firms start to
with clear causal face labour crunch. Firms in the service and manufacturing sectors see a fall in
links (E) supply of employable labour due to the lower Dependency Ratio Ceiling (DRC)
and high levy for each foreign worker. The DRCs specify the maximum
Elaborate the point proportion of foreign workers that companies can hire. When overall supply of
with workers fall, wage of workers rises and firms have to pay more to hire each
examples/diagram worker, incurring a higher operating cost; lower profits in the short run before
the some parts of the production process can be mechanised and innovated
upon to increase the productivity of the workers. This increase in cost can also
bring about an upward shift of AS curve, bringing about cost push inflation in
Singapore. A relatively higher inflation can increase price of Singapore’s export
worsening her BOP position.

In addition, raising the quality of the foreign labour may result in gaps in some
labour-intensive sector of the economy like construction and domestic help in
the short run. Construction sector faced the most challenge in adapting
increased technology usage and will continue to require high number of low-
skilled construction labour. With less low-skilled labour allowed into Singapore,
construction sector will not have enough resources to meet the increased
demand for construction work. In addition, with less of low-skilled foreign labour
and Singaporeans unwilling to work in such sectors, it will increase labour
shortage and raise wages in these industries. Aggregate supply may shift
upwards pushing up general price levels causing cost-push inflation.

However, some industries face persistent shortage of labour even with a rise in
wage. Some local workers are not willing to work in jobs due to the long working
hours or unconducive work environment. To comply with the DRC, the firms will
not be able to hire more foreign labour as they cannot get any local to fill the
vacancy. Some of these jobs include waitressing and construction work. The
rigidity in hiring reduces capacity of firms and their ability to ride on the recovery
of the world economy. Restaurants in Singapore were seen shutting down
despite a greater demand for their food due to the dire shortage of labour in the
industry. This has a far-fetching detrimental impact on Singapore’s hospitality
industry and its ability to attract tourism revenue. MNCs may also think twice
about investing in Singapore, local firms may not wish to expand their
production if they are unable to adapt to the new rule.At the same time, with
slower growth of foreign labour, the demand for housing and food slows
progressively. Export revenue and consumption and investment expenditure
and aggregate demand will fall, via reverse multiplier, national income will fall.
Singapore should expect slower growth during this period of restructuring
7
 towards a more high-value, productive economy.

E: In fact, Singapore government had implemented the DRC progressively and

during periods of slow growth to minimise the cost for the firms. In addition, to
help offset business cost and support the restricting process, Singapore
government have also put in place grants and subsidies to help firms embark on
the using innovation and technology in their production processes and improve
training of the workers. By slowing down the implementation of the DRC on
foreign labour and allowing the firms to catch up in their adaptation of
technology, Singapore government has reduced the negative impact on the
firms and economy.

Link back to Qn Singapore has to face slower economic, higher prices and worsening of BOP
position in the short run when moderating foreign employment in an attempt to
restructure her economy.

Conclusion (SR)
Conclusion The drive towards a high-value, productive economy supported by
moderating of foreign employment and higher quality foreign workforce
should bring about long term benefits of sustainable non-inflationary growth
and more job and favourable BOP position in the long run. However, in the
short run, she has to sacrifice her economic growth and suffer from raising
prices.
However, these negative repercussions can be mitigated with government
intervention. The more adaptable local firms are to the change on labour
policies, the faster Singapore can reap the benefits of a restructured high –
value productive economy.