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(b) Discuss the policies the Singapore government can adopt to maintain a healthy balance of trade. [15]

H1 students to skip the above question.

ACJC 2024

Introduction

The Singapore government can adopt various policies to improve its balance of trade, primarily by increasing export revenue and decreasing import expenditure.

Supply-Side Policies

One way the Singapore government can maintain a healthy balance of trade is by improving the price competitiveness of its exports. This can be achieved through supply-side policies aimed at reducing the cost of production. For instance, SkillsFuture, a national movement that encourages Singaporeans to develop skills relevant to the changing economy, plays a crucial role in increasing labour productivity. By equipping the workforce with advanced skills, the cost of producing goods and services can be lowered. As firms experience lower production costs, they can reduce the prices of their exports, making Singaporean products more attractive in the global market. This, in turn, increases demand for exports and improves the balance of trade.

However, such policies are costly and time-consuming to implement. Training workers under SkillsFuture requires significant investment in education and vocational programs. Additionally, training typically takes time, and workers might face an opportunity cost during this period. For instance, employees undergoing training may lose income from regular work, which can affect both their personal finances and short-term productivity. Moreover, the benefits of such policies are not immediate; it may take several years before noticeable improvements in productivity lead to a significant rise in export competitiveness.

In addition to enhancing price competitiveness, the Singapore government can adopt supply-side policies to improve the quality of its exports. By providing subsidies for firms to engage in research and development (R&D), the government can encourage innovation and the production of higher-value goods. For example, Singapore's Economic Development Board (EDB) offers grants and incentives to firms investing in R&D to improve the quality of goods and services. These higher-quality products tend to be more competitive in international markets, leading to an increase in export demand.

For instance, Singapore’s technology and pharmaceutical sectors have benefited from R&D subsidies, resulting in the development of cutting-edge products like medical devices and semiconductors. These industries contribute significantly to Singapore’s export revenue, helping maintain a healthy balance of trade. However, subsidies are costly for the government, and there is no guarantee of success. R&D involves high risks, and the benefits may take years to materialise. Furthermore, firms may misuse the subsidies or fail to generate commercially viable innovations, leading to inefficiencies.

Fiscal policy

Another approach the Singapore government can take is to implement fiscal policies that enhance the business environment and reduce the cost of doing business for firms. For example, increasing government spending on infrastructure—such as improving the country's high-speed fibre broadband network—can lower operating costs for firms by improving efficiency in communication and logistics. This can reduce the overall cost of production for export-oriented industries, enhancing their price competitiveness in global markets.

However, such infrastructure investments are costly and put a strain on the government’s budget. Large-scale projects require substantial capital expenditure, which could lead to budget deficits or the need to raise taxes if not managed carefully. Moreover, infrastructure projects take time to complete, and the effects on the balance of trade may not be felt in the short term.

Import substitution

While much of the focus is on increasing export revenue, the Singapore government can also improve the balance of trade by reducing import expenditure. One strategy is to encourage the consumption of locally produced goods through import substitution policies. For example, Singapore has implemented the “30 by 30” plan, which aims to produce 30% of its nutritional needs locally by 2030. This initiative, particularly focused on food production, seeks to reduce the country’s reliance on food imports, thereby improving its balance of trade. Tax incentives and subsidies for local agricultural firms, urban farming, and technological innovations in food production can make locally produced food more competitive against imports, fostering local industries and reducing import expenditure.

However, while the "30 by 30" plan may aid in import substitution, its primary intent is to build resilience against global supply shocks rather than directly targeting the balance of trade. Singapore's heavy reliance on imported food and energy exposes it to risks such as global supply chain disruptions or price volatility, as seen during the COVID-19 pandemic. By increasing local food production, the plan aims to ensure food security and mitigate the impact of potential supply shocks.

Despite these efforts, Singapore’s small land area and limited natural resources present significant challenges to achieving extensive import substitution. The country lacks the agricultural capacity to produce a large portion of its food needs domestically and remains highly dependent on imports for essentials like energy. Thus, while import substitution can help improve the balance of trade in targeted sectors like food production, there are clear limitations to how much the government can reduce import expenditure in a broad sense.

Conclusion

In conclusion, the Singapore government can maintain a healthy balance of trade by adopting various supply-side and fiscal policies aimed at improving the competitiveness and quality of its exports, as well as reducing import expenditure.