Discuss the causes and the effects of the sluggish productivity growth in Singapore and its impact on the gross domestic product.
The current study elucidates in detail the causes and the effects of the sluggish productivity growth in Singapore and its impact on the gross domestic product. The present study critically evaluates the scenario presented in the article with the help of the economic concepts of Aggregate demand (AD) and Aggregate Supply (AS). The study draws special reference to the economic concepts of the aggregate demand and the aggregate supply model (AD-AS model) to analyse the economic situation presented in the article on the sluggish rate of productivity of Singapore.
As rightly put forward by Abel, Bernanke and Croushore (2011), the aggregate demand as well as the aggregate supply model that is simply referred to as the AD-AS model is primarily used to illustrate the fluctuations in the level of output , level of price as well as the level of inflation in a particular economy. In particular, the aggregate demand curve mainly depicts the total amount of output of different goods as well as services that all the households, corporations as well as governments are willing to purchase at different levels of price (Chakraborty 2010). Therefore, it can be said that the aggregate demand curve presents the combinations of different levels of price as well as the aggregate output where the goods markets is in equilibrium with the money market. Chakraborty (2010) opine that aggregate supply curve presents the total quantity of goods as well as services that the firms of an economy produces and at the same time supplies at a certain given level of price.
Figure 1: AD -AS model
(Source: Colander 2010)
Figure 1 above presents the aggregate demand and the aggregate supply curve where real GDP is measured along and the price level along the vertical axis. The aggregate demand curve is represented by the downward sloping curve named AD and the aggregate supply curve is represented by the curve named AS. The AS curve remains horizontally flat for certain part of its entire length and past certain points become upward sloping (Colander 2010). The considerably flat position reflects the non-inflationary zone while the upward sloping region represents the inflationary section (Repository.neelain.edu.sd 2016).
The article mentions that the market research analysts of Nomura has put forward the fact the restructuring drive of Singapore has failed to lift the productivity growth of the economy of Singapore. This has further dampened all the prospects of growth of the economy and has shrunk to 3.8%. As mentioned in the article, the decrease in productivity will shift the aggregate supply curve towards left with the obvious implications of lack of technological improvement, inadequate level of research and development in addition to other things that tend to decrease the productivity. This in turn lowers the standard of living of the people of the economy as is enumerated by the level of real national output and at the same time works in favour of the inflationary pressures (Colander 2010). The decrease in productivity will cause lower demand for workers and will lead to unemployment. The fall in the wages of the employees will lead to lower levels of consumption and direct the way for decrease in demand for the goods and the services produced by the economy and the overall decline in the real GDP (Dornbusch, Fischer and Startz 2014).
Figure 2: Effect of decrease in productivity
(Source: Feenstra and Taylor 2012)
In addition to this, the article also mentions that the analysts such as the Euben Paracuelles is of the view that due to lack of restructuring the productivity is not likely to rise due to fall in global economic growth, ageing population as well as tightening financial conditions at the time of US interest rate hiking cycle. As is correctly mentioned in the article this situation will lead to debt servicing problems due to the fact that the households of the economy already have high levels of the debt. Again, in addition to the Fed tightening decline in the domestic rate of interest will also lead to further decline in the real GDP and lower the productivity of the economy (Feenstra and Taylor 2012).
The tightening economic conditions imply the course of action directed at constricting the total amount of spending in a particular economy (Feenstra and Taylor 2012). The money tightening policy will raise the short term rate of interest that in turn will increase the cost of borrowing and effectually reduce the attractiveness (Hubbard, O’Brien and Sharma 2012). Therefore, the higher rate of interest can have several economic implications that include the increase in the cost of borrowing. The increase in cost of borrowing will thereby discourage people from the act of borrowing and people will possess less amount of disposable income as they will expend more on payments of interests (Colander 2010). This in turn led to fall in consumption. The rise in interest rate will also direct the way towards increase in mortgage interest payments, increase the overall incentive to save than to spend (Hubbard, O’Brien and Sharma 2012). Again, the economy of Singapore will likely experience the fall in both investment as well as consumption. Furthermore, the payment s for government debt interest rate will also increase that might lead to higher rates of tax in the future (Mankiw 2012). However, this tightening policy will certainly reduce the confidence as the interest rate has a negative effect on the consumers as well as overall confidence of the business that makes both the corporation as well as the consumers to withdraw all the risky investments in addition to purchases. Therefore, the higher rate of interest has the inclination to reduce the spending of the consumers as well as investments and in turn lead to the fall in the aggregate demand of the economy (Mankiw 2012).
The fall in the aggregate demand will tend to lower rate of economic growth and further decline in the overall productivity and even recession (Mankiw and Taylor 2014). This may also lead to higher rate of employment. This is because the output will decline and the corporations will produce lesser amount of products as well as services and demand lesser number of labor forces (Mankiw and Taylor 2014).
The effect of the rise in interest on the overall aggregate demand and supply can be explained by the diagram drawn below:
Figure 3: Effect of the rise in interest on the overall aggregate demand and supply
(Source: Mankiw and Taylor 2014)
The above diagram reflects that the rise in rate of interest and its effect on the overall real GDP and the price level. The vertical axis measures the real GDP reflected by Y and the price level is presented through the vertical axis. The initial aggregate demand curve and the aggregate supply curve are represented by the AD1 and AS respectively. At the initial position the output and the price level is at Y1 and P1. However, with increase in the rate of interest the aggregate demand will fall with fall in consumption demand and will shift leftward to AD2 leading to fall in the real GDP to Y2 level at price level of P2.
The article also mentions that the sluggish productivity growth might also imply the restructuring efforts of Singapore cannot be completed even by the end of the decade and can lead to recession. This implies that the difference between the short run equilibrium GDP as well as the potential GDP will widen that essentially shall persist as at the short run equilibrium price level Po aggregate demand will not be adequate for the purpose of purchase of potential GDP level (Mankiw and Taylor 2014).
Figure 4: Recessionary Gap
(Source: Parkin 2012)
As is presented in the diagram above the long run equilibrium occurs at the definite level of price at which the aggregate demand curve (AD) essentially intersects the long run aggregate supply curve (LAS) that is represented by the vertical at the point of potential level of GDP. Therefore, it can be hereby ascertained that the long run equilibrium occurs at the point where the real GDP also equates the potential level of GDP (McDonald 2012). However, the short run equilibrium occurs at the point of intersection of the short run aggregate supply curve (SAS o) and the aggregate demand curve (AD) that in turn determines the price level that is Po and the corresponding real GDP that is Yo. However, the potential GDP is less than the real GDP. The potential GDP corresponds to the full employment of the total amount of the labour with assumed given stock of capital and the state of the technological improvements (McDonald 2012). Therefore, the difference between the real GDP and the potential GDP represents the recessionary gap in the short run with presence of cyclical unemployment (Parkin 2012).
In the present article Nomura also added that the decrease in level of productivity will lead to higher levels of employment of the workers in different unproductive areas and at the same time increase of employment of aged and less skilled workers. The other factors leading to the decline in the productivity are the rise in the costs in the midst of global economic slowdown leading to no lesser impetus for the corporations to invest in different productivity augmenting capital irrespective of different government policies (Williamson 2014). In addition to this, the small corporations struggle a lot to invest and thrive to survive at the time when the costs mount as soon as the restructuring started (Romer 2012). The increase in the cost of labour per unit might perhaps compel different firms to raise prices to restore the profit margin (Romer 2012). However, this also leads to the stagflation that is characterised by both inflation as well as recession at the same time (Macmillanlearning.com 2016).
The report presented by Nomura describes the concerns over stagflation that is regarded as the situation of both high inflation as well as low rate of growth. The situation of rise in the prices of labour with lower productivity levels in the Singaporean economy stems the concerns of stagflation. This can also take place in case of cost push inflation. Rossana (2011) opine that the cost push inflation can occur due to the overall increase in price of oils, increase in labour costs, and increased cost of restructuring. This economic situation thereby increases the costs of the operations of the corporations and consequently reduces the disposable income of the households (Rossana 2011). As a result there might be lower levels of growth amidst high levels of inflation. This economic condition can therefore invariably lead to the stagflation as presented in the diagram below.
Figure 5: stagflation owing to the leftward shift of the present aggregate supply curve
(Source: Rossana 2011)
The figure drawn above presents the emergence of the stagflation owing to the leftward shift of the present aggregate supply curve. The concern over the stagflation of the economy of the Singapore can be explained by drawing reference to the concepts of aggregate demand and aggregate supply and the factors and the characteristics of the shifts of these two curves and its impact on the overall output of the economy. In the above figure, the initial aggregate demand and the supply curve is presented by the AD and the SAS o curve. However, owing to the rise in the resource cost per unit of the corporations, the aggregate supply curve shift leftward as is represented by the SAS 1 curve in the figure. With the aggregate demand curve AD remaining the same and the AS curve shifting leftward, from SAS o to SAS1, a new macroeconomic point of equilibrium is thereby established at the point of intersection of the SAS1 and the aggregate demand curve AD (Storm and Naastepad 2012). Therefore, the initial level of equilibrium was at the intersection at the SAS o and the AD at which the level of price was P o and the level of output was Y o. However, the new situation leads to the new equilibrium at which the equilibrium level of output is Y1 and the equilibrium price is P1. Therefore, this becomes evident that this macro economic situation leads to raise in the overall prices (from P o to P1) and the decline in the aggregate output (from Y o to Y1).
As rightly indicated in the article, the fiscal policies can act as an important factor in promoting growth that can in turn boost the restructuring process of the economy. This implies increase in the fiscal costs and leads to the expectation of the acquiring fiscal surplus by means by imposing high rates of tax especially applicable for the upper income group (Rossana 2011).
In this case, the fiscal policies essentially refers to the alteration of the level of taxation of the respective government in addition to government spending in a bid to control the aggregate the overall aggregate demand of the economy along with the level of different economic activities in Singapore. Williamson (2010) opine that aggregate demand is the sum total of the total planned expenditure incurred by an economy presented by the equation AD= C+I+G+X-M. As rightly mentioned by Williamson (2011), the intention and purpose of the fiscal policy is primarily to stimulate the overall economic growth as well as productivity mainly in a recessionary economic situation. The fiscal policies also have the intention to keep the rate of inflation in the economy at a low level and to stabilise the entire economy by avoiding both the boom as well as bust in the entire economic cycle.
Deflationary Fiscal Policies
In this case the government of Singapore might perhaps select the deflationary fiscal policy in order to create fiscal surpluses (Chakraborty 2010). Therefore, the tight fiscal stratagem will have the inclination to lead to an enhancement of the overall budget deficit of the government not by cutting the government spending but by increasing the taxes. This increase in taxes will direct the way towards the decline in the consumer spending and will also lead to the overall reduction on the aggregate demand curve (Econweb.tamu.edu 2016).
Figure 6: Deflationary Fiscal Policies
(Source: Chakraborty 2010)
The figure presented above represents the effects of the deflationary fiscal policy of rise in the taxes on the overall real GDP of the economy. The aggregate demand and the aggregate supply curve is represented by the AD1 and the AS curve. The initial level of equilibrium is at the price level P1 and the output level Y1.
The rise in the levels of the taxes leads to the decrease in the disposable income of the people and therefore leads to lower consumption demand directing the leftward shift of the aggregate demand curve AD along the aggregate supply curve AS (Chakraborty 2010). The new equilibrium is at the point where the equilibrium price level is at P2 and the equilibrium output level is at Y2. The figure reveals the fact the rise in the taxes has a negative impact on the overall aggregate output of the economy but lowers the prices. However regardless of the slow rate of growth of the GDP, the outlook for the Singaporean economy might not be miserable as more than 50% of the overall revenue of the corporations of the nation is acquired from international business and the level of growth as well as higher levels of productivity therefore might possibly offset the strain on the on the whole earnings.
Conclusion
In conclusion, it can be said that the restructuring process that requires fiscal costs can slowdown the growth but has the capacity of checking inflation as well. The changes in the level of productivity by way of restricting plans implies that the labour force will be capable of producing more number of units with the quantity of input remaining the same. For example, the bar code scanners seen in different retail outlets generally raise the potential of a labour to keep accounts of the stock, materials in the inventory as well as the store shelves. Therefore, the introduction of the system led to the decrease in the cost of sales that in turn affected the profits of the corporations positively and in that order the quantity supplied escalated. Therefore, the plan of restructuring of the Singaporean governing authority can lead to the rise in the productivity by means by increasing the profits of the producers causing shifts in the aggregate supply curve in the short run to shift to the rightward direction.
References
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