With the advent of the unprecedented era of globalization, Countries rely on each other for the sake of economic

development more than ever, and countries which wish to prosper must engage in a modicum of free trade. Singapore, a small and open economy, is largely relying on foreign market, given a rather small domestic market. However, the economic outlook in the globe does not present a very hopeful and bright picture in front of Singapore, as devastating financial crisis in Europe, sluggish US economy and overheating in China and other developing economies have affected Singapores economy adversely. Firstly, we shall look at how euro zone financial crisis has brought changes in Singapores economy. Since year 2010, bilateral free trade agreement was launched between Singapore and Europe. Until now, Singapore is ranked 16th on the list of major importing countries of Europe, and 12th on the list of major trade partners of Europe. Therefore, Singapores economy is inevitably affected by euro zone crisis. The euro zone fell into a balance-of-payments problem; some of the countries in the single currency accumulated large external debts. The deficit countries have to become surplus countries to pay back those debts, which, is hard to do without the adjustability of a floating currency. The difficulty of adjustment has led markets to be skeptical about the solvency of some institutions, and these concerns have, in the absence of a lender-of-last-resort, metastasized into a contagion that threatens to leave banks and sovereigns bankrupt. What does this bring to Europe? A dreadful decrease in business confidence to invest in Europe, a horribly continuous increase in unemployment rate due to reduction in demand for factors of production and bankruptcy of standing European states has presented a despairing economic outlook of the euro zone, and affects its trading countries like Singapore, well, maybe detrimentally.

Fig.1. Euro zone unemployment rates (2000-2012 1st quarter)

Let us refer to figure 1; we see that since year 2009 euro-zone unemployment continues to hit new record highs.

Wage rate

W1

W2

ADL1 ADL2 Employment 0 N2 N1 The cyclical unemployment caused fall in aggregate demand (AD) from ADL1 to ADL2 due to two reasons. Firstly, it is the ongoing recession in Europe. Secondly, the nature of wage is sticky downward. On the diagram, N2N1 represents the cyclical unemployment due to negative growth. The implication is that households will earn lower income and will experience lower purchasing power. They are less willing and able to consume goods and services at the original general price level. Then, we shall examine the implications of continuous increase of unemployment rate in Europe with regards to Singapore. The decrease in ability in terms of consumption in Europe does not only affect domestic goods, but also imported goods. (i.e. Singapores exports to Europe would be affected.) As a matter of fact, Singapores export sector has been decreased from 22.4 in 2010 to 7.5 in 2011 (y-o-y %). Given AD=C+I+G+(X-M), Singapore would experience a decrease in aggregate demand on the economy due to reduction in exports.

General Price Level AS

Pe

P1

AD

AD1 Real National Output Y1 Ye \ Initial national output of Singapore is at Ye. When aggregate demand decreases from AD to AD1, at the original P1, total demand in the economy is less than total supply. There is a surplus of goods and services produced. This results in the downward pressure of prices and a run-down of firms inventories. As prices fall, firms in the Singapore produce fewer goods and services and quantity supplied fall. At the same time, lower prices will cause households to increase consumption and quantity demanded rises. This occurs until there is no more surplus of goods and services in the economy. At the new equilibrium, general prices decrease from Pe to P1, output falls from Ye to Y1. Thus we see that a fall in AD reduces actual growth in Singapore and the economy will experience a fall in national output which is a multiple of the fall in AD. As a result of decrease of national output, unemployment level in Singapore would increase as the decrease in national output will lead to a decrease in aggregate demand for labour. This will cause loss of jobs in Singapore, as labour is a derived demand. Hence, euro zone financial crisis causes negative economic growth in Singapore, which, leads to an increase in unemployment level. However, on the flip side of the coin, it may ease inflationary pressure. The resulting unemployment places downward pressure on prices by reducing wage claims, and limiting increases in aggregate demand. The unemployment creates spare capacity and lowers the prices of factor inputs such as rental. The overheating in China and other developing countries makes Singapore feel the heat too. It is important for Singapore to stand strong in such a competitive world. In the first quarter of 2011, the Chinese economy grew at a 9.7% pace, and inflation rose at 5.4%. Both figures were above expectations, and inflation is becoming a serious problem within China. Food prices are rising at a 12% annual rate. Bilateral trade between China and Singapore has risen more than 25 per cent to S$95.3 billion in 2010, and the rising trend continues. What does that suggest? Well, obviously, the serious problem of inflation in China would affect Singapore in a way or another. One is that there could be a rise in imported inflation in near future. Rise in prices of imported inputs is a

significant source of inflation for countries heavily dependent on imports such as Singapore. High prices of imported fuel and food were responsible for the inflationary pressure felt in 2008 in Singapore. Singapore mainly imports basic necessities from nearby developing countries like China. Thus, if Singapore does not do anything about the rising inflation rate in her trading counties, the domestic market will suffer from the imported inflation again. Moreover, inflation poses a threat to Singapores international competitiveness. If Singapore has a higher inflation rate than other competing countries, its goods and services will become less price competitive. Therefore, it is crucial for Singapore to manage the situation of overheating in China and other developing economies. Singapore could overcome this obstacle by adjusting exchange rate to achieve price stability in Singapore. When the Singapore government appreciate the exchange rate for Singapore dollars it could lower inflation rate by lowering imported inflation in three ways. Firstly, the imported finished product or basic necessities would be at a lower price in terms of SGD. Secondly, a rise in the external value of SGD will make imports cheaper. A fall in the price of imported raw materials puts downward pressure on the price level by lowering the costs of production, reducing the price of finished imports. Lastly, it imposes pressure on domestic firms to keep their products price competitive. Although the appreciation of Singapore dollar would inevitably make Singapores export less price competitive, it has actually alleviated the situation that imported inflation penetrates Singapore without government intervention. At the very least, by appreciation of Singapore dollar, domestic consumers are less suffered from the demand pull inflation. As for external consumers, they would suffer cost push inflation anyway even without appreciation of Singapore dollar, with appreciation, they might be suffered less, as domestic producers would try to keep their goods competitive. Foreign direct investment (FDI) to Singapore more than doubled to US$39 billion in 2010. And Singapore is heavily dependent on FDI for her development. Frankly, there is no way that Singapore could compete with developing economies like China in manufacturing goods, as Singapore does not hold comparative advantage at that. Singapore should hence looks out for less labour intensive industries. How could Singapore attract investors then? Well, Singapore is not attracting investment by quantity of labourers, rather, Singapores quality of labour has a very high recognition across the globe. Therefore, to continuously attract foreign investment Singapore should not only to maintain the quality of her labourers, but also to higher the standard of her labourers. And this could be done by education. By education, I do not solely mean schooling but also trainings, workshops and experience. Singapore government is doing things to improve education, but it is not enough, not yet. Singapore government promotes the system of meritocracy. It is a very impressive practice though. However, it implants an idea that school exam results is directly proportional to level of intelligence, and those who cannot do well there is no way that they can excel in the future. We shall somehow admit that it is not a good way to produce creative labour force, rather, routine labour force is resulted. The flourish of Apple, Windows and Sony shows us the power of creativeness. In the short term, the routine labour force could attract foreign investment, but in the long run, this could not stand as a comparative advantage for Singapore. How difficult is it to produce routine labour force? Well, China now has more and more number of undergraduates from many different famous universities who could just function like workers in Singapore. However, as the supply for labour is far more than demand for labour, the wage rate in China is far less than that in Singapore. In

the long run, the less labour intensive factory could also be drawn away from Singapore. How could Singapore survive then? That is why I suggest that Singapore should now start to produce innovative and creative labour force for her development. You always earn more for your own invention rather than produce for others. One suggestion is that despite of getting direct school admission by exam results or some talents in arts, we could also have direct school admission for those who have invented really interesting or applicable things. Companies could also set things like innovative award to encourage creative ideas, suggestions and plans. Some other Suggestions: Singapore highly relies on external market, so it is very important that global economic situation is stable and Singapore remains competitive in export. Unfortunately, the former is out of Singapores control. Therefore, it is the latter that we should concentrate on. Firstly, it is very crucial to make the price of Singapore goods competitive in global market. Despite of relaxing immigration policy to attract foreign talents, Singapore can also directly invest abroad to hire local workers that are comparatively cheaper, and, sell goods at that place so as to saving transportation costs.