First of all, I considered the monetarist approach of using interest rates to drive a change in money supply and export our way out of a recession. This seems to have worked very well in the 1998 recession when the regional economies in Asia went into a tail spin as a result of a currency crisis. The currency of key Asian economies collapsed causing a big drop in the value of their currency relative to the USD. When the currencies of the Asian economies collapsed, their export became relatively cheaper thereby increasing their export competitiveness. The Asia economies therefore exported their way out of the recession fairly quickly. I must say that the recovery was multi-factorial with banking reforms, market liberalization and governmental reforms contributing to the recovery. During this period, the economies of USA and Europe were doing well and well able to absorb the exports gracefully. The scenario is very different now. USA who is our largest trading partner is in a recession with the Feds making substantial interest rate cuts in the past six months to get her out of it. In order for a monetary policy to work itself through a cut in our interest rate, we would have to reduce our interest rate by a larger quantum than the Feds in USA. This would be difficult as the interest rate in USA prior to the recession is much higher than in Singapore. Couple this with the fact that such interest rate policy instruments does have a limit and diminishing effectiveness as interest rates moves closer to 0%.
Secondly, due to the size of the Singapore economy, we have a very open economy with a substantial external component and limited domestic demand. This could be a good time for us to develop the domestic component of our economy with the government helping to fund it. During this recession, almost all economies in the region are affected with the exception of China who has a big domestic demand helping to keep it growing. We must of course be realistic in our expectation in this aspect as we are comparing a population of 3 million against 1 billion.
Thirdly, the Singapore economy is very service based with service occupying close to two thirds of her economy. To add to the situation, electronics also occupies a large part of our economic landscape second only to petrochemical. From a perspective of perish ability, both services and electronics are highly perishable. Electronics is perishable because of the quick rate of technology innovation and obsolesce cycle. Perishables tend to have limited inventorial capability to buffer against near term cyclical demands resulting in shorter and more severe peak to trough fluctuations.
What if the Singapore government were to spend its way out of this recession? Will it really work and if yes how? I do not have the answer to this question as yet as implementation of such a policy is more of an art than a science and far from simple. It would have to consider not only the current structure of the Singapore economy and which sector needs it most but also ensure prudent usage of public funds and last but not least, the electoral and political dimensions.
If a case if Milton vs. Keynes were to be put before a jury against the current Singapore economic backdrop, I am quite sure that John Maynard Keynes is likely to emerge the winner.
lkypeter@gmail.com Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye (c) Peter Lye 2014