A Stronger Yuan - a benefit for some

Oct 29 2008 (TodayOnline)

Businesses with contracts in yuan see boost in earnings


THE stronger yuan has shut down some Chinese exporters but several companies in Singapore are benefiting from the rise in the value of China’s currency.

Business owners are earning more — even with the same level of sales — as the stronger yuan is worth more in Singapore dollars.

Mr Fong Kah Kuen, chief operating officer from Xpress Holdings, said that the impact from the weaker exchange rate is positive, as about 55 per cent of his company revenue comes from China.

Mr Fong explained that business contracts in China are often denominated in yuan and when converted back to the weaker Singapore dollar, earnings will be more. Mr Fong said about 80 per cent of his printing business comes from China.

Another company benefiting is Qian Hu Corporation, which exports ornamental fish to various countries, including Malaysia and Thailand as well.

Managing director Kenny Yap said: “It is to our advantage, as we export more to China than import from there, and the weaker Singapore dollar means that our products become more attractive to the Chinese buyers.”

But not all businesses have benefited. In fact, some Singapore firms have been hurt by the currency fluctuation.

Ms Lynn Ho-Tan, sales and marketing director from Bodynits International, said that the cost of products has increased due to the softening Singapore dollar, which has led to a narrower margin.

But the impact has been softened because of a diversification in trading currencies such as US dollars, which has strengthened over the past few weeks.

For several months, small- and medium-sized companies in China have been reported to be cutting back their operations because of the high cost of materials, issues of refinancing and the rapid appreciation of the Chinese currency.

High productions costs and the expensive yuan make exports less competitive and this has led to a domino effect, with thousands of such companies shutting down.

On the tourism front, travel agencies are seeing a fall in tourists visiting China, but the weak exchange rate is not the main reason for the dip.

“Travellers to China has been affected the past few months, not solely due to the Singapore dollar weakening against the yuan but also due to other factors such as spiked hotel rates in Beijing during the Olympic Games, the Sichuan earthquake and continuing aftershocks, and the latest melamine scare. We have seen an overall dip in volume of travellers to China for the past three months by roughly 20 per cent,” said Ms Jane Chang at Chan Brothers Travel.

It might be assumed that Chinese nationals working here, earning in Singapore dollars and sending money back home, might be feeling the pinch – but this is not true for all.

Ms Liu Xinyi, a banking executive, told TODAY that she does not feel any impact because “things are still affordable back home”. However she said that it might be wiser to hold US dollars in future, in the expectation of the yuan depreciating against it.

Mr James Ye, a stockbroker working here since 2007, said that he sees no great difference in the exchange rates, although many of his friends have gone back to China because of inflation here.

But for blue-collar workers such as Mr Ma Wuxing, the weaker Singapore dollar means less money is remitted back home. “Now that the exchange rate has fallen so drastically, I am getting paid the equivalent amount when I am working back in China for a less tedious job,” said the construction worker.

Boost in R&D spending

Oct 17, 2008 ST
RESEARCH and development (R&D) in Singapore is hotting up. The industry is getting more money and more manpower.

Some $6 billion was spent on R&D last year, with the private sector pumping in two thirds of this money.

This is a jump of 26 per cent from the $5 billion spent in 2006 and is the highest annual increase since Singapore's economic engine in R&D kickstarted in 2000.

It represented 2.61 per cent of Singapore's gross domestic product, and the target is to raise it to 3 per cent by 2010.

Prime Minister Lee Hsien Loong revealed the latest figures on Friday when he opened the latest in Singapore's R&D stable - Fusionopolis, which is the country's second major hub for R&D in physical sciences, engineering and interactive media.

More than 400 international leaders in science, technology and business attended the the opening of the futuristic 30-hectare Fusionopolis, which will be developed over six phases.

Located just 600m from its big sister Biopolis - the hub of biomedical sciences research which opened five years ago - Fusionopolis brings together the major areas of R&D Singapore has earmarked as a new economic engine.

Home to public sector research institutes and corporate labs, it is specially designed to break down the barriers in organisations and allow multidisciplinary teams from both national and corporate laboratories to flourish. This is critical to achieving breakthroughs in the face of highly-complex, large scale societal challenges confronting society today.

The opening of Fusionopolis was marked by a performance by the world's first robotic lion developed by A*STAR researchers in a traditional ceremony to usher good fortune.

Altogether, there will be 800 scientists, engineers and game developers working in Phase 1 of Fusionopolis. This number will increase to 2,400 by 2012 when Phase 2 of the development is ready.

The University of Illinois at Urbana-Champaign will also open its first overseas research centre at Fusionopolis Phase 1.

Called the Advanced Digital Sciences Centre, it is an extension of two of UIUC's most successful multidisciplinary, information technology focused research units, namely the Coordinated Science Laboratory (CSL) and the Information Trust Institute (ITI).

Singapore slides into recession

Oct 9, 2008
SINGAPORE (AFP) — Singapore's trade-sensitive economy has declined for a second straight quarter, the government said Friday, meaning the city-state has entered a recession for the first time in six years.

On a seasonally adjusted quarter-on-quarter annualised basis, real GDP declined by 6.3 percent in the third quarter after contracting 5.7 percent in the previous quarter, estimates from the Ministry of Trade and Industry said.

It did not describe the economy as being in recession, but a technical recession is generally defined as two consecutive quarters of quarter-on-quarter contractions in economic output.

Economists polled by Dow Jones Newswires had forecast a 0.3 percent quarter-on-quarter rise in gross domestic product (GDP), the value of goods and services produced in the economy.

Singapore's last technical recession occurred in 2002, and the most recent full-scale recession was in 2001 when the economy contracted 2.4 percent during the year.

-----------------------------

Angela Balakrishnan
Friday October 10 2008 11.35 BST

Economy heavily dependent on exports to developed world is one of the first in Asia to be hit by global slowdown

Singapore officially slid into recession today after falling consumer demand from the US and Europe hammered its manufacturing exports.

The south-east Asian country's economy contracted by 6.3% in the third quarter, on an annualised seasonally adjusted basis, having shrunk by 5.7% in the second quarter of 2008. This forced the government to cut its growth forecast for this year from 4%-5% to 3%. Analysts had expected a small rise in GDP.

"There's no question that growth will continue to slow down," said Yuwa Hedrick-Wong, economic adviser in Asia for MasterCard Worldwide. "2009 will likely be a very difficult year."

Singapore's economy, which is heavily dependent on exports to the developed world, is one of the first in Asia to be hit by a global economic slowdown. Following the rampant growth of China and India, many analysts believed Asia was well positioned to weather the storm.

But Asia relies on the west for trade, so slowing US and UK economies hit growth.

Along with markets worldwide, Singapore also experienced the gloom of Black Friday with stocks closing 8% lower earlier today

Singaporean manufacturing sector shrank by a hefty 11.5% in the third quarter, driven by a slump in pharmaceuticals. Construction and services activity maintained steady growth.

Prime minister Lee Hsien Loong said Asian economies faced slowing growth for at least the next year and will not be spared in this global crisis.

"The problems facing financial institutions in the US and Europe are complex and grave," he said in a speech. "Asian countries cannot avoid the impact of weakening US, European and Japanese economies."

"The world is caught up in a financial storm, and dark clouds fill our immediate horizon. The fear and panic gripping financial markets everywhere will take time to subside."

Singapore's central bank, known as the Monetary Authority, today shifted its foreign exchange rate policy to a "zero per cent appreciation" of the Singapore dollar from a "modest and gradual appreciation" in a bid to boost the competitiveness of the country's exports.

The government said last month that non-oil exports plummeted 14% in August after a 5.8% fall in July.

"A strong Singapore dollar has been quite detrimental to growth, especially manufacturing," Hedrick-Wong said. "It's much better to take a risk with inflation and deal with growth by making the Singapore dollar weaker and support exports."

Last month Ireland became the first member of the eurozone to fall into recession.

guardian.co.uk © Guardian News and Media Limited 2008

More on Yahoo News: Recession looms for Singapore: economists

MAS U-turn after four years of strong Singapore dollar policy

Chart 1
Nominal Effective Exchange Rate (S$NEER)

The Monetary Authority of Singapore (MAS) is abandoning its strong dollar policy and is switching to a "zero-percent appreciation" policy to keep the Singapore dollar at current levels and not let it rise higher.

It's a complete U-turn for MAS, though it doesn't say so, abandoning a policy it has followed since April 2004, letting the Singapore dollar grow stronger, and there have been no recessions during that period. Singapore's last recession was in 2002.

The MAS Monetary Policy Statement does not give any other reason for the new policy except that inflation has peaked and that "the outlook for the global economy has deteriorated". But news agencies from Reuters to Bloomberg have been quick to note that the new policy will help Singapore exporters.

The strong dollar was used to fight inflation, which reached a 26-year high of 7.5 percent in April as food, housing and transportation costs soared, reported Channel NewsAsia.

Reuters recalls only six months ago, on April 10, "The central bank (MAS) unexpectedly tightened policy by moving up the centre of the band in which the Singapore dollar trades, the most aggressive tightening move available, analysts said."

But that was before the Wall Street meltdown. And now MAS is following central banks in Europe and America in loosening monetary policy. That's what Reuters and Bloomberg say.

Reuters gives the following chronology of MAS monetary policy measures. S$NEER stands for the Singapore dollar nominal effective exchange rate at which it trades against a basket of currencies.

• Oct 10, 2008 - The central bank said it was shifting to a zero appreciation or neutral bias for the trade-weighted Singapore dollar, from a policy that allowed for gradual appreciation. It said there would be no change to the width or centre of the secret band.
• Apr 9, 2008 - The central bank unexpectedly tightened policy by moving up the centre of the band in which the Singapore dollar trades, the most aggressive tightening move available, analysts said.
• Oct 10, 2007 - The central bank said it would slightly increase the slope of its policy band but added it would maintain its policy of a 'gradual and modest appreciation' in the Singapore dollar.
• Apr 10, 2007 - As expected, the MAS maintains its policy of a gradual and modest appreciation in the currency.
• Oct 10, 2006 - As expected, the MAS maintains its modest appreciation policy of the trade-weighted Singapore dollar's nominal effective exchange rate (S$NEER).
• Apr 11, 2006 - The MAS surprises markets when it leaves its monetary policy unchanged. Analysts had expected the central bank to give the Singapore dollar room to appreciate further.
• Oct 11, 2005 - Maintains 18-month-old policy of allowing modest and gradual appreciation of the Singapore dollar. No change in the slope or width of the band.
• Apr 12, 2005 - Maintains year-old tightening stance of allowing a stronger currency to curb inflation risks.
• Oct 11, 2004 - Maintains tightening stance of modest and gradual appreciation to curb inflation risks.
• Apr 12, 2004 - Tightens policy by allowing a modest and gradual appreciation of the S$NEER. The width of the band in which the currency is managed remains unchanged.

Nobel Prize for Economics 2008 - Paul Krugman

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 "for his analysis of trade patterns and location of economic activity"

Summary: The Nobel committee gave Krugman the prize for work growing out of a model, on increasing returns to trade, which he introduced in a paper in the Journal of International Economics in 1979. Krugman's approach is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.

Background:

Until the end of the 1970s, the Heckscher-Ohlin theory for which Bertil Ohlin won the prize--Eli Heckscher died before the Nobel Prize in economics was instituted--dominated the field. This theory explained well why labor-abundant countries such as South Korea and Taiwan would export labor-intensive products such apparel, toys and footwear and capital-abundant countries such as the United States would export machinery and aircraft.

But it could not satisfactorily explain the two-way trade that was widely known to exist: Many countries exported automobiles and televisions, but they also imported them. The Heckscher-Ohlin theory also did not adequately explain why rich entities such as Europe and the United States, which had very similar endowments of capital and labor, traded more intensively than those with very dissimilar endowments. While descriptive explanations of these phenomena existed, a tight theory explaining them was lacking.

Starting in 1979, Krugman published a series of papers that successfully tackled these and many other related questions. He postulated that consumers like variety in what they consume. For the same expenditure, their satisfaction is greater if they have a larger variety of products available. This creates the incentive for firms to produce a large variety of products. But the production of a new variety has setup costs. This leads to declining per-unit costs as a larger quantity of the variety is produced and places a limit on the number of varieties the market can profitably supply. A firm produces a new variety only if it can capture a large enough market to allow profitable sales.

This seemingly simple structure gives rise to a tight theory that leads to rich implications: Countries gain from trade not only because larger market allows them to better exploit scale economies, but also because consumers can access a larger variety of products. And even identical economies can gain from trade through scale economies and a larger variety of products. The theory also brought imperfect competition into a formal trade model.

In subsequent work, Krugman combined this simple model of product differentiation and scale economies with transport costs. Scale economies push toward production in one location to minimize costs and then shipping the product to the locations where consumers are. But transport costs push toward locating production near consumers. These opposing forces give rise to large concentrations of populations such as those along the East Coast corridor of the United States.

Detail: Product Diversity and Monopolistically Competitive Trade

The traditional theory of international trade began with David Ricardo, and reached its peak in the mid-1960s. This theory explained trade in terms of comparative advantage: each country would export the good that it could produce at lower relative cost in autarky (definition: a policy of national self-sufficiency and nonreliance on imports or economic aid). Comparative advantage in turn was explained in terms of differences among countries. The Heckscher-Ohlin model, based on relative differences of primary factor endowments, came to dominate textbooks as well as research papers. Here each country had comparative advantage in the good that used relatively more intensively its relatively more abundant factor.

This theory had several further implications.

First, we should see the largest volume of trade between countries that are most different in their endowments, for example industrialized and less developed countries.

Second, the opening or liberalization of trade should lead to conflict between the owners of different factors of production. Since exporting a capital-intensive good to import a labor-intensive good is like exporting capital-and importing labor by proxy, trade indirectly faces domestic labor with greater market competition and laborers end up losers.

Finally, a group of countries stand to gain most in the aggregate by forming a bloc with more liberal trade within it (such as a free trade area or a customs union) if they are complementary in their factor endowments, so they can produce different commodities when trade expanded.

Just as the dominance of the Heckscher-Ohlin model became complete, disquieting observations contrary to all of these implications began to accumulate.

Since the second world war, the fastest growing component of trade was between industrial countries with very similar factor endowments. The European Common Market brought together countries that were not complementary in their factor endowments. Much of this trade expansion seemed to occur with relatively little distributive conflict within each country. Finally, in many emerging industries, one could not point to a clear comparative advantage for any country. Many patterns of production and trade seemed matters of chance; in fact there was a lot of two-way trade in very similar products such as automobiles.

Many different explanations for these facts were offered, and new ones are still being attempted. But the approach that Krugman helped pioneer in a pathbreaking series of papers (16], [17] and (18] was the most drastic departure from Ricardian tradition.

The new view in fact went back to an even older tradition, namely Adam Smith's idea that division of labor lowers unit costs. Scale economies internal to firms are incompatible with the perfect competition that was assumed in all traditional models. Many economists throughout the history of the subject had mentioned scale economies as a cause of trade, but they did not have, and could not develop, the tools that would implement this view in models that could yield its logical implications. Krugman found the necessary techniques, and wielded them with such skill and finesse that led not just to a new paradigm, but to a synthesis of the old and the new views of trade.

The scale economies were internal to firms, but sufficiently moderate to ensure the survival of a large number of firms in the free-entry equilibrium of a group producing close but not perfect substitute products. Thus the market structure was that of Chamberlinian monopolistic competition.

When such a sector expands, it does so through some combination of an increase in the number of firms (greater product variety) and the size of each firm (greater scale economies).

Suppose all the products in the group require the same factor proportions. Let there be another sector, operating under constant returns to scale and perfect competition. When two such countries start to trade, their inter-industry trade (exports of the competitive sector against net imports of the Chamberlinian sector) are still governed by the factor endowment differences as in Heckscher-Ohlin.

But when we examine the Chamberlinian sect or more closely, we see that the two countries produce disjoint sets of varieties; the choice of which ones are produced in which country is arbitrary. Each supplies the whole world's demand for the ones it produces, so we get two-way intra-industry trade. If the countries have identical factor endowments, there is no inter-industry trade (each produces an amount of the competitive good equal to its own consumption of it), but lots of intra-industry trade. All these results fit very well with the observations on the growing pattern of trade among industrial European countries cited above.

Even more remarkable is the implication for gains from trade.

The availability of greater variety of goods in the Chamberlinian sector at lower unit costs is a benefit to all income-earners. This can be enough to outweigh the conflict over incomes (factor prices) themselves. Then trade liberalization can command general consent. This is more likely the more similar the economies. This again squares with the observation that the formation of the European Economic Community in its initial stage, when the members were very similar economies, generated much less distributional conflict. A similar more recent observation is that the US-Canada free trade agreement produced only minor local complaints of a distributive nature, whereas the expansion of that agreement to include Mexico is proving more controversial.

In all, Krugman's contribution to the development of the monopolistic competition model of intra-industry trade was a remarkable achievement for one so young.

Preparing for the 'A' levels... What next?

Paper 1

• Constantly review the skills you need to do well in Case Studies. Awareness of what will impress the examiner in this part of the exam is critical!!
  
• Firstly, having an appreciation of the central or general theme/issue/s being presented in the particular case study will put you in an excellent position to answer the questions in a way that impresses the examiner. For an economics case study, it is not enough just to identify the right data to answer various questions. You need to know WHAT the issue is!
  
• Secondly, an attempt at making reference to a wide range of the available data is expected, especially for the higher-level response questions that tend to carry more marks (e.g. 8 to 10 marks). This is the case whenever it is not indicated specifically which part of the data you need to focus on. By this, we mean making use of ALL the charts, tables, figures and extracts, i.e. whatever is relevant to answering the question, making cross references where necessary. It is after all a CASE STUDY (i.e. study of a case!). While bringing in your own knowledge of the context is possible, it MUST NOT be the focus of your answer.
  
• Thirdly, as most of you should know by now, referring to the data goes beyond just quoting, lifting, "cutting and pasting" or even paraphrasing! When a piece of information is taken from the case study, the examiners expect the candidate to display the skills of knowledge, comprehension, analysis, and evaluation to process and present the information, skills that any 'A' level candidate should possess! If you treat the case study as a mere comprehension passage, failing to display the "sound economic reasoning and analysis and theoretical framework" that is expected of you, you CANNOT expect to do well.
• Lastly, responding to the command word, e.g. discuss, explain, compare is very important! It is critical that the examiner can see that you understand what skill is being asked of you and respond appropriately and sufficiently.
  

• Learn from the past - as part of your revision, do make sure you give some time to go through the questions and answers for ALL the case studies you have done in the past, including looking through the suggested answers you have downloaded from Litespeed. These should include:
• Those from your tutorials, tests & exams (2007 to 2008)
• 2008 Prelim Paper 1 Case Study 1 (Car and beer market) and 2 (India Economy)
• 2007 GCE 'A' Level paper 1 Case Study 1 (Brazil, Russia & China) and 2 (Supermarketization)
• 2007 Prelim Case Studies of AJC, SAJC, NJC and IJC that were put up before your Prelim exams for your self-timed practice - Complete them before you look at the answers!! The more you practice, the better!
• 2008 June Holiday Assignment (Case Study 2 and 3)
  
• 2006 Case Study 2 (Water shortage)
• 2008 Mock Prelim Case Study 1 (Airline Deregulation) and 2 (Vietnam Economy)
• 2007 Specimen Paper Case Study 1 (Market for Air Tickets) & 2 (The China Effect)

• Thirdly, PRACTICE MORE - the 2008 Prelim Paper 1 Questions of 6 other colleges have been put in the printshop - Practice to gain some confidence if you need to. Prelim 2008 papers of individual JCs are also available in Library for reference.
  

Paper 2

• Constantly review the skills you need to do well in the essay part of the paper too!
• In this case, the "Revision Packages" you were given for the various topics will be very useful in giving you an idea what are considered "good" essays. DO NOT TRY TO MEMORISE THESE ESSAYS!! The same questions are unlikely to come out again and if you merely reproduce everything from one essay into another, it is HIGHLY UNLIKELY that you will do well!!
• Instead use the essays as a resource to understand what is needed to score well:
• Answering the question - see how the essays attempt to address the requirement of the questions, ensuring sufficiently scope (width) and presenting accurate and relevant economic analysis (depth), as well as how they try to show application to the given context (recent years? Singapore?).
• Displaying the skills of knowledge, comprehension, application, analysis, and evaluation - look through the Revision packages to see how this has been done in each essay! The suggested answers are certainly not perfect but can give you an idea what an attempt at answering the question will usually entail. It is perfectly alright (and in fact strongly encouraged) for you to question the answers that are given!

• Secondly, as part of your revision, again you need to give time to go through the questions and answers for the many essays you have done in the past, including looking through the suggested answers you may have downloaded from Litespeed. These should include:
• Those from your tutorials, tests & exams (2007 to 2008)
• 2008 Mock Prelim Paper 2 Essays 1 to 6
  
• 2008 Prelim Paper 2 Essays 1 to 6
• 2007 GCE 'A' Level Paper 2 Essays 1 to 6
• 2008 June Holiday Assignments (Essays 1 to 5)

• Thirdly, PRACTICE PRACTICE PRACTICE - You would have been given the 2008 Prelim Paper 2 Questions of Other Colleges - Use them to practice doing essay outlines (as well as to review your economic analysis) before checking that your answers are on the right track. The more you try out other questions, the better you will be at handling some of the more challenging questions from the 'A' levels!

Dumping (in trade)

Definition
The practice of selling goods abroad below the price charged for the same goods in the domestic market or at a price below the cost of production, usually with the aim of driving competitors out of the market.

Dumping is considered to be an unfair trade practice and, as such, is prohibited under many national trade laws.

Dumping

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Types of dumping:

• Sporadic Dumping: Occasional sale of a commodity at below cost in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.


• Predatory Dumping: Temporary sale of a commodity at below cost or a lower price abroad in order to derive foreign producers out of business, after which prices are raised to take advantage of the monopoly power abroad.


• Persistent Dumping: Continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally (to meet the competition of foreign rivals). For international price discrimination to take place, conditions must be met:
• Domestic and foreign markets must be separated.
• Demand elasticity of the product must be different in two markets. The good can be sold with a lower price where the demand elasticity is high; and with a higher price where demand elasticity is low.

from Wikipedia:
In economics, "dumping" can refer to any kind of predatory pricing. However, the word is now generally used only in the context of international trade law, where dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. The term has a negative connotation, but advocates of free markets see "dumping" as beneficial for consumers and believe that protectionism to prevent it would have net negative consequences. Advocates for workers and laborers however, believe that safeguarding businesses against predatory practices, such as dumping, help alleviate some of the harsher consequences of free trade between economies at different stages of development

Remedies and penalties
In United States, domestic firms can file an antidumping petition under the regulations determined by the Department of Commerce, which determines "less than fair value" and the International Trade Commission, which determined "injury". These proceedings operate on a timetable governed by U.S. law. The Department of Commerce has regularly found that products have been sold at less than fair value in U.S. markets. If the domestic industry is able to establish that it is being injured by the dumping, then antidumping duties are imposed on goods imported from the dumpers' country at a percentage rate calculated to counteract the dumping margin.

Related articles:
- These shoes were made for dumping (BBC NEWS 24 Feb 2006)
- China slams EU anti-dumping charges on shoes (China Daily 24 Feb 2006)
- The Fallacies of Shrimp Protectionism

Fiscal Policy - Singapore

from Inland Revenue Authority of Singapore (IRAS) website

In Singapore, the long-term objectives of government budgetary policy are:

• to promote and support sustained, non-inflationary economic growth;
• to maintain a balanced budget, i.e. to finance total operating and development expenditures from operating revenue over the course of the business cycle; and
• to focus government expenditure on delivering essential public goods and services, e.g. education, healthcare, infrastructure, housing and programmes to protect the environment.

Underlying the above objectives are the recognition of market forces in driving the economy, financial prudence and emphasis on human & infrastructure investment.

Tax Policy

Tax policy is an integral part of fiscal policy. The main objectives of tax policy in Singapore are:

• Revenue Raising

  This is the traditional aim of tax policy. Tax revenue is a substantial source of funding for government operations.

• Promotion of Economic and Social Goals

  Tax has been used to influence behaviour towards desirable social and economic goals. For instance, to encourage mechanisation and automation, the government allows accelerated capital allowance for most assets used for business purposes. To encourage Singaporeans to have more children, tax rebates are given for the first to fourth child(ren).

The fundamental tenet of Singapore's tax policy is to keep tax rates competitive both for corporations as well as individuals. Keeping our corporate rate competitive will help us to continue to attract a good share of foreign investment. Keeping our individual rates low will encourage our people to work hard. It will also make risk-taking worthwhile and encourage entrepreneurship.

To increase the resilience of taxes as a source of government revenue, Goods & Services Tax (GST) was introduced in 1994. This balanced mix of tax on consumption and income reduces the vulnerability of revenue intake to adverse changes in economic conditions and strengthens the resilience of Singapore's fiscal position.

Taxes are used to develop Singapore into a stronger community, a better environment and a more vibrant economy, a place that Singaporeans can be proud to call home.

Taxes go towards the funding of government expenditure. In FY06, the Security & External Relations sector took up the largest share (51%) of total operating expenditure. The second largest sector is Social Development, making up 41% of the total Government Operating Expenditure. The Economic Development and Government Administration sectors make up approximately 4% each of the total expenditure.

Collection by Tax Type

The following pie chart gives a breakdown of the total tax collection by tax type for FY2006/07. Corporate Tax is the largest source of tax revenue, contributing a total of $8.5 billion. Individual Income Tax is next, at $4.7 billion. The Goods and Services Tax contributed $4 billion and Stamp Duty and Property Tax $2 billion each.

from Singapore Government Securities (SGS) website

Fiscal policy in Singapore is directed primarily at promoting long-term economic growth, rather than cyclical adjustment or distributing income. To meet its objective, the Singapore Government is guided by the following principles in its conduct of fiscal policy in Singapore:

1. the private sector is the engine of growth, and the government's role is to provide a stable and conducive environment for the private sector to thrive;
2. tax and expenditure policies should be justified on microeconomic grounds and focus on supply-side issues, i.e. incentives for saving, investment and enterprise;
3. the counter-cyclical role of fiscal policy is limited, due to high import leakages.

The success of Singapore's fiscal policy over the years lies in the government's prudent expenditure patterns and conducive taxation policies that have complemented monetary policy in promoting sustained and non-inflationary economic growth.

The main focus of the Government's expenditure is on the delivery of essential public goods and services to Singaporeans. The government spends to assure the nation of a secure future. Therefore, key areas of expenditure are on education, public housing, health care and national security. The Government is also committed to building and maintaining world-class economic infrastructure and services. This is evidenced by the fact that development expenditure accounted for around one-third of government expenditure on average over the last three decades.

Singapore's tax policies, although providing the main source of funding for the government, seek to enhance its economic competitiveness and attract foreign investments to Singapore.

This combination of fair tax policies and prudent expenditure programmes, augmented by high economic growth has enabled Singapore to enjoy consistent budget surpluses over the years. Such a prudent fiscal policy has also contributed to Singapore's high savings rate and allows it to achieve one of the highest investment rates in the world without having to incur foreign debt. High domestic savings have, in turn, contributed to Singapore's high level of foreign reserves, which has served to boost investor confidence and provided a buffer against adverse economic shocks.

With this ethos of fiscal rectitude, which extends throughout the public sector, the MAS has been able to focus on its primary goal of ensuring price stability and preserving confidence in the domestic currency through the appropriate management of the S$ exchange rate, without needing to balance this against the requirements of deficit financing.

Fiscal Policy - Fiscal Policy as a Supply-side Tool

Supply-side policies are policies that aim to increase the capacity of the economy to produce (i.e. shift AS).

Fiscal policy usually acts on the level of demand in the economy, such as deflationary and reflationary policies, often known as demand-side policies. However, it is also possible for fiscal policy to act on the level of supply as well.

Income tax will always have an effect on people's incentives to work. This will be true at most income levels. If income tax at low income levels is too high, people may choose not to work but to remain on benefits instead. If income tax on high levels of income is too high, people may choose not to work so hard and take risks. Ultimately they may even choose to leave the country if taxes elsewhere are much lower (a "brain drain").

Supply-side fiscal policies could therefore include:

• Cutting the lower and basic rates of tax to open up the gap between earnings in and out of work and ensure people have an incentive to work
• Increasing the level of personal allowances for the same reason
• Reducing the top rate of tax to encourage enterprise, risk-taking and the incentive to work hard

Taxation and Work Incentives

Can changes in income tax affect the incentive to work? This remains a controversial subject in the economic literature.

Consider the impact of an increase in the basic rate of income tax or an increase in the standard rate of national insurance contributions. The rise in direct tax has the effect of reducing the post-tax income of those in work. For each hour of work taken the total net income is now lower. This might encourage the individual to work more hours to maintain his/her target income.

Conversely, the effect might be to encourage less work since the tax might act as a disincentive to work. Of course many workers have little flexibility in the hours that they work. They will be contracted to work a certain number of hours, and changes in direct tax rates will not alter that.

The government has introduced a lower starting rate of income tax for lower income earners. This is designed to provide an incentive for people to work extra hours and keep more of what they earn. Changes to the tax and benefit system seek to reduce the risk of the poverty trap – whereby households on low incomes see little net benefit from supplying extra hours of labour in their work.

If tax and benefit reforms can improve work incentives and lead to an increase in the labour supply, this will help to reduce further the equilibrium rate of unemployment, and thereby increase the economy’s non-inflationary growth rate.

Taxation and Labour Productivity

Some economists argue that taxes can have a significant effect on the intensity with which people work and their overall efficiency and productivity. But there is little substantive empirical evidence to support this view. Many factors contribute to improving productivity – tax changes can play a role, but isolating the impact of tax cuts on productivity is extremely difficult.

Taxation – Investment and Long Run Aggregate Supply

Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nation’s capital stock can rise and the capital stock per worker employed can rise.

The government might also use tax allowances to stimulate increases in research and development and encourage an increase in the rate of small business start-ups. A favourable tax regime could also be attractive to inflows of foreign direct investment – a stimulus to the economy that might benefit both aggregate demand and supply.

Investment can also be seen beyond purchase of new machines.

Changes to the tax system and specific areas of government spending might also be used to stimulate investment in technology, innovation, the skills of the labour force and social infrastructure. A good example of this might be a substantial increase in real government spending on the transport infrastructure. Improvements in our transport system would add directly to aggregate demand, but would also provide a boost to productivity and competitiveness.

from tutor2u and Biz/ed

INFLATION GONE WILD!!

July 20, 2008

This is not funny, anymore.

Zimbabwe’s central bank recently issued $100 Billion banknotes in a desperate bid to ease the recurrent cash shortages plaguing the inflation-ravaged economy. The 100B$ bill still can’t buy a loaf of bread, but can instead buy only four oranges. It’s equal to just one U.S. dollar!!! Zimbabwe has seen an vicious economic meltdown since its independence in 1980, with the official inflation rate now at a staggering 2.2 million percent.

IMPACT OF INTEREST RATES ON INFLATION:

Changes in Federal interest rates influences interest rates charged for overdrafts, mortgages, loans and savings accounts. This change then affects the price of financial assets such as bonds and shares as well as the exchange rate of the currency. This in turn affects the consumer and business demand and thereby the output. This then impacts the employment levels and wage costs - which finally influence producer and consumer prices and thus the CPI and PPI.

Contributors:

A change in interest rates changes the cost of borrowing and thereby affects spending decisions. Interest rates impact the attractiveness of spending today versus spending tomorrow, as mentioned earlier. An increase in interest rates makes saving more attractive and borrowing less, which reduces spending, by both consumers and producers. Conversely, a reduction in interest rates increases spending by both consumers and producers.

A change in interest rates impacts consumers’ and producers’ cash flow or the amount of cash at hand. For savers, a rise in interest rates increases the money received from interest on their saving. But it will also imply higher interest payments for those with loans as they end up paying variable interest rates (as opposed to fixed rates which do not change). These fluctuations in cash flow affect spending.

A change in interest rates affects the value of certain investments, such as homes and stocks. Higher interest rates increases the return on savings, thereby encouraging people to invest less in property and stocks. A fall in demand for these reduces their prices, thereby eroding the wealth of investors. This, in turn, influences them to spend less.

A rise in interest rates in the US relative to other countries increases the amount of funds flowing into the US, as investors are attracted to the returns on a higher dollar rate of interest. This appreciates the exchange rate of the dollar against other currencies. In reality, the exchange rate is set by expectations about future interest rates and any unexpected changes in interest rates, as when investors expect interest rates to rise, they increase the amount they invest in a currency before interest rates actually rise. An increase in the value of the $ reduces the price of imports and, because many imported goods are included in the CPI, this has a direct influence on inflation. Also, a stronger dollar reduces the global demand for US goods and services. This reduces the exports which then reduces the output, and shifts domestic spending to imported goods.

Read more: Inflation vs. Interest Rates

Is China heading for a hard landing?

Oct 31, 2005 (From MoneyWeek)

China has raised interest rates for the first time in nine years to cool the economy. Will it work? asks Simon Nixon.

Is China over-heating?
Most economists agree it is growing too fast. In the first nine months of the year, it grew 9.5%, far above the 7% that analysts consider to be a sustainable. Growth has been driven in part by a huge surge of foreign investment totalling some $53bn already this year - up 30% on the year before. This has helped drive up prices in China. In the third quarter, inflation hit a seven-year high of 5.2%.


But the most worrying evidence that the Chinese economy is over-heating is in the property and construction sector. House prices in 35 of China’s biggest cities surged 9.9% in the third quarter and the price of land was up 11.6% on a year ago.

Why is this a problem?
Because the longer the boom continues unchecked, the greater the risk that the economy experiences a major bust. The fear is that too much money is flowing into speculative property ventures, just as it did in the Asian crises in the mid-1990s, and that sooner or later the bubble will burst.

A “hard landing” for the Chinese economy would be a disaster for everyone given that last year China accounted for a third of global growth.

What has China done to cool the economy?
Earlier this year, it tried to restrict bank lending by increasing bank capital requirements. It has also imposed administrative measures to cool investment in certain sectors, including tougher rules on converting farmland to industrial use.


These measures have had some success in cooling the boom. Investment growth fell from 48% in the first quarter to 26% in the third quarter and growth in steel production capacity fell from 100% in the first quarter of 2003 to 20% in July this year. Moreover, rising oil and commodity prices have checked the pace of growth. But many economists still fear that China is heading for a hard landing. Hence the People’s Bank of China (PBOC) decision last week to raise interest rates for the first time in nine years.

Will higher interest rates help?
The main aim of the rate rise was to put a further break on the booming construction sector, while helping to rebuild bank deposits. The problem is that, with inflation above 5%, real interest rates are negative. Under the circumstances, the PBOC fears savers will be reluctant to put cash on deposit and will instead do what English and US investors would do in the same position: borrow money to buy property. The last thing the rickety Chinese banking system needs is a combination of falling deposits and increasing property loans. A hard landing for the economy could lead to the collapse of many of these speculative property investments, putting immense strain on China’s fragile financial system.

Why were rates left so low?
Because the PBOC was worried that a rate rise would trigger an even greater influx of foreign funds into China, which would put further pressure on the exchange rate. The yuan is pegged to the US dollar and many think it’s very undervalued against the dollar. For the most part, this arrangement suits both China and the US. The weak yuan underpins China’s position as a low-cost manufacturing hub, while the US benefits from cheap imports, allowing Americans a higher standard of living. Moreover, China recycles its giant trade surplus with America into dollar assets, thus enabling the US to fund its vast current account deficit and to live well beyond its means.

Is this state of affairs sustainable?
Probably not. The US deficit is now running at an annual rate of $600bn or 5.5% of GDP and is predicted to rise to 7.8% in 2008. No other country could get away with a current account deficit on this scale. The US only succeeds because the dollar’s status as the world’s reserve currency provides it with a degree of protection from the normal disciplines of the markets. But this cannot continue indefinitely. The dollar has already fallen sharply against the euro, but this has made little difference to the deficit since the eurozone does not have a significant trade surplus with the US. To lower the deficit, the dollar needs to fall against those Asian currencies that are pegged to it - above all the yuan. But so far the Chinese have refused to devalue.

Will the Chinese revalue?
A revaluation seems inevitable, but the Chinese won’t be rushed. They fear that if the currency peg was removed, there could be a run on China’s rotten banks, triggering a financial crisis. Besides, the world has much to fear from a sudden yuan appreciation. Faced with higher import prices, America would have to tighten its belt and raise interest rates to hold off inflation. Both US and Chinese growth would slow, plunging the global economy into recession.

Related articles

• What is the risk of a hard landing in China?(24 Apr 2008)
• China's central bank to seek policy balance between fighting inflation, boosting economy (15 Aug 2008)
• Chinese official: curbing inflation a priority after Games (27 Aug 2008)
• SMEs to get benefit package soon (12 Sep 2008)
• China's railway investment hits $19.6 bln in first 7 months (8 Sep 2008)
• Tibet plans huge industrial investment (5 Sep 2008)
• China's central bank to make credit easier (1 Sep 2008)
• China curbs its boom with fine tuning and supply bottlenecks (2 Oct 2004)
• The China Effect:Assessing the Impact on the US Economy of Trade and Investment with China (by the Chinese Business Forum) (Jan 2006); also Summary
• The China Effect (CEP,LSE)(Autumn 2006)
• Is the China effect over? (17 Apr 2007)
  

Vietnam's Troubled Economy

From Time.com

A year ago, Vietnam was being hailed as the next Asian miracle, a success story to match the rise of the Asian tigers of the 1990s and more recently the stunning growth of China and India.

Thanks to economic reforms, the communist country was attracting record amounts of foreign investment. The economy expanded by 8.5% last year—among the fastest rates in the region—and housing prices doubled and tripled, driven up in part by frantic buyers who stood in line to snap up condos before they had even been built. The country's nascent stock market was minting millionaires. In Hanoi and Ho Chi Minh City, their flashy new cars clogged roads better suited for bicycles.

But a funny thing happened on the way to prosperity. Halfway through 2008, Vietnam's authoritarian government finds itself grappling with soaring prices, collapsing markets and an increasingly restive workforce. Inflation, now running at an annual rate of 25%, is eating up much of the gains made by citizens over the last several years. Vietnam's stock market, which has fallen 58.5% since January, currently holds the unhappy title of being the worst-performing in the world in the last 30 days.

Citing the government's difficulty in reining in inflation, Moody's, which grades creditworthiness, lowered Vietnam's ratings outlook last week to negative from positive. Poor ratings signal that banks may have trouble meeting their financial obligations, undermining investors' confidence in the country.

In a nutshell, the economy overheated and the government was too slow to respond, says Jonathan Pincus, chief economist for the United Nations Development Program in Vietnam. "It's how we got into this problem," he says.

Read whole article

Virtual Water Trade

Virtual water trade refers to the idea that when goods and services are exchanged, so is virtual water. When a country imports one tonne of wheat instead of producing it domestically, it is saving about 1,300 cubic meters of real indigenous water. If this country is water-scarce, the water that is 'saved' can be used towards other ends. If the exporting country is
water-scarce, however, it has exported 1,300 cubic meters of virtual water since the real water used to grow the wheat will no longer be available for other purposes.

Daniel Zimmer, Director of the World Water Council, in his presentation at the session on "virtual water trade and geopolitics" at the 2003 World Water Forum in Kyoto:

"The contrast in water use can be noticed between continents. In Asia, people consume an average of 1,400 litres of virtual water a day, while in Europe and North America, people consume about 4,000 litres. About 70 per cent of all water used by humans goes into food production. [...]

"Among the biggest net exporter countries of virtual water are the U.S., Canada, Thailand, Argentina, India, Vietnam, France and Brazil. Some of the largest net import countries are Sri Lanka, Japan, the Netherlands, South Korea, China, Spain, Egypt, Germany and Italy."

Water-scarce countries like Israel discourage the export of oranges (relatively heavy water guzzlers) precisely to prevent large quantities of water being exported to different parts of the world.

Food prices are soaring around the world, triggering hunger, hoarding and a crisis in the world food trade. There have been pasta panics in Italy, tortilla wars in Mexico, bread riots from Haiti to Cairo and rice shortages from Bangladesh to the Philippines. Some blame this on biofuels. But the real culprit is water.

Once, countries largely grew their own food, but an increasing number no longer do. And for many, particularly in the arid Middle East, the prime reason is a shortage of water. They can only feed themselves through imports of thirsty food crops. Economists call the water it takes to grow these crops "virtual water."

As water shortages emerge around the world--due to climate change and the sheer demand for the stuff--the exporting countries are going to become increasingly unable, or unwilling, to export their virtual water.

That will threaten the world food trade; some say it already has.

We don't realize it as we sit down to a meal, but most crops require huge volumes of water to grow: 65 gallons to grow a pound of potatoes; 650 gallons for a pound of rice.

Often, food supplies are only maintained at the expense of literally emptying some of the world's great rivers, such as the Indus in Pakistan, the Yellow River in China and the Nile in Egypt. Elsewhere, underground reserves are being pumped dry.

But increasingly, countries are giving up on trying to feed their populations from their own resources and are switching to food imports. That means they are also importing the water embodied in the crops, or virtual water. Every ton of wheat arriving at a dockside carries with it, in virtual form, the thousand tons of water needed to grow it.

Only this trade in virtual water--bound up in grains and vegetable oil, sugar and cotton, meat and dairy products from animals raised on fodder crops--has kept the world fed. Its total volume is estimated at 20 times the annual flow of the world's longest river, the Nile.

Two-thirds of all the water abstracted from nature by humans is used to grow crops, mostly food. And nearly a tenth of all the water used in growing crops is traded internationally. More and more, the entire international food trade looks like a trade between the water haves and water have-nots.....

Read more: Whole article from Forbes
Related article: Starbucks attacked over water waste

Call to up tax on snack foods (A case of market failure?)

From Straits Times 1 Oct 2008

A parliamentary report released Tuesday has 70 proposals for fighting obesity, one of it being increasing taxes on snack foods.

PARIS - FRENCH lawmakers want to increase taxes on snack foods and cut taxes on fruits and vegetables to fight growing child obesity.

The health minister, however, says she doesn't like the idea.

A parliamentary report released Tuesday has 70 proposals for fighting obesity. One would hike taxes from 5.5 per cent to 19.6 percent on chocolate bars, chips and other 'snack foods.'

Taxes would be reduced from 5.5 per cent to 2 per cent on fruits and vegetables.

Health Minister Roselyne Bachelot says on Canal Plus television that obesity-fighting efforts 'should not go in that direction' and that such a tax would hit poor households at a time of economic downturn.

The report, which is not binding, also suggests banning transfats. -- AP

See also: Related article: Snack tax to combat obesity? ; and a detailed study by the USDA

Questions:

1. Using economic analysis, explain why the government wants to intervene in the market for snack foods and vegetables.
2. Evaluate the effectiveness of such a measure in solving the problem you identify in Qn 1.