(b) Discuss whether the Singapore government should change its policies for managing the balance of payments.
The policies for managing the balance of payments could be directed to the current account via expenditure switching (exchange rates and protectionism), expenditure dampening or raising through Fiscal Policy and Monetary Policy, or through long-term measures like supply side policies (increasing general education, subsidies, etc.).
The policies directed at the capital account could include interest rate policy, taxation policy (related to Foreign Direct Investments) and complementary infrastructure and other supply side policies such as employer CPF levels.
To manipulate current account, the government by and large does not use protectionism except for domestic service sectors, such as banking, fiscal policy due to small multiplier and does not aggressively undervalue currency because of fears of imported inflation.
For the capital account, since we have elected to choose exchange rates and free capital movements as our two choices, it does not use interest rate and capital controls. Singapore does not want to scare away Foreign Direct Investments by implementing controls.
Singapore mainly relies on supply side policies as the government tends to be more far-sighted and focuses on returns on the long run. The Balance of Payments will be analyzed as such. Even in crisis periods such as early 2009, Singapore does not react much with exchange rate changes but instead encouraging foreign and few domestic firms to remain in Singapore by offering lower wage (and subsidizing for the lowest wage) and better tax breaks. The opinion is that sudden exchange rate changes are inflationary and destabilizing. Therefore, the typical exchange rate policy has been one of the slow and steady appreciate of the Singapore dollar in line with gradual improvement in performance of the current account.
The underlying policy behind the improved current...
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