Ethos Issue 6, Jul 2009

The End of the World (Economy) as We Know It
Adeline Aw, Lee Chor Pharn and Wee Shu Lin

In response to both diminished G3 consumption demand and more restricted market access, Asian governments step up public spending and focus on building up domestic demand. Domestic consumption in Asia, however, will need several decades of growth before it can fully replace G3 as a final source of demand. Global growth therefore slows down considerably, below its long-term potential.

Scenario 3: Abyss
In the "Abyss", international recovery efforts fail to contain the adverse effects of the financial and economic crisis. The global economy stagnates for a prolonged period of time, akin to a "Great Depression II". The protracted nature of the downturn causes deficit governments in the developed economies to exhaust their arsenal of fiscal and monetary tools. Public debt burdens rise to unstable levels and prevent G3 governments from enacting key longerterm structural reforms.

With both public and private sector spending diminished, unemployment rates soar to historic highs. Political instability in many countries mounts. Fears of more job losses to foreigners feed social and political unrest amongst the public; governments are pressured into implementing a massive slew of protectionist measures that eventually lead to a complete breakdown in existing trade architectures. With world trade stalled, the export-led model of growth in Asia collapses. Economic activity stalls in these nations and government expenditure becomes the primary driver of growth in the region. Economic growth will eventually resume, but it will take several years of persistent effort from Asia, as well as extraordinary coordination across governments, to restart the engines of growth again.

IMPLICATIONS FOR SINGAPORE
All three scenarios present significant challenges for Singapore. Against this backdrop, Singapore would need to address three main themes of Resilience, Survival and Relevance to secure its continued economic progress. In the "Wounded Beast", Singapore would need to develop deeper resilience to resource shocks and shorter business cycles to cope with heightened economic volatility. Muted G3 consumption growth as in the "Chasm" and the "Abyss" suggests that Singapore would need to develop new capabilities to survive a shortfall in G3 demand. Finally, the reduced relative importance of G3 final demand will require Singapore to stay economically relevant to Asia as economies in the region seek to jump-start their domestic demand.

Adeline Aw, Lee Chor Pharn and Wee Shu Lin are from the Economics and Strategy Division of the Ministry of Trade and Industry. The division studies and identifies key sectors and clusters in Singapore, assesses the impact of policy initiatives by other government agencies and produces research and analyses of the Singapore economy and global trends.

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