TWN Global Economy Series no. 24 Financial Liberalization and the Impact of the Financial Crisis on Singapore By MICHAEL LIM MAH-HUI and JAYA MARU Publisher: TWN (ISBN: 978-983-2729-93-8) Year: 2010   No. of pages: 56

ABOUT THE BOOK

As one of the most developed economies in Asia, Singapore’s success is built on an outward-looking growth model driven by exports, foreign investment and international financial flows. A key element in this externally oriented strategy has been the exchange rate policy. This paper looks, among others, at how Singapore’s “basket, band and crawl” exchange rate regime has helped it to manage short-term currency fluctuations and to redress currency misalignments with underlying economic fundamentals.

However, it is the very openness of the Singapore economy which also renders it vulnerable to shocks originating abroad – and the present global financial crisis is no exception. As documented in this paper, Singapore has experienced its sharpest economic downturn in over two decades as a result of the crisis. With exports plummeting, business confidence taking a hit and foreign portfolio capital exiting its equity markets, the economy contracted and unemployment climbed up.

The crisis has exposed the limitations of Singapore’s pronounced dependence on the external sector, a dependence which arises from a small domestic market marked by sizeable income and wealth inequalities. A more sustainable growth path would entail narrowing these disparities, this paper contends, as well as reducing reliance on industrial-country markets in favour of strengthened regional economic ties.

ABOUT THE AUTHOR

MICHAEL LIM MAH-HUI is a senior fellow at the Socio-economic and Environmental Research Institute (SERI) in Penang, Malaysia. He was previously a post-doctoral fellow at Duke University and Assistant Professor at Temple University in the US, and an international and investment banker.

JAYA MARU is a financial services professional based in Singapore. She has provided financial and business advisory services to leading corporations and government agencies.

Contents

1 INTRODUCTION                                                                         

2 TRANSMISSION CHANNELS OF ECONOMIC SHOCKS FROM THE GLOBAL CRISIS   

    Direct Losses in the American Capital Market                                   

    Fluctuations in Cross-Border Capital Flows                                        

    The Impact of the Global Financial Crisis via the Trade Channel          

3  CHINA’S MAIN POLICY RESPONSES TO THE GLOBAL SLOWDOWN    

    Expansionary Fiscal Policy                                                              

    Expansionary Monetary Policy                                                          

4 STRUCTURAL PROBLEMS IN THE CHINESE ECONOMY

5  HOW TO SAFEGUARD THE VALUE OF CHINA’S FOREIGN EXCHANGE RESERVES   

    The Dollar Trap                                                                             

6  REFORM OF THE INTERNATIONAL MONETARY SYSTEM          

    Relationship Between Global Imbalances and Global Financial Crisis 

    Creation of an International Reserve Currency                                 

    IFI Governance Reform                                                                  

7  CONCLUDING REMARKS                                                      

References                                                                                                               

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