BALANCE OF PAYMENTS ADJUSTMENTS AND GROWTH IN SINGAPORE, 1960-1972

Abstract

The aim of this thesis is to study the adjustments felt on the Singapore economy arising from the balance of payments position in the period 1960-1972. The Singapore economy is characterised by a very large foreign sector both in terms of trade and capital flows, and operates on a Currency Board System of currency note issue. In the period 1960-1972, there was a general net inflow on the capital account of the external balance. Given these conditions, this thesis examines the adjustment forces at work in the economy in the monetary, the real and the international sectors. The theoretical framework of analysis is culled from the standard theory of adjustment - from the standard price-specie flow and the income-specie flow mechanism of Classical-Humean and Keynesian process of adjustment. The received theory on this area is particularly relevant given the Currency Board System of money supply which is directly related to the balance of payments. Yet, two features are noteworthy in this thesis: (1) while conventional comparative static analysis are cast in terms of variation in the level of magnitude of the variables, this thesis is more concerned with the rate of variation of the magnitude of the variables in adjustment; (2) while conventional theory deals largely with the demand in equilibrating/disequilibrating adjustment, this thesis also considers the supply side which, in a fast growing economy, must be incorporated as one crucial force of disequilibrating adjustment with respect to the external sector. In Chapter One, the theoretical framework of analysis is discussed - largely relating to the approaches and the adjustment mechanism in a fixed exchange rate system; clarification is made about the concept of equilibrium in balance of payments theory. The characteristics and structure of the small open economy of Singapore is examined in Chapter Two, and a discussion of the crucial Currency Board System of monetary issue is done in Chapter Three. Chapter Four examines the balance of payments including the alternative concepts of balances and the relation with the money supply. The adjustment in the monetary sector is examined in Chapter Five with the strong relationship between money income and the foreign balance. The relationship between money and the other variables such as income and the interest rate as a structural set are also examined. Also the oft-alluded inflexibility of the money supply under the Currency Board System is examined. Chapter Six studies the variables in the real sector adjustment such as the changes in the components of aggregate demand and employment (in the Keynesian frame), and the wage-price adjustment of the Classical frame. The growth of the economy enters as a crucial force in adjustment. In Chapter Seven, two variables are specifically taken as variables which have great influence on the small open economy - viz the imported inflation and the effective exchange rate variables as forces impinging on the domestic economy from the international economy.