The policies directed at the capital account could include interest rate policy, action policy (related to Foreign Direct Investments) and complementary infrastructure and Other supply side policies such as employer CAP 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 UAPITA 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 areas. The opinion is that sudden exchange rate changes are inflationary and destabilize. 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 account performance and how the exchange rate strengthened Balance of Payments come from the following. If rusty, Singapore develops current account in areas of higher value added to AP into growing world of incomes and to avoid goods where prices are volatile, such as those primary products exported by many developing countries. Also, Singapore constantly aims to raise value added to stay ahead of other countries which are building their current account.
This involves increasing expenditure on human capital and strategic alliances with firms that can make use of such labor by offering supply side support. Critic: Employer’s CAP, Wage Flexibility, PR Protection, Physical infrastructure improvement, corporate tax regimes, manpower development There is not much to change because Singapore has one of the strongest current accounts in the world.
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