Monday, April 11, 2005

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The crazy life of a city-state

Normally when a country's GDP shrinks by more than five percent in three months, on an annualized basis for the past three months (thanks, Jacob), alarm bells go off about the long term. In the case of Singapore, however, this appears to be the result of the normal vicissitudes of on particular industry combined with the fact that Singapore, a city-state, has a small domestic economy. John Burton provides some background in the Financial Times:

Singapore’s economy suffered its first quarter-on-quarter decline in nearly two years in the first three months of 2005, undermined by a sharp fall in pharmaceutical production, according to a preliminary government estimate on Monday.

Gross domestic product in the first quarter shrank by 5.8 per cent on an annualised basis from the fourth quarter of 2004, while on a year-on-year basis, GDP expanded by a sluggish 2.4 per cent.

The weak economic data underscored how Singapore’s increased dependence on the volatile pharmaceutical industry was creating great swings in the city-state’s quarterly growth rates....

Drug production can fluctuate widely from month to month, in contrast to electronics, Singapore’s other mainstay industry, whose production cycles can be measured in months and even years.

The production of pharmaceuticals is affected by long chemical processing times and frequent shutdowns of facilities for cleaning. The value of output is also affected as drug plants switch from one product to another, with each priced differently.

Drug production shrank 11.6 per cent in January from a year earlier and then fell by more than 60 per cent in February, which had prompted many economists to cut their forecasts for the first quarter.

In contrast, growth for other manufacturing industries, such as electronics, in the first quarter was “still healthy”, although slowing, the ministry said....

The weak economic data could force the central bank to stimulate growth by abandoning its policy of a “modest and gradual appreciation” of the Singapore dollar in favour of a neutral stance when it meets today for a twice-yearly review.

Singapore relies on its foreign exchange rate rather than interest rates to guide monetary policy because of the small and open nature of its economy.

The last two paragraph suggest one reason why Bretton Woods 2 might persist for longer than some predict. If Singapore decides to halt the appreciation of its currency, it's going to buy more dollars.

posted by Dan on 04.11.05 at 12:31 PM


Careful, mister Degree-in-Economics. Singapore's GDP didn't "shrink by more than five percent in three months." It shrunk 5.8% on an annualized basis-- which is to say, something closer to 1.5% in three months.

posted by: Jacob T. Levy on 04.11.05 at 12:31 PM [permalink]

1.45% :-)

posted by: Scott Ferguson on 04.11.05 at 12:31 PM [permalink]

I don't think that Singapore's reserves or exchange rate decisions are as important as those of China, Japan and South Korea; that is to say, I wouldn't look at this case and say that this is a reason Bretton Woods 2 might last longer.

posted by: Nick Kaufman on 04.11.05 at 12:31 PM [permalink]

Some of that volatility of being a city-state carries over to other countries with large multinational manufacturing sectors. A good example (or at least the one I know about) is the Republic of Ireland. Check out the growth stats in the final column of Table 1 in the attached.

posted by: P O'Neill on 04.11.05 at 12:31 PM [permalink]

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