Business / Economic Impact Of Sars On The Singapore Economy

Economic Impact Of Sars On The Singapore Economy

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Autor:  anton  15 December 2010
Tags:  Economic,  Impact,  Singapore,  Economy
Words: 2030   |   Pages: 9
Views: 583

Topic: Impact of Severe Acute Respiratory Syndrome (SARS) on the economy of Singapore.

TABLE OF CONTENTS

1. Introduction to SARS Page 3

2. Impact on Export and Local Consumption Page 4

3. Impact on Employment and Wages Page 8

4. Impact on Government Expenditure Page 10

5. Impact on the Gross Domestic Product (GDP) Page 11

6. Conclusion. Page 14

7. References Page 15

Introduction to SARS

Severe Acute Respiratory Syndrome (SARS) first surfaced in Guangzhou, China, in November of 2002 and quickly spread throughout China, Asia and eventually to most parts of the world because of its transmission through close contact with anyone who has SARS. Studies concluded that it was transmitted to humans via the civet cat, which is eaten by the inhabitants in the Guangdong province of China, where Guangzhou is the state capital. By the time the epidemic was over, 8096 were inflicted with the disease, resulting in a total 774 deaths; of which 39 were from Singapore (www.who.int).

SARS affected the economies of many countries, especially in Asia. In the attached article, it mentioned that economies like Singapore and Hong Kong were most vulnerable as they are most dependent on tourism and business travelers amongst the affected countries. In addition, consumption is affected as mentioned by Jan Lambregts, Head of Asia Pacific Research at Rabobank, “the domestic component where people will go out less and spend less and that amounts to a pretty severe economic impact.”

SARS also affected employment. Singapore’s Manpower Minister Mr Lee Boon Yang said, “I would expect employment creation will be hard hit. If you look at the industries such as airlines, hotels, retail, food and beverages, they are all going to be hit.”

In this assignment, using theories in macroeconomics, I will analyze in detail how SARS affected Singapore’s economy.

Impact on Export and Consumption:

The biggest impact on the economy is on export and consumption. Major exports affected were from tourism and tourists related services, though exports in areas like manufacturing were also affected, it is marginal. The impact on consumption is centered on the change in consumption patterns of Singaporeans during the SARS period.

Impact on Export

The immediate impact on the economy was the sharp decline in tourism and related services - such as hotels, airlines, travel agencies - which contributes about S$7.8 billion or approximately 5 per cent of our total Gross Domestic Product (GDP) in 2002 (www.singstat.gov.sg). Month-on-month tourist arrivals dropped by 15 per cent in March and 67 per cent in April, resulting in a 30 per cent year-on-year decline compared to 2002; this greatly affected tourists’ consumption in Singapore (www.stb.gov.sg).

Due to the decline in tourist arrivals, airlines and hotels suffered the largest drop in revenues. Hotel occupancy rate fell from 75 per cent in February 2003 to a low of 20 – 30 per cent in April 2003. A total of 34 airlines announced temporary cutback in flights to and from Singapore between March to June 2003, and passenger load at Changi Airport dropped by as much as 50 per cent while the number of flights handled declined by 17 per cent around the same period (www.mti.gov.sg). A number of conventions and exhibitions were cancelled, the largest being Broadcast and CommunicAsia, which draws as many as 23, 000 overseas visitors, that could have contributed millions of dollars to Singapore’s tourism export (www.communicasia.com) and millions of dollars in revenue for local companies during the exhibition.

Similarly, the education services industry, which is a growing contributor to Singapore’s export, was affected with fewer overseas student enquiries and even fewer enrolments during the period.

Companies are affected by the many Singaporeans who were quarantined to prevent the spread of the disease, due to probable exposure to an infected carriers; some companies even had to shut some of their production lines. As high value goods are generally transported via air, the cut in number of flights by airlines would have reduced available cargo space and have an effect on goods delivery, affecting exports. Although the manufacturing sector which contributes much of our export economy is not adversely affected, there were some spillover effects, but these effects are not easily measured due to the complexity of too many variables involved, the spread across a wide variety of industries and the short period which people were quarantined and some of the productivity lost could have been replaced by co-workers putting in more effort.

Impact on Local Consumption

The drop in consumption is largely contributed by a change in the consumption habits of Singaporeans during the SARS period. Due to the transmission pattern of SARS, compounded by the fact that the virus can survive in the environment for up to twelve hours, anyone can be infected simply by touching an infected surface in public areas, and use their hands to rub their nose or lips. This caused a panic among the general public and people shunned public places, like shopping malls, restaurants, food courts and hawker centers.

According to the Economic Survey of Singapore, published in the third quarter of 2003 by the Ministry for Trade and Industry, businesses in retail shops and food establishments decline by as much as 50 per cent in the months of March to May 2003. Even taxi companies are not spared, Comfort Taxi, the largest taxi operator in Singapore reported that daily bookings dropped from an average of 28,000 before the start of SARS to 18, 600 in April 2003, and the average daily income of taxi drivers dropped from $68.00 to $41.50 during the same period (www.mti.gov.sg).

Another factor that contributed to the drop in consumption is the proposed wage freeze, wage restructuring and wage cut made by the National Wage Council (NWC) in May 2003; this will be discussed in more details later. Anticipating a drop or freeze in potential future income, Singaporeans’ consumption declined; since level of consumption is dependent on the level of disposable income, the lower the disposable income, the lower the level of consumption (Mankiw: 2000).

There were some positives to the consumption in the form of increase in demands for flu jabs, face masks, thermometers, air cleaners and thermal scanning equipments, but these increases in consumption pales in comparison to the losses suffered by the other industries.

Impact on Employment and Wages

Collectively, the travel and service related industries are one of the largest private employer in Singapore. When SARS hit in February 2003, many were unprepared, taking a severe hit on both revenue and profitability. In the airline industry, despite the cutback on flights, many flights were still less than half filled. The same situation happened in the hotel and travel services industries, resulting in an unprecedented number of retrenchments in these industries.

Statistics shows that in the first and second quarter of 2003, 4411 and 5144 people were retrenched respectively. This pushed the average annual unemployment rate to 4 per cent (Figure 1) with 91, 200 people being unemployed. Even Singapore Airlines, which is one of the most profitable airlines in the world, had to retrench some of their ground and air crews.

Although unemployment hit a record high due to retrenchment in 2003, many of the unemployment were cyclical, because when the economy began to recover in 2004, many workers were re-hired, reducing the average annual unemployment rate to 3.4 per cent (Figure 1). Cyclical unemployment is the fluctuating unemployment during the business cycle (Parkin: 2005). A high unemployment rate over a prolonged period of time poses a threat to the economy due to the loss of production and income, and the loss of human capital.

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Unemployment Rate (%)

Annual Average 1.7 1.7 1.8 1.7 1.4 2.5 2.8 2.7 2.7 3.6 4.0 3.4 3.1 n.a.

Figure 1

(Source: www.mom.gov.sg)

The impact on wages was largely due to the recommendation by the NWC published on the 21st of May 2003. In an attempt to save jobs, pay cuts were recommended for companies directly affected by SARS like airlines and hotels; due to the uncertain business environment, a wage freeze was recommended for other industries. The civil service took the lead by taking a 10 per cent pay reduction for all ministers and senior executives and a pay freeze for the rest (www.sars.gov.sg).

Impact on Government Expenditures

On 17th April 2003, in the midst of the SARS crisis, the Singapore Government announced a set of fiscal measures, to help offset the impact of SARS on affected industries. A S$230 million relief package, equivalent to 0.2 percent of GDP was announced. These included rebates to property taxes, a reduction in foreign worker levy, loans for affected Small and Medium Sized Enterprises (SMEs) and grants for training of retrenched workers, etc. S$ 1 million was donated to the Courage Fund, which was launched in April 2003 to provide relief to the families of needy SARS patients (www.mas.gov.sg).

In addition, the government also spent money on supplying every household with a SARS prevention kit which included a digital thermometer and face masks, and every child in the primary and secondary schools is provided with a digital thermometer for regular temperature checks during school hours.

Millions of dollars were also spent on preventive measures such as stringent health checks at immigration control points, hospitals, government and statutory board premises, as well as cleaning and sanitization of public places like hawker centers and public toilets (www.mas.gov.sg).

The Impact on GDP

GDP is defined as “the market value of all the final goods and services produced during within a country in a given period of time.” (Parkin: 2005, pg 480).

According to the Econometric Studies Unit, Economics Department at the National University of Singapore, Singapore’s GDP was expected to grow by 3.5 to 5 per cent in 2003, but the actual GDP growth rate in 2003 was below the expected figure at 1.4 per cent, see Figure 2 below (www.fas.nus.edu.sg).

Figure 2

(Source: www.mom.gov.sg)

Applying the expenditure method of accounting for GDP in macroeconomics, where GDP (Y) is the sum of Consumption (C), Investments (I), Government Expenditure (G), and Exports (X) minus Imports (M) (Parkin: 2005), I shall discuss how each of the above impact on the economy could have tipped the Singapore economy into a recession. The method can be summarise into the formula below:

Y = C + I + G + (X – M)

Consumption by Singaporeans and exports from the tourism sectors declined sharply, together with a slight increase in imports in the form of thermometers, thermal scanners and face masks contributed largely for the decline in GDP. Another cause of slight decline in export arises from the drop in productivity of workers as many work days are lost by those served with Home Quarantine Orders.

Although there was a slight increase in government expenditure during the same period, it was negligible compared to the decline in consumption and exports, moreover, part of the expenditure was used to fund the extra imports needed to fight and monitor SARS, like thermometers and thermal scanners.

While there was no concrete study on the impact on investment during the SARS period, in my opinion, there was little effect on investments because the SARS epidemic lasted only two quarters and most investment decisions were made way in advance, even if investments were delayed during the 2nd and 3rd quarters when SARS was battering the economy, many would have returned in the last quarter, thus the impact on investment is minimal.

Conclusion

In conclusion, although SARS had a negative impact on the economy of Singapore, it was limited due to the short period of the epidemic, however, it was enough to lower the growth rate substantially from the projected growth rate. If the epidemic had lasted longer, it could have tipped the economy into a recession, when the effects spillover into the other industries together with a prolonged decline in local consumption.

In my opinion, Singapore benefited in the long term from SARS because the swift and tough actions taken to tackle the virus won praises from many countries and the WHO. More importantly, the experience gained from tackling SARS had put in place an efficient system to managed possible future outbreaks or similar crises. This boosted investors’ confidence and has a direct impact for future Foreign Direct Investments (FDI), which is a major contributor to Singapore’s GDP and creation of jobs that is necessary for long term economic growth.



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