Economic Downturn and its Impact on the People

Economic Downturn and its Impact on the People

Sam Choon Yin (2003)

 

The recent economic downturn in Singapore affected many people both economically and psychologically. Workers were retrenched; they received pay cuts, and were asked to take no-pay leave as part of the companies’ efforts to survive. Family quarrels became more usual than before leading to family breakups. Singapore Airlines (SIA) was in the news on 17 June 2003 when it announced its plan to retrench 2,500 workers, its first since the Group was established more than 20 years ago (The Straits Times, 17 June 2003). In another report, it was noticed that more calls were made to the Samaritans of Singapore (SOS) with the number of calls rising to about 120 per day in mid 2003 when the economy was not doing fine from 100 calls per day in 2000. There were also more suicides. In 2002, a total of 361 suicides were reported, about 17 percent more than 1999 (The Straits Times, 15 June 2003). Economic downturns are usually associated with lower income. Why is income so important? Why is income, or rather the lack of it, the usual cause of quarrels in a typical family?

It may be useful to recognize that uncertainty matters. Whether it is pertaining to work, study or marriage, there is always uncertainty. What will happen tomorrow? The day after tomorrow? Unfortunately, no one can predict future outcomes in an accurate manner. As a result, one has to live with uncertainty and can only form expectations over future events. The level of uncertainty increases when the economy is not doing well. The probability attached to the worse case scenario increases during the economic downturns. This in turn creates a downward expectation over the future outcomes. This essentially implies that the expected outcome of future events has become worse than before during the downturns.

Moods swing between good and bad. The latter is more likely to occur during economic downturns. Family members are more likely to engage in fights over small matters. The whole world seems to be tumbling apart. These can take place even when there are no actual negative events incurred by the individuals. The reason is that we are focusing on expectations over future events. What the individuals formed are expectations, not real happenings. But obviously expectations matter in influencing human behavior.

A rational individual considers the expected costs and benefits of all the alternatives available to the person when he/she is confronted with a problem. A rational person will choose the option that yields the highest net benefits or lowest net losses.  Since it is not possible for the individual to acquire all the necessary information, the individual usually works with limited information. Even with all the necessary information, the individual is not likely to be able to decipher all these information. There is a cognitive limit in terms of how much one can decipher. In this aspect, we say that the individual is bounded rational.

When the economy is experiencing a downturn, the expected opportunity cost of consuming normal goods increases. Since there is likelihood that the individual will lose his/her jobs, it matters to the individual the kind of goods and services he/she is going to consume. It is likely that the individual will not be as conspicuous as before.

The degree of its seriousness differs among the individuals. One who has more savings, who is self-employed, and single is less likely to be affected as compared to one who has less savings and is the sole breadwinner of the family. Since most of the goods are normal goods, a possible reduction in income affects the consumption of many goods and services including necessities like bread, rice and vegetables. A fall in the income will cut the demand for these goods. An economic downturn therefore affects people’s standards of living.

The problem in Singapore is likely to be severe. Essentially a capitalist economy, the goods and services in Singapore are distributed through ‘money vote’. This implies that only those individuals with money are able to get the goods demanded while those without will feel less able to consume the goods. The firms are after all profit-maximization entities. They are not social institutions which will distribute goods to the individuals at prices that are below costs. The welfare system in Singapore is also weak. Only in cases where the individuals are extremely poor will the government offer some monetary aids. Otherwise, the government expects the individuals to take care of themselves during the economic downturn. Unfortunately, most of the workers’ savings are locked up in the Central Provident Fund. The members are allowed to withdraw the money only for certain uses, or they will have to wait till their retirement before some of the funds can be withdrawn.  Using the funds to tide over the economic crisis is not one of the permitted reasons to withdraw the funds.

It is true that the government has offered monetary aids to Singaporeans like the Singapore shares but the aid is meant for other uses. It was meant to tide over the negative impact of the goods and services tax (GST) when the rate was increased from three percent to four percent in 1 January 2003 (and five percent with effect from I January 2004). The current economic downturn was due to global uncertainties. The 911 incident, the war on Iraq and the SARS attack have led to economic downturn that is more serious than the East Asian crisis. And the government has yet to offer concrete aids to the people in the streets other than holding jobs fairs.

Why is it that the economic downturn has caused so many people to be unhappy? One of the main causes is the materialistic society that Singapore has put itself into. The people are materialistic. The economy is capitalistic. It certainly appears that money is a very important ‘commodity’ to make one happy. It may be useful to note that money is not necessary the only the source of happiness. A simple man may define happiness as having the opportunities to lead a simple life, to have the opportunity to go fishing, plant some vegetables and lead a quite life in a village. Or, one may feel contented with his life if he is healthy and does not suffer from any illnesses that can make him disabled. Not everyone sees money as the ultimate source of happiness. This however is less likely to be the case in Singapore. Singaporeans love money. They need money to maintain their standards of living. Everything in Singapore needs money to acquire. As the lyrics of a Cantonese song reads, ‘No money no talk’. This is the true state of Singapore. It is not surprising therefore for the people to be unhappy when the country’s economy does not turn out to be as good as they have expected. The probability of getting into quarrels and committing crimes are on the rise. Quarreling and committing crimes have been used, unfortunately, as means to overcome the feeling of inferiority created by the economic downturn.

It does not help by the fact that Singaporeans in the 20s and 30s have not undergone economic distress as severe as to the current economic downturn. Many were able to lead a plentiful life, with plenty of opportunities in getting jobs that paid relatively well. They are unlike the older generations of residents in Singapore who had undergone economic downturns cum political uncertainties in the 1960s, economic hardship in the 1970s due to the oil crisis and the economic recession in 1985. The current workforce in the 20s and 30s, who was hard hit by the economic downturn, was less adaptable to the economic downturn. They were less able to face with the hardship leading to social and psychological problems that many were suffering.

The other problem lies on the fact that debt grows in the economic downturn. When people become unemployed and their savings dried up, they ended up borrowing from the financial institutions, their relatives and their friends. The borrowings increased if they were not able to cut down on the consumption. Interest payments must be made to the borrowings. With more borrowings, the interest liabilities will grow on a compounding basis thus pulling the individuals further down. It will take some time before the debts are fully paid up. This kind of debt-filled lifestyle is not uncommon to many Singaporeans.

Many fail to see that the economic downturn is part of the business cycle. The recession comes and it will go away. It is only a matter of time before the economy recovers. Why is this so? Imagine that the economy is suffering from the economic downturn. When the individuals are less wealthy, they will cut consumption. Seeing a lower demand for their goods, the firms will cut investments too leading to a multiplier downward impact on the equilibrium national income. The firms will stop producing and wait until the stocks in the warehouses are cleared up. When this happens, the surviving firms will begin production thus creating an increase in the autonomous investment. Jobs are created. The economy begins to expand as investments create an upward multiplier effect on the equilibrium national output. The economy is back on track as the national income starts to increase.

It is important for the individuals in Singapore therefore to recognize that the current economic downturn is not a long-term phenomenon. Sooner or later, the economy will grow again. The residents in Singapore must be patient to wait for this day to come. The problem though is that nobody can accurately predict when this day will come, not even the supposedly sophisticated forecasters that governments, companies and universities around the world are having.

In this short essay, I have briefly discussed the impact of economic downturn on the people in Singapore. Economic downturn is occurring in many parts of the world as a result of the economic downturn in the US, which is major customer to many countries including Singapore. The invasion of the deadly virus, SARS, further pulled many of the countries’ economies downwards particularly the tourism industry. Many people are affected by the economic downturn. They are living with lower disposable income. Family quarrels are becoming more common. With lower income in their hands, people become less happy, leading to problems associated with economics, sociology and psychology. The government is responsible in stabilizing the economy. The government must do something to rectify the problem. The government of Singapore has said that the current situation does not provide justification yet for the government to do something to boost the economy. It is not known when the right time will arrive, and what kind of indicators the government will be using to determine the right time to step in. It should intervene soon to prevent any further growths in family breakups and commit suicides that have been increasing over the months.