NYJC

Answer all questions.

Question 1
The Automobile Industries in India and Thailand

Figure 1: Population Growth in India Figure 2: Vehicle Population Growth in India

PopulationGrowthRateinIndia(%) VehiclePopulationGrowth
1.8
RateinIndia(%)
1.7
1.6 12
1.5
10
1.4
1.3 8
1.2
6
1.1
1 4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

2002 2003 2004 2005 2006 2007 2008

Source: The World Bank

Extract 1: Traffic congestion and productivity losses

With growing prosperity in India, an increasing number of people can now afford their own
private vehicles. Public transport is becoming an inferior good for many of them. They prefer
travelling by their own cars to save time, to avoid the hassles of coordination in case of car-
pooling, and to increase their comfort while travelling. The states with the highest number of
motor vehicles per 100 people are Goa, Delhi, Tamil Nadu, Gujarat and Haryana. Delhi has the
highest number of cars per 1,000 people (262). It also has the highest number of vehicles per
km of road length, which thus increases the likelihood of congestion on roads. Often, because of
this, states like Delhi face crippling traffic bottlenecks leading to a standstill in peak hours.

Poor road infrastructure, traffic mismanagement, lack of efficient public transportthe reasons
can be numerous, but at the end of the day, all of this is resulting in an increase in congestion
on roads leading to traffic chaos and ultimately huge loss of time and hence productivity of the
nation. So, the increase in the prosperity of the nation is actually turning into economic losses
for the nation. Also, there are environmental losses with the increase in air pollution, losses due
to increase in accident rates on roads, increase in maintenance expenditure of road
infrastructure, losses due to delays and lost opportunities which collectively cost millions to the
nation each day. This will eventually hamper Indias ability to reach its potential.

Source: Adapted from The Indian Express, Oct 27, 2012

Extract 2: When it Comes to Reducing Car Congestion, Indias Cities Can Learn from its
Businesses

City governments in India are still focused on investing in road expansions and overpass
construction projects rather than curbing car dependence and improving public transport
services. Instead of waiting for local governments to act, a handful of Indian businesses are
taking the initiative to implement transport demand management (TDM) strategies, improving
the productivity of their employees and reducing the social costs of car congestion.

Employer-initiated TDM strategies have been especially common in the information technology
(IT) sector, because most IT employees in India use private cars to commute to and from work.
These strategies have been relatively easy to implement given the availability of information
such as employees origins and destinations, duration, and frequency of tripsfor designing
optimal transit and carpool routes.

Some initiatives have included providing employees with commuter subsidies for public
transport or carpooling. Other businesses have experimented with company buses that
transport workers from nearby metro stations to offices, providing much-needed last-mile
connectivity. These programs have successfully shifted 30-50 percent of the targeted
employees from cars to public transport, resulting in reduced travel times and significant cost
savings for employers. Not only are employees more productive from shorter commutes, bus
and other public transit subsidies are much cheaper compared to private company buses.

For example, Wipro worked with the Bangalore Metropolitan Transport Corporation on specific
routes designed to move workers more comfortably and efficiently. This initiative encouraged
employees to commute by bus rather that private vehicle and is credited with reducing
employee carbon footprint by almost 16 percent in the first year of implementation.

Source: Adapted from World Resources Institute, Anjali Mahendra and Pawan Mulukutla,
June 03, 2015

Extract 3: India Threatens Thai Automobile Industrys Detroit of the East Title

As if things were not bad enough already for Thailands prestigious automotive sector a report
by Standard Chartered Bank (SCB) shows that the countrys claim as the Detroit of the East
could be lost in less than five years. In the first seven months of 2014 the Thai automobile
industry produced 1.1 million vehicles, a 28.5 per cent drop on the same period last year.

In 2009 India became Asias fourth largest exporter of passenger vehicles behind Japan, South
Korea and Thailand and in 2011 became the sixth largest passenger vehicle exporter in the
world, exporting more than 3.9 million vehicles.
While the two countries are presently not direct competitors in the global market yet, they go
head-to-head in several Asean markets. The report notes that several automotive
manufacturers serving the Asean market are increasingly sourcing their engines from India.
The Thai automobile industry has been particularly hard hit due to the political upheavals in
2013 and 2014, with violent anti-government protests, sand-bagged fortress barricades and
daily street marches aimed at strangling Bangkok. These events cast a pessimistic shadow
over the Thai economy. Even the most optimistic prediction for full year Thailand 2014 GDP
forecasts a maximum growth of just 2 per cent 60.78 per cent below the 5.1 per cent in 2014.

Moreover, It has also suffered from a lack of skilled workers as well as low productivity of about
3.69 vehicles per employee, compared with 11-12 vehicles per employee in Japan. The
Federation of Thai Industries (FTI) said the number of skilled workers available to feed the
rapidly expanding Thailand automotive industry is an ongoing concern and developing highly
skilled and knowledgeable workers is crucial.

Source: Adapted from The Establishment Post, John Le Fevre, September 16, 2014

Questions

(a) Compare the trends in population and vehicle population figures in India from
2002 to 2008. [2]

(b) Explain why public transport is considered an inferior good in India. [2]

(c) Suggest a possible reason for the difference in productivity between the Thai and
Japanese automobile industry. [2]

(d) (i) Explain what is meant by the term third party costs. [2]

(ii) Instead of waiting for local governments to act, a handful of Indian

businesses are taking the initiative to implement transport demand
management (TDM) strategies.

Explain why private companies in India would take the initiative to implement
TDM strategies. [4]

(e) Assess whether the subsidy for public transport is the most effective policy in
addressing the congestion problem in the Indian cities. [8]
(f) In the first seven months of 2014 the Thai automobile industry produced 1.1
million vehicles, a 28.5 per cent drop on the same period last year.

To what extent is the rise of the Indian automobile industry the main reason for the
above development in the Thai automobile industry? [10]

Question 2
US economic recovery and its impact on Asia

Extract 4: What Fed's tapering means

The Quantitative Easing (QE) program which began after the financial crisis in 2008 has led to a
growing momentum of US economic recovery. QE kept interest rates low and this had a major
impact on investments and consumption in the US.

The US Central Bank (Fed) has repeatedly linked the QE program with the labour market and
inflation condition. With a stable and improving labour market, there is anticipation for the Fed to
initiate a tapering of the QE program in the near future. The tapering of the QE, which in general
means a reduction in the monthly bond purchase program, may result in a reduction of liquidity
in the market and perhaps a hike in interest rate.

If that is so, corporate borrowing cost may increase with higher interest rate and this can hurt
corporate earnings in the US. With higher interest rates, there is likelihood of USD to appreciate
in the medium term.

Source: Adopted from What the Feds tapering means for Singapore, 6 June 2013

Extract 5: US economic recovery finally taking hold in 2014

The latest government data shows the economy has bounced back sharply in 2014, and that
momentum is expected to carry into next year.There are signs that the 2013 growth slide has
finally given way to what economists call a "virtuous cycle," in which improvement in one part of
the economy feeds into the others, creating a self-sustaining expansion.

America is recovering for a few reasons. While many governments are tightening belts,
Americas is not: for the first time in five years, public spending as a proportion of GDP rose in
2014. American shoppers are flush with cheap credit. Lower oil prices also help, since America
is still a net importer of the stuff.

The pace of the US growth of course, depends on when the Federal Reserve will decide to
begin raising interest rates all the way back to more "normal" levels, and how quickly those
rates begin to rise.
And while the U.S. seems to be back on its feet, the economy in the rest of the world is
stumbling again. China's once red hot growth pace has slowed, and long-running efforts to
revive growth in Europe and Japan continue to come up short. Thatalong with a stronger
dollarcould hurt demand for U.S. exports. But for now, it looks like much of the U.S. economic
recovery is solidly on track.

Source: CNBC, www.cnbc.com, 25 Dec 2014

Extract 6: When US interest rates rise: Singapore wins, Hong Kong loses

Economists at Bank of America (BofA) forecast that the Fed to hike interest rate at every other
meeting in 2015 and 2016, bringing the funds rate to average 3.5% in the long run. But what
would such an increase mean for Asia and its companies?

Asian exports and growth typically strengthened during the past three episodes of US Fed rate
hike cycles" Thats because rate increases are associated with stronger GDP growth in the US.
For at least one market, Hong Kong, the implication is clear. Its banks will have to increase
interest rates as well, because the Hong Kong dollar is pegged to the US dollar. So the cost of
doing business is going to go up, particularly for enterprises with large bank borrowings. For
other economies, the impact is more mixed. The winners, according to the Bank of America
economists, would be the Asian exporters, which include Korea, Malaysia, Singapore and
Taiwan, and the manufacturing companies that sell into the US.

But the GDP improvement in the Asian exporters may not be as strong this time around. Asias
sensitivity to US GDP growth appears to have fallen compared to the past, says Bank of
America.

One reason is the fall in the US share of the global economy, from 33% in 2001 to about 23%
last year. At the same time, Chinas share has climbed to about 12%. So even if US GDP
growth improves Bank of America forecasts 3.3% expansion in 2015, a full percentage point
higher than its 2.3% forecast this year the impact on the exporters may be more muted
because of Chinas economic slowdown.
 Table 1: BofA estimation on the impact on Asias Growth due 1% expansion in the US
and a 1% contraction in China.

Overall impact Impact of +1% US Impact of -1% China

growth growth
Singapore 1.1 1.7 -0.6
Taiwan 0.7 1.25 -0.6
Malaysia 0.3 0.75 -0.5
Korea 0.2 0.45 -0.3
Hong Kong 0.2 1.25 -1.1
Thailand 0.1 0.60 -0.5
Indonesia -0.1 0.25 -0.3
India -0.2 0.05 -0.2

Source: BofA Merill Lynch Global Research estimates

The net impact of the divergent US-China growth may be beneficial for Singapore, Taiwan and
Malaysia because they are electronics exporters, but negative for commodity exporters
Indonesia (coal, palm oil) Thailand (rubber, food), and to some extent Malaysia (palm oil).
The positive impact from firmer US growth (which benefits manufacturing exporters) [could
be] partly negated by weaker China growth (which hurts commodity exporters), reckons Bank
of America. The main mode of transmission would be import demand for goods in the US and
for commodities in China.

How Asia fares will largely depend on how strong the US economic recovery will be in the
coming years, as the Fed normalize interest rates, Bank of America sums up.

Source: www.cfoinnovation.com, 13 Oct 2014

Table 2: Trade of Hong Kong and Singapore

Hong Kong Exports To Singapore Exports To

China 47% China 14%
ASEAN 5.8% Malaysia 12%
Malaysia 3.3% Indonesia 12%
United States 3.2% Hong Kong 7.2%
India 3.1% Australia 6%
Hong Kong Imports From Singapore Imports From
China 50% China 12%
Japan 7.2% Malaysia 10%
United States 5.7% South Korea 8.4%
South Korea 5.7% United States 7.3%
Singapore 3.7% Japan 6.1%
 Source: www.aseanbriefing.com, 2015

Table 3: Summary of the US economy

2011 2012 2013 2014

GDP growth (%) 1.6 2.3 2.2 2.4
Unemployment 8.3% 8% 6.6% 5.7%
Inflation 2.93% 1.59% 1.58% -0.09%
US Government Budget (%GDP) -10.7 -9.3 -6.4 -5.8
US Government Budget balance (US$bn) - 1299 - 1100 - 680 - 492

Questions Source: Various

(a) (i) Describe the trend in the US government budget balance between 2011 and
2014. [2]

(ii) Explain how the trend in the US government budget balance is expected to
affect the US inflation rate. [2]

(b) With the use of a diagram, explain how the Fed's tapering may cause an
appreciation of the US dollar. [4]

(c) Extract 5 explains that the 2013 growth slide has given way to what economists
call a "virtuous cycle".
Using the concept of the circular flow of income, explain how such a change will
affect the equilibrium level of national income in 2014. [4]

(d) With reference to the data, discuss whether economic growth in US is expected to
improve from 2014 and beyond. [8]

(e) Assess the likely impact of an increase in interest rates in the US and divergent
US-China growth on the balance of payments of Singapore and Hong Kong. [10]

[Total: 30]
SRJC

Question 1

From Farm to Supermarket

Figure 1: Price Indices for Farm and Retail Food Products, 2006-2013

Figure 2: Value-Added to Farm Products along the Marketing Chain

*
*Value-Added Marketing Share costs include labour expenses for handling, sorting,
cleaning, and packaging the product, transportation charges to move the product along
at each stage, and fees for processing, storing, insuring, financing, and retailing the
product (e.g., store maintenance and utilities, refrigeration, labelling, shelf display,
advertising and promotional costs).

Table 1: Farm and Value-Added Marketing Share for Major Food Groups
(as % of Final Retail Price)

Food Group Farm Share (%) Value-Added Marketing

Share (%)
Eggs 53.7 46.3
Beef 49.4 50.6
Processed Fruits & 17.0 83.0
Vegetables
Processed Cereals & 8.3 91.7
Bakery Products

Source (Figure 1, 2 and Table 1): Congressional Research Service, Farm-to-Food Price
Dynamics, 27 September 2014

Extract 1: Certain technologies create benefits that affect others in the

community

Agricultural technologies that create spillovers often remain at low levels of adoption
because some or all of the benefits from these technologies accrue to individuals other
than the adopting farmer. For example, practices that conserve water, or control pests
may benefit the wider community, not just the individual farmer. Similarly, the first
farmers to adopt a new technology in a village may benefit other farmers. In all of these
cases, as long as individual farmers are not rewarded for the benefits that they generate
for others, they will invest less in a new technology than is preferable from the point of
view of society.

Source: http://www.atai-research.org, accessed July 2015

Extract 2: How technology can boost African farming

The one area where information technology and communication technologies (ICT) can
have the greatest impact in Africa is in the agricultural industry. One of the largest
challenges traditionally experienced by Africas smallholder farmers has been a lack of
transparent information about the market prices of crops. One service that gives farmers
access to market prices via their mobile phones is called Esoko. Esoko also allows
farmers to place buy/sell orders.

Our goal is simply to put more money into the hands of smallholder farmers, and try to
address the problem of middlemen taking advantage of illiterate farmers who are
frequently disadvantaged price-takers, often selling at a loss. After receiving better
information, income improvements for farmers are estimated to be between 10-30%,
says the company.

Source: http://www.howwemadeitinafrica.com, 18 December 2012

Extract 3: Food fight! Stores, producers, consumers battle over high food prices

In the past year, consumer food prices have increased 4.4%, compared with a 2.9%
price increase for all consumer purchases. The costs of a few foods in particular have
skyrocketed. In 2011, meat, coffee and peanut-butter prices rose 9%, 19% and 27%,
respectively. Increased production costs will continue to mean higher food prices for
wholesalers, and these higher costs will inevitably be passed on to consumers.
Retailers and producers are strategising, and sometimes battling it out head to head, to
try to avoid sudden and exorbitant price increases on consumer goods in order to
keep consumers spending. What has developed is a push and pull between retailers
and producers over which entity will absorb the higher costs. Some of these costs, of
course, are passed off to consumers directly, in the form of higher retail prices.
Companies are trying to innovate and increase efficiency to lower their own costs.
Procter & Gamble is cutting 5,700 jobs. General Mills introduced a smaller Cheerios box
that lowers production costs as well.

Source: TIME online, http://business.time.com, 12 March 2012

Extract 4: British farmers forced to pay the cost of supermarket price wars

You can pick up a punnet of British raspberries on a two-for-one offer in most

supermarkets. But as shoppers reach for that quintessential summer treat, they should
perhaps ponder the fact that it is the farmer, not the supermarket, who is paying for the
generous discount.

The farmer may well be making no profit at all, with no choice in the pricing and little or
no idea, when he picked and shipped the raspberries, how much he would get for them.
Farmers do not talk about these things. Many of them dare not risk annoying the big
processors and shops. There is a "climate of fear" the National Farmers Union's
phrase in the monopolistic world of modern food retail: small farm producers are too
frightened to speak out about the abuses that are impoverishing them because they risk
"reprisals", which may mean losing the only customers there are.
Source: The Guardian, 2 July 2011

Extract 5: Choosing the right strategies for increasing farmers market power
In the face of agrifood enterprises concentration, farmers remain fragmented and are
the only ones to be subject to true competition. In an international context that is
characterised by economic, technical and financial concentration leading to the
increasingly large and powerful firms, farmers are an exception. Most of them are
effectively isolated and small compared to other sectors and especially compared with
the agrifood concerns (processors, distributors and retailers) that are their major buyers.

In this context, farmers can use several strategies to increase their market power.
These strategies can be collective or individual. The collective strategies can be based
on instruments such as market discipline (aimed at managing supply such as quota),
forming cooperatives etc. The individual strategies entail searching for market niches
(eg product differentiation by branding or labelling) and having direct access to
consumer (eg through IT).

Source: Sophia Murphy, Concentrated Market Power and Agricultural Trade, 2011

Questions

(a) (i) Using Figure 1, compare the changes in farm price and retail food price
from 2006 to 2013 .
[3]

(ii) Using Figure 2, explain a possible reason for any difference between
changes in farm price and retail food price.
[2]

(b) With reference to Table 1 and Figure 2, suggest a possible reason for the
difference in the marketing share of the final retail price among the different food
groups. [2]

(c) With reference to Extract 1, explain how the market fails.

[5]

(d) Discuss whether consumers or retailers of food are more likely to bear the
burden of increased farm prices.
[8]

(e) Improvements in technology cannot benefit farmers as much as measures to

help them acquire greater market power. Discuss.
[10]

[Total: 30]
Question 2

Internal and External Imbalances

Extract 6: Changing trade patterns

The relative importance of different countries and regions in specific markets is set to
change markedly over the coming decades, driven by diverging growth performance,
changes in relative productivity and production prices. Notably, China, India, other Asian
economies and Africa are projected to become the dominant players in manufacturing,
while most OECD countries are expected to lose ground.

Figure 3: Countries share in world exports by industry, 2010 and 2060 (%)

Manufacturing Industries Service Industries

15% 15% 9%
23%
19% Rest of OECD
14%
32% 12% Euro Area + UK
24% 12%
North America
17% 22% 36% Emerging Asia*
43%
Rest of the World
29% 21%
*Emerging Asia refers
24% to Southeast Asia,
16% 10%
7% China and India
2010 2060 2010 2060
Source: Trade patterns in the 2060 World Economy, OECD, December 2014

Extract 7: Fragile economies under pressure

The "fragile five" Turkey, Brazil, India, Indonesia and South Africa are considered
particularly vulnerable to an exodus of foreign capital as the prospect of higher interest
rates diverts funds back to the US in search of higher returns. The fate of the fragile five
is important, not least because they account for more than 12% of global GDP, and
have contributed almost one-fifth of world economic growth since 2009.

Ben Bernanke, the Fed chairman, has argued that emerging markets will ultimately
benefit from policies that are designed to create a stronger US economy. He, along
with the world's policymakers, will be hoping that the waves in emerging markets
created by the winding down of the US Federal Reserves quantitative easing
programme will prove to be a bump on the road to global recovery, and not the
beginning of a fresh crisis. Here we look at the problems that some emerging markets
are facing.

Brazil

According to the IMF, the government budget deficit of Latin Americas largest economy
will reach 3.3% of its GDP this year, while the current account deficit is estimated at
3.6%. Brazils trade balance in 2013 is the worst for 13 years.
Meanwhile, consumers are now laden down with record levels of debt. The countrys
decade-long consumption binge has helped drive annual inflation close to the 6.5%
ceiling of the central banks tolerance band, forcing the government to enforce costly
fuel subsidies to help cap prices.

Brazil has also been steadily increasing interest rates in the battle against inflation and
a weakening real the currency which has fallen by about 15% against the dollar over
the past year. Rates have risen by 3.25% points over the past nine months, and the
central bank's latest move was to push them up a further half-point, to 10.5%, in
January. Economists are expecting another rise this month.

But growth prospects are deteriorating. Some analysts had expected the tightening of
monetary policy to stop after the economy shrank in the third quarter of 2013, for the
first time since 2009. But the increases have continued, underlining some of the
unenviable choices faced by the country's policymakers.

India

In 2013, Indias current account deficit reached a record of 4.8% of GDP, in part due to
high gold imports. The yellow metal is one of the biggest contributors to the countrys
trade imbalance, second only to oil.

The government budget deficit of India is expected to reach 7.2% of its GDP and the
current account deficit 2.4% in 2014. Like several of its emerging market peers, India
raised interest rates last week, in its case by a quarter-point, to 8%, in an attempt to rein
in consumer price rises and prop up the currency.

It was a surprise move by Asia's third-largest economy, with analysts predicting no

change before the decision was made. Inflation has been slowing, but consumer price
inflation remains high: it was close to 10% in December. The Reserve Bank of India has
proposed a target of 4% inflation by 2016.

Despite these figures, the country is currently lifted by optimistic sentiments as reform-
minded Narendra Modi won the election, while the current account deficit has narrowed
rapidly as exports improved, remittance inflows remained solid and higher import duties
and quantitative restrictions discouraged gold imports. In addition, non-oil, non-gold
imports have declined in line with weak domestic demand, and capital inflows have
strengthened.

Indonesia

Indonesia resisted increasing interest rates for a second month in January, against a
backdrop of stable inflation, at 8.4% in December. The central bank said it was closely
monitoring the impact of the Fed's tapering programme, after growth in south-east
Asia's largest economy slowed to its weakest rate in four years last year, with a poor
trade position and the outflow of foreign capital taking their toll. The current account
deficit is expected to be around 3% of its GDP. The rupiah was the worst-performing
emerging market currency in 2013, down around a fifth against the dollar.

The Indonesian government and central bank (Bank Indonesia) are making efforts to
curb the current account deficit and combat high inflation. Therefore, it kept the
benchmark interest rate at the relatively high level of 7.5%.

Adapted from The Guardian & www.indonesia-investments.com, February 2014

Extract 8: Only structural reforms can reduce current account deficit: ADB

The Asian Development Bank (ADB) forecasts that Indonesias economic growth will
soften slightly to 5.7% in 2014, before picking up to 6.0% in 2015, ADBs country
director for Indonesia, Adrian Ruthenberg, said in a release made available to The
Jakarta Post on Tuesday. The current account is also projected to post a deficit for
2015.

The ADB said reducing Indonesias current account deficit, which is mainly caused by
trade deficit in the oil and gas sector, would remain a challenge in 2014 and beyond.
Domestic oil output has been in a state of decline for almost two decades due to a lack
of investments and exploration in combination with maturing oil fields and, secondly,
domestic fuel consumption has risen sharply in recent years amid solid economic
growth and generous government fuel subsidies. Structural factors have also
contributed to the problem. The deterioration that started in 2003 suggests that
Indonesias export competitiveness, particularly in manufacturing, has eroded. The
rupiah has appreciated in real effective terms, and labour productivity in manufacturing
has fallen below rates achieved in neighbouring countries.

To address this challenge, Indonesias government has taken steps to slow domestic
demand, spur exports, and dampen imports, said Edimon Ginting, ADBs deputy
country director for Indonesia.

Source: The Jakarta Post, April 2014 & Asian Development Bank, 2014
Questions

(a) (i) Using Figure 3, describe the changes in the relative shares of world
exports of manufacturing and services for North America and Emerging
Asia between 2010 and 2060.
[2]

(ii) Explain how the concept of opportunity cost can be used to explain the
changes you observed in (a) (i). [4]

(b) Using AD/AS analysis, explain how emerging economies can benefit from a
stronger US economy.
[4]

(c) Explain a possible link between the level of interest rates in a country and its
exchange rate. [2]

(d) (i) Discuss whether Indonesia or India should be concerned with its current
account deficit. [8]

(ii) Using the data provided and your own relevant knowledge, discuss the
factors that might influence a governments choice of policy options when
faced with the twin problems of current account deficit and inflation as
described in the case study. [10]

[Total: 30]
TJC

Singapores Transportation System

Table 1: Top 3 most important public transport attributes1

2011 2012 2013 2014

1) Travel Time Travel Time Travel Time Travel Time
2) Waiting Time Safety / Security Waiting Time Safety / Security
3) Reliability Waiting Time Reliability Waiting Time

Source: Land Transport Authority, Singapore

Extract 1: Singapore reveals 3 economic solutions to traffic congestion for Asian peers

Traffic congestion reduces a countrys potential for creating prosperity. Singapore identified this
early in the piece and was able to create an effective system of incentives and constraints so
traffic wasnt a hindrance to economic growth.

Its always a shock when people first hear about how much itll cost to get behind the wheel of a
brand new Honda Jazz in Singapore. After hitting a low of S$3,864 in March 2011 the Certificate
of Entitlement (COE) for a new car will now set you back over S$70,000. When you add on the
additional registration fee, the level of which ratchets up to 180 per cent of the Open Market
Value of the vehicle, you end up paying 2-3 times the regular price of the car.

By increasing the price of vehicles, the COE system restricts the amount of people that want or
are able to buy a car. Twice a month, the Singapore Land Transport Authority runs an auction
process for the available COEs. The amount of COEs is determined by a quota system.

Further to the quota system and additional registration fees that new car owners need to pay,
theres also the Electronic Road Pricing (ERP) system that incentivises drivers to avoid certain
areas at peak times. Costing about the same as a cup of coffee, passing underneath an ERP
gantry can cost a normal car up to S$5 during peak hours. If drivers arent in a rush theyll think
twice before turning down a road that could lead them to an ERP gantry.

Source: Singapore Business Review, 24 July 2013

Extract 2: Fare regulation framework

Public bus and train services are provided on a commercial basis, within the maximum fares
approved by Public Transport Council (PTC). The Government does not provide direct
subsidies for public transport operations.

To keep public transport fares affordable to the general public, public transport infrastructures
such as MRT/LRT lines and bus interchanges are funded entirely by the Government. In

1
Land Transport Authority (LTA) has conducted the Public Transport Customer Satisfaction Survey since
2006. The annual survey measures regular commuters satisfaction with Singapores mass public
transport services, namely bus and Mass Rapid Transit (MRT) services.
addition, public buses are also exempted from COE payments. The Government also pays for
the development and software cost of the contactless smartcard system. Therefore, bus and
train operators are only responsible for operations, maintenance costs and investments in
service improvements.

In regulating bus and train fares, the PTC carries out its statutory mandate to safeguard public
interest by keeping fares affordable while ensuring the long-term financial viability of the public
transport operators.

Source: Public Transport Council, Singapore

Extract 3: Singapore transport fare hike draws protest

About 400 people protested on Saturday against what they said were unjustified increases to
public-transport fares in Singapore, marking the first major show of public dissent here this year.

Protesters gathered at Hong Lim Park in central Singapore, the only place where
demonstrations are allowed here, to criticize a state-appointed panels decision last week to
approve a 3.2% increase to public bus and rail fares that will take effect in April. Their rally
comes amid growing public disquiet over perceived inadequacies in public transport, and follows
a series of disruptions to subway services in recent weeks.

Why is the government allowing the fare hike now, when it should first tackle the ongoing
problems with our trains and buses? said Dennis Khew, a 41-year-old sales executive who
joined the protest.

Subway networks run by SMRT Corp. and SBS Transit, a unit of ComfortDelGro, have been
plagued by repeated service disruptions, including severe breakdowns in December 2011 that
stranded hundreds of thousands of commuters for hours. Citizens have also complained of
overcrowding on buses and trains, as well as what they say is an inadequate taxi industry that
doesnt provide sufficient cabs for commuters during peak hours.

Source: The Wall Street Journal, 26 January 2014

Extract 4: Despite push for public transport, a love for cars endures

The Government has invested huge amounts of money to improve public transport as it seeks
to wean Singaporeans off their cars. There will be 99 new trains by 2019, and 450 new buses
by 2017 on top of the 550 already added in recent years. By 2030, there will be new rail lines,
more covered walkways, and a 700km cycling network.

Non-constituency Member of Parliament Gerald Giam, 38, in a Facebook post last month said
that he had given up his car. He told TODAY that he did so after the COE for his second-hand
2005 Toyota Corolla Altis expired. With the duration of his journeys now two to three times
longer compared to when he drove, Mr Giam said that advance planning is essential before he
and his family leave home.
But people like Mr Giam are the exception, not the norm. Transport analysts noted that
Singaporeans soft spot for automobiles is tough to eradicate.

Source: Today, Singapore, 17 July 2015

Questions

(a) Explain whether public transport in Singapore is a public good. [2]

(b) Using a diagram, explain why there is need for the government to intervene in the market
for private transport in Singapore. [6]

(c) Analyse the impact of higher COE prices on the market for public transport [4]

(d) Discuss whether rail fares charged by public transport operators in Singapore should be
regulated. [8]

(e) Discuss the extent to which factors influencing price elasticity of demand are relevant to
the Singapore government in encouraging the switch from private to public transport
through policies mentioned in Extract 1. [10]

[Total: 30]
VJC

Health Care Systems

Table 1: Health expenditure, 2013
Government
Total (% of total health
Country (% of GDP) expenditure)
Singapore 4.6 39.8
United
Kingdom 9.1 83.5
United States 17.1 47.1
Source: World Bank

Table 2: Health indicators, 2013

Life expectancy at birth Infant mortality rate
Country (years) (per 1,000 live births)
Singapore 82 2.2
United
Kingdom 81 4.0
United States 79 5.9
Source: World Bank

Extract 1: Health care systems

The single payer national health service model

In this system, health care is provided and financed by the government through tax payments,
just like the police force or the public library. Many, but not all, hospitals and clinics are owned
by the government. Patients never get a doctor bill. These systems tend to have low costs per
capita, because the government, as the sole payer, controls what doctors can do and what
they can charge. Countries using this model include the United Kingdom (UK), Spain, most of
Scandinavia and New Zealand.

The single payer national health insurance model

This system uses private-sector providers, but payment comes from a government-run
insurance program that every citizen pays into. Since theres no need for marketing, no
financial motive to deny claims and no profit, these universal government-run insurance
programs tend to be cheaper and much simpler administratively than private American-style
for-profit insurance. National health insurance plans also control production costs by limiting
the medical services they will pay for. This system is found in Canada.

The market driven health care model

Only the developed, industrialised countries have established health care systems. In poor
countries, the basic rule is that the rich get medical care; the poor stay sick or die. In rural
regions of Africa, India, China and South America, hundreds of millions of people go their
whole lives without ever seeing a doctor.
The United States (US) is unlike every other country because it maintains separate systems for
separate classes of people. When it comes to treating war veterans, it is like Britain. For
Americans over the age of 65 on Medicare, the system is like in Canada. For the 15 percent of
the population who have no health insurance, the US is like rural India.
Source: Physicians for a National Health Program, http://www.pnhp.org.
Accessed on 6 June 2015

Extract 2: Why Is American health care so ridiculously expensive?

The US medical system is absurdly expensive. The average routine office visit in the US is
three-times more expensive than in Canada. The average CT scan is five-times more expensive
than in Canada.

In The Healing of America, T. D. Reid explored why American medicine in general falls behind
other countries in quality while it races far ahead in cost of care. One reason offered by Reid is
that unlike other countries, the US government doesn't manage prices. While some developed
countries have one health care insurance plan for everybody - where the government either sets
prices or oversees price negotiations - the US is unique in its reliance on private for-profit
insurance companies to pay for both essential and elective care.

However, it's not like all this money buys the US nothing. American health care is the world's
envy in some categories, especially in cancer care, wait times, and access to new technologies
for affluent and insured families.
Source: The Atlantic, http://www.theatlantic.com, published on March 27 2013.
Accessed on 6 June 2015

Extract 3: Cost of ageing population Singaporeans' top worry

The number one worry of Singaporeans is the cost linked to the growing pool of old folk,
according to a global survey commissioned by global insurer Swiss Re. Singapore is projected
to have one in five people aged 65 or older by 2030. As the country greys, a critical quotient is
the gap between the cost of meeting people's needs in health care and what is available from
government schemes to cover these costs. A Swiss Re study found that if government health
care expenditure remains at the same proportion of GDP as in 2010, the gap in Singapore will
grow from US$100 million (S$124 million) to US$600 million by 2020. How to reduce this gap
was a topic discussed at a Swiss Re closed-door symposium, attended by regional life insurers,
academics and government officials. Popular solutions raised include the government focusing
on early intervention and promoting healthy living.
Source: The Straits Times, 23 Oct 2013

Extract 4: Health care financing in Singapore

The Singapore governments philosophy on healthcare and, more generally, social

welfare financing has largely been shaped by the countrys first Prime Minister, Lee
Kuan Yew, who often stressed that a welfare state was not viable for Singapore
because it bred dependency on the government, and led to wastage and over-
consumption. The governments approach is that the individual, and not the state, is
expected to bear the main responsibility for meeting his/her needs in healthcare.
Health care financing in Singapore is commonly known as the Subsidies plus 3M
framework. It comprises 1) government subsidies for health services obtained at public
healthcare institutions, 2) a mandatory savings account (Medisave) that induces
individuals to save for their hospitalisation expenses, including those that will be
incurred during retirement, 3) a catastrophic medical insurance scheme (MediShield)
designed to address medical episodes that are infrequent in nature, but impose high
financial impacts, and 4) a means-tested financial assistance scheme (Medifund) which
serves as a safety net of last resort for patients who cant afford subsidised care even
after using Medisave, MediShield and seeking help from their families.
Source: Lee Kwan Yew School of Public Policy, http://lkyspp.nus.edu.sg/wp-content/.../csu_healthcare-
financing-final_2207.pdf
Accessed on 6 June 2015
Extract 5: Key policy shifts to alleviate medical costs

Following the announcement by the Finance and Health Ministers of Singapore in early
2013 that the government was reviewing the countrys health care financing framework
with a view to having the State shoulder a larger share of healthcare costs, the Health
Minister has shared that the governments initiatives on healthcare affordability include:
1. Making outpatient costs more affordable by expanding government subsidies and Medisave
use, to reduce cash outlay for patients.
2. Enhancing MediShield to better cover large bills and provide life-long coverage for all
Singaporeans and permanent residents. The scheme will be renamed MediShield Life. The
government will provide subsidies to ensure that the premiums for MediShield Life are
affordable by all.
Source: Singapore Ministry of Health, 29 Aug 2013

Figure 1: Singapore governments budget position (surplus and deficit)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Straits Times Graphics, http://graphics.straitstimes.com

Accessed on 15 August 2015
Questions
(a) Explain what could be inferred from Figure 1 about the change in the [2]
Singapore governments reserves from 1999 to 2013.

(b) Using Table 1, compare health expenditure as a percentage of GDP [2]

 by the US and UK governments. Justify your answer.

(c) The average CT scan is five-times more expensive (in US) than in [5]
Canada. (Extract 2)
Justify if this difference in price is due to price discrimination.

(d) Using the concept of opportunity cost, explain how rising health care [3]
expenditure caused by an ageing population will impact a countrys
economic growth.

(e) With reference to the data, discuss whether the single payer national [8]
health service model is superior to the market driven model of health care
system.

(f) In view of the publics concern with health care affordability, assess the [10]
Singapore governments move to bear a larger share of total health care
spending.