ECONOMETRIC MODEL OF SINGAPORE ECONOMY

Mr Chng Hee Kok asked the Minister for Trade and Industry if he will give an update on the econometric model developed by his Ministry for the Singapore economy, including the degree of accuracy of this model for economic forecast.

BG Lee Hsien Loong: Mr Speaker, Sir, the formulation and estimation of the equations for the econometric model of the Singapore economy have largely been completed. The aspect of the model dealing with inflation was published in the second quarter issue of the 1987 Economic Survey of Singapore. Other aspects will be released in due course.

Constructing the model has helped us understand the structure and linkages of the various sectors of the economy better. Some of these include:

The fact that in the international economy, Singapore is a price taker, both as a seller of products in the export market and as a buyer of raw materials, intermediate inputs, capital and consumption goods in the import market.

Secondly, the impact of profitability on private investment. Thirdly, it has shown how critically our export performance depends on our cost competitiveness and on the growth of OECD economies.

Fourthly, it has established the link between inflation and exchange rate changes and nominal wage increases which exceed productivity growth.

The model has been useful in simulating and estimating the effect of various policy changes, eg, how increased public expenditure on construction will affect the GDP growth, or the consequences of the October stock market crash on our economy, directly through its effect on our domestic consumption and investment expenditure, and indirectly through the effects of a slowdown in the US economy.

To forecast economic growth, MTI has developed an index of leading indicators as well as short term forecasting models. Details of the index of leading indicators were pulished in the 1987 third quarter issue of the Economic Survey of Singapore. This index enables us to forecast overall GDP growth. The estimate is verified against sector by sector estimates, based on short term forecasting models and surveys of business expectations. The estimates are regularly revised as more information on actual growth and business expectations come in.

Mr Chew Heng Ching: Sir, may I ask the Minister whether he is aware of other econometric models developed by the academicians and professional institutions and whether the forecast of the economy from these models will also be taken into consideration?

BG Lee Hsien Loong: Mr Speaker, Sir, I think the University has got certain partial models of the economy and I am sure other private banking institutions like Nomura or some of the Wall Street firms would have some basis for the estimates which they publish every year. As you know, no two models produce exactly the same result and we look at all the data. If our forecast is way out of line, we go to some trouble to try and understand why.

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