Singapore's limits

Poh Ah Pak SG

Singapore's limits

The Wall Street Journal

It's time to rethink the corporatist model.

It's not often that a Singaporean official concedes the limits of the city-state's economic engineering. But the downturn is proving so severe that the Finance Minister said in yesterday's budget speech that the government's stimulus package "will not get us out of the recession," but rather "help avert an even sharper downturn."

That ought to be a wake-up call for Singapore, where government built a modern metropolis by hoarding its citizens' capital, plowing those savings into designated industries and opening itself up to foreign trade.

Yesterday's S$20.5 billion ($13.7 billion) package -- a whopping 8% of GDP -- looks like past stimulus plans: a broad mix of supply-side measures to help businesses, public-sector spending and cash handouts to stave off social discontent. What it doesn't acknowledge is that Singapore's growth model itself needs rethinking.

The export-led economy is falling on its face. Minister Tharman Shanmugaratnam predicts the city-state is "likely to experience" the deepest recession in its history. The government will tap its reserves to help pay for the stimulus package. Growth contracted 16.9% in the fourth quarter last year.

The Ministry of Trade and Industry has revised down GDP forecasts twice this month already, and expects the city-state's growth to contract 2% to 5% this year. The pain is now leaking into the domestic economy as consumers retrench.

Singapore's economy would be more resilient if it were better balanced. Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%. Yesterday's budget doesn't do much to change long-term incentives to consume. The government announced a 20% income-tax rebate for one year, but no permanent cuts. Nor did it cut the 7% goods and services tax. Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods.

The government could unleash more productive, sustainable growth by trimming back its public sector and allowing the economy to diversify on its own. Cutting the corporate tax to 17% from 18%, as it announced yesterday, will help attract investment.

But the city-state's bureaucrats have a habit of trying to pick winners, which sometimes works and sometimes doesn't. In recent years the bets have been on financial services, biotechnology and gambling. Yesterday's budget contained special tax incentives for the fund-management industry. Better to let private actors make those decisions based on market forces.

Mr. Tharman said yesterday that "no one knows how prolonged or deep this recession is going to be" and he pledged further measures to help if needed. The best help for Singaporeans would be expanded, permanent opportunities to work, save and invest with more of their own money, rather than relying on government to do it for them.

http://online.wsj.com/article/SB123264905073306835.html#articleTabs%3Darticle

Fantagf SG

Great article

Poh Ah Pak SG

Are our economic priorities right?

Singapore's non-oil domestic exports (NODX) crashed 20.8 percent in December 2008 from the same month 2007, significantly worse than economists had been expecting. This followed an already bad 17.5 percent fall November to November. "It was the eighth straight month of contraction for the NODX", reported Channel NewsAsia. [1]

Prime Minister Lee Hsien Loong was shown on television last night saying that the GDP growth forecast issued by his government just 2 weeks earlier must now be revised. That forecast said that Singapore might see at best 1 percent growth in 2009, at worst, minus 2 percent. I assume it is the minus 2 percent figure that needs revision.

[Update 21 January 2009: The Ministry of Trade and Industry, in a new press release, said the GDP forecast for 2009 is a contraction of 2 to 5 percent. See Addendum 1]

A week earlier, the Tourism Board revealed that we received 10.1 million visitors in 2008, 2 percent fewer than in 2007 [2]. The worst months were the more recent ones. November 2008 saw 9.7 percent fewer visitors compared to the same month a year earlier [3]. I don't seem to see the December figures anywhere, but I doubt if they are any rosier.

Singapore Airlines announced that it will be cutting 214 flights to Europe, Australia, China and India in the first quarter in response to falling passenger numbers. [4]

Indeed, the economic gloom is a pretty global phenomenon and is now hitting us through our exports and tourism, but it should also be noted that of all the countries in Asia, we were the first to tip into a recession. This happened when our third quarter shrank 6.8 percent from the second, following the second quarter's 5.3 percent decline from the first. A recession is defined as two consecutive quarters in which the GDP shows negative growth. [5]

I got the above figures from a Press Release dated 21 Nov 2008 issued by the Statistics Department:

"Singapore's GDP contracted by 0.6 per cent in year-on-year terms in the third quarter 2008. On an annualised quarter-on-quarter basis, growth declined by 6.8 per cent compared to a fall of 5.3 per cent in the second quarter." [6]

Preliminary indications are that the fourth quarter GDP would show a whopping, seasonally adjusted decline of 12.5 percent. On 2 January 2009, the Statistics Department said:

"Advance estimates show that Gross Domestic Product (GDP) in the fourth quarter contracted by 2.6 per cent in real terms over the same period in 2007, following the decline of 0.3 per cent in the preceding quarter. On a seasonally adjusted, annualised quarter-on-quarter basis, real GDP fell by 12.5 per cent compared to a decline of 5.4 per cent in the third quarter of 2008." [7]

Official figures are expected on 21 January.

Lay-offs have already occurred, but we have hardly seen the worst. Post-Chinese New Year, there will surely be a flood of bad news.

Next week, Parliament will begin debating the new budget, and a lot of focus, no doubt, will be on how we can alleviate the pain. While important, it is not the only kind of question we can ask. A different question might also be worth pondering: Are we following the right economic model?

* * * * *

There are number of features of our economic model that we should be aware of. Partly, they are a natural consequence of our small size and economic history, but equally, they are engineered through developmental policy. Have they been the wisest moves?

Consider this: We were the first Asian country to go into a recession, and then, not slipping by one or two percent in the declining quarters, but tumbling head over heels five, six and now twelve percentage points, as mentioned above.

If we look at a graph for the last 12 years, you'll see that our economic performance, while not bad overall, has tended to booms and busts. We've had two busts in the last decade and we're now into our third. It feels like we're riding rodeo.

I sometimes wonder how much of that is due to the way our economy is structured. A large percentage of Singaporeans produce goods and services for export; we do not produce for our domestic needs. Instead we import just about everything we need. Look around your own home -- from the corn flakes to the TV set, to the shampoo. Look too at the nationality of your domestic maid, if you have one, or the guy who is sweeping the void deck at 6 a.m. in the morning. (Yes, our town councils insist that municipal workers must wake up at that unearthly hour to do cleaning -- why, I have no idea.)

We earn money from abroad and we basically spend our money buying things and services from aboard. We are therefore highly exposed.

But if our economy were slightly different, and more of us were producing and consuming domestically, we'd be a bit better cushioned.

Let me give you a simpler, layman's example. Take a household where all adults go out to work and earn cash. None of them looks after the kids, cooks, does the laundry or cleans the house. Paid help comes in to do these things. In fact, no adult family member even knows how to cook, change diapers, mop the floor or wash clothes.

Everything's hunky-dory so long as the outside jobs are good and highly paid, but the moment the jobs disappear and cashflow dries up, the adults are stuck. They still have to pay the maid, cook, cleaner, gardener and washerwoman, not to mention the plumber, electrician and housepainter, because they don't have the ability to do any of these tasks themselves. If they don't keep the help, they go hungry and unwashed, so they have to retain the "imports". This is a household that can go from plenty to broke.

Take another household. Some adults go out to work, but they decide that one or two should stay at home to raise the kids, cook meals, do the laundry etc. In addition, they grow their own vegetables in the little plot of land they have, or maintain an aquaponics garden on their balcony. The situation still gets bad if outside jobs disappear, but at least meals continue to be cooked, the children are bathed, the clothes washed and mended.

Which household do you think Singapore resembles?

Our domestic economy is very weak and we have become too reliant on our export economy. Doubtless, our government will say that this cannot be helped, since Singapore is so small. We don't have the economies of scale to produce things for ourselves. And protectionism is no cure.

This is too glib. While indeed, we can never be as self-reliant as big countries are, I think there have been three policy "old faithfuls" that have contributed to the way things are and may need to be reexamined.

Investing in the export-oriented sector, neglecting the domestically-oriented sectors

The first is that we have consciously directed our investments at export-producing industries. And by investments, I mean investments in people as well. The technicians we train from among Singaporeans end up working in multi-nationals' (MNCs') factories. The technicians who come to fix our air-conditioner at home are from Myanmar. Why is that?

MNCs are treated royally when they locate here. They get all sorts of grants and research support. Local enterprises geared for the local market are, relatively speaking, starved of assistance, propagandistic news headlines notwithstanding. Over the years, one side thrives, the other side struggles and is eventually replaced by imports.

Widening income gap reduces domestic consumption, constraining market for domestically-oriented industries

The second factor is the income gap that we have allowed to widen. It is a well-known fact that rich people save more than poorer ones. Not only that, when they do spend, they spend proportionately more on luxuries, which must be imported brand names to have any cachet.

The result is that domestic consumption is kept down in favour of either money stashed away in bank accounts by those who have loads of them, or spent on BMWs and cooking lessons at Le Cordon Bleu in Paris. When domestic consumption is kept down, the industries that supply this side of the economy tend to wither.

Star-struck by economic fads

The third "old faithful" is our tendency to chase the latest economic fad in an attempt to maximise our external income. When IT was the rage, we put all our eggs in that basket. Then it was bioscience. More recently, when financial wizardry was in fashion, we let it nearly dominate our economy, and referenced the obscene salaries in that industry as our benchmarks. Each has led to grief.

But how else to grow fast unless we ride with the latest trends? What's wrong with hitching ourselves to the growth engines of the day?

They problem may well be that these "growth engines" tend to be bubbles. That's why they grow (inflate) the way they do. Why are we so starry-eyed? This characteristic may be why our economy goes into booms and busts.

At no point am I advocating protectionism, which is the raising of barriers to imports, investment or even the movement of people with skills. The question I pose shouldn't be reduced to a simple yes/no question of resorting to protectionism or not. The question is: Have we deliberately pursued for years a policy of domestic disinvestment, in our vain effort to be a high-flyer?

http://www.yawningbread.org

Fingolfin_Noldor SG

Meh.. I have argued with God Knows how many fuckers that we need to have a more balanced economy. They always give the same refrain: We are too small! Have they ever fucking decided to try think beyond that? Nyet. They just go on and on about it.

Well, good luck to them. Our economy is going down the shit hole, and even companies like Intel is closing down factories. Intel shut down 2 factories (or something) in Penang. We are soo... screwed. Not even all the help the government give in this budget will do us any good if they don't address the root cause of hte problem.

And very few fuckers think about the implications of the CPF system. It is a tax, and no less a tax. Tehy will return money, but it is still a lost opportunity cost! To use the proper economics word. Oh well, we reap, what we sow.

reyes SG

i am never supported of the current ruling regime, but this economic downturn i could not fault them either. this economic downturn not about how our economy should be structure. The whole world is in recession. the diversity of the american economy is bearing the crunch right now.

all i could question about the stimulus budget is dipping into reserves when we our govt still has back up fund available and how easily our president agree to hand over the second key. the president at least has to give a TV speech to explain his rational of handling over the keys and how he plan to safeguard the keys to the reserves. to be frank, i dont have much confident in our president role.

Fingolfin_Noldor SG

Everyone is suffering, but we will suffer more because we are so export oriented.

On the issue of our reserves.. you are talking about a former civil servant who spent his lifetime learning to only follow orders. What did you expect?

AndrewPKYap SG

The reason Singapore is doing so badly, triggered by the US crisis, no doubt (but anything could have triggered it as the economy was sitting on a time bomb anyway) because the despots are greedy, bent on controlling the economy and doing business so as to "legally" siphon public money into their own pockets and enable them to feed their cronies and dogs that is licking their asshole and tasting their sh!t.

In addition to feeding their dogs, people like Dr Chee Soon Juan that opposed the cursed and jinx family directly is made bankrupt and sent to jail again and again ...

How is it I could say that Singapore's economy will be in deep sh!t in this forum from way back in July 2007, if my analysis that the dishonorable despots are damaging the economy is wrong?

AndrewPKYap SG

The PAP method is "jiak bay pah, yaow beh si" economics while they cash in with public money disguised as "doing business" using public funds.