SO FAR SO GOOD, BUT WHERE DO WE GO FROM HERE?
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http://www.todayonline.com/articles/65713.asp
Augustine H H Tan
[email protected]
FORTY years after independence, Singapore can be proud of its
economic
achievements. Per capita gross national product, or GNP, rose from
US$528
($871) in 1965 to US$25,191 last year - an increase of over 47
times.
...
Per capita income comparisons suggest that there is still plenty of
room.
Ireland, with a population of four million, has a per capita income
of
US$34,280. Finland, with a population of 5.2 million, has US$32,790
per
capita, while Switzerland, with a population of 7.4 million,
has
US$48,230 per capita.
Singapore has a high competitive ranking of third place, according
to the
Switzerland-based International Institute for Management
Development
(IMD), but it ranks 28th in per capita income. Something is clearly
amiss.
What's wrong?
Unlike advanced economies, Singapore is investment-driven,
particularly by
foreign investment. Investment in machinery and equipment (38 per
cent of
total) is closely correlated with the electronic cycle. Investment
in
construction and works (47 per cent) is languishing because of the
long
downturn in the property sector.
There was therefore negative growth in Gross Fixed Capital
Formation for
1998 to 1989 and 2001 to 2003, which resulted in poor economic
growth.
Consumption spending did not help, as the wage share of GDP is only
about
42 per cent, unlike the advanced countries share of over 55 per
cent.
Fiscal policy is normally deflationary because, in view of the
openness of
the economy, counter-cyclical deficit spending is regarded as
ineffective.
Monetary policy is the outcome of exchange rate policy, which tends
to
favour a strong Singapore dollar. The theory is that, weakening the
dollar
would not be helpful, because the import content of manufacturing
exports
is high at 70 per cent.
The strong dollar policy is also deemed to be necessary for a
major
financial centre. Other services tend to be neglected in the
scenario and
consequently, business services, tourism and the medical sectors
suffered
in the aftermath of the Asian Currency Crisis.
Small countries like Singapore will face increasing economic
volatility
due to the accelerating pace of globalisation, quickened by the
rapid
ascent of China, the liberalisation of the Eastern European
countries and
India.
A giant in the neighbourhood
The rapid rise of China alone poses severe threats: It took the
United
States 130 years to increase its share of global GDP from 1.8 per
cent to
27.3 per cent but China will take only 35 years to increase its
share from
3.2 per cent (1980) to 20.3 per cent (2015).
What China offers the world is a huge internal market but
Singapore's
non-oil exports are mostly electronic semi-manufactures, which can
be made
elsewhere, especially in China and India.
What we need to develop is branded goods for the huge consumer
markets
that are developing in China and India.
Singapore has opted for high-tech and highly capital-intensive
investments
such as chemicals, pharmaceuticals and biotechnology.
Unfortunately, the
job creation capability is very limited and the input-output
linkages with
the economy small.
Moreover, much of the research and development, or R&D, talent
has to be
imported. In the meantime, established companies such as
Creative
Technology and Maxtor pulled out their factories, causing about
5,000 job
losses each. The high-tech lab left behind by homegrown
Creative
Technology is no consolation.
Herein lies a lesson in growing our own multinational corporations
(MNCs):
Their bottom line, and not patriotism, dictates the location
of
production.
If this is so, then the investment in our external wing will not
assure
Singapore of jobs and dependable income from abroad, as production
moves
abroad and even headquarters may not be here for long, as foreign
tax
incentives prove irresistible.
Don't think small
Singapore has to brace itself for an industrial hollowing-out
process. The
current account surplus amounts to over 30 per cent of GDP, which
is
unprecedented!
Profits of MNCs and foreign nationals not re-invested here mean an
outflow
of capital. Has Singapore reached a stage where such firms and
foreigners
are pulling out more than they bring in? The Government needs to
monitor
the situation carefully.
Singaporean investors have taken the Government's "Go regional, go
global"
message too seriously. There are Singapore firms that, after
establishing
a foothold in China and learning the ropes of doing business
there,
re-locate their Singapore factories overseas.
It is time to sit down with our businessmen and talk about what to
invest
and how to create jobs here. If everybody thinks that Singapore is
too
small, it will grow even smaller.
We also need to learn from other
countries like Switzerland about how to
keep unemployment down (4 per cent) even with low economic growth.
Foreign workers comprise one-quarter of Switzerland's labour
force.
When there is a downturn, foreign workers with short-term permits
absorb
the impact. Finland, on the other hand, has only 45,000 foreign
workers:
Its structural unemployment is consequently more severe - 8.8 per
cent.
The Finnish economy is high tech but very volatile: Its fortunes
depend
very much upon Nokia. It should also be noted that much of its
research is
industry-oriented rather than the frontier type.
Singapore has to move towards
"value innovation" rather than solely
patent-producing type innovations.
Value innovation
Dell Computers is a good example of value-innovation, based on a
concept
of zero-inventories and removing the middlemen role. "Singapore
girl" has
been a highly successful Singapore Airlines value-innovation.
Toyota's
Lexus is another example: Providing premium quality at less cost
than BMW
or Mercedes Benz.
As the China and India markets grow there will be great
opportunities to
exploit, but Singapore has to be nimble enough in policy-making and
skills
to take advantage.
The issue of immigrant labour has to be examined carefully. We
need
foreign talent but we should not destroy Singaporeans' morale in
the
process. It would be an irony if, because of discouragement,
homegrown
talent migrates abroad while new talent comes in. Somewhere in
there is a
balance. We also need young immigrants to alleviate the ageing
problem
without exacerbating structural unemployment in the process.
To sum up, for Singapore, the
halcyon days of depending largely on the
MNCs of the world to generate rapid growth are over. They have
greener
pastures now and Singapore has to discover niches for itself
quickly or
else adjust painfully to a new era of much slower
growth.
Structural unemployment can only get worse in a slow-growth
environment
and the ageing of the population will compound the problem
To alleviate these problems, the Government will have to
manage
immigration policy carefully, use macroeconomic policies
judiciously, and
draw down the dividends of the problematic external wing to
re-distribute
in ways that will not erode the work ethic.
The writer is a Practice
Professor of Economics at the School of
Economics and Social Sciences in Singapore Management University
(SMU).
His views do not necessarily reflect those of SMU.
