For a long time, growth has been one of the most important subjects of study for economists. In recent decades, in particular, the issues of erratic growth patterns experienced by emerging economies have increasingly caught the attention of academics and policymakers. Volumes of literature have been written on theories and strategies on growth for emerging economies in attempts to explain why initial spurts of growth experienced by them ran out of steam by the 1980s. Related to the issue of erratic growth pattern is the increasing macroeconomic volatility experienced by many of these emerging economies. Notably, the causal link of the two issues works both ways. In some instances, macroeconomic shocks arose as a result of endogenous imbalance caused by erratic or unhealthy growth. In others, the volatility from exogenous macroeconomic shocks eventually impacted adversely on domestic economy, causing growth to sputter.

In recent years, the tackling of the twin-problems of growth and volatility have taken up new urgency as financial and real economic crises happen in increasing frequency and intensity and hurt growth. As the global markets become more and more integrated, volatility spread rapidly especially within a region as a result of contagion. The emerging economies are especially susceptible to the increasingly hostile external environment because of their inability to build a firewall to isolate their domestic economy against the full wrath of such external shocks as well as their lack of resources and institutional mechanisms to implement countercyclical measures quickly to ameliorate the adverse impacts of such external shocks.

The emerging economies have long faced a number of difficult challenges in designing macroeconomic policy frameworks that would help to promote monetary and financial stability. Their central banks, in particular, face a unique set of challenges.[1] To start with, many central banks lack independence. Many are under the statutory purview of the finance ministry and end up eventually as the government’s cash till. Even if they are statutorily independent, they can be buffeted by various political forces, resulting in the loss of operational independence. Very often, operational independence is also constrained by other conflicting macroeconomic objectives. For example, the objective of maintaining a fixed exchange rate can often limit the scope that the central bank has in using policy instruments such as the interest rate to pursue an independent domestic monetary policy aimed at managing domestic activity and inflation.[2]

Second, central banks in emerging economies also face the problem of fiscal dominance. The root of the issue is that in many of these countries, fiscal policy serves important redistributive functions and their governments builds its legitimacy to rule based on fulfilling that.  As a result, monetary policy often became adjunct to a fiscal policy that is characterized by persistent deficits and rising public debts. For example, central bank may be coerced to maintain low interest rates to minimized government’s debt financing burden. This, however, complicates monetary policymakers ability to manage inflation expectations.[3]

Third, the conduct of monetary policy for emerging economies is often hampered by a weak transmission mechanism arising from the underdevelopment of the financial system. Generally, deep and liquid financial markets not only provide important feedback to the government through their market actions about market sentiments and expectations with regards to the monetary policy, they also facilitate the transmission of the monetary policy. In the absence of well-developed financial markets, therefore, central banks may be handicapped in its use of policy tools such as money stocks and interest rates.

Next, central banks in emerging economies are also finding it difficult to isolate monetary policy from external influences as a result of the increasing openness of their economy. Even though many have imposed capital controls to better manage their exchange rates, money stocks and interest rates.  Despite so, increasingly, sophisticated international and domestic investors have managed to bypassed capital controls measures put in place by government of emerging economies. Take, for example China whose policymakers are determined in tightening controls on inflows to dampen asset inflation and speculation. Yet, money has been pouring in through different channels in recent years.[4]

Finally, in addition to the abovementioned institutional limitations, many central banks in emerging market economies are also constrained by their lack of technical capacity to model the economy to help them implement monetary policy. Structural changes in the economy also demand that modelling and forecasting techniques evolve to stay relevant. The problem is often further compounded by the dearth of accurate and timely macroeconomic data upon which simulations can be carried out and decisions made.

In short, all the institutional and technical constraints faced by central banks inexorably translate into macroeconomic volatility that in turn contributes to the sputtering growth patterns faced by many emerging economies. Of course the challenges mentioned are by no means the only problems faced by emerging economies in managing macroeconomic volatility. A sampling of the plethora of issues that have been raised by economists includes the following: What are the pros and cons of different monetary policy frameworks? Has rising openness to trade and financial flows made monetary policy less effective in achieving domestic objectives? What institutional frameworks can help in increasing the effectiveness of monetary policy transmission in less developed economies?  How can capital controls be imposed to reduce volatility without sacrificing growth? How should monetary policy respond to endogenous and exogenous shocks?

As early as the 1990s, the World Bank began a series of reviews as part of the overall efforts to build sustainable growth among developing countries. It was noted that not all emerging economies experienced the same inconsistent growth patterns. In particular, eight East Asian economies – Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia – stand out because of their ability to sustain unusually high growth rates over an extended period of time. Collectively, these highly successful East Asian economies were dubbed as the ‘East Asian Miracle” by the World Bank in 1993.[5] Among them, Singapore, as one of the four Asian Tigers, became one of the most quoted examples of a successful example of a low value-add labour-intensive economy succeeded in transforming itself into not only a high value-add technology-intensive manufacturing base but also a hub providing professional services to businesses within the region.

Since its independence in 1965, Singapore has gone against the tide and achieved consistent economic growth for the past four decades despite its puny size and lack of natural resources. Even though Singapore began at the same start line with many developing countries which gained independence after the end of the Second World War, the city-state has chalked up an impressive average growth rate of 8.1% between 1965 and 2007. Today, Singapore is one of the few non-OECD countries that have a living standard comparable with the developed countries.

It is against this background that I first looks into the issue of volatility and tries to provide a perspective of how Singapore has managed to achieve macroeconomic stability over the last few decades when many other developing countries were constantly embroiled in one financial crisis after another. In particular, special attention is given to the roles played by exchange rate-centred monetary policy as well as its increasingly matured financial markets in fostering economic growth and overcoming financial crisis. In-depth analysis will also be conducted with regard to Singapore’s strategies in responding to challenges posed by two recent crises (i.e. the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008) to see how they can serve as lessons for other developing countries. Lastly, this dissertation will also show how Singapore consistently attempts to turn crises into opportunities. The exploitation of emerging opportunities in the aftermath of crises has helped to reposition the city state to enable it get ahead of its regional competitors which are less responsive in responding to the challenges because of structural and financial constraints.

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[1] See Hammond, Kanbur and Prasad (2009)

[2] See Goodfriend. (2004)

[3] See Sims. (2005).

[4] See Prasad and Wei. (2007).

[5] See World Bank. (1993).

7.1 Problem of Growing Income Inequality

Contents

7.1  Problem of Growing Income Inequality
7.2  Inclusive Growth Underpinned by Rise in Productivity
7.3  Re-evaluating Singapore Growth Strategy

Moving into 2010, the economic continues its robust recovery. GDP grew at a record pace of 14.5% compared to the contraction of 0.8% in 2009. Overall, manufacturing sector grew by a stunning 29.7% while the services sector, which makes up about two-thirds of the economy, expanded by 10.5%. With the opening of the integrated resorts, the ‘arts, entertainment and recreation’ sector grew by an astounding 123.5%. A record 11.6 million tourists visited Singapore and their spendings amounted to $18.8 billion.

The sterling economic data, however, hid an increasing strain attributable to the ballooning foreign population. The strain was already beginning to show before the onset of the global financial crisis in 2008. Even when the economy was expanding prior to the crisis, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same time. Efforts to position Singapore as a global city and to move into higher-end technologically- and knowledge-intensive industries led to the shortage of professionals with both the relevant skills and international exposure. On the other hand, the hollowing out of low value-add manufacturing operations resulted in an excess of unskilled workers. The problem was exacerbated by the fact that Singapore was importing not only highly-skilled professionals. Many unskilled low-cost labourers were also brought in to do menial works shunned by the unemployed Singaporeans.[1]

The end result is that income gap has been widening between the high skilled, whose wages are pushed up by shortages, and the unskilled, whose wages have been depressed by low-cost foreign workers. Since the turn of the century, even though the economy as a whole registered impressive growth, in particular after 2004, the unequal distribution of income persisted. Between 2000 – 2005, for example, the lower income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3% fall in average household income, while the 21st to 30th income decile group saw a 0.5% decline.[2] Consequently, between 2000 and 2007, the Singapore’s Gini coefficient climbed from 0.444 to a high of 0.489. It moderated to 0.481 in 2008 and 0.478 in 2009 only because of the financial crisis (See Figure 7.1).[3]

Figure 7.1 : Gini Coefficient among Employed Households (2006 – 2009)

Source : Singapore Department of Statistics. “Key Household Income Trends, 2009.” February 2010.

Despite putting up a vehement defence for its policy actions, the government has been quick in responding to the grouses of the poor. With rising discontent, government’s inaction can upset the social cohesiveness and put a crack line in the “Total-defence” concept that underpins the government’s effort to enhance Singapore’s national security.[4] The riot and bloodshed in Thailand in May 2010 is a stark reminder of the consequence of inequitable redistribution of the fruit of economic growth. The rural-based red-shirt faction represents the dispossessed class that feels that it has been unfairly excluded from the country’s economic growth by the urban-based elites. Even though the Thai government, which has the support of the urban elites, succeeded in forcibly quelling the protestors, long term social order depends on its ability to address the grievances of the economically dislocated rural class in order to close the rift.

So, what has the Singapore government done in response to the trend of rising Gini coefficient? Right from the start, the government has put in place measures that provide subsidised services such as public housing, education and healthcare. These services help to ensure that the lower-income group are able to maintain a minimum standard of living and that their offspring receive quality education so that there is equality in opportunity. In addition, the greater amount of subsidy received by the low-income groups also means that their higher real incomes in turn help to lower the post-subsidy Gini coefficient (See Figure 7.1). On top of these permanent measures, the government has also initiated several programmes to help the poor and the dislocated since the 2001 General Election when the opposition drove a ‘new poor’ campaign to make the plights of the low income a political issue.

High on the list of those programmes is the provision of subsidies by Workforce Development Agency for approved training courses as well as bonus payments when training under the new Workfare Training Supplement scheme is completed. The emphasis on retraining ensures that dislocated workers can as far as possible be re-equipped with new technical skills and diverted into emerging industries. Besides assistance associated with retraining, financial support in the form of cash supplements from the Workfare Income Supplement (WIS) has also been offered to families in financial distress. Older low-wage workers also received a boost in their retirement funds through the CPF component of the WIS. In addition, the government put forth a host of measures covering education, housing and healthcare. In public housing, for example, other than the concessionary loan from the Housing Board for the housing mortgage, various grants are also provided for the purchase of public flats. For education, in addition to bursaries, students received top-ups to their Edusave accounts. As for healthcare, the government has also set up a Medifund from which low-income families can tap to pay for their medical bills.[5]

In times of extreme economic hardship, the government has been quick to implement relief packages to ameliorate any adverse impacts of economic shocks on the lower-income households. In February 2008, for example, to help Singaporeans cope with the rising inflation, relief measures including Growth Dividends, enhanced Marriage and Parenthood measures, personal income tax rebates, and utility rebates were implemented as part of the Budget. In November the same year, in the aftermath of Lehman Brothers’ collapse, the Skills Programme for Upgrading and Resilience (SPUR) was introduced to ramp up training and at the same time to keep the workers stay employed. In February 2009, as the global financial crisis evolved into the Great Recession, a S$20.5 billion (8.2% of GDP) Resilience Package was introduced to cushion the impact of the worst economic contraction since Singapore’s independence. Even though many of the measures were for companies, the aim was to help workers stayed employed.[6]

All in all, therefore, the government has indeed been responsive to the grouses of the people. Special transfers by the government to the poorer segments of the society have increased in recent years and to finance such transfers, the constitution has been amended to unprecedentedly allow the government regard the returns from the investments of the country’s reserves as fiscal revenue. Despite all the government’s efforts, however, there are indications that discontent is still smouldering, not only from those structurally unemployed but also from those who have managed to hold on to a job. What they have on their wish list is a secured job with rising income, not just ad hoc relief measures when the time is hard. In that regard, the workers have little leverage against the employers given that the trade unions have relinquished their collective bargaining role since the 1980s.[7] Singapore’s MNC-driven growth model means that a large proportion of a company’s earnings is likely to be repatriated rather than recycled among the local population as wages. As a result of the workers’ lack of bargaining power, wages constitutes only 43% of Singapore’s GDP, compared to 58% in the US and 57% in Japan. Conversely, profits make up about 46% of Singapore’s GDP, extremely high compared to other developed economies.[8]

7.2  Inclusive Growth Underpinned by Rise in Productivity

To quell discontent over stagnating income, the government launched a new economic strategy through the Economic Strategies Committee (ESC) on February 1, 2010.[9] Among other things, the new strategy calls for a switch from the ‘growth at all costs’ to an ‘inclusive growth’ approach to ensure that weaker segments of the population would not be left behind. This would be achieved by a push to raise productivity from the 1% recorded over the last decade to 2 – 3% over the next ten years so that wages, in particular for the lower income segments, can rise in tandem. The aim is to raise the median income by an average of 2.8% a year or a total of one-third to S$3,100 by 2020.[10]

For the strategy to succeed, businesses must try to grow qualitatively by upgrading, not just by expansion using more low-cost unskilled foreign workers. To ‘persuade’ businesses to invest in better equipment in order to raise productivity, measures to increase foreign worker levies based on a tiered system were announced in February 2010. These measures would make it increasingly costly to employ many lower- and semi-skilled foreign workers. On its part, the government is committed to spending S$5.5 billion on productivity-related initiatives over the next five years.

Similar productivity movements were also launched in the 80s and 90s but policy measures implemented then were not ‘exploited’ fully because of a ready supply of low-cost foreign-labour. As such, there is no shortage of sceptics that the current renewed effort will peter out again especially when global demand improves. Their scepticism is based on the projection that to achieve a GDP growth rate of more than 6%, employment growth rate must exceed 4%.[11] With a population that is expanding at less than 2% annually, a substantial jump in productivity is needed to compensate for shortfall in number of workers. Given that discernible productivity improvements are not likely to materialize in the short term, there seems to be no alternative to importing more foreign workers. Hence, despite the official rhetoric, the number of foreign workers is likely to continue growing albeit at a slower rate than in the previous decade.

In spite of the reservations, however, internal and external conditions may be really different this time round to warrant optimism for the renewed impetus. During the 1980s, even with the influx of foreign workers, income was still growing for all segments of the workforce. Workers who lost their jobs then could easily find employment in other areas of the economy. Hence, few felt the pain from loss of jobs then. Fast forward two decades and Singapore’s external environments have fundamentally changed and become less favourable because of mounting external competition. For the workers, the motivation is not only the higher wages that come with the productivity improvement. If productivity continues to languish and industries lose competitiveness, companies may be forced to relocate and more people will lose their job. This time round, those unemployed will stay unemployed unless they acquire new skills and get re-deployed to new growth areas.

The upgrading process cannot be just a one-time affair.  Policymakers need to nurture a culture of life-long learning in order to keep up with the incessant upgrading the economy has to undergo in the future. The competing regional economies are entering an investment-driven high-growth phase which Singapore already enjoyed in the past decades. They are upgrading their capabilities aggressively and will in time catch up in more industries. A case in point is the growing threat from China as a result of the emergence of sophisticated production networks due to agglomeration effects. A high proportion of Singapore’s exports to China comprised of upstream components to support downstream assembly operations in China. With the entire production network now gradually being localised in China, the scope for Singapore’s export has been significantly reduced. In addition, China has the advantage of a huge and relatively yet untapped consumer market which serves as a strong pull factor for attracting FDI. Hence, as MNCs rationalize their operations, relocation of operations out of Singapore is likely to continue in the future, contributing to more structural unemployment.

The stark message for Singapore workers, especially those in the low- and middle- income segments, is therefore that they need to increase their productivity to remain competitive or face a downgrade in their standards of living. Raising productivity to ensure that Singapore remains competitive is therefore not an option but an absolute necessity. The collapse of demand in the West due to the Great Recession is largely cyclical and hence not the root of the problem. Even if global demand fully recovers, the sobering truth is that certain jobs will not return to Singapore. [N.B. Read the article on Inclusive Growth for a more in-depth look at the issue.]

7.3  Re-evaluating Singapore Growth Strategy

Just as the Asian Financial Crisis enabled Singapore to see both problems and opportunities relating to its financial sector, the lull provided by the Great Recession also afforded Singapore the break to re-evaluate its growth strategy. This time round, the ESC, which had eight sub-committees[12] comprising representatives from the public and private sectors, was also tasked to review Singapore’s medium term economic strategies in five broad areas: seizing growth opportunities, strengthening corporate capabilities, growing human and knowledge capital, creating quality jobs and real wage growth for Singaporeans to foster inclusive growth, and optimising the use of scarce resources.[13]

In February 2010, the ESC released its reports outlining its recommendations to the government.[14] Besides the aforementioned strategy to grow output not only by expanding workforce but by increasingly workers’ productivity to foster inclusive growth, the report also calls for an economic restructuring and qualitative transformation of the Singapore economy based on six other strategies.

First, Singapore must continue to enhance its position as a global city as well as an Asia hub so that it can grow both high-value complex manufacturing and international services. The committee envisages that Singapore will eventually retain a globally competitive manufacturing sector at between 20% to 25% of the economy.

Second, Singapore needs to build a vibrant and diverse corporate ecosystem that comprises of a mix of large and small enterprises, be they local or foreign. In particular, Singapore must help to strengthen the capabilities of the local companies so that they can internationalize to become globally-competitive Singapore enterprises.

Third, Singapore must not only intensify efforts to build R&D capabilities, but should also seek to reap greater economic benefits from its R&D investments by emphasizing on commercialization of new ideas.

Fourth, in order that energy does not become a limiting barrier for a small and resource-constrained country like Singapore, the city-state must strive to become a smart energy economy or an economy that is resilient, sustainable, and innovative in its energy use.

Next, given that Singapore is also land-constraint, the economy should accelerate its shift towards higher value-added and more land-efficient activities.

Finally, to achieve all the above, Singapore must continue to attract foreign talent by making the city-state an endearing home with the best quality of life in Asia.[15]

Along with the seven strategies, many specific proposals were put forth by the various subcommittees. To illustrate, let’s take the need to shift to more land-efficient activities for example. In order to make better use of land and the transport system, it has been suggested that economic activities be decentralized across the island. Also, to achieve greater economies of scale in terms of land and operations, a feasibility study has been proposed to evaluate the possibility of constructing a consolidated port at Tuas (an area in the island’s south-western part where an industrial park is sited) in the long term. The freed-up port land at the existing Tanjong Pagar Port can then be re-developed as a new waterfront city. Finally, an even more radical idea is the development of underground space as a means to intensify land use. Specific plans to catalyze the fruition of this revolutionary vision include developing a subterranean land rights and valuation framework, and establishing a national geology office.

It is too early to tell at this point whether the strategy works. The switch to ‘inclusive growth’ is timely but may be perceived as mere rhetoric since concrete benefits to the general populace may not be discernible by the next election, which must be held by February 2012. Voters’ unhappiness with the inequality in income distribution may cause a backlash for the government at the ballot box. Without a viable opposition, the ruling party is certain to be returned with a majority but the level of support it receives in terms of percentage of vote will reveal the voters’ underlying sentiment. Given the dominance of the ruling party, even if a swing in vote occurs, its impact on the future direction of policymaking in Singapore is hard to tell, unless if the swing is by a substantial margin. Without a strong opposition, the motivation for engaging in populist welfarism to win vote is mitigated. Still, with the Gini coefficient set to rise further, there will be an inexorable increase in transfers to the poor even just to maintain the post-subsidy index at the current level.

More than ever, Singapore’s economic development is at a critical juncture where highly sought-after foreign talent plays an increasingly indispensable supplementary role in bringing policymakers’ vision of a vibrant global city to fruition. Changes in the external competitive environment also dictates that the economy speeds up on its upgrading and restructuring by importing more foreign talents to leverage on the world-class soft- and hard-infrastructures while the city-state still commands those advantages. But domestic discontent arising from dislocation caused by the changes demands that growth be inclusive in order for it to be sustainable. This problem of external motivation for change versus internal inertia to maintain status quo has long been a conundrum of globalization that no government has yet found a solution to. It remains to be seen whether the city-state’s two-track pro-poor but not anti-rich strategy supplemented by ad hoc compensatory measures can succeed in substantially lifting the earning of the low income amidst high economic growth. Until then, one can only say that, at best, income distribution in Singapore is technically not inequitable and economic growth is not anti-poor.

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[1] Factories, for example, have difficulties recruiting Singaporeans to staff their night shifts without which the unit cost of production would be much higher.

[2] See Singapore Department of Statistics. (2006)

[3] Straits Times. “A Global, Vibrant Singapore.” December 31, 2009.

[4] The Total Defence concept encompasses the government’s efforts in protecting the Singaporean’s way of life through 5 pillars: military defence, civil defence, economic defence, social defence, and psychological defence. Economic defence is about achieving a better life for everyone. Social defence is about making people living in harmony looking out for one another. Hence, the unequal distribution of benefits, if unchecked, will inexorably negate government’s efforts in the building of economic and social defence.

[5] Straits Times. “No lack of help for low-wage workers.” March 5, 2010.

[6] One of the key features of the package, for example, was the $4.5 billion Jobs Credit Scheme, which involved giving cash grants to employers to subsidize part of their local wage bill.

[7] See Leggett. (2005A, 2005B).

[8] Straits Times. “Look beyond GDP for true measure of welfare.” July 21, 2010.

[9] See Economic Strategies Committee. (2010).

[10] Straits Times. “Goal 2020 timely and significant.” July 16, 2010

[11] Straits Times. “Shift to ‘quality’ growth a big change: Experts.” January 27, 2010.

[12] More information on the ESC and its various sub-committees is available at the website: http://www.esc.gov.sg.

[13] See IMF (2009)

[14] See Economic Strategies Committee. (2010).

[15] In a survey conducted by ECA International, Singapore has been voted to offer the best living environment for Asian expatriates. See Channel News Asia, “Singapore offers best living environment for Asian expats: Survey”. March 24, 2010.

6.1 Third Recession in Thirty Years

Contents

6.1     Third Recession in Thirty Years
6.2     The Economic Review Committee (ERC) Report 2003 – A New Economic Master Plan
6.3     Seeking New Sources of Growth Underpinned by Innovation and Creativity
6.4     Seeking Growth by Pushing for Trade
6.5     Structure of Singapore Economy as of 2006
6.6     2007 Subprime Mortgage Loan and the Great Recession

Just as the regional economy was recovering in the aftermath of the Asian Financial crisis, the new millennium heralded a series of unsettling events that happened in quick succession.

In 2000, the NASDAQ dot-com bubble reached its peak and began to decline thereafter. By 2001, the bubble was deflating at full speed. On September 11 the same year, airplanes hijacked by terrorists ramped into and brought down the Twin Towers of the World Trade Centre in New York City. The events wrought havoc on the United States and world economy. As a result, Singapore’s economy experienced its worst recession in thirty years when its GDP declined by 2.4% in 2001.[1] However, given its strong fundamentals, the economy soon managed to recover as external environment improved the following year, registering 4.2 per cent in GDP growth (See Table 6.1).

Table 6.1 : Economic Growth by Sectors (2000 Market Prices – Change in %) 2002 2003 2004 2005 2006 2007 2008 2008Q3 2008Q4 2009Q1 2009Q2 Total 4.2 3.1 8.8 6.6 7.9 7.7 1.1 0.0 -4.2 -9.5 -3.5 Goods Producing Industries 3.9 1.1 10.5 8.0 10.7 7.2 -1.0 -6.2 -6.5 -17.4 0.5 Manufacturing 8.4 3.0 13.9 9.5 11.9 5.9 -4.1 -11.0 -10.7 -24.1 -2.4 Construction -14.0 -9.0 -6.1 0.7 3.6 18.2 20.3 26.0 18.5 24.4 18.6 Services Producing Industries 4.0 3.3 7.6 7.0 7.7 8.1 4.7 5.5 -1.3 -5.1 -4.8 Wholesale & Retail Trade 8.2 10.6 15.6 9.8 10.3 7.4 2.6 4.5 -5.3 -14.8 -13.8 Hotels & Restaurants -2.4 -8.7 11.5 7.6 7.4 4.9 1.2 0.0 -0.1 -5.6 -6.2 Transport & Communications 6.3 – – – – – – – – – – Transport & Storage – -1.7 10.4 5.8 6.1 5.0 3.1 3.8 -2.4 -9.7 -10.3 Information & Communication – 4.6 6.0 5.3 6.6 6.5 7.2 7.7 5.4 1.9 0.3 Financial Services -3.4 7.6 5.4 8.4 11.7 15.7 5.5 5.6 -8.1 -7.7 -4.5 Business Services 3.9 -1.0 2.8 6.0 5.3 9.1 7.4 8.2 5.2 3.8 2.7 Source :  Economic Survey of Singapore, 2005, 2008 and 2009Q2; http://www.singstat.gov.sg/stats/keyind.html

The recovery, however, was interrupted by another confluence of negative events in 2003. The combination of bird flu which infected poultry in large parts of Asia and the Severe Acute Respiratory Syndrome (SARS) near-pandemic outbreak severely affected regional economies. Enterprises in the travel, tourism and hospitality sectors bore the brunt of the economic slowdown as tourists stayed away from the region because of bird flu and SARS. In March the same year, the U.S. launched its war against terrorism by invading Iraq. The combination of events put a further damper on the still weak recovery and growth in Singapore slowed to 3.1 % in 2003.

6.2     The Economic Review Committee (ERC) Report 2003 – A New Economic Master Plan

In respond to the contraction in 2001, the government established the Economic Review Committee (ERC) to comprehensively examine the status of the national economy. In February 2003, the committee released a report that reiterated the vision of Singapore as a leading global city that functions as a hub in the new Asian and global economic network, with a knowledge-driven and diversified economy.[1] To realise this vision, the ERC identified six key areas which had to be developed:

Firstly, Singapore needed to expand external ties by embracing globalisation and linking to the developed economies in order to attract investment and expand our markets. The report recognized that the main drivers of Singapore’s economic growth remained the US, the EU and Japan even though Asian markets were growing in importance.

Secondly, Singapore needed to remain competitive and flexible in the face of growing competition for investments and export markets. This would be achieved by lowering direct taxes (corporate and personal income tax) and raising the indirect Goods and Services (GST) taxes. The restoration of employers’ CPF contribution, which was previously reduced, would also be deferred to lighten the burdens of businesses. Also, the employees’ contribution rate for workers aged 50-55 would be lowered from the present level of 20 per cent to 16 per cent to make older workers more employable. At the same time, wages must be made my flexible to move in tandem with the more volatile business cycles. Steps would be taken to ensure that pricing of infrastructure services would remain competitive.

Thirdly, Singapore must continue to upgrade and build a knowledge economy powered by innovation, creativity and entrepreneurship. The role of the government-linked companies (GLCs) was brought up again in its discussion on promoting entrepreneurship.  The report cautioned the government to avoid crowding out the private sector by providing services which the private sector could offer. Even though the committee reaffirmed the constructive roles played by GLCs, it reiterated the need for the GLCs to be run strictly on commercial principles and be subject to the discipline of the market. In addition, GLCs with little growth potential or has no strategic significance should be divested. Furthermore, innovative ways must be found to enable deserving start-ups and SMEs, whether they are high-tech or low-tech, to obtain funding. Also, Singapore companies must be encouraged to venture overseas in order to tap emerging regional opportunities. At the same time, foreign entrepreneurs and SMEs could be attracted to Singapore to consolidate the city-state’s position as an entrepreneurial hub.

Fourthly, Singapore must continue to develop the manufacturing and services sectors as the twin engines that drive our economic growth. The report identified four key manufacturing clusters which had already formed the core of the high value-add activities: electronics, chemicals, biomedical sciences, and engineering. At the same time, efforts must also focus on developing new capabilities in emerging technologies such as micro-electromechanical systems, nanotechnology and photonics. In particular, R&D efforts in the research institutes, universities and industry needed to be strengthened in order to create and exploit IP. Efforts must also be stepped up in encouraging MNCs to make Singapore as a key node in their global R&D networks. As for services, the report projected a growing demand for high-end, better quality educational and medical services especially from the burgeoning middle classes in high-growth countries such as China and India. At the same time, Singapore must continue to upgrade, liberalize and further develop established industries such as trading and logistics, information and communications technology (ICT), financial services, and tourism. Also, as the economy becomes more innovation and knowledge driven, Singapore needed to enhance the protection and commercialization of intellectual property (IP). The report recommended the setting up of an IP Academy to promote Singapore as an IP management centre. [3]

Next, the report recognized the importance of people to make all the vision come true. Besides stressing the needs for continuous manpower planning and training, the committee emphasized the importance of nurturing a strong research culture among young Singaporeans through exposure and postgraduate education. Besides continuing to attract foreign talents to augment our talent pools, the government should also engage overseas Singaporeans so that the latter stay rooted to Singapore.

Finally, the committee projected increasing job displacements due to perennial economic restructuring. Assistance must be provided to older Singaporeans who would find increasing difficulty in finding re-employment.

Hence, the seminal ERC report released in 2003 was more than just a response to the economic contractions in 2001. In effect, it outlined the master plan for Singapore’s economic development at the turn of the century. Building a globalized, entrepreneurial, and diversified economy became the major goals of government policy.

6.3     Seeking New Sources of Growth Underpinned by Innovation and Creativity

Around the same time when the ERC 2003 report was being prepared, ground works were being laid for the transformation of the Singapore economy based. Several institutional changes were made to facilitate the implementation of the strategies and to address emerging challenge.

One such challenge was to find new sources of growth through unlocking the workforce’s innovativeness and creativity, an attribute which the Singapore workers were not known for. The task fell on Product and Standards Board (PSB), the agency set up in 1996, by merging the National Productivity Board (NPB) and the Singapore Institute of Standards and Industrial Research (SISIR), to raise productivity. Since its inception, PSB had launched initiatives such as the two ten-year plans Productivity Action 21 in 1999 and SME 21 in 2000, both aimed at raising productivity at the worker and enterprise levels. Another ten-year plan Retail 21, was launched in 2001, to improve the working of the retail industry which was a key segment of the services sector.

In terms of productivity improvements, considerable progress has been made since the 1990s. In fact, the Singapore workforce has been rated top by BERI for a record 21 consecutive years since 1980. Switzerland retained second position this year, followed by Belgium, Japan, Taiwan and the US. In 2002, the US-based institution, BERI (Business Environment Risk Intelligence), once again ranked Singapore workforce first. Of the four factors that were assessed by BERI, Singapore earned top marks for three: Legal Framework, Relative Productivity and Technical Skills. For the fourth factor Worker Attitude, Singapore was ranked third after Japan and Switzerland.[4] Especially when other institutional factors were taken into considerations, Singapore workforce as a whole fared relatively well.

Another reason that contributed to the increasingly better performance of the Singapore work force is that past investments in software and physical infrastructure were beginning to bear fruit. The turn of the century marked the distinct transformation of the Singapore economy from investment-driven to increasingly productivity-driven. After almost four decades of high investments, Singapore’s competitiveness began to improve. In 2003, the country’s ranking in the Growth Competitiveness Index (GCI) improved from 7th to 6th in 2003. In the same year, Singapore improved its ranking in Business Competitiveness Index (BCI) marginally to the 8th position, making it the top-ranked Asian country on the index, outstripping Japan (13), Taiwan (16) and Hong Kong (19). According to the 2004-2005 Global Competitiveness Report published by the World Economic Forum, Singapore’s economy was the seventh most competitive in the world.

However, to achieve the vision stipulated in the ERC report, Singapore needs to harness the potential of its workforce more than just in terms of productivity. This is especially so as the competition for investments and export markets have intensified over the years with more economies in the region embracing open door economic policies. Consequently, some of Singapore’s hub roles had been duplicated by lower cost regional rivals. To keep ahead, Singapore needed to move beyond just looking at improving productivity. Instead, its workforce had to increasingly fall on innovation and creativity to create new values that the world demanded.

With this shift in emphasis to creativity, innovation, and entrepreneurship as new sources of productivity growth as laid out by the ERC report, PSB’s original mission of pursuing productivity had become inadequate. According, it was renamed, in 2001, as SPRING Singapore, which stands for Standards, Productivity and Innovation for Growth, to signify the shift towards an innovation-driven economy. With the change, it assumed new role in promoting creativity to sustain growth for Singaporeans by focusing on the following three areas in particular pertaining to SMEs: productivity and innovation; standards and quality; and development and training programmes. In line with that mission, SPRING Singapore launched a wide variety of SME and start-up support schemes to provide them with assistance in financing, capacity building, and networking.

6.4     Seeking Growth by Pushing for Trade

Another institutional change that took place to facilitate the implementation of the new economic master plan was the renaming of Trade Development Board to IE Singapore in April 2002. The move symbolically reflected TDB’s transformation from an agency that played a traditional role of merely trade promotion to one that would assist in the internationalization of Singapore-based companies.  Under its Connections, Competency, Capital (3C) assistance framework, IE Singapore undertakes to help Singapore companies build and strengthen business connections, develop robust competencies to succeed in global marketplace, and build financial management capabilities as well as providing access to capital for overseas market development.

To achieve its goals of providing connections, IE Singapore has established a global network of overseas locations, Honorary Business Representatives (HBRs) and Business Advisors in over 30 locations worldwide. Besides providing market information, it also assists Singapore companies in carrying out feasibility studies and finding overseas partners. Its earlier efforts included the setting up in 2001 of Network China, a premier networking platforms that help Singapore-based enterprises to foster connections as well as share timely information, ideas and experiences. This was followed by Network India and Network Indonesia in 2002 and 2003 respectively. In addition, IE-Singapore also set up offices in Dalian of Liaoning in 2004, a liaison office in the capital of Shaanxi, Xi’an as well as its Latin America office in Sao Paulo, Brazil in 2005. In 2004 and 2005, MOUs were also signed with Singapore Representative Office of the German State of Brandenburg, the Asia Pacific Cooperation Centre in St Petersburg, the China Council for the Promotion of International Trade (CCPIT), the Busan Metropolitan City Government and the Busan-Jihae FEZ Authority, Wuxi Municipal Government, Shandong Provincial Department of Foreign Trade and Economic Cooperation, Shaanxi’s Department of Commerce, and Tianjin Binhai New Area (TBNA) Administrative Commission to either promote two-way trade and investment flows or to set up an office in Singapore.  In 2005, IE Singapore also signed a Memorandum of Agreement with World Bank Group to promote trade and investments with developing member countries. [5]

To equip Singapore companies with competencies for their internationalization efforts, several capability development and market development initiatives covering areas such as alliance formation, branding, product design, distribution, financial management, intellectual property, internationalisation road-mapping and human resource planning have been launched by IE Singapore through its Capability Development Group. For example, the International Partners (iPartners) programme launched in 2003, helps Singapore companies to form alliance so that they can combine their resources, complement their product offerings, achieve economies of scale, or pursue bigger projects. The International Market Immersion Programme (iMIP), helps companies to send staff for overseas market attachments so that they can gain relevant market expertise to help their companies internationalise successfully. The International Business Fellowship (iBF) Programme, helps to give exposure to participants and opportunities for learning in supported markets of Central Asia, China, India, Latin America, Russia, the Middle East or Vietnam. Where necessary, IE Singapore also works in collaboration with other government agencies. For example, assistance in helping companies to brand their products for overseas markets is carried out in collaboration with SPRING Singapore in an initiative known as BrandPact. Assistance in helping companies to improve product designs is carried out in collaboration with DesignSingapore Council and SPRING Singapore through an initiative known as Design for Enterprises (DEF).

Finally, to provide Singapore-based companies access to capital for overseas expansion, a series of initiatives and programmes has been developed. They include the Enterprise Fund, the Loan Insurance Scheme 3, the Internationalisation Finance Scheme, and the Trade Credit Insurance Programme.

The works of the Capability Development Group within IE Singapore is complemented by the Trade Group which promotes awareness and utilisation of the various Free Trade Agreements (FTAs) through consultations, seminars or FTA-related publications and CD-ROM. In addition, the Trade Group seeks to broaden the base of exporters and to anchor international traders in Singapore through the Global Trader Programme (GTP) launched in 2001. Under the programme, global trading companies are encouraged to use Singapore as their regional or global base to expand activities into the region and beyond. The programme has successfully created a vibrant cluster of global trading companies, including key players in industries such as oil trading, petrochemicals and agri-commodities and metals.

6.5     Structure of Singapore Economy as of 2006

Meanwhile, the recovery gained momentum against the background of strong growth in developed countries, especially in US. Inflationary pressures also eased with lower oil prices. With strong external demand, the Asian economies regained their resilience.[6] Singapore’s economy also expanded at a healthy pace from 2004 onwards. Between 2004 and 2007, GDP growth average 7.75% per annum (See Table 6.2).

Table 6.2 : Structure of Singapore Economy (based on GDP at 2000 Market Prices, %) Industry 2002 2003 2004 2005 2006 2007 2008 GDP Growth 4.2 3.1 8.8 6.6 7.9 7.7 1.1 Manufacturing 24.3 24.3 25.4 25.6 26.4 26.0 24.6 Construction 4.8 4.2 3.6 3.4 3.2 3.6 4.2 Wholesale & Retail trade 13.3 14.3 15.2 15.9 16.2 16.2 16.4 Hotels and Restaurants 2.0 1.8 1.9 1.8 1.8 1.7 1.7 Transport & Communication 12.4 – – – – – – Transport & Storage – 9.3 9.4 9.4 9.2 9.0 9.1 Information & Communication – 4.4 4.2 4.3 4.2 4.2 4.4 Financial Services 10.6 11.1 10.7 10.9 11.2 12.1 12.6 Business services 14.0 13.5 12.7 11.4 11.1 11.2 11.9 Other service industries 11.4 11.3 10.8 9.9 9.5 9.1 9.5 Others 7.2 5.9 5.9 7.5 7.1 7.1 5.5 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source : Economic Survey of Singapore, 2005 and 2008 Table A1.1

Structurally, services sector remained the key engine for growth. In 2006, for example, total growth registered 7.9%. Goods producing industries made up 33.1% of the total nominal value added while services accounted for 63.5%, almost double that of the goods producing industries. Among the goods producing industries, manufacturing grew the fastest at 11.5%. Among the services industries, wholesale and retail trade and financial services chalked up the highest growth rates at 10.3% and 9.2% respectively (See Table 6.3).

Table 6.3 : Structure of Singapore Economy and Sectoral Growth Rate for 2006  (%) STRUCTURE OF ECONOMY Nominal Value Added (% Share) Real Growth(%) TOTAL 100.0 7.9 Goods Producing Industries 33.1 10.2 Manufacturing 27.7 11.5 Construction 3.6 2.7 Utilities 1.7 4.4 Other Goods Industries 0.1 12.7 Services Producing Industries 63.5 7.0 Wholesale & Retail Trade 15.2 10.3 Transport & Storage 9.6 4.3 Hotels & Restaurants 1.9 5.1 Information & Communications 3.8 4.6 Financial Services 11.2 9.2 Business Services 11.5 5.8 Other Services Industries 10.2 4.4 Others 3.4 2.5 Source :     Economic Survey of Singapore, 2006 P.3

Table 6.4 : Breakdown of Industries within Manufacturing Sector and their Growth Rates for 2006  (%) MANUFACTURING SECTOR Nominal Value Added (% Share) Real Growth (%) Manufacturing 100.0 11.5 Electronics 28.8 3.2 Chemicals 13.9 1.7 Biomedical Manufacturing 24.6 22.5 Precision Engineering 12.6 9.5 Transport Engineering 11.2 32.3 General Manufacturing Industries 8.9 6.3 Source : Economic Survey of Singapore, 2006 P.3

Within the manufacturing sector, the electronic and biomedical clusters contributed 53.4% of the total value added but it was the transport engineering and biomedical clusters that expanded the fastest, chalking up 32.3% and 22.5% growth respectively (See Table 6.4).

Within the electronic cluster, semiconductor had grown to become one of the largest and most important industries in Singapore. Altogether, there were 14 operating silicon wafer fabrication plants, 20 assembly and test operations, and around 40 integrated circuit design centres operating in the country. Two new wafer fabrication plants were expected to come on-line after 2008. In addition, four of the world’s top five assembly and test subcontractor companies, and four of the world’s top 10 fabless integrated circuit (IC) design companies use Singapore as a base for manufacturing and IC design respectively. Altogether, semiconductor foundry wafer output from the city-state commanded 10 per cent global market share.[7] Production of semiconductor surged 28% in 2006.

Another key electronic industry was the hard disk drive (HDD) industry. Over the last two decades, the industry had evolved from assembly of HDD to increasingly higher value added acitivties, including the manufacturing of enterprise HDD, media manufacturing and R&D, and manufacturing of network storage systems. By 2006, Singapore had emerged as a major hub for HDD activities accounting for 25 percent of worldwide magnetic media shipment.  At the same time, its output of enterprise HDDs amounted to almost 80% of global enterprise HDD shipments. Despite the strong position, competition was emerging from other lower-cost regional countries, especially Malaysia and China and outward relocation of production by MNCs was taking place. As a result, the data storage segment shrank 28 per cent in 2006.

In the area of biomedical sciences, Singapore was fast gaining a reputation as a globally competitive and trusted source for pharmaceutical, medical devices and biotechnology manufacturing, R&D and commercial operations. The city state had attracted ten of the world’s leading biopharmaceutical companies to establish 25 manufacturing plants supplying to the global markets. At the same time, Singapore was also home to 14 of the world’s leading medical devices companies with 18 manufacturing plants. 30 per cent of the world’s hearing aids, for example, were manufactured in Singapore. In addition to its strong position in biomedical sciences manufacturing, Singapore was also a leading biomedical research hub in areas such as stem-cell research, oncology, tropical diseases, neuro-degenerative diseases. There were close to 2,000 researchers from all over the world at the Biopolis.[8] In 2006, the biomedical manufacturing cluster expanded by 22.5 per cent.[9]

One manufacturing cluster that also saw high growth was transport engineering. For the aerospace segment, Singapore was emerging as a global aerospace hub, accounting for a quarter of the market share in Asia. Its full range of ‘nose-to-tail’ capabilities enabled it to become a leader in aerospace maintenance, repair and overhaul (MRO). Besides MRO, Singapore also hosts aerospace design, manufacturing and R&D activities. Supported by rising demand for commercial aircraft repair jobs as a result of the proliferation of budget air travel in the region, the industry grew by 18 per cent in 2006.[10] In the marine and offshore engineering segment, Singapore also commanded world leadership positions with 70 per cent world market share in jack-up rig production and Floating, Production, Storage and Offloading (FPSO) vessel conversion. In 2006, the industry grew 40 per cent with a total output of S$10 billion.

Another cluster that registered fairly high growth was precision engineering. By 2006, Singapore was already commanding global leadership positions in products such as refrigerator compressors (10 per cent of global output), wire/ball bonders (70 per cent) and quartz analogue watch movements (25 per cent). The cluster expanded by 9.5% in 2006.[11]

The chemical cluster also grew at a slower rate, chalking up only 1.7% for 2006. While the petrochemicals and specialty chemicals grew at 5.2 per cent and 5.1 per cent respectively, the petroleum segment contracted by 2.7%.[12] Despite the slower growth, prospect for the chemical cluster was promising.  Singapore ranked amongst the top three global centres for oil refining, and oil trading and price discovery. Singapore was also one of the world’s top 10 petrochemical hubs, and top three bulk liquid ports. Jurong Island[13], the nerve centre of Singapore’s petrochemicals industry, was the host for 90 companies with a total investment of S$27 billion. In 2006, constructions of two world-scale crackers by ExxonMobil Asia Pacific Pte Ltd and Shell were underway on the island.  When completed, the crackers would increase Singapore’s ethylene output by 1.8 million tonnes per annum, providing the cluster with a critical mass of higher olefins to enable new chemical products downstream.

Within the services sector, wholesale and retail trade, financial services and businesses enjoyed robust growth. For the wholesale and retail trade sector, full year growth in 2006 came up to 10.3%. Retail trade, in particular, was boosted by an increase in the sales of telecommunications and computers as well as motor vehicles.

Table 6.5: Top Ten Visitor Generating Markets, 2006 Country of Residence Number of Arrivals Percentage Distribution Percentage Change TOTAL 9,748,207 100.0 9.0 Indonesia 1,921,455 19.7 5.9 China 1,036,957 10.6 20.9 Australia 691,547 7.1 11.5 India 658,655 6.8 12.9 Malaysia 634,116 6.5 9.7 Japan 594,198 6.1 1.0 United Kingdom 488,078 5.0 4.5 South Korea 454,666 4.7 24.8 United States 399,712 4.1 7.6 Philippines 385,960 4.0 20.6 Others 2,482,863 25.5 4.4 Source : Source: Singapore Tourism Board

Meanwhile, the hotels and restaurants sector grew by 5.1 per cent in 2006 driven by higher visitor arrivals. Altogether, visitor arrivals rose 9.0 per cent in 2006 to reach 9.7 million (See Table 6.5).[14] Tourism receipts for the year amounted to $12.4 billion in tourism receipts, 14 per cent higher than in 2005.[15]

Next, Singapore’s info-communications (infocomm) industry also saw healthy gains in 2006, on the back of favourable economic conditions. Revenue for the industry was expected to hit a record of S$40 billion. Within the same year, the Infocomm Development Authority of Singapore (IDA) launched the Intelligent Nation 2015 (iN2015), a 10-year masterplan which aimed to make Singapore Number 1 in the world in harnessing infocomm to add value to the economy and society.

The government had also drawn up the blueprint for the Next Generation National Infocomm Infrastructure comprising of two key components – an ultra high-speed Next Generation National Broadband Network and a pervasive Wireless Broadband Network. In addition, Wireless@SG was launched to enable users to enjoy free wireless broadband access for three years. It was hoped that the greater internet accessibility would accelerate the adoption of new technologies and create opportunities in emerging applications such as Internet Protocol Television (IPTV) and Voice-Over- Internet-Protocol (VoIP).

The financial services sector grew by 9.2 per cent in 2006, on the back of broad-based expansions across most major segments. There was a diversified group of more than 500 local and foreign financial institutions in Singapore offering a wide range of financial products and services.[16] The country was widely recognised as a key financial services centre in the world. It had been consistently ranked as the fourth most active foreign exchange trading centre in the world[17], after London, New York and Tokyo, and the sixth most important offshore private banking centre [18] in the world. Within the sector, in 2006, the fund management industry was once again a key growth driver, reflecting in part the buoyant investment climate and the higher number of wealth management firms that have either established or increased their presence here. At the same time, stock market activity surged by 57 per cent in terms of volume of shares traded, while turnover of foreign exchange grew by 5.4 per cent. Banking activities also strengthened throughout the year, chiefly on the back of strong gains in interbank loans. Loans to non-bank customers in both the domestic and offshore banking segments also continued to expand over the year, mainly due to stronger lending to the building and construction segment. The insurance industry, however, declined by 5.4 per cent in 2006. Total assets/liabilities of the Asian Dollar Market (ADM) recorded a US$87 billion expansion to reach US$699 billion in 2006. Year-on-year growth of assets strengthened to 14 per cent from 5.1 per cent in the previous year. As at end-2006, there were 108 commercial banks, 49 merchant banks and 3 finance companies in the domestic financial sector.

Finally, favourable economic growth conditions helped the business services sector to grow by a healthy 5.8 per cent in 2006. Singapore continued to be an attractive location as a regional business hub for MNCs. Underpinned by improving business sentiment, business representative offices’ activities grew by 6.7 per cent in 2006 while professional business and management consultancy activities also grew by a healthy 7.6 per cent.

In short, the state of the Singapore’s economy in 2006 shows that Singapore was making good progress in moving its economy towards high value-add and high technology industries. Within the electronics sector, for example, restructuring was on-going as lower value-add operations such as HDD operations and consumer electronics such as PCs and mobile handsets were being relocated while higher value-add semiconductor chips assumed greater importance.[19] Biomedical manufacturing, an industry that was relatively new compared to electronics, made up 24.6% of the GDP, almost as much as the 28.8% for the electronics. Supported by its growing reputation as a leading biomedical research hub, biomedical manufacturing was expected to increasingly assume greater role in driving the manufacturing sector in the coming years. At the same time, foreign investments continued to flow in for oil refinery, petrochemicals and specialty chemicals, a testimonial to Singapore’s position as a regional chemical hub. Similar strengths could be seen in aerospace, marine and offshore engineering, and precision engineering as Singapore increased its investments in R&D for science and engineering. Meanwhile, contributions from new growth areas such as environmental and water technologies and interactive and digital media, were also expected to help drive future grow. Within the services sector, supported by its strategic geographical location as well as excellent physical and soft infrastructures, Singapore continued to build on its strengths and future growth looked good especially for its financial and business services sector. Financial services such as fund management, foreign exchange and Asian Dollar Market were registering strong growth. As the regional economies continued to develop, Singapore was also likely to see further strengthening of its position as the business hub hosting headquarters and professional services of MNCs to serve their operations within the region. Tourism was also likely to see a boost when the two integrated resorts open for business.

In short, prospect therefore looked good for Singapore with one caveat. Given its openness and high dependency on external demand, future growth was built on the premise of a strong global economy.

6.6     US Subprime Mortgage Meltdown and the Great Recession

Moving into 2007, the world economy continued to perform generally well. Asian economies saw robust expansion, supported by both domestic demand and external trade. However, mood turned cautious towards the end of 2007 as a result of slowdown in the G3 economies. In particular, even though the US economy expanded by 2.2 per cent for the year as a whole, growth decelerated sharply from 4.9 per cent to 0.6 per cent in the fourth quarter.[19] As the crisis triggered by the meltdown of subprime mortgage evolved, there was a broad consensus that the US economy was losing steam though the severity and length of the slowdown remained uncertain. Given US’ strong fundamentals, it was initially hoped that the downturn there would be mild and limited to the first half of 2008 and with appropriate fiscal and monetary stimulus, a recovery would be possible in the second half.

In view of the increased downside risks, the Ministry of Trade and Industry lowered the 2008 GDP forecast range from 4.5–6.5 per cent towards the economy’s underlying potential rate of growth of 4.0–6.0 per cent. That projection proved to be overly optimistic when the year 2008 ended for Singapore economy with a growth rate of only 1.1 per cent, far from even the lower range of the 2007 projection. The speed and severity of the financial crisis that originated from U.S. caught the world by surprise. The rapid deterioration of the global economic environment was particularly damaging to Singapore’s external-oriented sectors like electronics, wholesale trade, and financial services.

Growth was still healthy in the first quarter in 2008 with Singapore’s economy expanding at 6.7% underpinned by strong performance in both the goods producing and services producing sectors (See Table 6.6). Manufacturing expanded by 12% while financial services grew 14.8%. The construction sector, which had been shrinking since its 14% contraction in 2002 had finally turned its corner in 2007 when commercial development projects such as the Marina Bay Sands Integrated Resort, the Marina Bay Financial Centre, as well as industrial developments such as the Universal Terminal and the Shell Eastern Petrochemicals Complex boosted the sector’s growth to 18.2 per cent. In 2008, that uptrend continued in first quarter with a 13.1% expansion.

Table 6.6 : Quarterly Economic Growth & Trade by Sectors, 2008 – 2009 Q2 (Change in %) 2008 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 GDP AT 2000 MARKET PRICES 1.1 6.7 2.5 0.0 -4.2 -9.5 -3.5 Goods Producing Industries -1.0 12.0 -2.0 -6.2 -6.5 -17.4 0.5 Manufacturing -4.1 12.6 -5.6 -11.0 -10.7 -24.1 -2.4 Construction 20.3 13.1 23.7 26.0 18.5 24.4 18.6 Services Producing Industries 4.7 7.5 7.5 5.5 -1.3 -5.1 -4.8 Wholesale & Retail Trade 2.6 5.4 6.0 4.5 -5.3 -14.8 -13.8 Hotels & Restaurants 1.2 3.1 2.0 0.0 -0.1 -5.6 -6.2 Transport & Storage 3.1 5.5 5.8 3.8 -2.4 -9.7 -10.3 Information & Communication 7.2 7.1 8.4 7.7 5.4 1.9 0.3 Financial Services 5.5 14.8 11.2 5.6 -8.1 -7.7 -4.5 Business Services 7.4 8.5 7.7 8.2 5.2 3.8 2.7 TOTAL TRADE AT CURRENT PRICE 9.6 16.1 17.1 16.4 -9.6 -27.7 -26.8 Imports 13.9 21.5 21.4 22.2 -7.1 -27.6 -28.3 Exports 5.8 11.5 13.2 11.4 -12.0 -27.8 -25.3 Domestic Exports 5.4 12.7 11.2 14.5 -15.5 -31.1 -26.8 Oil 41.5 52.6 53.4 77.4 -10.0 -43.1 -46.3 Non-oil -7.9 0.6 -5.5 -8.6 -17.8 -25.6 -14.3 Re-exports 6.2 10.3 15.5 8.1 -8.1 -24.1 -23.7 Source :  Economic Survey of Singapore 2009Q2

In the second quarter, however, manufacturing contracted -2.0%, a drastic deceleration from the 12.0% expansion in the previous quarter. Services sector, on the other hand, held up with an expansion of 7.5%. By the fourth quarter, the contraction spread beyond just manufacturing. All clusters, except construction, information and communication and business services, contracted. Manufacturing sector contracted by 10.7 per cent on the back of falling external demand as the financial crisis that originated from U.S. spread to all markets. Growth in the financial services sector fell by 8.1 per cent because of declines in trading activities in foreign exchange and stock brokerage, fund management and Asian Currency Units. The collapse in world trade also resulted in contractions in the wholesale and retail trade (-5.3 per cent) and the transport and storage (-2.4 per cent) sectors. Growth in construction was initially driven by private residential and commercial projects but as the global economic crisis unfolded, construction demand in the private sector plummeted by 70 per cent in the fourth quarter of 2008. However, this fall in private sector construction demand was moderated by a surge of 205 per cent in public sector construction demand, which was indicative of the government’s efforts in providing a positive spin to moderate the decline of the economy caused by contraction of external demand. For the year as a whole, all sectors, the economy still saw positive contribution from all sectors except manufacturing.

In the midst of the market chaos, two other actions were promptly taken by MAS. Firstly, MAS announced in October 2008 that the government would guarantee all deposits placed with banks licensed in Singapore. Besides aiming at restoring confidence in the soundness of the Singapore financial system, the move also helped to ensure that Singapore banks would not be disadvantaged by similar guarantees offered by other governments for deposits placed within their jurisdictions. Secondly, MAS announced also in October the setting up of a temporary reciprocal currency swap arrangements with the US Fed. The precautionary measures helped to reassure financial institutions that are involved in international operations that there would be sufficient US dollar liquidity as US dollar funding dwindled.

In February 2008, the FY2008 budget announced was also largely neutral. The economy was still growing but inflation was mounting. To help Singaporeans cope with the rising costs of living, relief measures that were implemented included Growth Dividends, enhanced Marriage and Parenthood measures, personal income tax rebates and utility rebates. At the same time, government spending on social and healthcare services were also increased. To further ease inflationary pressure, the government deferred projects worth nearly $3 billion. By September 2008, with the collapse of Lehman Brothers and other financial institutions, economic conditions worsened rapidly. In November 2008, the government introduced the Skills Programme for Upgrading and Resilience (SPUR) to encourage companies to send their employees for upgrading during the economic downturn. At the same time, the government also enhanced its business financing schemes to ensure that viable local firms have access to credit.

Table 6.7: Key Components of the Resilience Package ($ Billion) Components Spending Preserve Jobs 5.1 Stimulate bank lending 5.8 Enhance business cashflow and competitiveness 2.6 Support families 2.6 Build for the future 4.4 Total 20.5 Source: MAS Macroeconomic Review April 2009

As the crisis continued to worsen in early 2009, global demand slumped and the world receded into the worst recession since the Great Depression. More actions from policymakers were clearly needed to save jobs. In January 2009, a month earlier than usual, the government announced the FY2009 Budget to complement its monetary policy efforts in trying to contain the damages to the domestic economy. The budget unveiled a $20.5 billion (8.2% of GDP) Resilience Package aimed to save jobs, enhance the cash flow and competitiveness of firms, support families, and strengthen the economy’s long-term capabilities (See Table 6.7). One of the key features of the package was the $4.5 billion Jobs Credit Scheme. It involved giving cash grants to employers to subsidise part of their local wage bill. In effect, the scheme helped to reduce firms’ costs of production without eroding employees’ take-home pay and CPF savings. To further alleviate the risk of a credit crunch, another element of the package was the Special Risk-Sharing Initiative in which the government would assume 80% of loan loss risk. In addition, a series of tax measures were also implemented to help ease the cost burden of businesses. Companies could also claim losses against their preceding three years of taxable income. Because of the rescue measures, deficit for FY2008 rose to S$2.2 billion, three times the original projection made in February 2008. Meanwhile, the deficit for FY2009 was projected to hit S$8.7 billion (3.5% of GDP). The budget was unprecedented not only in its size but also in the way the deficit is financed. To avoid borrowing, the Singapore government amended the Constitutions in October 2008 to allow investment returns from the country’s reserves to fund the deficit. The definition of investment returns had also been broadened to include capital gains rather than just interests and dividend income.[21]

Without the increase in revenue from the investment return of its reserves, the deficit would have been almost doubled at 6.0% of GDP’s basic balance.[22] This is significantly more expansionary than the off-budget packages introduced to tackle the two earlier economic crises. For FY1998, for example, the off-budget measures resulted in a surplus in the basic balance of 0.7% of GDP. For FY2001, a deficit of 1.5% of GDP was recorded. Another measure indicating the magnitude of the government’s strongly expansionary fiscal measures could be seen in the Fiscal Impulse (FI) measure[23] which hit 5.7% of GDP, much larger than in 1998 and 2001.[24] The unprecedented size of the deficit is reflective of the speed and magnitude of the reversal in output gap in 2009.

Despite the severity of the crisis, Singapore’s GDP contracted by only -0.8% for the whole of 2009. In fact, the economy rebounded as early as Q2 2009 alongside a surge in pharmaceutical output. The fast recovery could be attributed to a combination of external and internal factors. Externally, firms were beginning to replenish their inventories, which had been run down earlier. Also, the global credit and financial market conditions had improved as a result of concerted efforts by the various central banks to ensure ample liquidity within their systems. Internally, Singapore’s fundamental strength, as exemplified by its zero external debt, strong foreign reserves, effective governance with prudent fiscal and monetary management, productive labour force and increasing strength in high value-add and high technology manufacturing and services sectors, enabled Singapore to jump into action as soon as external environments improved.

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[1] [sg012/194]

[2] Ministry of Trade and Industry (2003)

[3] Singapore today ranks first in Asia for IP protection. (Check for source)

[4] http://www.spring.gov.sg/newsarchive/epublications/pd/2002_06/index10.html

[5] http://www.iesingapore.gov.sg

[6] Singapore Economic Survey 2006, P.5

[7] EDB Annual Report 2007.

[8] EDB Annual Report 2007, P.35

[9] Economic Survey 2006, P.72

[10] Economic Survey 2006, P.73

[11] Economic Survey 2006, P.72

[12] Economic Survey 2006, P.72

[13] Jurong Island was formed by combining seven small islands into a big one. It currently houses operations of all the top oil companies in the world.

[14] The top five markets were Indonesia (552,000), China (240,000), Malaysia (190,000), Australia (175,000) and India (171,000), accounting for 52 per cent of total visitor arrivals.

[15] Economic Survey 2006, P.90

[16] iN2015 Steering Committee Report P. 75

[17] Based on the last three triennial surveys conducted by the Bank for International Settlements. The three surveys are: “Central Bank Survey of Foreign Exchange and Derivative market Activity 1998”, Bank for International Settlements, 1999; “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2001”, Bank for International Settlements, March 2002; “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2005’’, Bank for International Settlements, March 2006. The full publication is available for free at the following website: http://www.bis.org

[18] “Singapore: The New Switzerland”, http://www.wealthbriefing.com, March 2006.

[19] In September 2009, for example, Seagate made an announcement that it would close its Ang Mo Kio plant by the end of 2010. The operation will be relocated to other existing Seagate sites in countries such as China, Thailand and Malaysia. The departure of Seagate marked reflects Singapore’s transformation from being a lower value–add hard disk drive assembly location to being a higher value-add hard disk media manufacturing hub. (Straits Times, August 5, 2009, “Seagate to axe 2000, close plant”.)

[20] Economic Survey, 2007. P.6.

[21] The fact that the Constitution has been amended shows that drawing from reserves to finance deficit is not a one-off move. It is an indication that policymakers anticipate either expenditures to rise or revenues to fall in the future.

[22] The basic balance is the budget balance before accounting for net investment income/returns contribution and transfers to endowment and trust funds.

[23] A positive FI value indicates a more expansionary stance and vice versa. In 2007, the FI measure was negative at -2.9% of GDP. See Monetary Authority of Singapore (2008A)

[24] See Monetary Authority of Singapore (2009A)

5.1 1991 Strategic Economic Plan – Overcoming the Shortages of Key Resources

Contents

5.1  1991 Strategic Economic Plan – Overcoming the Shortages of Key Resources
5.2  The New Industrial Strategy
5.3  1997 Asian Financial Crisis and Singapore’s Second Recession
5.4  1997 Committee on Singapore’s Competitiveness
5.5  Structure of the Economy as of 2001

 

The Second Industrial Revolution of the 1980s did not bring about immediate results.[1] As an extension of the Economic Planning Committee’s earlier works on the causes of the 1985 recession, the Ministry of Trade and Industry introduced another new national economic development strategy in 1991, known as the ‘Strategic Economic Plan’.[2] The objective was to propel Singapore into the league of developed countries within the next 30 to 40 years. By then, Singapore would be a global city with economic dynamism, a high quality of life and a strong national identity.[3]

Specifically, the plan noted that the key constraint Singapore faced was the shortage of key resources in particular, people and land. As a result of the high growth in the past decades, the economy has reached full employment. At the same time, Singapore had reached the limits of sea-front land and sea space. To sustain a high growth rate, there was a need to reorganize the way human and physical resources were managed. One way was to set up a Growth Triangle linking Singapore with Indonesia’s Riau Islands and Malaysia’s Johor so that production works could be distributed according to the comparative advantages of the three locations. In other words, low value-add activities could be moved from Singapore to Riau or Johor where physical resources were abundant and human resources were at low costs. Secondly, Singapore needed to improve resource efficiency internally. The service sector, in particular, was plagued with problems of low productivity. In 1989, for example, the sector took up 39% of the workforce but contributed only to 9% of the GDP.

A greater concern to the committee, however, was Singapore’s long term economic competitiveness. Up till then, the country’s edge over its competitors in the developed countries was its low costs. However, as Singapore became more developed, its costs would increase. Furthermore, countries in the region with more abundant human and physical resources were also opening up for foreign investments. It would be only time before they became strong competitors. Singapore therefore needed to re-position itself and build up new capabilities to be nearer to that of the developed countries and to be ahead of competitors within the region. However, because of limited resources and the lack of economies of scale, Singapore needed to identify niche areas and focus its resources to raise its capabilities comparable to the developed economies. For that to be possible, human resources must attain a high level of basic education and be provided with training relevant to the industries. Besides having a high level of technical competence, workers must also possess the right work ethic and be willing to continue learning and apply knowledge creatively.

Another area identified by the committee as lacking was the soft infrastructure to complement the excellent physical infrastructure that the country had built over the past two over decades. In particular, the state would increase its investment in technological infrastructure and innovation capabilities to reduce the technological gap with advanced economies and become a high-income economy. In particular, Singapore needed a technological infrastructure comprising of a pool of trained manpower in key technologies as well as a network of research institutes capable of doing R&D. In 1991, the first five-year National Technology Plan was formulated to steer the development of science and technology in Singapore. Given the small population base and low growth rate in the labour force, the Strategic Economic Plan reaffirmed the needs to depend on foreign talents. It estimated that immigration of professional and skilled technical personnel at the rate of around 0.4% per annum of the population must be allowed. Besides improving the technological infrastructure, the social climate and institutional structure must also be made more conducive for creativity and innovation. In addition, the stability of the tripartite relationship between the labour, business and government must also be maintained.

The concept of global city also entailed the continued expansion of local companies beyond Singapore’s shore, not only within the region but to any parts of the world where opportunities exist. In that regard, EDB would have to develop a globalization plan and work with other government agencies to provide support for local companies to invest internationally.

5.2     The New Industrial Strategy

The main thrust of the plan’s industrial strategy was to identify 14 industrial “clusters“ and then channel all available resources to make them world-class industries. One such cluster, for example, targeted for development was the tourism cluster. Although tourism had played an important role in the economy thus far, it had not received the same recognition and attention that the industrial sectors had, until now. Firstly, the plan outlined the objective to establish Singapore as a premier visitor destination with universal appeal and a leading international hub for aviation, convention, exhibition and travel/tourism-related services”.[4] The cluster approach recognized the diversity of sectors the tourism industry embraced. The development of the cluster would therefore have to encompass hotels, travel agencies, restaurants, shops and airlines. After working out the detailed composition of the tourism industry, several policies were drawn up. They included exporting travel-related services, increasing the intensity of land use for hotel development, and improving the efficiency of workers employed in the travel industry through automation and training.

Besides the focus on developing clusters, another key component of the Plan was the regionalization strategy, with which the government hoped Singapore could take advantage of new economic opportunities emerging within the Asia Pacific region. The strategy had several different thrusts – including the regional headquarters programme, the regional investment programme and the regionalization of Singaporean enterprises programme. The strategic intent of the programme was to build an external economy with which the domestic economy could be closely linked to. This would in turn help to enhance the domestic economy, giving it opportunities to participate in the growth outside Singapore, especially in the fast-growing Asia region. To achieve the objective, the programme sought to form a network of strategic zones in key markets with emphasis on building good linkages between Singapore’s regional projects and domestic clusters.[5] The roles of EDB had also broadened from merely investment promotion to helping companies to configure and design activities, and creating economic space beyond Singapore.[6]

Soon after the release of the 1991 Strategic Economic Plan, several policies and initiatives were introduced by the government. In 1992, as part of the effort to prepare Singapore to propel Singapore to the technological forefront, the IT2000 Report was released by the National Computer Board (NCB).[7] The report painted a grand vision of an ‘Intelligent Island’ based on an advanced nation-wide National Information Infrastructure (NII) that interconnect computers in virtually every home, office, school and factory. In 1993, the STB launched the Strategic Plan for Growth, 1993-95 (STPB 1993), which looked into various means of diversifying the tourism product. This was followed by the Tourism 21 strategy in 1996 to reposition Singapore in the new millennium as a tourism business centre and a tourism hub. Then in 1996, in line with the development towards a knowledge-based economy, the Singapore Productivity and Standards Board (PSB) was established to work on raising the total factor productivity (TFP) of the workforce.

To assist in the expanded roles, EDB set up a wholly-owned investment arm EDB Investments Pte Ltd (EDBI) in 1991 with the objective of investing in companies that would help to grow the key industry clusters that had been identified and to promote emergent technologies and innovations. These investments were effected through the Technopreneurship Investment Fund (TIF) wholly-owned by EDBI. Besides nurturing promising local companies with high-growth potential, the TIF helped to attract venture capital activities and develop a venture financing industry in Singapore. To ensure that Singapore stay in touch with the international business community and its economic strategies remain relevant and effective, the International Advisory Council (IAC) was set up in January 1995 to advise the EDB on its international and regional strategies.[8] The council members comprises of international business leaders from major MNCs.[9] They would meet every two years to review and map out the business strategies of the EDB in pursuing economic growth for the nation.

5.3     1997 Asian Financial Crisis & Singapore’s Second Recession

Economic growth peaked in 1993 at 11.9% before hovering around 8% from 1995 – 1997. Growth, however, was disrupted when the Asian Financial crisis erupted in 1997. It started in July 1997 with the floatation of the Thai baht which had been under intense speculative pressure since mid 1996. Soon, Philippines Peso and Indonesian Rupiah also came under attack. By October, the crisis spread to Hong Kong, Taiwan and South Korea. The sharp declines in currencies triggered panic and fund managers started to pull out funds en masse from the region. As a result, stock markets and property markets also saw sharp adjustments. With increasingly unemployment and falling income, aggregate demands in these economies began to fall.

Given its increasing trade links with countries within the region, Singapore could not escape the crisis unscathed. Domestically, the crisis affected different sectors and companies unevenly. Since the crisis was limited to Asia, hub-services with large regional exposures like commerce, tourism, transport and financial services were badly hit. In contrast, companies with markets in the US and EU were less affected. Indirectly, however, the negative impacts on our economy suffered inevitably as demand within the region contracted. Also, the rapid and sharp weakening of the regional currencies against the Singapore dollar since the crisis began made Singapore’s exports relatively less competitive. The loss of competitiveness was not only due to the relatively strengthening of the Singapore dollar. As the crisis-hit economies undertook structural reforms to address their problems, they became leaner as they emerged from the crisis.

Overall, however, Singapore weathered the crisis relatively well. Despite the regional turmoil, the Singapore economy expanded by a strong 8.3% in 1997, compared with 7.8% in 1996. In 1998, Singapore underwent its second recession since independence when GDP contracted by -1.4% and stock prices plunged by over 60 percent from their peak.[10] By 1999, however, the economy rebounded strongly with a growth of 7.2%.[11] This admirable performance was due to a combination of strong fundamentals of the economy and the adept handling of the crisis by the government whose prompt actions during the early phase of the crisis, to allow the depreciation and flexible management of the Singapore dollar as well as to ease money supply, prevented the economy from deteriorating as panic wreaked havoc in the regional financial markets. At the same time, even though the local banks were hit with nonperforming loans mostly to clients in the crisis-hit countries, they remain financially healthy. Their capital adequacy ratio remained above the 12 percent minimum set by the Monetary Authority of Singapore (MAS), which itself is 1.5 times higher than the 8 percent Bank for International Settlements (BIS) standard.[12]

5.4      1997 Committee on Singapore’s Competitiveness

Just about the same time the crisis started, a Committee on Singapore’s Competitiveness (CSC) was put together by the government to review Singapore’s long term competitiveness. But as the crisis wore on and spread, the committee began to also deliberate on strategies that could help Singapore deal with the crisis. Firstly, the committee identified that the primary cause of the contraction was the sharp fall in external demand brought about by the crisis rather than fundamental problems intrinsic to our domestic economy. Specific measures were therefore suggested to help Singapore companies weather the storm in the short term. Based on the CSC recommendations, the government introduced a S$2 billion package of off-budget cost-cutting and spending measures in June 1998. The greater concern of the CSC, however, was not the crisis but the long-term competitiveness of Singapore’s economic. The committee noted that Singapore’s wages had risen steadily over the years and were already a concern even before the crisis began. The rising wages had severely eroded the country’s competitiveness. This loss of competitiveness, though further accentuated by the sharp depreciation of the regional currencies during the Asian Financial crisis, was unlike the short-term effects of shrunken external demand caused by the crisis which was beyond Singapore control. Rather, it reflected inherent problems with Singapore’s economic and cost structures caused by the high wage policies in the previous years and decisive actions had to be taken to correct the situation.

Specifically, the CSC report recommended that total wage costs be reduced by 15% from 1997 level to bring the wage competitiveness back to the level of 1994. This reduction would be achieved by 10% reduction in employers’ CPF contribution rate as well as through reduction in the variable components of the wages (See Appendix 1).[13] In addition, the government would also make reduction in the foreign workers levy, land and factory rentals, charges for electricity and telecommunications, port services, property taxes, and corporate and personal income taxes. In effect, these measures amounted to $10 billion a year or about 7 % of Singapore’s GDP. Using companies in the electronics sector as an indication, the CSC estimated that the measures would help to reduce business costs of a firm in the electronics industry by about 15%. In addition, to ensure that local companies continued to have access to funds, the government also took measures to enhance the Local Enterprise Finance Scheme.

Besides cutting costs and enhancing working capital cashflow, CSC reiterated the needs for Singapore to enhance the capabilities of its businesses and workforce by leveraging on science, technology and innovation more effectively. In 1996, the second 5-year plan, the National Science and Technology Plan, was launched to bring Singapore closer to having world-class science and technology capability.

To offset the fall in regional demand, CSC also suggested ways to help local companies explore and penetrate new markets. These included enhancing trade development incentives to induce companies to undertake overseas investments, establish overseas marketing offices, undertake international marketing programmes, like franchising, direct marketing, licensing, and branding. In addition, funding would also be increase for companies participating in trade missions and fairs.

At the same time, investment promotion would also be stepped up to retain or attract more businesses to Singapore. In particular, the CSC report noted the growing trends of economic liberalization, continuing globalization, and rapid technological improvements as well as a fundamental shift towards a knowledge economy. Singapore should position itself to take advantage of these trends. The CSC’s vision is for Singapore to become an advanced and globally competitive knowledge economy within the next decade, with manufacturing and services as its twin engines of growth. To achieve this vision, CSC recommended several strategies. First, Singapore should actively promote not only manufacturing but also services as the twin engines of the economy. Besides growing the existing hub services where Singapore had already achieved international repute (e.g. financial services, international trading, transport and logistics, exhibition management and tourism), the city-state should also develop new high-growth hub services (e.g. healthcare, education, media, communications and information technology (IT) services, e-commerce and direct marketing). For financial services, for example, the committee recommended firstly the consolidation of the existing leadership position in Asian Dollar market and foreign exchange and derivatives trading, followed by development of new capabilities in fund management, debt and issuance distribution, and venture capital.

The negative impacts of the regional crisis also demonstrated the need for Singapore to incorporate a global dimension in its effort to nurture an external wing. Even though Singapore’s fundamental strengths allowed it to escape the direct effects of the crisis, the overdependence of its exports on the regional markets hit Singapore indirectly when demand in the regional markets shrank. Incorporating a global dimension therefore would enable Singapore to diversify its risk so that its growth would not be devastated even if regional growth stalled. The implication, however, was that Singapore companies needed to be not only regionally but also globally competitive. This could only be possible if Singapore had its own world-class companies (WCCs) with core competencies that could enable them to compete effectively in the global market.

Since independence, Singapore’s economic development has been unique in that the state acts not only as an agenda-setter but also an agenda-achiever. Other than the MNCs and some big conglomerates in the financial, property and trading sectors, the other major enterprises are mainly government-linked companies (GLCs).  The rest are small and medium enterprises (SMEs) that traditionally contribute a relatively smaller share to the economy.  GLCs are government-linked companies that reside under a statutory board or under one of four holdings, with Temasek Holdings being the largest in terms of assets. Today, among the best known and most profitable GLCs are Singapore Airlines, Singapore Telecommunications, DBS Bank, Keppel Corporation, Neptune Orient Lines, SembCorp Industries, Singapore Technologies, CapitaLand, Singapore Press Holdings, SMRT Corporations, and Singapore Power. Even though the GLCs are wholly or majority-owned by the government, they have meritocratic management that run their operations based entirely on commercial principles. In other word, they are autonomous profit-seeking entities that are subject to market forces. Unprofitable operations have been threatened with closure. Having said that, however, it is undeniable that GLCs enjoy unfair advantages over the private enterprises. With almost unlimited funding from the government, they are able to grow quickly and in the process attract the best brains the small population could offer. The unfair advantages put them at a different start line from purely private enterprises and as a result, local competition is crowded-out. So, it is almost inevitable that they have performed well domestically. The real challenge is to project their strength overseas where their government-linked status will not confer them any advantage and may even work to their disadvantage.

Indeed, by the end of the 1990s, many GLCs were dynamic enough to be even leaders within their industries not only in Singapore but also regionally. Singapore Airlines, for example, was among the most respected airlines in the world not only for its iconic sarong kebaya-cladding air-stewardess and their excellent in-cabin services but also its forward looking and prudent management. JTC’s had accumulated invaluable experience from developing and managing industrial parks within Singapore and was poised to help countries in the region to set up similar parks as foreign investment flowed into these countries. GLCs therefore made good candidates in Singapore’s quest to develop world-class companies.

Meanwhile, the capabilities of the SMEs also needed to be strengthened so that they could become more productive. In 1999, for example, even though SMEs employed 51.7% of the labour force, their total value added to the overall economy was only 30.4%.[14] In other words, SMEs needed to be more efficient so that Singapore’s limited resources could be better utilized. Eventually, it was hoped that some would grow to become MNCs. In that regard, in 1999, PSB introduced its first ten-year plan, Productivity Action 21, with the aim to sustain TFP growth and make Singapore one of the world’s 10 most productive countries in both manufacturing and services. Another ten-year plan, SME 21, was formulated in January 2000 with the aim to create vibrant and resilient small and medium-sized enterprises (SMEs) in the new economy.[15] Changes were also made to various skill development programmes and schemes to ensure that workers received the right kinds of training to stay relevant.

Finally, the CSC report also made recommendations with regards to Singapore’s constraints in physical and human resources. In terms of human resources needs, the CSC recommended that Singapore should also continue to develop a world class workforce in the 21st century by adopting a dual approach – maximising the potential of the domestic workforce while enhancing the attractiveness of Singapore to foreign talent. As for Singapore’s limited land and water resources, market pricing should be applied as far as possible to ensure efficient allocation and optimal usage.

Finally, the regional economic crisis has highlighted the importance of correct macroeconomic policies for continued competitiveness, stability and resilient growth. The Government should therefore continue to play an active role to support and facilitate the private sector through provision of sound economic policies and a regulatory environment that is conducive to the conduct of business.

5.5     Structure of the Economy as of 2001

Moving into the new millennium, Singapore economy continued its growth after its recovery from the 1998 contraction caused by the Asian Financial crisis. Overall, the broad structure of the economy remained largely unchanged, with financial and business services and manufacturing remaining as the key sectors, comprising more than half of the country’s GDP (See Table 5.1).

Table 5.1 : Changes in Structure of Singapore Economy (%) 1985 2001 Change Manufacturing 21 23 2 Construction 10 6 -4 Commerce 16 15 -1 Transport & Communications 13 11 -2 Financial & Business Services 22 28 6 Others 18 17 -1 Source : 2003 Economic Review Committee Report Part 1 Chart 1.2

Table 5.2: Manufacturing Value-add by Products, 1985 and 2001 (%) 1985 2001 Change Electronic products 25 36 11 Chemicals & Chemical products 8 17 9 Transport equipment 11 9 -2 Machinery & equipment 10 8 -2 Fabricated metal products 5 5 0 Others 40 25 -15 Source : 2003 Economic Review Committee Report Part 1 Chart 1.3

For the manufacturing sector, the growth in the 1990s was becoming more broad-based with increasing contribution from electronics and chemical industries. Singapore was moving up to capital- and skill-intensive higher value-added activities such as precision instruments, complex aspects of disk-drive design, and pharmaceuticals. The role and share of the electronics industry, especially disk drives and personal computers, increased further in terms of both production and exports. In the second half of the decade, several wafer fabrication plants had come into operation too. By 2001, electronic and chemical products jointly account for 53% of the total manufacturing value-add, constituting a rise of 20% from the 33% in 1985 (See Table 5.2). The growth of the chemical cluster had also helped Singapore to realise its vision of becoming a world-class chemical hub with an optimal combination of petroleum, petrochemicals and supporting industries. By 2001, chemical products made up more than 10 per cent of Singapore’ non-oil domestic exports.[16] Productivity growth in the manufacturing sector had been strong, averaging 5.3% per annum from 1985 to 2001, outstripping the other major sectors.[17]

More importantly for the manufacturing sector, Singapore had created new economic space by setting up industrial parks in different countries within the region. These parks in Indonesia, India, China, Philippines, Thailand and Vietnam allowed local resource-dependent businesses to relocate their low-value add operations to resource-rich countries while upgraded to higher-value add and more capital- and technology-intensive operations could be retained.[18]

Also, the government began to target biomedical industry as a priority sector. Biotechnological and other MNCs were enticed to locate their regional headquarters and R&D facilities to Singapore. The growth of the chemical, biochemical, and pharmaceutical industries helped to moderate the economy’s dependence on the volatile IT capital expenditure cycle, not to mention the declining margins of the IT industry because of increasing competition. Another emerging industry targeted for high growth was the water industry using wastewater recycling and purification technology and reverse osmosis-based desalination technology.

As for the services sector, tremendous progress had been chalked up by the turn of the century with Singapore emerging as the services hub for the region. Between 1985 and 2001, Singapore’s services exports have grown by 9.9 percent annually to reach almost S$50 billion (See Figure 5.1).[19] Besides contributing to a net export balance of S$10 billion, the services industries also created many employment opportunities for Singaporeans.

Meanwhile, the financial sector, which saw high growth in the 1980s, also continued its expansion in the 1990s. By the early 1990s, Singapore was ranked fourth in the world in the daily trading volume in foreign exchange, behind New York, London, and Tokyo. The city state hosted a total of 115 foreign banks by 1993. Singapore’s aspirations to be the regional financial centre had come a long way since the setting up of the ACU by Bank of America in 1968. With progressive liberalisation of the financial sector since 1998, a new industry landscape was also emerging. The liberalization opened up domestic retail banking to the foreign banks and the competition had led to the consolidation among the local banks. Fund management activities and the capital markets had also grown as a result of government efforts to liberalize the market.

Figure 5.1 : Growth of Services GDP, Export and Employment, 1985 – 2001 Source : Economic Review Committee Report 2003 Part 1, Chart 1.5

A key industry in the services sector that saw fundamental changes in the 1990s was tourism. The growth of the sector in the 1980s continued into the 1990s. Despite the natural constraints and high costs, the city-state had earned itself the name ’Garden City” by successfully maintaining a number of public parks and open spaces decorated with ornamental plants and magnificent greenery. In addition, Singapore had gained a reputation as a safe and politically stable tourist location that offered a unique mixed pot of Asian cultural experiences and gourmet delights. Its duty-free port status also turned the country into a shopper’s paradise.

In 1993, the STB launched the Strategic Plan for Growth (1993 – 1995) which built on the cluster development approach mapped out in the 1991 Strategic Economic Plan.[20] The new plan sought to further diversify the tourism products by expanding the cruise market and improving convention facilities. At the same time, the plan also took stock of constraints that could impede the growth of the industry. They include internal factors such as rising business costs and shortage of labour, and external factors such as competition and restrictive trade policies of neighbouring countries.[21]

Singapore’s response to these internal and external constraints came in 1996 in the form of a new strategy that would position Singapore as the world’s “tourism capital” in the twenty-first century. Known as “Tourism 21”, the strategy formed part of the Singapore Unlimited vision that aimed to reposition Singapore in the new millennium and was devised by STB in conjunction with other public and private sector agencies to make Singapore not only as a tourist destination but also as a tourism business centre and a tourism hub.[22] The target was also set for Singapore to increase tourist arrivals from the 7.3 million in 1996 to 10 million by 2000.

According to Tourism 21 strategy, Singapore would work to enhance its attractiveness as a tourist destination so that tourists would be willing to come back, stay longer and spend more. A thematic approach was adopted in re-developing the city-state’s attractions comprising of activities, services and facilities.  Under the plan, 11 thematic zones were delineated and targeted for development: Entertainment District, Theatre Walk, Museum and Heritage Trail, the Night Zone, Island Escapade, Rustic Charm, Mall of Singapore, Nature Trail, Singapore Heartland, Ethnic Singapore and International Vacation Gateway. The objective was for visitors to spend at least half a day at each of the zones.

Besides enhancing Singapore’s attractiveness as a “must-visit” destination and encouraging companies to use it as a test bed for new ideas and products, Singapore would also actively work with other countries through both cooperation and competition. Such a “co-opetition” strategy would allow Singapore to overcome its internal constraints by co-opting the strength of the competitors and seek complementary synergies on a mutually-beneficial basis. For example, to overcome the constraints of lack of space and attractions, Singapore could work with Malaysia to jointly promote tourist attractions in Johor and Singapore as a package. In other words, given its advantages as a transportation hub, Singapore could become a base for tourists to venture into the countries in the region. The collaborative promotion could blend Singapore’s city sophistication with the rustic charms of her less developed neighbours.

Unfortunately, the tourism industry was dealt a serious blow and a temporary setback by the Asian Financial Crisis that erupted in 1997. After increasing from 5.3 million in 1990 to a record high of 7.3 million in 1996, tourist arrivals fell by 1.3% in 1997 and another massive 13.3% in 1998. However, the market began to recover by 1999 when nearly 7 million tourists visited the city-state. Given the devastating effects the financial crisis wrought on the region, it was clear that the target of 10 million tourist arrivals by 2000 would not be achievable and had to be set aside for at least five years.[23]

Besides the financial and tourism industries, the information and communication technology (ICT) industry also underwent fundamental changes as a result of changes outlined in the report IT2000 introduced in 1992. During this period, ICT usage, spearheaded initially by the public sector, spread rapidly to homes and businesses. The highlight was the 1998 launch of Singapore ONE (One Network for Everyone), the first nationwide broadband network in the world was launched. E-commerce Master Plan was then introduced within the same year to position Singapore as an international e-commerce hub.  As a strategic response to the increasing convergence of the IT and telecommunication industry, a new statutory board called the Infocomm Development Authority (IDA) was created in December 1999 by merging NCB and TAS. In 2000, the telecommunication industry was liberalized in a big bang. Mobile phones and internet subscriptions increased dramatically, and prices dropped rapidly while range of products and services expanded as a result of competition. With the liberalization, Singapore was building itself up as a telecommunications node within the global telecommunication grid. It also consolidated Singapore’s position as a total business centres and a logistics hub. Within the same year, to ensure that Singapore maintain its competitive edge as an early adopter of emerging technology, a fourth strategic masterplan – Infocomm 21 (Information and Communications Technology for the 21st Century) was launched by IDA.

The turn of the century also marked Singapore’s aim to evolve into an advanced and globally competitive knowledge intensive economy and a key node in a global network of people and ideas. Efforts included positioning the state as an innovation center of higher learning and business education where venture capital, engineering design, software and digital and interactive media development would converge. It was hope that the arrival of Lucasfilm would jumpstart the digital and interactive media industry which was expected to generate 3 per cent of GDP by 2018. As part of the efforts to further diversify the economy, emphasis was also placed on marketing and design services and on making Singapore a choice location for international events.

In short, 1990s was a technologically intensive phase. In response to competition from other emerging economies, Singapore companies sought to move up the value chain by intensifying their use of technology. Even though manufacturing remained an important pillar of Singapore’s economy, the services sector had also emerged as a second engine driving the city-state’s economy. By leveraging on its excellent soft and hard infrastructures, Singapore not only worked hard to maintain its competitive edge in key industries like chemicals, electronics and engineering. At the same time, it also intensified its efforts to build clusters for the emerging media industries and biomedical science industries (which include pharmaceutical, biotechnology and medical technology companies). Hence, Singapore’s economic structure had become increasingly diversified and balanced by the turn of the century.

---

[1] sg010/28

[2] Wong and Ng (1997)

[3] Ministry of Trade and Industry (1991)

[4] Ministry of Trade and Industry 1991 : 144

[5] EDB (1995)

[6] EDB (1993)

[7] NCB, was formed on 1 September 1981 under the auspices of the Ministry of Finance. One of its earliest functions was to implement the computerization of the civil service and to encourage the widespread adoption of ICT especially among the local enterprises.

[8] http://www.edb.gov.sg/edb/sg/en_uk/index/about_edb/international_advisory0.html

[9] In 2009, for example, the council members include 12 leading international business leaders, including Chairman, President, CEO, or Managing Director from MNCs such as GE International, Chairman, President, and CEO of 3M, President and CEO of Philips,  Chairman of Sumitomo Chemical, Chairman and CEO of Institute for Global Futures, Chairman of Tata Group,  Procter & Gamble, Royal Dutch Shell, Micron Technology Inc, Toshiba Corporation, Agility, Draper Fisher Jurvetson, TCL Corporation, Medtronic Inc, and Infineon Technologies.

[10] Sg012/190

[11] www.singstat.gov.sg

[12] Chia (2000)

[13] The employers’ CPF contribution rate has not been adjusted back to the 20% since 1998.

[14] SPRING Singapore Annual Report 2001 – 2002

[15] PSB Annual Report 1999/2000, Chairman’s Statement. http://www.spring.gov.sg/newsarchive/annual_report/ar1999_2000/review/index.html

[16] Economic Review Committee Report 2003 Part 1, P. 22

[17] Economic Review Committee Report 2003 Part 1, P. 23

[18] EDB (1993)

[19] Economic Review Committee Report 2003

[20] STPB (1993)

[21] Sg001/475

[22] ”The Singapore Unlimited vision articulates Singapore’s aspirations to become a first league developed nation and its strategies to enhance its economic activities in an integrated, holistic manner, using a total approach to systems involving all parties–political leaders and government, institutions and academia, chambers of commerce and trade associations, industrialists and labour, foreign investors and local companies, the people, and all who have identified themselves to be Singapore’s stakeholders.” See EDB (1995)

[23] Sg001/468

4.1 The Second Industrial Revolution

Contents

4.1   The Second Industrial Revolution
4.2.  Development of Human Capital
4.3   Push for Trade Expansion
4.4  Second Oil Shock and Singapore’s First Recession since Independence
4.5  1985 Economic Committee – Charting New Directions
4.6  Strong Recovery (1986 – 19990)

The rapid economic growth of the late 1970s continued as Singapore stepped into the 1980s. Success in attracting foreign investment had caused the economy to become highly dependent on foreign firms, especially in manufacturing. Based on the 1980 Report on the Census of Industrial Production, majority foreign-owned firms accounted for 73.7% of gross output, 67.4% of value-added, 58.4% of total employment, and 84.7% of direct exports.

Externally, the 1980s was a time when the world economy experienced rapid globalization. More and more MNCs streamlined and relocated their operations either in search of lower costs or to be nearer to its raw materials and markets. As they sought to take advantage of advances in communications, transport, and production technologies and relocate their labour-intensive operations outside their home countries, a new international division of labour emerged. This new spatial configuration of economic activities provided unique opportunities for small countries like Hong Kong and Singapore, which had no hinterland or resources, to grow their economy by embarking on export-led industrialization driven by foreign investments. However, the success of the four Asian Tigers, namely Korea, Taiwan, Hong Kong, and Singapore, provided an attractive model which other developing countries could emulate. Competition was therefore heating up for foreign investment. Many national governments were ‘liberalizing’ their economies and were eager to receive FDI. Singapore would therefore have to compete with these economies in offering more attractive inducements to MNCs. To avoid competing with these lower costs countries, Singapore needed to reposition itself. It became apparent that the shift towards capital- and technology-intensive industries could wait no more. With the growth still going strong, the government resumed efforts to upgrade and diversify the economy.

In 1980, the Singapore government introduced a new national economic development strategy which heralded the city-state ‘Second Industrial Revolution’. During the 1980 Budget Speech, the Economic Development Plan for the Eighties was released. The plan outlined Singapore’s efforts to diversify its economic activities into new information-based services, such as computer, medical, consultancy and warehousing services. In line with the new economic plan, from the early 1980s the emphasis was put on promoting R&D, engineering design, and computer software.[1] To encourage industrial transnational corporations to switch from labour-intensive manufacturing towards more capital-intensive (Huff 1994), tax incentives would be offered to participating enterprises. At the same time, education and training programmes in the labour force would be upgraded.

Through its network of 22 overseas offices in the U.S., Japan and Europe, the EDB intensified its investment promotion efforts targeting MNCs from eleven primary and supporting industries: automotive components, machine tools and machinery, medical and surgical apparatus and instruments, specialty chemicals and pharmaceuticals, computers, computer peripheral equipment and software development, electronic instrumentation, optical instruments and equipment (including photocopying machines), advanced electronic components, precision engineering products, and hydraulic and pneumatic control systems.

Through EDB’s efforts, Singapore received an average of S$1.7 billion per annum during the period of 1980-84. More importantly, there was a strong expansion in new, higher value-added industries such as computers, electronics, machinery, printing and pharmaceuticals. In particular, the city-state succeeded in attracting many major electronics multinationals and emerged to be an important production platform for computers and hard disk drives.

4.2.    Development of Human Capital

Along with repositioning of Singapore, the government had to reassess the dependency on foreign workers. The labour market became tighter as foreign investment continued to flow in. As a result, the inflow of foreign workers continued unabated. The 1980 Census of Population showed that the number of foreign workers in Singapore had increased to nearly 120,000 in 1980, an increase of about 50,000 since 1970. Given Singapore’s small population, it was inevitable that Singapore needed even more foreign workers to generate growth. However, from their earlier attempt to restructure the economy in the 1970s, the government also came to the conclusion that low wages encouraged the inflow of labour-intensive, low-technology investments and were therefore an obstacle to upgrading and restructuring. From 1979, to encourage companies to climb up the value chain, the NWC initiated wage increases of about 20 percent for three years in a row. The higher wages would induce companies to upgrade their operations and provide trainings to their workers. It would also enable Singapore to attract more skilled foreign talent and reduce its dependency on non-skilled workers. On the part of the government, new initiatives were introduce to assist local companies to adopt the use of information technology (IT) to raise efficiency through the automation of traditional work functions. Among others, the initiatives included the launch of Civil Service Computerization Programme (CSCP), National IT Plan (NITP), Small Enterprise Computerisation Programme (SECP), Enterprise Computerised Accounting Programme (SECAP). Financial assistance, such as the Skills Development Fund administered by EDB, were also provided to subsidize the training of the employees and to ensure that the market provided the right kind of manpower training.[2] At the same time, fiscal incentives were introduced to induce companies, especially the SMEs, to upgrade their operations.

Meanwhile, EDB intensified its effort to ensure that Singapore’s human resource needs in the new economy would be met. Following the success of the earlier joint training centres, EDB proposed the setting up of institutes of technology with the aim of training A-level school leavers based on a curriculum that focused on equipping them with practical skills rather than theoretical and academic concepts. In the early 1980s, three such institutes were set up: the German-Singapore Training Institute (1982), the Japan-Singapore Training Institute (1983) and the French-Singapore Training Institute (1984).[3]

Meanwhile, the government also upgraded the local educational institutions. Besides strengthening the engineering departments of polytechnics, the government also transformed Nanyang University into Nanyang Technological Institute. Massive funds were allocated to the local universities to bring in foreign talent. At the same time, scholarships were given to local students to pursue advanced degrees in leading universities in the West with the hope that they could eventually augment the teaching and research capabilities of the local universities. As a result of government efforts, the science and engineering faculties at the local institutions expanded considerably.[4]

4.3     Push for Trade Expansion

Given Singapore’s strategy of export-led industrialization, another critical institution that played an important role in promoting economic growth was Trade Development Board (TDB). It was formed in 1983 from the Department of Trade which was initially involved in only trade policy development and regulatory formulation and enforcement only.  Based on requests from the business community for a responsive trade promotion agency to facilitate their overseas market development activities, the new TDB took on additional functions of promoting and developing Singapore’s international trade and to develop Singapore as a premier international trading hub. Besides basic trade facilitation, TDB also reviewed marketing policies, strategies, and techniques and explored new opportunities in both traditional and non-traditional markets. In addition, TDB oversaw Singapore’s involvement in the General Agreement of the Tariff and Trade (GATT) to secure market access and to lobby for free trade. To carry out its job, TDB developed a comprehensive network of overseas in cities such as Frankfurt, Bombay, Shanghai, Geneva and Washington. In the ensuing years, TDB importance grew as Singapore’s trade expanded. By the 1990s, TDB represented Singapore at multilateral negotiations forums involving organizations such as WTO, ASEAN and OECD. Later on, it also actively assisted Singapore in pursuing free trade agreements with trading partners, paving the way for Singapore companies to internationalize.

4.4     Aftermath of Second Oil Shock and Singapore’s First Recession since Independence

The economy continued its upward trend in the early 1980s. From 1980 to 1984, real GDP growth averaged 8.5% p.a.[5] The construction sector, in particular, saw exceptionally high growth that averaged 21.6%. Financial and business services sector also registered an average of 11.3 percent per annum. In contrast, manufacturing sector grew only modestly by an average of 5.1 percent a year.

By 1985, however, the Singapore economy was badly hit by a slowdown in global demand. Exports declined drastically and for the first time since its dependence in 1965, the city state’s GDP contracted by 1.4 percent. The second oil shock in 1979 had a negative impact also on the oil- and marine- related industries. There was a global glut in the oil-refining industry and demand for Singapore’s oil products (mainly refined oil) fell. The shipbuilding and ship-repairing industry had also been laden with excess capacity since the first oil crisis of 1973. The outlook was so gloomy that the Mitsubishi Heavy Industries Ltd withdrew from Singapore in 1984. Other ship-building companies diversified their activities into the production of oil-rigs and marine engines in order to weather the recession. The global economic slump also hit the electrical and electronics industry. Even the construction industry, a sector which saw phenomenal growth in the past, was slowing down.

The situation was further exacerbated by the high-wage policy of 1979-1984 amidst growing labour shortages and high incidences of labour turnover.[6] By 1984, for example, the CPF contribution by employers had risen to 25 percent of wages. The rising wages squeezed profits at the same time as external demand was declining in a prolonged global recession. Enterprises engaging in labour-intensive operations were especially hard-hit as profitability declined.[7] Besides the rising wages, MNCs engaged in industrial development also faced rising rent and land costs as a result of land shortages.[8] To make things worse, the strategy to nudge enterprises up the value-ladder did not produce the desired results in the short term.

Instead of upgrading their operations, many chose to relocate to other locations where factor costs were lower.[9] For example, in 1989, labour costs on Batam Island, Indonesia were, on average, only 25 per cent of those in Singapore.[10] In short, Singapore was losing its competitiveness, as a location within the global industrial production system.

4.5     1985 Economic Committee – Charting New Directions

The 1985 recession laid bare the risk of Singapore’s overdependence on a few sectors, such as electronics and chemicals, to drive export-led growth. Clearly, Singapore had to diversify its risks by widening its spectrum of economic activities.

In April 1985 an Economic Committee was set up to look into the economic downturn. In the following year, a report entitled The Singapore Economy: New Directions was released. It reaffirmed Singapore’s limitation in human and natural resources and recommended that Singapore be made into a ‘total business centre’ with not only manufacturing but also services (international services, transport and communications, logistics, and finance and banking) sectors as the backbones of the economy.[11] To promote the growth of the tertiary sector, services industry became eligible for pioneer status, an incentive which had hitherto been granted only to manufacturing firms. At the same time, companies that set up OHQ (operational headquarters) and IPO (international procurement offices) in Singapore could enjoy various tax reductions.

The committee also confirmed Singapore’s lost of competitiveness because of escalating costs. Wages, in particularly, had risen faster than productivity. To remedy the situation, the government froze wages for two years and lowered the corporate tax rate from 40% to 33%. At the same time, the employers CPF contribution was reduced from 25% to 10%, while the workers’ contribution remained at 25%. More importantly, by 1987, a system of flexi-wage had been put in place. Under the system, wages were tiered into a basic component, an annual supplement of one month’s basic wage, and a variable performance bonus based on company performance measurable by profits or productivity. With this system, workers’ remuneration would vary automatically with the performance of the economy and the individual enterprise.

The SMEs were also not left out in government’s plan of charting a new direction for the economy. In February 1987, the EDB coordinated a multi-agency effort to draft a master plan for SME development which culminated in the release of the SME Master Plan in 1988. Among other things, the plan aimed to promote entrepreneurship and innovation, encourage information exchange and dissemination to increase informational market efficiency, promote best practices through consultancy and training, and encourage internal expansion of domestic enterprises. These would be achieved through five strategic thrusts covering technology adoption, application and innovation; business planning and finance, human resource management; productivity improvement and training; and marketing and business partnership. The plan marked the first phase of the government overall strategy to develop indigenous world-class enterprises.

As for the tourism industry, after seeing double-digit growth rates for most years in the 1960s and 1970s, pace of development began to slow in the 1980s. In 1983, for the first time in 20 years, tourist arrivals were down by 3.5%. The decline jolted the government into action. A team of experts were quickly assembled to study the reasons for the decline and to formulate remedial actions. The taskforce came to the conclusion that the cause for the decline was structural rather than cyclical. Problems identified by the team included travel restrictions imposed by some ASEAN neighbours (particularly Indonesia), Singapore’s uncompetitive position as a tourist destination, and the loss of attractions.[12] For example, in its race for higher economic growth, Singapore was unwittingly destroying its heritage. Hence, Singapore needed to incur substantial investment in infrastructural projects to restore what has been lost and to build new tourists attractions.

In 1984, STB was reorganized and expanded to reflect the new needs of the industry. In conjunction with the Ministry of Trade and Industry which collected inputs from other ministries and statutory bodies, STB tabled a Tourism Product Development Plan in 1986. The $1 billion plan aimed to increase visitor arrivals, length of stay and tourist expenditure. It also outlined action plans for the restoration and revitalization of older areas such as Chinatown and Little India, the greening of the whole island and the cleaning of the Singapore River. The various projects would help to create five major themes (exotic east, colonial heritage, tropical island resort, clean and green garden city, and centre for international sporting events), each of which was expected to generate half-day or daylong visits by tourists. Finally, to encourage private sector participation in developing tourism-related projects, the government also offered a package of tax incentives to both local and foreign investors.

Tourist arrivals registered small increases of 4.8% in 1984 and 1.3% in 1985. Not surprisingly, the hospitality industry was also hit by the slowdown in tourist arrivals. Given the rising number of tourist arrivals in the previous two decades, Singapore’s hotel industry expanded quickly, resulting in a glut of hotel accommodation in the 1980s. Occupancy fell from 86.1% in 1980 to 64.7% in 1986. After a slowdown in hotel construction, the occupancy rates recovered in 1987. The industry was also helped by one bright spark which was the growing importance of Singapore as an international convention city.  Singapore had continued to host the largest number of international conventions in Asia every year since 1983, and had ranked in the top ten in the world since 1983. By 1990, the number of tourist arrivals hit 5.3 millions.[13]

4.6     The Strong Recovery (1986 – 1990)

With all the efforts by the government to regain competitiveness, by the second half of the 1980s, the Singapore economy noticeably accelerated. Between 1986 and 1990, growth rates averaged 8.5 percent per annum.[14] Singapore was also achieving some success in establishing the tertiary sector as the second engine of growth. This change was noticeable in terms of both GDP and employment. By 1989, the financial and business services sectors had overtaken manufacturing as the vanguards of the economy. In 1990, they grew by a further 14.6 percent which amounted to one-third of the overall growth rate of 9.2 percent chalked up by the economy that year.

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[1] [eBESg012/189]

[2] http://www.edb.gov.sg/edb/sg/en_uk/index/about_edb/our_history/the_1980s.html

[3] Sg001/311

[4] Sg001/311

[5] Ministry of Trade and Industry (1986).

[6] Okposin, S. B. (1999). P.12

[7] Chiu, Ho and Lui (1997)

[8] [sg010/27]

[9] Krause, L. B. (1987).

[10] Kumar and Lee. (1991)

[11] Economic Committee 1986: 4—20

[12] Ministry of Trade and Industry (1984)

[13] Sg001/472

[14] Singapore Department of Statistics (2008b)

3.1 Growing Dependence on Foreign Workers

Contents

3.1  Growing Dependence on Foreign Workers
3.2  Oil Crisis and the Failed Attempt of Industrial Upgrading

By the early 1970s, as FDI continued to flow in, the unemployment situation was reversed and the economy approached a situation of full employment. The creation of jobs came not only from a dramatic increase in foreign direct investment but also a rapidly expansion in public housing program in the early 1970s.[1] Given Singapore’s small population, there was an increasing dependence on foreign workers from neighbouring countries. According to the 1970 Census of Population, there was a total of 72,590 non-citizen and non-resident workers in 1970 constituting about 11 per cent of the work force.[2]

Meanwhile, Singapore’s excellent geographical location had allowed it to successfully develop the service sectors in air transportation, telecommunications, shipping and cargo handling activities.  Coupled with the efficient infrastructure of land-, air- and sea transport and an increasingly skilled and hard working labour force, Singapore emerged as an attractive choice for MNCs seeking low-cost locations to manufacture products for markets in the West.

Despite the success, there were worries about the sustainability of the economic growth driven by labour-intensive industries. Competition for foreign investment was heating up. Singapore was not unique in offering various incentives to MNCs. Costs in Singapore were also rising because of labour and land shortages. Wages, in particular were already higher than those in Taiwan, South Korea and Hong Kong. In 1972, for example, the average monthly wage of a semi-skilled worker was US$87 compared to the US$66 in South Korea, US$73 in Taiwan, and US$84 in Hong Kong. [3] The worries about rising costs and labour shortages prompted a shift in Singapore’s economic strategy away from labour intensive to capital- and technology-intensive industries.

3.2     Oil Crisis and the Failed Attempt of Industrial Upgrading

The government sought to upgrade the economy’s industrial structure through a two-pronged approach.

Firstly, efforts were intensified to attract manufacturing industries that would place more emphasis on quality, skills and technology (such as petrochemicals, machine tools, precision engineering, sophisticated electronics, office equipment and machinery). Next, assistance were provided to existing industries to upgrade their skills and technological level.

The Finance Minister, Hon Sui-Sen, also announced a ten-point program as part of the effort to restructure the economy. Industries with the desired level of technology would be given a five-year tax holiday. To help with the upgrading of the industries, an open-door policy was adopted for qualified foreign engineers, technicians and other professionals, and skilled workers. At the same time, manpower development efforts within the country would be intensified to promote industrial training.

As an incentive to enterprises, training expenses by medium- and high-technology industries could be amortized for tax purposes.[4] As a ‘disincentive’ for companies to remain labour-intensive, the wage policy was revised to effect increase in wages in stages. However, the increase was to be done in an orderly manner under the guidance of the National Wages Council established in 1972, to ensure that Singapore would remain competitive internationally in the medium- and high-technology industries.

Unfortunately, this initial attempt to upgrade the economy was disrupted by the first oil crisis in 1973, and the ensuing world recession in 1974-76.

As global economic conditions worsened, FDI inflow also fell sharply from S$708 million in 1972 to S$376 million in 1973. Singapore economy growth slowed consecutively to 6.1 percent in 1974 and then 4.1 percent in 1975.[5] As fear of recession rose, Singapore clung on to labour-intensive industries and kept wage increases down to protect jobs.[6] The delay in the restructuring because of the oil crisis meant that Singapore would become increasingly more dependent on low-skilled foreign workers to drive the economic growth. Had Singapore proceeded with the upgrading, many of the labour-intensive industries would have simply relocated to other locations with abundant labour supply.

By 1976, Singapore’s economy resumed its rising trend, growing by 7.1%. During the period 1974 – 79, its real GDP grew by 7.4% a year, much higher than the average of 4.8% achieved by developing countries. Notably, however, most of that Singapore’s economic growth did not come from the manufacturing sector which actually saw a declined in 1975.[7] Instead, the growth could be attributed to firstly the construction sector which benefited from the government’s continued investment in infrastructure, and secondly from financial services which saw a rise in activities in the Asian Dollar Market (ADM).

Despite the delay in the upgrading and restructuring of the economy because of the oil-crisis, several important developments further strengthened Singapore and helped it prepare for the shift to capital- and technology intensive industries in the next phase. As a result of the government’s constant effort in upgrading the skills of the entire work force, this phase saw the establishment of a strong foundation for industrial training. The Vocational and Industrial Training Board was set up in 1979 to increase the supply of skill-based workers. Besides continuing its efforts to strengthen the domestic educational institutions, the government had also initiated the establishment of the joint industry training centers, in collaborations with MNCs, through the EDB. The Joint Industrial Training Scheme was an excellent example of how industries and government could build symbiotic relationships. By helping to train the work force, the MNCs were guaranteed of a supply of highly-skilled workers as they shifted their operations increasingly towards more capital- and technology-intensive. In 1978, to encourage the adoption of automation, enterprises were charged a levy for foreign unskilled labour. At the same time, the government also encouraged wage increases in excess of productivity growth to nudge enterprises to upgrade their operations and reduce their dependence on labour.[8]

Next, services sector also saw rapid growth. The success of the ADM, for example, contributed to the growth of the financial and business sector and put Singapore on its path to become a regional financial centre.[9] Another service sector that continued to see high growth during this period was the tourism industry. To further extend the scope of the industry from private to business travellers, STPB created a Singapore Convention Bureau in 1974 to attract international conventions, exhibitions and incentive tours. Eventually, the relentless efforts of the STPB to promote Singapore paid off and the number of foreign visitors rose steeply from 98,500 in 1965 to 2.56 million by 1980. As a percentage of the GDP, tourism revenue grew from 5% in 1970 to more than 12% in 1980. Despite the rapid growth, Singapore faced natural constraints in its efforts to further develop the industry. As a small city-state, there were hardly any natural or cultural attractions to pull in tourists or entice them to extend their stay. Also, the industry was both labour- and land-intensive. Given the focus on industrial development, allocation of scarce resources, such as labour and land, to the tourism industry was seen as a diversion at the expense of the higher value-add industrial activities. As such, the government’s enthusiasm in developing the industry was thought to be lukewarm and low-key. [10]

The increase in tourists resulted in a rapid rise in air traffic at the Payar Lebar Airport, which had been in operation since 1955. In 1975, government made the decision to build the Singapore Changi Airport to facilitate a higher flow of travellers. The new airport opened for operation on 1 July 1981. The success of Singapore’s evolution into a regional transportation hub not only underpinned the development of tourism industry but also that of the export trade. Given that Singapore was an open economy with close links with global markets, the ability to maintain connections, both in terms of sea and air, was critical.

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[1] [Sg004/83]

[2] [ePEScEc001/12]

[3] Yoshihara (1976)

[4] Hon, Sui-Sen (1973) “The New Phase of Industrial Development in Singapore,” Address to the Singapore Press Club on March 23, 1973.

[5] Singapore Department of Statistics. 2008b. Statistics: GDP at 2000 Market Prices. (http://www. singstat.gov.sg/stats/themes/economy/hist/gdp1.html).

[6] Goh, Chok Tong (1980) We Must Dare to Achieve” Budget Speech, 1980.

[7] [ePESgEc001/13]

[8] [Sg004/84]

[9] [ePESgEc001/13]

[10] Sg001/474

2.1 First Industrial Revolution and the Drive for Foreign Direct Investment

Contents

2.1  First Industrial Revolution and the Drive for Foreign Direct Investment
2.2  Building Soft and Hard Infrastructures
2.3  Expanding from Manufacturing to Services Sector
2.4  The Taking off of the Economy (1966 – 1973)

Singapore’s separation from Malaysia in 1965 marked the beginning of the city-state as an independent republic. It also meant the end of the import-substitution strategy. On its own, the domestic market was too small to be of interest to any MNCs. In addition, Singapore had to compete with Malaysia which was also seeking foreign investment. Left with no choice, the government increasingly turned to the idea of export–oriented industrialization, as proposed in the 1961 Winsemius Report, to drive economic growth. This early period of export-oriented industrialization is commonly known as Singapore’s “First Industrial Revolution”.

To attract foreign investment for its export-oriented industrialization drive, the government adopted various measures. In 1967, the Economic Expansion Incentives Act was enacted to provide incentives to the MNCs. Besides incorporating the Pioneer Industries Ordinance of 1959, the act also introduced export promotion measures.[1] Among other things, foreign firms were allowed total freedom in repatriation of capital and earnings abroad. Singapore was also one of the few developing nations to allow companies with 100 percent foreign ownership.[2]

Unfortunately, just as Singapore was struggling to stand on its feet after its separation from Malaysia, another crisis erupted. In 1967, the British government, pressured by its own financial difficulties, dealt another blow to Singapore’s fragile economy when it announced its intention to withdraw its military base in Singapore by 1971. Since the bases-related activities accounted for 20% of the Singapore’s GNP, the move could seriously worsen the unemployment situation and even trigger a recession.[3] Under these conditions, the government began to push for FDI in heavy industries, especially those that could create jobs quickly.

One country that played a significant role in Singapore early industrialization efforts was Japan which had achieved rapid post-war economic growth through its own industrialization efforts. Japanese investment flowed into Singapore as early as the 1950s. With economic survival at stake after its separation from Malaysia, the Singapore government was anxious to obtain the Japanese assistance. To invite Japanese companies to set up plants in Singapore, EDB set up an office in Tokyo in 1962. There was however, strong animosity towards the Japanese, especially among the local Chinese people, because of the atrocities committed by the Japanese when Singapore was under their occupation. Despite so, some Japanese investments did flow in. For example, in 1963, the Japanese shipbuilding firm Ishikawajima-Harima Heavy Industries (IHI) was invited to form a joint venture company, Jurong Shipyard Ltd.

To resolve the what came to be known as the “blood-debt issue”, Japan signed an agreement on ‘quasi-reparations’ with Singapore on 21 September 1967. As compensation, Japan offered grants amounting to $25 million (2,940 million yen) and an equal amount of loans in yen on liberal terms.[4] With the symbolic reparation, the historical baggage and animosity was put behind, at least at the governmental level.[5] In 1968, the Singapore government and the Mitsubishi Heavy Industries Ltd became venture partners to set up Mitsubishi Singapore Heavy Industries Ltd. In 1970, Robin Group joint Hitachi Zosen Ltd to set up the Hitachi Zosen Robin Dockyard Ltd. In 1971, Jurong Shipyard Ltd, a $15 million joint venture between the Ishikawajima-Harima Heavy Industries, the Singapore government, and the Jurong Shipbuilders Ltd, began operation.[6]

The Japanese interests went beyond just heavy industries. Large trading companies including Mitsui & Company, Mitsubishi Corporation, Marubeni-Iida, Ito Chu and Nissho also invested, some as early as the 1950s. These trading companies played a crucial role in helping to attract Japanese manufacturing investments, including those from textile and plywood industries, into Singapore in the first half of 1960s. Many of these manufacturing companies were unfamiliar with overseas market conditions at that time and had to depend on the trading companies for their overseas expansion.

2.2  Building Soft and Hard Infrastructures

Meanwhile, Singapore government’s policy initiatives during the early 60s were beginning to bear fruit. The education system’s sole focus on producing skilled artisans and technicians needed for industrial growth allowed the city state to generate a substantial pool of semi-skilled workers instead of unemployable white-collar graduates. School curriculum focused on applicative, rather than academic, subjects such as English, mathematics, and science. Enrolment was strictly merit-based.[7] In addition, to support the industrialization effort, EDB set up its Manpower and Training Unit in 1971, to provide ad hoc industrial training. In the same year, EDB launched the Overseas Training Programme which put young Singaporean workers in apprenticeship programmes in Germany. Joint training centres were also set up between the Singapore government and Tata of India, Philips of Holland, and Rollei of Germany.[8]

At the same time, the government also quickened its pace of putting in place infrastructures needed for the industrialization. Efforts to improve telecommunication, port and air services were intensified. The EDB had also developed several industrial estates each equipped with excellent physical infrastructure at subsidized rate. After promoting Singapore to its prospective foreign investors for almost a decade, the EDB had also improved its organizational capability and accumulated selling experience. Its officials had gained a reputation of delivering their promises. They were also very efficient in helping foreign investors cut down red tapes so that the production could begin within the shortest period of lead time.  By November 1969, the government had set up Singapore Investment Centres in various countries including the US, Japan, Germany and Britain to help attract direct investments in Singapore.

In its efforts to consolidate its governance, the government continued with its efforts to streamline and put in place institutions that were critical for building and managing the economy. For example, as industrialization efforts gained momentum, EDB’s functions grew increasingly complex. In 1968, to relieve the EDB of the financial functions of providing investors with long-term loans at favourable interest rates and of making capital investment in industry, the Development Bank of Singapore (DBS) was established. In the same year, EDB’s responsibility of managing industrial estates was transferred to the Jurong Town Corporation (JTC). As a result of such relegations of tasks to other agencies, EDB could focus on its original goal of investment promotion to foreign investors. In 1971, Singapore created the Monetary Authority of Singapore (MAS) as its central bank. The task of issuing currency, however, remained with the Board of Commissioners of Currency, Singapore (BCCS) which had been performing that role since 1967.

Domestically, the government had also won the confidence of its people with the success in alleviating the problem of housing shortage. During the general election held in 1968, PAP won all 58 parliamentary seats. Armed with the strong mandate from the resounding victory, the government then acted quickly to improve industrial relations, another thorny issue which, if not tackled, could derail the industralization effort. Stoppages were widespread at that time. In quick succession, two legislations were introduced in 1968. Firstly, the Employment Act abolished some discriminatory practices and rationalized pay structures. Next, the Industrial Relations (Amendment) Act gave the management absolute prerogative over matters such as promotions, methods of recruitment, transfers, task assignments and retrenchment.  These legislative changes helped to remove a big source of friction between labor and management and allowed trade unions to adopt a non-confrontational stance towards management.[9]

To further foster industrial peace, government promoted a tripartite relationship consisting of the government, employers and labour. The interests of the labour would be represented and protected by the National Trades Union Congress (NTUC). It was hope that tripartism would provide a system of dialogue to reduce stoppages and help to achieve higher productivity, greater efficiency and faster economic growth. The inclusion of six central committee members of the NTUC as parliamentary candidates in the 1968 general election further consolidate the relationship between the government and the unions.[10] By co-opting the union leaders within the government, it ensured that the interests of the workers would be taken into considerations during policy makings. More importantly, it shifted the focus of the unions from class actions to that of meeting national interests.

2.3  Expanding from Manufacturing to Services Sector

Despite its focus on industrialization, the government was quick to capitalize on emerging opportunities even in the financial sector. For example, it was quick in capitalising on the opportunity of providing international banking services after San Francisco had closed in the evening and before Zurich opened the next morning. The move made 24-hour global trading possible for the first time. In 1968, the government invited Bank of America to set up an Asian Currency Unit (ACU) to deal in U.S. dollars and other hard currencies, similar to its Eurocurrency unit in London. The Bank of America (BoA) jumped at the offer as it was anxious to collect deposits particularly from Chinese in Southeast Asia. As incentives, the government offered tax-exemption for the interest derived from non-resident deposits in these units. BoA’s entry was followed by a rapid succession of other banks, mainly foreign. These commercial banks (and merchant banks after 1970) were permitted to set up Asian Currency Units (ACU) to accept foreign currency deposits and make loans in foreign currencies. The ensuing phenomenal growth led to the formation of the Asia Dollar Market (ADM). It also resulted in the expansion of financial services industry and helped to diversify the economy from its dependence on the manufacturing sector. At the same time, the growth of the financial industry facilitated the inflow of foreign investment by making financial resources more readily available. Hence, the growth of the ADM provided the impetus for Singapore to emerge as a regional financial centre.[11]

Another industry which Singapore sought to develop was tourism. The Singapore Tourist Promotion Board (STPB, renamed the Singapore Tourist Board in 1997) was created in 1964 to oversee the development of the industry. In addition to its functions of marketing and planning tourism, the STPB also acted as an agent for the government on a wide range of tourism-related matters. For example, to improve the wholesome experience of tourists in Singapore, STPB acted as the lead agency that coordinated activities with other government bodies including Civil Aviation Authority of Singapore, Economic Development Board, Urban Redevelopment Authority, and the Ministry of Information and the Arts.

In 1970, STPB set up an office in Tokyo to attract Japanese tourists which formed the second highest group of visitors, after those from the neighbouring ASEAN countries. By 1972, another statutory body, Sentosa Development Corporation, was established to develop Sentosa Island (formerly known as Pulau Blakang Mati) into a tourist resort. For most years in the 1960s and 1970s, the tourism industry saw double-digit annual growth rates. One factor that contributed to the rapid growth of the industry was the liberal tourism policy Singapore adopted right from the beginning.[12] To welcome visitors from all over the world, there were hardly any visa or foreign currency restrictions. To ensure tourists safety, strict laws were enforced. At the same time, tough pollution control measures were implemented to keep the environment clean.

The growth of the tourism industry was also boosted by the development of the aviation industry. There were few restrictions on the landing rights or scheduled airlines and on the operation of chartered flights. The liberal aviation policies helped to increase the growth of air travel.

One government effort which eventually gave rise to a mega-success story that epitomizes the development of Singapore was the creation of Singapore Airlines (SIA). The history of SIA dates back to 1 May 1947 with the formation of Malayan Airways Limited operating three scheduled flights a week to Kuala Lumpur, Ipoh and Penang from Singapore’s Kallang Airport. Then, in 1966, Malaysia – Singapore Airlines (MSA) was formed from the Malayan Airway Ltd (MAL) after the governments of independent Singapore and Malaysia acquired a joint majority holding on it. Two years later, the iconic Singapore Girl adorning the sarong kebaya uniform designed by French couturier Pierre Balmain was introduced and became internationally the recognized image of the airlines. In 1972, Malaysia-Singapore Airlines split up to become two entities – Singapore Airlines and Malaysian Airline System. This milestone marked the beginning of the modern history of one of the most successful and respected airlines in the world.

2.4  The Taking off of the Economy (1966 – 1973)

The multi-front efforts by the government worked and the economy picked up during the second half of 1960s. Foreign direct investment (FDI) began to surge after 1967. During 1968-73, for example, manufacturing investment commitments amounted to S$2.3 billion. The US overtook United Kingdom as the largest foreign investor with most of their investment going to petroleum refineries and electronics. During that period, Singapore also benefited from the political uncertainties in Hong Kong attributed to China’s Cultural Revolution. The resultant relocation of textile and garments plants to Singapore generated a large increase in industrial employment and exports.

Overall, Singapore economy grew by an average of 12.6 percent every year between 1966 and 1973 (See Figure 2.1).[13] Exports expanded by an average of 19 percent annually between 1965 and 1974.[14] The number of workers employed in electronics industry rose from 1,611 in 1966 to 44,483 in 1973. During the same period, employment in textiles and clothing also increased from 2,459 to 35,012.

Altogether, these two industries alone generated more than half the total growth of about 147,500 in manufacturing employment during this period.[15]

The share of manufacturing rose sharply from 16.0 percent in 1966 to 22.3 percent in 1973. During the same period, direct exports as a percentage of total sales in manufacturing rose from 43.3 percent to 53.9 percent. Gross domestic capital formation as a percentage of GDP rose rapidly, from 21 percent to 40 percent in 1973.[16] Even though operations were focused initially on labour-intensive, low value-added items such as textiles, garments, furniture, electrical household appliances, ship repair, and simple repetitive assembly tasks in consumer electronics, capital intensity subsequently increased with investments in petroleum refining and chemicals.[17] In particular, the industrialization drive was led by the shipbuilding, oil refining, and electronics sectors.

With continuous inflow of FDIs, foreign invested companies dominated both production and exports and became the locomotives of industrial growth. Because of Singapore’s traditional strength in trading, there was a shortage of indigenous industrialists with the necessary experience to build industries. In the end, the government had to create state-own companies, including Singapore Airlines, Sembawang Shipyard and DBS, to grow the tertiary and manufacturing sectors. The rest of the domestic private companies, especially those dominated by Chinese conglomerates and active in trade and services played a relatively smaller role in Singapore’s industrialization process.

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[1] Goh Keng Swee (1973) “lnvestment for Development : Lessons and Experiences of Singapore, 1959 to – 1971,” paper presented at the Third Economic Development Seminar in Saigon on January 17, 1973.

[2] [eBESg012/188]

[3] [eBESg012/188]

[4] Hiroshi Shimizu, Hitoshi Hirakawa (1999). “Japan and Singapore in the world economy: Japan’s economic advance into Singapore, 1870-1965”, Routledge,

[5] This simple statement makes light the severity of the conflict and the power struggle between the government and those who led the blood-debt campaign which included students, workers, and ordinary Chinese who supported the communists. Since this is beyond the scope of this paper, anyone interested should read Chapter 7 of Hiroshi Shimizu, Hitoshi Hirakawa (1999).

[6] Hiroshi Shimizu, Hitoshi Hirakawa (1999).

[7] [Sg004/73]

[8] http://www.edb.gov.sg/edb/sg/en_uk/index/about_edb/our_history/the_1970s.html

[9] [ePESgEc001/11]

[10] [ePESgEc001/11]

[11] [ePESgEc001/11]

[12] Khan (1998)

[13] Singapore Department of Statistics. (2008).

[14] Koh et al. (2007). P187

[15] [ePESgEc001/11]

[16] [ePESgEc001/12]

[17] [Sg004/83]

1.1 Founding of Singapore and Growth of Entrepot Trade

Contents

1.1  Founding of Singapore and Growth of Entrepot Trade
1.2  The Challenges of Self-Government
1.3  The First State Development Plan (1961 – 1964) : Strategy of Import-Substitution
1.4  Singapore’s Independence

Until the early nineteenth century, Singapore was just an ordinary Malay fishing village first known as Temasek (淡马锡) and then Singapura (新加坡啦).[1] It was Stamford Raffles, who was then the Governor Lieutenant-General of Bencoolen, that established a settlement on the island after coming ashore in 1819 and started the colonial history of Singapore as a trading port.

Besides having a natural deep-water habour, Singapore’s was also strategically located at the southern tip of the Malay Peninsula. Geographically, it not only occupied a centralized location within the Southeast Asia but was also well placed to tap the growing East-West sea-borned trade sailing between the Indian and Pacific Oceans through the narrow Straits of Malacca. To promote trade, the British adopted liberal trade policies and put in place an efficient system of administration and law. Soon the new port became a centre of entrepot trade not only for the British East India Company but also for all ships traversing the East-West maritime spice route. Spices from the Southeast Asia region were brought into Singapore by Malay traders for processing before they were traded with Chinese, Indian, Arabic and Europeans traders, all converging in Singapore.

The island was initially jointly administered by the British and Malays. In 1824, the Sultan ceded the authority to the East India Company which held it until 1858 when the latter was dissolved by the British Parliament. The administration was then transferred to the Indian Office of the British Governor, which ruled Singapore with Malacca and Penang collectively known as the Straits Settlements.[2]

During the Second World War, Singapore was briefly occupied by the Japanese when the British on the island surrendered in 1942. The occupation lasted until when the war was over in 1945. The control reverted to the British, though its moral rights to rule as colonial master was thought to have already been weakened by their incompetence and weaknesses displayed during the war

1.2  The Challenges of Self-Government

As the clamour for independence gathered strength across the region, Singapore gained limited self-government in 1959. The People’s Action Party (PAP), under the leadership of Lee Kuan Yew, won a landslide victory in the parliamentary elections to form the country’s first autonomous government. At that point, Singapore was still an underdeveloped Third World country, just like other former colonial countries. The national economy was still dominated by intermediary entrepot trade and the services (including banking, shipping, warehousing, transportation and some intermediate processing industries) supporting this trade. The nascent autonomous-state was plagued with widespread poverty, low levels of education, inadequate housing, poor sanitary conditions and healthcare, and high unemployment. Population was also increasing rapidly and the trade sector was not creating enough jobs. Its long history of entrepot trade had endowed Singapore with hardworking and shrewd traders but not industrialists who could start factories and create jobs quickly. To make matter worse, there were constant disturbances arising from communism, communalism and militant unions. The Malayan Communist Party (MCP), with the support from China, set itself out to liberate Malaysia and Singapore from the clutch of the colonialists. They infiltrated schools and unions and mobilised students and workers for their cause. Industrial unrest was high, instigated and incited by the militant unions. Since the population comprised of a disparate group of immigrants from different countries, there was a lack of sense of national identity. In short, the newly elected government faced an uphill task in an extremely volatile environment but they proceeded with the nation building, undaunted.

On the social front, the government embarked on a mass housing program in 1960 by establishing its first statutory board, the Housing and Development Board (HDB), to build subsidized housing on a large scale. The population of Singapore had risen steeply from 978,000 in 1947 to 1.5 million in 1959 and there was a serious problem of housing shortage. After taking over from its predecessor, the Singapore Improvement Trust, HDB was given the task of building 50,000 flats under its First Five-Year Building Programme. By 1965, HDB had built 54,000 flats.[3]

In addition, the government recognized, right from the start, the importance of education in supporting economic development and stepped up its effort to expand the capacity of the educational and training institutions. A five-year education plan that emphasized basic education was introduced soon after Singapore attained self-governance in 1959 to equip the workforce with basic skills in mathematics and science.[4] Between 1960 and 1965, secondary school enrollment doubled. Vocational schools providing students with technical skills were also started. In fact, Singapore Polytechnic was the first polytechnic established as early as 1954, providing skilled-based training to support the industrialization efforts. Ngee Ann College, on the other hand, was inaugurated in 1963. The College offered four-year degree courses in three main areas: language, commerce and technology.[5]

The nascent government made integrity a top priority in their governance of Singapore. In 1959, as soon as it had assumed office, a stringent anti-corruption law was enacted to replace an outdated one established during the colonial times. Besides widening the definition of gratuity to anything of value, the law also empowered investigators with the authority to arrest, search, and investigate bank accounts of not only the suspected public officials but also their wives, children, or agents. Officials living beyond their means could be construed as guilty of corruption. In 1963, the law was further tightened to witnesses to provide information in court.[6]

1.3  The First State Development Plan (1961 – 1964) : Strategy of Import-Substitution

Economically, given the limited experience and resources, the government started by seeking external assistance and there were three external reports made on Singapore’s economic development from 1955 to 1961. The first was the 1955 report made by a mission organised by the International Bank for Reconstruction and Development (IBRD). The second was a report made by a Canadian industrial development specialist F.J.Lyle. The third was the Winsemius Report of 1961.[7]

All the three reports emphasized the need for industrialization as a way out of the unemployment situation in Singapore. Out of the 1959 Lyle Report also came the Pioneer Industries Ordinance of 1959 which exempted companies that were granted pioneer-industries from paying the prevailing 40% corporate tax for five years. However, it was the Winsemius Report that culminated in the government’s first State Development Plan (1961 – 1964) which served as blueprint to help guide the country’s industrialization efforts.

Winsemius Report was the work of Dutch Economist Albert Winsemius.[8] In 1959, in response to the Singapore government’s request, a UN Industrial Survey Mission headed by him arrived in Singapore to study the possibility of industrialization. The Winsemius Report released in 1961 pointed out that Singapore’s foreign trade sector was unable to provide enough jobs for the rising population which was growing at an average rate of 4%. To solve the unemployment problem, Singapore needed to embark on an industrialization drive, focusing on promising industries that could utiltise the ability and skill of the local workforce to produce quality goods for overseas markets. These industries included ship building, steel-rolling, electrical appliances and parts, and chemicals. The report further advised Singapore to make an export drive for distant overseas markets rather than selling to the neighbouring countries which were thought to be limited in size. Also, intervention of the state should be restricted to selected industries and joint ventures should be encouraged between local manufacturers and foreign companies investing in Singapore in order to grow the indigenous private sector.[9]

However, not all the recommendations of the report were taken up by the government. Firstly, instead of growing the private sector to drive the industrialization, it became a state-led process where the government assumed the dominant role. Next, the government also adopted the strategy of import-substitution rather than the recommended export-driven approach. This strategy entailed attracting FDI and selling the manufactured goods in the expansive and protected Malaysian hinterland. The strategy was underpinned by the assumption that Singapore would enter into a political and economic union with Malaya which would effectively doubled the size of the market in terms of GDP. In addition to the secured access to raw materials, the larger market size allowed Singapore manufacturers to reap economies of scale.

1.4  Singapore’s Independence

In 1963, after calling for a referendum and winning the support of its people, Singapore broke free from the British’s rule and merged with Malaya, North Borneo (Sabah) and Sarawak to become a part of the Federation of Malaysia.[10] To protect the local industries, import quotas were instituted. By May 1965, as many as 230 imported items were subjected to quantitative restrictions and import licensing.

To promote economic growth, the Economic Development Board (EDB), another statutory board set up in 1961 by the government , was given the task to promote Singapore and draw in foreign investment.[11] The objective of the EDB was to attract labour-intensive industries in order to create jobs for the unemployed. Among other things, the agency was given the power to grant loans or to subscribe to shares, bonds, or debentures of industrial enterprises, to establish industrial estates with the required facilities, to invest directly in industrial ventures, and to offer incentives, such as “pioneer status” award which grant five-year tax holidays to foreign investors.[12] To be better placed to attract foreign investments, EDB opened its first overseas centres in Hong Kong and New York.[13]

Besides the UN, the government also sought the assistance of Japan in Singapore’s economic development. In 1960, a team of six Japanese technical experts from the International Construction Engineers’ Association of Japan came to Singapore to prepare a detailed plan for an industrial estate at Jurong, in close consultation with the UN Industrial Survey Mission. Based on the plan, EDB built the Jurong Industrial Estate in 1961.[14]

Singapore’s industrialization push coincided with the moves by MNCs to relocate their production overseas. Many MNCs were facing rising costs and frequent strikes in their home countries and were eager to relocate the labour intensive parts of their operation to developing countries where costs would be lower. The lure of the common market also helped to pull in investments from foreign companies who wanted to bypass the protective trade barriers.

By 1965, however, it was evident that Singapore’s merger with Malaysia was not a happy-ever-after story. The PAP state government turned out to be an adept rival that threatened the dominance of United Malays National Organization (UMNO), the national ruling party. PAP’s platform of meritocracy and multi-ethnic state with equal rights for all Malaysian people, regardless of race, went head on with UMNO’s position of preferential treatments for the indigenous Malays. PAP’s assertiveness was viewed by Tunku Abdul Rahman, the Prime Minister of the Malaysian government, as a Chinese bid to challenge Malay supremacy. After the eruption of a politically-incited bloody racial riot in 1964, Singapore was told to leave the Federation of Malaysia in 1965.

Despite the politically unsettling situation, however, Singapore’s GDP grew at an annual compound rate of 5.7% from 1960 to 1965. In 1965, its per capita income of US$512 was about 2.5 times that of Malaysia-then and 10 times the levels that prevailed in Indonesia and India.[15] Manufacturing, as a share of real GDP, increased from 16.9% to 19.1%. During this period, EDB attracted S$157 million of investment from foreign companies aiming to secure a foothold in the Malaysian common market.[16] The manufacturing sector created 21 000 new jobs but the unemployment was still more than 10%.[17] Production was initially focused on labour-intensive industries, including the production of transistors, textiles, and leather products.

Besides these labour-intensive industries, there were also capital and technology-intensive projects from companies such as Shell Eastern Petroleum and the National Iron and Steel Mills. Shell, for example, set up Singapore’s first oil refinery in 1961 and was awarded “Pioneer Certificate No. 1” by the Singapore government.[18] Finally, the public housing programme and the building of infrastructures also contributed to the rise in the share of construction from 5.4% of GDP in 1960 to 9.4% in 1965.

Up till this point, Singapore’s economic achievements were modest. The real success of the government, however, was in the laying of the foundations for later success. The establishment of the two statutory boards was instrumental in helping to tackle the initial social and economic problems faced by the infant city-state. More importantly, the government’s effort in expanding training and education capacity helped to prepare its hard-working people for the next phase of industrial development as foreign investment trickled in. Such efforts were instrumental in helping Singapore survived the crisis that erupted in the in the second half of the 1960s.[19]

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[1] Singapura means the “Lion City” in Malay.

[2] The Straits Settlements was initially under the control of the East India Company. In 1858, the control was transferred to the India Office in London when the company was dissolved in 1858. In 1867, the Straits Settlements became a Crown Colony under the Colonial Office in London.

[3] http://www.hdb.gov.sg/fi10/fi10296p.nsf/WPDis/About%20UsA%20Brief%20Background%20-%20HDB’s%20Beginnings?OpenDocument&SubMenu=A_Brief_Background

[4] Sg001/P.310

[5] Today, the college is known as Ngee Ann Polytechnic.

[6] Lee Kuan Yew (2000), Chapter 12

[7] Hiroshi Shimizu, Hitoshi Hirakawa (1999). P.182

[8] Subsequently, he was retained as an economic advisor to Singapore until 1984.

[9] Hiroshi Shimizu, Hitoshi Hirakawa (1999). P.183

[10] There were political motives for the British and Malaya to assent to the union. Singapore was then a hotbed of communist agitation. Leaders from Britain and Malaya saw the union as a way to help themselves by preventing Singapore from becoming an Asian Cuba. One country which vehemently opposed the union was Indonesia whose President Sukarno waged an intermittent war, known as “Konfrontasi” against Malaysia from 1963 to 1966.

[11] The EDB replaced rhe Singapore Industrial Promotion Board set up by the colonial government in 1957.

[12] [ePESgEc001/9]

[13] http://www.edb.gov.sg/edb/sg/en_uk/index/about_edb/our_history/the_1960s.html

[14] Hiroshi Shimizu, Hitoshi Hirakawa (1999). P.183

[15] [Sg004/43]

[16] Ryokichi, H. (1969) “Japanese investment,” in Hughes, H. & P.S. You (3ds.) Foreign Investment and Industrialization in Singapore. Australian University Press, Canberra.

[17] Yoshihara, K. (1976) “Foreign Investment and Domestic Response“, Eastern Universitie Press Sdn. Bhd., Singapore.

[18] http://www.shell.com/home/content/sg-en/about_shell/shellinsingapore_10170901.html

[19] [ePESgEc001/9]

Many factors contributed to the poor performance of the SOEs in the 1990s.

Firstly, because of historical reasons, SOEs bear a heavy responsibility of providing its employees with a host of social services and securities, including housing, education, health insurance, and pension provision. Each large- and medium-sized SOE essentially functions very much like a city within a city and the leader of the enterprise working like a mayor of the city. It has a community that includes all the amenities that one needs and can normally find in a city. The costs of running a SOE therefore go way beyond the normal operations of a business, causing profitability to be persistently depressed. It has been estimated that about 40% of the difference in profitability between SOEs and TVEs can be attributed to social welfare provision (Xiao, 1991). Since most of the workers are on tenured basis, SOEs in effect have been providing support even for redundant workers. Even though their sales have declined over the years as a result of competition from new enterprises, SOEs had to keep on its payroll staffs that it employed before the start of the reform. Bell (1993), for example, estimated that about 20% of employees in the SOE sector are redundant.

Another area which worked as a disadvantage to SOE was their tax liability at least until tax reforms were implemented in 1994. Before 1994, the nominal tax rate of corporate income for large- and medium-sized SOEs was 55%. Private enterprises and foreign-investment enterprises paid 35% and 33% respectively while small SOEs and collective enterprises paid tax rates ranging from 7% to 50 %. After the tax reform in 1994, the corporate tax rate for all domestic enterprises was unified ay 33%. Notably, despite the adjustment in the tax rates, SOE’s tax contribution constituted 71.1% of total government revenue, unchanged from those of the previous years. One possible reason to explain the persistently high percentage of tax revenue contribution by the SOEs was that tax evasion for non-state enterprises could be easier for the non-state enterprises. This ease of tax evasion by the non-state enterprises put the SOEs in a relatively unfair possible.

Thirdly, being disadvantaged by the tax policies, SOEs also lost out because price control on selected products was still in force. As a result of the low prices, SOEs in industries such as energy, grain storage and processing, and the weapon sector were deprived of the opportunity to make a reasonable profit.

Another factor which contributed to SOEs’ losses was the failure of the state investment system within which investment decision-making boiled down to distribution of rights to the possession and use of scarce state assets including budget funds, bank loans, land, quotas of power, oil, and other key materials (Sun 1998s). The objectives of local governments and SOEs were therefore to obtain and occupy as much investment and property from the distributive negotiation process as possible so that they can reap future benefits and justify their power base. In other words, SOEs took on investment projects with little concern over profitability. In any case, losses would be borne by the state. In the end, the disregard of project viability and the persistent soft-budget constraints resulted not only in explosive growth of inefficient investment projects but also widespread duplication of efforts at the national level. The duplication led to industrial overcapacity which led to enterprise failures when market became saturated amidst strong competition. In 1993, for example, China had 126 automobile factories and 5,000 re-equipping automobile factories with a theoretical capability of producing 1 million automobiles per year. However, most of these factories had no economy of scale by any standard and the average utilization ratio of capacity was less than 50 per cent (Sun, 1997a).

Not surprisingly, the investment inefficiency exacted its toll on the capital efficiency of the SOE. During 1985 – 1992, for example, even though the net value of fixed assets industrial SOEs with independent accounting systems increased 700 billion yuan from 398 billion yuan to 1,098 billion yuan, their realized pre-tax profits rose by only 61 million yuan from 133 billion to 194 billion yuan. The incremental ratio of fixed assets to pre-tax profit of 11.5 indicated that every 11.5 yuan increase in fixed assets (net of depreciation) resulted in only one yuan increase in pre-tax profits. (SSB, 1993)

Despite the abundance of statistics indicating the poor performance of the SOEs, however, it had been pointed out the actual performance might not be as bad as it looked because of several irregularities in the ways SOEs operated (Jefferson, 1993).

One such irregularity was the diversion of SOEs’ assets and profits through backyard profit centres. In order to create jobs for the children of their employees, many profitable SOEs set up new branches, using the equipment and technologies of the parent SOEs free of charge. These branches were often registered as collectives and therefore assumed independent identities. Profits were also often diverted to such branches to avoid tax and to increase the incomes of the managers and employees. Over time, however, many SOEs also transferred profits to firms set up by sons and daughters in the name of subsidies and employment creation (Qian, 1995). Very often, such branches also make profits by simply selling the low-price planned goods from the parent SOEs at going market prices.

Besides the creation of backyard profit centres, many SOEs also set up joint ventures with foreign firms to take advantage of preferential policies meant for such Sino-foreign ventures. Even though SOEs were the majority investors, such ventures were not counted as part of the SOE sector officially. Over time, many of them, especially the more successful ones, were transformed into joint stock companies and classified into the category of ‘other ownership firms’. Hence, it could be possible that official statistics suffered selection bias in reporting the results of mostly SOEs that performed poorly.

Next, another reason SOEs under-declared profits could be attributed to the ratchet effect. Since a higher profit attained in one year was likely to invite a higher target the following year, there is a motivation for SOEs to under-report. In the end, many SOEs reported profits as merely break-even so that they were in a better position when negotiating for future profit targets.(Zhou 1993).

Finally, many managers of SOEs also undeclared their profitability so that they could benefit from the organizational restructuring of the state sector that had been taking place since the early 1990s. In 1992, the enactment of the Ordinance on Restructuring the Management Mechanisms of State-owned Industrial Enterprises, for example, greatly expanded the autonomy of the state enterprise leaders. On the other hand, however, state enterprise leaders’ financial rewards continued to substantially trail behind those received by non-state enterprise leaders. To enrich themselves, many state enterprise leaders began to make opportunistic use of their increased autonomy for private gains, often at the expense of their enterprises.

One commonly used approach was to seize control of the state enterprises through management buyout. Managers would first intentionally cause company to underperform so that the assets of the loss-making enterprise could be undervalued. After buying over the company at low price, the company could start making profit again or the assets could be sold at much higher price. The problem was that there was neither proper valuation of assets by a third party nor a transparent process of open bidding for the assets. As a result, the management could set a price they wished to pay for the assets and acquired the assets. It was reported that, in 1996 alone, over 6,000 small and unprofitable state enterprises were closed down and their assets were liquidated. The self-seeking behavior of corrupt state enterprise leaders explains why performances of state enterprises markedly deteriorated in the 1990s even though their decision-making authority significantly increased.

Hence, corruption in China was not confined to government officials. In fact, 1990s marked the beginning of extensive managerial corruption especially of state enterprise leaders.

 

Work in progress.