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.

---

[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.

---

[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