Singapore 2030

As the Singapore Conversation gathers pace, the Insight team examines present trends for a reading of the future - in politics, the economy and society. This week, Robin Chan reports on growth, spending and the global outlook.

The Straits Times, 5 Jan 2013

1 Asia keeps growing

ASIAN economies are set to keep pumping with China at the heart of the region's growth. The East Asian powerhouse's contribution to global growth is already one and a half times the size of the United States'.

The World Bank predicts that by 2025, China will contribute about one-third of the world's output - more than any other economy.

Its population, as well as those in India, Indonesia and other emerging economies in the region, will grow richer, but also older, with dramatic implications, says the US National Intelligence Council (NIC) in its recent Global Trends 2030 report.

By 2030, most European countries, and Asian economies like South Korea, Singapore, Hong Kong and Taiwan, will have entered the "post-mature age category".

This will lead to a new era of increased global migration, the NIC says.

The report adds: "Migration will become more globalised as both rich and developing countries suffer from workforce shortages.

2 Rise of the new rich

"AS MORE countries get richer, they will add another one billion people, or an entire China, into the world's middle class.

These people will consume more of everything, from household goods to luxury items, driving a huge consumption boom.

The emergence from poverty for many, who will attain education and skills, will lead to a rise in wages, reducing income inequality around the world.

But there will be risks.

National University of Singapore Business School dean Bernard Yeung says: "Asian growth, while in the short and intermediate term is good news, in the longer term they need to deal with multiple things. The first is how to deal with the resource constraints. The second thing is how to deal with the development of institutions so that the growth is self-sustaining rather than relying on relationships or cronyism."

China, itself, could be stuck in a middle-income trap, in which per capita income does not rise to the level of the world's most developed economies, he adds.

"We worry whether China can fix its fundamental problems of cronyism that favour the established and powerful.

"China needs a system that encourages open competition, innovations and productivity growth."

3 Turning inwards 

CLIMATE change could lead to rising energy costs, and in turn to higher transport costs for goods, leading to "deglobalisation and regionalisation", warns Dr Teh Kok Peng, China Business group chairman at the Government of Singapore Investment Corporation.

Countries could turn inwards if global governance is not strong enough, and this in turn could lead to increased economic volatility, says the NIC.

What about Singapore's two major markets - the US and Europe? Professor Yeung says their prospects will remain dim.

The US faces a fiscal imbalance and will have to find a balance between cutting public spending, raising taxes and boosting growth, as it moves forward.

The euro zone's worries could see the break up of the currency union, or members drag their feet against greater fiscal union, says Prof Yeung.

These big changes around Singapore spell both opportunity and risk for the city-state as it grapples with its own economic restructuring and domestic constraints.

Grow fast, grow slow, grow well: Three scenarios
By Robin Chan, The Straits Times, 5 Jan 2013

AS SINGAPORE matures, restructures and undergoes a dramatic demographic shift, it is entering a new era of slower growth.

And it is doing so at a time when global attitudes towards economic expansion undergo a big shift, in response to alarm over high levels of income inequality, the onset of climate change and energy constraints.

Eminent economists such as Robert Skidelsky have observed such a change. The professor emeritus of political economy at Warwick University wrote in a recent article: "A deeper shift in the attitude towards growth has occurred, which is likely to make it a less important lodestar in the future - especially in rich countries."

The new direction is towards growth with equity, which is sustainable and inclusive. Hence the rise to prominence of alternative measures of well-being such as the Gini coefficient that tracks income inequality, and indexes to measure liveability, environmental sustainability and even happiness.

Deputy Prime Minister Tharman Shanmugaratnam noted that "growth does not lift all boats and certainly does not lift all boats equally".

Therefore, more important than just growth rates is the composition of that growth and how it is shared.

Centennial Asia Advisors chief executive Manu Bhaskaran says: "Switzerland, Finland, Sweden, Norway, the Netherlands and Australia, the countries increasingly seen as models, grow slowly, but deliver a high quality of life and a much fairer distribution of income than anywhere else.

"They remain dynamic with many high-growth and innovative companies, some of which dominate their niches globally."

Economic Development Board chairman Leo Yip says economic competitiveness rests not on speed and volume of growth but the ability to adapt and grow new skills and industries, and to innovate. "It is not just about the growth numbers... The differentiator of economic competitiveness is what sustains our growth."

Another factor that has shaped thinking about growth here is the capacity and resource constraints of tiny Singapore, felt most acutely in recent years with infrastructure bursting at the seams due to a large influx of foreign workers. That contributed to MRT breakdowns, overcrowding and a relentless climb in property prices.

But some experts believe that once these infrastructure bottlenecks are fixed, Singapore will once again have room to grow.

In this new era of slower growth, there are three scenarios for Singapore, come 2030.

Same old story

THE first is that Singapore reverts to its old growth formula that has propelled it over the last decade.

With growth hard to come by in the next few years, productivity low, and businesses clamouring for more foreign manpower, the Government could, under pressure, reverse its stance and, by 2030, return to a more liberal foreign worker policy.

With the total fertility rate (TFR) stuck at 1.2, more new citizens will be needed. One scenario drawn up by the National Population and Talent Division in a paper last year was to naturalise 20,000 to 25,000 a year. These moves could keep the population growing at about 2 per cent a year, paving the way for the economy to grow close to its potential of 3 per cent to 5 per cent a year.

But that will likely put the productivity push into reverse gear, as firms fall back on low-skilled foreign labour as a means to grow.

The major cost will be social in nature. In this scenario, the population would likely soar to over seven million by 2030.

That means having to adjust to more crowded conditions and less green spaces. The large influx of foreigners and new citizens could be socially destabilising if integration efforts fall flat.

Living costs will rise, as a fast-growing population puts upward pressure on asset prices.

Go slow

AT THE other end of the growth spectrum is the option to pull the brakes on foreigner inflows, and let the population stabilise at around 5.5 million - close to the current level.

The citizenship population will start to shrink, and age more rapidly. The median age will rise from the current 39 years to close to 47 years by 2030, according to official projections.

Even then, the economy could grow at 1 per cent or 2 per cent each year and remain relatively competitive - if productivity improvements more than make up for a shrinking labour force.

But that is a big if.

The manpower shortage could spell fewer options in the foreign investments Singapore can accept, the new industries it can grow and the pace of change it can keep up with.

That in turn could hurt competitiveness. Companies may choose to invest elsewhere, to enjoy access to a larger pool of workers.

Firms may move out or close down. Unemployment rises, and wage growth slows.

And if productivity growth stays anaemic, say at less than 1 per cent a year, growth may even grind to a halt.

According to the Ministry of Trade and Industry in a paper last year, such a scenario would hit lower-skilled workers hardest. They are less internationally mobile and tend to have the highest rate of unemployment during periods of slow growth.

A stagnating economy could add to the strain of an ageing demographic and the Government's fiscal resources.

Fading global interest in Singapore also means fewer visits and fewer opportunities for talented Singaporeans, who might move to faster-growing cities in China, Indonesia or Vietnam.

Singapore could follow the path of Japan and its decades of zombie-like growth.

For those with wealth or secure jobs, the slower pace of life may well prove more comfortable. The income gap could narrow as wage rising at the top slows.

Singapore drops out of the race to be a leading global city and slips into quiet obscurity.

A new path

THE third way involves a struggle to carve a new growth path.

For the economy to grow at 2 per cent to 3 per cent a year and stay competitive even as policies rein in foreigner inflows, local companies must find ways to become more productive.

That will require many small firms to commit to and invest in new technologies and processes.

Going down this path will be disruptive, discomfiting even at times, as some firms move out to lower-cost destinations. Others will close, be pushed to consolidate or be replaced by new firms better able to use labour more efficiently.

The restructuring will involve pain, which policies can ease but not erase.

Singapore stays in the race against other global cities for investments and foreign talent. It ranks up there with Shanghai, Mumbai and Jakarta as a leading global city.

Still, there will be some investments that Singapore misses out on, and some that it chooses to pass on. It will have to pick and choose its industries more carefully as it operates at the limits of its land and labour resources.

Experts say it will have to give up some old industries as pressure rises to free up land and energy used by heavy industries, such as petrochemicals.

The manufacturing profile itself will change, focusing on high-value added, skill-intensive manufacturing such as additive manufacturing. The typical worker in this sector will be one who designs engines on a computer, or analyses consumer taste preferences in a lab.

That shift is consistent with the shift towards a better-educated workforce, where most are professionals, managers, executives or technicians. The region is more integrated and open, and more Singaporeans will commute to and from Iskandar, Kuala Lumpur, or Jakarta.

Life in this Singapore will still be fast-paced. Costs will stay high. OCBC economist Selena Ling says: "Part of the price of wanting to be a global city, attracting the globally mobile foreign talent, as well as foreign direct investment and portfolio capital flows, is asset price inflation."

Choosing one

EACH scenario exacts costs. Scenario 1 maximises growth but of a lower quality. It delays Singapore's need to become more innovative and productive even as sources of cheap foreign labour dry up in the future.

The rapid pace of population growth puts pressure on city planning and infrastructure.

Scenario 2 is attractive in some ways. Given current stresses, Singaporeans may decide that they simply want out of the rat race, and are content to live in an average city in a vibrant Asia.

But the downsides of too slow or no growth are stark - stagnation, higher unemployment and loss of confidence.

Even as they may lament the pace of life here, just as many Singaporeans will likely find it hard reconciling themselves to living in an also-ran city.

To keep up the vibrancy and competitiveness, Singaporeans have to accept a certain number of foreigners and new citizens. Businesses have to transform and become more productive, and adapt to an ageing population by making it possible for more older workers and women to stay employed or return to work.

Scenario 3 is the most desirable but also the most challenging because it involves the toughest adjustments of all.

Experts, however, believe that if Singapore perseveres in going down that path, it stands to achieve good growth that is fair, inclusive and sustainable.

In the end though, the challenge is political: The Government will have to persuade and win over enough segments of the population to go along with the pain of change.

The end of manufacturing?

MANUFACTURING and services are Singapore's two dominant engines of growth.

But as economies develop, higher costs of production tend to hollow out manufacturing.

Britain and Hong Kong have seen their manufacturing sectors shrink over the last 20 years. Some now believe manufacturing could be at its "high noon" here.

The big constraints are a lack of land and labour and that could shrink the sector's share of the economy, which ranges from 20 per cent to 25 per cent now.

Others disagree, as a manufacturing revolution is taking place.

By 2030, Singapore could be home to advanced manufacturing firms that specialise in 3-D printing or robotics.

These need less land and labour but more sophisticated skills, knowledge and innovation.

These industries will better suit the needs of Singapore's better-educated workforce.

As manufacturing processes become more distributed, with deeper integration throughout the region, Singapore can remain a part of the production chain, as a site for complex design work or the testing of products.

The trend in developed economies is for services' share of the economy to grow, as manufacturing hollows out. Here, services' share has risen from 66 per cent to 69 per cent over the last 20 years. Also, its share of employment has risen.

Going forward, service companies - whether in food and beverage, architecture or finance - will have to increasingly customise their offerings for Asia's diverse markets, spurring growth for customer insight research.

As rapid urbanisation takes place, the demand for services such as data management and city planning will rise.

And the creation of new wealth will generate demand for wealth management and other financial services, and tourism-related opportunities.

Q&A: S. ISWARAN

Understanding trade-offs in any growth strategy

We are having a National Conversation about the future and a White Paper on Population issues will also be released soon. What are your views on the growth debate and the future of the Singapore economy?

When we look at Singapore's economy over the next decade or two, the question that we need to ask ourselves is whether we can get a consensus around a balanced and sustainable growth trajectory for Singapore. We want a growth path that will ensure that our economy stays vibrant and competitive, and creates the kind of good opportunities and jobs that we want for ourselves and our children.

If we agree that this is the way we want to go forward, it will then have implications for our policies with respect to key resources, especially manpower and land. That is why there is a link between our growth strategies and the Population White Paper.

We accept that there is a limit to the absolute number, the stock and flow of foreign manpower that Singaporeans would be willing to accommodate. But we also need to establish clearly what that threshold is and how that threshold impinges on our overall growth opportunities.

While remaining cognisant of our domestic constraints, equally, we should not allow some of these concerns, which may be the result of transitional infrastructure bottlenecks, to limit our perspective on what is possible for Singapore in the long term. If we are able to address these issues, which we are doing, then it might give us more options in future to pursue our goals than what might be thought possible today.

So, it is important that we Singaporeans have a forthright discussion on this matter and clearly understand the trade-offs.

What will a slower growth rate, of 1 to 3 per cent, look like in terms of jobs, the wages and the type of lifestyles that people will have?

We cannot calibrate growth rates with digital precision. As a small country, our economic growth is affected by changing domestic circumstances, as well as a dynamic external environment, and unforeseen events like the Asian or global financial crisis. Hence, we must also be opportunistic in seizing growth opportunities.

The rapid urbanisation of Asian cities creates opportunities for Singapore to share our expertise in areas such as innovative urban, energy and environmental solutions. The expanding Asian middle classes will also seek high-end, better-quality services. There is therefore scope for us to further develop established service industries like trading, logistics, information, communication and media (ICM), financial services and tourism, as well as promote promising new areas such as consumer analytics. It will also give us the chance to grow manufacturing-related services such as headquarters activities, R&D, IP management and product life-cycle management.

But to seize these opportunities, we need people, both Singaporeans and foreigners, with the right skills and capabilities. If not, it is wishful to think that Singapore will rise with the Asian tide.

Building on the skills and capabilities of our core of Singaporean workers will help us grow both high-value complex manufacturing, such as industrial robotics, and international services as our twin engines of growth. Foreign workers will help to complement this Singaporean core in our workforce. This will ensure that we have a diversified and resilient economy.

The Government has said it will keep the number of foreigners at about a third of the workforce. Will this not change over the next 20 years?

We will not be able to say for certain that this will remain constant for the next 20 years to come. For one thing, we cannot ignore what is happening around us and our own domestic situation may change.

We are aiming for balanced and sustainable economic growth, and that will require some foreign manpower. At a very micro level, a factory that runs three shifts may need foreign workers to man the graveyard shift which is not always popular with Singaporeans. Similarly, a retail or F&B operation will minimally need to supplement its Singaporean team on the weekends and weekday evenings. While some of these needs can be addressed through higher productivity, job redesign and the use of technology, our businesses will need foreign manpower to complement the Singaporean core in the workforce.

At the macro level, our citizen workforce will start to shrink after 2020. At the same time, there will be stronger demand for health-care workers and home-based care to cater to our ageing population; likewise, construction workers will still be necessary to continue building our infrastructure.

These roles will have to be met mostly by foreign workers as Singaporeans become increasingly better educated and higher skilled. As the proportion of Singaporeans holding PMET (professionals, managers, executives and technicians) jobs increase, more foreign workers will be needed to fill the lower-skilled supporting jobs. Hence, foreign workers will continue to complement our local workforce in essential roles to support our social and development needs, as well as support the higher aspirations of Singaporeans, to help us achieve balanced and sustainable economic growth.

But most importantly, even as we judiciously bring in foreign workers, we will continue to preserve and build a strong and skilled Singaporean core in the workforce. Singaporeans remain at the heart of our economy, and our policies need to provide the opportunities for our citizens to achieve their aspirations.

The counterpoint to that is that we can become a bit more like Europe where stores close a bit earlier; people don't work on the weekends, so we don't have the stores open on the weekends; and we need fewer foreigners and less manpower.

Well, Singaporeans will have to decide if that is the way of life we want and need to bear in mind how this could affect the overall vibrancy and attractiveness of Singapore compared with other Asian and global cities.

We could be similar to, say, Australia where stores close by 5pm, with late-night shopping on one night a week. This would mean, however, that Singaporeans need to accept certain compromises in their lifestyle. Additionally, we have grown accustomed to various round-the-clock services which we may have to give up if companies do not have the foreign manpower to complement their Singapore workforce. Interestingly, even in Australia, they now have overnight shopping in the lead-up to Christmas, and shopping on Boxing Day, which was somewhat unthinkable before.

Ultimately, we need to ask ourselves whether Singapore can remain a placid isle surrounded by a hive of activity in a rising Asia, and what that means for future generations of Singaporeans in terms of opportunity. We need to be cautious about training our sights on too low a rate of growth. If we do that, I think we are doing our economic potential, and more importantly, the aspirations and ambitions of Singaporeans, an injustice. There is much we can still do and accomplish given the opportunities around us. And we must make sure that we continue to achieve balanced and sustainable growth to create good jobs that meet the aspirations of present and future generations of Singaporeans.

Ageing population will strain finances
Govt may face pressure over reserves spending and resistance to tax hikes
By Robin Chan, The Straits Times, 5 Jan 2013

Inequality and welfare

INCOME inequality all over the world has widened dangerously, leading to the fall of governments, Occupy Wall Street protests, and an Arab Spring. But it may well have peaked.

By 2030, income inequality will have narrowed from the level it is at now, many experts believe.

Singapore, similarly, could be witnessing the height of its income inequality. This is because "the drivers of inequality - ill-thought-out foreign worker inflows, the China effect, poor skills among lesser educated workers, are all weakening", says Mr Manu Bhaskaran, chief executive of Centennial Asia Advisors.

China's large pool of low-wage workers will shrink as it develops and workers become more educated and skilled. They will demand higher wages and enjoy better job prospects at home.

By 2030, Singapore's population will also be substantially better educated. There will be fewer low-skilled workers. Instead, the new workforce will increasingly shun blue collar jobs for office jobs, and more professional and technical jobs. The economic restructuring could also lead to the more inefficient, less productive companies closing down or consolidating, reducing the number of these jobs in the first place.

These trends will push up wages at the bottom and may narrow income inequality or at least not let it worsen.

More spending

EVEN as income inequality improves, there will still be segments of the population struggling and in need of help.

Of grave concern will be the plight of the retired poor with little savings, says Dr Teh Kok Peng, chairman of the China Business Group at the Government of Singapore Investment Corporation.

Many have salted away little because they earned low wages in their working years and now find themselves living longer.

There are currently about 110,400 residents who survive on less than $1,000 a month.

By 2030, Singapore is expected to have 900,000, or triple the current number, of people aged 65 and above.

Moves to raise the retirement age to near 70 will help. With better health care, and jobs that require more brain power than manual labour, employment among the elderly is set to rise.

The labour force participation rate of those aged 60 to 64 rose from 35.6 per cent in 2001 to 50.7 per cent last year. For those aged 65 to 69 it was 36.2 per cent last year, having risen from 20.7 per cent in 2001.

Lee Kuan Yew School of Public Policy Senior Fellow Donald Low suggests lower employers' Central Provident Fund (CPF) contribution rates for older workers, which the Government can top up through public funds. He also proposes a basic monthly retirement grant for those above 65 who do not meet the Minimum Sum requirement for annuity benefits under CPF Life.

As the population ages, health- care costs will also rise. And if the experience of Japan and Britain are anything to go by, the increase will exceed the rate of inflation.

In Japan, health-care spending per person rose by an average 5.7 per cent each year between 1960 and 2006. In Britain, it was 3.7 per cent a year.

Another pull on public social spending will come from a growing need to insure workers against unemployment, which is set to hit more workers in future as economic growth becomes more volatile at a low growth rate, leading to more bouts of peaks and troughs.

Lee Kuan Yew School of Public Policy Associate Professor Hui Weng Tat is of the view that the social safety net may have to be extended to include government- funded unemployment credits.

The Singapore Government has thus far resisted universal unemployment benefits for fear they erode the work ethic. The jobless can tap on ComCare funds for short-term financial help but the emphasis is very much on getting individuals back to work.

The Government also tops up the wages of those on very low incomes, through the Workfare Income Supplement.

Over the last five years, social spending has increased from $13 billion in 2006 to $21.5 billion in 2011.

Economist Manu Bhaskaran expects a further increase, from the current 14 per cent of GDP to as much as 25 per cent.

CIMB economist Song Seng Wun says: "The hand of the Government will become even stronger across the lower-income groups."

This year, for example, the Government made permanent transfers such as the GST Voucher. Experts say this is likely to increase as the cost of living heads up.But the Government will do so slowly and carefully, balancing new demands with its own principles to preserve the work ethic.

Deputy Prime Minister Tharman Shanmugaratnam highlighted the Government's stance on redistribution last year.

"Our fiscal policies must be progressive, which means most of the benefits being received by lower- income citizens and most tax revenues being paid by those at the upper end... The key question is how we do this.

"How do we maintain and strengthen our progressive slant, do more to support those at the lower end, while ensuring that we remain a society where at the core, people do have a deep sense of responsibility for their families, do want to work hard to improve themselves and take pride in being part of a society where everyone moves up together that way?"

(Don't) go West

IT MAY not be easy to stand firm as economic and social needs change against a backdrop of a shifting political landscape. A more pluralist and vocal society will lead to increased demands for more help and aggressive redistribution, as has happened in Europe and the United States. In those countries, governments of the day finance for shorter political horizons so as to win elections, instead of aiming for a balanced budget for the long term.

Opposition parties here, such as the Workers' Party and the Singapore Democratic Party, have already issued calls for more transparency on the reserves, and for its use to fund greater social spending.

Balancing the budget will therefore be an increasingly difficult financial and political task.

"The pressure will just keep piling up to use more of our NIR for the annual Budget and also to dip into the reserves for major social spending needs like health care," says PAP Member of Parliament Liang Eng Hwa.

The NIR or net investment returns framework allows the Government to draw on a portion of the returns from investing the reserves, to finance expenditures in the Budget. This is based on expected returns over a 20-year horizon rather than on actual returns and is capped at 50 per cent.

But what that expected rate of return is and whether the cap is reached are not known.

One view is that some of the past reserves should be returned to the baby boomer population that will have entered retirement in 2030.

Mr Low says: "Much of our reserves are the result of fiscal surpluses generated in the 1980s and 1990s - the period when the baby boomer generation was most economically productive."

He adds: "Setting aside part of our reserves for the baby boomer generation also alleviates the fiscal burden on the working-age population for the next 20 years, allowing them to consider parenthood decisions with less worry about supporting elderly parents."

Growing the government finances will also be an increasingly important and difficult task. The tax base will shrink with an ageing population, and lower growth will mean slower growing income tax revenue.

By 2030, experts believe that taxes will have to rise, and likely it will be the goods and services tax (GST) which could rise from 7 per cent to 10 per cent or even more.

Singapore will not be alone in struggling to maintain its fiscal health, as many Asian economies face similar ageing population challenges, and there could also be marginal increases in personal and corporate taxes around the region.

Singapore and Hong Kong currently have the lowest tax regimes in the region. Both rapidly reduced their tax rates over the past decade to compete for investments and growth. But the competition on taxes may no longer be as important in 2030 due to the changing demographic needs.

Another source of revenue could come from amending the reserves framework. That was done in 2008, to allow a greater portion of the current reserves to be drawn upon. The Government has the leeway to raise the 50 per cent cap on NIR, if it so chooses.NIR contributions were about $8 billion, or 15 per cent of total government revenue, in 2011.

Mr Low says that "the question of whether we need higher taxes cannot be properly addressed until we have better information on the national reserves and their expected future contributions to the national Budget".

While citizens do not need to know the exact amount of reserves that the state holds, at the minimum, the Government should inform the public whether it is utilising the full 50 per cent of the NIR contribution rate and what it expects future rates to be, he says. Unofficial estimates put it at anything between $800 billion and $1 trillion in size.

A third boost to revenues could come from Singapore firms growing their overseas wing, says Dr Teh. A company's income growth will not be bound by the low growth here, and Singapore firms may be able to generate higher wage growth and more savings. It is therefore important that small and medium-sized enterprises (SMEs) are given more help to expand overseas.

Singapore's investment vehicles Temasek and GIC will also be competing with the capital of other sovereign wealth funds in its markets, increasing the difficulty for high investment returns. As such, they are already beginning to shift their portfolio to emerging markets and to new industries and away from the developed country markets.

In conclusion, by 2030, even as income inequality may ease, Singapore's finances will be strained by an ageing population and growing health-care costs. The Government could face popular pressure for more aggressive redistribution and spending of the reserves, combined with resistance to tax hikes.

Its ability to sustain a balanced Budget and to raise taxes when needed will depend to a large extent on its political fortunes, and its ability to persuade voters that the fiscal conservatism that is Singapore's hallmark remains the best way forward.

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