Monday 28 September 2015

What's in store for the Singapore economy?

Amid a slowdown and uncertainty in the global economy, what lies ahead for Singapore? Insight looks at whether it might be time to review the country's economic strategy, and how growth can be more inclusive. We also look at what Singapore could do to secure its economic future.
By Wong Siew Ying, The Sunday Times, 27 Sep 2015

It was about five years ago that the world averted financial ruin, saved only by the trillions of dollars pumped in by taxpayers and governments around the world.

The heady days of 2010 saw China overtake Japan as the second- largest economy in the world while the price of crude oil climbed to nearly US$91 a barrel.

Singapore also celebrated in the afterglow of that close shave, with its economy growing 15.2 per cent, the fastest annual rate on record.

It was also in 2010 that the Government endorsed a report that looked at long-term strategies for the Singapore economy and how the country should position itself in the post-financial crisis world.

The Economic Strategies Committee (ESC) had said then that the next 10 years would provide greater opportunities for growth, but would also present greater challenges due to land constraints and slower workforce growth.

It proposed bold ideas to grow the Singapore economy - higher productivity, improved skills and more innovation - strategies it believes will transform the economy, raise living standards and enable Singapore to take full advantage of the opportunities emerging around the world. Today, the picture is completely different, and a lot less optimistic.

China is expected to record below 7 per cent growth, the slowest in six years; a barrel of crude oil can be bought for just US$48; and Singapore could slip into a technical recession this year, with growth forecast at just 2 to 2.5 per cent.

The changed circumstances have prompted some experts to call for a review of the plans made by the committee back in 2010, a suggestion which Prime Minister Lee Hsien Loong indicated the Government was open to considering .

"Every few years we've had an economic review. I did one, probably the first one, 30 years ago back in 1985, and since then we've done one every five to 10 years.

"And maybe it's time for us to take a look again," he said during a dialogue at the Singapore Summit last Saturday.

Is it time to chart a new path? What should be examined or changed? Insight takes a look at some of the key areas that should be reconsidered.


Among the many suggestions put forward by the ESC, productivity remains the most contentious issue.

The ESC set a productivity growth target of 2 to 3 per cent annually, a target that the Government has since admitted was an ambitious one.

Despite efforts to boost labour productivity growth, it remains stuck in reverse, with the overall figure in the first half of this year in negative territory, where it has been sitting stubbornly since a year ago. Since 2010, productivity has actually fallen 0.05 per cent a year on average, a DBS report showed.

The Government's response has been on two fronts.

One has been to encourage companies to use better technology and processes to raise their bottom line and get more value from their workers. Policies such as the Productivity and Innovation Credit scheme, which gives tax breaks and cash incentives for moving to more productive technologies, have been rolled out.

The second prong has been to wean companies off cheap sources of labour by tightening the growth of foreign worker numbers here through levies and administrative changes.

While many observers agree that the productivity drive strategy is the right approach to take, they say the authorities have "failed" in its implementation.

For one thing, SMEs are not getting enough attention, says entrepreneur and former MP Inderjit Singh.

"On the surface there are many schemes but I think we are stuck at the surface and not able to get to the root of the issues and are not sufficiently organised to make real fundamental changes, " he adds.

Specifically, SMEs - which account for 70 per cent of employment in Singapore - are now struggling to make ends meet. Costs are rising, potentially offsetting any gains from mechanisation and technology.

The Association of Small and Medium Enterprises (ASME) says policy measures in recent years have helped firms become more efficient, whether it is through mechanisation, redesigning processes or maximising each unit of labour.

"But we are not seeing effective cost management solutions for businesses," says ASME president Kurt Wee. He points out that labour costs have jumped significantly for many smaller firms.

Mr Singh agrees, noting that if nothing is done to review costs, Singapore's competitiveness will be affected: "If we do not make Singapore more conducive for business, especially in cost and labour growth, we will not be able to keep our competitiveness for long."

A recent Singapore Chinese Chamber of Commerce and Industry survey of businesses noted similar concerns.

The poll found that salaries and rentals contribute the most to rising business costs, followed by compliance costs and government administration fees.

One suggestion is for the Government to do a detailed study of business costs alongside any further moves to boost productivity.

Says Mr Wee: "There might be some grounds to warrant a study on how much of the cost is actually policy-triggered, such as compliance cost, levies and so forth."

At the same time, analysts also say that a better way of calculating productivity is required, particularly as the open nature of Singapore's economy means efficiency gains can be distorted by global business cycles.

Currently, productivity is derived by taking the total gross domestic product (GDP) divided by the number of workers, or GDP per worker. But analysts have been calling for different ways of calculating productivity.

"For example, in the construction sector, we can have square metre per man day. In F&B, it could be table turnovers," says DBS economist Irvin Seah.

As Barclays Capital economist Leong Wai Ho puts it: "Is it about doing things better, or doing the right things better?"


Another key suggestion raised by the ESC was that of managing the economy's dependence on foreign workers.

While skilled foreign manpower will remain valuable to Singapore, there are limits to raising numbers. Easy access to labour would also affect efforts to lift the lot of lower- wage workers.

Five years on, the move by the Government to restrict the flow of foreign workers has been effective. While the number of foreign workers is still rising, growth has slowed significantly. Overall annual foreign workforce growth has moderated from 144,500 in 2007 to 34,000 in 2014.

But some analysts wonder if it is time to revisit the need to restrict certain types of foreign labour.

Mr Seah of DBS says the strategy of tightening over the past four years has been targeted at the wrong places: "The categories that are more in demand, such as construction where you can't find locals to fill up (the vacancies), need to be tightened at a slower pace." He suggests that the flow of workers in jobs that Singaporeans can do, such as managerial or executive positions, be tightened at a faster pace instead.

Another suggestion: Recalibrate measures so that the tightening is specific to each industry and takes into account productivity gains.

Tightening the labour force is not a wrong strategy, says Mr Singh. But he adds: "It's just that we have implemented (it) at the wrong time and at the wrong pace. This needs to be recalibrated along with our goals of productivity targets."

For local workers, the move to keep Singaporeans equipped with new skills to take on future economic challenges is a sound one, economists say.

SkillsFuture, a broad-based national continuous education and training movement with details introduced in this year's Budget, is likely to be a big part of any future economic road map.

A slower foreign worker intake, coupled with an ageing population, means that employers will increasingly have to embrace middle-aged and older workers.

This calls for a rethink of traditional career paths in organisations, creating more flexibility and increasing training to enable this workforce to operate effectively, says consultancy Deloitte Southeast Asia.

Mr Wee of ASME adds: "SkillsFuture is necessary in the long term and in the order of things, because your workforce needs to be able to remain mobile despite economic circumstances."


But any move to restructure the economy will have to be measured against rising expectations of voters.

In dissecting the results of the Sept 11 General Election, which saw the People's Action Party (PAP) win a 69.9 per cent share of the popular vote nationwide, Mr Singh notes that the success of the ruling party was in rectifying many of the problems that surfaced in the 2011 elections.

Among the crucial factors which explain the win, he notes, is the fact that major issues such as transport, housing availability and cost had been addressed. This resulted in many of the swing voters choosing the PAP over the opposition.

Policy-wise, the Government is expected to continue to be consultative, and show its ability to connect with the ground.

For example, any move to reshape the foreign worker policy will have to be tempered by the promise to cap the foreign worker component to a third of the local workforce.

Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam has also indicated that there is much more to be done on the social welfare front.

At a PAP rally for East Coast GRC on Sept 9, during the election campaign, he said: "First, we are rebalancing between economic and social policies. No matter how successful our economy is, success by itself will not give us an inclusive and fair society."

But having garnered a strong mandate in the elections, would the Government now have to tread carefully as it embarks on the next stage of restructuring?

Singapore Management University law professor Eugene Tan believes so.

"Treading carefully is something which will probably be the new mantra. That's necessary in terms of trying to maintain trust. But treading carefully doesn't mean that the Government shouldn't be bold and that society should resist any change."

Policymakers, he adds, should press on with restructuring efforts as they continue to engage various stakeholders.

"What happened in the last four years should give them enough confidence that they are generally on the right track. But it is by no means a done deal," he says.

"They will be even more hard- pressed to engage even better. Now with their hand strengthened, they are a lot more comfortable and they should be able to press on with some of the changes."

The last four years while seemingly difficult, could be the easy part, he says. But this may not be the case in the next four years.

The outcome of the Sept 11 General Election will also have a bearing on the road ahead for the economy, and the country as a whole.

One of the goals PM Lee set was to ensure that the bulk of the fourth-generation leadership team is in place.

That has been achieved.

The confluence of a changed political landscape, challenges and opportunities ahead for the economy, and a new team in place to help shape the direction for Singapore's future, makes it an opportune time for a substantial review of the economy to take place.

Ensuring that economic growth is more inclusive
Middle-income earners, the poor and underprivileged need more help: Observers
By Rachel Au-Yong, The Sunday Times, 27 Sep 2015

As Singapore positions itself for the next phase of its economic development, one key area of focus for policymakers will be how to make sure no one is left behind.

Several key measures have been put in place in recent years, chief among them SkillsFuture.

Its initiatives, announced in Budget 2015, aim to provide a range of opportunities for workers to continue their education and training so that they can improve their skills and incomes throughout their careers.

But what about those who have left the workforce, or seem caught in a cycle of low-paying jobs?

Economists and observers say some changes may be made to social policies in the coming years to ensure a more inclusive society.

But they predict that these will be mere tweaks, rather than drastic shifts, given that much has already been done over the last few years.

One example is the $8 billion Pioneer Generation Package. Rolled out last year, it helps citizens aged 65 and above in 2014 meet their healthcare costs for life, with further subsidies on services and medicine at polyclinics and specialised outpatient clinics, among others.

Another is the Wage Credit Scheme launched in 2013, which has seen more than $2.2 billion handed out to help local businesses subsidise wage increases for low-income workers. Under the scheme, the Government co-funds 40 per cent of wage increases given to citizens earning $4,000 and below a month from 2013 to this year.

It has been extended for another two years because of the tight labour market, with co-funding for 20 per cent of wage rises given or sustained for next year and 2017.

With such big items, many observers feel there is not much more room to move in fiscal terms.

Underlying these views is the fervent belief that any further redistributive policy changes must be financially sustainable.

It was a point underscored by Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam in several speeches ahead of the 2015 General Election.

"We are already maxing out on the investment income from our reserves. The Constitution allows us to spend 50 per cent of the income on our reserves and we are already maxing out; we're spending it fully on our increased social spending, on healthcare, on our infrastructure," he said at a general election rally on Sept 5.

"It's fully used, there's no more money left there that you can just take without compromising the next generation."

DBS economist Irvin Seah points out that it is the Government's prudence in adding to and managing its reserves over the decades that has allowed it to deliver such packages in the first place.

"If we take out the Net Investment Returns Contribution component from the fiscal Budget, we have been in deep deficit for many years. If not for the reserves that we accumulated over the past 50 years, we wouldn't even have the luxury of thinking about inclusive growth. It would just be growth at all costs - generating revenue to sustain the fiscal position," he said.

But as the Singapore economy moves forward, the Government has to account for increased spending in healthcare and eldercare and a changing revenue base, said Mizuho Bank economist Vishnu Varathan. The challenge is how to do so without overtaxing the working class over the next 10 to 15 years.

He suggests that Singapore's current goods and services tax (GST) rate, which stands at 7 per cent, "may be living on borrowed time, particularly if investment returns begin to get eroded by drawdowns". It is the norm in many other countries that a similar tax stands at about 10 to 15 per cent, he noted.

But several ministers have said that the Government has no plans to raise the GST for now, and would not do so without justification.

Retired four-term MP Inderjit Singh told Insight he hoped higher taxes could be avoided, as the cost of living is already a big issue in Singapore.

Rather, more active policy measures may need to be adopted to help level the playing field.


Observers say more can be done to ensure the vast majority of middle- income earners are able to benefit from an economy whose pace of growth is likely to be much slower than it was over the past five years.

Mr Singh, an entrepreneur, feels laws can be tightened to make it more difficult for employers to hire foreign professionals who compete directly with local professionals, managers and executives (PMEs).

This is on top of the Fair Consideration Framework, introduced last year to get companies to look for suitable Singaporeans before hiring foreign professionals.

"Local PMEs risk becoming the new poor: asset-rich but cash-poor," he said.

He also suggested enacting anti-discrimination laws to protect against discrimination on the basis of age, race and gender in hiring and firing.

West Coast GRC MP Foo Mee Har worries that PMEs may be "automated out and become redundant" if they are not sufficiently helped to become experts in their fields. While SkillsFuture is a good start, she said many programmes currently target entry-level jobs.

"What we need to do is help our PMEs become masters in their industries. It's often the mid-level managers who truly understand the processes, who know the business prospects and ground intelligence best, and who can help companies realise real productivity gains," she said.

"If we get this right, we will realise economic benefits, whilst mitigating the risk of mid-level redundancies."


Even as measures are adopted to help middle-income earners tap opportunities to stay ahead in a changing economic landscape, the focus on helping those at the bottom move up must remain.

Much has been done to help lower-income earners in recent years. Workfare, made permanent in 2007 and enhanced since, is a key pillar of social security, and has boosted the wages of low-income Singaporean workers by as much as 30 per cent through Government top-ups.

The Progressive Wage Model, rolled out in 2012, has lifted the wages of those in the security, cleaning and landscape sectors.

Mr Singh thinks it is problematic to restrict the model to only a few industries: "The idea was to pick the lower-paying jobs and institute a minimum wage, with the hope that the rest of the industries will up wages for all other low-paying jobs."

"This has not happened significantly. So it is not a bad idea to expand the targeted progressive wage to an industry wide minimum wage system," he added.

But some observers feel much more can be done. Among them is former GIC chief economist Yeoh Lam Keong, who argued in a widely shared Facebook note earlier this month: "The adequacy of government spending on social protection and social security, especially for the poor and underprivileged is surely as, if not more important than how progressive it is for the middle-class."

Arguing that Workfare was a great scheme but that its monthly handouts of about $150 to $200 were "sadly inadequate", he proposed $500 to $600 primarily in cash. The cost would come up to about $1 billion a year, or about 0.3 per cent of the country's gross domestic product.

He also suggested similar boosts for the Silver Support scheme, a permanent initiative which aims to help low-income elderly Singaporeans through quarterly cash payouts.

These reforms, he added, would "largely eliminate much of the absolute poverty and hardship we still see in spite of a decade of insufficient policy action to ameliorate it, in a way we can well afford."

Such calls for more concrete steps will continue to be aired in the years ahead, and are likely to be closely studied, given the emphasis the Government has placed on ensuring social mobility, equal opportunities and an inclusive society.

But, as with every policy decision, there will be tough trade-offs - and the Government is likely to stand by its position that there has to be a fair balance between spending on present needs and securing the interests of future generations.

Barring a prolonged period of economic uncertainty ahead, those seeking more substantial changes in social policy may have to either temper their expectations or be prepared to fund such social policies through other means.

How Singapore can secure its economic future
Inject a dose of risk-taking and remain relevant to the rest of the world
By Chia Yan Min Economics Correspondent, The Sunday Times, 27 Sep 2015

Driverless cars zip through the tree-lined streets of a city nestled under a protective dome which keeps out pollution and harmful UV rays.

Technicians with highly specialised skills work alongside robots in factories, while scientists research the next cancer vaccine, and bankers, lawyers and businessmen negotiate deals spanning multiple countries across the region.

For now, this vision exists only in the realms of science fiction but it could be Singapore's reality if the cards are played right.

If this utopian dream is to be realised, what needs to be changed and is Singapore already on the right path?


Singapore has managed to overcome many of its disadvantages by using technology - such as the development of Newater and desalination plants to overcome its lack of water resources.

What it cannot change, however, is its location. Fortunately, this will continue to be a key advantage in whichever growth strategies it chooses to pursue.

The Republic's location in the heart of fast-growing South-east Asia, combined with its strong institutions and physical infrastructure, will entrench its position as the region's "middleman" even in the long term.

"Our expertise has tended towards being a synthesiser of things, being an adaptor... given that naturally we don't have the platform to have that big enough market to develop products," said Mizuho economist Vishnu Varathan.

To this extent, there is no need for a radical transformation of Singapore as it has always been a purveyor of trade in the region.

In fact, it already has the building blocks of the new economy, where legal, accounting and financial services will still be in high demand for a fast-growing South-east Asia.

Said Professor Hoon Hian Teck from the Singapore Management University School of Economics: "Singapore's strong legal institutions and excellent physical infrastructure give it a comparative advantage in the 'middleman' role, particularly as the region expands."

But Mr Devadas Krishnadas, chief executive of management consulting firm Future-Moves Group, said the financial sector needs to evolve beyond the current emphasis on wealth management.

"We need to deepen and widen the human capital expertise in the legal and accounting fields such that we have the capability and capacity to undertake larger and more complex financial and business transactions."

"(For instance) we need a financial services sector that is geared to deal-making more than it is about wealth management," he said, adding that Singapore should also nurture home-grown brands in sectors such as consulting, executive education and advisory services.

The Republic's location in the region means its status as one of the key hubs for multinational firms will continue to grow, as companies relocate here to get closer to their markets in Asia.

SIM University senior lecturer Walter Theseira said this will be an advantage that Singapore should continue to hold over its rivals.

Foreign direct investment in Singapore has continued to rise despite the global economic slowdown - from a stock of about $511 billion in 2008, to $853 billion in 2013.

A host of multinational firms, including consumer products giant Procter & Gamble and healthcare company Merck among others, have made Singapore their Asia Pacific hub, generating hundreds of high-value jobs.

"Even as other countries catch up, we do have the advantage of a head start and an existing concentration of such higher value functions in Singapore, and that is quite valuable to firms who are making these location decisions, because they can benefit from shared access to the same pool of talent and higher end professional services in Singapore," he noted.


But while the basic blocks are in place, this will not be enough to ensure that the economy thrives in the future.

Some adjustments will have to be made in the way the economy is managed in the next fifty years, which will be very different from how it has been guided in the past.

One is simply that it will become increasingly difficult to "cherry pick" potentially successful industries.

In the past, the Government would identify a growth sector and work towards making it a key part of the economy by getting trade agencies to woo big firms to set up shop here.

One recent example is the research and development sector, which led to the Government building infrastructure such as the Biopolis to support its growth.

While this worked in the past, it is no longer as easy to predict the trends disrupting the world's largest industries, said Boston Consulting Group's senior partner and managing director in Singapore, Mr Jeffrey Chua.

For instance, 10 years ago, people could not foresee some of the big changes that have since impacted the global economy.

These include the shale gas boom in the United States which altered the entire global energy landscape; the sharing economy; and the Internet of Things, which refers to the network of physical objects collecting and exchanging data.

CIMB Private Bank economist Song Seng Wun said rapid technological change has made product cycles much shorter.

"Before 2000, product cycles were long. Now product cycles are super compressed, sometimes as short as three years," he noted.

This means industries and companies could move in and out of Singapore at a much more rapid pace in future.

"We have to keep the environment conducive for allowing different industries to come and go... Singapore must remain an attractive place to do business for highly specialised, high value-added companies...There's no way of knowing what kind of industries they will be in," added Mr Song.

Even as policymakers prioritise certain key growth industries, they must also leave room for unpredictability, said Mr Chua.

"We have to build adaptiveness into the system...We have to keep detecting signals on what's happening out in the world, to discern which of the weaker signals might one day become a big trend."

This means there has to be an appetite for risk-taking incalculated into both policymakers as well as the younger generation of Singaporeans.

They should be allowed to experiment and even fail, as this is now part of the formula for success, experts said.

Mr Adrian Kuah, senior research fellow at the Lee Kuan Yew School of Public Policy, notes that Singapore still suffers from a "societal problem of extreme conservatism towards risk taking".

"How can we genuinely and meaningfully reshape the incentive structures confronting individuals so that they choose the road of innovation and entrepreneurship? The reason always given is that people are scared to fail," said Mr Kuah.

Societal and family perceptions of failure must shift and the education system must be more forgiving in creating pathways beyond failure, added Mr Kuah.

A critical factor in the success of small advanced economies is "the mindset and willingness to try", said Ms Diaan-Yi Lin, director and managing partner for Singapore at McKinsey & Company.

Singapore provides a safe environment with low risk for both companies and individuals, and going abroad to more competitive markets is risky and challenging.

However, if Singaporean companies address the global trends of disruptive technologies, ageing and emerging markets, there is much to gain, said Ms Lin.


For this reason, Singapore, even as it leaves room for experimentation, should pay close attention to global trends for future growth.

Experts said there are several but a few stand out for Singapore.

One is robotics, or smart machines, which can do the work that humans currently do.

Machines have been used in many ways in the past to supplement human labour. The difference today, and in the future, is that these machines are now smart and can do tasks independently of their human operators.

Smart machines will enter offices, factories and homes "in numbers we have never seen before" over the next decade, said Mr Lee Chew Chiat, the public sector industry leader at Deloitte South-east Asia.

"They will become integral to teaching, medicine, production, security, and virtually every domain of our lives," he added.

This is not too far off. Already, countries like Japan are using robots to replace human labour in factories.

Google has started to invest in humanoid robots which can traverse rough terrain, while IBM is developing a supercomputer to find personalised treatments for cancer patients, which would replace doctors.

Another game-changer will be the development of autonomous vehicles, experts said.

"The impact will be massive... (for instance) drivers will have to eventually find other jobs, or will have to change their roles significantly to adapt," said Dr Theseira.

Another mega trend that Singapore can play a role in is the changing demographics of many advanced countries.

Singapore can turn its ageing problem into an economic advantage by leveraging off on its strong position in the biomedical and healthcare sectors, said Barclays economist Leong Wai Ho.

"We can turn the ageing demographic into a strength by building a centre for experimental geriatric medicine and technologies."

This would tie in with deepening Singapore's expertise in urban planning and the environment, which would also involve understanding the needs of the elderly.

"This is worth a bit of growth since it involves building new towns in a different way, perhaps even in an array of climate controlled domes that would also shield us from the haze," added Mr Leong.

In this instance, the blueprint for future success has already been drawn up today, and it remains largely intact.

What it does need is a fresh injection of impetus, a dose of risk-taking and a hard look at how to continue making Singapore relevant to the rest of the world.

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