Challenges for the Singapore Economy After the Global Financial Crisis

Peter Wilson

• Editorial: WSPC
• Año: 2011
• ISBN:
  9789814460552
• Categoría: Sciences biologiques
• Categoría: Science générale

This book is a collection of invited and selected papers from the Singapore Economic Policy Forum 2009 around a central theme, Challenges Facing Singapore in the Post-Crisis Era and Policy Responses.

There are very few books on the Singapore economy. This one is largely non-technical in nature and brings the reader up to speed on the key issues facing policymakers in Singapore in the wake of the worst financial crisis since the Great Depression. The contributors are all experts in their field and have extensive experience of the Singapore economy. The book also offers an international dimension to look at the role of China in the Asian economy and the impact on Asia of reforms to the international financial architecture.

Contents:

• Introduction (Peter Wilson)
• The Post-Crisis Era: Challenges for the Singapore Economy (Manu Bhaskaran and Peter Wilson)
• Economic Policy-Making in Singapore: Some Reflections (Basant K Kapur)
• Reform of the International Financial Architecture, the G20 and Asia (Pradumna R Rana)
• The Current Productivity Drive in Singapore and Labor Market Policies (Chew Soon Beng and Rosalind Chew)
• China as an Emerging Market for Singapore: Challenges and Opportunities (Yunhua Liu)
• Equity in Singapore's Healthcare Financing (Tilak Abeysinghe, Himani and Jeremy Lim)
• Monetary Policy in Singapore and the Global Financial Crisis (Chow Hwee Kwan and Peter Wilson)
• Fiscal Policy in Singapore and the 2010 Budget (Lee Soo Ann)
• Singapore's Exchange Rate Policy: An Evaluation (Partha Sen)
• Citizen-Government Partnership for Social Equity: How It Strengthened with the Global Crisis (Chew Soon Beng and Rosalind Chew)

Readership: Students and researchers who are interested in the Singapore economy.
Keywords:Singapore Economy;Global Financial CrisisReview:

“In this authoritative and stimulating volume, Peter Wilson and his team of leading Singapore intellectuals provide a rigorous, forward-looking analysis of policy options and challenges. The international parameters are likely to include slower global economic growth and continuing asset price volatility, while at home the challenges include the evident secular decline in productivity growth and a range of pressing social policy issues. A must-read volume. ”

Hal Hill
H W Arndt Professor of Southeast Asian Economies
Australian National University

“This is a timely book with fresh insights and recommendations which reframe policy issues in key areas. The bold proposals are a valuable contribution to the debate on the future of Singapore in general and its economy in particular.”

Phang Sock Yong
Professor of Economics
Singapore Management University
Key Features:

• This is a timely book which brings together a number of experienced observers of the Singapore economy to provide up-to-date and relevant policy proposals on many areas of public policy, including health, education, monetary and fiscal policy and issues connected with the labor market and social equity

Chapter

1

INTRODUCTION

Peter Wilson

“Here all is life and activity; it would be difficult to name a place on the face of the globe with brighter prospects or more pleasant satisfaction. In little more than three years, it has risen from an insignificant fishing village to a large and prosperous town, containing at least ten thousand inhabitants....”

(Stanford Raffles)¹

With hindsight Singapore escaped relatively unscathed from the 2008–2009 global crisis as far as the direct financial fallout is concerned apart from a fall in equity prices and some losses by Singapore’s de facto sovereign wealth funds. The impact of the crisis on the ‘real’ economy was, however, much more dramatic as the slowdown in weighted GDP growth in Singapore’s major trading partners (apart from India and China) in 2009 was transmitted to Asia and Singapore through the trade channel. As it transpired, the real rebound in Singapore was not to come until the second and third quarters of 2009 following four consecutive quarters of sequential contraction in GDP.

However, the widely expected severe and prolonged contraction did not materialize such that by April 2010 Singapore had recovered all the output lost since the peak in the first quarter of 2008 and the official forecast for 2010 released in July was between 13% and 15%. Moreover, the impact on employment was much more muted than in previous downturns, undoubtedly helped by large nominal wage cuts, job creation in the construction and services sectors (integrated resorts) and budget stimulus initiatives in the 2009 and 2010 fiscal year budgets, including the Jobs Creation Scheme.

We begin in Chapter 2 with an overview of the impact of the global financial crisis on Singapore and post-crisis challenges ahead. This is followed by a summary of the main tenets of Singapore’s economic policy strategy since independence in 1965 and some recent concerns and suggestions for a change in direction in some areas. The chapter is rounded off with the recommendations of the Government’s 2010 Economic Strategies Committee, which addresses some of these issues.

Taking the long view, Manu Bhaskaran and Peter Wilson show that there has been a remarkable degree of continuity in Singapore’s economic strategy since 1965, which has undoubtedly been helped by the fact that the government has been formed by the same party since 1959 and Singapore had one Prime Minister, Lee Kwan Yew from that time until 1990.

Policy-making in Singapore has always been heavily top-down with the government playing the role of entrepreneur in the sense of establishing organizations to support growth through Statutory Boards and a myriad of Government-Linked Companies (GLCs), many of which still survive today. In one way or another the government has a tight control over resources, including land. Savings are mobilized through the compulsory Central Provident Fund (CPF) and investment, especially in social and economic infrastructure, is targeted and directed through government or quasi-government organizations.

A key feature of Singapore’s economic growth is that it has been overwhelmingly driven by exports, aided by large inflows of foreign capital and labour, and has been supported by policy commitments to free trade, regional integration and export promotion. As a consequence, growth cycles in Singapore are strongly affected by swings in external demand. This, together with a heavy dependence on foreign labour and multinational corporations (MNCs), has tended to be viewed as an inevitable consequence of Singapore’s dearth of natural and human resources and a necessary evil to achieving rapid growth in GDP and industrialization.

Macroeconomic policy has played an important complementary role by focusing on high savings through budget surpluses and the CPF and conservative fiscal and monetary policies have been aimed at maintaining long-run competitiveness by keeping consumer price inflation low and stable and attracting a steady stream of mobile foreign capital and labour. When necessary, especially during severe downturns, adjustment can be speeded up as a result of Singapore’s flexible labour market, where a substantial portion of wages are now contingent on the performance of the economy and can be reduced to restore cost competitiveness. If that is not sufficient, then publicsector related cost-cuts can be implemented quickly.

Since Singapore competes largely without protection in the global economy, if there are periodic concerns about Singapore’s long-run structural adjustment and ability to compete in a rapidlychanging world economy, then the traditional policy response has been ‘diversification’, both in terms of products produced and markets to sell to, ‘restructuring’ to increase value-added and ‘upgrading’ through a variety of government subsidized, but ultimately market related, training schemes.

There is no doubt that this strategy has been successful according to conventional indicators of economic development in transforming Singapore into a high income manufacturing and services economy with a substantial increase in welfare for the vast majority of its citizens. Moreover, rapid growth and industrialization have not been at the expense of macroeconomic stability. Price inflation has been low by international standards, there has been high employment most of the time, external government debt has been negligible, and there have been persistent surpluses on the balance of payments and a rapid accumulation of official foreign exchange reserves.

The post-crisis outlook for Singapore will pose many challenges, including increased volatility in external markets, the threat of slower global growth and rising protectionism and competitive challenges in financial services from Chinese cities, such as Shanghai, but there will also be opportunities as China and India continue to expand and Singapore benefits from being at the heart of an expanding Asian hinterland.

Although Singapore’s economic strategy has been very successful since independence, there have been some concerns expressed by economists and others in the last decade or two that the Republic’s growth and welfare performance may have fallen short of expectations and that the present underlying growth model may be unsustainable.

Real GDP growth appears to have slowed in the last decade and Singapore’s growth cycle has become more volatile. The long-term ‘catch-up’ in productivity growth also appears to have stalled somewhat and looks especially weak in services industries, such as restaurants and real estate, and in construction. Some argue that Singapore might have become ‘hooked’ on cheap foreign labour to sustain growth which has adversely held down the wages of indigenous workers and acted as a disincentive to raise labour productivity. In particular, the issue of foreign workers, which now constitute about 35% of the total workforce, has become more controversial in recent decades.

At the same time, the domestic economy may have become too dependent on foreign-owned MNCs in the manufacturing sector, reinforced by the official determination to keep manufacturing at 20–25% of GDP. The negative side of rapid export-led growth may have been an excessive dependence on external demand and foreign resources and an increase in the volatility of the business cycle. Allied to this is the longer-term weakness that Singapore generally does very well in comparative studies of international business competitiveness but not so well in entrepreneurship and related activities, perhaps because of the extensive involvement of the government in the economy and the emphasis on manufacturing for export by large foreign companies.

Perhaps Singapore should reset the goal to 3–5% GDP growth and raise domestic labour productivity by reducing the number of foreign workers allowed into the Republic. There could also be a gradual shift in emphasis towards increasing domestic demand and the services sector and the role of decentralized market forces, together with greater help to small and medium-sized firms. This might move Singapore closer to its current competitive advantage as a knowledge-based hub and revitalize ‘regionalization’, on the assumption that Singapore has not done enough to take advantage of opportunities in the Asian region in its quest to diversify into global markets.

There have also been some doubts whether the ‘trickle down’ of the benefits of past growth has been sufficient to compensate for the sacrifices that Singaporean workers have made to keep the externallyoriented model working. One indicator of this has been rising income inequality as technological change benefits those with higher skills and knowledge and increases competition for jobs, reinforced by the meritocratic nature of Singaporean society and absence of comprehensive safety nets for the poor and unemployed and flaws in the design of the CPF system which has produced a number of retirees who are ‘asset rich but cash poor’.

Some have called for a move away from a narrow focus on GDP as the barometer of success to criteria which are more explicitly ‘inclusive’ such as targets for income distribution or indicators of the quality of life. Others have suggested cuts in the CPF employee contribution rate or a rise in the employer’s contribution, or even changes to the tax and benefit system to make it more redistributive, an issue which is very sensitive in Singapore.

The chapter finishes with a summary of the recommendations presented by the Economic Strategies Committee (ESC) set up by the government in May 2009 and whose findings were made public in February 2010.

The Committee accepted that in a cross-country comparison Singapore’s productivity in manufacturing and services fell short of its peers and recommended institutional changes to help achieve a 2–3% target of productivity growth per year over the next decade. They also recognized that some slowing in the inflow of foreign workers might be necessary through a rise in the Foreign Workers’ Levy. Nonetheless, despite some laudable changes in policy, such as measures to improve energy efficiency and provide more help to smaller firms and those needing trade financing, the post-ESC strategy appears to be more of a continuation of the ‘top-down, diversify and upgrade’ model of the past with continued stress on export-led MNC-oriented growth and manufacturing remaining at 20% to 25% of GDP.

In Chapter 3, Basant Kapur offers some deep reflections on economic policy-making in Singapore and laments the narrow emphasis on ‘growthmanship’ or GDP growth as a measure of social welfare. He suggests that more time should be allowed for distributional issues, that public-sector bonuses should be linked to a broader measure of productivity growth and the well-being of lower paid Singaporeans than GDP per se and perhaps the tax system should be made more progressive to reduce income inequality.

This should be part of a more general change in emphasis in Singapore away from a local culture which puts great stress on material prosperity and examination-oriented performance criteria, towards one which would allow more space for ‘passion’ and comparative cultural studies in schools and more concern for others to enhance social cohesiveness. He cites the lack of access to subsidies for anti-retroviral drugs to combat HIV/AIDS as an example.

He is also in favour of increasing the role of domestic demand by increasing the ratio of consumer expenditure to GDP as in other small open economies, such as Hong Kong, perhaps by increasing the rate of release of land sales to moderate house price increases; and reconsidering the ‘mixed blessing’ of relying on unskilled foreign labour to propel growth, although increasing the Foreign Worker Levy should be done slowly to give firms time to adjust to the new environment.

Policy-making in Singapore does not operate in a vacuum but rather is significantly affected by external political events, including those in the Asian region. In Chapter 4, Pradumna R Rana carefully weighs up the reforms to the international financial architecture implemented after the Asian financial crisis of 1997–1998 and during the present global financial crisis and how they affect Singapore and Asia. In particular, he asks how Asia can further strengthen its participation in the Group of Twenty (G20) and other negotiating bodies.

Although some steps were taken after the Asian crisis to reform the governance of the International Monetary Fund and make it better equipped to deal with future crises, with some increases in quotas and voting rights in line with the greater importance of emerging economies, including those in Asia, progress so far has been slow. The broadening of the Group of Eight (G8) to the G20 and associated institutional changes to enhance peer review systems and reduce the likelihood of systemic failures are steps in the right direction, but it is still not clear what will be done with the ‘left-out’ countries.

His advice is to make sure that these ‘left-out’ countries are heard effectively at G20 meetings by making the present Association of South-East Asian Nations (ASEAN) representatives at G20 meetings more of a formal part of the proceedings, to arrange meetings of ASEAN+3 just prior to G20 meetings, to invite India, Australia and New Zealand to Asian regional negotiations once the new ASEAN+3 Macroeconomic Research Office (AMRO) is established in Singapore in May 2011 and to increase the dialogue between the ASEAN+3 and other developing countries.

The labour market has been a crucial ingredient in Singapore’s economic strategy, both as a long-run source of growth and as a stabilizer during cyclical downturns. Chew Soon Beng and Rosalind Chew argue in Chapter 5 that Singapore has been successful in managing its labour market since independence because the government has adopted a ‘strategic’ rather than an ‘adversarial’ strategy of collective bargaining. There is no ‘free lunch’ in the form of universal unemployment benefits, as in Europe, and there is no state pension for the public sector. The emphasis instead was to set non-mandatory wage guidelines through the National Wages Council from 1972 onwards, try to increase productivity and wages by increasing the employers’ CPF contribution rate after 1978 (which was not very successful), to make the system more flexible with monthly variable components after 1988 and, more recently, to adopt pro-market training schemes to keep Singaporean workers up to speed in the face of global competition. To ensure that ‘no one is left out’ schemes, such as Workfare are designed to provide basic help to low wage workers in concert with self-help bodies.

How have these policies changed as a result of the global crisis? Should they be further changed to enhance labour productivity?

They point out that in reaction to the 2008–2009 downturn the budgets for Fiscal Years 2009 and 2010 have provided temporary support for workers through the Jobs Creation Scheme and Skills Programme for Upgrading and Resilience (SPUR) and that some public sector jobs were created according to ‘Keynesian’ logic. The raising of the Foreign Workers’ Levy in 2010 is the latest example of government initiatives to ‘manage’ the influx of foreign workers and raise labour productivity in the longer run. Their view is that wages should only be increased if there is productivity growth and inflation is kept low. Shorter business cycles and an increasingly competitive international environment may also require further fiscal support during a downturn.

Singapore has become increasingly enmeshed in a complex system of cross-border production networks in the Asian region since the early 1990s and China has emerged to become the epicentre of this fragmented universe as an assembler and exporter of final goods. Chapter 6 by Yunhua Liu reminds us of the increasing importance of China as a market for Singapore’s goods and as a source of imports and how the relationship has changed within a few decades. In the early 1990s Singapore was still seen as competing with China in both exports to third markets and as a recipient of foreign direct investment. However, now that the Republic has moved up the value-added chain the relationship has become more complementary rather than competitive with China and Hong Kong together accounting for more than 20% of Singapore’s exports. China is also Singapore’s largest destination for foregin direct investment and Singapore’s businessmen and officials have undoubtedly learnt some important lessons from their earlier collaborations with the Chinese authorities.

Tilak Abeysinghe, Himani and Jeremy Lim ask, in Chapter 7, whether Singapore should be concerned about the equity aspects of its healthcare financing system and if so how equity can be improved without unduly burdening taxpayers.

Singapore’s mixture of public and private provision and low public expenditure cost (less than 4% of GDP) ensures that it scores high on many international comparative healthcare indicators but does poorly in terms of equity, largely due to higher ‘out of pocket’ expenditures by those hospitalized. Based on a data analysis of hospital expenditure of a large number of elderly citizens they conclude that there is no comprehensive cover after retirement when it is most needed. The majority of patients are in subsidized wards with insufficient savings and few have government or private insurance cover, so they are heavily reliant on family medical savings, which is a burden for low income families. Indeed, despite subsidies, the system is closely aligned to income levels and there may even be some regressiveness in the system.

They recommend that the government should take steps towards a more universal system of healthcare financing without abandoning the principle of individual responsibility. Maybe ...

Índice

• Cover page
• Title page
• Copyright
• Preface
• Contents
• Chapter 1 Introduction
• Chapter 2 The Post-Crisis Era: Challenges for the Singapore Economy
• Chapter 3 Economic Policy-Making in Singapore: Some Reflections
• Chapter 4 Reform of the International Financial Architecture, the G20 and Asia
• Chapter 5 The Current Productivity Drive in Singapore and Labour Market Policies
• Chapter 6 China as an Emerging Market for Singapore: Challenges and Opportunities
• Chapter 7 Equity in Singapore’s Healthcare Financing
• Chapter 8 Monetary Policy in Singapore and the Global Financial Crisis
• Chapter 9 Fiscal Policy in Singapore and the 2010 Budget
• Chapter 10 Singapore’s Exchange Rate Policy: An Evaluation
• Chapter 11 Citizen-Government Partnership for Social Equity: How It Strengthened with the Global Crisis
• Index