Remaking Singapore for a Different World
Dr Bergsten
Ladies and Gentlemen
INTRODUCTION - A TURNING POINT
1. Singa-pore has reached a turning point. For more than two decades until the Asian Crisis in 1997, Singa-pore enjoyed sustained high growth. Southeast Asia was doing well, foreign investments grew year by year, and our exports expanded. We upgraded our economy, and transformed the lives of Singa-poreans in less than a generation.
2. But the last five years have shown clearly that this phase is over. The Asian Crisis plunged Southeast Asia into political and economic uncertainties. The US recession marked the end of the long boom, and the start of a new period of slower growth. After September 11th last year, the discovery of terrorist groups in Southeast Asia linked to Al Qaeda brought new worries that will stay with us for many years. Our world has changed profoundly, and we must change with it.
3. We have witnessed changes at all levels of our external environment: in the global economy, in the Asian continent, and in Southeast Asia, our immediate region. Internally too, Singa-pore has become quite different from what it was just 10 or 15 years ago. Let me sketch how a small country, dependent on its wits and on the outside world, sees these changes, and is responding to them, in order to continue to thrive and prosper.
THE G-3: US DOWN BUT NOT OUT
4. Singa-pore's basic strategy has been to plug ourselves into the global economy. Of the three major economies - the US, Europe and Japan - the United States has for more than a decade been Singapore's main growth engine. The EU economy has been far less vibrant than the US, and Japan's post-bubble economy has been stagnant. After the Asian Crisis, when the Southeast Asian economies abruptly stalled, our reliance on the United States deepened.
5. Now that the US economy is entering a period of slower growth, Singa-pore will inevitably be affected. Despite this, I believe that the US will still outperform both the EU and Japan over the medium term. The US economy has a resilience and ruthless efficiency which the EU, with its state welfare and structural rigidities, will not match. And Japan will take many years to sort out its banking and corporate problems, even after they reach a consensus to tackle them. We are therefore continuing to bank on the US economy.
6. To secure our overseas markets, our basic approach has been multilateral - to rely on the framework of the World Trade Organisation (WTO) to ensure a level playing field and protect the interests of a very small player. Singapore will contribute actively to the Doha Development Agenda, because multilateral trade liberalisation will continue to be the cornerstone of our trade policy.
7. However, the failure of the Seattle WTO meeting in 1999 highlighted clearly the limitations and risks of a purely multilateral approach. After Seattle, many countries, including Singa-pore, reassessed their positions, and decided that it would be wise to complement the multilateral approach with a strategy of bilateral Free Trade Agreements (FTAs) with key trading partners.
8. Singa-pore has already secured FTAs with Australia, New Zealand, Japan and the European Free Trade Association. In the pipeline are FTAs with Canada, Mexico and the United States.
9. Of all these, by far the most important is the US-Singapore FTA (USSFTA), the negotiations for which are almost completed. Singapore is the US' 11th largest trading partner and the US is Singapore's 2nd largest. The USSFTA will be the US' most significant FTA since NAFTA. It will be a win-win deal that will boost trade between our two countries, and catalyse more investments in both directions.
10. For Singapore, the USSFTA will eliminate tariffs on most exports to the US, particularly electronics and chemicals. This will encourage MNCs to set up more plants in Singa-pore, and help secure our manufacturing base. Indeed a large part of these benefits will accrue to US companies, because over 60% of Singapore's trade with the US is intra-MNC trade.
11. Since Singa-pore has practically no import tariffs, virtually all US imports already enter Singa-pore duty free. The main benefit to the US in the FTA is therefore greater access to Singapore's services sectors, especially financial services. In addition, Singapore will pass a competition law to proscribe unfair competition, and encourage entrepreneurship and enterprise. We will also strengthen our intellectual property protection regime, which is a prerequisite for the knowledge-based economy we are building. Physical investments will also enjoy better protection.
12. However, the greatest value of the USSFTA is not in enhancing our bilateral relationship, but in its powerful demonstration effect on the rest of Southeast Asia. This is the US' first FTA in Asia (outside the Middle East). It is convincing proof of US commitment to the region, and the benefits which the US and Singa-pore see in promoting freer trade. The USSFTA will cause other countries in the region to reassess their policies, and encourage them also to open up their economies and conclude FTAs with the US. Such a web of FTAs will increase trade and investment, and bind our economies and destinies more closely together.
13. On the fringes of the recent APEC Leaders' Summit, President Bush launched the Enterprise for ASEAN Initiative (EAI). The EAI offers the prospect of bilateral FTAs between the US and other ASEAN countries. This is precisely what we had hoped the USSFTA would spark off. And just as NAFTA has entrenched pro-market economic policies in Mexico, EAI will achieve the same effect on ASEAN.
THE WIDER REGION: NORTHEAST ASIA AND INDIA
14. In Asia, the overall picture is one of progress, particularly in Northeast Asia because of the continuing rapid transformation of China. Market liberalisation has accelerated in recent years as China prepared to join the WTO and bring 1.3 billion Chinese into the global trading system. The results are dramatic and visible everywhere, as visitors to Beijing or Shanghai will attest. It is impossible to miss the buzz, the zest of the Chinese people, and their keenness to push ahead. China has attracted large amounts of FDI from MNCs eager to exploit its potential both as a production base and as an enormous market.
15. What is new about China's rise is that now China and Northeast Asia are eclipsing Southeast Asia in terms of economic performance and investor interest. Before the Asian Crisis, Southeast Asian countries saw China's growth as an unambiguous opportunity that would enhance their own prosperity. But now that Southeast Asia is not doing well, China presents a serious challenge, competing for FDI and for market share in export markets.
16. Singa-pore's response to this tectonic shift is to recognise the magnitude of the challenge, but also to position ourselves to exploit the wealth of opportunities that an affluent China is creating. International trade is not a zero sum game. As China's exports have grown, so have its imports. China is becoming a major market for manufactured goods, consumer products, and services like tourism, banking, education and healthcare. We see this in the rapid growth of Singa-pore's own exports to China. This year, for the first time, our exports to greater China (i.e. the PRC, Hong Kong and Taiwan) exceeded our exports to the US.
17. In South Asia, India is stirring, although so far not as vigorously and profoundly as China. In the decade since India started liberalising its economy, it has significantly lowered its high tariffs and trade barriers. India has been growing at 5-7% per year, higher than the "Hindu growth rate" of 3-4% before the reforms. If India continues to liberalise its economy, and achieves the 7-8% growth it aims for, it will create many more opportunities for Singapore and Southeast Asia.
18. India is unlikely to repeat China's explosive take-off. Growth will not be uniform across that diverse sub-continent. But India will have many high growth pockets and sectors, which will present opportunities for Singapore. In Bangalore, for example, a Singapore consortium set up an IT industrial park, which has been quite successful. Indian companies are setting up in Singa-pore, to use it as their gateway to Southeast Asia. We are also attracting more Indian tourists, who are the highest spending tourists in Singapore.
19. Given the prosperity of China and India, Singapore has been extending its hinterland beyond the traditional areas in Southeast Asia, to service a wider area defined by a radius of 7 hours' flying time from Singapore. This brings China, India and even Australia within Singapore's catchment. Jet travel and modern telecommunications makes this feasible. Many companies are already setting up headquarters in Singa-pore to do this.
SOUTHEAST ASIA: RISING TO THE CHALLENGE
20. Before the Asian Crisis, Southeast Asia played a star role in the Asian Economic Miracle. Since then, the region has languished. Countries have registered modest economic growth, but not enough to make up for the diminished demand from the depressed G3 economies, or to rival the performance of China or South Korea.
21. Southeast Asia's economic malaise is aggravated by the uncertainty in the regional political and security environment, particularly the rise of political Islam and the threat from extremist regional terrorist groups linked to Al Qaeda, as recently highlighted by the terrorist attack in Bali. This uncertainty saps confidence, and deters MNCs from committing new investments. Southeast Asia has slipped off investors' radar screens.
22. Singa-pore was not a casualty of the Asian Crisis. Our politics have remained stable, and we are tackling the security threats vigorously. Nevertheless, Singa-pore has not escaped the regional climate. We used to thrive by servicing our neighbours and investing in their prosperity; now we share their woes.
23. Southeast Asia's economic factors remain positive - a sizeable market of 500 million people, high savings rates, good infrastructure, ample natural resources, and a hard working labour force. But to attract investments and generate growth, Southeast Asian countries must resolve the political and security issues. They must also strengthen their economic cooperation, to combine their advantages and offer investors a value proposition at least comparable to what China offers.
24. The six older members of ASEAN have made a good start by implementing a substantive ASEAN Free Trade Area (AFTA) that will eventually cover all 10 ASEAN countries. ASEAN is also starting to negotiate FTAs with its trading partners. Besides the Enterprise for ASEAN Initiative with the US, ASEAN is also launching negotiations with China, Japan and now India. These will take time, and will not be easy to conclude. But they demonstrate that ASEAN is outward oriented and supportive of economic integration, and provide an umbrella for member states which are ready to go ahead on their own.
REMAKING SINGAPORE
25. Just as our external world has changed, Singa-pore, too, has developed rapidly. In the last 15 years, we have upgraded our people and our economy. Our per capita GDP has more than doubled. In purchasing power parity terms, Singa-pore now ranks ahead of many OECD countries. The proportion of our workforce with more than 10 years of education has doubled (from 17% 15 years ago to 38% today). So has the fraction of managers, professionals or technicians (from 22% 15 years ago to 42% today). 15 years ago we were still making consumer electronics; today we have wafer fabrication plants, pharmaceuticals and petrochemicals. We are now playing in the major league, against formidable competitors.
26. We achieved this transformation by consistently pursuing four fundamental economic strategies. We strove to create a favourable business environment, so that firms could operate efficiently and profitably. We invested heavily in human capital through education and training. We welcomed investments by MNCs to create jobs, transfer technology, and link us to global markets and the global web of production. We promoted manufacturing as a growth engine that generated many spin-offs even in the services sector.
27. These strategies remain sound, but they are no longer sufficient. We have to rethink and adapt them to suit our new situation.
28. Firstly, what used to be a favourable business environment is no longer sufficiently attractive. What matters to businesses is after tax returns. We have to reduce the burden of direct taxes on businesses and individuals to the minimum possible, to encourage investment and wealth creation across the board. Hence, we are cutting the top rates of corporate and personal taxes from about 25% to 20% over 3 years, while raising indirect taxes to make up the revenues.
29. A favourable business climate also calls for labour market flexibility. We are refocusing our state pension fund system, the Central Provident Fund (CPF) on essentials, to minimise the statutory burden on wages. We are also introducing a more flexible wage system, linking wages less to the seniority of the worker and more to his performance and his employer's profitability, to keep structural unemployment as low as possible.
30. Secondly, we must continue to invest in education and training, because value in the knowledge economy lies less in natural resources and more in human capital. And to supplement our own talent, we will keep our doors wide open to foreign talent.
31. But we must go beyond this, to encourage greater entrepreneurship among Singaporeans. Singa-pore has prospered, but, as individuals, Singa-poreans are much less likely than Americans to start new businesses, or even to dream of starting one. There have been too many other opportunities in the professions, working for MNCs, and in the public sector. But in this new and more uncertain world, success lies not in avoiding risks, but in managing them. Singaporeans must learn to assess odds, seize opportunities, and make their ventures succeed. As China and India open up, our people must have the drive and spirit to conceive new business ideas and operate in the region. Encouraging entrepreneurship confronts deep issues of culture and social values, and will be a long term endeavour, but we must start now.
32. Thirdly, besides attracting MNCs to locate in Singapore, we must also grow strong Singa-pore companies. This will broaden our economic base and anchor critical activities in Singa-pore. We cannot achieve this by protecting local companies or giving them handouts. Instead we must get Singa-pore companies to be more entrepreneurial, build globally competitive businesses, and venture beyond Singa-pore to become international players, as Singa-pore Airlines has done. This depends on the companies attracting quality talent, building strong management teams, operating strictly commercially, and subjecting themselves to market discipline. This applies both to startups and established companies, to private firms as well as government-linked companies.
33. Fourthly, while we maintain manufacturing as a growth engine, we will put more emphasis on growing our services sector, particularly exportable services. Singapore has the reputation and potential to become a world class service supplier. But to tap these opportunities, we need to further upgrade our service industries and make them globally competitive.
34. Since the Asian crisis, our exportable services have lost market share in Asia. This is partly because our immediate neighbours have faltered, but also because our service industries have been less open and more regulated than our manufacturing sector, and so less competitive internationally. We have deregulated and liberalised industries like finance and telecommunications, but we must go further to develop a range of competitive service industries. We are already a significant financial and telecoms hub, and we are actively working to make Singapore the regional hub for other services, such as logistics, healthcare, education, and legal services.
CONCLUSION
35. Despite our rollercoaster ride of the last five years, we in Singapore are confident of the future. Indeed our world has changed, and the challenges have become more daunting. But uncertainty and discontinuity put a premium on enterprise, agility, and resolve, which are Singa-pore's strengths.
36. We are systematically rethinking our strategies for securing growth and prosperity, and remaking Singa-pore. The road ahead will not be easy, but we will succeed, because we must succeed. Every Singaporean knows that the alternative to adapting ourselves and transforming our economy is stagnation and decline. At a turning point in the road, we are absolutely clear which path we have to take.