The Singapore Economy Reconsidered 9789814377973

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THE

SINGAPORE ECONOMY RECONSIDERED

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of development and modernization, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer.

THI SIN APORI ICONOMY RICONSIDIRID LAWRENCEB.KRAUSE University of California, San Diego

KOHAITEE National University of Singapore

LEE (TSAO) YUAN National University of Singapore

I5ER5

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1987 Institute of Southest Asian Studies First printed 1987 Reprinted 1988 The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data Krause, Lawrence B. The Singapore economy reconsidered I Lawrence B. Krause, Koh Ai Tee and Lee (Tsao) Yuan. 1. Singapore - Economic conditions. 2. Singapore - Economic policy. I. Koh, Ai Tee. II. Lee (Thao), Yuan. III. Institute of Southeast Asian Studies. IV. Title. 1987 HC445.8 K91 ISBN 9971-988-63-1 (soft cover) ISBN 9971-988-66-6 (hard cover) Typeset by The Fototype Business Reprinted in Singapore by Kyodo-Shing Loong Printing Industries Pte Ltd

Contents

List of Tables List of Figures Preface chapter one

Thinking about Singapore

Vl Vlll

ix

1

Lawrence B. KRAUSE chapter two

Linkages and the International Environment

21

KOH Ai Tee chapter three

Industrialization of an Advanced Global City

54

Lawrence B. KRAUSE chapter four

Saving, Investment and Entrepreneurship

78

KOH Ai Tee chapter five

The Government as an Entrepreneur

107

Lawrence B. KRAUSE chapter six

The Government in Macro-economic Management

128

LEE (TSAO} Yuan chapter seven

The Government in the Labour Market

174

LEE (TSAO} Yuan chapter eight

Challenges Facing Singapore

217

Lawrence B. KRAUSE KOH Ai Tee LEE (TSAO} Yuan About the Authors

231

List of Tables 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.5 2.6

2.7

2.8 2.9 2.10 2.11 2.12

Average Annual Growth of Real Gross Domestic Product and Real GOP Per Capita, 1965-85 Average Annual Rates of Change of Consumer Price Indexes, 1966-85 Singapore's Gross Domestic Product by Industry Shares at 1968 Factor Cost Growth of Money Supply in Singapore Sources of Growth in Singapore Labour Productivity in Singapore Domestic Savings and Investment in Singapore as a Share of GOP Selected Indicators of Foreigners' Role in Singapore, 1966-85 Role of Imports in Production and Final Demand, 1973, 1978 Contribution of Foreign Capital to Singapore's Manufacturing Sector, 1975-84 Foreigners' Share of Capital/Funds of Limited Companies in the Commerce Sector, 1975, 1983 Foreigners' Share of Capital/Funds of Limited Companies in Selected Services, 1974 Correlation Coefficients of Real GOP Growth Rates between Singapore and Major Groups of Countries, 1966-84 Correlation Coefficients of Real GOP Growth Rates between OECD and Selected Countries/Groups of Countries, 1966-84 Degree of Openness of ASEAN, Asian NICs and Selected OECD Countries, 1984 Major Export Markets of Singapore Coefficient of Variation of Singapore's Trade with the OECD and ASEAN Countries, 1975-84 Major Sources of Imports of Singapore Foreign Investment in Singapore's Manufacturing Sector by Country of Origin, 1966-83

6 7 9 12 15 16 16 23 24 25 26 27

28

30 31 32 33 34 35

List of Tables

2.13

2.14 3.1 3.2 3.3 3.4 3.5 4.1 4.2 4.3 5.1 5.2 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12

vii

Contribution of Foreign Establishments to Manufacturing Output and Value Added by Major Source of Capital, 1984 36 Capital/Funds of Limited Companies in the Commerce Sector by Country, 1983 37 Country Comparison of Educational Profile of Work-force 58 Educational Effort in Several Countries in 1982 59 Singapore's Re-exports 65 Singapore's Domestic Exports 67 Distribution of Singapore's Domestic Exports and Net Domestic Exports, 1985 68 Selected Indicators of Saving and Investment in Singapore, 1966-85 80 Gross Domestic Capital Formation by Private and Public Sectors at 1968 Market Prices, 1960-85 83 84 Savings by Public and Private Sectors, 1974-85 Measurements of the Role of Government in the Economy of Singapore, Korea and Taiwan in 1984 116 Growth in Public Enterprises in Singapore, 1960-83 117 Nominal Exchange Rates of the 130-31 Singapore Dollar Rates of Growth of GOP, M1, M2, M3 and Bank Loans 133 135 Interest Rates and Inflation Net Contributions to the Central Provident Fund 138 139-40 Public Sector Revenue and Expenditure 141 Banks' Resident Deposits by '!ypes of Customers Source of Changes in M 1 142 Banks' Liabilities to Banks Outside Singapore 144 Gross Domestic Fixed Capital Formation by Public and Private Sectors, 1968 Market Prices 145-46 Contribution to Growth in Total Demand 147 Construction by the Public and Private Sectors, 148-49 and by '!ype 150-53 Building Statistics by Public and Private Sectors

List of Tables, Figures

Vlll

6.13 6.14 6.15

7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14

7.15

Indices of Monthly Earnings and Total Labour Cost Total Remuneration per Employee in Singapore Manufacturing Relative Unit Labour Cost and Exchange Rate Changes, Singapore vis-a-vis the other Asian NICs NWC Wage Recommendations Percentage of "Benefited" Employees Average Nominal Monthly Earnings, All Industries, Actual and Recommended Rates of Change of Nominal Wages by Occupation, Actual and Recommended Rates of Change of Nominal Wages by Major Sector, Actual and Recommended Extent of Implementation of NWC Guidelines by Firms Indicators of Unemployment Rates of Change of Employment Rates of Change of the Capital Stock Rates of Change of Nominal Labour Productivity, Recommended Wages and Total Labour Cost Output from Educational Institutions Comparative Statistics on Education Statistics from the Graduate Employment Surveys Distribution of Professional, Administrative, and Managerial Workers, by Specific Industries, in the 1980 Census Rates of Change of Nominal Wages by Occupational Group

156 158

159-60 178 180 181-82 184 185-86 187 190 191 193 194 202 203-4 206

207 209

List of Figures 6.1

Comparison of Domestic and Foreign Interest Rates, 1982-86

134

Preface

The Singapore Economy Reconsidered owes its origins to a growing concern within and outside the Institute for the need of a comprehensive survey of the Singapore economy, particularly over the medium term. The decline of the economy in 1985, for the first time in twenty years, focused these concerns even more sharply, since it brought to light structural difficulties that had been hidden by the general economic growth. At the same time, the findings and recommendations of the Economic Committee, set up in 1985 under the chairmanship of the then Acting Minister for 'frade and Industry, Brigadier-General (Res.) Lee Hsien Loong, provided additional data and a bench-mark to launch critical investigations into both the trends and desired future directions of the Singapore economy. It was felt that this objective could perhaps be best achieved if investigations were undertaken by a team of researchers, including those from outside Singapore, who could bring fresh insights and perspectives to the problems involved. The first step taken to give substance to this idea was to check on the availability of Dr Lawrence B. Krause, and to seek the cooperation of the Brookings Institution where he worked as a Senior Fellow. Dr Krause had participated and helped direct three country studies for the Brookings Institution - on the United Kingdom, Japan, and Australia - and was known to have professional interest in Singapore. He readily endorsed the idea of a study along the lines above, and the Brookings Institution agreed to give him leave to undertake it. For the Singapore component of the research team, Dr Koh Ai Tee and Dr Lee (Tsao) Yuan of the Department of Economics and Statistics, National University of Singapore, were approached and they too agreed to participate in the study. Working contacts were also established with the Ministry of Trade and Industry and the Monetary Authority of Singapore, in terms of access to information and any other assistance required.

X

Preface

Field-work for the study began in Aprill986 when Dr Krause took up residence at the Institute. This permitted close collaboration among the researchers until August 1986. The drafts of the various chapters were completed in September 1986 and were circulated to a select group for comments. They were subsequently discussed at a special workshop held at the Institute on 31 October 1986. Participants included senior civil servants, business and media executives, and academics. 1\vo persons were assigned to critically review each draft chapter. These commentators - Dr Chan Heng Chee, Mr Patrick Daniel, Dr Basant Kapur, Prof. Lee Soo Ann, Prof. Lim Chong Yah, Dr Linda Low, Mr Ngiam Tong Dow, Dr Ong Nai Pew, Dr Pang Eng Fong, Dr Augustine Tan, Mr Tan Chin Nam, Dr Amina 'JYabji, Mr Wong Chin Yeow, and Dr Wong Kum Poh presented their critiques at the workshop. These critiques and the subsequent discussions stimulated considerable debate and exchange of views. The authors benefited immeasurably from these comments and the discussions, and would like to thank all the commentators and participants at the workshop for their invaluable suggestions and the time they took to review the drafts of the manuscript and to participate in the workshop. It is possible that despite such improvements to the original drafts, purists may still find the quality of the individual chapters in the volume variable. Likewise, a longer gestation and research period may have led to greater sophistication of analysis. However, given the topicality of the issues involved, it was generally felt that any further delay in the publication of The Singapore Economy Reconsidered would detract from its significance and impact. Accordingly, it is presented as it is. In doing so, the authors are also aware that not all will agree with their conclusions. All the same, it is hoped that this volume can contribute to the ongoing debate on the future of the Singapore economy and the Republic's well-being. During the research and the preparation of the manuscript for publication, the Institute received assistance from several individuals and organizations, and it would like to record its appreciation of such support. In particular, it is grateful to the Lee Foundation and the Board of Trustees of the Institute for covering part of the costs of the study and its publication; Mr Ngiam Tong Dow and Dr Teh Kok Peng and their colleagues at the Ministry of Trade and Industry and the Monetary Authority of Singapore, respectively, for their advice and encouragement throughout the study; Prof. Lim

Preface

xi

Chong Yah and the National University of Singapore for their cooperation and permission for Dr Koh Ai Tee and Dr Lee (Tsao) Yuan to participate in the study; and the Brookings Institution for the release of Dr Lawrence B. Krause, and the research assistance of Ms Elizabeth Phillips. Last but not least the Institute would like to thank the authors for their contributions and promptness in meeting requests and deadlines. Whilst wishing them and The Singapore Economy Reconsidered all the best, it is clearly understood that responsibility for statements made and for the accuracy of the information provided rests exclusively with the individual authors.

20 December 1986

Kernial S. Sandhu Director Institute of Southeast Asian Studies

chapter one

Thinking about Singapore Lawrence B. KRAUSE

B

ecause of its rapid pace of growth, Singapore, along with the other Asian newly industrializing countries (NICs), has changed the way most economists view the process of economic development. The NICs are moving along a path of industrial catch-up already traversed by Japan, and are doing so at twice the speed that Japan took. Others can learn from their experience, and in fact, the NICs themselves are still learning how to maintain continued growth of their economies. This study is devoted to the economy of Singapore. It is a particularly appropriate time for such a study, since Singapore, in 1985-86, has suffered an unusually severe recession. It is at such times that structural factors important in the medium and long run should be given attention. Four characteristics of Singapore are striking. The most important is the fact that it is a multiracial city-state of 618 square kilometres, and 2.6 million people. The consequence of its small size cannot be overemphasized, and it is natural that external markets are larger than domestic markets for Singapore producers of goods and services. In fact, Singapore is the most open country in the world. Secondly, Singapore has recorded the highest savings rate in the world and, since becoming fully independent in 1965 (an unusual independence, thrust upon it when it was expelled from the Federation of Malaysia) has achieved the fastest economic growth of all countries in the world. Thirdly, the industrial structure of Singapore, if not unique, is certainly different from that of most countries in that 70% of investment in manufacturing is by foreign firms. 1

2

Lawrence B. Krause

Finally, the average wage in manufacturing, while higher than any other developing country, is the lowest of all occupational groups in Singapore - even below agriculture and fishing.

Historical Experience Although lacking both natural resources and a hinterland of any sort, Singapore does have two powerful assets - its people and its geography. It was its geography, characterized by a large natural harbour and a location astride the most important shipping route between Europe and the Pacific, that gave Singapore its original economic rationale as an entrepot for the entire Southeast Asian region. Historically, the entrepot trade began because nature made Singapore a perfect transshipping point between the Indian Ocean and the South China Sea and beyond. However, with the development of rubber estates and tin mining in Peninsula Malaya, Singapore ultimately became a full-fledged primary port and commercial city for a rich producing area. The foreigners heading for work on the peninsula came into Singapore, and the product and wealth created went out through Singapore -and some of it stayed. Thus, in addition to the volume of activity of the port, the Singaporean economy was affected by the price of rubber and tin inasmuch as this meant good or bad times up-country. The economic linkage between Singapore and Malaysia continues to be an ongoing story of the region. Furthermore, entrepot activities such as trading, processing, storing, banking, insurance, repackaging, marketing, transportation and communication, provided much useful preparation for wider economic achievements. They led to the creation of certain physical facilities such as the port, to the development of certain worker skills, and to the encouragement of risk-taking by entrepreneurs. It may well be that the entrepot function, modernized and expanded into sophisticated business services, remains the backbone of the Singapore economy, and was only temporarily eclipsed for a brief period by the rapid growth of manufacturing. The contrast between Hong Kong and Singapore with respect to the entrep6t business should not be overlooked. Historically, Hong Kong was the entrepot for South China. Once an embargo against China was introduced because of China's participation in the

Thinking about Singapore

3

Korean War in 1950, the entire raison d'etre of Hong Kong collapsed. Hong Kong had to learn to live by its wits, and these wits also came from China - in the form of entrepreneurs fleeing Shanghai. They brought with them their ability to organize manufacturing, as well as some capital. Combining this with the worker-refugees from China, they completely transformed Hong Kong into a manufacturing centre. In recent years, some of the entrepot business has begun to return. Nevertheless, the interruption of the entrepot trade in Hong Kong stands in contrast to its continuity in Singapore. Singapore's original economic strategy, which was reflected in its first and only formal development plan, become inoperative after Singapore was separated from Malaysia. Clearly, import replacement made no sense for a city-state. Still, as in other developing countries, the most rapid economic progress seemed to lie in industrialization. The question was how to bring it about. A strategic question that had to be decided was whether to rely principally on domestic entrepreneurs or to make a conscious effort to attract foreign direct investment (FDI). The decision was made to encourage FDI, which explains why such a large share of Singaporean manufacturing is foreign-owned. It also helps explain Singapore's success in export-led growth. The strong perception was that once that decision was made, Singapore necessarily had to look to the entire world for its economic linkages since the whole world was the domain of the multinational corporations (MNCs) which were to provide the investment. This meant less reliance upon the Southeast Asian region in general, and the neighbouring countries in particular. This was also seen as inevitable, since growing nationalism in the region was putting severe limits on the original entrepot function of Singapore. The Political Landscape

The early politics of Singapore was not appreciably different from the general run of anti-colonial ferment of the mid-1950s. Once independence was achieved, however, the socialism of the People's Action Party (PAP) and its Prime Minister, Lee Kuan Yew, was noticeably different in that pragmatism became a ruling virtue. The market mechanism was utilized, and private enterprise encouraged. Singapore also became noted for its efficient, graft-free, no-nonsense government administration.

4

Lawrence B. Krause

A major concern of the government was political stability and security. Communism was seen as the external threat to the country, and communalism (racial conflict) as the internal threat. A joining together of these two was to be avoided at all costs, and government action was designed to prevent it. The social and political face of Singapore has changed drastically from the time the PAP first came to power in 1959 (when the country became self-governing under British tutelage). Improvement of the housing stock was the first order of business, and this was tackled through public construction of apartments. Huge numbers of units were constructed, but not without difficulty. Land acquisition was a serious obstacle that was overcome only with aggressive use of government power, which became a trademark of the PAP. By 1985, over 500,000 dwelling units were under public management (Housing and Development Board), and 81% of the total population was living in them. Advances were also made in basic education and delivery of medical services, which along with housing, constituted the social policy of the government and reinforced the political appeal of the PAP. The Singapore Government plays an atypical role in the economy. There are two dimensions for measuring a government's interference in its economy - one is whether or not it distorts relative prices (usually through import protection or price controls and subsidies of various sorts), the other is how intrusive it is in the economy through government enterprises and various regulations (in other words, is it dirigiste or laissez faire). Most countries that distort prices are also dirigiste, with the non-market economies of Eastern Europe being the prime examples. Countries such as Hong Kong that espouse mainly free trade, are usually more laissez faire. Singapore, however, is an unusual combination of no distortion and dirigiste. The seeming inconsistency, however, is understandable as Singapore's free trade does not grow out of an ideological belief in the superiority of the market, but rather out of a combination of the necessity of size, the historical tradition of an entrep6t, and the intuitive feelings of its political leaders.

Singapore and the Theory of Industrial Catch-up Economic models have been developed to describe countries which, like Singapore, have high labour to land ratios (Krueger 1977). In

Thinking about Singapore

5

certain respects, Singapore fits the model, but in others it does not. Instead of agriculture being the sector employing low productive labour, in Singapore it was the entrepot business (albeit at a wage higher than agricultural subsistence). This adjustment to the model is easy to make. As suggested by the model, capital accumulation led to the expansion of labour-intensive industry, and the relative contraction of traditional entrepot activity. As expected, Singapore became an exporter of labour-intensive goods. Further capital accumulation resulted in the adoption of more capital-intensive means of production, and a shift in comparative advantage towards more capital-intensive products. When unemployment was absorbed, wages began to rise. Whether the government's wage policy distorted the labour market or not is an issue examined in Chapter 7. The model suggests that by avoiding distortion of the product and capital markets, by having an outward oriented trade policy, and by maintaining an equilibrium exchange rate, Singapore should enjoy rapid growth. This was clearly the case. However, the model also suggests that Singapore should have paid dearly for the interference of the government in the economy. Whether this has happened, and why it might not have happened in the past, is examined in several chapters of this study.

Progress since 1965 The well-recognized success of Singapore in achieving rapid growth of gross domestic product (GDP) is displayed in Table 1.1. Even compared to the other fast growing Asian NICs, Singapore's record is outstanding. The first eight years following independence in 1965 was the most dynamic, with a record growth rate of 12.7%, and a per capita growth rate of real GDP of 10.7%. However, it was not sustainable, even in its own terms. This was the period when the MNCs invested heavily in manufacturing in Singapore and the unemployment rate was reduced. Unemployment had been a serious problem. In 1959, the unemployment rate was estimated at 13.5%. It receded gradually, but was still near 10% in 1965. By 1973, however, unemployment had been reduced to 4.5%. Subsequent periods of growth reduced unemployment to a minimum level below 3% in the early 1980s, before the onset of the recession.

Lawrence B. Krause

6

Growth during the 1965-73 period was achieved by adding workers to the payroll and providing all workers with more capital to work with (capital deepening). However, total factor productivity did not increase, suggesting a limit to how long this type of growth could continue (Thao 1986). Singapore was proceeding rapidly along a path of industrial catch-up.

TABLE 1.1 Average Annual Growth of Real Gross Domestic Product and Real GOP Per Capita 1965-85 (In per cent) Years

1965-73

1973-79

1979-84

1985p

12.7 7.9 10.1 11.0

8.7 8.9 9.6 8.6

8.6 7.4 5.1 6.8

-1.8 0.8 5.1 4.1

10.7 5.7 7.9 8.1

5.8 6.2 7.8 6.4

7.3 5.5 3.4 4.9

-3.4 -0.3 3.8 2.8

Growth of Real GDP Singaporea Hong Kongb South Koreac Taiwand Growth of Real GDP Per Capita Singaporea Hong Kongb South Koreac Taiwand

a GDP at 1968 market prices. Economic Survey of Singapore, 1985 and Economic and Social Statistics, Singapore, 1960-82. b GDP at 1980 prices. United Nations, Statistical Yearbook for Asia and the Pacific. Growth of Real GDP Per Capita is estimated from figures in Estimates of Gross Domestic Product, 1966-85 (Census and Statistics Department). c GNP at 1980 prices. Economic Planning Board, Korean Economic Indicators 1986.3. Growth of Real GDP Per Capita is estimated from International Monetary Fund, International Financial Statistics, 1965-73. d Council for Economic Planning and Development, Republic of China, Taiwan Statistical Data Book 1985. P Preliminary.

Thinking about Singapore

7

TABLE 1.2 Average Annual Rates of Change of Consumer Price Indexes, 1966-85 (In per cent)

Singapore Hong Kong Korea a Taiwanb

1965-73

1973-79

1979-84

1985p

3.7 6.3 11.3 4.5

5.9 7.4 18.0 13.0

4.9 12.0 12.6 8.2

0.5 5.5 2.5 0.6

a All cities, consumer price index. b Urban consumer prices. c Preliminary. SouRcEs: Department of Statistics, Singapore, Yearbook of Statistics 1985/86; United

Nations, Statistical Yearbook for Asia and the Pacific, various years; Economic Planning Board, Korean Economic Indicators, 1986.3; and Council for Economic Planning and Development, Taiwan Statistical Data Book, 1985.

What is even more remarkable was that this growth was accomplished with an outstanding record of price stability. As seen in Table 1.2, inflation in Singapore (measured by consumer price indexes) was less than in the other NICs. According to Herbert Grubel, low inflation was caused by the maintenance of strict control over the money supply and made possible by the conservative fiscal policies of the government (Grubel 1985). Other analysts would include low world inflation rates - except in those years when they were high and led to high inflation in Singapore - a free trade policy, provision of inexpensive housing, inflow of foreign workers, and moderating policies of the National Wages Council as contributing factors (Lee [Tsao] 1987; and Lim 1984). As with other rapidly developing countries, Singapore relied upon foreign savings to finance a significant portion of its investment, especially in the early years of development. As domestic savings rose, however, reliance on foreign savings was reduced. From 1965 through 1973, the share of gross domestic capital formation financed by net borrowing abroad averaged 35.2%. The share of foreign borrowings decreased to 23.6% from 1974 to 1979, and

8

Lawrence B. Krause

to 18.1% from 1980 to 1984. In 1985, the share of foreign finance was just 3.4%. Furthermore, the form of the borrowing is most significant. Cumulatively from 1965 through 1985, Singapore attracted more private, non-monetary capital (net) than the deficit in the current account of the balance of payments. This means not only that a great deal of productive long-term capital committed to development was invested in Singapore, but also that Singapore avoided becoming indebted to foreign banks (net), something that has plagued many developing countries. Moreover, Singapore has been able to accumulate a significant amount of foreign reserves. Several further comments need be made concerning the 1965-73 period. Firstly, at $1,616 (US$524) the per capita income of Singapore in 1965 was already quite high by developing country standards and was considerably above that of the other Asian NICs. This suggests that not only were the original conditions not unfavourable for Singapore, but subsequent high growth rates were also not a statistical artifact of beginning at a low base. Secondly, the average wage rate in manufacturing in Singapore in 1965 was $231 (US$75) per month, which was low by the standards of the industrial countries, but otherwise quite high. Thus, Singapore's attraction to the MNCs could not have been solely or even principally low wages. There were always countries with wages even lower than Singapore's in which to make foreign investments, but few which had such educated and productive workers at these low wages. The end to the super growth period was brought on by the first oil shock in 1973, and the world-wide recession that it caused. However, even the recession years of 1974-75 found Singapore still growing by about 5% per year. Thus, while Singapore's growth slowed considerably from what it was, it remained high by the standard of other countries, recording an 8.7% average rate for the whole period from 1973 to 1979, and a per capita rate of 5.8%. While manufacturing continued to grow, it was no longer a leading sector. The share of manufacturing in GDP was 23.6% in 1979, only slightly above the 22.6% recorded in 1973, as shown in Table 1.3. Instead, transportation and communication became the fastest growing sector, which is more in keeping with an entrepot than a manufacturing centre. Singapore was seemingly untouched by the second oil crisis

Thinking about Singapore

9

TABLE 1.3 Singapore's Gross Domestic Product by Industry Shares at 1968 Factor Cost (In per cent) Years Type of Industry

Agriculture and Fishing 3 Manufacturing Utilities Construction Commerce Transport and Communication Financial and Business Services Other Services Less: Computed Bank Service Charges a

1965

1973

1979

3.7 15.6

2.3

1.8 23.6

22.6 2.7

1984 1.4 20.1 2.8

1985 1.3 19.0

29.5

5.8 28.6

26.5

8.8 23.4

3.0 7.7 23.4

11.6

13.5

18.6

21.4

22.3

13.9 18.2

14.8 12.4

16.0 11.5

22.2 10.6

23.2

-1.8

-2.7

-6.0

-10.7

-11.2

2.5 6.8

3.0 5.0

11.2

Includes quarrying.

SouRcEs: Ministry of Trade and Industry, Economic Survey of Singapore, 1985; and Department of Statistics, Economic and Social Statistics, Singapore, 1960-82.

which began in 1979, and which set off the longest and deepest recession in the industrialized countries since the Great Depression of the 1930s. If anything, Singapore's growth increased in 1980-81, while the rest of the world was contracting. For the whole of the 1979-84 period, the average real GDP growth rate was 8.6%, and the per capita growth rate was 7.3%. Transportation and communication, along with financial and business services, were the star performers. Thus, Singapore behaved more like an oil producer than an oil consumer - or at least, like an entrepot servicing oil producers. Given Singapore's great dependence on the rest of the world, however, it could not postpone forever the consequences of declining foreign demand. Maintaining high growth in 1983 and 1984

10

Lawrence B. Krause

became increasingly difficult, and was only accomplished with a tremendous expansion of the construction sector. This too turned out to be non-sustainable.

The 1985-86 Recession Recent economic performance has been marked by the severe recession of 1985-86. The extensive investigation of the recession by the Economic Committee indicated that the causes were related to both demand and supply factors (Report of the Economic Committee 1986). Externally, the worsening fortunes of the oil and marine related sectors world-wide were reflected in reduced demand for goods and services from Singapore. It also raised the spectre of world-wide structural over-capacity in shipbuilding and ship-repairing. Furthermore, the slowdown in the electronics business in the United States sharply reduced demand for Singaporean parts and components. Internally, the construction boom - which led to excess supplies of hotels, shopping centres and flats - began to be reversed. Domestic demand was also weakened by the rise of domestic savings which was not matched by a rise of productive domestic investment. Moreover, the situation was complicated by a loss of international competitiveness and a profit squeeze attributed to labour costs rising faster than productivity. Given the real factors at work, Singapore could not avoid having a recession; indeed it might well have had it earlier. There is a question, however, why Singapore's downturn was so much more serious than that of the other Asian NICs. Possibly three factors should be given emphasis in explaining this differential phenomenon: the negative consequence of declining oil and other commodity prices (on balance), the pro-cyclical fiscal policy of the government in the last several years (unlike earlier recessions), and the operation of monetary policy in 1984-85. Singapore is the world's third largest oil trading centre and also the third largest refining centre for petroleum (U.S. Department of State 1981). It is the second largest builder of drilling rigs and also manufactures some drilling equipment. It has the largest and most competitive facilities for repairing and maintaining rigs and tankers in East Asia. And it is the most important service base for offshore oil exploration in Asia. Clearly, the petroleum industry has a serious impact on the economy of Singapore.

Thinking about Singapore

11

When oil prices started to erode in 1981 and especially when they began to collapse towards the end of 1985, both positive and negative consequences were felt in Singapore, but the negative side was felt first and is probably the more powerful. On the positive side, Singapore benefits from being able to consume cheaper energy. That saving amounts to about $2.5 billion (US$1.12 billion) in 1986 (DBS 1986). Secondly, Singaporean refineries have invested heavily in recent years to enable them to refine a wide variety of crude oils, and to obtain a higher proportion of high-valued products from the process. This added flexibility helps in good times, but is particularly helpful in bad times when it permits higher utilization of capacity. Petroleum refining alone made up 27% of manufacturing activity in Singapore in 1985. Finally, Singapore benefits indirectly when large oil importers such as Japan and the United States obtain higher real incomes from lower oil prices and in turn import more from other countries, albeit with some time lag. On the negative side, the collapse of oil prices has dealt a severe blow to oil exploration. The impact is felt widely and immediately in Singapore, in everything from reduced orders for rig construction to reduced occupancy of luxury apartments as the expatriate oil men return home.1 Secondly, both of Singapore's immediate neighbours are heavily dependent on oil and gas for their export revenue - 70% for Indonesia and 30% for Malaysia. The worsened fortunes of both of these countries have negative effects in Singapore through a loss of trade in both goods and services. Indeed, all of Singapore's neighbours in ASEAN have suffered from declining commodity prices, and this has impacted negatively on Singapore. It should be noted that the other Asian NICs are affected to a much lesser extent by the negative side of the collapse of oil prices and the decline of other commodity prices. In fact, they benefit greatly from them. A second reason why Singapore is having a more serious downturn than the other Asian NICs is that Singapore's fiscal policy has been pro-cyclical in the last several years- which led to higher growth in 1983-84, but lower growth in 1985-86. Singapore has a very decentralized fiscal policy in that the statutory boards conduct investment activity outside the traditional budget, engage in construction activity, and directly encourage private construction activity as well. The pro-cyclical action of the HOB (Housing and

Lawrence B. Krause

12

Development Board) has been widely recognized. There have also been actions in the same direction by the Urban Redevelopment Authority (URA), and some of the other statutory boards, who with their pricing practices could also have worsened the cycle. The cyclical consequences of land policy, and land policy in general, however, require more attention than was possible in this study. In order to avoid introducing instability into the economy, more central recognition might be given to the overall fiscal operations of the government. Such a possibility will be discussed in Chapter 6. A third possible reason for Singapore's harsh downturn relates to the operation of monetary policy in 1984-85. The question is whether Singapore was put through an unintended liquidity squeeze, and if so, whether this had negative consequences for the economy. Colin Simkin has argued that variation of the supply of money does matter in Singapore, although not in the same way as in larger, more closed economies (Simkin 1984). He suggests that causation runs from the growth of the nominal money supply to the real economy through changes in the real money supply, real exports, and changes in real fixed capital formation. In addition, if liquidity is drained from the economy, affecting property values and the like, then real consumption could be affected as well. The evidence of a reduction of liquidity is quite strong. The growth in the narrow money supply (M1) was sharply reduced in 1984, and was negative in 1985 as shown in Table 1.4. A parallel TABLE 1.4 Growth of Money Supply in Singapore (Annual percentage changes) Years

1969-79

1983

1984

1985

M1a Mzb M3c

15.6 14.8 n.a.

5.5 11.9 13.7

3.0 6.2 6.8

-0.9 3.8 1.5

a Currency plus demand deposits of private sector. b Ml plus fixed deposits and Singapore dollar negotiable certificates of deposit, and savings and other deposits. c MZ plus net deposits with non-bank financial institutions. SouRCES: Ministry of Trade and Industry, Economic Survey of Singapore, 1985.

Thinking about Singapore

13

movement is seen in the broader monetary aggregates (MZ and M3). Similar trends are seen in the real money supply. The growth of commercial bank deposits with the Monetary Authority of Singapore (MAS) declined sharply in 1985. Nominal interest rates to bank borrowers (minimum lending rate) increased in 1984 before dropping in 1985. However, this decline was less than the fall of wholesale prices indicating that the real interest rate to business borrowers actually increased. Further evidence of the liquidity decline is seen in the decline of share prices on the stock exchange and the widely recognized decline in property values. Because of the way monetary policy is operated in Singapore, a liquidity squeeze could have occurred even though the authorities may not have seen a need for monetary tightness (consumer price increases were very moderate and wholesale prices were declining throughout the period). A significant development occurred in 1984 when contributions to the CPF were raised. Since outflows from the CPF did not rise correspondingly, the surplus of the Fund (and possibly of other arms of the government as well) increased, and was turned over to the MAS. The MAS only injects domestic currency into the economy through intervention in the foreign exchange market. Thus, replacing the liquidity would have required selling Singapore dollars and reducing its value in terms of foreign currency and/or swaps of foreign exchange with commercial banks. Apparently, the MAS saw no need to let the foreign exchange value of the Singapore dollar decline from the path it had followed, and thus liquidity was drained. Some analysts have argued that the Singapore dollar was overvalued, which led to a loss of international competitiveness as seen in a loss of market shares. Some ambiguity is introduced into the analysis when it is recognized that growth of nominal income and real income diverged in 1983 - rising in real terms and falling in nominal terms. When attention is centred on M3 (rather than on M1), it is possible to argue that the decline in the growth of money supply did not lead to the downturn, but merely reflected it.2 Of course, actual growth of the money supply is partially endogenous to the economy - as business declines, demand for money also declines. However, if this was the only cause, then real interest rates should have declined sharply, which was not the case. 3 To be sure, interest rates in Singapore are affected by rates in other countries. However, the relationship is by no means exact because

14

Lawrence B. Krause

of the lack of perfect substitutability among assets denominated in different currencies. 4 Interest rates differ even among countries whose capital markets are closely integrated but of different size, such as Canada and the United States, and West Germany and Switzerland. Finally, real interest rates were declining internationally during this period, and while they were generally above the rates in Singapore, would still have put downward pressure to the extent that this force was operating. Thus, the rise in real interest rates in Singapore is prima facie evidence that the decline in liquidity was not endogenous. Needless to say, considering the real factors that were operating, Singapore could not have avoided a sharp downturn in its economy. However, the downturn might well have been moderated by a more liberal monetary policy. Share prices might not have declined so abruptly, nor property values. This might have sustained some consumption and possibly some domestic investment that was otherwise lost. The immediate solution to the liquidity squeeze is likely to have already been made by the reduction of the contribution rate to the CPF, and some other policy adjustments to reduce costs for business. However, it would appear that in the future more attention might be given to the liquidity conditions of the economy.

Structural Factors and Sources of Growth 5 Attention to the recession should not overwhelm concerns about longer term prospects for the economy. While actual growth in any particular year will be affected by cyclical demand conditions, the growth of the economy over a longer period is determined by its ability to produce goods and services valued in the marketplace. In the past, Singapore had grown primarily by increasing the number of labour hours devoted to work and by sharply increasing the amount of capital devoted to production. Studies of most industrial countries find that after increases of factor inputs are accounted for, there is a further increment of growth - a residual - that is attributed to total factor productivity (TFP) improvement. This is not the case in Singapore, nor apparently in some other Asian developing countries (Tsao 1986; Lin 1986; and Sanchez 1983).

Thinking about Singapore

15

TABLE 1.5

Sources of Growth in Singapore (In per cent) Rates of Growth of Inputs

Period

1966-72 1972-80 SOURCE:

Contribution to Growth

-------

Capital

Labour

Capital

Labour

TFP

16.7 10.9

6.0

9.3 6.8

2.7 2.1

0.6 -0.9

5.5

GDP Growth

12.5 8.0

Tsao (1986).

From 1966 to 1972 (the period fixed by data availability), the increase in capital contributed an average 9.3% to overall growth, while labour contributed 2.7%, as seen in Table 1.5. TFP contributed only 0.6% on average, and thus total growth was 12.5%. Clearly, in this period Singapore's growth was mainly a result of capital investment. The same is true for the 1972 to 1980 period. The growth of capital contributed 6.8% on average and labour 2.1 %, while TFP actually declined 0.9%, so that actual growth averaged 8.0%. (Data are not yet available for more recent years, but even if they were, interpretation would be nearly impossible because the calculations themselves are affected by the recession.) A somewhat more familiar method of analysing sources of growth involves allocating the contribution of capital to labour productivity, and thus growth is the result of an increase in labour inputs and in labour productivity. Labour productivity results from changes in the composition of labour, from increases in the capital stock per worker, from changes in the composition of capital, and from changes in TFP. As seen in Table 1.6 and consistent with the earlier analysis, the increase in labour productivity in the 1966-72 period of 6.9% on average was due primarily to the increase in capital stock per worker. The 3.2% increase in labour productivity during the 1972-80 period was even more dependent on the increase in capital per worker. While data are not available to explain the increase in labour productivity in recent years, the total increase is recorded in Table 1.6. During the 1980-85 period, total productivity increased

Lawrence B. Krause

16

TABLE 1.6

Labour Productivity in Singapore (In per cent)

Year

1966-72a 1972-80 1980-85b SouRcEs: a b

Total Labour Productivity

Composition

Composition

of

of

Labour

Capital

6.9 3.2 4.4

0.2 0.3 n.a.

0.5 -0.1 n.a.

Stock per Man-Hour

TFP

5.6 3.9 n.a.

0.6 -0.9 n.a.

T.sao (1986). Ministry of Trade and Industry, Economic Survey of Singapore, 1985.

by 4.4% on average - that is, below that of the late 1960s, but above that of the 1970s. What accounts for these differences? As in the two earlier periods, we know the slower growth of labour productivity was due to the slowing in the growth of capital stock while growth in the labour force was maintained. It should be noted that the share of GDP devoted to investment was increasing (or being maintained) throughout both of the earlier periods, as seen in Table 1.7. Nevertheless, the percentage increments to the

TABLE 1.7

Domestic Savings and Investment in Singapore as a Share of GDP (In per cent) Years

Gross Domestic Fixed Capital Formationa

Gross Domestic Savingsa

1966-72 1972-80 1980-85

27.9 31.6 39.3

17.1 27.6 36.9

a

At 1968 market prices.

SouRCES: Ministry of Trade and Industry, Economic Survey of Singapore, 19RS; and Department of Statistics, Economic and Social Statistics, Singapore, 1960-82.

Thinking about Singapore

17

capital stock per worker necessarily abated as capital was accumulated, and the growth of the labour force was maintained. It should be recalled that the 1970s was a period of wage restraint made possible by inflows of foreign workers. Thus, much investment was devoted to capital broadening rather than capital deepening. The rise in labour productivity during the 1980-85 period may have been due to the somewhat higher utilization rates of industrial capacity, as well as the change in wage policy at the end of the 1970s when a three-year period of upward wage adjustment was undertaken. Employers were forced to make better use of labour, especially because CPF contributions (a direct cost of hiring labour) were also being increased. The growth of the labour force slowed, and more investment was devoted to capital deepening. However, there is no assurance that the TFP was increasing. What about the future? A naive calculation that assumes no increase in foreign workers, no change in the composition of workers or capital, and an investment share of GDP of about 38% would yield a trend rate of growth for the rest of the 1980s of about 4-5%. However, the investment share might ebb with the end of the construction boom which would be consistent with a slower growth of income. Four analytical factors support the suggestion that a decline in the trend rate of growth is in the offing. First is the arithmetic proposition already indicated that, given a more or less constant investment share of GDP, the percentage increment to the capital stock must decline, the larger the capital stock becomes. Secondly, the earlier stages of industrial catch-up are made easier because of the large pool of technology that already exists and is available for transfer from abroad. As the economy absorbs the backlog, however, further transfers of technology are more difficult, which slows growth. Thirdly, the gain to worker productivity from greater education of the labour force comes from universal literacy or primary education. Providing a larger share of the work-force with secondary and higher education does enhance growth, but the increment is smaller. To have continuing gains from education, the average level of education of the population must be constantly increased, which is increasingly difficult and expensive relative to the economic returns. Finally, growth in the labour force is slowing, and this will reduce aggregate growth (but not necessarily growth per capita).

18

Lawrence B. Krause

What Drives the Singapore Economy?

Given the small size and the openness of the Singapore economy, it might be assumed that external forces alone must drive the economy. This proposition is supported by the entrepot origins of the economy. After independence, a manufacturing sector was grafted onto the entrepot base which was accomplished by foreign firms. The entrepot core itself was expanded by the development of international banking. However, since Singapore was able to achieve rapid growth when the rest of the world was in a slump (1980-82), and had its own recession when the world was in a weak recovery (1985-86), that judgment cannot be absolute. The missing element is the Government of Singapore. In any particular year there is clearly room for government influences to determine aggregate outcomes - as the construction boom and the subsequent reversal indicate. Furthermore, through its role as direct entrepreneur and its control over macro and micro-economic instruments, other government elements are also involved. These will be the subject of Chapters 5, 6, and 7. Adjusting Policy It may well be that Singapore will have to make some governmental policy changes to adjust to the major factors shaping its future. The forces and the policy alternatives have been given much attention, particularly by the Economic Committee appointed by the government, which issued its report in February 1986 (Report of the Economic Committee, 1986). There is a normal tendency for government policy to follow a formula that had proved successful in the past. During the turbulent years from 1965 to 1968, when not only the trauma of separation from Malaysia was experienced, but also the beginning of the withdrawal of the British military, the Government of Singapore responded by tightening labour discipline as an instrument in promoting manufacturing for export. That policy was successful, and Singapore embarked upon export-led growth with foreign-owned firms in the vanguard. A similar message is being sounded by the government in 1986. The government is calling for severe wage restraint to last as long as is necessary to overcome the recession and to restore

Thinking about Singapore

19

international competitiveness. This comes after four years of almost 8% per year increases of the real wage (ending in 1984). Is this response to the present day problem of Singapore appropriate? The manufacturing jobs that are attracted by stable real wages may not bring growth in income to the country. Unlike in 1968, when unemployment and underemployment were higher, and when the average wage world-wide in manufacturing was above the going wage in Singapore, the reverse may be true in 1986. Thus, government policy may be aimed at holding and attracting jobs that will result in stagnating incomes for all concerned. Wage restraint is not an instrument for selectivity, but instead has general macro consequences. Wage restraint may help restore full employment, but it is wage and labour market flexibility that is necessary to promote sustained growth. Some very basic questions have been raised in the study of Singapore which may or may not be answerable. For instance, is there a maximum degree of interdependence with the world economy that a country can achieve and has Singapore attained it? Can a domestically owned private enterprise sector prosper and coexist with a strong publicly owned enterprise sector? Does the contribution that manufacturing make to the prosperity of a country reach a maximum at a certain stage of development and has Singapore already passed it? Does Singapore have a capacity for autonomous industrial development? Will an educated people continue to accept a socially intrusive government? These questions will be broached in the subsequent chapters.

NOTES 1. It has been estimated that half of the Americans working in Singapore left during the first six months of 1986. 2. The author is indebted to Tharman Shanmugaratnam for clarification of this point. 3. Of course, measuring the real interest rate is not straightforward, since expected inflation is not observable. If wholesale price changes determine business expectations, then the analysis follows. If, however, business makes the difficult distinction between the WPI change coming from domestic sources and those coming from abroad, and makes independent forecasts of the two, then the direction of change of real interest rates is also somewhat ambiguous. The author also thanks Shanmugaratnam for this point. 4. See also Simkin, who supports this point through correlation analysis.

20

Lawrence B. Krause

5. This section draws heavily upon an earlier work of Tsao (1986). The methodological foundations and a discussion of data limitations - which are considerable are found in the original.

REFERENCES DBS (Development Bank of Singapore). "Repercussions of Falling Oil Prices on the Indonesian, Malaysian, and Singapore Economies". Occasional Papers Series No. 2. June 1986. Grube!, Herbert G. "Singapore's Record of Price Stability 1966-84". Institute of Southeast Asian Studies, 1985. Krueger, Anne 0. Growth, Distortions and Patterns of Trade Among Many Countries. Princeton Studies in International Finance No. 40, 1977. Lee ('Thao) Yuan. "Economic Stabilization Policies in Singapore". In Economic Stabilization Policies in ASEAN Countries. Singapore: Institute of Southeast Asian Studies, 1987. Lim Chong-Yah. Economic Restructuring in Singapore. Singapore: Federal Publications, 1984. Lin Kuan-pin. "Productivity in ASEAN Manufacturing". Institute of Southeast Asian Studies, 1986. Report of the Economic Committee. The Singapore Economy: New Directions. 1986. Sanchez, Aurora. "Capital Measurement and Total Factor Productivity Analysis". Ph.D. dissertation, School of Economics, University of the Philippines, 1983. Simkin, Colin. "Does Money Matter in Singapore?". Singapore Economic Review 29, no. 1 (April 1984): 1-15. Tsao Yuan. "Sources of Growth Accounting for the Singapore Economy". In Singapore: Resources and Growth, edited by Lim Chong Yah and Peter Lloyd. Singapore: Oxford University Press, 1986. U.S. Department of State. "Airgram of April 15, 1981".

chapter two

Linkages and the International Environment KOH Ai Tee

S

ingapore, along with the other Asian NICs, has shown impressive growth rates over the last two decades. Yet, unlike the other three Asian NICs, Singapore's growth is characterized by increasing internationalization of its economy, with foreigners playing an important role on the growth front. This chapter examines the nature and evolution of the foreigner's role within the Singapore economy over the past two decades. Has this role risen over time and is it expected to rise further in future? What is the optimal degree of dependence on foreigners, and has Singapore exceeded it? In view of future constraints posed by lower labour force growth, land, water and other constraints, how does a more mature Singapore economy maximize growth in the context of a less benign international environment? Would this growth strategy call for a greater dependence on foreigners than at present? How should Singapore manage such dependence in a way that will ensure its continued prosperity? Finally, what are the implications for Singapore's future linkages with the world in view of certain changes in the international environment, particularly relating to the changing role of the United States and Japan? 1

The Foreigner's Role 2

The term "foreigner" is broadly used here to refer to non-residents who are stationed within Singapore or outside Singapore in the course of their dealings with the country. ?I

22

Koh Ai Tee

Foreigners' contribution to production of net output in Singapore is not only high (by NIC standards) but rising over time. The share of resident foreigners and resident foreign companies in GOP expanded from 15.7% in 1966-73 to 23.6% in 1973-79, and to 28.1% in 1979-84 (Table 2.1). Net factor payments to foreigners formed 8.5% of GOP in 1979-84, compared to 5.1% in 1966-73. 3 Foreigners seem to be sending more factor income back to their home countries than what overseas Singaporeans are sending back to Singapore. Since the early 1970s, net factor income from abroad has been negative and rising over time. Thus, an increasingly larger proportion of output produced on Singapore soil is being generated by foreigners. Singaporeans' role has been diminishing. Although net factor receipts of Singaporeans from the rest of the world have claimed a rising share of GOP over time, the rate of increase in these receipts lags behind contributions by resident foreigners and resident foreign companies operating in Singapore. As a result, the share of indigenous gross national product (GNP) in gross domestic product has fallen from 89.1% to 78.9%, and then to 78.1% over the three periods (excluding 1985). 4 Another measure of the foreigner's role in production pertains to the importance of imports (products of foreigners stationed in foreign countries) in production. The 1973 and 1978 Input-Output Tables show that imports constituted 23.2% and 26.8% of gross output, respectively, in these two years. The import content of intermediate output is larger than the import content of final output. The import content of total intermediate output rose from 32.3% in 1973 to 40.3% in 1978 (Table 2.2). 5 Contributions to GOP by a sub-set of foreigners, namely tourists, have been estimated for 1980. 6 Foreign tourists' contributions to GOP and employment were estimated to be 8.5% and 7.9% respectively. Each dollar of tourist spending also generated 52 cents in net foreign exchange earnings.7 Foreigners' role in consumption has also grown over time but at a much slower pace. Non-residents stationed in Singapore spent more on consumer goods and services in 1979-84 (25.4% of GOP) compared to 1966-73 (16.7%) (Table 2.1). Between 1973 and 1978, imported consumer goods and services constituted 15.1% and 17.2% of private consumption expenditure respectively (Table 2.2). In the area of investment, foreigners' contribution is more in terms of provision of imported capital machinery equipment rather

TABLE 2.1 Selected Indicators of Foreigners' Role in Singapore, 1966-85 1966-73

1973-79

1979-84

Share of Resident Foreigners and Resident Foreign Companies in GDP as o/o of GDP at current market prices

15.7

23.6

28.1

25.9

Ratio of Resident Foreigners and Resident Foreign Companies in GDP to Indigenous GNP

18.0

29.8

36.1

31.4

1.0

-0.9

-2.2

1.5

-0.1

-0.5

-0.7

-1.0

Net Factor Payment to Foreigners as o/o of GDP*

5.1

4.2

8.5

7.0

Net Borrowing from abroad as o/o of Gross Domestic Capital Formation

35.2

24.8

17.5

3.4

Non-Residents' Consumption Expenditure Locally as o/o of GDP at current market prices

16.7

18.3

25.4

23.5

Indigenous GNP as o/o of GDP

89.1

78.9

78.1

82.5

Gross National Savings as o/o of Gross Domestic Capital Formation

64.8

75.2

82.5

96.6

Net Factor Receipts of Singaporeans from Rest of the World as o/o of GDP

4.7

4.7

6.2

8.5

Residents' Consumption Expenditure Abroad as o/o of GDP at current market prices

2.8

4.3

5.1

6.4

Net Factor Income from abroad as o/o of GDP Net Transfers from abroad as o/o of GDP

1985p

* Net factor receipts of Singaporeans from rest of the world minus net factor income from abroad, divided by GDP at current market prices. SouRCES: Department of Statistics, Singapore, Economic and Social Statistics of Singapore, 1960-82 (Singapore National Printers, 1983); and Department of Statistics, Singapore, Yearbook o( Statistics 1985186 (Singapore National Printers).

Koh Ai The

24

TABLE 2.2

Role of Imports in Production and Final Demand, 1973, 1978

Imports as %of Gross Output* Imports as % of Output going to Final Demand Imports as % of Output going into Industry as Intermediate Inputs Share of Imports in Gross Fixed Capital Formation (%) Share of Imports in Private Consumption Expenditure {%)

1973

1978

23.2 13.5

26.8 11.5

32.3

40.3

40.9

46.6

15.1

17.2

• Sum of output going into final demand and output going into industry as inter· mediate inputs. SouRcE: Department of Statistics, Input-Output Tables 1973 (Singapore National Printers, July 1978); and Input-Output Tables 1978 (Singapore National Printers, June 1983).

than in terms of financing. Imported equipment constitutes a large and rising share of gross domestic fixed capital formation (40.9% in 1973, rising to 46.6% in 1978). To the extent that technology is embodied in capital, such imports also reflect transfer of technology from foreigners to Singaporeans. The financing of investment, however, comes largely and increasingly from Singaporeans. Gross National Savings financed 64.8%, 75.2% and 82.5% over the three periods under study. The foreigners' share of financing has correspondingly been eroded from 35.2% to 24.8%, and to 17.5% over the same periods. 8 The foreigner's role is the greatest in manufacturing (Table 2.3). The latest (1984) figures show that the majority of (more than 50%) foreign-owned establishments comprised only 21 o/o of establishments, but generated 82% of direct exports, 71% of gross output, 63% of value added, 62% of capital expenditure, and 53% of employment. During the last decade (1975-84), foreigners owned 23% of manufacturing establishments, yet accounted for a disproportionately high 84% of direct exports, 73% of gross output 65% of value added, 67% of capital expenditure, and 55% of employment. C:ontribution by foreign business in services and construction 1

Linkages and the International Environment

25

TABLE 2.3

Contribution of Foreign Capital* to Singapore's Manufacturing Sector, 1975-84 Percentage Share of Foreign Firms in terms of --·- -- ---- -·- ---- --·- ----------Number of Number of Value Direct Capital Establishments Workers Output Added Exports Expenditure -~

Year

-·--~-

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

22.0 22.0 22.8 21.7 23.9 24.9 26.1 25.4 21.0 21.0

52.0 53.9 54.5 52.5 57.2 58.4 58.5 55.4 50.8 52.8

71.3 73.1 73.4 71.5 73.8 73.7 76.0 73.7 71.5 70.9

62.7 64.1 65.2 63.5 67.3 67.4 67.7 66.6 63.2 63.0

84.1 84.7 84.5 83.7 85.2 84.7 86.8 83.6 82.9 82.0

64.6 66.6 67.4 69.8 73.1 74.6 71.8 63.6 58.5 61.8

Average 1975-84

23.1

54.6

72.9

65.1

84.2

67.2

* more than 50% foreign-owned.

SouRCE: Department of Statistics, Singapore, Census of Industrial Production, various years.

to GOP in 1984 has been estimated to be 11.4%. 9 Notably, this is not very far below the foreigners' share in manufacturing 15.6% of GOP. While foreigners' share in manufacturing (by most indicators) has remained stable since 1975, their share in services appears to be expanding over time. In the area of wholesale and retail trade, restaurants and hotels (for which data are available for 1975 and 1983), foreign ownership has risen from 22.4% in 1975 to 38.6% in 1983 (Table 2.4). The latter share is by no means insignificant if we take into account the fact that the commerce sector is the largest single industry in terms of overall GOP contribution. Foreign ownership in the other services in 1974 (the latest year for which published data are available) is as follows: finance (15%), real estate and business services (18o/o), transport (lOo/o),

Koh Ai Tee

26

TABLE 2.4 Foreigners' Share of Capital/Funds of Limited Companies in the Commerce Sector, 1975, 1983

(In per cent) Foreigners' Share of Total Capital/Funds of Limited Companies as at end of 1975 WHOLESALE, RETAIL TRADE RESTAURANTS & HOTELS

Wholesale Trade Retail Trade Restaurants & Hotels

1983

22.4

38.6

27.6 13.8

40.2 34.2 35.0

8.2

SouRcE: Department of Statistics, Census of Wholesale, Retail Trade, Restaurants and Hotels, 1975 (Singapore National Printers, June 1978); and Census of Wholesale, Retail Trade, Restaurants and Hotels, 1983 (Singapore National Printers, 1986).

insurance (6%), recreational and cultural (26%), and personal, household, social, community and other services (10%) (Table 2.5). Within the above services, foreigners' share has been extremely high in merchant banking (52%), engineering, architectural and technical services (89%), and advertising and market research services (51%). While it is hard to generalize from data from a single year, it seems fairly clear that foreigners play an important role in certain services requiring a fairly high degree of skill, such as engineering, architectural and technical services.l 0 The above macro and sectoral indicators may not entirely capture the full range of contributions that foreigners make to the Singapore economy in the areas of technology transfer, foreign entrepreneurship and labour, training of locals, and so forth. Although these contributions are important, they may not lend themselves to empirical quantification. Yet, the above discussion does suggest two things. Firstly, Singapore's growth over the last twenty years has been positively correlated with greater internationalization of the economy, with foreigners playing an important role on the growth front. Secondly, the foreigner's role is multi-dimensional, with extremely complex consequences.

TABLE 2.5 Foreigners' Share of Capital/Funds of Limited Companies in Selected Services, 1974 (In per cent) Foreigners' Share of Capital/Funds of Limited Companies as at end of 1974 FINANCIAL SERVICES

14.9

of which Commercial banks (includ. ACUs) Merchant banks Finance companies Investment companies Money-lenders Stock, shares & bond brokers

12.0 52.4 (6.6)* 20.7 6.3 5.0 2.0

REAL ESTATE & BUSINESS SERVICES

17.9

of which Real estate & housing development Legal, accounting, auditing, book-keeping & data processing Engineering, architectural & technical services Advertising & market research

9.3 12.3

89.1 (9.6)* 51.0 (1.8)*

TRANSPORT SERVICES

10.1

INSURANCE SERVICES

5.8

RECREATIONAL & CULTURAL SERVICES

25.5

Motion picture series Theatrical producers, entertainment, & radio broadcasting services

22.7 91.8 (9.6)*

PERSONAL & HOUSEHOLD SERVICES

10.6

SOCIAL, COMMUNITY & RELATED SERVICES

10.0

* Figures in parentheses represent the share of that particular service within the service group under which it belongs. For example, merchant banks account for 6.6o/o of capital/funds within the Financial Services group. Similarly, engineering, architectural & technical services account for 9.6o/o of capital within Real Estate and Business Services. SouRcE: Department of Statistics, Census of Services 1974 Vol. I and 2 (Singapore National Printers, 1977).

Koh Ai Tee

28

Linkages with the OECD, ASEAN and Asian NICs It is often tempting to discuss Singapore's linkages with the outside world only in terms of ties with either the countries of the OECD (Organization for Economic Co-operation and Development) or ASEAN (Association of Southeast Asian Nations). Singapore's drive towards industrialization has seen it drawn increasingly towards the OECD countries for foreign investment, technology and markets. To a large extent, this has meant decreasing reliance on the other ASEAN countries in many respects, particularly in the area of markets and supplies. The Asian NICs have been treated as competitors rather than as potential traders/investors. The latter attitude, however, requires closer examination to establish its validity. As will be shown later, there is more interdependence, present but particularly potential, between Singapore and the Asian NICs than is commonly supposed. To establish the relative extent of interdependence between Singapore and each of these three groups of countries (OECD, ASEAN and the Asian NICs). correlation analysis has been carried out. Table 2.6 shows the results of such an exercise done with

TABLE 2.6 Correlation Coefficients of Real GDP Growth Rates between Singapore and Major Groups of Countries, 1966-84 1966-73

1973-79

1979-84

1966-84

0.33 (0.41)

0.52 (0.71)

0.27 (0.44)

0.46 (0.50)

Asian NICsb

-0.33

0.84

-0.35

0.15

ASEAN 4c

-0.42

0.27

0.42

-0.23

OECD (PB 5)a

a USA, Japan, Canada, Australia and New Zealand, frequently called the Pacific Five (or PB 5). b Hong Kong, South Korea, and Taiwan. c Indonesia, Malaysia, Philippines, and Thailand. SouRcEs: International Monetary Fund (IMF). International Financial Statistics, various years; Council for Economic Planning and Development, Republic of China, Thiwan Statistical Data Book 1985; and Asian Development Bank, Key Indicators of Developing Member Countries of ADB, various years.

Linkages and the International Environment

29

regard to real GDP growth rates between Singapore and these groups. Two features are noteworthy. Firstly, Singapore's growth shows a higher correlation with the OECD countries and the NICs than with the ASEAN countries over the whole nineteen-year period from 1966 to 1984. This correlation varies within the period. Correlation was much higher with the OECD countries during 1966-73, before the oil crises, but grew substantially in the case of ASEAN after the first oil crisis, seemingly reflecting Singapore's behaviour more as an oil producer than a consumer. The strong correlation with ASEAN peaked in the 1979-84 period, reflecting in part Singapore's gain from the second oil shock. During this period, the weak correlation with the OECD countries and the negative one with the Asian NICs reflect very much Singapore's internally generated growth (for example, via construction) during this period even though the world was in a recession (1981/82) and weak recovery (1984). Secondly, although correlation with the OECD countries was high, it was even higher with a particular group within the OECD, namely, the group of five developed countries in the Pacific Basin (Pacific Basin Five or PB 5) comprising the United States, Japan, Canada, Australia, and New Zealand. With trade and investment links with Europe, particularly the European Economic Community (EEC), showing weaker trends (compared to those with PB 5) over the last twenty years, Singapore is becoming more Pacific-oriented in its links with the OECD. While the above analysis shows Singapore to be more dependent on the OECD countries than on the ASEAN countries or the Asian NICs, the extent of dependence is even greater when we consider the fact that the ASEAN countries and particularly the NICs themselves depend very much on the OECD countries. Table 2.7 shows that for 1966-84, ASEAN's linkage with the OECD countries is below that of Singapore's but still positive, while the NICs' dependence on the OECD countries is much higher. The implication is that any linkage which Singapore develops with the Asian NICs would be highly sensitive to fluctuations in the growth rates of the OECD countries. Just like Singapore, the other ASEAN countries and the NICs are also highly vulnerable to changes in the international economy although to different extents (Table 2.8). The ASEAN economies are not only open, but they are also heavily dependent on the

Koh Ai Tee

30

TABLE 2.7 Correlation Coefficients of Real GDP Growth Rates between OECD and Selected Countries/Groups of Countries, 1966-84 1966-73

1973-79

1979-84

1966-84

Asian NICsa

0.22 (0.66)

0.53 (0.83)

0.47 (0.46)

0.55 (0.59)

ASEAN 4b

0.28 (0.16)

0.12 (0.36)

-0.33 (-0.28)

0.16 (0.09)

Singapore

0.33 (0.41)

0.52 (0.71)

0.27 (0.44)

0.46 (0.50)

a Hong Kong, South Korea, and Taiwan. b Indonesia, Malaysia, Philippines, and Thailand. Note: Figures in parentheses show correlation coefficients between the Pacific Basin Five (PB 5) countries and the respective groups. SouRcEs: IMF, International Financial Statistics, various years; Council for Economic

Planning and Development, Republic of China, Thiwan Statistical Data Book 1985; and Asian Development Bank, Key Indicators of Developing Member Countries of ADB, various years.

export of primary commodities: 90% in the case of Indonesia, 74% for Malaysia, 62% for Thailand, and 33% for the Philippines (Tan Tat Wai 1985). In the case of Indonesia, there is an overwhelming reliance on crude petroleum (about two-thirds) while for the other three countries the primary commodity exports are spread among four or five commodity items, such as rubber, tin, timber, palm-oil and vegetable oils. However, in the case of Malaysia, there is increasing dependence on crude petroleum and gas exports (Tan Tat Wai 1985).

Trade In terms of markets, the OECD countries still form the largest export market, accounting for a fairly stable 40% of Singapore's exports (Table 2.9). The Asian NICs have shown rising importance as a market, ccounting for 2.6% of total exports in 1960, 5.4% in 1970,

Linkages and the International Environment

31

TABLE 2.8 Degree of Openness of ASEAN, Asian NICs and Selected OECD Countries, 1984 (In per cent) MIGDP

XIGDP

(M+X}I(M+X+GDP}

ASEAN Indonesia Malaysia Philippines Singapore Thailand

14.2 29.3 16.5 60.4 19.8

20.7 32.7 14.0 56.2 15.0

29.9 47.3 26.5 73.8 29.8

Asian NICs Hong Kong South Korea Singapore Taiwan

47.3 26.9 60.4 27.9

47.1 26.0 56.2 34.8

64.1 41.8 73.8 47.9

OECD France Italy Japan United Kingdom United States West Germany

17.4 19.5 9.8 19.8 8.6 19.9

16.6 17.4 11.9 18.2 5.7 21.9

29.1 31.2 19.6 31.9 13.4 34.6

M X

Imports Exports SouRcEs: IMF, International Financial Statistics, May 1986; Asian Development Bank, Key Indicators of Developing Member Countries of ADB; and Republic of China, Statistical Yearbook of the Republic of China, 1985. =

=

8.7% in 1984. On the other hand, ASEAN's share has fallen during the same period.11 Within the OECD, the United States remains the biggest single export market, followed by Japan, the United Kingdom and West Germany. Among the NICs, the Hong Kong market is not only the most important but also exhibits a rising share over time. The same

Koh Ai Tee

32

TABLE 2.9

Major Export Markets of Singapore 1960 OECD

USA Japan West Germany Netherlands U.K. Others ASEAN

Malaysia Indonesia* Thailand Philippines ASIAN NICs

Hong Kong South Korea Taiwan PEOPLE'S REPUBLIC OF CHINA OTHERS TOTAL TOTAL (US$mil)

1970

1984

39.8 7.0 4.5 2.3 0.5 8.2 17.3

40.5 10.7

7.3 2.8 1.5 6.6 11.7

42.2 18.7 8.7 2.2 1.1 2.5 8.9

34.9 26.7 3.5 3.1 1.7

28.1 21.1 3.5 3.2 0.3

27.3 15.1 6.9 4.5 0.8

2.6 1.7 0.7 0.2

5.4 3.9 0.7 0.8

8.7 5.8 1.5 1.5

2.5

1.4

0.9

20.2

24.6

20.9

100.0

100.0

100.0

1,135.9

1,610.4

25,859.3

* Since Singapore does not publish figures of exports to Indonesia, this figure is obtained from Indonesian data which is reported in the International Monetary Fund, Direction of Trade Statistics Yearbook, various years. SouRcEs: Department of Statistics, Singapore External Trade Statistics, various issues; and IMF, Direction of Trade Statistics Yearbook, various years.

is true of Taiwan which has been absorbing Singaporean exports (from a much smaller base than Hong Kong) at a faster rate than South Korea.

Linkages and the International Environment

33

In contrast, the Malaysian market, probably the single biggest ASEAN destination for Singapore's exports, has been losing importance over time. Malaysia's share of exports has been eroded from 26.7% in 1960 to 15.1% in 1984. However, data from Indonesia, the second biggest ASEAN market, show an increase in its share from 3.5% in 1960 to 6.9% in 1984. Exports to Thailand have risen slightly (from 3.1 o/o to 4.5%) while those to the Philippines, the least important ASEAN market, have fallen (from 1.7% to 0.8%). Not only is the OECD the most important destination for Singapore goods, but it is also a more stable market. Exports to the OECD during the last decade show less variability than those to ASEAN (Table 2.10). In terms of supply dependence, the OECD group of countries is also the most important (Table 2.11) compared to the other two groups. ASEAN is the second biggest supplier of goods to Singapore, but its share has dropped sharply from 54% to 24% between 1960 and 1984. There has been an increase in sourcing from the NICs over time. Sourcing from the OECD countries has also shown less variability compared to that from ASEAN (Table 2.10). At the country level, although the United States is the most important market for Singapore, it is not the most important supplier.

TABLE 2.10 Coefficient of Variation of Singapore's Trade with the OECD and ASEAN Countries, 1975-84 (In per cent) Coefficient of Variation of Growth Rates of Singapore's Trade Partner Domestic Exports To

Imports From

OECD (PB 5)a

72.1

92.3

(59.1)

(79.6)

ASEAN 4b

83.3

104.5

a USA, Japan, Canada, Australia and New Zealand. b Indonesia, Malaysia, Philippines and Thailand. SouRcEs: Department of Statistics, Singapore External Trade Statistics, various issues; and IMF, Direction of Trade Statistics Yearbook, various years.

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34

TABLE 2.11 Major Sources of Imports of Singapore 1960 OECD

30.1

1970 49.9 18.1

1984 45.1

10.1 3.1 7.1 1.2 10.4

17.1 13.6 2.5 2.4 0.8 8.7

53.9 25.8 24.5 3.6 0.1

26.1 17.4

23.5 14.0

6.5 1.9 0.3

6.9 2.1 0.6

2.7 2.2 0.0 0.5

4.4 2.3 0.5 1.6

6.2 2.0 1.2

PEOPLE'S REPUBLIC OF CHINA

3.4

4.8

4.4

OTHERS

9.9

14.8

20.8

100.0

100.0

100.0

1,332.1

2,633.0

30,785.5

Japan USA West Germany U.K. Netherlands Others ASEAN

Malaysia Indonesia Thailand Philippines ASIAN NICs

Hong Kong South Korea Taiwan

TOTAL TOTAL (US$mil)

7.3 3.8 1.8 8.9 1.4 6.8

3.0

SouRCES: Department of Statistics, Singapore External Trade Statistics, various issues; and IMF, Direction of Trade Statistics Yearbook, various years.

This position is occupied by Japan with whom Singapore has been registering persistent trade deficits because of the large imports of machinery and equipment and difficulties in penetrating the Japanese market (see subsequent discussion). Within ASEAN, Malaysia is still the most important supplier even though its share has been falling over time. Such falling trends are also observed for

35

Linkages and the International Environment

Thailand and Indonesia, but not for the Philippines, which is, however, the least important trading partner among the ASEAN four.

Investment In terms of foreign direct investment (FDI) in manufacturing, exelusive dominance by the OECD countries, particularly the United States, Japan, and the EEC, is clearly evident (Tables 2.12 and 2.13). TABLE 2.12

Foreign Investment in Singapore's Manufacturing Sector by Country of Origin, 1966-83

Year

Total {S$m}

1966 239 303 1967 454 1968 1969 600 1970 995 1971 1575 1972 2283 1973 2659 3054 1974 3380 1975 1976 3739 1977 4145 5242 1978 1979 6349 1980 7520 1981 8593 1982 9607 1983 11123

Percentage Distribution by Region/Country in terms of Gross Fixed Assets -----------------

USA japan Europe {EEC} 10.0 8.9 11.7 21.8 34.5 31.8 36.8 37.3 35.4 33.1 33.0 33.0 30.5 28.6 29.5 30.2 33.7 33.7

12.6 10.2 7.5 6.0 6.8 6.9 6.0 8.9 11.6 13.4 14.0 15.3 15.3 16.5 15.8 16.0 16.5 20.1

n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a.

42.5 40.7 39.4 35.9 33.9 34.6 34.9 33.9 38.2 38.3 39.3 39.1 39.4 37.1

(40.8) (39.1) (37.8) (34.3) (32.6) (32.8) (33.1) (31.9) (36.4) (36.1) (36.7) (35.4) (35.9) (33.7)

{UK.} {Netherlands} Others

22.2 28.1 22.7 20.3 (20.0) (18.7) (16.4) (14.7) (13.9) (14.2) (14.8) (13.7) (15.1) (16.2) (16.3) (16.4) (16.5) (15.8)

19.2 20.5 17.8 17.3 (18.4) (17.5) (15.6) (14.3) (13.8) (14.0) (14.0) (13.8) (17.2) (15.9) (16.2) (15.2) (14.8) (13.3)

n.a. = not available. * includes Europe except United Kingdom and the Netherlands. SouKcEs: Economic Development Board, Annual Report, various years.

36.0* 32.3* 40.3* 34.5* 16.2 20.6 17.8 17.9 19.1 18.9 18.1 17.8 16.0 16.5 15.5 14.7 10.5 9.2

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36

TABLE 2.13

Contribution of Foreign Establishments to Manufacturing Output and Value Added by Major Source of Capital, 1984 Major Source of Capital

Establishment

Gross Output

No.

%

S$mil

%

S$mil

Value Added

----·----

%

United States

129

3.5

8,170.4

19.9

2,491.9

22.4

Europe Switzerland U.K. West Germany Others

185 23 73 35 54

5.1 0.6 2.0 1.0 1.5

10,613.1 1,312.6 631.8 435.4 8,233.3

25.8 3.2 1.5 1.1 20.0

2,147.0 641.6 335.3 183.0 987.1

19.3 5.8 3.0 1.6 8.9

Japan

193

5.3

4,670.5

11.4

1,478.5

13.3

Hong Kong

81

2.2

1,143.0

2.8

327.7

3.0

Australia

38

1.0

290.6

0.7

103.9

0.9

Malaysia

75

2.1

287.5

0.7

98.4

0.9

Taiwan

15

0.4

119.1

0.3

35.9

0.3

Others

39

1.1

762.8

1.8

189.3

1.7

755

20.7

26,058.9

63.4

6,872.5

61.9

Total Singapore

2893

79.3

15,019.0

36.6

4,233.8

38.1

Total All Sources

3648

100.0

41,077.9

100.0

11,106.3

100.0

Total Foreign

SouRcE: Department of Statistics, Report of the Census of Industrial Production, 1984 (Singapore National Printers, 1985).

Among the Asian NICs, Hong Kong is the most active investor, accounting for some 3% of gross output and value added within the manufacturing sector in 1984 (Table 2.13). Taiwan's share is a fairly insignificant 0.3%. Within ASEAN, Malaysia is the most important investor. Even then, she accounts for barely 1% of manufacturing output and value added.

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37

In the area of services, the OECD investor's lead over his ASEAN or Asian NIC counterpart is much narrower. In terms of ownership in the wholesale and retail trade, restaurants and hotels sector, the OECD share is 12.3% compared to ASEAN's share of 9.5o/o and that of the NICs of 8.7o/o (Table 2.14). Among individual foreign investors, Hong Kong tops the list in terms of ownership, followed by Malaysia, Japan, the United States, the United Kingdom, and Indonesia. Hong Kong investors are particularly active in the restaurant and hotel business as well as in wholesale trade, whereas the Malaysian investor dominates retail trade. TABLE 2.14 Capital/Funds of Limited Companies in the Commerce Sector by Country, 1983

Country

TOTAL (S$ '000) TOTAL(%) Total Singapore Total Foreign Hong Kong Malaysia Japan USA U.K. Indonesia Others

TOTAL WRRH*

Wholesale Ira de

Retail Ira de

Restaurants & Hotels

{1 +2+3}

{1}

{2}

{3}

5,639.1 100.0 61.4 38.6 8.7 7.9 4.4 4.2 2.9 1.6 8.9

4,012.2 100.0 59.8 40.2 7.1 6.9 4.3 5.8 3.5 2.2 10.4

541.5 100.0 65.8 34.2 7.0 16.7 3.5 0.2 3.9 0.6 2.3

1,085.4 100.0 65.0 35.0 15.2 6.8 5.4 0.3 0.0 0.3 7.0

38.6 12.3 9.5 8.7 8.1

40.2 14.7 9.1 7.1 9.3

34.2 7.6 17.2 7.0 2.4

· - - -

Total Foreign OECD ASEAN Asian NICs Others *

35.0 5.7 7.1 15.2 7.0

Wholesale and Retail Trade, Restaurants & Hotels

So!IRCFs: DepartmC'nt of Statistics, Census nf Wholesale, Retail Trade, Restaurants and Hotels, 1983 (Singapore National Printers, 1986).

38

Koh Ai Tee

As would be expected, Singapore investors are much more important in ASEAN and the NICs than they are in the OECD. One reason is that economic restructuring and high wage policy, among other factors, have forced many Singapore manufacturers to relocate labour-intensive operations to the other ASEAN countries (particularly Malaysia, Indonesia and Thailand) and the NICs (particularly Hong Kong).1z

The Chinese Connection The official trade and investment data presented above give high visibility to linkages with the OECD countries compared to those in ASEAN. This has the weakness of underestimating the true extent of intra-ASEAN trade, much of which is informal trade which is not only a result of illegal activities (for example, smuggling) but also reflect the nature of Chinese business practices since the Chinese community still dominates ASEAN economic life. Thus, the true extent of trade with Indonesia is as yet unknown and probably heavily underestimated. Official data also may not highlight the precise nature, extent and evolution of the "Chinese connection" within ASEAN .13 Chinese economic life has been shown to impact on the structure of trade and investment within the Chinese communities of ASEAN. Close correspondence has been observed between Chinese dialect groups/clans/associations and occupational structure because of historical reasons. For instance, the Teochews tended to be petty merchants and agriculturalists, the Hokkiens to be wealthy merchants, and the Hakkas and Cantonese to be artisans (Lee Poh Ping 1978). As a result of historical hostilities between different dialect groups, Chinese businessmen prefer to deal with those of the same dialect group. Trust is an important element in Chinese business philosophy and its use requires limiting potential trade partners to those of the same dialect or clan. Thus, the Teochew rice exporter in Thailand prefers to deal with the Teochew rice importer in Singapore. Both these groups belong to the same Teochew clan/association which acts as an informal referee to ensure non-violations of business trust. The implication for intra-ASEAN trade (much of which is conducted by Chinese immigrants) in the early days when the Chinese were predominantly migrants, is that a great deal of potential trade based on

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39

comparative advantage regardless of dialect/clan associations go unexploited, thus limiting intra-ASEAN trade. Moreover, the Chinese practice of keeping business within the family means that the Chinese investment pattern within ASEAN is organized not only along dialect/clan lines but also frequently involve family members or relatives. The concentration of the rubber business in Hokkien hands and within certain Hokkien families in the early days is a case in point. Trade and investment organized along family lines is probably an important factor in explaining the lack of dynamism in intra-ASEAN trade. Firstly, firms are constrained to stay small in order to maintain control. There is unwillingness to raise, and hence a lack of, equity capital for purposes of expansion and modernization. Unwillingness to draw new talent from outside the family also severely restrains quality control on entrepreneurship as well as pose problems of continuity and succession when the original first-generation entrepreneur dies. These problems plague the average Chinese firms within ASEAN and severely restricts the scope of trade and investment that is possible within the region by the still economically dominant Chinese. It also makes the region very vulnerable to international business downturns.14 The advent of state and foreign entrepreneurship in the last decade or so would, of course, have dampened the extent of such problems. However, it still remains true that the dynamism of certain types of intra-ASEAN trade and investment (to the extent that they are still largely in Chinese hands) could be improved with changes in business practices.

The Political Economy of Trade, Investment and Other Linkages

How should Singapore conduct its relations with the United States, Japan, the ASEAN countries, the Asian NICs and China in a way that will allow continuation of the prosperity that has been brought about by trade, investment and other relations with these nations? In the case of trade with the United States, which is increasingly concerned about its huge trade deficit, Singapore is not considered a target country responsible for this deficit. In fact, in the last decade, Singapore has been registering negative trade balances with the United States except for the two most recent years (1984

40

Koh Ai Tee

and 1985) (Henry Lim 1986/87). One possible point of contention in bilateral relations is the U.S. demand for the protection of intellectual property rights. As is well known, the Singapore Government has already taken steps to ensure the enaction of a copyright law by the end of 1986. However, the U.S. perception is that such copyright protection will remain inadequate until Singapore adheres to the international agreement on copyright protection or establishes bilateral copyright relations with the United States.15 As far as investment policies are concerned, the government's liberal, non-interventionist and, in fact, pro-foreign investment stance would appear to offer no ground for complaint by U.S. (or for that matter any other foreign) investors, by the standards of most developing countries. It is important for the government to continue to recognize and appreciate differences in investor preferences, practices, motivations, and so forth, and not to expect U.S. investors, for example, to behave like the Japanese. For instance, U.S. investors show a general tendency to prefer majority control over their subsidiaries compared to the Japanese investors because of the relative superiority of U.S. technology and the relatively greater need to protect specialist know-how. Since U.S. firms are also more experienced in international operations, they also want full control of market allocation strategies, transfer pricing, and repatriation of profits. Singapore's policy of non-requirement of local equity participation and local sourcing, free repatriation of profits, absence of exchange controls, freedom in allowing MNCs to hire expatriates, and so on, would appear to constitute major attractions to foreign MNCs. The experiences of neighbouring countries (for instance, Malaysia) with U.S. investment appear to support this judgment. Too much insistence on local participation and local sourcing, as had been the case with Malaysia for instance, seems to have had a deterrent effect on American investment in that country. At the time of writing (September 1986), Malaysia is in the process of liberalizing its foreign investment rules in an attempt to attract foreign capital, which is viewed as an important factor in energizing its lack-lustre economy.16 In the area of trade with Japan, unhappiness appears to be on the Singapore side because of persistently large and rising trade deficits with Japan (Mona Chew 1986/87).17 The problem does not lie in exporting intermediate goods to Japan, partly because such exports fit into the Japanese global strategy of geographical division

Linkages and the International Environment

41

of labour - namely, to produce certain components in Singapore and have them shipped back for assembly in Japan. As is well known, the problem lies in penetrating the Japanese market for final consumer goods. Some recent studies have shown increasing incidence of Japanese non-tariff barriers against final (particularly consumer) exports of less developed countries (LDCs) including Singapore.1 8 Import-penetration ratios by LDC exporters into the Japanese market are much lower than that for the United States or the EEC even though Japanese incomes have risen faster than those of the latter two. Japanese trade practices are characterized by lack of transparency of Japanese trade barriers and limited information, which create uncertainty for and hence have a deterrent effect on the would-be exporter.I 9 As a small country with limited bargaining power, there does not appear much that Singapore can do as far as this market access problem is concerned except to work in concert with other groupings such as ASEAN, or possibly the Asian NICs to negotiate for greater Japanese trade liberalization. Another alternative that may be worth looking at would be for Singapore exporters to co-operate with Japanese trading companies to distribute Singapore products under Japanese names. Unlike South Korea (and to a lesser extent Taiwan), which has established its own trading companies in Japan (Eddy Lee 1981), Singapore does not at present have this capability, and the above suggestion may be worth some study. In terms of economic relations with ASEAN, reduced trade over time between Singapore and its ASEAN neighbours, particularly Malaysia and Indonesia, has been partly the resuit of substitution policies in these countries, which effectively bypass Singapore. This is something exogenous and beyond Singapore's control. What Singapore can do is to co-operate with the other ASEAN countries in ways that would help them grow, so that with rising income, there would be more ASEAN demand for Singapore products, particularly in the area of services. In this regard, it would appear important for Singapore to continue to work with the other ASEAN partners in international forums to push for better commodity prices, for more open markets for their products, and to explore possibilities to offer expertise in certain areas that would be helpful to ASEAN. Politically, more contacts and exchanges of views both ways would be important in further strengthening ties by reducing misperceptions and misunderstandings.

42

Koh Ai Tee

In the case of the NICs, there appear to be more areas of interdependence (actual as well as potential) between Singapore and these countries than is commonly recognized. Firstly, the share of exports to the NICs has been rising over time although it is still below that of the United States or Japan. Secondly, intra-industry trade between Singapore and the three Asian NICs and among the four Asian NICs themselves have been growing in recent years. 20 Thirdly, the NICs have shown impressive track records of growth which, barring any major disruption to world trade, are likely to be sustained in the near future. This expected dynamism in growth frequently translates into potential dynamic markets which Singapore should try to exploit. These markets should be seriously explored particularly in view of the lack of promise of much growth in the United States (due to the high budget deficit and protectionist clamours), Japan (still a closed market for final consumer goods) and the EEC (continued protectionist sentiments associated with still fairly high unemployment rates). Other possible new areas such as Latin America, Eastern Europe, India and China are generally poor, and some are plagued with debt problems. Moreover, considerable uncertainty exists in trade with these countries because of lack of familiarity. Fourthly, more trade and investment relations with the NICs would foster closer ties, and enable the NICs to come together as an economic force in negotiating with large countries in matters of common concern, such as pushing for greater market access in the developed countries. Fifthly, with the rise in the value of the Japanese yen, the attractiveness of sourcing from Japan is greatly reduced, and there may exist scope for the NICs to source more from each other than from Japan. However, in trying to trade more with the NICs, Singapore should expect a certain amount of variability in year-to-year trade volumes in view of the fact that these countries themselves are very dependent on export markets in the developed countries and their year-to-year performances correlate closely with the international business cycle. Such variability is to be expected particularly for Hong Kong (Lin and Ping 1979). What about economic relations with the People's Republic of China? If China is seriously pursuing its modernization policy, it will become an increasingly important player in the international trade arena. It has also shown an increasing desire to diversify its trade partners (Hsueh and Shea 1981). There would appear to be

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43

scope for Singapore to carve out certain trade niches with China as it gradually opens up. A recent study by the World Bank, however, projects that Chinese spending on food, clothing and consumer durables will grow by only 4-7% annually until the year 2000. 21 In the near term, the world trading community will be more concerned with China as an export competitor than as an import market. Additionally, it is important to note that historically, China's trade relations with the world have exhibited high variability which correlates positively with changes in political attitudes towards foreign trade. In this regard, a certain amount of caution appears desirable in dealings with China.

Maximum Dependence? Given Singapore's size and lack of natural resources, it will have to be very much dependent on the world economy for markets and supplies. In its pursuit of growth, foreign entrepreneurship and technology have been allowed free play and are very much at the forefront of its growth. The high and rising dependence on foreign entrepreneurship, however, raises the question of what would be the optimal degree of dependence on foreigners in the course of development. 22 This is a conceptually challenging question and may well be politically important. Consider a scenario in which the objective is to maximize Singaporeans' lifetime welfare. Suppose maximization of growth is an important component of this welfare function. Growth requires the use of two inputs: domestic resources (such as entrepreneurship, labour, capital, and so forth), and foreign resources. For growth maximization, the conventional economic criterion for choosing the optimal amount of foreign resources would be the point at which the marginal benefits and costs from an extra unit of foreign resources are equated. Technology, markets, organizational/managerial expertise and positive spillover effects on local entrepreneurship and labour would constitute the usual benefits from foreign investment. Cost elements are much more subjective and depend very much on what enters the welfare function of Singaporeans. However, they would include costs of congestion such as pressure on land, housing, utilities and other non-tradables. 23 Before the optimal point is reached, progressive introduction of foreign resources to

44

Koh Ai Tee

the domestic economy will serve to convey more overall benefits than costs to local residents whose welfare would be enhanced. Beyond this point, increasing dependence on foreign entrepreneurs and labour would create problems of congestion, raise the costs of non-tradables and so forth to a level beyond the benefits conveyed, thus reducing the welfare of Singaporeans. From the track record of past growth, it would appear that this optimal degree of dependence has not been exceeded. The increasing dependence on foreigners over the past twenty years, as measured by the share of resident foreigners and resident foreign companies in GOP, has been accompanied by rising total as well as per capita indigenous GNP, used here as a rough proxy of Singaporean welfare. The only exception is the 1985 recession which was unique because it was a combination of a drop in external and regional demand on the one hand and internal construction on the other, possibly exacerbated by a liquidity squeeze (see Chapter 1). While this rising dependence is a reflection of greater global interdependence in the international economy, it is also a direct result of Singapore's deliberate growth strategy which set out to attract the foreigners and foreign investment who, in turn, exported their goods to foreign markets. The evidence shows that this strategy has been correct by far, even though it has meant rising dependence on foreigners. This rising dependence has occurred alongside the fact that the Singapore economy has developed a remarkable degree of resilience and diversification over the last twenty years. Whenever one sector did badly, others did well so that on balance the economy was buoyant. Foreigners can at least claim credit for contributing to this resilience and flexibility within the manufacturing sector in which they dominate. But what of the future? In view of constraints posed by lower labour force growth, land and water, among others, what is the future role for foreigners if a more mature Singapore economy aims to maximise growth in the context of a less benign international environment? A more protectionistic and uncertain international environment would imply greater difficulty in market penetration by local entrepreneurs and hence, no less dependence on foreign MNCs to assume the exporting role it has done so well in the past. Singapore's economy would have matured to a point at which greater growth

Linkages and the International Environment

45

would have to come from increasing the "quality" rather than the quantity of factor inputs such as labour and entrepreneurship. While human resource development efforts would prove vital in the upgrading process (see Chapter 7), foreign entrepreneurship would appear to be no less important in the next phase of growth. In particular, Singapore would need to be able to attract the right kind of foreign entrepreneurs that can spearhead the economy into the new age of information technology, biotechnology, robotics and artificial intelligence, micro-electronics, laser technology, and optics and communications technology. 24 New technology appears to be an important answer for future growth maximization in view of the physical constraints (such as land and water) faced by Singapore. The new industries (services included) of the future would have to economize on these scarce resources via the introduction of new technology. To the extent that foreign entrepreneurship holds the best promise for the introduction of new technology, it would appear to be vital for future growth. The foregoing discussion implies that if growth maximization is an important goal during the next phase of Singapore's development, the role of foreigners in the Singapore economy is not expected to diminish and is likely to increase. With land and other physical constraints becoming binding, certain social pressures may emerge as foreigners and locals compete for scarce nontradables, but these costs are not likely to dominate the gains from greater foreign participation.

The Changing International Environment and Implications for Singapore The above discussion on the role of foreigners and trade and investment linkages takes as given certain important parameters in the international environment. However, this environment is changing rapidly and will serve to alter in important ways the complexion of some of the linkages Singapore has with the rest of the world. Firstly, the world has become more interdependent.2 5 Consequently, many countries have come to rely more on international trade for their economic well-being than in the past. The increasing number of players on the export scene implies greater competition

46

Koh Ai Tee

among many newly industrializing countries for the markets of the world in many important manufactured goods of relevance to Singapore. The foregoing is exacerbated by certain trends in the international environment, particularly the changing role of the United States and Japan, that imply little increase in or even the possibility of shrinkage of world markets for such goods (see discussion below). In this environment, the need for Singapore to maintain, let alone enhance, its export competitiveness in a fierce international environment cannot be over-emphasized. A related aspect of greater interdependence is reflected in the liberalization of international capital movements in many industrial countries in recent years. In some industrial countries, capital controls were relaxed in order to promote capital outflows and thus offset external current account surpluses. In others, the measures were motivated mainly by the desire to increase the efficiency and competitiveness of domestic financial markets. These developments have contributed to increased integration and competitiveness of the international investment markets and have also encouraged other countries to consider similar reductions in regulations. 26 This implies that the race for the investor's dollar is expected to get tougher for Singapore. Secondly, the United States no longer dominates the global economy. Although it has remained the world's largest trading nation and the biggest export market for many countries, including Singapore, this scenario is fast changing and unlikely to be sustainable for the near future. Despite substantial progress made towards depreciating the value of the American dollar to equilibrium levels, the twin deficits in the U.S. Federal budget and foreign trade continue to be high by historical standardsP The resultant high probability of protectionist legislation continues to be real. Furthermore, the higher debt profile of the U.S. economy will mean greater debt servicing burdens in future and lower propensity to import. The lower American dollar makes production on and export from American soil more attractive to American producers who had hitherto gone abroad as foreign investors. Moreover, rapid advances in U.S. production technology have reduced the labour component in the overall cost of production of many types of manufactured goods and rendered foreign investment based on cheap labour less attractive to U.S. firms. In place of labour cost, the availability of skilled manpower has now become a major attraction for many

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47

U.S. firms. In this area, Singapore faces an uphill task in competing for an increasingly scarce pool of U.S. investment with countries such as Taiwan and South Korea which have invested more heavily in human resources than Singapore. What the above implies is that the future trade and investment scene in Singapore is likely to see less American dominance. It may be increasingly difficult for the United States to remain Singapore's top export market and foreign investor. In contrast, Japan is expected to assume an increasingly higher profile in the Singapore economy, and even fill the void left by the United States. 28 Firstly, the continued appreciation of the Japanese yen makes imported goods cheaper in Japan and is likely to facilitate greater exports of Singapore-made goods to Japan. Secondly, if under pressure from the United States and the rest of the world Japan decides to correct its saving-investment imbalance in order to avoid running sizeable current account surpluses, the resultant higher demand for consumption goods would imply higher imports (in addition to higher demand for domestically produced goods) which would also benefit Singapore exporters. Thirdly, with the higher yen, many Japanese firms would find it expensive to produce on and export from Japanese soil. As has been happening, many such firms have relocated operations abroad for export to third-country markets. Singapore stands to benefit from this higher Japanese investment. Fourthly, while the major share of Japanese goods produced in Singapore may continue to be targetted at non-Japanese markets, the increasing protectionist difficulty with the American and EEC markets and American inability to absorb imports at past rates may imply the re-direction of many manufactured exports to the Japanese market itself. Efforts by Singapore-based Japanese subsidiaries to penetrate the Japanese market are likely to be more successful than similar efforts by other Singapore-based American or European firms because of the greater familiarity on the part of the former with the Japanese distribution network and government trade regulations. 29

Summary and Conclusions The examination of broad macro data shows that Singapore's growth over the last twenty years has been positively correlated with

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greater internationalization of the Singapore economy. Foreigners have accounted for an increasing share of production on Singapore soil. Foreign entrepreneurship, technology and markets have been particularly significant in driving the manufacturing sector which is largely foreign owned. Even in the services sector which is primarily the domain of Singaporean firms, foreigners are making significant and in some cases rising contributions. Given this scenario, an important question that arises concerns the optimal degree of dependence on foreigners. The evidence shows that this degree has not been exceeded. In fact, the record of the past twenty years (apart from the recession) shows that the rising reliance on foreigners (as measured by the rising share of resident foreigners and resident foreign companies in GDP) has been accompanied by growing affluence of Singaporeans as reflected by positive and respectable growth in total as well as per capita indigenous gross national product. To the extent that this rising dependence is the result of a deliberate growth strategy to rely on foreign MNCs to spearhead growth, this strategy appears to have been successful. With the benefit of hindsight, it is hard to imagine an alternative strategy that could have delivered the kind of results Singapore has enjoyed over the last twenty years. Given lower expected future labour force growth, land, water and other physical constraints, a more mature economy and a less benign international environment, the role of foreigners in the next phase of Singapore's development is likely to increase, or at the very least, remain unchanged from the present, if its goal is continued growth maximization. Although there may be resultant competitive pressures between foreign and local firms for certain scarce resources (land, water, and so forth) as the physical constraints become binding, the attendant costs associated with greater reliance on foreigners are likely to be dominated by the benefits. The kind of industries that are likely to emerge in the future would be those that are least penalized by such constraints. One expects foreign technology to play an important role in addressing some of these problems and in contributing to the resilience and flexibility of the Singapore economy as they had done in the past. Existing trade and investment data give high visibility to Singapore's linkages with the OECD countries, particularly the Pacific Basin Five countries, compared to ASEAN. This has the weakness of underestimating the true extent of intra-ASEAN links,

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and also does not capture the nature, extent and evolution of the "Chinese connection" within ASEAN for which anecdotal accounts may be more appropriate. There is also a general tendency to view the Asian NICs as competitors rather than as potential traders/investors. The extent of linkages (both actual and potential) with the Asian NICs is more significant than is commonly recognized. Given the rising value of the Japanese yen, which makes sourcing from Japan increasingly expensive, one possible area of co-operation among the Asian NICs would be to source from each other rather than from Japan. The time may also have arrived for Singapore to perhaps take the initiative in persuading the Asian NICs to act together in international forums, particularly concerning the question of market access for manufactured goods. Continuing U.S. difficulty in reducing its high budget and trade deficits, the depreciation in the American dollar, higher future debt-servicing burdens and advances in production technology in the United States imply lower future propensity to import and invest abroad on the part of U.S. residents. Thus, the United States is likely to become a less important export market and investor for Singapore in the near future. This gap will most likely be filled by Japan who will assume a higher profile on Singapore's trade and investment scene.

NOTES 1. Another fundamental question that needs to be discussed concerns the type

of goods and services Singapore has comparative advantage in. This question is addressed in Chapter 3. How Singapore's comparative advantage is expected to change over time !namely, Singapore's dynamic comparative advantage) is the subject of a doctoral dissertation currently being written by Miss Tan Lin Yeok, a senior tutor at the Department of Economics and Statistics, National University of Singapore, who is presently pursuing her Ph.D. in the University of Sussex, England. 2. The author wishes to thank Associate Professor Augustine H.H. Tan and Dr Amina Tyabji for many helpful comments on this chapter. 3. Net factor payments to foreigners is derived by using the following relationship: net factor income from abroad !available from Yearbook of Statistics) equals net factor receipts of Singaporeans from rest of the world !available from Yearbook) minus net factor payments to foreigners. Hence, net factor payments to foreigners equals net factor receipts of Singaporeans from rest of the world minus net factor income from abroad.

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4. Indigenous GNP is defined as the aggregate value of output produced by Singaporeans. It is equal to GDP minus the share of resident foreigners and resident foreign companies in GDP plus net factor receipts of Singaporeans from the rest of the world. 5. The higher import content for 1978, however, could well be due to the higher oil prices which should ideally be removed to arrive at "real" imports. This was not done because of the lack of a satisfactory price deflator. 6. Ministry of Trade and Industry, First Quarterly Economic Survey 1983. 7. The above benefits from tourism accrue mainly to the wholesale and retail trade, transport, hotels, restaurants and manufacturing sectors. Wholesale and retail trade is the largest single beneficiary, capturing a quarter share of output and employment gains from tourism. 8. Note, however, that whereas, on the surface, Singapore is generating more gross national savings, much of these savings are channelled abroad by the public as well as the private sectors. Thus, the gross flows of foreign investment are much more than the figures would indicate on an aggregate basis. 9. Since foreigners' share in value added within manufacturing in 1984 was 63o/o and the manufacturing share of GDP was 24.8o/o, foreign manufacturers' contribution to GDP works out to 15.6o/o (that is, 0.63 x 0.248). This is subtracted from the GDP share of resident foreigners and resident foreign companies in GDP of 27o/o to yield 11.4o/o. It is assumed that foreigners' role in agriculture, fishing and hunting, and utilities is negligible. 10. The high proportion of expatriates in the institutions of higher learning (for instance, about one-third in the National University of Singapore) would also suggest the inclusion of educational services in this category. 11. This should be interpreted with caution since exports to Indonesia have been estimated using Indonesian data which has the tendency to underestimate the true extent of Singapore exports to this country. 12. Figures for 1979-85 show that Singapore is the single largest less developed country investor in Malaysia, accounting for 12o/o of total foreign investment in approved projects, compared to much lower figures for Hong Kong (5o/o) and South Korea (3o/o) (Economic Report, various years). Singapore's share in Thailand as at end June 1984 is lower at 5o/o but comparable to similar shares for Hong Kong (5o/o). though lower than that of Taiwan (10o/o) (Bank of Thailand). In the case of Hong Kong, Singapore's share is 2.7o/o, compared to those of Thailand (also 2.7o/o) and Taiwan (1.1o/o) as at end of March 1980 (Centre of Asian Studies, University of Hong Kong). 13. See, for instance, Cheng (1985). Arndt (1983). Chong (1978/79) and Alexander (1973). 14. Straits Times, 11 September 1986, "Why Some Large Companies in Asia have

gone Bust". 15. United States Government, USTR Report, "National Trade Estimates: 1986 Report on Foreign Trade Barriers", November 1986. 16. Straits Times, 24 September 1986, "Radical New Terms on Equity Holdings by Foreigners". Until 1986, Malaysians had to hold the controlling stake in

joint-venture companies. Some relaxation was introduced recently to allow foreign investors to have the majority stake under certain conditions. The new terms for foreign investors would be announced at a meeting hetween the Prime Minister and American businessmen in New York at the end of

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17.

18. 19. 20.

21.

22.

23.

24.

25. 26. 27.

28.

29.

51

September 1986. The new terms for foreign ownership of companies are expected to be a radical departure from the New Economic Policy (NEP), the chief objective of which is to redistribute wealth. In the words of the Prime Minister, "We have first to create wealth if we are going to have any to distribute under the NEP". In 1975, trade deficit with Japan stood at S$2, 141 million, which was 33o/o of Singapore's total trade deficit with the world. By 1985, this had grown to S$5, 148 million and escalated to being 67o/o of the total deficit. See Balassa (1985) and Lim (1985). Balassa (1985). Comments by Augustine Tan. See also Joanna Sng, "Singapore's Economic Relations with the Newly Industrialising Countries (NICs) in Asia" (National University of Singapore, Department of Economics and Statistics Academic Exercise, 1981/82). Jacques van der Gaag, "Private Household Consumption in China: A Study of People's Livelihood", World Bank Staff Working Paper, No. 701; cited in The Economist, 11 May 1985, p. 82. Conventionally defined, the optimal degree of dependence is one which maximises Singaporeans' lifetime welfare. As a practical definition, the degree of dependence on foreigners may be proxied by the share of resident foreigners and resident foreign companies in GOP, and welfare proxied by indigenous GNP. They could also include social "costs" such as the erosion of indigenous culture through more contact with foreigners, and political "costs" such as the increasing influence of foreigners on local politics. Of course, perceptions of what constitute social and political costs differ across societies. These technologies have been recognized by the Economic Committee to be the emerging, advanced technologies that will have significant impact in the future. For a discussion of the meaning and relevance of high technology for Singapore, see Chapter 3. International Monetary Fund, IMF Survey, 15 September 1986. Ibid. The U.S. trade deficit stood at a historically high level of US$132 billion in 1985. By October 1986, this had risen to US$170 billion. The Federal budget deficit now stands at well over US$200 billion. The EEC is unlikely to fill this void because of persistent high unemployment problems at home. Furthermore, as noted above, Singapore is becoming more Pacific-oriented in its trade and investment links with the OECD countries. Familiarity with the marketing distribution network in Japan is an important ingredient for success in penetrating the Japanese market. See Koh (1986) and Lim (1985).

REFERENCES Alexander, Garth. Silent Invasion: The Chinese in Southeast Asia. London: MacDonald & Co. Ltd. 1973.

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Arndt, Heinz W. "Financial Development in Asia", Asian Development Review 1, no. 1 (1983): 86-100. Balassa, B. "Japanese Trade Policies Towards Developing Countries". Paper presented at the Second Conference on U.S.-Asia Economic Relations, New York City, September-October 1985. Cheng Lim Keak. Social Change and The Chinese in Singapore. Singapore: Singapore University Press, 1985. Chew, Mona. "Singapore-Japan Trade: Some Recent Issues". Academic Exercise, Department of Economics and Statistics, National University of Singapore, 1986/87. Chong S.Y. "Chinese Business Organizations in Singapore - Evolution, Problems and Prospects". Academic Exercise, Department of Economics and Statistics, National University of Singapore, 1978/79. Hsueh Tien Thng, and Koon-Lam Shea. "Trade Stability, Balance and Trading Partners of the People's Republic of China". The Developing Economies 19, no. 3 (September 1981). Koh Ai Tee. "Singapore's Exports to the U.S., Japan and the EEC: A Study on Trade Barriers". Paper presented at the Eleventh Conference of the Federation of ASEAN Economic Associations on "Barriers to ASEAN Market Access to the U.S., Japan, and the EEC", Bangkok, 27-29 November 1986. Lee, Eddy, ed. Export-Led Industrialization and Development. International Labour Organisation, 1981. Lee Poh Ping. Chinese Society in Nineteenth Century Singapore. Kuala Lumpur: Oxford University Press, 1978. Lim, Henry. "Singapore's Trade with the United States and the European Economic Community: Some Recent Developments". Academic Exercise, Department of Economics and Statistics, National University of Singapore, 1986/87. Lim Hua Sing. "Singapore-Japan Trade Frictions: A Study of Japanese Non-Tariff Barriers". Department of Japanese Studies, National University of Singapore Occasional Paper Series No. 1, September 1985. Lin S.Y. "ASEAN: Financial Development and Interdependence". In Pacific Growth and Financial Interdependence, edited by Augustine Tan and B. Kapur. Sydney: Allen & Unwin, Australia, Pty Ltd, 1986. Lin T.B., and Y. Ping. "Export Instabilities and Economic Fluctuations in Hong Kong's Manufacturing Industries". The Developing Economies 17, no. 2 (June 1979). Lindsey, C.W. "Transfer of Technology to the ASEAN Region by U.S. Transnational Corporations". Paper presented at the Conference on ASEAN-U.S. Economic Relations, Institute of Southeast Asian Studies, 22-24 April 1985. Rieger, H.C. ASEAN Cooperation and Intra-ASEAN Trade. Research Notes and Discussions Paper No. 57. ASEAN Economic Research Unit, Institute of Southeast Asian Studies, 1985.

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Suryadinata, Leo. China and the ASEAN States: The Ethnic Chinese Dimension. Singapore: Singapore University Press, 1985. Tan, Augustine H.H. "Changing Patterns of Singapore's Foreign Trade and Investment since 1960". In Singapore: 'IWenty-five Years of Development, edited by You Poh Seng and Lim Chong Yah. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, August 1984. Tim Tat Wai. "A Comparative Overview of the Internal Structures of ASEAN Economies". In ASEAN Economies: Crisis and Response, edited by Jomo. Kuala Lumpur: Malaysian Economic Association, 1985.

chapter three

Industrialization of an Advanced Global City Lawrence B. KRAUSE

rom the perspective of what it does to earn a living, Singapore is made up of six main sectors. There is a sector with much government participation that produces goods and services for local consumption, a traditional entrep6t, a petroleum centre, an export platform for MNCs with some local participation, a business service centre which includes tourism, and an international financial centre. Singapore is highly industrialized in both manufacturing and services, and because of its remarkable international involvement, is deservedly called a global city.1 According to estimates made by Lloyd and Sandilands, 75% of Singapore's GDP was exported in 1982, and using similar methodology, the figure for 1985 was 71% (Lloyd and Sandilands 1986). 2 This characterization of Singapore's output makes imminent sense, given its comparative advantage. Singapore's strengths come from its location, its favourable business environment, its people's skill as traders, and its infrastructure investment. Singapore's weaknesses come from its small size, its relatively high wages, its relative under-investment in education, the underdevelopment of its domestic entrepreneurs, and the aging of its population.

F

Singapore's Strengths Singapore's strategic location was discussed in Chapter 1, and nothing more need be added here - except to note that as Singapore's neighbours prosper, the positive spillover to Singapore also expands, making location a dynamic force for growth.

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55

The favourable business environment was not provided by nature, but rather was an explicit policy decision, and resulted from strenuous efforts to bring it about. Fundamentally, it arose from, and was made possible by, the political stability of Singapore. Political stability has been purchased at considerable costs, including devoting resources to the armed forces. The extended tenure of the People's Action Party (PAP) has allowed policy formation with long horizons. The business environment is made up of a number of factors. Singapore has achieved macro-economic stability, with an absence of high and variable inflation. Industrial relations are conducted in a harmonious manner. Singapore has instituted a free trade policy which has not distorted the price structure. It maintains a competitive level of business taxation and incentives. Furthermore, its regulation of business tends to be reasonable, non-distorting, and is implemented honestly and efficiently. Even the bringing in of foreign managers and experts is done with a minimum amount of government interference. The Economic Development Board (EDB) operates a one-stop promotional office for foreign investors, where decisions can be reached with a minimum of red tape. All of these characteristics are important. 1\vo consequences flow directly from the favourable business climate; costs of new business projects are predictable, and start-up times are short. This means that business firms view Singapore as a place where they can respond rapidly to changing market conditions. When world economic conditions deteriorate, MNCs and local businessmen alike will reduce investment and retrench staff. When the business outlook brightens, businesses are quick to commit new investments to Singapore. Thus, Singapore reflects the world economic environment, and benefits from world growth. While MNCs may not continue to produce the same product in Singapore, they may well continue to produce some product there. This is an important ingredient in the flexibility of the economy. A favourable business environment may be even more important to a foreign firm doing business in Singapore than for a domestically-owned enterprise, since local firms are generally less constrained by regulation because of their superior knowledge of local institutions and personalities. Local businessmen are part of an extended family and a strong clan relationship. Business is often conducted among friends, and these friendships may date

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from school days. 3 Thus, it is the foreign firms that are particularly dependent upon the general business climate. Two possible explanations may account for Singapore's skill in trading, and both may be important. Trading is an essential element in the entrep6t business, and many Singaporeans have had long years of training in it. Recently, countertrade has attracted many countries. While countertrade (barter) makes little economic sense, if other countries want to do it, Singaporean traders will oblige. Secondly, it is said that trading is a skill easily mastered by the Chinese, or at least those Chinese who emigrated to Southeast Asia. Therefore, Singapore, with its large ethnic Chinese population, is well provisioned. It may be related to the legendary Chinese love of gambling, but that is even more speculative. However, if trading skills are related to recent immigration, then Singapore may encounter difficulties in the future. Having skilled traders has not only helped sustain the entrep6t business; it has also opened banking to Singaporeans. Trading is an essential part of banking, and therefore it is entirely understandable that local entrepreneurs found banking more to their liking than manufacturing (Lee S.Y. 1978). However, skill in trading is not enough to bring success in general trading companies (such as the Japanese Sago Shosha). Success in these Japanese companies is more related to economies of scale, being connected to a diversified manufacturing base, and large amounts of capital. Finally, Singapore has superb infrastructure facilities. It has everything from a modern and efficient seaport and airport, to more than adequate public utilities, to widely available residential housing at various levels of quality and price. In addition, Singapore has, or will make available, industrial sites for business with a minimum of red tape. This reinforces the ease of starting new ventures, and is particularly attractive to firms with hard-to-locate plants, such as those in the chemical industry.

Singapore's Weaknesses The most serious weakness of Singapore is its small size. Fundamentally, small size means that Singapore cannot diversify its economic activities in order to manage risk. Instead, it must make strategic choices and hope they are correct. In an uncertain world

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economy, an inability to diversify is a significant problem. To give a couple of examples of the limitations imposed by size, it is clear that without a large domestic market, firms must export in order to reach economies of scale. Not having a local market also means that it is difficult for domestically-owned firms to get the experience necessary to grow into large enterprises, as noted in Chapter 4. Furthermore, with a limited number of households, the absolute amount of savings in Singapore is small. Without a large savings pool, it is difficult to create a long-term capital market. To be sure, there are some advantages to small size - it's a more governable country - but for the most part, size is a constraint. One implication of the small size is that Singapore's international involvement is necessarily large, compared to other countries. If Singapore wants to limit its dependence on the international economy, it can do so, but only with a tremendous loss in living standard. Another implication is that Singapore in general is likely to be more competitive in the production of services than in goods. Value added per worker tends to rise as size increases. However, this is much less critical in the production of services than in goods. Moreover, in Singapore, the level of value added per worker is greater in services than in goods. Indeed, on the average, the smallest service firms (those with less than ten workers) have higher value added per worker than the largest goods producers (those with more than 100 workers) (Report of the Economic Committee, 1986). A second weakness of Singapore is its high wages, compared to all other developing countries, and even some industrial countries. In 1984, the average monthly wage in Singapore was about 57% above the average wage in Korea. In 1985, the average direct monthly wage in Singapore was $1,053 (US$479). When social -charges that employers must pay for each worker are added, the gap between the total cost of employees to businesses in Singapore and that in Korea is probably widened even further. Since manufacturing is a relatively low-paid occupation in Singapore, if we restrict the comparison to wages in manufacturing alone, the gap between Singapore and Korea is reduced to about 45%, and that between Singapore and Taiwan to 32%. Of course, higher wages in Singapore reflect higher worker productivity there. Thus, they are a reflection of economic success, not a barrier to success. However, high wages do mean that Singapore will not be

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able to compete in those industries in which worker productivity is not higher in Singapore than elsewhere. Thirdly, Singapore has not made an investment in the formal education of its work-force comparable to advanced countries or even the other Asian NICs. This was recognized as a problem in the Report of the Economic Committee. As seen in Table 3.1, Singapore has a higher number of workers with just a primary education (or less) than any of the other countries shown. Correspondingly fewer Singaporeans have had post-secondary and especially tertiary education. Measures of the current educational efforts of different countries (as of 1982) are presented in Table 3.2. Again, Singapore shows up poorly. Singapore has a smaller share of its eligible age group enrolled in secondary school than any other country, and (along with Hong Kong) a much smaller share in higher education. Singapore (and possibly Hong Kong) reflects the British tradition of only providing education for a small elite. In truth, most workers in standard industrial jobs only require a primary education - that is, an ability to read instructions and directions and understand simple mathematical concepts. However, in more sophisticated industries, workers may need more analytical training and may have to comprehend certain scientific processes that are not taught in primary school. Obviously, high technology industries require the kind of skilled manpower that only comes

TABLE 3.1 Country Comparison of Educational Profile of Work-force (In per cent)

Singapore 1984 Tertiary Post -Secondary Secondary Primary & Below Total SotTRCE:

5 11 31 53 100

Taiwan 1984

japan 1982

6 23

19 46

26! 45

35

100

100

us. 1983 19 16 50 15 100

Report of the Economic Committee, ThP Singaporp Economy: NPw DirPclions (1986), Table 11-2.

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TABLE 3.2

Educational Effort in Several Countries in 1982

Singapore South Korea Hong Kong Taiwan a Japan United States a

Number Enrolled in Primary School as Percentage of Age Group

Number Enrolled in Secondary School as Percentage of Age Group

Number Enrolled in Higher Education as Percentage of Population Aged 20-24

108 100 105 100 100 100

66 89 67 66 92 97

11 24

11 19 30

58

Taiwan Statistical Data Book, 1985.

SouRcE: World Bank, World Development Report 1985, Table 25.

from colleges and universities. As for management, or even staff jobs in all industries, a great deal of education not provided in Singapore in the past, is required. Fourthly, as discussed in detail in Chapter 4, Singapore seems to suffer from a shortage of domestic entrepreneurs, or at least ones that have been successful enough to manage growth beyond very small enterprises. If the government's goal is growth of indigenous income, then the shortage is seen as a problem. Finally, Singapore has an aging population. 4 Earlier, the age of the population was a strength as it was young, and the number of new entrants into the labour force was substantial. However, there is now a relative dearth of new entrants, which impinges most on manufacturing.

Industrial Policy in Singapore Because of its small size, Singapore must make strategic choices. Therefore, it needs an industrial policy. The original industrial policy in 1959 was to promote industrialization as a way of diversifying from the traditional entrepot business. It was not specific in

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what to promote, though the instruments chosen could permit selectivity in implementation. Reliance was placed on private enterprises (Tan and Ow 1982; and Lloyd and Sandilands 1986). In the early years, there were several changes of strategy, mainly in reaction to changing circumstances. At first, a system of import quotas (QRs) was introduced for a limited number of goods, along with controls on how many enterprises could enter a particular line of activity. This was done with production for the expected common market with Malaysia in mind. However, when separation from Malaysia occurred in 1965, the QRs were mainly replaced by protective import tariffs, and a traditional import-replacement strategy (IS) was implemented - although the level of protection was quite moderate by the standards of developing countries. An import-replacement strategy never made sense for a citystate, and this became obvious when the British announced the intended removal of their military just two years later in 1967. At that point, the import-replacement strategy was replaced by a strategy of export promotion, although it took several years for tariffs to be reduced. Furthermore, the government took a more direct and intrusive role in the economy by creating many public enterprises, as discussed in Chapter 5. Export promotion has been an essential element in the economic development strategy of Singapore continually since 1967, although there have been some changes in emphasis. As early as 1970 when full employment was reached, there was some desire to upgrade the industrial structure in order to create more higher paying jobs. The only way this desire was reflected in policy at that time, however, was a liberalization of the immigration restriction on skilled people. This was in recognition of shortages in Singapore, and the deterrent effect that such shortages had on enterprises considering investment in Singapore. This policy was interrupted by the first oil crisis and the recession in the industrialized countries that came in its wake. The more important evolution of strategy had occurred earlier, in 1968, when a programme to encourage offshore banking was begun. Offshore banking thrives because of regulations and limitations that countries place on their domestic banks, making it cheaper for banks to conduct some of their business through branches abroad. Singapore competed for this business by instituting a very

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attractive regulatory and tax regime (Bryant, forthcoming [a] and Bryant, forthcoming [b]). Efforts to upgrade the industrial structure were intensified in 1979 when the National Wages Council recommended large wage increases for a three-year period (Lim 1984; and Pang 1985). The intention was to accelerate the trend towards skill-intensive, technology-intensive, and higher value-added economic activity. In the process, it was recognized that labour-intensive, low valueadded activities would be eased out of business in Singapore. The implications of this policy for the labour market are discussed in Chapter 7. According to the Report of the Economic Committee, the emphasis of the government since 1980 has been on high technology. The attraction of high technology is clear since by definition it represents areas of growth. All countries want growth, and thus the encouragement of high technology has been an essential element of policy for all industrialized countries, old and new alike. High Technology: What Does It Mean? The phrase "high technology" came into popular usage in recognition of the fact that the pace of change of industrial technology was speeding up. In particular, there was a spate of new products coming out of industrial laboratories and there was also a quantum improvement in the nature of industrial processing. Thus, high-technology products were ones whose very natures were being frequently transformed or were being produced by rapidly changing processes. Progress in high technology derives from the close integration of three elements: high-quality scientific skill, bold entrepreneurship, and large amounts of venture capital. The kind of scientific skill required for high technology is more likely found in a university setting, but can also occur in a company or government laboratory. In general, new products are usually the creation of pure scientists, whereas industrial processes are the work of industrial engineers. Success in high technology can occur in both very small and very large firms. New products are often the creation of a single or a small group of scientists who may even form a new research company to exploit an idea. In contrast, new processes can result

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from the application of huge amounts of engineering resources to solve what is often a rather well defined production problem. Thus, large enterprises are usually more successful at this. In industrialized countries (old or new), obtaining capital is rarely a problem for an industry or a country. Domestic savings exist, money can be obtained from abroad, and financial institutions are ready to intermediate between lenders and borrowers. However, venture capital is a different story. While a thousand high technology seeds may be planted, only a very few ever bloom, and the risk deters conventional lenders. Thus, there is a need for a peculiar breed of capitalist who is prepared to wager large amounts on a small probability of a gigantic payoff. A particular characteristic of high technology products is that their shelf life as star performers is rather short, often measured in months rather than years. During the time of star performance, very high profits are earned, and research and development costs can be recovered. Subsequently, however, as many followers copy the innovation, the profit rate is driven down to a normal level. Thus, if timely research is to be done, there is a need for the close integration of the three necessary elements - scientific skill, entrepreneurship, and capital. Four major areas of research are considered the most likely to provide technology breakthroughs for the remainder of the 1980s: micro-electronics, biotechnology, materials technology, and a combination of optics and robotics. Thus, the "cutting edge" of high technology relates to goods, although technology embodied in services is also likely to improve. High Technology in Singapore In a number of countries, including Singapore, "high technology" is often used synonymously with "high value added". While hightechnology products are high value-added goods, the reverse is not true, and the concepts should be kept quite distinct. When comparing the characteristics of high technology with the strengths and weaknesses of Singapore, it would appear that Singapore does not have a comparative advantage in high technology. The fact that only 0.6% of GDP is devoted to research and development (R&D) in Singapore - considerably below Taiwan's 1.0% and Korea's 1.2%- is a reflection of the low expected returns on such investment.

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As to the first element for success in the area of high technology, high-quality scientific and technical personnel, it has already been noted that Singapore has not been educating a very large share of its population at the college level or above. Taiwan can claim that it is building a comparative advantage based on the cheap engineer (34% of all students in higher education in Taiwan are studying engineering); but Singapore cannot. Furthermore, universities in Singapore are all government institutions. In several respects, professors are like civil servants. They are assigned administrative jobs by their department chairmen, and they cannot go into business for themselves. Professors at the Massachusetts Institute of Technology in the United States start up new high technology firms; that is not possible in Singapore. Secondly, as mentioned before, high technology entrepreneurs are lacking in Singapore. Singapore's weakness in the area of entrepreneurship is critical. Though some Singaporean firms are improving technology in services, few, if any, are on the cutting-edge of technology associated with goods. Of course, the government can always finance and organize research in government enterprises, and in 1983 the Singapore Technology Corporation (comprising 800 engineers, technicians and executives) was formed through the pooling of resources of six companies in the military field, organized under Sheng-Li Holdings (Low 1984). However, research driven by military needs is quite specialized and has few spillovers into civilian technology, as is well known in the United States. The experience of other countries is that government laboratories are no place to create successful commercial technology. Finally, true private venture capital firms do not exist in Singapore, although this is probably the least important deficiency of the three. If there were exciting new ventures in the wings, capital would likely be raised in Singapore. The deficiencies of Singapore for high technology were apparently well understood by the Economic Committee, and they did not recommend that Singapore attempt to compete at the cutting edge of technology. Rather, the thrust of their recommendations was to encourage the rapid diffusion in Singapore of technology developed elsewhere, and to ensure its application in all industries. Much attention in the Report was given to information technology (IT), although robotics was also mentioned.

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The concept of an information sector of an economy may be useful in understanding the evolution of an economy after it has industrialized (Bell1973). IT covers the use of computer technology, telecommunications, and office systems in all aspects of information flows (National IT Plan Working Committee 1985). What it entails is improving the way income is earned from the production and distribution of information goods and services. It was estimated that already in 1973, 24% of Singapore's GDP was earned by the information sector (Jussawalla and Cheah 1983). Furthermore, in 1980, 34.1% of the labour force was employed in the information sector, about the same as in the advanced industrialized countries other than the United States (Kuo and Chen 1985). Thus, although it is not a new development, if productivity can be raised by improving both the hardware and the software of the information sector, then Singapore will clearly benefit, and it is well worth promoting even though it is not literally high technology.

Singapore's Comparative Advantage As already noted, the current industrial structure of Singapore conforms to its comparative advantage - indeed, it could not be otherwise since Singapore does not have policies that distort product markets, apart from housing. The external environment is changing and is likely to have an impact on Singapore's comparative advantage. For example, rapid changes are occurring in technology, commodity prices have been deteriorating, the exchange rate of the U.S. dollar has been depreciating relative to the Japanese yen, and mainland China has become more outward oriented. These trends suggest possible changes in the future. The Entrep6t Trade

As conventionally measured, Singapore's entrepot trade has become less important since 1965, but the decline has not been monotonic, as shown in Table 3.3. Singapore's reported trade (both re-exports and domestic exports) exclude trade with Indonesia. A "naive" adjustment was made to the reported data by incorporating information available from Indonesian sources. 5 From a share of more than 60% of total exports and approximately 20% of GDP in early

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TABLE 3.3

Singapore's Re-exports

Year

1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Adjusteda Official Re-exports Re-exports {millions of dollars} 1,855 2,924 5,218 6,904 8,438 9,760 12,749 15,647 14,839 15,315 16,949 18,289 17,603

Official Share Adjusted ofGDPc Share ofGDP (per cent} 2o.ob

5,551 7,481 8,975 10,188 12,991 16,404 15,781 17,539 19,638 19,650 18,264

7.5 9.1 10.2 10.7 12.1 12.5 10.2 9.4 9.1 9.0 9.0

8.0 9.9 10.9 11.1 12.4 13.2 10.8 10.7 10.6 9.7 9.4

a Adjusted by "naively" using Indonesian data for imports from Singapore and assuming the ratio between domestic exports and re-exports is similar to overall Singapore exports. b Estimated by]. McClellan and reported by Ow (1984). c Value added estimated at 18o/o of trade values (Lloyd and Sandilands 1986). SouRCES: Department of Statistics, Yearbook of Statistics: Singapore 1985/86, and earlier years; International Monetary Fund, Direction of International Trade, Yearbook 1984, and earlier years; and Straits Times, 5 June 1984.

1965, traditional entrepot exports declined to 35% of total exports and 9% of GDP in 1985. The importance of the entrepot trade to the economy, measured by its contribution to GDP, seems to have hit a nadir in the mid-1970s, increased significantly by 1980, and then declined again, probably in reflection of fluctuating world commodity prices. 6 The standard explanation for the relative decline in Singapore's entrepot trade is both the decline in commodity prices and the desire of neighbouring countries to deal directly with their customers and suppliers. However, two other explanations are possible and probably contributed to the decline. Firstly, commodities as

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a share of the total volume of world trade, have suffered a relative decline. Thus, Singapore may have maintained its competitiveness and still suffer a relative decline as an entrep6t.7 Secondly, Japan now accounts for a much larger share of the world market for commodities, and Japanese users of commodities buy through their own trading companies which insist on direct trading to improve their bargaining power. Singapore's entrepot trade has essentially become one of shipping commodities produced in the region to the industrialized countries, and of distributing intermediate and manufactured goods from the industrialized countries to the region. Indeed, more than half of all re-exports are manufactured goods. As manufactured goods become more sophisticated, they require more after-sales service. Since Singapore is good at providing service, it will have a continuing role to play. Goods trade generates service trade. Despite the relative decline, Singapore has ongoing strengths which should sustain its role as an entrepot. Obviously, its location does not change, and the more the neighbouring countries develop, the more central is its location. As noted by the Economic Committee, Singapore has good trading contacts with both buyers and sellers (Report, Appendix A, 1986). Many buyers are prepared to pay a premium to obtain reliable service, and this improves the welfare of sellers as well. As long as Singapore keeps reasonable control on costs, the business should continue. 1\vo trends suggest that Singapore's entrepot trade will prosper. Firstly, the inseparability of sophisticated goods from sophisticated services suggest that Singapore's comparative advantage in services will help support the entrep6t trade of goods. Secondly, the shifting of materials processing manufacturing away from Japan because of the appreciation of the Japanese yen may lead to a dispersion of this activity to many countries and enhance the role of an entrep6t. The Export Platform

Domestic exports have grown rapidly in recent years and are now much larger than re-exports. Lloyd and Sandilands, with good reason, take issue with the sharp distinction made between this trade and re-exports. They point out the artificiality in the standard definition of entrep6t trade, which includes only minor handling, packaging, and minor processing in Singapore, and domestic exports,

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which involves major transformation of commodity and intermediate inputs, but may still have a relatively small share of domestic value added applied to a huge amount of import content. According to the 1978 input-output table, 73% of the value of domestic exports of manufactured goods was previously imported, and preliminary evidence suggests that the import share had risen to about 75% in 1983 (reflecting the higher price of crude petroleum). By using the 1978 table, Lloyd and Sandilands were able to estimate what they describe as net domestic exports (NDE) - that is, exports after the import content has been excluded. Singapore's domestic exports under various definitions are shown in Table 3.4.

TABLE 3.4 Singapore's Domestic Exports (In S$ millions and per cent)

Year

1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 a b c d e

Reported Net Net Direct Full Adjusted Domestic Domestic Manufacturing Share of Share of Domestica GDPd GDPe Exportsc Exports Exportsb

8,021 10,144 12,393 13,806 19,121 27,053 31,322 33,392 33,839 35,511 33,799

1,149 1,832 7,540 9,362 11,652 13,226 18,200 25,805 29,452 29,158 29,206 33,051 32,576

283 602 1,943 2,563 3,091 3,548 4,906 6,222 6,823 6,675 7,059 8,372 8,186

108 260 1,352 1,891 2,235 2,587 3,548 4,259 4,663 4,568 5,033 5,784 6,240

10.4 11.2 15.5 18.9 20.8 21.5 26.0 27.8 26.0 22.7 21.1 22.9 23.3

14.2 14.4 20.9 25.1 27.9 28.7 34.7 38.2 36.1 31.6 29.0 31.0 31.6

"Naive" adjustment for Indonesian trade. Excluding import content of exports (Lloyd and Sandilands 1986). SITC 5, 6, 78, adjusted as for b. Net domestic exports divided by GOP. Net domestic exports, plus indirect service, estimated at 9% of reported domestic exports, divided by GDP.

Lawrence B. Krause

68

Net domestic exports (after the import content is excluded) amounted to $8,186 million in 1985, or 23.3% of GDP. NDE's contribution to GDP was only 10.4% in 1965, so it has been a major factor promoting rapid growth. The share of NDE in GDP peaked in 1980 at 27.8%, then declined to a low of 21.0% in 1983, before rising to its present value. During the 1985 recession, NDE played a counter-cyclical role, as it did in many advanced countries. Most of the growth in NDE since 1965 has been in manufactures. Table 3.5 shows the distribution of domestic exports by major product group and indicates the importance of the NDE concept. Petroleum appears to be the largest domestic export, with mineral fuels and oil bunkers comprising close to half of the total. When import content is excluded, machinery and equipment becomes the largest category, comprising close to half of the (smaller) total. A more analytic interpretation of Singapore's domestic exports can be obtained by examining factor content (Krause 1982; and Tan 1984). As of 1982, 63.8% of Singapore's domestic exports were

TABLE 3.5 Distribution of Singapore's Domestic Exports and Net Domestic Exports, 1985

Food Beverages & Tobacco Crude Materials Mineral Fuels Animal & Vegetable Oils Chemicals Manufactured Goods (by material) Machinery & Equipment Miscellaneous Manufactures Miscellaneous (Oil bunkers) Total a

Domestic Exports

Net Domestic Exportsa

1.5 0.3 0.6 39.9 1.9 4.9 3.7 31.1 6.8 9.3

2.4 0.6 0.7 15.2 1.6 9.2 6.4 47.5 13.1 3.3

100

100

Excluding import content of exports by estimation.

SouRCE:

Ministry of Trade and Industry, Economic Survey of Singapore, 1985.

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natural resource products, though the share was declining. Clearly, the importance of refined petroleum products and bunkers determined this finding. Only in its trade with the United States and the European Community (EC) did natural resources not dominate Singapore's domestic exports. The second most important classification was technology-intensive goods, which had a rising share and reached 23.6% in 1982. ASEAN, the EC, and the United States were all important markets. Only 8.4% (though rising) of Singapore's domestic exports were human-capital-intensive products, and 7.2% (and falling) were labour-intensive. In both cases, the EC and the United States were important markets. By 1985, the United States had become Singapore's largest overall market for its domestic exports, taking 25% of the total. ASEAN came second, taking over 20% (including an estimate for Indonesian trade). Japan was third with about 12%, and the EC slightly less. Almost 10% of Singapore's domestic exports were to other Asian NICs, indicating that an intra-industry trade pattern might be developing. China bought only about 1%, which suggests that while it may be a market in the future, there is very little business there at present. In manufacturing, exporting is dominated by foreign-owned firms. Wholly foreign-owned firms conduct 65% of all direct exports and foreign-controlled firms (that is, those with more than 50% foreign equity) accounted for another 16% in 1984 (Department of Statistics, 1985). Purely domestic firms only provided 11% of direct exports. The important firms in the critical machinery and equipment sector are foreign, and they produce mainly for export - thus, Singapore is properly described as an export platform for MNCs. Singapore's growth, especially before 1982, has been particularly dependent on this activity. In the future it is likely to be less important. The reason for this is that Singapore, as a result of past growth, is beginning to take on some of the characteristics of a rich country. Its production and consumption are increasingly of services, and wages are relatively high. This does not mean that MNCs will find Singapore unattractive. On the contrary, all of Singapore's noted strengths are important to MNCs. Indeed, they are very likely to expand production of high value-added products that can afford Singapore's relatively high wages. Thus, the trend towards more technology-intensive

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and human-capital-intensive exports is likely to continue. Much of the trade is likely to be intra-firm transfers. Singapore has no forced joint venture regulations, which means MNCs can locate in Singapore for export elsewhere without sharing profits, technology, or control with other firms. This is most important if the export is a critical input to the MNC in its home market. Nevertheless, the absence of a domestic market and the inability to recruit large numbers of workers, along with the higher wages, means that MNCs in Singapore are likely to produce only those products in which large scale is not demanded. Some changes are likely to occur in the composition of the MNCs operating in Singapore. Japanese firms over time are likely to become much more important, as they seek to escape their high cost base at home. It is already apparent that Japanese MNCs have taken new interest in locating in Singapore. Driven by the same factor - that is, the yen appreciating relative to the U.S. dollar American firms are likely to be less aggressive in sourcing abroad as domestic production becomes more competitive.

The Petroleum Centre The collapse of crude oil prices has caused an implosion of world petroleum activity, with significant negative consequences for Singapore, as noted in Chapter 1. The share of GDP arising from petroleum refineries and products peaked in 1981 at 6.5%, and dropped to 2.6% in 1984. If one could isolate the other dimensions of the petroleum centre, such as the building of rigs and the provisioning of offshore platforms, then the contribution of the petroleum centre to GDP would be seen to be larger, but the decline would be even sharper. The petroleum industry was quite volatile even before 1973, so it would not be surprising if another change occurred before long. However, even the current situation, particularly the refining business, is not all that unhappy for Singapore. High petroleum prices used to mean small growth of volume, as importing countries sought alternative energy sources and conserved on their use of petroleum. In time, low petroleum prices will turn those efforts around, especially since nuclear energy has become suspect after the Chernobyl nuclear plant disaster in the USSR. Meanwhile, investments in new so-called greenfield

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petroleum refineries will appear less necessary, as countries will be less pressed to save foreign exchange in energy, which may mean less competition in the future (or at least less than would otherwise have occurred). What matters in the refining of petroleum is volume and the margin between crude inputs and product outputs. Lower crude prices help volume and leave margins uncertain (when measured in absolute amounts, not as a percentage of the product price). To be sure, past investments in neighbouring countries have reduced the current market for contract refining, but with the expected rise in volume and a new market developing in mainland China, that may be only temporary. The fact that past investments permit Singapore's refineries to accept a wide variety of crudes adds the kind of flexibility that is the hallmark of the entire economy. Of course, it may be some time before the exploration business picks up again. In the interim, the government has mounted an effort to promote petroleum trading, both of the paper and the real variety. Trading thrives in a volatile market.

International Business Service and Tourist Centre The Economic Committee recognized that Singapore is rapidly developing as an international business service centre. According to its estimates, this sector has grown by 14% per annum in recent years, making it a leading growth sector of the economy (Report of the Economic Committee, 1986, Chapter 15). The export of business services, including tourism and banking, may have contributed 30% to GDP in 1985. 8 However, ship-repairing and services to the oil business declined in both 1984 and 1985, possibly bringing a halt to overall growth. The pause is likely to be temporary, as those factors that business services require are the real strengths of Singapore. Business services are a classic footloose industry, since they require few firm-specific fixed assets. The essential ingredients of success are the skill of the people involved, and the fact that people can move. A successful business centre must also have excellent communications, transportation, and office and residential accommodations - thus, the attraction of Singapore. Furthermore, it must be located reasonably close to where other business is taking place. (Proximity is an ambiguous variable since it relates primarily to

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time zones, though for some services, place does matter.) The rapid growth of the Pacific Basin is certainly encouraging for Singapore. It should be noted that Tokyo is a major competitor of Singapore as a business service centre in Asia, but Tokyo has some real disadvantages. Operating costs are particularly high, within city travel is difficult because of congestion, and the airport is located at a considerable distance from the business district. International trade in business services is growing because many multinational firms prefer to deal with specialized service vendors rather than to maintain in-house capabilities. Most business services have become so sophisticated that highly specialized skills are required. MNCs either develop the skills themselves, and try to capitalize on their investment by selling services to other firms, or they buy them from an independent vendor. Because this requires a great deal of trust (for instance, in the transmission of confidential data), firms prefer to deal with the same vendor for all locations. This has spurred the international trade of services. Large service vendors tend to have offices in several strategically located countries; Singapore is a natural spot in Asia. The Economic Committee identified the exhibition business and regional operating headquarters as fields that Singapore should try to promote. They also suggested that Singapore become a centre for computer software development, but that is more problematical unless patent, copyright, and trademark laws, as well as their implementation, are improved. Singapore cannot be both a centre of software development and a centre for software pirating. It is Singapore's location and facilities rather than its natural attractions that make it a tourist centre. Thus, the tourist business will thrive only as an adjunct to other services and the success of Singapore's neighbours in attracting tourists from afar. The degree to which the indigenous GDP of Singapore is increased through the development of international business services depends on whether Singaporeans are hired, or whether, as has tended to be the case, most skilled employees continue to be expatriates. If Singapore wants greater indigenous return from this industry, it will have to make the investment in education, and permit these better educated people to enter the private sector. Because of the confidentiality factor, MNCs will be reluctant to buy services from a government vendor.

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International Financial Centre As noted earlier, international banking has been developing in Singapore since 1968. By the end of the 1970s, Singapore had approximately 100 banks operating in the external currency market. It should be remembered that financial services include things other than traditional banking, and that the banking business itself is changing (Bryant, forthcoming [a] and [b]; and Giddy, forthcoming). Essentially four financial services have developed in Singapore: deposit taking and lending, money management, foreign exchange trading and management, and treasury risk management. 1\vo forces are producing change in international banking. Firstly, many countries are deregulating their domestic banking, thus undermining the basic advantage of offshore banking. Secondly, corporations and other institutional borrowers are relying less on bank borrowing, even for short-term needs, and instead are borrowing directly from investors by issuing their own liabilities, such as commercial paper. Thus, the short-term capital market is coming to resemble the long-term market. This means that traditional offshore deposit taking and commercial lending are being undermined. International banking as a whole is also being impacted by the problems resulting from previous lending to certain developing countries, though in the past Singapore was not directly involved in much of this lending. Though not the only participants, commercial banks get involved in the new forms of lending (the so-called securitization of lending), but the activity and the risks involved are also new. They may provide advice to borrowers and lenders, finance the underwriting process, provide guarantees, actively trade the securities for their own account, and act as brokers for others. Some of this business is service-for-fee, which is rather new to banking. The major competitors to Singapore for the international financial business of the western Pacific are Hong Kong, to a small degree Sydney, and increasingly Tokyo. Eventually, mainland China's control over Hong Kong, due in 1997, will hurt Hong Kong, but that time has not yet arrived. In the meantime, Hong Kong is very competitive because of its near absence of regulation and control. The existing competition between Hong Kong and Singapore for the banking business has been studied at some length, and will not occupy us further (Bryant, forthcoming [a]).

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A major undecided issue with bearing on the competitiveness question is how important prudential regulation will be in the new short-term securitization business. To the degree that investors value prudential regulation, Singapore will have an edge over Hong Kong. If they do not value a stamp of approval for prudence, then Hong Kong will benefit. It may take a major bankruptcy or irregularity for investors to make up their minds on this issue. In the future, the more serious competition for both Singapore and Hong Kong will come from Tokyo. Japan is in the midst of deregulating its financial business, thereby improving the international competitiveness of its institutions. While this will certainly help, the overwhelming strength of Tokyo comes from the existence of a huge pool of savings in Japan, which financial institutions, with government encouragement, are willing to invest abroad. This factor is so important that Tokyo is unlikely to be rivalled in the long-term capital market. In the short-term market, other banking centres can compete - but only by finding niches and trading on thin advantages. Most likely, Singapore will continue to grow as an international financial centre, but it will not be easy. Japan will maintain some financial regulation and control, giving Singapore room to compete. Moreover, Singapore's trading skills and ability to evaluate risk will no doubt sustain its business. The government, however, must be sure that its tax laws and regulations still permit the firms to earn some profit.

Conclusions: The Danger of Protectionism The structure of production in the major industries in Singapore has not changed very much during the last twenty years, as pointed out by Lee Soo Ann (1984). Manufacturing expanded and then declined. Construction rose, and is now declining. Services formed a very large part of the economy, went through a period of relative decline, and are on the rise again. The qualitative improvement within each sector, however, is striking and that improvement is likely to continue. Continuity also means that Singapore will continue to be dependent on external forces for a major share of its stimulus to

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growth. Singapore's outward oriented strategy was well designed and executed, but progress was possible in part because the international environment was permissive. In the future, that environment may be compromised by protectionism. Protectionism may be becoming systemic in the world economy. It is significant that it is in the most open major market, the United States, that protectionism is most threatening. Of course, the threat of protectionism arose because of the over-valued U.S. dollar and the huge loss of competitiveness that it caused. Unfortunately, the process of correcting the over-valued dollar may cure protectionism in the United States, only to have it appear in other countries as they lose competitiveness when their currencies appreciate. Meanwhile, the world economy is dependent on Japan to sustain the liberal trade regime. The economic strength of Japan, widely attributed to its combination of export-led growth and strict control on access to its domestic market, has undermined faith in the liberal dictum that a country will maximize its welfare through laissez (aire policies. Protectionism is the natural product of a retreat from liberalism. At the minimum, countries will demand reciprocity from their trading partners, and restrict trade if they don't get it. At the first sign that a country is following the route of Japan, many countries are likely to place especially heavy demands upon it for market access. It is for this reason that world attention has been focused on the Asian NICs as possible followers of Japan. The best hope for sustaining the open world trading system is the new round of trade negotiations starting under the auspices of the General Agreement on Tariffs and Trade (GATT). These talks will be long and difficult. There are many areas that have defied negotiators in the past - such as liberalizing agriculture and textiles, and protecting intellectual property rights- for which progress will be demanded. Other market distortions, such as the General System of Preferences (GSP), might also come under attack. This last issue is one of importance to Singapore, but must be seen in the overall context of the negotiations. It may well be that the world will make significant progress towards a more open, less distorted international system, or slip backwards towards trade restrictions at an accelerating pace. There is no question which of the two is in Singapore's interest.

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NOTES 1. The phrase "global city" is taken from Lee Soo Ann (1984). 2. The calculations were extended to 1985 by assuming that the input-output table for 1978 was still appropriate and that no change had occurred in the trade structure within one digit SITC categories of Singapore's exports between 1982 and 1985. 3. Some friendships formed at university transcend national borders, particularly between Singapore and Malaysia. However, these ties may weaken in the future, now that each country is educating its own university students. 4. The author is indebted to Lee Soo Ann for bringing this point to his attention. 5. Indonesia reports its bilateral trade with Singapore. The reliability of that data is suspect, however, because it shows continuous Indonesian surpluses which suggests inadequate coverage of imports. Nevertheless, the data may correctly indicate trends. The division between Singapore re-exports and domestic exports was made by assuming that this trade was similar to overall Singaporean trends. 6. GDP at current factor costs is used in this chapter, although a fixed price concept would be preferable. Unfortunately, price deflators for most variables are not available. 7. No effort was made to quantify this effect because it would rely too heavily on estimated trade between Singapore and Indonesia. 8. The estimate is made by taking the figure for the export of services from the balance of payments (excluding investment income) and applying to it the net export content ratio from the input-output table (.7550). The resulting figure may be attributing some influence to services that more appropriately belongs to goods, since net trade with Indonesia must appear somewhere in the accounts.

REFERENCES Bell, Daniel. The Coming of the Post-Industrial Society. 1973. Bryant, Ralph C. International Banking in Singapore and Hong Kong. The Brookings Institution, forthcoming, a. ___ . "The Evolution of Singapore as a Financial Center". In Singapore: The Management of Success, edited by K.S. Sandhu and Paul Wheatley. Institute of Southeast Asian Studies, forthcoming, b. Department of Statistics. Report on the Census of Industrial Production, 1984. 1985. Giddy, Ian H. Singapore as an International Capital Market Centre. (Forthcoming). Jussawalla, Meheroo, and Cheah Chee-Wah. "Towards An Information Economy; the Case of Singapore". In Information Economics and Policy. 1983. Krause, Lawrence B. US. Economic Policy toward the Association of Southeast Asian Nations. The Brookings Institution, 1982. Kuo, Eddie C.Y., and Huey-tsyh Chen. Towards an Information Society: Changing Occupational Structure in Singapore. 1985. Lee Sheng Yi. "Business Elites in Singapore". In Studies in ASEAN Sociology, edited by Peter S.J. Chen and Hans-Dieter Evers. 1978.

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Lee Soo Ann. "Patterns of Economic Structure in Singapore". In Singapore: '!WentyFive Years of Development, edited by You Poh Seng and Lim Chong-Yah. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984. Lim Chong-Yah. Economic Restructuring in Singapore. Singapore: Federal Publications, 1984. Lloyd, Peter J., and Roger J. Sandilands. "The Trade Sector in a Very Open ReExport Economy". In Singapore Resources and Growth, edited by Lim C.Y. and P.J. Lloyd. Singapore: Oxford University Press, 1986. Low, Linda. "Public Enterprises in Singapore". In Singapore: '!Wenty-Five Years of Development, edited by You and Lim. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984. National IT Plan Working Committee. National IT Plan: A Strategic Framework. 1985. Ow Chin Hock. "Conclusion: Singapore Past, Present and Future". In Singapore: '!Wenty-Five Years of Development, edited by You and Lim. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984. Pang Eng Fong. "Labour Market Changes and Industrialization". ASEAN-Australia Economic Papers, No. 22. Kuala Lumpur and Canberra: ASEAN-Australian Joint Research Project, 1985. Report of the Economic Committee. The Singapore Economy: New Directions. 1986. Report of the Economic Committee. Report on the Subcommittee on International Trade. 13 January 1986, Appendix A. Tan, Augustine H.H. "Changing Patterns of Singapore's Foreign Trade and Investment Since 1960". In Singapore: '!Wenty-Five Years of Development, edited by You and Lim. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984. Tan, Augustine H.H., and Ow Chin Hock. "Singapore". In Development Strategies in Semi-Industrial Economies, edited by Bela Balassa et a!. Baltimore: Johns Hopkins University Press, 1982.

chapter four

Saving, Investment and Entrepreneurship KOH Ai Tee

ingapore has often been described as a high-savings, highinvestment society. As a country with the highest savings rate in the world, a natural question that arises relates to what is the optimum savings rate that is compatible with its development strategy, and has Singapore surpassed it? Behind this high savings scenario is the issue of forced private saving which has taken up an increasing share of private-sector saving. Can forced savings be a sustainable feature for the future? Until the recent liberalization in the use of CPF (Central Provident Fund) funds, much of privatesector savings were either channelled into housing or shipped abroad for investment in foreign assets. How should one characterize the merits and demerits of this pattern of fund utilization? Is the efficiency of fund utilization somehow improved with the liberalization of the CPF? 1 What are the costs and benefits of investing Singapore's assets abroad? While Singapore may be a high-savings, high-investment society, it is not generally noted to be a society characterized by a bountiful supply of private local entrepreneurs, quite unlike one's impression of Hong Kong or South Korea, for example. If anything, the general impression of Singapore is that of a society characterized by two features: firstly, domination by foreign entrepreneurs, often credited for the transformation of the economy from that of an entrep6t outpost to a manufacturing centre, and secondly, pervasive presence of government in economic activities. Given this, some important questions need to be asked. Are private local entrepreneurs being "crowded out" by foreigners? Should they be encouraged and if so, how? Is there a case for the infant industry

S

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79

argument in the strive to help develop indigenous entrepreneurship? To what extent should Singapore continue to rely on foreign investment? What would the cost-benefit score-sheet of continued dependence look like and how can this ratio be minimized? What is the effect on local business of government encroachment into economic activities? In adopting the above agenda, no attempt is made to relate the subject of saving to that of entrepreneurship. 2 While recognizing fundability to be an important factor in entrepreneurship development, it is felt that there are more fundamental forces at work that may help explain the entrepreneurship profile of Singapore and that these should take precedence over availability of capital funds in examining entrepreneurship development in Singapore. As a result, the chapter is dichotomized (somewhat intentionally) into two sections, one touching on savings and investment, and the other on entrepreneurship. The subsequent discussions are organized as follows. The next section sets out some stylized facts on the savings and investment scene in Singapore to provide background material for subsequent discussions. Following that, some policy issues concerning Singaporeans' saving behaviour as well as entrepreneurship development are examined with the objective of arriving at answers to the questions raised above. The overall discussions are then summarized in a concluding section.

Some Stylized Facts and their Implications 3 The savings-investment scene in Singapore exhibits the following: 1. A rising trend in the savings and investment ratio (GNS/GDP and GDCF/GDP respectively) over the last two decades. Starting at 16% in 1966, the savings ratio more than doubled to 42% by 1985. The rise in the investment ratio is equally dramatic, starting at 22% in 1966 and was 43% in 1985 (Table 4.1). Without suggesting directional causation, Singapore's high savings/investment rate must be one of the prime reasons behind its successful growth record over the past two decades. Although higher savings help to spur growth, ceteris paribus, does the desire for further growth imply the need to adopt ever higher savings rate over time? Although economic growth is important, it is equally

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TABLE 4.1

Selected Indicators of Saving and Investment in Singapore, 1966-85

Year

Investment Ratio {GDCFIGDPJ

Savings Ratio {GNSIGDPJ

1966 1967

21.9 22.2

16.3

74.0 73.5

1968 1969

24.9

20.1 19.4

80.5 67.7

19.5 18.4 24.1 26.7

50.3 45.7 58.5 68.1 55.5 73.5 76.0 87.2 84.6 81.3

44.5 26.5 24.0 12.8 15.4 30.5 22.8

25.9

16.2

GNSIGDCF

1970 1971 1972 1973

28.6 38.7 40.2 41.1 39.2

1974 1975 1976 1977 1978 1979

44.6 39.2 40.1 35.2 37.6 41.8

24.7 28.8 30.5 30.7 31.8

1980 1981 1982 1983 1984 1985*

45.3 44.8 45.0 45.6 45.7 42.9

31.5 34.6 36.2 39.6 41.2 41.5

69.5 77.2 80.5 89.8 91.9 96.6

Average 1966-85

38.2

28.3

74.1

34.0

Net Capital Inflow!GDCF {per cent} 26.0 26.5 19.5 32.3 49.7 54.3 41.5 31.9

18.7

19.5 10.2 8.1 3.4

* preliminary SouRCE: Department of Statistics, Economics and Social Statistics of Singapore, 1960-82

(Singapore National Printers, 1983); Yearbook of Statistics, various years; and Ministry of Trade and Industry, Economic Survey of Singapore, 1985 (Singapore National Printers).

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important to ask what is growth for. If it is for future consumption, at what point does Singapore start consuming, and reduce (or hold constant) its savings rate? Intimately related to the above question is the issue of what is the optimal savings rate for Singapore, and whether Singapore has exceeded it. This question is addressed in a subsequent section. The larger part of gross domestic capital formation (GDCF), 2. averaging some 75% in the last twenty years, can in principle be domestically financed from gross national savings (GNS). External finance (net capital inflow) constitutes the remaining one quarter (Table 4.1). In practice, however, although Singapore is generating more gross national savings over the years, much of these savings are invested abroad by both the public and the private sectors, and are not invested domestically. This suggests that the gross inflows of foreign investments are much more important than the figures would indicate on an aggregate basis. As will be shown later, public sector savings have taken an increasing share of gross national savings over time, a significant portion of which are invested overseas by the Government of Singapore Investment Corporation (GIC). This raises the question of what is the trade-off between investing Singapore's savings abroad in foreign assets vis-a-vis investing them locally. Could it really be true that the rate of return is significantly higher abroad than at home (the current recession aside)? If the rate of return from investing abroad is not much different from investing locally (after adjusting for currency fluctuations and so forth), would not the same rate of return when the amount is invested in Singapore provide longer term benefits to Singapore, such as development of local entrepreneurship? If the foreign-local differential is not very significant, it may help the local economy if some of these savings are brought home for investment in Singapore. One possible scenario we have in mind is for the public sector to reduce its savings through further reduction in statutory board surpluses. 4 More profits would then accrue to the private sector, some of which would be saved and invested in the domestic economy. This implies that more saving and investing would be done within enterprises or through the private financial system, which is likely to improve the intermediation process. Of course, there will always be the risk that local entrepreneurs may not at times be good predictors of what the right industrial opportunities are. However, giving

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local entrepreneurs greater opportunities to make mistakes will in time reduce the frequency of such mistakes after the initial learning period. From a financial standpoint, releasing more funds into private hands and allowing private entrepreneurs to do more of the investing could serve to diversify the overall investment risks facing Singapore. This strategy makes sense in a world in which uncertainty may not diminish but may even be increasing, and could well be an improvement over the present system in which a heavy burden is placed on the GIC to do the investing. Additionally, if efficiency in fund management is an important criterion, a proper study of the relative efficiency of the government vis-a-vis the private sector in this area is crucial in deciding on the optimal mix of funds to be managed by the public vis-a-vis the private sector. 3. The investment picture is dominated by the private sector (consisting of both locals and foreigners) (Table 4.2), which accounts for the major part of gross domestic capital formation (69o/o in 1985) compared to the public sector (31 %). Generally, over the last twelve years, three quarters of Singapore's gross fixed capital formation was carried out by the private sector. The public sector accounts for a mere one quarter of capital formation. 4. Although the public sector assumes only one quarter of total investment carried out over the last twelve years, it commands a disproportionately high share of total savings (46% of gross national savings and 42% of gross domestic savings) over the same period (Table 4.3). This implies that the private sector has on average been facing a positive resource gap during this period. The year-to-year changes show that while the public sector share of investment has risen over time (being 18% in 1974 and almost doubling to 31% in 1985), its share of savings has escalated at an even faster rate during the same period. For instance, the public-sector share nearly tripled from 24% to 69%, while its share of gross domestic savings more than tripled from 21% to 70%. This rising public-sector surplus over time in turn mirrors the rising resource gap faced by the private sector over the same period. What the above implies is that the government has had to play an intermediary role between savers and investors. This intermediation role is unique among countries in the world and deserves careful study. In particular, if the intermediation process carried out by the government is as efficient as that done by the financial market and private enterprises, then allocative efficiency is ensured.

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TABLE 4.2

Gross Domestic Capital Formation by Private and Public Sectors at 1968 Market Prices, 1960-85

Year

Gross Domestic Fixed Capital Formation ($mil}

Public Sector

Private Sector

1960 1965 1970

219.9 639.5 1,712.0

29.8 31.0 19.2

70.2 69.0 80.8

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985*

2,953.8 2,902.2 2,908.6 2,945.8 3,270.5 3,601.2 4,289.0 5,204.0 6,415.8 6,963.6 7,575.1 6,588.5

18.4 23.5 29.3 30.3 29.4 21.6 21.9 21.0 24.3 27.5 27.6 30.7

81.6 76.5 70.7 69.7 70.6 78.4 78.1 79.0 75.5 72.5 72.4 69.3

25.5

74.5

Average 1974-85

Percentage Shares of

* preliminary SouRcE: Wong (1986), Table 3.3; Department of Statistics, Yearbook of Statistics, various years; and Ministry of Trade and Industry, Economic Survey of Singapore, various years.

Otherwise, it may impose welfare costs on the economy. 5. The CPF has taken up an increasing share of private-sector saving, rising from 27o/o in 1974 to well over 80o/o in 1985 (Table 4.3). If we treat 1985 as an "abnormal" year (because of the recession), the CPF share of private savings would still have doubled from being 23o/o of total private (local plus foreign) savings to 45o/o in 1984. 5 The rising share of private-sector savings taking the form

TABLE 4.3 Savings by Public and Private Sectors, 1974-85 (In S$millions)

Year

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985*

GNS

3102 3851 4441 4904 5649 6946 7642 9906 11508 14020 17645 15954

GDS

3548 3820 4644 5200 5780 7102 8880 11576 13750 16282 18267 15771

Private-sector Saving

CPF

Publicsector Savinga

Localb {1)

Local + Foreignc

S$m

{2}

{3}

736 1362 1470 2021 2230 2801 3407 4261 5936 8649 11291 11052

2366 2489 2971 2883 3419 4146 4235 5645 5572 5371 6354 4902

2812 2458 3174 3179 3550 4301 5473 7315 7814 7633 6976 4719

643 821 831 888 1027 1534 2036 2599 3506 3849 3166 4159

{3} 1{1}

{3}1{2}

{per cent}

Share of Publicsector Saving in GNS GDS {per cent}

27.2 33.0 28.0 30.8 30.0 37.0 48.1 46.0 62.9 71.7 49.8 84.8

22.9 33.4 26.2 27.9 28.9 35.7 37.2 35.5 44.9 50.4 45.4 88.1

23.7 35.4 33.1 41.2 39.5 40.3 44.6 43.0 51.6 61.7 64.0 69.3

20.7 35.7 31.7 38.9 38.6 39.4 38.4 36.8 43.2 53.1 61.8 70.1

45.8

39.7

45.6

42.4

Average

1974-85 * a b c

preliminary. current surplus in consolidated accounts of the public sector (government plus statutory boardsj. GNS minus Public-sector Saving GDS minus Public-sector Saving.

SOL:RCE: Department of Statistics, Yearbook of Statistics, various years; and Ministry of Trade and Industry, Economic Survey of Singapore, various years.

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of forced savings has certain implications for investment and consumption patterns in Singapore, and hence on allocative efficiency. This issue will be examined later.

Singapore, an Over-Saver? Since Singapore has the highest savings rate in the world, it is tempting to conclude that it has "over-saved" relative to some optimum. 6 If it over-saves (adopts a savings rate higher than the optimal rate), it unnecessarily restricts its consumption today for higher consumption tomorrow 7 and as a result total lifetime utility is below the level that would prevail if the savings rate had been adjusted downward to the optimal rate. Thus, over-saving entails inefficiency in allocating consumption inter-temporally and reduces savers' lifetime welfare. The under-saver, on the other hand, consumes "too much" today with less left over for tomorrow. His lifetime welfare would also be below the level that would obtain had he adjusted his savings rate upward to the optimal rate. It is not easy to determine whether Singaporeans are oversavers on average. This requires finding out what is the average Singaporean's optimal savings rate, which in turn requires knowing what factors contribute to his "feelings of well-being". Several factors can contribute to this feeling, such as assurances of having enough reserves to cope with future uncertainties, of owning a house in old age, of continued high growth, and so forth. If these desires receive higher weight in Singaporeans' welfare function than, for example, the welfare function of residents of other countries in the world, then the optimal savings rate for Singapore would be the highest in the world and this would entail no distortion in the inter-temporal consumption behaviour of Singaporeans at all. While it is easy to find out what factors contribute to Singaporeans' feeling of well-being, such factors are not easily quantifiable. This means that it is not easy to determine the optimal savings rate for Singaporeans and to check if Singaporeans have over-saved relative to this optimum. A more indirect but deterministic way of deciding whether Singapore has over-saved is to look at the problem from both a macro and a micro point of view. 8 From a macro standpoint, one evidence of over-saving is the existence of a significant amount

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of excess capacity over the last few years. 9 This excess capacity implies there is less need for Singapore to invest as much as it has done over the last few years, and hence from the standpoint of the adequacy of savings, the need to save as much as it has done is less. Thus, there is a strong presumption that Singapore has over-saved. From a micro point of view, one may also conclude that Singapore has over-saved. Here, one can only make some definitive statements about one type of savings, that is, the forced CPF savings. An important study on this subject, namely, the CPF study group report of the National University of Singapore (Lim Chong Yah et al. 1986) suggests that after provisions have been made for housing, for life annuity, and for Medisave, the 50% rate of contributions which Singapore was on until recently, was quite in excess of the needs of an average worker in Singapore. The present 35% is much closer to the optimum rate of 36-39% {depending on the assumptions made), thus implying that during the period when Singapore was on the 50% rate, it had over-saved.

Allocative Efficiency A somewhat easier question to ask is to what extent has forced savings (CPF) distorted private consumption behaviour? The findings of Choon and Veall (1985) and Datta and Shome (1981) show that the CPF does not distort private consumption behaviour. The reasons given were the following. Firstly, the CPF is fully funded. Secondly, it is not redistributive: each individual's benefits equal the accumulated value (with interest) of his or her contributions. Thirdly, individuals may withdraw most of their CPF savings before retirement for the purchase of homes. The upshot of the above is that if individuals consume out of lifetime wealth, then the introduction of the CPF does not change the present value of that wealth, and hence has no effect on consumption. On the other hand, if individuals consume out of current disposable income, an increase in the CPF reduces this income and would serve to reduce individuals' consumption below what it would be in the absence of CPF. Whether individuals consume out of current disposable income or out of lifetime wealth is an empirical question and one that should be examined at the micro level. As such, given the macro

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nature of Choon and Veall's and Datta and Shame's studies, their results should be treated as tentative. Another related question is the following. Given Singapore's savings rate, have savings been efficiently allocated among various forms of investment? The recent experience of over-investment in housing, which was recognized by the Economic Committee, suggests it is not. The impact of under-investment in machinery and equipment over the last few years will translate into lower future output. The recent liberalization of the CPF in terms of the ability to invest in a wider (but still limited) basket of assets would appear to reduce the danger of over-investment in a particular asset. But whether this objective will be achieved is essentially an empirical question and the returns have yet to come in. Another issue concerns allocative efficiency in consumption. While our high savings rate need not distort consumption patterns over different time periods (note the above suggestion to treat this result as tentative), it may distort the composition of consumption within a given period. Household consumption is particularly distorted in favour of housing and against consumption of other goods and services such as financing children's education, holidaying abroad, and so forth. The income elasticity of certain categories of consumption (such as holidaying abroad) may well exceed that of housing for many Singaporeans. As Singaporeans become more affluent, demand for certain categories of non-housing consumption is likely to increase. There are likely to be pressures from more affluent Singaporeans to liberalize the use of the CPF for consumption purposes.

The Entrepreneur Defined Before we attempt to address the entrepreneurship issue, it is important to recognize two things. Firstly, considerable diversity exists in the definition of the term "entrepreneur" and in the economic and sociological theories on determinants of entrepreneurship.10 Secondly, economic theory and empirical evidence have yet to establish a precise linkage between entrepreneurship and development.11 The definitional problem is important particularly in studying entrepreneurship supply and identifying the relevant target groups to whom assistance can be given to enhance entrepreneurial

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quality. The presence of competing theories on what determines entrepreneurial qualities - that is, why Country A is more endowed with entrepreneurs than Country B-and the difficulty in testing them imply the need for extreme caution when making crosscountry comparisons and when suggesting remedial action. The broadest definition of "entrepreneur" seems to come from Higgins (1968) who defines him as one who sees investment and production opportunities, organizes an enterprise to undertake a new production process, raises capital, hires labour, arranges for the supply of raw materials, finds a site and combines these factors of production into a going concern, introduces new techniques and commodities, discovers new sources of natural resources, and selects top managers for day-to-day operations. Implicit in the above is that of one who is an innovator (who identities a new production process, new products, new inputs, and so forth) and an organizer (when he "combines these factors of production into a going concern" and "selects top managers for day-to-day operations"). It is not clear whether he uses his own capital and hence is also a risk-bearer. Other definitions have emphasized one or more of the above three functions. The Schumpeterian entrepreneur (Schumpeter 1934), for instance, is definitely and exclusively an innovator, defined as one who sees and seizes the opportunities for introducing a new technique or new commodity, an improved organization or for the development of newly discovered resources. He need not be a capitalist as he may not provide any funds of his own, neither is he a day-to-day manager. He is thus a creative person who brings about growth through changes in the production functions. Kihlstrom and Laffont (1979) leaves out the innovation part and focuses on the entrepreneur as a risk-bearer and managercum-organizer. Innovation and risk-bearing are, however, important for Yoshihara (1984). The entrepreneur, defined as a risk-bearer, is also followed by Knight (1921), Kanbur (1979, 1981) and Grossman (1984). Is the Singapore entrepreneur a risk-bearer or organizer/manager or innovator, or a combination of any two or all of these characteristics? Following the Yoshihara definition implies excluding the government as an entrepreneur since "the managers of state enterprises may innovate but they do not risk their own capital" (Yoshihara 1984).12 The Schumpeterian definition is fairly strict and would imply exclusion from our discussion of a sizeable portion

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of local, foreign and/or government business to the extent that they may not be "innovators" in the Schumpeterian sense. The problem of differing definitions is not easily resolvable. However, given the agenda of this paper, which focuses on an examination of the interactions between foreign, local private and government business enterprises, it seems more useful to adopt the broad definition (innovator and/or manager and/or risk-bearer), bearing in mind the above-mentioned difficulties.

Why Develop Indigenous Entrepreneurs? What is the rationale for encouraging development of local entrepreneurs? This question needs to be asked simply because it has been taken too much for granted that such encouragement is desirable. Why it is desirable is often not explicitly made clear. Such desirability was assumed in the report by the Subcommittee on Entrepreneurship Development, which was devoted mainly to examining problems faced by local entrepreneurs and suggesting remedies. A frequent argument in favour of encouraging local entrepreneurship is based on the desire to reduce "excessive" dependence on foreigners as the source of one's livelihood. Quite apart from the problem of defining "excessive", it is often felt that the average local entrepreneur is more "committed" to the economy, less footloose and show greater stability in his investment pattern than the average foreign investor who may be here today, and gone tomorrow. Hence, for the sake of stability and continuity, developing a local entrepreneurship capability is to be encouraged. Appealing as it may be, this argument does not stand up to empirical scrutiny. Past investment commitments by locals in the manufacturing sector have exhibited greater variability than foreign investment.l 3 It may be argued that the higher variability of local investment is a result of small size and related problems and that as local investors get bigger and more established, such variability would decrease. This argument is also not convincing. A bigger and more established local firm of similar size and producing the same product as an MNC is going to have to behave not very differently from the MNC as it will be subject to more or less the same competitive forces in world markets in terms of marketing, technology, variations in

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input prices, and so forth. Thus, a strong case for encouraging local investment based on alleged relative superiority in terms of providing stability and continuity has yet to be made. In fact, continuity and succession is a serious problem facing many local Chinese firms because of the Chinese tradition of keeping business within the family (see discussion on "The Chinese connection" in Chapter 2). Yet another indicator that has been used to measure "commitment" is to compare the relative tendency of local investors (vis-a-vis foreign ones) to pull out funds and invest them abroad during hard times. Not infrequently, this has been taken to be a sign of lack of patriotism. Unfortunately, this is difficult to document because of non-availability of data. However, there is no strong a priori reason to assume that local investors, simply because they have family ties here, would be more hesitant to relocate abroad vis-a-vis foreigners if economic circumstances warrant such action. It is not even clear that the action of pulling out funds from Singapore and investing them abroad during difficult times reflect lack of commitment. This relocation could well be an economically rational move in accordance with changing dynamic comparative advantage. Income earned by such investors abroad constitute Singapore's GNP. Whether such income is repatriated home depends very much on the tax and other regimes affecting the desirability of sending money home, as well as investment opportunities available at home. Perhaps a more convincing reason to encourage local entrepreneurship would be one that is based on the political objective that growth should be for Singaporeans. If so, then a stronger case can be made for encouraging local entrepreneurship, subject to certain qualifications. If the growth objective is narrowly defined to be that of increasing GNP rather than GDP, then, to the extent that local entrepreneurs' income go into GNP while foreigners' income do not, encouragement of such entrepreneurship would, other things being equal, enhance GNP. "Other things being equal" requires assuming that domestic firms have similar capability as foreign firms in terms of employment generation, export capability, managerial and technological know-how and related considerations. The latter assumption amounts to assuming that foreign and local entrepreneurs are perfect substitutes apart from their nationality and that a change in entrepreneurship composition in favour of greater weight being given to local entrepreneurs would essentially

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substitute foreign entrepreneurs' income with domestic entrepreneurs' income, thus increasing GNP. Such an assumption is unrealistic at this juncture in Singapore's development. Under present conditions in which domestic entrepreneurial capability has yet some way to go in terms of catching up with entrepreneurship skills, any premature policy to replace MNCs with locals is more likely to decrease than raise GNP. This is not to dismiss local entrepreneurship development as a viable long-run objective. If the process of development requires discrimination against foreign enterprises in the short run, then such costs should be borne in mind and recognized as the price that needs to be paid for achieving this long-term goal.

Entrepreneurship Problem: Characterization and Underlying Reasons From the viewpoint of history and tradition, entrepreneurial instincts and inclinations are not absent in Singapore. Should such instincts be found lacking in present-day Singapore, the reasons are to be found not in our history but in the subsequent evolution of events in the move from an entrep6t port to a low-cost exportoriented assembly centre, and more recently to a high technology and services centre. What then is the problem with entrepreneurship? Is it a lack of supply? On a per capita basis, does Singapore suffer from a relative dearth of private local entrepreneurs? This question is not easily answered by merely comparing the number of Singapore-owned companies stationed locally and abroad on a per capita basis with similar figures in Hong Kong, Taiwan, or South Korea. One major constraint is that figures on local entrepreneurs stationed abroad are difficult to obtain. Another problem is that associating one firm with one entrepreneur ignores the question of entrepreneurial quality. Thirdly, the quantity of entrepreneurs may actually reflect symptoms of certain economic distortions (both market and policy-induced) in certain countries, so that meaningful cross-country comparisons cannot be made.14 Given Singapore's history, it seems reasonable to argue that Singapore's problem is not one of lack of entrepreneurship supply, but rather a dearth of certain entrepreneurial types. Specifically, there appears to be a relative visible absence of industrial, export-

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oriented, high-technology local private entrepreneurs in contrast to foreign entrepreneurs. The manufacturing sector is clearly dominated by foreigners by most indicators (see Chapter 2 on "The Foreigner's Role"). Local entrepreneurs, on the other hand, tend to pervade non-manufacturing, entrepot-related, domestic-regional based activities such as wholesale and retail trade, banking and finance, construction, transport and communication, and real estate. While the relative paucity of local entrepreneurship in industry stems in part from socio-economic factors,' 5 and history,' 6 exogenous factors beyond Singapore's control and past development emphasis on encouraging foreign investment and state entrepreneurship are important explanations. As Deyo (1981) notes: ... the break with Malaysia led to a sudden shrinkage of the market for local consumer goods and thus severely damaged many of the domestic industries that had been encouraged under the government's import substitution industrialization strategy. There has also been a continuing tendency for local capital to flow mainly into tertiary activities such as tourism, real estate, stock market investment, banking, finance, domestic trade, in part because of uncertainties regarding Singapore's political future and a resulting desire to maintain highly liquid assets. In addition, continuing family control over local business establishments has been associated with conservative investment attitudes and unwillingness to expand the equity base of firms by bringing in outside capital (pp. 63-65\.

While past government industrial policy conferred no explicit favour on foreign vis-a-vis local investors, it nevertheless had this effect. For instance, major tax incentives were offered to designated pioneer enterprises with investments of over $1 million in high priority, export-oriented industries. Such incentives, which clearly favoured large foreign investors, partly explain the disproportionate growth of foreign firms among pioneer industries. By 1973, only 22% of the firms which had qualified for pioneer status were locally owned, and these provided only 16% of paid-up capital among pioneer enterprises (Deyo 1981, p. 65). Foreign investment also had an earlier headstart than local business where policy encouragement is concerned. In contrast to foreign investment policy which was enacted in the early 1960s, measures to assist small local firms were only adopted some 10 to 15 years later. For

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instance, the Small Industries Finance Scheme was introduced in 1976; the Product Development Assistance Scheme in 1978; and the Small Industries Technical Assistance Scheme in 1982.17

Is there a Crowding-Out Effect? Given the increasing role played by foreign entrepreneurs in the Singapore economy, an interesting assignment would be to examine whether this has served to crowd out existing domestic (private) entrepreneurs? As a working definition, crowding-out is deemed to have occurred when the entry of a foreign firm into a particular product line reduces domestic entrepreneurial supply (defined to include Singaporean entrepreneurs stationed within Singapore as well as those abroad). Since allegations of crowding-out are often made with regard to the manufacturing sector, we shall consider the effect on entrepreneurship supply of the entry of foreign manufacturing firms. Here we note that the average foreign firm pays higher wages than local firms because of the higher productivity of workers in the former. Potentially, foreign (manufacturing) firms can crowd out local firms via direct competition in the product market, or via indirect competition through the factor market. Direct product competition by foreign firms can actually drive a local firm out of business for a variety of reasons, such as ability to adopt more competitive pricing (for the same quality of products), ability to offer better quality products for the same price, better advertising and product differentiation and many other reasons.18 A foreign firm producing a product which is different from that of a local firm can also drive the latter out of business by competing away the latter's workers via offering better wages and salaries. The local firms which are unable to afford higher wages stand to lose workers and may be forced to close down. Those who wish to retain workers would have to raise wages beyond what they can afford and would sooner or later be forced into insolvency. (In some cases, local firms with adequate resources and will to withstand competitive pressures could be forced to upgrade). Competition for unskilled workers do not pose a problem since they are readily available from neighbouring countries, but becomes important in the case of skilled workers.

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The above discussion seems to imply that domestic entrepreneurial supply will be decreased as a result of foreign competition. But there is some evidence that domestic entrepreneurs have not simply melted away from the scene but have responded to this challenge by merging (to increase efficiency), relocating their operations to neighbouring countries, or moving into services such as hotels, catering, tourist trade, real estate and housing development, processing of food and beverages, transportation, warehousing and some medium-scale back-up industries for foreign enterprises (Lee 1977). Evidence of linkages can be seen especially in the shipbuilding and ship-repairing industries where back-up outfits such as metal fabrication, specialized paint manufacturing, and engine components have emerged.19 Domestic firms which are primarily low technology, low value added and labour intensive in character (for example, sawmilling, textile-weaving, garment manufacturing, simple food processing) may have found it attractive to relocate to Malaysia, Indonesia, Philippines and Thailand because factor endowments there accord well with the labour intensive nature of their operations, and also because these industries were given special treatment under the import substitution industrialization strategy pursued by these countries at the time. 20 What the above implies is that the advent of foreign businesses need not have decreased domestic entrepreneurial supply but has altered its composition. To the extent that it forces local firms to upgrade, move into areas where they have greater comparative advantage (for example, in services), increase local investment abroad (hence increasing foreign exposure) and so forth, it may even be said to have increased entrepreneurial quality. Not only would foreign business not crowd out existing entrepreneurs, but their presence is likely to increase the potential pool of Singaporean entrepreneurs. The experience of the United States shows that big multinational firms serve as important training grounds for future entrepreneurs. For instance, many entrepreneurs of new computer firms in the United States were ex-employees of IBM. While foreign firms may not have crowded out local ones, the effect of government entrepreneurship on the private sector is not so clear-cut, and is extremely controversial. Allegations of unfair competition by government companies have been made by local businesses. 21 The Local Business Subcommittee has voiced

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concern over, firstly, the extent of government involvement, citing the existence of more than 450 government-owned companies, subsidiaries and associated companies and secondly, the increasing involvement of such organizations in activities formerly in the exclusive domain of the private sector. In addition, these enterprises are alleged to have enjoyed privileges and advantages denied private-sector business. 22 In the view of the Committee, such government track record is deemed to have created uncertainty in the minds of local business. In particular, uncertainty with regard to future government involvement in trade and industry would either discourage further investments by the private sector or lead to unnecessary duplication and consequential waste of scarce financial and human resources (Annex viii, p. 2). The Committee thus recommends to put a stop to the incorporation of new government companies and urges the Temasek, MND and Sheng-Li groups of companies to "review their portfolios and release some of their business undertakings back to private hands" (p. 34). To the author's knowledge, no study has been made by either the government or academia to evaluate the validity of such allegations. Such an effort would appear to be important and necessary, given the damaging effects such perceptions (whether real or imagined) can have on local business morale.

How should Local Entrepreneurship be Encouraged? The Report of the Economic Committee (1986) has outlined five broad categories of measures to promote entrepreneurship. These pertain to (i) improving the regulatory environment, with a view to ensuring that laws and regulations do not unnecessarily impede private enterprise, (ii) promoting of creativity through modification of the educational system, (iii) improving access to financing, in particular financing of small businesses and high technology companies in the form of venture capital, (iv) modifying the taxation system to improve the risk/reward balance especially for ventures in new fields, and (v) privatization. 23 Several points are noteworthy. Firstly, it bears emphasizing (and this is recognized by the Economic Committee Report) that no single measure alone can help improve the entrepreneurial scene. For instance, no amount of venture

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capital alone can "make" an innovator if the attributes of creativity and an inquiring mind are lacking or if failure is very much frowned upon by the general populace. Secondly, under measures suggested for improving the tax system, no mention is made of taxing capital gains. The risk-reward balance between investing one's money in unproductive, speculative activities (in the stock market, foreign exchange market, real estate, and so forth) vis-a-vis investment in a new productive unit is far too uneven and tends to encourage the former group of activities. Thirdly, what is visibly absent are recommendations which would have the effect of reducing the role of foreign investment, seen by some to have partially impeded the growth of local business. 24 It will be argued later that this is not desirable in the light of other more desirable policy options. By and large, government policy has refrained from adopting measures to protect local firms from foreign competition. The response given to local construction firms' complaint about foreign competition in the construction industry is probably illustrative of government stance on the issue of protection. The key idea is that local companies stand to benefit from the "advanced technological methods" of foreign firms and that this is preferable to "protective measures that may lead to complacency and inefficiency in the construction sector" (Deyo 1981, p. 67).

Entrepreneurship - Policy Options and Recommendations The subsequent discussion on policy options assumes the following. Firstly, there are three main actors on the entrepreneurship scene: the foreign entrepreneur (FE), government entrepreneur (GE), and the domestic (private) entrepreneur (DE). Secondly, the current status of foreign and government entrepreneurship is assumed to be strong, while that of the domestic entrepreneur is weak. 25 Thirdly, if government entrepreneurship remains strong, it cannot at the same time be effectively helping the development of domestic entrepreneurship, particularly if it is also competing in the same area as local businesses. The presumption here is that the government will also be too busy trying to enter new growth areas. Much of the top quality civil servants will be involved in such ventures so that even if some help is accorded local entrepreneurs, the

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benefits may prove marginal. Partial divestment of shares in some existing government companies is not expected to diminish governmental role in these companies since the government still retains majority ownership and control in most cases (Linda Low 1985). From the above assumptions, one can identify five possible policy options as listed below: Option

A (present scenario) B

c D E

FE

GE

DE

strong strong weak*** weak*** weak***

strong weak* strong strong weak*

weak developing* * weak developing* * developing* *

because of deliberate government policy to reduce its role with government help *** because of deliberate government policy to reduce the role of foreign investment.

These policy options are likely to lead to the following policy results:

A' B

c D' E'

FE

GE

DE

strong strong weak weak weak

strong weak strong strong weak

weak strong weak strong/weak (?) strong (probably)

Policy A is the present policy, which assumes no decrease in government entrepreneurial role and will produce a future entrepreneurship scene (A') much like the present one. Policy B is one in which the government wilfully reduces its entrepreneurship role to concentrate on helping develop domestic entrepreneurs while allowing no change in its foreign investment policy. Pursuit of this policy is expected to reduce growth in the short run but raise it in the

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long run. Lower short-run growth would reflect in large measure the direct costs of time and resources incurred in training local entrepreneurs and the indirect costs of government giving up entry into new growth areas. In the short run, government entrepreneurial efficiency is assumed to be higher (due, for instance, to its larger resource base and informational advantage) so that a transference of entrepreneurial responsibility from the government to the local private sector is likely to reduce short-run growth. In the long run, however, government entrepreneurial efficiency is likely to diminish (because of work overload and other reasons pointed out in Chapter 5) while private efficiency will increase after the initial learning period, so that growth is expected to pick up. This policy thus entails making short-run sacrifices for longer term gains and appears the most appealing in the light of the government's intention to let the private sector play a more important role in the economy. In view of the government policy to let the private sector be the engine of growth, and the high regard given to foreign investment, policy C would not be preferred to the present policy A. On the one hand, the large net benefits from foreign investors will be foregone, and there is no effort to help develop local entrepreneurship to reap future gains. Policy D entails imposition of policies aimed at reducing the role of the foreigners, while the government concentrates its efforts on developing local entrepreneurship. These latter efforts would largely take the form of training locals to fill the gaps left by the foreigners. However, to the extent that the government prefers to maintain a strong entrepreneurial presence, it is likely that it will also be interested in filling such gaps and may have little time left over to help local entrepreneurs. Policy E would very likely not be preferred because it implies a sharp reduction in present growth rates due to reduced reliance on superior foreign and government entrepreneurs while incurring costs in training local ones. In the long run, it is also not clear if the gains from strong local entrepreneurship can make up for the loss of net benefits accruing from foreign investment. The upshot of the above discussion points to Policy B (strong foreign- weak government- developing locals scenario) as the most desirable policy stance in view of the government's announced intention of letting the private sector be the engine of growth for

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the future. The presumption is that the government cannot be assuming a strong entrepreneurship posture and simultaneously be helping to develop a strong indigenous entrepreneurship capability. Despite apparent past successes of state-owned enterprises, we have reason to believe that the costs of the government continuing as an entrepreneur are likely to outweigh the benefits. One cost to society would be that part of the success of state-owned enterprises would be at the expense of private domestic entrepreneurs. There have been charges of favouritism for government enterprises at the expense of domestic firms that were raised by the Economic Committee. Furthermore, there are four other problems and dangers that may become important, namely, the difficulty of direction and control, the lack of initiative, the consequence of business mistakes, and the indirect impacts on the quality and effectiveness of government. These are examined in detail in Chapter 5.

Summary and Conclusions Singapore's high saving and investment rates are significant factors in explaining its high growth rate in the past. Its primarily domestically-generated savings allow a pattern of development that steers clear of debt and inflationary problems which plague many LDCs. Being the highest saver in the world need not imply that Singapore has over-saved relative to some optimum rate that maximizes the lifetime utility of Singaporeans. Certain unique characteristics about Singaporean taste patterns such as the desire for 100% home ownership, a high degree of dislike for uncertainty (hence the need for greater precautionary saving), greater desire for faster growth (such as the desire to reach the Swiss standard of living in a shorter time), and so forth, could imply an optimum savings rate that is higher than other countries in the world. However, there is indirect evidence that Singapore over-saved when it adopted a CPF contribution rate of 50% and as reflected in excess capacity indicators. The present contribution rate of 35% appears to be closer to the implied optimal rate after taking into consideration housing, Medisave and life annuity needs of the average worker. In the longer run, when the present recession is over and wage costs have adjusted to a level more in line with

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productivity, equity considerations may call for the present 35o/o (if it is to be permanent) to be split equally between employers and employees (that is, 17Vzo/o each way), instead of the present 10o/o-25o/o arrangement. The private sector has been responsible for most of the real investment (gross fixed capital formation) that has taken place over the last twelve years. Yet, the major part of gross savings of Singapore is in the hands of the public sector. Thus, increasingly, the government has been playing the role of an intermediary between savers and investors. This intermediary role of the government is unique among countries in the world and its implications, particularly the efficiency of the intermediation process between the government and private domestic investors, deserve careful study. With regard to the investment of Singapore's gross savings abroad, some questions need to be asked. Could it really be true that the rate of return is significantly higher abroad than at home (apart from the current recession)? Could it be possible that the government is a better investor than the private individual who is risking his own money? From the standpoint of risk diversification, is it healthy for the task of investment to be increasingly concentrated in government hands in a world in which uncertainty may not diminish but may even be increasing? Choon and Veall's (1985) and Datta and Shame's (1981) findings show that the CPF contributions have no effect on private consumption behaviour because the Fund is fully funded, nonredistributive and can be used to finance home purchases. This finding, however, depends on the assumption that individuals consume out of lifetime wealth. If instead, individuals consume out of current disposable income, an increase in CPF contributions reduces this income and hence reduces consumption during his working period. In other words, it causes individuals to consume less than they otherwise would in their working years and more than they otherwise would during their retirement years. In this sense, the individual's inter-temporal consumption pattern is being interfered with. It also distorts consumption and investment patterns within a given period in favour of housing, thus entailing certain welfare costs. Over-investment in housing in the current period implies under-investment in machinery and equipment, with adverse implications for future output. Such costs have to be weighed against the benefits of the CPF (such as the achievement of lOOo/o home ownership, and so forth).

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The entrepreneurship scene in Singapore is characterized by the presence of three main actors: the government, foreign enterprises, and local businesses. Foreign enterprises are more productive than local ones, primarily because of their larger size and greater capital intensity. 26 Despite this, the advent of foreign firms need not have reduced the supply of local entrepreneurs but may have altered its composition. Foreign firms may even have improved the quality of existing local entrepreneurs through providing competition and forcing some to upgrade, others to move into areas where they have greater comparative advantage, or to relocate to neighbouring countries. They also serve as important training grounds for future local entrepreneurs. The rationale for encouraging the development of indigenous entrepreneurship has yet to be clearly defined, although they appear justifiable on political rather than on economic grounds. To the extent that encouraging indigenous entrepreneurship is desirable, the apparent reluctance of the government in reducing its entrepreneurial role while continuing to encourage foreign entrepreneurship is difficult to understand. The recent divestment of certain government companies cannot be interpreted as a reduction in government entrepreneurship as the government still retains majority ownership and control of these companies, and is still keen on going into new ventures and growth areas. If the private sector is to be the engine of growth for the 1980s and beyond, the government has to start reducing its entrepreneurial role and concentrate on providing the necessary environment and help required to build up local entrepreneurs. This is expected to lower short-run growth but appears to be the best course of action for ensuring long-run growth.

NOTES 1. Various other aspects of the CPF such as portfolio management, home-ownership,

old-age security financing and company welfarism are discussed extensively in Lim Chong Yah et al. 11986). Probable economic effects of the CPF, such as stabilization effects, growth effects, allocation of resources, equity effects and the issue of social adequacy are examined in Asher jl985a). 2. Qualitatively, an obvious linkage would stem from the fact that for any given income level, the higher the amount of forced CPF savings, the smaller the

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5.

6. 7. 8. 9.

10. 11.

12. 13.

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level of voluntary private savings left over for purposes such as financing the set-up of one's own business. While it may be argued that potential entrepreneurs need not be deterred from setting up their own businesses because of the possibility of borrowing from financial markets, the problem may be more acute for small businesses who may have difficulty producing satisfactory collaterals to facilitate the securing of loans. Quantitatively, to what extent higher CPF savings deter the development of local private entrepreneurship is an important subject in its own right and merits careful study. The author would like to thank Dr Ong Nai Pew and Dr Wong Kum Poh for helpful comments on this and subsequent sections. Reduction in employers' CPF contribution would be another measure. But this has already been enacted by the government via the reduction of employers' contribution from 25% to 10%. An econometric study done by Wong (1986) shows that the CPF crowds out voluntary private savings. Here we define the optimal saving rate to be one that maximizes the present value of Singaporeans' total expected lifetime utility. In the extreme case, imagine someone who prefers to starve today in order to eat like a king tomorrow. The following two points were suggested by Dr Wong Kum Poh. Wong Kum Poh's computation of the incremental capital output ratio (ICOR) for Singapore for the last two and a half decades using different time lags shows a significant jump in this ratio during the last few years. Specifically, the ICOR based on one-year Jags was about 1.2-1.4% in the sixties, then increased to about 2-4% in the early seventies, and 6-7% in the late seventies. It jumped to 8%, 13%, 11% and 12% in the early eighties. If based on two- or three-year Jags, the same pattern emerges. The ICOR was significantly higher at 12%, 10%, and 10% for 1982, 1983 and 1984 respectively, compared with 1-2% in the sixties and early seventies, and 5-6% in the late seventies. Chee (1984/85). The more prominent sociological theories are found in McClelland (1967), Hagen (1971) and Collins and Moore (1964). See Lewis (1984), for instance. Baumol (1968) and Liebenstein (1968) complain that the entrepreneur's place in formal economic theory has been scanty and often, totally absent. The theoretical firm is sometimes said to be entrepreneurJess. Nonetheless, he is of the view that even if economic theory is deprived of the ability to provide an analysis of entrepreneurship, one can hope to examine fruitfully the means of encouraging this activity by examining the determinants of the pay-off to this activity. For example, the entrepreneur must bear the risks associated with his operations, and theory can consider how the marginal costs of risk-bearing can be reduced. Here it is possible to counter-argue that they do stand to risk their careers. A caveat is in order here. It is likely that many local investments go unrecorded with the EDB. If this undercoverage is significant, the above result may be altered substantially. In many (particularly underdeveloped) countries, the scarcity in entrepreneurship supply reflects the general absence of a domestic market for risk-sharing. In this instance, the size of the risk-hearing entrepreneurial class should not, in and of itself. be a policy target. Rather, policy should aim to provide the

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16.

17.

18.

19.

20.

21.

22.

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mechanisms by which risk can be efficiently allocated across the population (Grossman 1984). Such as society's low tolerance for failure, an educational system that overemphasizes grades rather than creativity, reluctance among Singaporeans to work abroad, and so on. Here the author fully concurs with the Entrepreneurial Subcommittee's view that our trading background has created a group of entrepreneurs whose risk-reward motivation is short-term and opportunistic in nature. This characteristic may not be particularly useful in ensuring success in a complex, technological-oriented environment which calls for qualities of perseverance, keen perceptivity and anticipation, much needed in long-term, strategic behaviour. An alternate though related thesis on entrepreneurship was suggested by Wong Kum Poh in his comments on this chapter. In his view, entrepreneurship arises in response to both opportunities and pressures. The fact that Singapore, historically, has had good indigenous entrepreneurship in trade, banking, transportation and related fields has been the result of abundant opportunities offered in the old days when it was just opening up as a free port. Additionally, the pressures on the poor Chinese and Indian immigrants to make good in a strange land were real. In contrast, the opportunities and pressures to become industrial entrepreneurs seem to be missing. Because of a strong foreign presence and government entrepreneurship in manufacturing, it would appear that a substantial amount of opportunities are foreclosed to the potential indigenous entrepreneur in this sector. With rising affluence and steadily rising standard of living, the pressure for risk-taking is not as strong as the attraction of greater job security arising from working for the government or the foreign multinationals. Examples are competition posed by Lever Brothers in soap products and ice-cream; by Yaohan in shopping, and Bata in shoes. In these instances, foreign firms have been fairly successful in reducing the local firms' market share (Deyo 1981). Lee (1977) reported an increase in total paid-up capital by domestic firms during the 1959-73 period, despite a fall in the number of medium and large domestic firms. Many weaker firms have been forced to merge with the larger domestic ones in order to survive the competition. Besides the increasing presence of foreign firms, other factors that compelled relocation include rising wages and production costs such as rising rentals and the increasing number of pollution, safety and health measures introduced over the years. For instance, rising costs due to anti-pollution measures were significant in pushing plywood factories and sawmills out of Singapore. In 1977, the Chinese Chamber of Commerce registered an indirect complaint about government economic encroachment by asking for an official statement regarding the respective roles of public and private enterprise in the national economy. See Subcommittee Report on Local Businesses, Annex viii. Four examples of unfair public-sector competition were cited, namely, in the housing market by the Housing and Urban Development Corporation (HUDC); in retail trade by the National Trade Union Congress (NTUC) supermarkets; in trade and manufacturing by the state-trading company INTRACO; and in the financial market by the Post Office Savings Bank. Some state enterprises

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Koh Ai Tee are alleged to have lost sight of their original objects and overextended into domains outside their original perview (Report, Annex viii). The first four measures are outlined in the chapter on entrepreneurship, while privatization is discussed separately in Chapter 6. The rationale behind the current world-wide interest in privatization and the ways to go about doing it are discussed in Asher (1985b). See Report of the Subcommittee on Local Business, p. 28, which states "it is also felt that too great an emphasis has been placed on free enterprise and the free trade system which works against the interests of Singapore". This assumption may seem too strong and may not be true of existing local entrepreneurs in services. However, it may not be inappropriate to describe them as "weak" relative to their potential if services were given the kind of active promotion and encouragement accorded to manufacturing in the past. The Economic Committee is aware of this need and has made recommendations to promote services. No attempt is made to compare government enterprises with private ones or with foreign firms because of the lack of comprehensive and systematic data on government companies. In the face of as yet unresolved allegations by local businesses on unfair competition from government, it is also not clear how meaningful the results of such comparisons would be.

REFERENCES Asher, Mukul G. "Forced Savings to Finance Merit Goods: An Economic Analysis of the Central Provident Fund Scheme of Singapore". Centre for Research on Federal Financial Relations, Occasional Paper no. 36. Canberra: Australian National University, 1985a. Asher, Mukul G. "The Public-Private Mix and Privatisation". Institute of Strategic & International Studies Seminar Paper, Kuala Lumpur, Malaysia, 1985b. Baumol, W. "Entrepreneurship in Economic Theory". American Economic Review 58, no. 1-2 (May 1968): 64-71. Chee, M.L. "The Development of Domestic Entrepreneurship in the Industrial Sector in Singapore". Academic Exercise, Department of Economics and Statistics, National University of Singapore, 1984/85. Chia, S.Y. "Direct Foreign Investment and the Industrialisation Process in Singapore". Singapore: Resources and Growth, edited by Lim C.Y. and P. Lloyd. Oxford University Press, 1986. Choon, C.L. and M.R. Veall. "A Note on Social Security and Private Savings in Singapore". Public Finance 40, no. 2 (1985). Collins, O.F., and D.G. Moore. The Enterprising Man. Michigan: Michigan State University Business Studies, 1964. Datta, G., and P. Shome. "Social Security and Household Savings: Asian Experience". The Developing Economies 19 (1981 ): 143-60. Deyo, Frederick C. Dependent Dewlopment and Industrial Order. New York: Praeger Publishers. 1981.

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Grossman, G.M. "International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class". American Economic Review 74, no. 4 (September 1984): 605-14. Hagen, E. "How Economic Growth Begins: A Theory of Social Change". Political Development and Social Change, edited by J. Finkle and R. Gable. New York: John Wilken and Sons, Inc., 1971. Higgins, B. Economic Development. New York: W.W. Norton and Co. Inc., 1968. Kanbur, S.M. "Of Risk-taking and the Personal Distribution of Income". Journal of Political Economy 87, no. 4 (August 1979): 769-97. ___ . "Risk-taking and Taxation: An Alternative Perspective". Journal of Public Economies 15 (April 1981): 163-84. Kihlstrom, R.E., and J.J. Laffont. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion". Journal of Political Economy 87, no. 4 (August 1979): 719-48. Kilby, P. "Hunting the Heffalump". Entrepreneurship and Economic Development, edited by P. Kilby. New York: The Free Press, 1971. Knight, F.H. Risk, Uncertainty and Profit. New York: Harper and Row, 1921. Kotlikoff, L.J., A. Spivak, and L.H. Summers. "The Adequacy of Savings". American Economic Review 72, no. 5 (December 1982): 1056-69. Lee, S.A. Singapore Goes 'Iransnational. Singapore: Eastern Universities Press, 1977. Lewis, W. Arthur. "The State of Development Theory". American Economic Revie\,\1 74, no. 1 (March 1984). Liebenstein, H. "Entrepreneurship and Development". American Economic Review 58, no. 1-2 (March-May 1968). Lim Chong Yah et al. "Report of the Central Provident Fund Study Group". Singapore Economic Review, Special Issue 31, no. 1 (April 1986). Low, Linda. "Privatisation Policies and Issues in Singapore". Department of Economics and Statistics, Staff Seminar Paper No. 7, National University of Singapore, 1985. McClelland, D. The Achieving Society. New York: The Free Press, 1967. Schumpeter, J. The Theory of Economic Development. Cambridge: Harvard University Press, 1934. Singapore, Federation of Chambers of Commerce and Industry. Report of the SubCommittee on Local Businesses. August, 1985. Singapore, Ministry of Finance. Report of the Property Market Consultative Committee. February 1986. Singapore, Ministry of Finance. The Singapore Economy: New Directions. February 1986. Singapore, Report of the Suh-Committee on Entrepreneurship Development. Octoher 1985.

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Wong, K.P. "The Financing of Trade and Development in the Advanced Developing Countries: The Experience of Singapore". 7rade and Growth of the ADCs in the Pacific Basin , edited by Hong Wontack and L.B. Krause. Papers and Proceedings of the 11th Pacific Trade and Development Conference. Seoul: Korean Development Institute, 1981. ___ . "Saving, Capital Inflow and Capital Formation". Singapore: Resources and Growth, edited by Lim C.Y. and P. Lloyd. Oxford University Press, 1986. Yoshihara, K. "Indigenous Entrepreneurs in the Asean Countries". Singapore Economic Review, Special Issue 29, no. 2 (October 1984): 132-47.

chapter five

The Government as an Entrepreneur Lawrence B. KRAUSE

C

an theory help explain the role of the government in the economy of Singapore? In the early literature of economic development, economists viewed the state as a benevolent and unitary actor, behaving solely in the societal interest. The government was seen as able to obtain needed information, and then equipped with that knowledge and the available policy instruments, could intervene in an optimal way to correct any market failure and promote rapid development. That view was dissipated by the reality of governmental interventions (both in developed and developing countries) that often did more harm than good. Indeed, government failures proved more damaging than market failures. Government bureaucrats were often forced to make business decisions with even less information than was available to the private sector. Politicians and bureaucrats turned out to be motivated by personal ambition and desires that did not necessarily lead to the improvement of the public good. And government power was manipulated by private agents to benefit particular groups, often at the expense of the general welfare. In response to this reality, economists using traditional neoclassical tools developed theories of government in the economy, but none of them provide much insight into the essential nature and far-reaching role of the government in the Singapore economy.1 However, some insight can be obtained from the work of economic historians such as Douglas C. North (North 1981). These economic historians define the optimal or neutral state as one that takes actions that would emerge with perfect markets, which if accomplished by the private sector, would require intense competition. 107

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Since Singapore is a small country, the law of large numbers cannot operate. Therefore, perfect competition in private markets is precluded, and the role of the government must necessarily be relatively large in order to counter market failures. While international trade allows individual factories to reach economies of scale, trade does not relieve the constraint of size limiting the total number of factories and their product and industry diversification. The market failure is that no insurance market exists to guard against the risk of over-specialization in an activity which could be subjected to a negative shock. Of course, governmental action is dependent on the availability of technology, and the existence of information costs and uncertainty, so that nothing is perfect even in theory. However, if the state operates as best it can, transaction costs will be minimized and efficiency will be promoted. In all economies, certain functions such as protection and justice should be monopolized by the state because they are subject to increasing returns, and have both indivisibility and positive externalities (all characteristics which keep private markets from reaching optimal outcomes). Many other activities can be provided by the state to reduce transaction costs, such as services of public utilities and housing, remembering of course that low service prices are not optimal if they involve a subsidy by the state since that could not occur in a perfectly competitive market. 2 Since growth of the private sector also benefits the government sector in its activities, there need be no inherent conflict between the two. However, if the prices of public services are set as would be done by a monopolist, in order to maximize government revenue, then they may not (and usually will not) maximize output and growth of the economy. Thus, the equilibrating tension within the government is the desire to reduce transaction costs on the one hand, and to maximize government revenue on the other. Complaints of high and excessive charges by the Singapore statutory boards selling public utility services to the private sector were heard by the Economic Committee during their deliberations, as discussed in Chapter 6. The possibility of the boards charging excessively high prices comes from the fact that they do sell in a monopolized market and they do report huge profits. Apparently, the desire to reduce transaction costs relative to the desire to maximize government revenues started in 1985 before the recession began.

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Economic historians also have a role for ideology in their theories which seems to strike a responsive cord in Singapore . . Ideology helps overcome the free-rider problem (that is, each individual wanting a particular societal outcome - such as clean streets - but having little incentive to voluntarily incur a cost to contribute to it - such as the cost of properly disposing of trash). Ideology serves to legitimize institutions, which in turn encourage individuals to obey rules and laws (without the government incurring uneconomic enforcement costs). Ideology helps create a dominant societal viewpoint or consensus which makes individual decision-making easier and more predictable. The government can either accept the dominant ideology of the people, or mold the people to its own preconceived ideology. The institutions created under the dominant ideology will be accepted as legitimate only if perceived by the population as being fair. Thus, if the people begin to believe that institutions are unfair, then the free-rider problem will become serious. If a central part of the government's ideology is market development, and this corresponds to the dominant viewpoint of the society, then rapid growth can be promoted if the government's performance is consistent with its ideology. Since the value of ideology is greater the more widely it is accepted in society, the government will consider competing ideologies to be unhelpful, and may try to discourage them. Analysts have suggested that the political leaders of Singapore felt that they themselves were capable and honest, and that they alone had the welfare of all Singaporeans (regardless of race) as their goal. Therefore, they did not feel obliged to promote competitive politics and a pluralistic democracy (Vasil1984) and it was thought desirable that all instruments and centres of power should be controlled by the government. Furthermore, Prime Minister Lee Kuan Yew was of the strong opinion that governments had to have longevity to be effective. Thus, armed with an ideology, a belief in their own abilities, and a desire to remain in power, the PAP became a formidable political force. Singapore may also display some features of what sociologists describe as a neo-patrimonial state. That is a state in which the political leaders and the bureaucracy act as would a father to the populace, and the people have certain obligations to the state in

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return (Eisenstadt 1973; and Low 1984). The Singapore Government is paternalistic, but the political leaders do clearly separate their private and official lives, which is not the case in many neopatrimonial states. 3 All of these theories, however, do not completely explain the actions of the Singapore Government. At most, they indicate why the government was disposed towards being activist. The reality was determined by political circumstances and a triggering event, namely, the separation of Singapore from the Federation of Malaysia, as discussed subsequently. Concerning the role of the government in the economy of Singapore, the questions yet to be answered are: How well has the government performed? and, Has the government expanded its participation too far for the good of society?

Historical Evolution The pervasive role of the government in Singapore is understandable given the actual conditions at the time of independence. The government had to create a sense of nationhood in an immigrant population of diverse cultures and languages. Even though the overwhelming majority of the people were Chinese - 75.4% according to the 1957 census - they reflected the diversity and regionalism of China. The potential danger to public order and well-being in a multiracial country was demonstrated by the communal riots of 1964 which made a deep impression on the country's leaders. Whether a viable independent country could be made out of the island of Singapore was uncertain in 1959. Even the leaders of the PAP and the Prime Minister himself were doubtful in that regard, which is why federation with Malaysia was so appealing (Vasil1984). It was also the issue that separated the group supporting the Prime Minister from the communist members of the PAP. Thus, the issue of a common market with Malaysia was probably exaggerated beyond its economic importance because it was the cutting political issue over which the communists left the PAP. When lasting federation was found to be impossible, the mere survival of Singapore became, by necessity, the top priority. Despite the requirement of maintaining its support among

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the Chinese masses, the PAP realized that appeals to Chinese chauvinism were very dangerous - they threatened to ignite racial tensions domestically, and worsen relations with its Malay neighbours. The desire was to build a Singaporean identity, not to become a third China. Thus, it was decided that the basis of political support would be economic accomplishments, that is, improvement in the economic and social environment.

The Transition Period, 1959-65 Singapore was considerably better off than most developing countries when it emerged from colonialism. It had already established itself as the premier commercial city in Southeast Asia. The British had devoted resources to improving the health of the population, and free primary education had been started. Nevertheless, the mass of people in Singapore were poor, economic activity was hindered by restrictive practices based on communal lines, and unemployment was high. The growth of the population (4.4% in 1959) threatened to overwhelm the confined physical space of the island. However, the strategic location of the island and the fact that the literacy rate was relatively high (two-thirds among men and one-third among women) were strong assets. It was recognized that economic progress could be built upon the private enterprise structure that already existed in Singapore, a structure which included foreign enterprises. Self reliance could grow if each individual relied upon his own hard work for advancement and was permitted to retain the fruits of his efforts. Competition among individuals is clearly part of Chinese culture and was made a virtue by the government. The government itself had few resources and thus had to temper its spending and have a strong sense of priorities. During this period, the government confined itself mainly to traditional activities and to indirect involvement in the economy. Indeed, Ow Chin Hock characterized the government during this time as laissez faire (Ow 1976). The major exception to this policy was housing. While most countries have some public housing, no other market-oriented economy has it to the extent that Singapore does. Improving housing - which had been neglected by the British - became a central political goal of the PAP, and with it they sought and built political

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support. The government was very successful in creating an energetic public housing programme during the transition period (which signalled their effort in future years). Indeed, their success in housing, along with their successful operation of public utilities, which were nationalized in 1955, convinced the government that it was very capable in business. This confidence was demonstrated in subsequent years. Two tasks were recognized in 1959; the need to restructure the economy away from dependence on traditional entrepot trade, and the alleviation of unemployment. The promotion of industrialization, which was seen as the way to diversify the economy, was assigned to the newly created Economic Development Board (EDB). The EDB was envisioned as a one-stop agency to facilitate investment. During the transition period, the EDB confined itself to providing incentives to attract foreign investors, and infrastructure which included industrial sites. The highly innovative Jurong industrial estate was started at this time, and this was a step beyond the usual activity of a laissez faire government. Other government economic institutions were created, mainly in the form of statutory boards - a concept carried over from colonial days. These included the Port of Singapore Authority (PSA), the Housing Development Board (HDB), the Public Utilities Board (PUB) and the Singapore Tourist Promotion Board (STPB). At this time, close ties were established between the government and organized labour. They grew out of the political needs of the PAP to discredit and replace the communist-dominated unions of the colonial period with more moderate unions under the banner of the new National Trade Union Congress (NTUC) (Bloodworth 1986). At first, the link was informal, but in recent years, the Secretary-General of the NTUC has become an important policy-maker in the government, occupying a ministerial post (presently, Second Deputy Prime Minister). This link has helped the government to promote stable industrial relations and operate a national wages policy, as discussed in Chapter 7. Some progress was made during this period, and unemployment was reduced, but economic plannin;s and policy, which was based on an expected common market with Malaysia, was undermined by separation, and made worse by the erection of barriers to trade and the flow of people on both sides of the causeway (between Singapore and Malaysia).

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Post 1965

The shock of separation had not yet been overcome when the British announced the end of its military presence in 1967, to be completed by 1971. The economic implications of the pull-out were enormous since British expenditures constituted 12.7% of the GDP in 1967, and they employed directly and indirectly 38,000 local workers, or 20% of the work-force. The beginning of a much expanded and more intrusive role for the government in the economy can be marked by this event (Ow 1976). No longer did the government confine itself to traditional economic pursuits and the building of infrastructure, but instead began to enter activities that were or could have been the domain of private enterprise. However, the government had no intention of turning Singapore into a welfare state. It benefited by learning from the mistakes of other developing countries. It was seen that when political leaders rallied support through welfare-state rhetoric, soft states were created with little economic progress. It was felt that Singaporeans had to be protected against such politics since the idea of getting something for nothing was very appealing. Political independence was simply not enough to create prosperity. While having little faith in capitalism as such, the ideology of Singapore became economic pragmatism for survival (Goh 1977a). Institutionally, a number of new statutory boards were created from functions previously centralized in the EDB. They were charged with activities such as promoting a savings bank -the Post Office Savings Bank (POSB) - and developing Sentosa Island as a resort. Increasingly, the statutory boards became major actors in the economy. Furthermore, they formed some subsidiary companies to add flexibility to their own operations. For example, the Singapore Broadcasting Corporation (SBC) in 1986 formed a subsidiary to produce commercials on a fee-for-service basis. The subsidiary is able to offer a more attractive compensation package than SBC in order to attract high quality advertising talent. Numerous other state and semi-state companies were created either directly by ministries, or more likely, organized under three wholly-owned government holding companies (Temasek Holdings Pte Ltd, MND Holdings Pte Ltd, and Sheng-Li Holdings Co Pte Ltd). These different institutional forms permit great flexibility. Expenditures by ministries are subject to the annual budget which

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must be approved by Parliament. Expenditures of the statutory boards are not covered in the budget as such, although some of their resources may come from the budget, and they are created by an act of Parliament with their terms of reference specified. Government companies are the most flexible because, although they are answerable to the ministry or statutory board that created them, they are subject only to the same limitations as other companies, as provided in the company law. Since government companies are not required to disclose their company accounts, they are in that sense treated favourably by the company law. These government-owned companies provide a wide range of services such as air and sea transportation, and goods such as merchant ships. In addition, joint ventures have been started by the government with both domestic and foreign partners to produce several industrial products, including refined sugar and steel. (In addition, the NTUC runs many businesses including supermarkets, taxi cabs, and a travel agency.) Indeed, there appears to be no ideological barrier preventing the government from entering any economic activity. Speaking in June 1977, the then Deputy Prime Minister and Minister of Defence Goh Keng Swee declared that the government would start new businesses to create new wealth and new jobs that would add to the growth of the GNP (Goh 1977b). Governmentowned enterprises were explained in three ways: as a carry-over from colonial administration, as a response in meeting specific needs such as those created by the Ministry of Defence, and in the case of new ventures, as a way "to encourage investors to take the plunge". The government was prepared to play a pioneering role when it perceived the initial capital requirement as being too large for the private sector, or the project too experimental in nature. Furthermore, the government felt it would be successful, given its capabilities and proven record of running businesses. It should be noted that the period from the mid to late 1960s corresponded to a time when structural change was appropriate for the economy. Enough capital had been accumulated to permit the domestic production of products that were more capital-intensive, and unemployment was being reduced. It was not clear, however, whether domestic or foreign entrepreneurs were willing to undertake this production. Domestic entrepreneurs had geared themselves towards import replacement in anticipation of the common

The Government as an Entrepreneur

115

market that never materialized, and were not yet prepared to meet international competition. Foreign enterprises were responding to the nominal price of labour which had been restrained by the national wages policy, and thus saw no need to become more capital-intensive. The government thus responded implicitly to a shadow price of labour that was higher, and invested in capitalintensive industries. In South Korea, at a similar point in its development, the government provided huge financial incentives to private domestic entrepreneurs to start shipyards, heavy machine shops, and the like. In Taiwan, the government invested directly in such heavy industries. Singapore followed the Taiwan pattern, but carried it much beyond heavy industry. Moreover, the Government of Singapore does not confine itself merely to the economy. It is willing to experiment in social engineering, and thus, all of the following have been goals of government policy: controlling population growth and limiting the size of families to two children; cleanliness, sanitation and upkeep of buildings; controlling long hair and corrupt music and dance; care of parents and older relatives; courtesy; production of more children by graduate parents; instilling ethics of hard work and discipline; good health; and the non-use of Chinese dialects (Vasil 1984). Clearly, the government is a major force in many aspects of Singaporean society.

Measuring the Government's Role Various measures of the government's involvement in the economy are tabulated in Table 5.1. By some of these measures, Singapore is not out of line with other countries. Government consumption amounts to only 20% of total consumption in the economy. Current government expenditures (including those of statutory boards and government enterprises) amount to about 15% of GNP, which places it between Korea (lower) and Taiwan (higher). 4 The development expenditures of the government in Singapore are below those of Korea and Taiwan. Government tax revenue has been about 29% of GNP, which is considerably above the other Asian NICs, but below most European countries. When the current surplus of the seven largest statutory boards is added to government revenue, however, the resulting amount as a share of GNP is tremendously

Lawrence B. Krause

116

TABLE 5.1

Measurements of the Role of Government in the Economy of Singapore, Korea and Taiwan in 1984 (Current prices, in per cent) Singapore

South Korea

Taiwan

1. Government revenue plus current surpluses of government enterprises/GNP

43.5 3

18.4

22.9

2. Government revenue/GNP

29.4

17.1

18.0

3. Government expenditure/GNP

20.8

17.3b

22.7

4. Current government expenditures/GNP

15.2

10.0

16.6

5.6

7.3

6.1

6. Public sector gross saving/gross national saving

64.0c

28.8

12.7

7. Public gross domestic fixed capital formation/total gross domestic fixed capital formation

33.4d

17.6

42.7

8. Government consumption/total consumption

19.9

14.8

24.4

Classification

5. Government development expenditures/GNP

a b c d

Government revenues plus current surpluses of seven major statutory boards, but excludes undistributed profits of public enterprises. Excludes other special accounts separately funded, which amounted to 3.7o/o of GNP in 1984. Current surplus of government plus current surpluses of seven major statutory boards, but excludes undistributed profits of public enterprises. If measured in 1968 prices it would be 22.6o/o.

SouRcEs: Ministry of Trade and Industry, Economic Survey of Singapore 1985; Major Statistics of Korean Economy 1985; and Taiwan Statistical Data Book 1985.

above a similarly calculated measure for Korea and Taiwan. The share of public investment (including the seven major statutory boards was a moderate 33.4% of gross domestic fixed capital formation -again, between that of Korea (low) and that of

The Government as an Entrepreneur

117

Taiwan (high). However, gross savings of the public sector amounted to a huge 64o/o of gross national savings, as discussed in Chapter 4, which probably has no counterpart in any other market-oriented country, and certainly not in the other Asian NICs. Furthermore, 19.5% of the work-force was employed by the government, according to the 1980 census and, as already noted, the HOB manages 81% of all dwelling units in the country and intends to raise that to 90%. Moreover, none of these measures reflect the government's role as entrepreneur in the economy, since they exclude all wholly or partially owned government companies. It is difficult to evaluate the dimensionality of these companies since information is not readily available. The number of such companies, including the subsidiaries of statutory boards, is believed to have numbered 490 in 1983 (Low 1985). As seen in Table 5.2, the number of companies

TABLE 5.2 Growth in Public Enterprises in Singapore, 1960-83

No. of Public Enterprises t Period/Year

1960-67 1969 1972 1974 1982 1983

WOC&POC

WOC&POC & Others*

13 29 59

n.a. n.a. n.a.

n.a.

180

61 70

450

n.a.

Govt. issued and paid-up capital {$MJ

n.a. 192.4 312.0 833.0 1,900.0 2,400.0

t

Excludes statutory boards. * Others comprise subsidiaries and other associated companies.

SouRcEs: Lee, S.Y., "Public Enterprises and Economic Development in Singapore", Malayan Economic Review, October 1976; Singapore, Ministry of Culture, The Mirror 5, no. 2 120 October 1969); Tan, Chwee Huat, "Managing State· Owned Enterprises", World Bank Annals of Public and Co-operative Economy, January-March 1975; Singapore, Hansard, Vol. 43, No. 1 (30 August 1983), Cols. 90-96; Straits Times, 6 April 1985. Compiled hy Linda Low, "Privatisation Policies and Issues in Singapore", Staff Seminar Paper, No. 7, 17 October 1985.

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and the capital invested in them seem to have grown considerably. 'TWo financial institutions, the Post Office Savings Bank (a statutory board) and the Development Bank of Singapore (48% governmentowned), are the largest of their kind in the country. In 1983, 450 government companies (excluding the subsidiaries of the statutory boards) employed 58,000 workers or 5o/o of the labour force. All analysts suggest that the Singapore enterprises are profitable, although the total amount of profits and the rate of return on investments cannot be documented (Ow 1976, Low 1984, Lee 1976, Tan 1975). In manufacturing alone, 65 public companies were identified in 1984 (Department of Statistics 1985). They employed 8.5% of the workers in manufacturing, produced 7.4% of sales, and 10.2% of value added, and 5.1% of direct exports. 5 Though public enterprises are concentrated in food, fabricated metal products, non-electrical machinery, transport equipment, and printing and publishing, they also operate in textiles and leather, wood products, industrial chemicals, petroleum refinery, plastics, cement, iron and steel, and electronic products. Clearly, the government intends government-owned companies to be run on commercial, not ideological grounds (Goh 1977b). It expects these firms to be efficient, make profits, and expand when feasible. They are not supposed to be given any special privileges or concealed subsidies. If they lose money, they are supposed to be permitted to go bankrupt. The personnel policy is to recruit in the open market, both at home and abroad, on competitive terms. Furthermore, it is the stated policy of the government not to buy failing private firms just to save jobs. Avoiding the Pitfalls of Other Countries

Other countries have enunciated some or all of these same policies, but their implementation has been quite different. Indeed, stateowned enterprises (SOE) have caused major disasters in developing and developed countries alike. They have generally been gigantic money losers, causing a drain on public budgets. They have been staffed with politicians, relatives, friends, and ex-generals with little concern or real incentive for efficient management. Labour productivity has often been low, and industrial relations chaotic. They have been shown favouritism by the government, and in turn have been

The Government as an Entrepreneur

119

used for blatantly political purposes. Even if honestly run, they have often displayed a lack of initiative and arrogance towards their clientele, an occasional complaint even in Singapore. While little can actually be documented about the operations of SOE in Singapore, major pitfalls have been avoided. In such a small country, anything of real consequence would have become public knowledge. Several reasons can be suggested to explain this phenomenon. However, the most important factor may have been identified by Bruce Gale when he observed that SOE reflect the society and the political system from which they come (Gale 1981). Singapore is a commercial society, and it is not surprising that government companies behave in a commercial way. Furthermore, the honesty and integrity of the present political leaders have never been questioned, and this also is carried over to the SOE. Another important reason may be the quality of personnel. The civil service in Singapore is an extreme example of a meritocracy. The government identifies the country's best scholars at an early age, and they are given encouragement and special tracking throughout their schooling. They are given scholarships to attend universities, some going abroad. In return, the individuals are bonded to work for the government for eight years, and some are tapped to join the PAP. Thus, the best and the brightest go into the public service, and the SOE in Singapore have access to this pool of human resources for their personnel needs. Indeed, they sit on their boards, and may be sequestered to them full time. Given the additional natural advantage that SOE have in marshalling financial resources, the chances of commercial success are quite good. It should be recalled that the government saves more than it invests, and thus always has easy access to finance.

Problems and Potential Dangers of Singapore's SOE Despite the apparent success of Singapore's SOE, it can be asked whether it makes a difference to society if the government continues its role as an entrepreneur or not. If part of the SOE's success is at the expense of private domestic entrepreneurs, a cost to society might be involved. The crowding-out of domestic entrepreneurs is discussed in Chapter 4. In addition, within the Economic Committee, there have been some charges of favouritism for government

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enterprises at the expense of domestic firms. There are other problems and potential dangers as well - namely, the difficulty of direction and control, the lack of initiative, the consequence of business mistakes, and the indirect impacts on the quality and effectiveness of government. Singapore's SOE have grown into a large and complex business group, making direction and control extremely difficult. Since its origins, the Singapore Government has maintained a style of strong leadership from the top. The success of the country indicates that the strategy was appropriate. Central direction to the SOE is given by the Co-ordinating Board chaired by the Prime Minister, and implemented through the Directorship and Consultancy Appointments Council (DCAC). The information that must be digested by these groups in order to make wise decisions is immense and growing in a geometric fashion as more industries are entered, and more countries become industrialized. This can only be described as information overload. Furthermore, the several parts of the government have to be co-ordinated. Some co-ordination among different enterprises is accomplished by assigning a single civil servant to sit on a number of different boards. Such assignments are demanding in the extreme, and it would be entirely understandable if the individual could not keep up with all his different assignments. A virtue can be made out of the reality of the natural limitation of central control that comes from confining centralization to overall planning, and decentralizing operational decisions by assigning them to lower levels. However, there are obvious dangers in the loss of central control. Directors and managers of SOE can use their leeway to build empires which result in enhanced status for themselves with significant perks of office. Furthermore, despite overall policy to the contrary, with decentralization, favouritism, nepotism, self-dealing, and even larceny can occur. The system is very dependent indeed on the honesty and integrity of directors and managers at all levels. However, even in the best of bureaucrats, jealousies and destructive competition can develop between different SOEs, and personality problems are hard to avoid. Management deficiencies may be picked up by the DCAC, but as already noted, they are subject to work overload. Some oversight and protectic-n against abuse is provided by the auditing procedures of the Auditor-General. However, he very

The Government as an Entrepreneur

121

clearly states in his annual report, This audit approach is not intended to reveal all errors, irregularities, wastage, extravagance and inefficiency. (Report of the Auditor-General 1985.) In Fiscal Year 1984/85, the accounts of only 29 of the 41 statutory boards were audited - no doubt the more important ones. Moreover, only 18 of the statutory boards had internal audit units (an increase from 12 in 1979). The Auditor-General also examined 36 of the government's wholly-owned companies in that year. The annual budget for the audit department for manpower was only $5.2 million in FY 1984/85 which, according to the budget, permitted them to employ just 51 auditors, 19 of whom were assigned to the statutory boards and public enterprises. With this limited manpower, the Auditor-General is responsible for auditing all of the government's accounts. 6 Thus, the danger exists for abuse to go undetected. Another quite different problem that may arise with SOE is that often they are not very imaginative in their decisions, and may display a lack of initiative. The high quality civil-servant managers, the so-called chosen elite of Singapore, are under great pressure to succeed. While generally desirable for society, two difficulties arise. Since the SOE are often selling a service or product in a monopolized market, they may set prices very high in order to maximize their revenues - since actual profits are an important measuring rod for the success of the managers. Alternatively, the pressures for success may force managers to be too cautious and avoid risk. In evaluating the performance of a public servant, avoiding losses is usually more important than making gains. This may also be found in private business bureaucracies, but it is particularly acute in SOE. A third area of potential concern revolves around the consequences of, and the reaction to, a shift in economic conditions or a business mistake. The question is whether SOE have the courage to recognize reality and cut their losses when conditions become adverse. SOE tend to hold on to losing ventures too long both because they don't want to admit their mistakes, and because they have easy access to credit to keep them afloat. Sometimes their persistence is rewarded, but very often they have thrown good money after bad. In Singapore, the issue may arise with respect

122

Lawrence B. Krause

to the government-owned shipyards and possibly the new petrochemical facilities, although the fact that these are joint ventures may complicate the decision. Over the years, several public enterprises have been permitted to fail in Singapore, including a widely reported failure of a paper company. However, the amount of the capitalization of these failures was quite small (Ow 1976). Some other public enterprises were terminated in the 1980s, but they too had small capitalizations. The problem would become more acute if a particular business venture was given high level attention and took on symbolic value. In such a case it would be very hard to accept that a mistake had been made, and eventually the welfare of society is hurt if public subsidies are used to sustain losing propositions. Finally, there is the concern that the talents and style of management that ensure successful SOE are not the same as those required for good governance, and tensions may arise because of the conflict. For example, secrecy is a natural part of business because knowledge is an element in the competitive struggle. Thus, detailed information concerning the operations of SOE might properly be withheld from the public. However, public accountability is an essential ingredient in good government. The question is, can a civil servant, or even a minister, keep his two functions clearly in mind and act accordingly, or will secrecy in Singapore be unnecessarily and improperly extended? Another example of the problem might appear in the relations between civil servants and private businessmen. Because a civil servant must be perceived as honest and having integrity, as well as actually having those characteristics, civil servants may limit their contacts with private business. However, such contacts are essential if the government is to stay abreast of current business conditions and to understand the problems of domestic businessmen. This illustrates the tension between the two roles of civil servants; that is, as policy analysts of business, and as participants in business. A final example comes from the fact that tensions and conflicts naturally arise in business transactions. When one of the participants is the government, however, there may be unwanted political consequences. For example, relations between new high technology firms and the venture capital firms that finance them are extremely contentious and it would not be wise for either party

The Government as an Entrepreneur

123

to be a government enterprise. Furthermore, there is a natural tendency for the government to deal mainly with SOE. This may be resented by businessmen in competition with the government. The civil service has been overtly politicized in Singapore, going back to the creation of the Political Study Centre in 1959. Thus, when a businessman has a conflict with an SOE, he might well interpret it in political terms, and the conflict may encourage anti-government politics.

The Role of Government in the Future There is no reason to believe that the government will or should change its basic goals of wanting to improve the economic welfare of Singaporeans, and improve society in generaP However, that still does not prevent a change in the role of the government in the economy. To analyse whether a shift is desirable, one must begin by asking the question: What is growth for? 8 To come to grips with this question, two stylized and extreme scenarios are postulated and then compared. In the first case, suppose the initiative for growth came exclusively from foreign investors. Assume further that despite an absence of bias in hiring, all management came from abroad and even the production workers were foreigners. Also assume that the factories and housing of the foreign workers were constructed by foreign workers. In the second case, assume that the initiative for growth came only from SOE. Assume all managers come from the civil service and all production workers are recruited in the market - which means foreigners- and all construction is done by foreign workers as above. What are the consequences for non-government Singaporeans (NGS) in the two cases? In both cases, the society must absorb the negative burdens of growth in greater congestion and pollution (if any). In the first case, the positive spillover to NGS comes in the form of permitting them to pursue the kinds of jobs they prefer - shop attendants and taxi drivers rather than machine operators, etc. It also permits some local entrepreneurs to develop businesses to provide parts and services to the foreign enterprises (even though they do not have the ability to initiate growth). It also permits the local shops and the local property market to flourish.

124

Lawrence B. Krause

What about the second case? Almost the same spillover occurs, with one subtle exception. It is recognized that SOE prefer to deal with other SOE. Thus, instead of local entrepreneurs getting the parts and service business, new government companies might be created for that purpose which might lead NGS to prefer foreign firms to SOE. However, there is yet another difference in that civil servants are themselves Singaporeans. More Singaporeans do become enterprise managers within the civil service, but is that why they joined the civil service? If they had wanted to be enterprise managers, one might guess that they would have preferred the higher risk cum higher reward in private enterprise, if that option was open to them. If instead, they entered the public service to promote society's welfare, then they might feel misused if their only goal seems to be making money for the government. Moving away from our stylized scenarios, one might view economic growth as the mechanism through which individuals obtain greater satisfaction by utilizing their maximum potential. The barriers to reaching the maximum are inadequate education or other personal factors on the one hand, and inadequate institutions to provide risk capital, technology, and so forth, on the other. Thus, improving the welfare of Singaporeans requires both the provision of more investment in human capital and the designing of institutions to give them choices as to how to apply their talent. It may not require more government enterprises.

Privatization

In March 1985, the government announced its intention to privatize its enterprises, and reduce its role in business. In the 1980s, it was stated that the engine of economic development should be the private sector and not the government (Report of the Economic Committee, 1986). A government committee is drawing up a longterm divestment plan. It is not clear why such a policy change is being contemplated. Unlike most other countries, Singapore is not short of revenues, nor is it trying to relieve itself of a drain on the budget. As noted, SOE make money in Singapore. And even if the government wanted to rid itself of enterprises that have recently been losing money

The Government as an Entrepreneur

125

such as the Keppel Shipyard, it is uncertain that a private buyer could be found. It is possible that the government wants to act in advance of problems, such as those just described, becoming realities. SOE in Singapore are too big and complex to be properly controlled. Furthermore, the government may feel that state enterprises are less necessary now that the economy has grown, and that certain government companies have now matured to the point that they can be turned over to the private sector. It could well be that they want to encourage private enterprise and promote competition to improve efficiency. It is also possible that the government has become sensitive to the complaint that it is omnipresent, with too dominant a role in the economy (Report of the Economic Committee, 1986). What a new plan for privatization may mean is not clear, since there has not been a full public statement of such a policy. However, there is no indication that the inclusion of the functions of the statutory boards are being considered as in some other countries, and there is no intrinsic reason why in Singapore they should not be. Some might argue that government enterprises are needed as a counterveiling power to the MNCs that operate in the economy. It is generally conceded that there are now few private domestic enterprises that could become partners with MNCs and be at all comparable. However, having this role filled by SOE because of the lack of domestic entrepreneurs is a self-fulfilling prophecy since it is unlikely that private domestic enterprises will develop in competition with the government. MNCs follow the laws of the countries in which they operate. Thus, the government has all the tools it needs to control MNCs while a more vibrant private sector is in the process of developing.

Conclusion As yet, no real progress has been made towards privatization. A few companies, such as the Ming Court Hotel in 1981, have been completely divested, but no large enterprise has been sold off. Singapore Airlines was partially divested in 1985, but the government remains the largest stockholder and thus retains control. Furthermore,

126

Lawrence B. Krause

government talk of new high technology ventures being required does not appear to imply less government entrepreneurship. Despite all that has just been said, the greatest need is not for the government to sell existing enterprises to the private sector. While that may be desirable, in the short run it would probably drain funds that would otherwise be invested in new assets. Rather, the need in Singapore is to have less government control of the economy. That can come about through the government restraining itself from absorbing new investment opportunities, and by encouraging local private entrepreneurs to do the investing instead. It is likely that in time a more vibrant economy will develop, and the good governance of Singapore will be maintained.

NOTES 1. In particular, the work of Mancur Olson, Anne Krueger, Assar Lindbeck, and

2.

3. 4. 5.

6. 7. 8.

Gordon Thllock can be cited. Special mention need be made of the work of James Buchanan for which he was awarded the Nobel Prize in Economics in 1986. A concise characterization of these theories can be found in Srinivasan (1985). Optimality is used only in the sense of its economic efficiency. The Singapore Government may want to subsidize housing for good social and political reasons, but it is at the expense of economic efficiency. The author is indebted to Chan Heng Chee for clarification of this point. Measurements have been made in terms of GNP to make them comparable with data for South Korea and Taiwan. The Singapore Government is not extreme in its ownership of manufacturing enterprises as compared to Egypt or Thrkey where over 50o/o of value added is produced by government enterprises. The author is indebted to Bela Balassa for this observation. The job of bookkeeping for the government is done within the Ministry of Finance. This can be interpreted to mean the maximization of the indigenous GNP per capita. Clearly, the economy needs to produce enough non-inflationary growth to maintain full employment, but that is stabilization policy and does not require the more intrusive involvement of the government. Moreover, the question of how fast to grow involves the comparison of marginal rates of return to savings (investment) and the population's time preference.

REFERENCES Bloodworth, Dennis. The Tiger and the Trojan Horse. Singapore: Times Books International, 1986.

The Government as an Entrepreneur

127

Department of Statistics, Singapore. Report on the Census of Industrial Production 1984, Tables 5 and 30. 1985. Eisenstadt, S.N. 'Jraditional Patrimonialism and Modern Neo-Patrimonialism. 1973. Gale, Bruce. Politics and Public Enterprise in Malaysia. 1981. Goh Keng Swee. "A Socialist Economy that Works". The Practice of Economic Growth, Chapter 9. Singapore: Federal Publications, 1977a. ___ . "Government-Owned Enterprises". Speeches, Volume 1. Singapore: Ministry of Culture, 1977b. Lee Sheng Yi. "Public Enterprise and Economic Development in Singapore". Malayan Economic Review, October 1976. Low, Linda. "Public Enterprise in Singapore". In Singapore: 1Wenty·Five Years of Development, edited by You and Lim. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984. ___ . "Privatization Policies and Issues in Singapore". Staff Seminar Paper, Na· tiona! University of Singapore, 17 October 1985. North, D.C. Structure and Change in Economic History. Chapters 3, 4, and 5. 1981. Ow Chin Hock. "Singapore". In The Role of Public Enterprise in National Development in Southeast Asia: Problems and Prospects, edited by Nguyen Truong. Singapore: Regional Institute of Higher Education and Development, 1976. Report of the Auditor-General. Financial Year 1984/85, p. 1. Report of the Economic Committee. The Singapore Economy: New Directions. February 1986. Srinivasan, T.N. "Neoclassical Political Economy, the State and Economic Develop· ment". Asian Development Review. 1985. Tan Chwee Huat. "The Public Enterprise as a Development Strategy: The Case of Singapore". Annals of Public and Cooperative Economy. January 1975. Vasil, Raj K. Governing Singapore. Singapore: Eastern University Press, 1984.

chapter six

The Government in Macro-economic Management* LEE (TSAO) Yuan

T

he focus of this chapter is on the conduct of macro-economic policy in Singapore, especially during the eighties. An attempt will be made to identify the instruments used and the targets at which they are aimed. A number of writers have already discussed the practice of macro-economic policy in Singapore in the seventies. For example, such writers as Branson, Hewson and Kapur in the Monetary Authority of Singapore (MAS) Anniversary Volume (1981) focused on exchange rate/monetary policy. So long as there is an exchange rate target, given the high degree of capital mobility, there is little room, if at all, for independence of the money supply; it is determined endogenously by money demand.1 Lee (1987) discusses the reasons for the unique experience of high growth accompanied by low inflation during the seventies. Carden (1984), in his paper on macro-economic targets and instruments, suggests that exchange rate policy be used to achieve price stability, and wage policy, full employment. 2 Much of this literature was written while Singapore's record of rapid growth was still unmarred. The downturn since late 1984, however, coupled with the current policy debate and the policy attempts to aid recovery have uncovered features of macroeconomic management which were not sufficiently highlighted before. The objective of this chapter, therefore, is not to cover old ground, but to build on the current literature, focusing in particular on the experience of the eighties in a fresh evaluation of macro-economic policy.

128

The Government in Macro-economic Management

129

Instruments and Targets There are five main policies which affect the macro-economy: (i) the exchange rate/monetary policy; (ii) the Central Provident Fund and public-sector surpluses; (iii) public-sector construction; (iv) other fiscal instruments, such as various taxes; and (v) labour policy, comprising foreign labour and wage policies. The two main goals of macro-economic policy are continued high growth and price stability. Although a distinction can be made between raising the trend rate of growth in the medium to long run and minimizing fluctuations around a given trend rate in the short run, the macroeconomic policies mentioned above can have consequences for both the short and the medium run. There are, however, other policies used to achieve a higher growth trend, such as various industrial strategies and a continued emphasis on capital formation and human resource development. 3 Since these have been amply covered in the literature, they will not be discussed here. The Exchange Rate The Singapore dollar has been on a managed float since 1973. The Monetary Authority of Singapore sets a target band for the dollar which is based on a trade-weighted basket of currencies of Singapore's major trading partners (MAS, Annual Report 1984185, p. 1). The exact weights used are, however, not known. It is therefore difficult to determine the effective exchange rate on which the MAS bases its target band because of two major reasons: a) since Singapore's entrepot trade is fairly extensive, it makes a difference whether the weights are based on total exports, domestic exports, total imports, retained imports, or a combination of these; and b) Singapore's trade with Indonesia, supposedly a not insignificant volume, is not published. 4 Table 6.1 shows the nominal Singapore dollar exchange rate vis-a-vis a number of other currencies. The Singapore dollar appreciated at an average annual rate of 3.5o/o against the U.S. dollar during 1971-80, an important factor accounting for the relatively low inflation in Singapore vis-a-vis the rest of the world. In the eighties, the Singapore dollar has, on average, maintained its value against the U.S. dollar, depreciating by an average annual rate of 0.6o/o. In so doing, however, it has appreciated against a number of its important trading partners, such as Malaysia and the European Economic Community. It has also

......

w

TABLE 6.1

0

Nominal Exchange Rates of the Singapore Dollar EXCHANGE RATES, S$ PER UNIT (100 UNITS/ OF DOMESTIC CURRENCY

us. 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

dollar

Pound sterling

Deutschmark

Malaysian ringgit

Hong Kong dollar

Korean won

Taiwan dollar

3.0942 3.0267 2.8092 2.4436 2.4369 2.3713 2.4708 2.4394 2.2740 2.1746 2.1412 2.1127 2.1400 2.1136 2.1331 2.2002

7.4137 7.3976 7.0281 6.0299 5.6940 5.2523 4.4638 4.2570 4.3613 4.6154 4.9777 4.2845 3.7450 3.2061 2.8486 2.8448

0.8485 0.8692 0.8810 0.9143 0.9408 0.9644 0.9818 1.0512 1.1347 1.1876 1.1805 0.9378 0.8829 0.8296 0.7517 0.7520

1.0000 1.0000 1.0000 1.0063 1.0153 0.9877 0.9723 0.9912 0.9821 0.9937 0.9839 0.9174 0.9166 0.9107 0.9104 0.8864

0.5099 0.5306 0.4928 0.4802 0.4797 0.4800 0.5043 0.5234 0.4849 0.4350 0.4299 0.3780 0.3526 0.2908 0.2728 0.2824

0.9962 0.8693 0.7149 0.6136 0.6086 0.4899 0.5105 0.5039 0.4698 0.4494 0.3525 0.3103 0.2927 0.2725 0.2646 0.2529

7.7253 7.5581 7.0137 6.3875 6.4132 6.2395 6.5026 6.4184 6.1377 6.0333 5.9439 5.7341 5.4703 5.2758 5.3864 5.5165

t--

""""

---~ l:l

-2. ~

l:l ;::$

TABLE 6.1 (contCi) RATES OF CHANGE (in per cent)

us. dollar

~

Pound sterling

Deutschmark

Malaysian ringgit

Hong Kong dollar

Korean won

Taiwan dollar

(I)

CJ 0

;:s

The Government in the Labour Market

181

been if the NWC recommendations had been rigidly adhered to every year. NWCH is the hypothetical series of the rate of wage increases, using the actual wage only in 1972. NWCH is similar to NWCA in that the mid-point of the range is used where applicable, while NWCHT uses the top of the range recommended. Since the NWC recommendations are in nominal terms, all the calculations are computed accordingly. The series stops at 1984 since the aggregate rate of wage increase for 1985 is, unlike previous years, based on the 1978 Occupational Structure and is therefore not comparable with previous years. In all of these calculations the incentive payments recommended for the more productive workers, of 3% and 2% in 1980 and 1981 respectively, are ignored.

TABLE 7.3 Average Nominal Monthly Earnings, All Industries, Actual and Recommended (In per cent) RATES OF CHANGE

Actual NWCA NWCAT NWCH NWCHT Actual- NWCH

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

9.6 17.8 13.8 4.7 6.9 5.6 8.8 13.0 14.0 15.3 9.0 9.2

8.0 9.0 19.6 6.0 7.0 6.0 8.1 12.2 12.3 12.1 6.5 5.0

Average 1973-79 1980-84

9.6 12.1

9.1 9.6

14.1 8.5 7.0

8.0 9.0 20.5 6.0 7.0 6.0 8.2 12.4 12.4 12.2 6.7 5.1

14.2 8.6 7.1

1.6 8.8 -6.7 -1.3 -0.1 -0.4 0.6 0.7 1.6 3.1 2.3 4.1

10.8

9.2 9.8

10.9

0.4 2.4

Lee (TSao) Yuan

182

TABLE 7.3 (contd) INDICES

1972= 100

- -

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

--------------

1979= 100

------

Actual

NWCA

NWCH

Actual

NWCH

NWCHT

100.0 109.6 129.1 146.9 153.8 164.3 173.6 188.8 213.4 243.4 280.7 305.9 334.1

100.0 108.0 119.4 154.4 155.7 164.5 174.2 187.7 211.9 239.6 272.7 299.0 321.2

100.0 108.0 117.7 141.8 150.3 160.9 170.5 184.5 207.2 233.0 261.5 279.0 293.2

100.0 113.0 128.9 148.7 162.0 177.0

100.0 112.4 126.3 141.8 151.2 159.0

100.0 112.4 126.3 144.3 156.8 167.8

NWCA: Wages calculated by applying the middle of the range of the NWC recommendations to the previous year's wages; NWCAT: Wages calculated by applying the top of the range of the NWC recommendations to the previous year's wages; NWCH: A hypothetical wage series based entirely on the NWC recommendations, using the middle of the range; NWCHT: A hypothetical wage series based entirely on the NWC recommendations, using the top of the range. SouRcE:

Ministry of Labour, Yearbook of Labour Statistics, various years.

The first point to note regarding Table 7.3 is the close similarity between NWCA and NWCH, and NWCAT and NWCHT, even though these series are computed differently. This implies that either NWCA/NWCAT or NWCH/NWCHT can be used in interpreting NWC recommendations. Secondly, in the comparison of actual wage increases with NWCH (or NWCA), two periods can approximately be distinguished: 1973-79, and 1980-84. During the earlier period, the actual wage increases followed the NWC recommended wage increases closely, with the difference being an average of 0.4 percentage points per year.11 During 1980-84,

The Government in the Labour Market

183

however, actual wage increases exceeded the NWC recommendations by an average of 2.4 percentage points per year.12 In other words, actual wages in the eighties rose above that recommended by the NWC whereas in the seventies actual wages closely followed NWC recommendations. This is seen even more clearly when indices of wage increases are computed. Using 1972 as the base, the actual wage level in 1979 of 188.8 was very close to that recommended by the NWC (NWCH = 184.5). Using 1979 as the base (before the corrective recommended wage increases), the difference between the actual wage level in 1984 of 177.0 and NWCH of 159.0 is substantial. The 1984 actual wage level is higher, even compared to NWCHT of 167.8. Wong Chin-Yeow has suggested that the influence of the NWC should be differentiated by worker classificationP The NWC is, in general, not applicable to the professional and managerial workers in the private sector, where, because of the availability of foreign professionals who can work in Singapore on employment passes, wages are determined more by international forces and the international market. The NWC recommendations are more important for the white-collar workers. For the blue-collar workers, which constitute about 40% of the labour force, the union's influence is more crucial as the degree of unionization is higher. However, as this is often the tightest segment, market forces are even more important. It might also be added that the influx of foreign workers has the greatest influence on blue-collar wages. The author, however, does not have sufficient information to substantiate Wong's interesting observation which seems intuitively correct. The same calculations for aggregate average wages are therefore carried out for disaggregated wage data, by occupational category and major industry, as shown in Tables 7.4 and 7.5.14 Table 7.4 shows that the discrepancy between actual and recommended wage increases is greatest for professional workers during 1980-84. Table 7.5 shows that for all the major industries shown, actual wage increases exceeded that recommended during 1980-84. This is further substantiated by the results of the Ministry of Labour surveys on the implementation of NWC guidelines, reported in Lim (1986), and shown in Table 7.6. In 1982 and 1983 in particular, more than half of the firms surveyed had wage increases above that recommended by the NWC.

TABLE 7.4

Rates of Change of Nominal Wages by Occupation, Actual and Recommended (In per cent)

..... Oo 4

Professional ---------

Clerical

-------

---------"----

Production

---------

---------

Actual

NWCA

NWCH

Actual

NWCA

NWCH

Actual

NWCA

NWCH

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

10.3 17.7 12.1 4.9 5.7 3.8 6.9 10.5 8.7 17.4 7.7 8.6 2.4

8.0 9.0 13.8 6.0 7.0 6.0 6.9 9.2 9.5 9.8 5.4 4.4 7.3

8.0 9.0 14.2 6.0 7.0 6.0 6.9 9.3 9.6 9.9 5.5 4.5 7.3

8.9 18.9 10.8 3.0 5.8 8.1 7.4 12.2 10.1 12.7 7.0 8.6 5.3

8.0 9.0 21.2 6.0 7.0 6.0 8.6 13.4 13.4 13.2 7.2 5.3 9.2

8.0 9.0 22.4 6.0 7.0 6.0 8.5 13.2 13.1 12.8 7.0 5.3 9.2

12 0 14.2 14.0 5.8 5.4 7.3 9.5 14.3 16.9 10.8 8.9 9.1 2.0

8.0 9.0 24.4 6.0 7.0 6.0 9.2 14.7 14.5 13.8 7.5 5.5 9.8

8.0 9.0 25.7 6.0 7.0 6.0 9.1 14.6 14.3 13.8 7.5 5.5 9.8

Average 1973-79 1980-84

8.8 10.6

8.1 7.7

8.2 7.8

9.0 10.1

9.4 10.5

9.6 10.3

9.8 12.0

9.9 11.2

10.1 11.1

r-, (I) (I)

B 0

NWCA: Wages calculated by applying the middle of the range of the NWC recommendations to the previous year's wages. NWCAT: Wages calculated by applying the top of the range of the NWC recommendations to the previous year's wages. NWCH: A hypothetical wage series based entirely on the NWC recommendations, using the middle of the range. NWCHT: A hypothetical wage series based entirely on the NWC recommendations, using the top of the range. SouRCE: Ministry of Labour, Yearbook of Labour Statistics, various years.

0 .._

~ 0

;::!

TABLE 7.5 Rates of Change of Nominal Wages by Major Sector, Actual and Recommended (In per cent)

~ ~

a0