Miss Sheryl Yeo from Hwa Chong Institution - Economic Society of ...

MAS-­‐ESS Essay Competition 2011/2012
“Moving Ahead With The Times:
Managing External Challenges and
Internal Diversities in Singapore”
YEO SU HUI SHERYL
Hwa Chong Institution
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Abstract
The global economic climate is rife with change today. Market volatility and the rise of
emerging economies have become a fact of the new world order. No longer will
advanced economies fuel the engine of global growth, a rebalancing act is in place that
will see emerging economies take centre stage in the quest for economic success.
Set against a backdrop of rising Asia, Singapore is indeed well positioned to ride on this
new wave of growth. Yet, these opportunities do not come without its challenges.
Structural changes in the world economy means relooking at our high-­‐tech exports
model, while the coming dominance of Asia can only signify more competition from
within the region. Internally, income disparity has also been on the rise-­‐ the cause of
much dissatisfaction and unhappiness amongst Singaporeans. Amidst pervading
economic forces that mandate a constant widening of the underlying gap between top
and bottom incomes, this paper relooks at the sustainability of the ‘grow and transfer’
strategy that Singapore has much heralded.
Changing times call for new strategies. Moving ahead, this means positioning Singapore
to better leverage on growth in emerging markets. Here, a diversification of innovation
markets is recommended, along with greater support for local enterprises to capture
emerging markets. While acknowledging the government’s call to move away from
reliance on foreign labour, this paper also calls for greater support for productivity
increases in businesses affected. Vital in selected industries such as construction and
service, pledged governmental help amidst long term targets set to reduce our reliance
of foreign labour will better assist businesses in their planning. Last but not least, we
explore the need for a composite means-­‐based tax that will allow for a more
progressive tax system, whilst providing the government with greater resources for
income redistribution.
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Moving Ahead With The Times
The Changing Circumstances Surrounding Singapore’s Economy
Economic growth has always been the fundamental tenet of the collective Singapore
strategy to increase our standard of living. While such a focus remains vital in an
increasingly competitive world however, many factors have grown in importance in the
equation for improving the lives of our citizens. No longer is the average Singaporean
content with growing real annual income-­‐ rising aspirations necessitate a
reexamination of our priorities. Increasingly, we realise that it is not just about how
much or how fast we grow, but how we grow and where we grow.
‘Change alone is unchanging’, recognised Greek philosopher Heraclitus in his time 2500
years ago. With change reshaping both our internal and external economic landscapes,
Singapore can only seek to constantly accept and adapt to these new trends. Indeed, the
rise of emerging economies amidst the volatility of traditional economic strongholds,
competition from the region, and widening income disparity pose to us new challenges
that we must face. Moving ahead, Singapore has to adapt and to employ suitable
policies that leverage on our core competencies, so as to effectively turn challenges into
opportunities for us.
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Structural Changes in the Global Economy
External Rebalancing and the Challenges for Trade
“Clouds are particularly dark over developed economies.”
Mr. Rob Vos, Director of the Development Policy and Analysis Division of UN DESA
Up till 2025, global growth is predicted to slow to approximately 3% per year on
average (The Conference Board, n.d.a.). In particular, growth in advanced countries are
projected to remain low even under optimistic conditions, and external rebalancing for
many of these countries with current account deficits will see a drop in their imports.
Singapore’s growth has always been contingent on the performance of the external
economy. In the wake of economic recovery, fiscal contraction has been underway in
advanced economies, but private demand has not taken up the relay as much
(International Monetary Fund, 2011). Further austerity cuts in the EU in light of the
colossal debts by its ‘peripheral’ nations would then only seek to exacerbate this
decrease in aggregate demand. Unquestionably, it will be emerging economies that will
grow to take a larger share of global demand.
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Singapore’s Services Exports by Major Trading Partners
Source: Department of Statistics Singapore
For an open economy like Singapore with its reliance on trade 1 , such structural changes
will have significant impacts on Singapore’s trade balance. As seen in the graph above,
the EU and US are one of Singapore’s top export markets for services in 2009 and 2010.
With the decline of developed nations and the rise of emerging markets however, such
a trend is not expected to stay for long. Indeed, since 2009, the total value of exports
exceeded imports for Singapore’s trade with China. In comparison, the value of imports
has exceeded exports for Singapore’s trade with the United States since 2006
(Department of Statistics Singapore, 2011). Whether Singapore can then make up for
the shortfalls of export revenue from advanced economies with revenue from demand
by emerging economies remains the key question.
1 According to the IMF, the current account balance as a percentage of GDP in
Singapore was reported at 19.10 percent in 2009, and predicted to increase to 21.32
percent of GDP in 2015.
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Thus increasingly, the challenge for Singapore will be to look towards other export
markets of emerging economies for trade and growth opportunities, as well as to
suitably employ policies that will target consumers and businesses from these markets.
The opportunities from emerging markets are huge, but so are the obstacles.
Overcoming these obstacles is essential for us as a nation to leverage on emerging
economies for growth. On a national level, this means expanding free trade agreements
and helping local firms meet demands from such economies. For the local firm, this
entails identifying unmet needs, improving cost competitiveness, and customising
products and services to suit emerging markets.
The Rising Asian Economy
Competition From Within the Region
Emerging Asian economies will also see significant trade flows, with the quantity of
both economic output and input rising. The value of Indonesia’s exports, for one, is
predicted to double between 2010 and 2025, while the value of its imports grows by
one-­‐and-­‐a-­‐half times higher by 2025 (World Bank, 2011). Current account surpluses in
developing regions, particularly in Asian markets, are bound to increase, together with
rising capital inflows, and these will seek to allow for accumulation of foreign exchange
reserves.
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Share of Global Assets and Wealth in Emerging and Advanced Economies
Source: The World Bank
Such a trend can only see emerging economies taking a more favourable position, with
increases in its net assets and wealth, accompanied by a corresponding decrease in
advanced economies. This is particularly so as emerging economies increasingly
become factor and resource holders, with increased holdings of investments in
developed nations.
It is evident that this accumulation of wealth in Asian emerging markets will translate
to more opportunities for Singapore, but there are also costs associated with the
strengthening of our neighbours that will effectively change the economic landscape in
Asia, with more countries in better positions to compete with us for foreign direct
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investment (FDI). As economies like China, Vietnam and Indonesia grow their domestic
markets and utilise their wealth for investment into technical capabilities, they will
increasingly appear on the radar of Multi-­‐ National Corporations (MNCs).
Spatial relationships will also grow in prominence, with a growing risk that MNCs may
choose to set up their regional headquarters right where the market is. In fact,
Singapore’s relative distance from the emerging China market has already been
pointed out as a disadvantageous factor in comparison to cities like Shanghai and Hong
Kong (European Chamber, 2011). Further, as other economies implement more pro-­business
policies and strengthen their institutional factors 2 (once seen as an advantage
unique to Singapore), competition within the region for FDI will intensify, which will
require constant differentiation on Singapore’s part.
Widening Income Inequality
The Easterlin Paradox: Relative Incomes and its Correlation with Happiness
Widening income disparity is arguably the heaviest price we have paid for growth.
With skill bias technological change, Singapore has seen stagnating wages at the lower
end of the job spectrum, coupled with rising top incomes. This has given rise to an
increasing Gini coefficient, one that is a polarising factor in our society today.
2 Some significant pro-­‐business changes include China’s new commitments to
strengthening IP protection and enforcement, as well as simplification of a former 150-­‐
day investment permit process to a 30-­‐day registration process in Indonesia
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Gini coefficient among resident employed households
Source: Department of Statistics Singapore, Key Household Trends 2011
Income inequality is an important issue because the implications of such a
phenomenon extends beyond economic costs that affects the purchasing power of
those with lower incomes. A ripple effect is set in place, causing social polarisation and
rising dissatisfaction amongst the population. For a government that has pledged to
‘leave no one behind’, rising income disparity has indeed had political consequences as
well.
This range of destabilising implications associated with growth and the pursuit of GDP
has caused many to reconsider our priorities as a nation. If the ultimate aim of growth
is to improve the human lot through bringing about happiness, surely a relentless
pursuit for rising national income at the cost of social priorities is grossly wrong The
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Easterlin Paradox notes that more income does not necessarily translate into greater
happiness. In fact, relative incomes play a greater role than absolute incomes in
determining happiness (Clark, Frijters and Shields, 2008). Taking this into perspective,
a rising income disparity can only mean that happiness may be diminished, despite
overall rising absolute incomes.
Increase in Real Wages by Percentile
Credit: Assoc Prof Hui Weng Tat, LKYSPP
For the low income and the average Singaporean who has seen a slight rise in income
compared to those at the 80 th percentile of incomes, happiness for them may have
indeed decreased through the years.
Our leaders do indeed know this, and rising social transfers have indeed played a part
in decreasing inequality. The focus of Budget 2012, a largely social budget, was also on
creating an inclusive and fair society. Singapore’s strategy has been in growing the
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economic pie as much as we can, before tackling income disparity through social
transfers. Yet, such a strategy is only viable in the short run to alleviate the situation.
Natural economic forces mandate that incomes at the top grow at a pace far faster than
the rest, while incomes at the bottom stagnate, which means that the underlying
income gap between the rich and poor will only continue to grow. The challenge for
Singapore thus lies in the sustainability and durability of this ‘grow and transfer’
strategy.
Leveraging on the Growth of Emerging Markets
Diversifying our Innovation Markets and Boosting Local Enterprises
In responding to the new global economic order of the decline of the West and the rise
of the East, Singapore should seek to rightly position itself so as to leverage on
emerging markets for growth. This can be done through expanding and diversifying
our innovation efforts, so as to capture consumers and businesses from emerging
markets.
Innovation is often a main driver of economic progress, translating scientific and
technological advances into productive economic activity (OECD, 2007). Yet,
innovation in itself is not simply limited to high-­‐tech industries. Having had a strong
focus on high-­‐tech industries, it is perhaps time for Singapore to consider diversifying
its investments to include research into lower-­‐cost innovative solutions targeted at the
mass consumer in emerging economies. One such technological solution is the I-­‐slate,
an educational tablet developed by Rice-­‐NTU Institute for Sustainable and Applied
Infodynamics, which at US$45, has been snapped up in India, and is poised to being
about educational changes in classrooms around the nation. Though this had been a
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largely philanthropic effort, it had shown us the huge potential market in emerging
economies for such low-­‐cost technological inventions.
Small-­‐medium enterprises (SMEs) should indeed be encouraged to take on such lower-­cost
innovation. In order to enhance the technological capabilities of SMEs, Singapore
should encourage a network approach towards investments, so as to allow for pooling
of resources and for a more streamlined product development process. Noting that
SMEs often obtain much of their knowledge inputs from third-­‐party firms or research
institutes (OECD, 2000), it is worth considering a cluster strategy 3 as well, to allow for
groups of SMEs working in the same product sector to be each others’ seedbeds for the
transmission of ideas, with higher government grants given to more commercially
viable activities.
Reducing our Reliance on Low Cost Foreign Labour
A Graduated but Necessary Process for Increases in Productivity
“Our first task is to upgrade and restructure our economy, so that we can grow by
becoming more productive, and can rely less on expanding our workforce.”
Finance Minister, Tharman Shanmugaratnam
Budget 2012 had its focus on reducing the Dependency Ratio Ceilings (DRCs) in the
manufacturing and services sector, and it is clear that policy-­‐makers see productivity
as Singapore’s economic destiny. Reducing our dependency on low-­‐cost foreign labour
was seen as fundamental to increasing productivity, and businesses will have to bear
the short-­‐term pains in order to reap the benefits of higher productivity in the long run.
3 A cluster approach is one whereby physical proximity of companies facilitates the
exchange of knowledge and thus enhances effectiveness of product development
(OECD, 2000).
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The Productivity and Innovation Credit (PIC) was then part of the government’s efforts
to help businesses cope with expected labour shortage.
It is inevitable that local SMEs pay the greatest price of having DRCs cut. Whether they
can withstand the immediate and short-­‐term costs to reap long-­‐term benefits remains
questionable. One recommendation however, is for the government to publish long-­term
targets so as to allow small businesses to plan for calibrated productivity
increases, while phasing out foreign workers. The promise that the PIC and other
initiatives to help SMEs will stay over a longer term will also enable businesses to
better cope with the change, and to assure them that help will be consistent. Rather
than function as a broad-­‐based support 4 , it may also be more constructive for the
government to provide greater entitlements to affected, yet vital industries, such as in
service and construction 5 . For SMEs in these industries, the PIC cash payout quantum
should also be relatively increased compared to larger firms in other sectors.
Means-­‐based Tax
The Need for a Composite and more Progressive Tax System
The income tax in Singapore has always been one heralded as a progressive tax, with
help then redistributed to low-­‐income earners 6 . However, with top incomes moving
4 In a Channel News Asia report, Abhijit Ghosh, tax partner, PwC Services LLP
(Singapore) noted that the MNCs and “the big business operators ended up enjoying
most of the benefits."
5 It is important for us to note that while the government cannot continue subsidising
sunset industries such as low-­‐cost manufacturing, greater support can be given to
industries vital to economic expansion such as construction and service.
6 Finance Minister Tharman Shanmugaratnam announced as part of his budget speech
that for every dollar that low-­‐income Singaporeans paid in taxes in their lifetimes, they
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apidly while bottom incomes stagnate, the sustainability of our tax system based
solely on income is called into question, for the underlying gap between the rich and
poor will always widen 7 . Given the situation, it is necessary for us to look at a
composite, means-­‐based tax system that does take into account not only income, but
capital gains and assets as well.
With social responsibility being fundamental to the values the Singapore government
inculcates in its people, a means-­‐based tax will also be instrumental in providing the
government with greater resources for redistribution. Though the costs of such a policy
include a more complicated tax collection system and competition from other cities
given that half of income taxes are paid by foreigners (The Straits Times, 2012), it is my
personal belief that Singapore is well-­‐positioned to implement such a policy. This is as
Singapore has unique advantages of strong institutional factors, a secure environment
and a good educational system that distinguishes it from other cities-­‐ factors that do
play a large part in influencing the decision of foreigners to work here. Further, as
inequality rises, the efficiency costs of redistribution from a more complicated tax
system falls.
A means-­‐based tax would thus be one that ensures a more progressive tax system,
while providing greater resources for social transfers. Complementing this approach, it
is expected that the reduced reliance on foreign labour would also reverse the wage
depression that has been going on in Singapore for the lower-­‐incomes for many years.
now get back $4 in the form of government aid.
7 The phenomenon of ‘money growing money’ is also one that exacerbates the
polarising effect of widening income disparity.
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A strong educational system and retraining subsidies will then serve to provide a long-­‐
term approach allowing for income mobility. 8
Conclusion
Economic growth is never always an end in itself, for its impacts extend beyond the
material realm to include the social wellbeing of our citizens. Moving ahead, the
challenge for us lies not in how much we grow, but how we grow and whether we grow
together. As it has been wisely put, ‘a chain is only as strong as its weakest link’.
Increasingly, there will be greater intervention required on the government’s part to
ensure that no Singaporean is left behind in our quest for prosperity.
In an ever-­‐changing world as ours, Singapore is indeed well poised to leverage on the
rising Asian market, and it is only through combating challenges can we turn them into
opportunities for growth. As it has been since our day of independence, Singapore’s
economic destiny lies in its own hands, and it is through riding the waves of change,
together as one, can we secure a sustainable future for ourselves.
8 Inter-­‐generational earnings elasticity is a key here, for income mobility strongly
affects competitiveness and social equity.
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