Singapore has embarked on a bold restructuring programme aimed at boosting productivity and relying on innovation and skills for economic growth
Along with several other export-driven economies in Asia, Singapore has seen economic growth slow in the face of weaker demand from Europe and the US.
But the island state’s finance minister, Tharman Shanmugaratnam, has used the good times as an opportunity to take pre-emptive measures that proved valuable as the world economy weakened, analysts say.
The Singaporean economy emerged strongly from the 2008−09 global financial crisis, with real GDP growth reaching 14.5% in 2010; but growth has slowed recently, with output contracting in the second quarter from the first, on the back of the global slowdown. The contraction, however, was less than initially estimated as the pharmaceutical sector offset a decline in the electronics manufacturing sector. GDP expanded by 2% year-on-year in the second quarter, faster than the first quarter’s 1.5% advance.
Tharman has set out his aims to restructure Singapore’s economy to grow on the basis of skills, innovation and productivity, and is driving these measures through parliament and in face of union criticism.
“[Singapore] has had to restructure its economy at a time when the global economy has been pretty turbulent,” Hak Bin Chua, Asia economist at BofA Merrill Lynch, tells Emerging Markets. The Singapore finance minister has managed the transition well, according to Hak Bin Chua. “So far the economy has been holding up a lot better than one might have expected,” he says.
The IMF backed Tharman’s moves “promoting inclusive growth, centred on keeping unemployment low and preserving incentives to work”. The measures he has announced include cutting Singapore’s dependence on foreign workers by reducing quotas for foreign workers for the manufacturing and services sectors and encouraging firms to hire local people and keep older workers.
The reforms also aim to improve productivity and address the issue of income inequality, with the long-term goal of growing productivity by 2–3% a year. A one-off cash grant for small and medium-sized enterprises pegged at 5% of the company’s revenue is also included, to boost domestic enterprises.
Steps were also taken to boost the use of green vehicles. A new scheme will give up to $20,000 registration fee rebates for those who buy cars with low carbon emissions, while new cars with high carbon emissions will be subject to up to the same amount in surcharges.
As part of the reforms in the housing sector, a bonus of $20,000 will be given to older Singaporeans who move to smaller homes, while healthcare spending will be doubled to around $8 billion over the next five years.
To develop the tourism sector further, the Singapore government pledged to inject $905 million into the Tourism Development Fund, while simplifying the goods and services tax relief for goods brought in by tourists and by Singaporean residents returning from abroad.
Singapore has maintained its top spot on the World Bank’s Ease of Doing Business report, and it is the country with the easiest procedures and the lowest costs for trade across borders. It takes five days for a container to be exported from Singapore, at a cost of $456, compared with 22 days and a cost of $906 for countries in East Asia and Pacific, and 10 days and $1,032 for OECD countries. The island state is the second-best in the world at protecting investors and the third-best in terms of dealing with construction permits.
The finance minister put contingency measures in place against a euro crisis shock. “That has given companies and investors quite a lot of confidence, and that’s part of the reason why the job market and investment have been resilient in Singapore,” says Hak Bin Chua.
Tharman, who took over as finance minister in December 2007, is a trained economist with degrees from London School of Economics, Cambridge and Harvard. He spent much of his early professional life at Singapore’s central bank, where he was the chief executive, before entering politics in 2001.
In its latest Article IV assessment, the IMF commended the authorities for proactive macroeconomic and financial policies, which it said had underpinned the strong rebound in activity last year. It said that while the outlook was for weaker growth, Singapore has sufficient policy room and tools to cushion the impact of external shocks and preserve macroeconomic stability.
Charlie Lay, an economist at Commerzbank, says that Singapore now faces a challenge to steer its way through the weak global outlook. “Singapore’s economy is vulnerable to a correction in global financial markets,” he says.
On the fiscal side, Singapore enjoyed a primary budget surplus of about $2.9 billion, or 0.9% of GDP in 2011, from $722 million in 2010, and an overall surplus of $2.3 billion, or 0.7% of GDP.
Analysts attribute the boost to stronger corporate profits, lower-than-expected claims for capital allowances as well as a sharp increase in stamp duties, which they say could be partly put at Tharman’s door.
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