Cablegate: Economists Question Future of Singapore's Growth Model

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DE RUEHGP #0113/01 0280544
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R 280544Z JAN 10
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 7743
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 SINGAPORE 000113

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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV SN

SUBJECT: ECONOMISTS QUESTION FUTURE OF SINGAPORE'S GROWTH MODEL

1. (SBU) Summary: As Singapore recovers from another recession
brought on by events outside its borders, local economists have
begun to question Singapore's economic growth model. In past
decades Singapore utilized an extraordinary openness to foreign
investment and labor to quickly grow its economy to developed
status, but this same openness has exposed the small city-state to
volatile economic swings outside its borders, as well as unforeseen
domestic impacts from a steady stream of foreign workers. In May
2009 the government established an Economic Strategies Committee
that will put forth preliminary recommendations next week to prepare
the country for sustained and inclusive economic growth by looking
for new growth opportunities. Several noted local economists
believe the committee's recommendations must address structural
problems inherent in Singapore's growth model, including declining
productivity growth, an overdependence on external markets and
foreign enterprises and workers, and a widening income gap among
Singaporeans. End Summary.

Is The Singapore Model Still Valid?
-----------------------------------

2. (SBU) In the wake of Singapore's worst recession since
independence in 1965, local economists are questioning whether the
economic growth model that lifted Singapore into the developed world
is still valid, or whether significant changes must be made to guide
the economy forward. The financial crisis that rocked the global
economy in late 2008 impacted Singapore particularly hard, exposing
its vulnerability to the economic ebbs and flows outside its
borders. As a small, open economy heavily dependent on trade,
Singapore has ridden the wave of globalization to new heights of
wealth, but economic crises over the years in the region and in its
major markets have inordinately buffeted the tiny city-state. Its
openness to foreign workers and businesses brought new investment
and talent, but also concerns of a widening disparity of incomes and
declining productivity.

3. (SBU) Few would argue that Singapore could ever turn inwards and
relinquish its long-standing role as a gateway in the region for
trade and investment. However, local economists have been
considering how Singapore's economy could be restructured to fuel
future growth, and for whom the economic growth should benefit. As
the country begins to retune the economy, economists believe that
economic policymakers must take into consideration structural issues
that may slow Singapore's path ahead, including lagging productivity
growth, its dependence on external markets, low domestic demand, and
growing income inequality.

4. (SBU) The Singapore government has joined the debate, announcing
in May 2009 the establishment of an Economic Strategies Committee
(ESC) composed of members from the government, labor and the private
sector to develop economic strategies and examine new opportunities
in the changed global environment. The 25-member Committee has been
studying how to seize new growth opportunities, deepening
Singapore's corporate capabilities, growing human capital, creating
good jobs, and optimizing use of scarce energy and land resources.
The ESC will present its initial recommendations February 1 just
ahead of this year's budget release later that month. The
committee's recommendations are intended to guide Singapore's
economic strategy in the medium term. A full report is due in
mid-2010.

Productivity on the Downtrend
-----------------------------

5. (SBU) Singapore's productivity growth has been languishing since
2004, and in recent years productivity has dropped into an outright
decline. Although Singapore has continually posted exceptional GDP
growth rates rarely seen in the developed world, in recent years it
has been growth in the labor force rather than productivity
improvements that have driven GDP growth. In a recent report,
Citigroup calculated that of the 8.2% average growth from 2004-7,
only one-fifth was driven by productivity growth. Singapore's
non-resident labor force grew almost 20% between 2006 and 2008, and
foreigners now account for approximately 34% of the labor force.
The influx of labor has meant that strong GDP growth has not
translated into a similar growth in wages. In the last five years
overall nominal GDP growth has outstripped per capita GDP growth.
The recent recession sent productivity into a further tailspin as
companies used government incentives to keep workers on the payroll
even as industrial production nosedived.

6. (SBU) Economists put much of the blame for the lack of
improvements in productivity on the easy availability of imported
low-cost unskilled labor. Of the approximately one million foreign
workers in Singapore, 80% are unskilled or semi-skilled workers,
many of whom brought in on short-term contracts to work in

SINGAPORE 00000113 002 OF 003

construction and light manufacturing. Dr. CHOY Keen Meng, professor
of economics at Nanyang Technological University, told Econoff that
the cheap imported labor had contributed to stagnant wages at lower
income levels, helping to widen the income divide in Singapore.
Choy said tightening the taps on immigration and foreign labor would
push up wages and incentivize companies to substitute capital for
labor and become more productive. He conceded that Singapore would
continue to need foreign labor as the country's fertility rate is
below replacement level, but advocated being more selective by
recruiting higher skilled laborers, which would also help improve
productivity. Although a more restrictive policy on foreign labor
would inevitably reduce GDP growth rates, Dr. Choy said a slower
pace of growth would in the end be more sustainable given
Singapore's limited land and resources.

7. (SBU) More restrictive policies on foreign labor could have
negative impacts that the GOS will need to consider. Dr. Choy
warned that the GOS had attempted to improve productivity through
encouraging wage increases in the 1980s which contributed to
Singapore falling into recession in 1985. Higher wages could also
spark inflation as Singaporeans would require higher wages to be
enticed to take jobs currently held by foreigners. Other jobs would
likely disappear for good as low-wage industries move offshore as
labor costs become uncompetitive.

Offshore Waves Rock Singapore's Boat
------------------------------------

8. (SBU) The recent economic crisis reminded Singaporeans that
their economic growth is highly dependent on overseas markets.
Economists are concerned that Singapore's export industries have
become dangerously dependent on their primary "G3" markets in
Europe, Japan and the United States that have recently become
volatile. At its height the crisis cut Singapore's non-oil exports
by over a third, and also crippled the country's extensive shipping,
logistics and other service industries that support international
trade. International trade has long been the lifeblood of
Singapore's economy, with its imports and exports totaling 350% of
its GDP, one of the highest levels in the world.

9. (SBU) To offset its traditional export destinations, Singapore
has been searching out new markets in Latin America, India and
China. Although trade with China has been growing rapidly, much of
the trade is in intermediate products whose final markets tend to be
the same G3 countries to which Singapore already exports heavily.
NTU's Dr. Choy said that demand from China is beginning to
contribute to regional growth, and said the government had made big
efforts to expand markets in other regions like Russia and the
Middle East, but that in the medium term they would not be able to
replace traditional markets.

Building Domestic Demand
------------------------

10. (SBU) As a small city-state Singapore has little option than to
continue with international trade and foreign investment as major
parts of its economy. However, as Singapore's population crosses
the five million mark, domestic demand is becoming a force to be
reckoned with, and economists are considering ways to boost lagging
domestic demand and reduce the economy's dependence on foreign
consumption. Domestic consumption is currently 40% of GDP, down
from over 60% in the 1970s.

11. (SBU) Domestic consumption has been low in part to an unusually
high savings rate. Dr. Choy told Econoff that a regression analysis
found that high property prices were one of the most significant
depressors of consumption. In a country where most residents own
their own home, Singaporeans have become accustomed to saving large
amounts in order to afford expensive housing purchases, leaving
relatively little for other purchases. The government also
contributes to high savings rates through a compulsory nationwide
saving plan, and by squirreling away budget surpluses into reserves
and its sovereign wealth funds which hold hundreds of billions in
dollars worth of assets. The government insists high levels of
reserves are necessary for emergencies, but Dr. Choy recommends
transferring surpluses back to the population and selling off shares
in government-linked companies to allow Singaporeans to hold a
greater share of the nation's wealth.

12. (SBU) Economists also advocate policies to support local small
and medium-sized enterprises (SME) which have often been ignored in
the drive to attract investments from large multi-national
corporations (MNC). Manu Bhaskaran, head of economic research at
Centennial Group, told a recent economic forum that Singapore had
relied on MNCs early in its development to attract capital,
management and technology. However, recent data show that

SINGAPORE 00000113 003 OF 003

foreign-owned companies receive almost half of business profits.
Bhaskaran said the time had come to develop the "inherent capacity"
of the country, advocating development of worker skills and local
intellectual property. A recent Citigroup study also advocated
encouraging SMEs by facilitating technology transfer, penetrating
foreign markets for locally produced goods and services, and
promoting domestic brands. Bhaskaran said stronger local businesses
would also stabilize and smooth business cycles.

13. (SBU) Economists also see a gradual shift from manufacturing to
a services-based economy as a means to boosting domestic demand and
smoothing the volatility in the business cycle. As a small open
economy like Singapore, an increase in domestic demand has typically
been expected to bring a rise in imports rather than a commensurate
boost to domestic production. However, domestic demand in Singapore
leans more to consumption of services, relatively little of which
are imported. Domestic service industries are also ripe for new
export opportunities as markets in the region, particularly China,
shift rising consumption from basic food and clothing into services.
Service industries expected to prosper in coming years include
medical services, financial services, education, transportation, and
other specialized services in which Singapore is a clear leader.
Dr. Choy pointed out that service industries have also become more
labor-intensive and are better sources of employment than
manufacturing, particularly the high-end capital-intensive
manufacturing that has found a niche in Singapore.

Growing Income Inequality
-------------------------

14. (SBU) Economists view Singapore's focus on rapid GDP growth as
masking slower growth in overall welfare, and a growing income
divide. Singapore has one of the highest per capita incomes in the
world; the IMF listed Singapore as 22nd highest in 2008 with a per
capita income of US$38,972. However, Centennial Group's Manu
Bhaskaran estimates profits take about 46% of that GDP pie, almost
half of which go to foreign companies. Much of the economy's recent
high growth was concentrated in high-end manufacturing and finance,
dominated by foreign companies. Bhaskaran notes that although
Singapore's GDP per capita is roughly 11% higher than Hong Kong's,
per capita consumption is 21% lower.

15. (SBU) Singapore's income divide as measured by the Gini
coefficient has been rising steadily in recent years from .42 in
1998 to .48 in 2008, one of the highest rates in the developed
world. The stream of unskilled foreign labor has depressed wages at
the lower end and contributed to a widening income gap. At the same
time, cuts in corporate and personal income tax rates to encourage
business have disproportionately benefited higher income groups.
According to a recent Citigroup report, real household incomes for
the bottom quintile of households actually fell in the years after
the 1997 financial crisis and 2001 recession and have only recently
begun to creep upwards again.

16. (SBU) The Singapore government has begun to recognize the
growing income inequality and is changing policies to address it.
In previous economic downturns the government focused its efforts on
restraining wages and reducing costs for business, but last year's
stimulus budget in reaction to the economic crisis used state funds
to preserve jobs by extending worker retraining programs and
subsidizing salaries. The government has been reticent in the past
about building a social safety net, fearing it would reduce
incentives to work and damage Singapore's competitiveness. However,
economists expect the government to go beyond current health,
housing and retirement programs and put in place programs to provide
a cushion against economic downturns. A more solid net would not
only serve as an automatic fiscal stabilizer during difficult
economic times, but would also improve social cohesion and guard
against a potential reaction to globalization.

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