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Cablegate: Singapore Committee Recommends Productivity Boost to Drive

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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0167/01 0420851
ZNR UUUUU ZZH
R 110851Z FEB 10
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 7807
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 SINGAPORE 000167

STATE PASS USTR

SENSITIVE

SIPDIS

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

SUBJECT: SINGAPORE COMMITTEE RECOMMENDS PRODUCTIVITY BOOST TO DRIVE
GROWTH

REF: SINGAPORE 113

1. (SBU) Summary: Singapore's Economic Strategies Committee
released recommendations to drive future growth, focusing on raising
productivity by improving worker skills, encouraging innovation, and
limiting the economy's reliance on foreign labor. The
recommendations mark a policy shift from a previous focus on
expanding growth at all costs to a recognition that Singapore's
physical limits in resources and population have caught up with its
economic growth and that a slower pace of growth will be more
sustainable. The Committee's report recognizes the need to continue
to attract foreign multinational companies and position Singapore as
a global hub for business, but also advocates policies to support
local enterprises become more competitive. PM Lee has broadly
endorsed the goals and the 2010 budget due February 22 will likely
put many of the proposals into practice. End Summary.

2. (U) After eight months of deliberation, Singapore's Economic
Strategies Committee (ESC) released its report February 1 with
recommended strategies to provide sustained and inclusive growth for
Singapore. Prime Minister Lee Hsien Loong established the committee
with representatives from government, business and labor last year
in the wake of the global economic crisis and a growing perception
that the Singapore model of economic growth was in need of
retooling. The Committee is the latest in a series of similar
committees that the government has established after previous
economic crises to put the country back on the right economic track.
Although the recommendations remain just that, PM Lee has already
broadly endorsed the ESC's report. The 2010 budget due out on
February 22 will almost certainly include many of the Committee's
recommendations and specific measures to put them into practice.

Working Smarter, Not Harder
---------------------------

3. (SBU) Central to the ESC's report are recommendations to boost
productivity growth over the next decade. The Committee proposed a
goal of 2-3 percent annual growth in productivity over the next ten
years, after a relatively anemic average of one percent growth in
the previous decade. Although Singapore's GDP grew at an impressive
annual pace of 4.7 percent between2000-9, much of the growth was
driven by increases in the labor force rather than through
improvements in productivity (reftel). The ESC's initial
recommendation is to improve worker skills through continuing
education and training. Enterprises are encouraged to be more
innovative by putting more investment into technology and training,
with a goal to spend 3.5 percent of GDP (from 3% currently) on
research and development. The ESC recommends establishing a
National Productivity Fund to provide grants to support productivity
initiatives. The Committee also pitched ideas for greater land
productivity, including suggestions that Singapore place more
facilities underground.

And With Fewer Foreigners
-------------------------

4. (SBU) The ESC also recommended increasing productivity by
managing the economy's dependence on foreign workers, which now make
up one-third of the total workforce. The Committee called for a cap
on the size of the foreign workforce at the current proportion of
the total labor force, which would allow foreign workers to continue
to enter Singapore but at a slower rate. Economists have blamed the
easy availability of low-cost imported labor for relatively low
investment in modern manufacturing methods and the resulting
declines in productivity growth in recent years. To avoid a shock
to the manufacturing sector the Committee recommends managing the
inflow of foreign workers by gradually raising levies on their
employment. However, the gradual pace means the impact on
productivity in the short term will be modest. A Standard Chartered
Bank analysis suggested that industries likely to be hardest hit by
the restrictions will be the construction sector, low-end
manufacturing, and labor-intensive service industries like hotels
and restaurants.

Boosting Industry
-----------------

5. (U) Unlike similar committees in the past, the ESC did not
single out specific industries for targeted support to drive growth
forward, but did recognize that the country's financial services,
healthcare and urban services industries are well-placed to serve
the region's growing demand for services. The coming budget may
include incentives to further support those industries. The report
also recommended keeping manufacturing as a key pillar of
Singapore's economy, maintaining its position as 20-25 percent of

SINGAPORE 00000167 002 OF 002


GDP.

6. (U) The Committee recommended continuing Singapore's strategy of
positioning itself as a "Global-Asia Hub", attracting multi-national
firms to establish operations in Singapore to take advantage of
opportunities in rapidly growing Asia. However, the Committee also
added global mid-sized companies to the mix of industries to
attract, and encouraged measures to make local Singapore enterprises
more competitive globally. The Committee called for better
cross-border financing capacity for local industry, including an
Export-Import Bank and a seed fund for new capital for small- and
medium-sized enterprises.

Going Nuclear
-------------

7. (U) More controversially, the Committee's report recommended
examining the feasibility of nuclear energy to diversify the
Singapore's energy sources. S. Iswaran, co-chair of the ESC
sub-committee on energy, made clear that the prospect of nuclear
energy was in the very distant future, but advocated beginning the
process of studying its potential now given the complexity of the
issue. Given Singapore's small size a standard nuclear power plant
would not meet current international safety guidelines on proximity
to populated areas, but energy analysts said an offshore or
underground facility could reduce dangers. In the meantime, the
Committee recommended exploring diversifying energy sources,
developing renewable energy, promoting energy efficiency, and
pricing energy to reflect external costs like environmental
stability and energy security.

The Paradigm Shift
------------------

8. (SBU) Dr. Choy Keen Meng, Associate Professor of Economics at
Nanyang Technological University and frequent commentator on
Singapore's economy, told Econoff that many of the report's
proposals are close in line with Singapore's existing economic
strategy, but that the report did demonstrate a paradigm shift
toward the quality of economic growth and not just its rate of
expansion. The recommendations would move Singapore away from a
previous "growth at all costs" strategy to one more reflective of
Singapore's population and space constraints that require a slower
and more sustainable pace of growth. Nevertheless, Dr. Choy saw the
goal of three percent productivity growth as a tall order. Serious
restrictions on the import of foreign labor could curtail overall
economic growth in the short run, particularly if unemployment
continues to drop.

Comment
-------

9. (SBU) The ESC's recommendations accurately gauge some of
Singapore's economic problems and provide steps to overcome these
barriers to broader economic growth. However, the committee did not
address some key structural issues that will continue to limit
Singapore's growth potential. Although many of these issues are
politically-related, and therefore presumably more difficult for a
public/private entity like the ESC to tackle, pushing these bolder
reforms would have a much greater and more successful chance to
transform the economy. The ESC recommendations focused on labor
productivity, but neglected to address the productivity of capital,
which is linked to the lack of a truly competitive business
environment because of the overwhelming size of government-linked
companies in many core areas of the economy. The report notably
lacked a plan to rebalance the economy away from a dependence on
exports, as pushed by the G-20 and to which Singapore has agreed to,
and boost domestic demand. No mention was made of the low level of
private savings for retirement among the ageing population, and
whether to use the large public savings of Singapore's sovereign
wealth funds towards supporting private savings for this growing
segment of the population. Finally, the report accurately pointed
out the need to make Singapore a more vibrant and culturally rich
city to attract talent and promote innovation, but did not recommend
a political and cultural shift to greater openness and debate that
would be necessary to foster that vibrancy.

10. (U) The ESC's full set of recommendations can be found at
www.esc.gov.sg.

SHIELDS

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