Dr Vivian Balakrishnan at the Institute for Emerging Forum, 6-7 Feb 2006: “SINGAPORE’S STORY: BIG IDEAS IN ACTION”

21ST EMERGING ISSUES FORUM, 7-8 FEB 2006: INSTITUTE FOR EMERGING ISSUES, NORTH CAROLINA “SINGAPORE’S STORY: BIG IDEAS IN ACTION” Dr Vivian Balakrishnan Minister for Community Development, Youth and Sports 2nd Minister for Trade and Industry Republic of Singapore

Good morning. I've been asked to speak on “Singapore’s Story: Big Ideas in Action” and some of the policies we have formulated to finance our future in areas such as social security, healthcare and education. "Big ideas” is a rather lofty term to describe the survival strategy of a tiny city state. We have only been independent for 40 years. Our island measures 40 km from east to west, and 20 km from north to south. Conventional wisdom at our point of conception was that a tiny city with no hinterland, no natural resources, a diverse collection of poorly educated people divided by race language and religion were destined for failure.

There are three general principles of public policy that I wish to discuss this morning. The first principle is “No intergenerational transfers”. Each generation must earn enough to provide for its own consumption, to pay for retirement and invest for the future. The second principle is “Do not subsidize consumption”. Instead of subsidizing consumption, government funds are better spent investing in education, housing and healthcare. It is essential to build up assets for the future, at both a personal and state level, rather than to just boost today’s consumption. The third principle is to “Use the free market”. If people have sufficient savings, and are empowered to make personal choices, then the free market can be used to deliver even social objectives. Underpinning all these principles is political fiscal discipline. All of us have to win elections. However, in order to stick to these principles, politicians must not be tempted to offer free lunches. Every service offered to the population must be paid for in either higher taxes or a cut back in some other services. Let me now illustrate how these operating principles have been applied in the economic development of Singapore, and in particular how our approach to social security, housing, education and healthcare has differed from the US.

Like the United States, Singapore is an immigrant society. And we both share the hallmarks of an immigrant society – a diverse population willing to work hard, a sense of self reliance and strong family ties. In Singapore’s case, immigrants from China, the Indian sub continent and the Malay Archipelago came to make a better living in what was then a British trading colony. Jews from Iraq and eastern Europe, Arab traders and other Europeans were also part of this immigrant society.

Taking the “road less travelled” in our economic model

Upon independence, our immediate priority was to figure out how best to organize our economy to feed 2 million people. It is worth reflecting on the economic models that were available for a newly independent nation 40 years ago. China had a centrally planned communist system. India had socialist model, which placed a premium on import substitution and the promotion of domestic industries behind high tariff barriers. We rejected each of these in turn as unsuitable for our circumstances. Our separation from Malaysia in 1965 meant the loss of the hinterland. Left with only a tiny domestic market, Singapore could not sustain a closed economy based on import substitution. A communist centrally planned model also did not fit in with our understanding of human nature – that reward should be commensurate with ability and effort.

So instead, we chose a free market, export driven economic model with low barriers to trade. We actively courted MNCs – then seen as neo-colonialist exploiters of poor countries – to set up operations in Singapore. We offered them tax incentives and guaranteed open capital markets. We made heavy investments in education and infrastructure. We ensured stable labor relations by managing these relations under an equitable tripartite partnership between the unions, employers and the government.

Adopting this economic model paid off with 4 decades of spectacular growth. Our compounded annual growth rate was 8 percent during this period. Today, Singapore’s per capita GDP is close to US$26,000. Our trade is almost four times the size of our GDP, hitting US$441 billion last year. So we are absolute believers in the value of global free trade.

Financing the Future in Singapore

The United States and Singapore share broad similarities in terms of our immigrant origins and free market economic model. But our approaches on “financing for the future” in areas such as social security, education and healthcare have been quite different.

Singapore has sought to keep our corporate and personal tax rates low. Our top personal income tax rate stands at 21 percent, with a flat rate of 20% for corporate tax. Nearly 60% of economically active persons in Singapore do not pay any income tax. Our Goods & Services tax is only 5%. We need to maintain low tax rates in order to attract talent, reward hard work, incentivize success and attract foreign investments. Meanwhile, fiscal discipline has enabled us to afford these low taxes whilst maintaining budget surpluses.

Social security

We have designed a social safety net that deliberately eschews subsidies on consumption, but focuses on investing in housing, education and healthcare for our people. For example, when oil prices rise, prices for utilities and public transport also rise accordingly. To cushion the impact on low-income households, our preference has been to give cash transfers to these households, rather than use subsidies to absorb the price increase. Cash transfers, unlike subsidies, do not distort price signals. Rational decision-making at the micro level continues. Households will still have to choose whether to take the bus or walk the additional eighth of a mile in view of transport cost increases.

We do not believe in intergenerational transfers to fund retirement. Consequently, we eschewed “pay as you go” systems where the current generation of working adults paid for the retirement of the generation before them. You will run out of funds when fertility falls, and the population ages. This is precisely the trap facing Europe and perhaps America. Instead, in 1955, Singapore implemented the Central Provident Fund, or CPF, scheme. This was a mandatory, personalized savings scheme under which all workers had to save part of their monthly wages with the CPF Board for their retirement. Today, employees contribute up to 20% of their wages to the CPF board. Employers would contribute a further 13%. In summary, up to 33% of wages accrue to each employee’s CPF accounts. The primary advantage of the CPF system is that it is self-sustaining. There is no need for intergenerational transfers. The individual remains responsible for his retirement funding and incentives for work are not distorted.

Healthcare

In 2002, overall expenditure on healthcare constituted 4.3% of our GDP, with government expenditure on health making up 5.9% of overall government expenditure. For the US, these figures stood at 14.6 and 23.1 percent respectively. There is universal health coverage in Singapore, and the patients are free to choose their healthcare provider. Funding is primarily derived from what we call the 3Ms – Medisave, Medishield and MediFund. Medisave – a mandatory, personalized savings account to meet healthcare expenses – is a key reason behind the relatively low healthcare burden on the government. Created in the 1980s, the Medisave scheme was simply an extension of the CPF scheme, where part of the monthly contributions to the CPF Board would be diverted into the Medisave account. Contribution rates go from 6 to 8.5 percent, depending on one’s age. Funds from the Medisave account can be used to pay for hospitalization charges, certain outpatient treatment expenses and healthcare insurance. Medishield – the second “M” – is a low cost catastrophic illness insurance scheme which complements the Medisave scheme. This insurance scheme is designed to help members meet medical expenses from major or prolonged illnesses which would otherwise drain their Medisave accounts. Meanwhile, those still unable to pay for their medical expenses despite government subsidies, Medisave and Medishield are given additional assistance through the third “M” – an endowment fund named Medifund.

In the same way the CPF scheme was designed to stress individual responsibility, so too was our healthcare system. HealthCare in Singapore is subsidized, but not free. Patients are expected to co-pay part of their medical expenses and to pay more when they demand a higher level of service. Caps are imposed on the amount of Medisave funds that can be used to pay for various charges and procedures to ensure that these funds can be sustained in the longer term. There are high deductibles attached to MediShield insurance scheme. Consequently, all patients, even poor patients, can afford to shop around for the best quality and value for money. Health care providers compete for patients. Thus we have a competitive market based healthcare system with reasonable prices, freedom of choice, universal coverage and adequate resources set aside for healthcare in the long term.

Housing

Housing is another fundamental policy issue for Singapore. From the very start, we encouraged home ownership in Singapore. During periods on unrest in the 1960s, it was observed that people who owned motorcycles were more keen to push them out of harm’s way rather than engage in destructive violence. We realized that owning a home would give one a tangible stake in Singapore, and hence promote greater social stability. We subsidize public housing heavily to promote home ownership. Rental is not a common option in Singapore and today, more than 90% of all Singapore resident households own their homes.86% live in public housing, which in Singapore has a very different connotation from public housing in the United States or from the council flats in the UK. To make it easier for people to pay for their homes, we allowed the use of CPF funds for this purpose. People could subsequently sell their homes in the open market, and in effect, liquidate their housing equity. Consequently, they had an incentive to ensure that their homes and neighbourhoods were well maintained.

The other key focus of our housing policy has been on upgrading the facilities of older public housing estates. Elevators have been modified to stop on every floor where before they would stop on only selected ones. Landscaping work has been carried out. In some cases, new bathroom fittings have been installed in some of the older apartments. We do not want a situation where the older housing estates become ghettoes of sorts and blights on the urban landscape. Since its inception in 1990, the government has poured over US$2.1billioninto this upgrading programme. The upgrading programme, like our healthcare programmes, is subsidized but adopts a co-payment approach. The common theme in both our housing and retirement policies is to help people build up personal assets – their homes and their retirement funds. This is literally financing the future rather than subsidizing present consumption.

Education

As is the case for the US and most other governments, education is a key priority for Singapore. This is another area that is heavily subsidized in Singapore. In 2004, Singapore’s public expenditure on education amounted to 3.5% of our GDP, or 21.1% of total government expenditure. Singaporean students in Grade 4 and Grade 8 emerged top in Science and Mathematics in a 49-country study conducted in 2003 by the International Association for Evaluation of Education Achievement (IEA) based in Boston, USA.

We believe this reflects well on the educational resources provided, the school climate and safety, and probably most important of all, our students’ (and parents’) aspirations to fully exploit the opportunities in this knowledge-based age. Consequently, funding across schools is equitable to prevent any resource disparities regardless of neighbourhood. The average school these days has facilities like computer labs, music studios, and a range of sports facilities. We have also worked to prevent the creation of “education ghettos”, as school facilities age or if student enrolments shrink in more mature neighbourhoods. In 1999, the government poured US$2.7 billion into a scheme to rebuild and upgrade schools with aging facilities. By 2003, more than a third of Singapore’s 335 primary and secondary schools had been upgraded.

The creation in 1993 of what we termed Edusave accounts for all Singaporean students in government schools between the 1st to 10th grades was another move to create more opportunities for students across the board. The government would contribute funds to these accounts which students could then use to pay for enrichment activities such as study trips and exchange programmes, drama classes, sports camps and the like.

Facing the challenges of the new century

The key challenge facing Singapore today is maintaining competitiveness and promoting creativity in a rapidly aging population. Singapore’s fertility rate currently stands at 1.25.It is estimated that by 2030, close to 19 percent of our population will be over the age of 65, compared to the current 8 percent.

To maintain our competitive edge, we will invest more in training and education, so that we can move up the value chain, towards more knowledge-intensive industries such as the biomedical sciences, nanotechnology, environmental engineering and digital media. For instance, to establish Singapore as a biomedical hub, the government has poured in large amounts of funding for the life sciences, providing not only the facilities and grants for cutting-edge research, but also overseas scholarships to train future generations of researchers. To get a sense of the budgetary commitment, our Economic Development Board set aside over US$600 million in funds to attract leading industry players to set up world-class research centres in Singapore. This is complemented by equally large fund dedicated to investing in biotech start-ups and joint ventures. And these are just two out of several life sciences related funds.

We have also set aside more funds for research. We will use these funds to attract and nurture top scientific talent, build research infrastructure, promote private sector R&D by offering to co-fund strategic projects and attract top universities to establish branches in Singapore.

Taking a leaf from other educational models such as the US, we have also introduced changes in our school curriculum to encourage more creative, interdisciplinary approaches to problem solving. For instance, the school curriculum now has a greater emphasis on project work instead of testing. To support the drive to develop Singapore as a biomedical hub, our high school students are being exposed to life sciences modules in class.

We are encouraging older workers who are willing and able to continue working to remain in the workforce. This has involved a series of measures such as the gradual raising of the retirement age from 55 to 62 over the years, upgrading the skills of older workers and even redesigning jobs to allow older workers to continue performing effectively in them.

The ideas that I have shared may not be relevant to larger countries with quite different circumstances. Nevertheless, I believe the key themes of saving enough so that every generation pays for its own way; government expenditure on building intellectual assets rather than today’s consumption; and a competitive free market economy are always worth thinking about. And finally, you need political will to create the future.

Thank you.