Mr S Iswaran at the Singapore Economic Review Conference, 6 Aug 09

SPEECH BY MR S ISWARAN, SENIOR MINISTER OF STATE FOR TRADE & INDUSTRY AND EDUCATION, AT THE SINGAPORE ECONOMIC REVIEW CONFERENCE ON THURSDAY, 6 AUGUST 2009, 9.10AM, AT SWISSOTEL THE STAMFORD

Prof Euston Quah, President of the Economic Society of Singapore and Editor of the Singapore Economic Review;

Distinguished Speakers;

Ladies and Gentlemen;

A very good morning to all.

Introduction

I am pleased to join you today at the Singapore Economic Review Conference, and to extend a very warm welcome to our overseas guests and participants at this conference.

The Singapore Economic Review Conferences in 2005 and 2007 were very successful. Today, we are gathered here for a third time, against the backdrop of the most severe economic downturn the world has experienced since the second World War.

Like other open, export-oriented economies, Singapore has been hit hard by the downturn. In the first quarter of this year, our exports fell by 28 percent, while our GDP fell by 10 percent.Extraordinary circumstances call for extraordinary measures. The government responded with bold and unprecedented measures, going to the extent of drawing on our past reserves, with the consent of the President, to fund the Jobs Credit Scheme and to share losses of bank loans under various new loan and credit programmes for businesses. As a percentage of GDP, our Resilience Package, at 7 percent of GDP, was one of the largest fiscal stimulus packages in the world this year.

While these measures cannot compensate for the sharp decline in global demand, they have helped to mitigate the impact of the recession – on individuals, households and businesses.The overall unemployment rate has remained fairly low, stabilising at a seasonally adjusted 3.3% in June, unchanged from a quarter ago, even though output contracted by more than 6% in the first half of this year.

It is inevitable that a downturn of this magnitude will precipitate far reaching questions, both globally and locally, about the economic and financial architecture, regulatory systems and growth models.Singapore is not immune to such inquiry.The government has recognised that this recession has brought to the fore some questions relating to Singapore’s growth strategy.

Should Singapore do more to boost domestic demand in order to reduce our reliance on exports and external demand? Have foreign companies become too dominant in the Singapore economy? What can Singapore to do deal with the challenges and opportunities arising from an emerging Asia, that appears to be more resilient and dynamic than developed economies like the US and Europe? At a more fundamental level, the current recession prompts us, yet again, to think hard and objectively about the structure of our economy, the nature of our constraints, and the opportunities that we should be tapping into.

Singapore’s Growth Story

Singapore has not modelled itself on any particular city’s or country’s growth model. Our growth strategy has seen our GDP growing at an average of 5.5 percent per year in real terms between 2000 and 2008, faster than other developed and regional economies, while enjoying much lower inflation rates. Our tenet was a simple one: to capture growth opportunities when prospects are good, to ensure that we would have enough resources to ride through lean times.

Some economists have argued that Singapore has become too reliant on external demand. Indeed, external demand accounts for three-quarters of our total demand.Is there scope for greater contribution from domestic demand?Possibly. But, for a small economy like Singapore, the reality is that external demand will always be a key driver if we want to raise living standards for our people.

In the same period between 2000 and 2008, our average annual real growth in total demand was 8% - with external demand contributing 7 percentage points while domestic demand contributed just 1 percentage point. In other words, if Singapore did not have an export-led growth model, we would not have grown as fast in the past decade.And we would not have been able to build up the resources that have helped to cushion the impact of this current recession.

Another point of discussion has been the role of large foreign companies in our economy. Some analysts have argued that Singapore’s growth has been driven largely by export-driven foreign MNCs, which have crowded out smaller, local companies catering to domestic demand.

This is a misperception. Over the last few years, SMEs share of the total value-add produced in our economy has been steadily increasing to just under 50 percent. Small companies therefore account for about half of Singapore’s value-added. If you were to split total value-added along the lines of foreign versus local companies, you would find that each accounts for about half of the total value-added of the economy.In other words, there is a healthy mix of companies in our economy with no particular corporate model being dominant.

Also, framing this issue as a zero sum trade-off between foreign MNCs and local SMEs can be misleading for it ignores symbiotic links.For example, to anchor some leading growth sectors, we have invested resources to attract star players or the ‘queen bees’.These companies in turn spawn a cluster of supporting enterprises which typically are SMEs.

The semiconductor industry is a case in point.In a similar vein, we have now attracted the Renewable Energy Corporation of Norway to build the world’s largest integrated solar manufacturing complex in Singapore. Halliburton, Baxter, Abbott, Rolls Royce are other examples of companies that have already begun, or will soon be starting, production in their facilities in Singapore. In tandem with this inflow, we have been equally committed to helping local enterprises build their capabilities and growing them to become successful regional players.

Economic Strategies Committee

Therefore, it could be argued that, at the broadest level, our approach to economic development and growth remains robust. However, our strategies have been constantly reviewed to match the economic conditions and the goals set in each phase of development. In the wake of the current economic crisis, we expect to see significant shifts in the patterns of global demand and growth, and it is imperative that Singapore be well prepared for the choices, and poised for the opportunities that lie ahead.

The recent establishment of the Economic Strategies Committee (ESC) recognises the challenges in growing Singapore’s future as a leading global city in the heart of Asia.

To enable sustained economic growth, faster than other advanced economies, we will need to seize new growth opportunities that the post-crisis world will present. To accomplish this, we will need to grow Singapore-based companies with the requisite capabilities, technology and expertise; invest in the education and skills of Singaporeans; while continuing to attract foreign talent and companies, big and small, to our shores.

For growth to be sustained, it needs to be based on sustainable comparative advantages. Given our land and population constraints, there are limits to how much more we can drive growth by merely increasing our factor inputs.Looking back, Singapore’s growth in this decade (2000-2008) has been largely driven by labour growth (3.9 percent) rather than productivity growth (1.4 percent).

While our labour productivity growth is comparable to that of advanced OECD countries (For info: US 1.3%, UK 1.7%) it lags that of other Newly Industrialised Economies (For info: Hong Kong 3.5%, Korea 3.3%, Ireland 2.6%).

Other resource constraints will also become increasingly binding – most notably energy. Ensuring allocative efficiency in this sector which has significant externalities will be a key economic challenge.We have improved energy intensity by 28 percent from 1990 to 2007.However, growing concerns over global climate change, and the seemingly inexorable rise of energy cost, will require more innovative solutions to optimise our use of energy.

The ESC process has already started. With a wide spectrum of government officials, business leaders, unionists, and academics applying themselves to the task, the ESC should yield fresh perspectives and approaches for Singapore. Your thoughts and research, some of which will be presented at this conference, will be of great help to the ESC process as we review and refine our strategies

Past economic crises have proven to be watershed moments which have given rise to thought leaders and thought-provoking, if not provocative, economic research. I believe that your work and the research that will emerge from this crisis will similarly, and most certainly, have a lasting influence on economic thought for generations to come.

I wish you all a fruitful conference.

Thank you.