Opening Remarks by Second Minister S Iswaran at the 2014 Annual Asia Competitiveness Institute Conference at Orchard Hotel

Professor Chan Eng Soon, Vice-Provost, NUS

Professors Tan Kong Yam and Tan Khee Giap, Co-Directors, Asia Competitiveness Institute,

Distinguished Guests,

Ladies and Gentlemen,

Good morning,

I am pleased to join you this morning at the 2014 Annual Asia Competitiveness Institute Conference.  This annual conference is an important platform for academics, business leaders and government officials to discuss and better understand issues pertaining to competitiveness in Asia.

Competitiveness is vital to the success of any economy, and its ability to create employment, raise wages, and lift the living standards of its people.  In a globalised economy with greater integration of markets, competitiveness takes on added significance, and it is a challenge of increasing importance for Asian countries.  Fundamentally, competitiveness is underpinned by three key factors – skills, scale and sustainability.  

From low-cost advantage to skills-driven growth

First, the importance of skills and knowledge has great significance to the development strategy of Asian economies.  In recent decades, many Asian economies have achieved rapid growth by shifting resources away from primary industries towards export-oriented manufacturing.  In China, for example, GDP grew by an average of 10 per cent per year in the last four decades, as large numbers of rural workers moved into the cities.  This supply of low-cost labour to urban centres allowed the country to compete in industries previously dominated by more developed nations.

Some have argued that this phase of catch-up growth is over for many Asian economies, as the growth in labour and capital inputs that has driven much of Asia’s development is beginning to taper.  In particular, the supply of rural labour in many countries has shrunk dramatically in the last few years, leading to an increase in urban wages.  This means that Asian economies can no longer compete on the basis of cost alone.  Instead, they will need to move towards more skills-intensive, knowledge-based and innovation-led activities.  This, coupled with efforts to raise productivity will help to maintain their competitive edge, and support higher wages and better living standards.

Some have already taken steps in this direction.  For example, as part of the recent ‘Make in India’ initiative of PM Narendra Modi, the Indian government is seeking to build a pool of skilled manpower to support the growth of the manufacturing sector.  A new government department has been set up to look specifically into skills development and entrepreneurship.  Similarly, in Singapore, the Government has emphasised the importance of moving towards productivity-driven growth, especially given our tighter manpower constraints envisaged in the coming decades.  To this end, we have embarked on an extensive restructuring effort to deepen skills and expertise across all sectors of the economy, encourage and support productivity initiatives within enterprises, and capture new growth opportunities in high-value activities.

In this regard, I am happy to note that ACI has embarked on initiatives to help policymakers better understand how to encourage firms to be more efficient.  An example is the SME productivity benchmarking exercise that ACI is working on with SPRING Singapore, in consultation with the European Central Bank.  Benchmarking Singapore SMEs to regional SMEs will help to shed light on the areas that need further attention, and enable policymakers to formulate better policies and more targeted programmes. 

Increasingly integrated world allowing firms to produce and sell on a global scale

Second, globalisation in an increasingly integrated world has enhanced the returns to scale and connectivity.  Technological advances and the lowering of trade barriers allow businesses to tap on new growth markets across geographies, with greater flexibility in the location of their operations, and greater mobility of talent.

Apple is a famous example of how firms are now able to produce and sell on a global scale.  Apple designs its iPads and iPhones in California, but assembles them in mainland China, with components supplied by economies from all over the world, including Mongolia, Japan, South Korea and Taiwan.  These products are then sold in markets across the globe.  Other examples are Alibaba and Amazon, which have been able to ride on the proliferation of the internet to transcend geographical boundaries and sell on a global scale.  Both companies now rank among the largest S&P 500 companies in the US.

With production and markets straddling geographical boundaries, enterprises can choose to locate almost anywhere in the world, and still be plugged into global value chains and have access to global markets.  Consequently, nations will need to sharpen their respective comparative advantages in order to attract enterprises and activities that generate economic wealth.  The competition for such investments can be intense.  A recent survey by the Boston Consulting Group, for instance, found that more than half of US manufacturing companies with at least $1 billion in annual sales were considering returning production to the US from China.  Among the reasons cited were the increased ease of doing business and better access to skilled labour in the US.  This means that China and indeed other developing economies will need to enhance their business environment and labour quality in order to remain attractive to investments.   

Achieving sustainable competitiveness

Finally, enhancing competitiveness is more challenging in today’s world given the increasing emphasis on sustainability. Sustainability in this context has several dimensions.  It is about reducing any adverse environmental and social impact of rapid development, even as a country continues to pursue economic growth.  It is also about responsible government spending that ensures fiscal sustainability in the face of a multitude of developmental needs.

Countries need to proactively address these issues, or risk them negatively affecting their competitiveness over the longer term.  For instance, in many countries, rapid economic growth has been accompanied by increasing pressures on the environment.  Pollution and environmental degradation have not only affected the health, but also the productivity of the workforce. This will in turn have negative repercussions on a country’s competitiveness.  Moreover, a poor living environment affects the standard of living of a country, and reduces its attractiveness to investors and talent.

On the social front, rising income inequality can sow the seeds of social discontent and unrest, disrupt the economy and reduce the productive capacity of the country.  Inclusive economic growth with the opportunity for all to benefit from the rewards, will help to preserve social mobility, incentivise hard work, and allow talent to realise its full potential.

In this respect, I am heartened to note that ACI’s Global Liveable Cities Index not only considers each city’s economic competitiveness, but also takes into account environmental and social factors such as pollution, depletion of natural resources, income equality and community cohesion.  The Index – which covers 64 cities – can thus be a useful tool for policymakers to understand and I dentify gaps in their city’s social and environmental performance, so that steps can be taken to address them.
 

Countries also need to keep a close watch on their fiscal positions.  Persistent deficits and high debt levels can cause a loss of confidence in a government with serious consequences on the financial and wider economy.  Governments in the region recognise the importance of fiscal sustainability.  The recent fiscal consolidation effort by the Indonesian government is a case in point.  By reducing fuel subsidies, the Indonesian government will be able to focus more resources on areas such as education and infrastructure to boost the country’s long-term growth potential.  Markets cheered this move — the day after the fuel subsidy cut was announced, government bond yields fell, and the stock market and rupiah rallied.

Conclusion

Let me sum up.  Low cost cannot be the basis of long term sustainable competitiveness.  Instead, our focus must be on skills development, market scale through economic connectivity, and fiscal, economic and social policies that are sustainable.   

Countries must enhance their competitiveness by investing in measure to raise the skills of their workforce, and the productivity of their economy.  This can be done through continual education and training, encouraging innovation among companies, and helping them to be integrated into global supply chains to exploit economies of scale.  However, such efforts will also need to be accompanied by sound environmental, social and fiscal policies to ensure that the growth generated is sustainable.  If we succeed in doing so, we will be able to anchor vibrant companies, create good jobs and raise the living standards of their people.

To this end, I believe that the ACI can play an important role in helping Asian countries better understand the factors driving competitiveness, and what they can do to raise competitiveness.  This conference, and the broader research agenda of the ACI, serves an important purpose in this regard by informing the discussions and exchange of views among policymakers, academics and business leaders.

I congratulate the ACI on the successful organisation of this conference, and wish all of you a productive conference.  Thank you.