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Kenneth Jeyaretnam
Recently there have been quite a few articles in the international press speculating that the recent financial crisis and ensuing severe recession may lead to a lost decade of growth for countries such as Germany, (which have relied on exports rather than domestic demand for growth). The German economy is characterised by high net exports, a high savings rate and low domestic consumption.
But this is also true of the high-growth Asian economies, such as China, Korea and in a particularly exaggerated fashion, Singapore. The Singapore government has long relied on exports and on the U.S. to be the ultimate driver of demand to provide the stimulus for Singapore’s growth. Domestic saving has been increased through the forced saving mechanism of the CPF, government budget surpluses and curtailing domestic wage growth through the import of low-cost labour from overseas. This model is no longer viable.
In 2008 net exports were 19% of Singapore’s GDP (however this was down from 32% in 2007 due to the collapse in external demand)**, the current account surplus was close to 15% of GDP (down from 23% in 2007), while domestic saving was 47% of GNP. Personal consumption expenditure was about 41% of GDP in comparison with countries like the US where personal consumption expenditure is around 70% of GDP.
The U.S. Administration has stated that the US cannot continue indefinitely to be the world’s consumer of last resort. President Obama recently called for America to consume less and export more. Here, despite a fall in first quarter GDP of close to 20% at annualised rate, the government’s policies mainly consist of waiting for a revival of U.S. growth whilst announcing limited measures to cut business costs. Whilst a package of S$20 billion may appear large, the actual budget deficit was much smaller and after taking account of the income from overseas investments smaller still.
It must be remembered that Singapore lacks many of the automatic stabilisers, such as unemployment benefits, which increase spending in a recession and mitigate the multiplier effects from declining exports and falling demand. Cutting costs through wage reductions and other domestic income-reducing measures may work for one country but cannot work for the world economy in aggregate; a point which I thought was conclusively settled with the publication of Keynes’ General Theory. Lower wage costs (which are in any case likely to be a relatively small proportion of the costs of production) are unlikely to stop firms here from laying-off workers when their export sales have fallen off a cliff.
In my view, the government should be much more aggressive in taking steps to boost domestic demand to offset the contractionary impact arising from the export sector. It is completely unnecessary for Singapore to be saving 47% of GNP when the returns from our foreign investments have been so low. I would like to see the following steps (the list is not meant to be exhaustive) to boost domestic demand adopted as a matter of urgency:
· A minimum wage with exemptions for both old and young workers. This will also have the effect of discouraging employers from just importing cheap labour from poorer Asian countries which has depressed wages and led to declining productivity
· A reduction or suspension of the GST which disproportionately impacts lower-income households
· Higher tax credits for lower income households which will be clawed back as income rises
· Reductions in fees and service charges, including total elimination of school fees at the primary and secondary level
· Reductions in Employee CPF
· Massively increased investment in education and infrastructure, particularly aimed at increasing energy efficiency and developing new “green” technologies along the lines of the recent US stimulus package
Given the magnitude of the falls in GDP year-on-year we need a total stimulus (tax reductions plus additional spending) of the order of 8-10% of GDP, instead of 3.5% of GDP which is what was projected as the Overall Budget Balance in the Government’s 2009 Budget. It should be pointed out that whereas the Budget says S$5.8 billion will be spent by the government on stimulating bank lending this is not actual spending but is in the form of loans or loan guarantees. There will only be spending and losses to the taxpayer if the loans have to be written off. Therefore the actual stimulus arising from this scheme will only be a small fraction of the headline number. This is much less than the other central banks, such as the US Federal Reserve and the Bank of England, are doing on a massive scale already.
All this can be done without raising taxes on the higher earners and without raising the low marginal tax rates that make Singapore an attractive place to invest and do business in.
To conclude, Singapore risks a lost decade of economic growth akin to that suffered by Japan in the 1990s or even worse unless the Government recognises that the old model is broken and that we must reorientate the economy away from exports and saving towards higher domestic consumption and investment.
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* ‘Germany’s Policy of Containment’, Financial Times, 6th April 2009
**Economic Survey of Singapore 2008
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Yes, learning more about the statistics is the way to go (but you may want to look at more recent ones). There is a lot of information on the internet that will help us understand things better.
By the way, personal income tax and GST in total contribute less than 20% of the govt revenue last year (refer to revenue statistics from MOF website).
somebody is repeating again…however, i do must agree that the internet provides us with a lot of information, however people *or some* tends to only digest what they want to see and won’t accept other perspective, typical of a group-think.
however, statistics isn’t the way to go in every situation. rules and procedures gain from statistical situation can usually only be use in recurring situation. however when it is an unexpected situation, creativity and judgment is needed. past statistics won’t be effective in solving this crisis as it is the past that leads to the present, and if depend on the past again that lead us to success and the current scenario, it will be going through a death spiral aka trap of success and this type of events will still hit us hard.
it is said in the death spiral, one of my fav, that period of success leads to the success syndrome, which consist of arrogance, complacency, inward focus, codification, conservatism, greater complexity and because of that, an “organization” becomes learning disabled and lost touch with the external environment. then when performance decline due to environment disturbances, the “organization” goes into denial and will try to do the same to achieve back the past result. and the spiral will go on and forth.
so in the end, what i am trying to say is that statistics won’t get you out of every scenario
To Patriot@40: landmass, geography, culture, strong primary productions including fisheries, national high tech industries, common national identities, common belief, national (indigenous) cultures and even homogenous national ideologies, have very little to do with private consumption.
The truth is, that it is a myth that countries with small population cannot rely on its private consumption like bigger nations and have to overly depend on exports.
I think Singapore focuses too much on foreign exports rather than making domestic demand its main pillar of strength. I believe that since we’re still a young nation, we should focus more on strengthening our infrastructure and foundation and not spending too much resources garnering foreign investments and foreign talents.
“By the way, personal income tax and GST in total contribute less than 20% of the govt revenue last year (refer to revenue statistics from MOF website).”
Yeah, cos the rest come from ERP, alcohol tax, cigarette tax, road tax, petrol tax, COE etc
Hi Parka, I come from a business school too. Of all the people I know (in my class), those who are enthusiastic about becoming entrepreneurs I can count with a single hand. And they are all foreigners :-)
Apparently the government isn’t doing enough to promote entrepreneurship… is not true. Creative and Osim thrived w/o gahmen’s help and wilted when they came in. there is plenty of money. The problem is that the funds are controlled by … inexperienced folks who know nuts about business. so the easy way to make money is to …
Anyway, Singaporeans not willing to take up menial jobs is … bullshit. The problem is the pay is too low and not viable. And by employing cheap foreign workers, the employers simply pass the hidden social costs to the average Singaporean. so a min wage would indeed help… by creating decent paying jobs for SINGAPOREANS.
Finally, if we want low lying fruits, we can start off with NS. Lets face it. Recruits, Reservists are useless in a battle. And wages are a small component of the cost. Peanuts. think iceberg. Soldiers need to be feed, housed, equipped, trained, etc. Real money. We can have a equally effective professional army with 1/3 the numbers at probably half the cost. 20k real jobs that can feed a family.
Is there not a disproportionate % of savings (via compulsory CPF) being channelled to property? Which in itself does not have a great multiplier effect in the current scenario where raw materials and labour are both imported !
Even more foreingers working here pay rent which goes back to the landlord to repay his loan !
Not to mention, nowadays you have to Serve your Service Providers because they can’t even understand our Orders!
hmm…the minimum wage wouldn’t work…..that would encourage people with higher valued jobs to complete with people who lower valued jobs of the same pay….providing no economic benefit….domestic consumption should be boosted..even a 1 percent increase of domestic consumer spending can provide a stimulus to local industries which can keep more people in jobs.
“hmm…the minimum wage wouldn’t work”
Why not just try and see if it works ? The government can try job credit scheme but yet cannot try minimum wage.
It’s time Singaporean wake up their own ideas. After all Singapore is known as city of possibilities, what cannot be possible ? Try first and then criticize, don’t criticize and whine even before trying especially it is for benefit of employees.
choonway,
agree with you. Singaporean has always look outwardly for innovation and creativity. When US popularize the trend like web 2.0 and social network, tech savvy citizens capitalize on their popularity, and when the hype dies off, so is the enthusiatism. If Singaporean has been looking inwardly, we wouldn’t be mercy of outside countries, and we will have create innovation capability and motivation for more sustainable innovation, technology and business for local consumption. Needless to say, the main culprit is the Singapore government who control everything and go by profitability and chasing money first, and still look upon itself as leader, resulting in singapore going nowhere because the core competency is never build by following and moving whatever money-making trend. Worse still, the government is still living in the past, thinking what works and make money in the past can still be milked but then Singapore government is all about short term not long term, just take at the nonsense of old fart who justifies 30 years frailing investment. Why is this still old fart and his families of mercenaries still around sprouting nonsense and holding Singapore back ?
Kenneth,
At lot of what you have presented in your essay is not new. Many commentators ranging from the well-known economists (Paul Krugman, Alywin Young and Linda Lim) to non-professional, blogger types have already said essentially the same thing. The question is why has such views not sunk in?
I don’t have an aswer but as far as I can tell, it seemed that much of the Economics debate about Singapore seemed to revolved around a set of self-fulfilling prophecies that seemed to have grip (local professional economist) and the electorate in the main.
(a) Singapore is too small — this is often used as a convenient counter argument to shut any rationale alternative. For example, when the spector of increasing “consumption” is mooted, you will see the classic counter argument “economy is too small”. Somehow the notion of economic sustainability is often left out.
(b) High tech == good (success), low tech == bad (backward) — the high tech-ness of Singapore is often presented as proof of success of the economy or as some kind of means to the nation’s survival. So low tech activities are often overlook as “growth” potential. For example, BioTech at one time was seen as the growth engine and low tech like Shipbuilding sunset. Yet during the BioTech investment boom largely by the government, Shipbuilding was booming driven by demand rather than investment but seen as low tech left to wilther.
(c) Welfare bad. Another one of the classic counter argument used to put down alternative economic policy. In any rationale debate, all policy instruments including those that seemed to be “Welfare” in nature should be judge on cost-effectiveness basis. But in Singapore it seemed that anything smack of welfarism or is labelled so by old man LKY and his PAP stooge becomes a taboo.
(d) Saving is good, spending is bad. I supposed this attitude towards economic policy seemed to flow from the view that managing a household account is the same as managing a national account. Yet, in economics term, money is worthless when one talk about a national economy unless money is recycle for a purpose. Saving and debt are basically two side of the same coin. Neither is good or bad. Yet, the magic counter argument often deployed by people with wants to demolish alternative policy is the “so-you-want-to-deplete-the-reserve”!
(e) Economics is only for the people with economics degree. This is often the case when someone come up with alternative policy the first thing to attack is whether the originator of the policy has an economics degree or not, rather than whether the policy itself has merit or not. A useful insight about whether having a economics degree is helpful in understanding the economics is Alan Greenspan himself a train economics and a PhD holder admitted to not knowing what CDO was about. And non-economics or even university trained financial traders were able to understand CDO and implications for the economy. But I guess in Singapore, paper qualification is more important and the message itself.
If my gut feeling about these self fulfilling prophecies are indeed true, the really the key questions raised by you is how do we get the message of an alternative model to the people especially the powers-that-be and the electorate (those that can vote)?
Answers anyone?
Superb article. KAJ should now focus more on the Reform Party website & post more information there. Not much had been done when it was managed by the Ex Chairman NTS.
Whats wrong with Elites joining the Opposition as commented.? Its getting better informed. This is a media revolution.
Lets hope KAJ have some Prayers for Prosperity.
There’s nothing inherantly wrong with a moderate form of welfare state, one which education, food and healthcare are provided fully by the state.i feel that one of a good reasons why people in western countries / japan etc are so creative and entrepreneural is that they know that their basic needs are taken care of by their government.
pancake, what you say may be quite True, just like Maslow has said, “humans are wanting beings” and those motivation theories may differ in terms of what are the needs and how it is trigger, but if we put it in singapore context, most Singaporeans can’t even fulfill the bottom two needs which is psychological *food,shelter” and safety “security,stability”, so perhaps that’s why the motivation is at this level. some people will say that shelter as a need has been fulfilled, as they have a HDB home to stay in, but how true is it? with the current cost of housing.
Were you being ironic, Andrew? Your post is puzzling, taken at face value. Many countries have a system of social security. China is looking to reinforcing its own. In Europe, these systems have slowed and cushioned the effects of the recession thus far. The crisis wasn’t caused by state welfare, either. Without de facto state welfare, the financial sector in the US would have gone thermonuclear last september.
We need to examine all possibilities to get ourselves out of this hole we have dug ourselves into.
GO KJ! i wish you all the best in the upcoming GE! :D
Great article Ravi.
I quit Singapore and I am now living in Indochina.
Everything in Singapore reminds of my unhappy past and during this recession time there are too many sad faces in Sing to brighten my life.
Though 69 years old I plant sugar cane and sell them at the local prices and hope to own an ethanol factory to turn out green energy.
Ravi, come and see my farm. I will give you VIP treatment.
Being a small island state with a population of about 4.5m, local consumption alone will not support the local economy. Release the fund in CPF to the citizen will offer short term help but in the long and medium term, USA economy is the key. China and India may not be able to offer much as they are focus on manufacturing as well. Low consumption and high saving rate in China do not offer us a easy ride into that market. This recession had opened up cracks in the gahment policies both domestic and export strategies. There is no quick fix solution unlike China which could could use its large reserve to build large capital projects as many part of China lack basic infrastructure . Sinkapore uses that strategy during the last recession hence the MRT. It is sad, the gahment had no fallback strategy other then reactive actions to mend small local issue. Long term planning for political succession to ensure famiLee (PAP) continue stay in power was actively pursued.
Maybe for once instead of worrying about GDP and moneygrubbing , we should start having new ideas on economies and finance , which seem to have gone off the rails in recent years,
Also countries like Singapore that make large use of low paid foreign labour should have import taxes imposed on them in developed countries . They are making use of other countries populations , do not have a minimum wage , even for Singaporeans , so do not have the same overheads or restrictions as other countries.