With its 7.9 per cent growth last year, it has been called a developed country growing at developing-nation rates. Bryan Lee explains this anomaly.
IT IS almost a given that in the global rankings for economic growth, poor countries typically fill the top spots while rich nations bring up the rear.
Last year’s top three – Azerbaijan, the Maldives and Angola – clocked in impressive expansion of between 18 and 31 per cent.
But they were anything but wealthy: Their citizens took home an average income of less than US$3,000 (S $4,300) that year.
In contrast, the United States, the world’s biggest economy, grew a paltry 2.9 per cent.
Against this long-standing trend, Singapore stands out as an anomaly.
At 7.9 per cent, Singapore’s economic performance puts it more in the league of emerging growth stars such as China and India than in the comparatively tired ranks of the US, Europe and Japan.
Yet the Republic is one of the most affluent countries in the world, coming in at No. 25 in per capita GDP terms. In Asia, it is beaten only by Japan and Brunei, and may well leapfrog both to the No. 1 position this year.
In fact, out of the 180 nations ranked by the International Monetary Fund, only two rich countries grew faster than Singapore – oil-rich Qatar and the United Arab Emirates.
Indeed, this phenomenon was picked up in a recent report in The Economist magazine, which described Singapore as ‘a developed country that grows at developing-country rates’.
The report was quoted by Prime Minister Lee Hsien Loong at an NTUC conference in October, when he said economic growth this year will hit the upper end of the official forecast of 7 per cent to 8 per cent.
So, how has this tiny country with no natural resources managed such a feat? Is it just sheer survival instinct gone into overdrive?
The rise – and fall – of productivity
THEORIES about long-term economic growth come in several flavours but virtually all the major ones stem from a common foundation.
An economy’s capacity to produce goods and services is essentially constrained by two ingredients – capital and labour.
Growth therefore is determined in a big way by the rates at which a country is expanding its stock of machinery, infrastructure and workers.
It is also largely dependent on the productivity of these two production factors which tends to decline as capital and labour are accumulated.
A baker, for instance, would be more efficient if he were given a whisk. But hand him another whisk and it would probably do little to get the cake out of the oven faster.
Little surprise then that developing countries, with their explosive population growth rates, can expand their economies quickly simply on the back of a fast-growing workforce.
Also, as their factories are relatively poorer equipped, and other supporting infrastructure such as roads less developed, the output boost from additional capital investments will be bigger than in developed countries.
This in turn translates into a higher rate of capital accumulation, since investment spending equals the portion of a country’s output or income that is not consumed by households and the government.
In this simple model, Singapore’s economic prospects look bleak.
With a population that is struggling to replace itself and factories, roads and ports that are top-flight, the Republic would seem to be doomed to slow growth rates.
But the Singapore Government estimates that the country’s long-term potential growth rate lies between 4 per cent and 6 per cent, well ahead of those in the developed world.
And in the past three years, helped in no small part by a buoyant global economy, its economic growth would appear to be no less than miraculous, reaching an annual average of about 7.8 per cent.
A nimble labour force, thanks to foreigners
THE magic, say economists, lies in Singapore’s flexible labour markets.
‘Most of the growth comes from our elastic labour supply, where we can rely on bringing in more foreign workers,’ said Citigroup economist Chua Hak Bin.
Step into a shop or restaurant these days and there’s a good chance you will be served by a Filipino or a migrant from China.
Shipyards, construction sites and factories are also well staffed by workers from the region.
Government statistics show that Singapore’s non-resident population has swelled 34 per cent in the past four years to one million.
In contrast, the resident population expanded just 7 per cent, a figure likely to have been helped by a fair number of expatriates who have taken up permanent residency here.
While some may wonder if this absorption of foreigners is at the expense of local workers, recent employment figures point to a labour force that is maxed out, so labour imports are necessary to keep the economy growing.
Marching up the technological ladder
OF COURSE, the Singapore growth phenomenon is not just a simple recipe of adding more workers.
The country has undergone major economic restructuring to upgrade itself to take on higher value-added activities.
In economic growth theory, technology and human capital – that is, education and training investments – are two key factors that can help mitigate the diminishing productivity of labour and capital.
And unlike labour and capital, these two factors have a certain self-sustaining, self-propagating element.
Returning to the baker, he would prefer to be given a Kitchen Aid rather than 100 whisks of the same value.
Not only is the mixer much more efficient, it may even enable him to come up with different and better cakes.
And if he is sent to the finest pastry school in France, he could make a lot more money selling souffles than pandan chiffon cakes. He could even pass on his new skills to his friends, spreading the benefits of his training beyond himself.
In a similar way, Singapore has moved from making calculators to semiconductors, and embraced high-value service industries such as financial services.
Much of this has been achieved through targeted government policies that create a suitable business environment for foreign investors, promoting in particular several key sectors.
These measures, which may take the form of tax breaks, are costly. But they have helped attract investments from overseas that inject not just capital into the economy but new technologies as well.
Efforts, including direct public funding, have also been made to build up research and development activities here. These would go some way towards helping the economy sustain a continuous rise up the technological ladder.
The same is being done in the human capital side of the equation, with constant improvements to the education system.
‘With the resources accumulated over the past four decades, the Government has a large enough war chest to prepare the economy for the next stage of development,’ says CIMB-GK economist Song Seng Wun.
Reality of a supply crunch
SO HAS Singapore achieved economic nirvana, where wealth creation fears little abatement?
DBS Bank economist Irvin Seah reckons Singapore’s small size has made it especially nimble to respond to threats and opportunities in the global cycles of boom and bust.
‘The economic structure is well diversified. Singapore has a unique collection of strengths that is hard to emulate and that has allowed us to enjoy a mid- to long-term growth higher than many countries.’
But all that nimbleness ultimately requires acute judgment and some degree of clairvoyance on the part of the Government, whose policies have played no small part in Singapore’s success.
As it stands, trouble is brewing, and ironically, it is partly a consequence of the ‘developing economy’ growth rates of the past few years.
Inflation, while low by world standards, hit a 16-year high of 3.6 per cent in October and is set to rise even more next year.
While due in part to high global oil and food prices, this has come about because the surprisingly rapid expansion of the economy is using up spare capacity in the system. In the property and labour markets, in particular, demand is far outstripping supply, and this imbalance is pushing up prices.
The Government is releasing more land for developing homes and offices, but it will take some years before these are built.
There is also the tried-and- tested foreign labour solution. Certainly, the large populations of Singapore’s Asian neighbours would ensure a ready supply. But simply allowing more immigrant workers into the country, as the Government is doing next month, may not be enough.
High rentals, coupled with rising living costs, mean employers will need to pay foreign workers higher wages to bring them in.
Indeed, this has prompted the Government to hold back $2 billion worth of public construction projects to ease the supply crunch.
‘The economy is currently facing a serious supply-side constraint. Shortage of land and labour has driven up rentals and wages,’ says Mr Seah.
All this goes to show that even the most efficient of governments can do only so much to bend economic realities.
For sure, many of the current issues will subside in time.
But in the meantime, the pain of higher electricity and restaurant bills will, for the man on the street, take off some of the shine from the trend-breaking achievement of the Singapore economy.
Source: The Sunday Times 9 Dec 07
