Singapore’s economic growth has been heavily dependent on factor accumulation during the past three decades. Attempts to gauge productivity growth in Singapore and other East Asian countries has led to the widely publicized debate on whether the East Asian “miracle” was driven by factor accumulation or productivity growth. According to the most recent study by the authorities, Singapore’s productivity growth was indeed very low until the 1980s, but has improved significantly to a level comparable to the Organization for Economic Co-operation and Development (OECD) average in the 1990s.
1. Singapore has had a remarkable growth record over the last three decades, propelling the city state into the league of countries with the highest per capita income. Backed by credible and proactive policy management, Singapore’s strong fundamentals have allowed the economy to weather the impact of the Asian crisis more successfully than most countries in the region. With the recovery now fully underway and the short-term economic outlook bright, the focus of this year’s Article IV consultation is on the medium-term structural challenges facing Singapore’s economy.
2. Singapore’s economy faces considerable challenges to its future growth, in part because of the impact of rapid globalization and “digitalization” and in part because of demographic pressures arising from an aging population and high government involvement in the economy. The government is keenly aware of these challenges and over the past few years has begun progressively addressing them with the aim to facilitate the transition to an increasingly private sector-led, knowledge based economy. A core theme of the reforms is to enhance private, sector initiatives and innovation.
3. Chapter II “Singapore: Productivity Growth and Competition” discusses the government’s reforms to deregulate the economy and enhance competitiveness with the aim of developing Singapore into a knowledge based economy within the next decade. The author reviews factors that have contributed to Singapore’s historical strong growth performance while spotlighting microeconomic weaknesses that are acting as drag on Singapore’s growth potential. The paper notes that several studies suggest past growth has been due more to factor accumulation and less to productivity growth. The author notes that, going forward, economic growth in Singapore must come from sustained productivity growth, since there is limited scope for capital accumulation as capital ratios are already at levels in advanced economies and labor force growth is expected to stabilize due to demographic trends. The study concludes that while the government-led strategy has been very successful to date, productivity growth in the future will have to come from a more dynamic and entrepreneurial private sector.
4. Chapter III “Singapore—Financial Sector Development: A Strategy of Controlled Deregulation” reviews the authorities’ reforms aimed at promoting Singapore into a full service international financial center. Like other financial centers, Singapore faces a difficult transition to a “digital age” of global markets. The paper provides a brief background to the development of the financial sector and the government’s central role in promoting and regulating the financial industry. What sets Singapore apart from other countries in the region is that the development of the financial sector has been carefully controlled, and guided by conservative prudential practices. The author notes that, although this approach has helped to create a solid and sound financial system, it has not been without costs in that the tight controls may have limited financial sector development. The paper then reviews major trends that are sweeping through the global financial industry and their impact on Singapore’s financial center and concludes by discussing outstanding constraints that still need to be addressed to improve the depth and efficient functioning of Singapore’s capital markets.
5. Chapter IV “Singapore’s Central Provident Fund: Options for a Comprehensive Reform” describes the mandatory Central Provident Fund (CPF) and highlights how the CPF has been a useful tool in mobilizing household savings and helping to finance Singapore’s growth. However, over time, the author notes that several problems have emerged as the scheme has been used for wider policy uses. A central problem is that at retirement most CPF members are “asset rich but cash poor” largely because almost all of their savings has been used to finance housing and because of low returns on their cash balances. The paper discusses the government’s reforms to the CPF and concludes by highlighting several proposals that could be considered to refocus the CPF as a core retirement scheme with the aim of providing a satisfactory replacement rate at retirement.
6. The last chapter “Generational Accounting for Singapore” reviews the sustainability of Singapore’s fiscal policy management within a long-term context. Prudent fiscal policies have been the cornerstone of Singapore’s financial management, with the government budget recording overall surpluses in every year but two since 1970. At end-March 2000, the government’s net assets were estimated to amount to roughly 125 percent of GDP. Various studies have raised the question of whether Singapore’s fiscal surpluses are excessively large in an intertemporal framework, especially when taking into account the impact of population aging on revenues and expenditures. The author addresses the same question by applying the “generational accounting” method. The paper concludes that taking into account population aging, uncertainty about future revenues and expenditures, and a relatively high degree of risk aversion, a good case can be made for a reduction in taxes and/or an increase in expenditures leaving an overall fiscal position that would be both sustainable and equitable across generations.