Abstract
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.
II. Singapore: Productivity Growth and Competition1
The tidal wave of competition is already upon us. We must move decisively now to ride the wave, and not try in vain to hold it back. This applies both to regulators and players. In this situation, the adage “If it ain’t broke, don’t fix it” does not apply. Our policies have not failed; they have succeeded, so far. But they will not continue to succeed in future. By the time our policies no longer work, it will be too late. We must fix them before they are broken.2
A. Introduction
1. Singapore has had remarkable economic growth during the last three decades, averaging 8 percent per annum. Its real per capita GDP increased eight-fold, putting Singapore in the league of countries with the highest per capita GDP. In tandem, Singapore has carved out distinct niches in the global economy. It is the world’s largest in disk-drive production, the third largest in oil refining, and the fourth largest global foreign exchange center after London, New York, and Tokyo (see Chapter III).
2. The strength of its economic fundamentals and policy management has also borne the test of time, especially during the Asian crisis. The 1997 crisis hit Singapore with much less severity than other East Asian countries and after a slowdown in growth in 1998 a strong recovery has been underway since early 1999. The recovery, initially fueled by the strong external demand, has become increasingly broad-based and leading indicators point to prospects for continued strength in the period ahead.
3. The remarkable success to date notwithstanding, a closer look reveals areas in which some signs of weakening have emerged. Some studies suggest that the bulk of past growth has not been so much due to productivity growth as due to factor accumulation, but such a pattern of growth cannot be expected to continue. Various indicators of competitiveness—including the microeconomic competitiveness indicator of the World Economic Forum—confirm Singapore’s macroeconomic strengths, but have also revealed a relative weakness in the microeconomic environment viewed critical for innovation and productivity growth. Singapore’s market shares for some goods have declined against regional neighbors in its major export markets.
4. The Singapore authorities have acted pragmatically by implementing changes and formulating plans to help maintain a strong economy in the region. From a longer-term perspective, the authorities have stressed the importance of a strategic repositioning away from low skill, labor-intensive production and toward higher value-added and knowledge-intensive activities. This vision was followed up by a number of measures to strengthen the innovative capacity and efficiency of the economy.
5. The rest of this chapter discusses these developments in more detail. The importance of productivity growth is discussed in Section B, and followed by the discussion of signs of competitive weaknesses in Section C. Section D discusses the measures undertaken by the authorities in response to signs of weakness. Section E contains concluding remarks.
B. The Need for Productivity Growth
6. The economic growth of a low-income country is typically driven by factor accumulation at early stages of development, but increasingly needs to rely on productivity growth. The low capital stock in low-income countries means that rapid capital accumulation will generate rapid economic growth, enabling the country to narrow the gap between itself and higher-income country. However, as a country’s economy matures, decreasing returns to capital set in and sustained economic growth depends on a country’s capacity to generate productivity growth.
7. 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 (Krugman 1994). In particular, some economists have argued that Singapore’s economic growth has been driven almost entirely by factor accumulation with little contribution from productivity growth (see Box II.1). 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 OECD average in the 1990s. While the exact magnitude of Singapore’s productivity growth is still debatable, it is clear that a larger part of Singapore’s economic growth has been due to factor accumulation up to this point. Even in the 1990s, factor accumulation accounted for three-quarters of Singapore’s economic growth of about 8 percent per annum.
8. Regardless of how the past is characterized, there can be little debate about the fact that future economic growth in Singapore has to come from sustained productivity growth. The capital-output ratio in Singapore has reached 2.7 in 1997, comparable to the ratio in the United States in the same year, suggesting that there is limited scope for capital accumulation alone to generate strong growth. Likewise, in the absence of large inflows of foreign labor, demographic trends suggest that growth in the labor force will stabilize around 1½ percent per annum. Thus, without robust productivity growth, the scope for economic growth will be much more limited in the future. The areas in which the authorities need to focus their attention with a view to enhancing productivity growth can be assessed by reviewing a broad spectrum of indicators of Singapore’s competitiveness.
Singapore—The Debate on Total Factor Productivity
The debate was initiated by Young (1995), who argued that economic growth in Singapore was driven by massive capital accumulation that was not accompanied by reasonable productivity growth (Table II.1). Out of the average growth rate of 8 percent per annum, growth in total factor productivity accounted for less than ½ percent from the mid–1960s to 1990, with the remainder of growth attributable to the accumulation of capital and labor. Productivity growth in other Asian tigers (Korea, Hong Kong, and Taiwan) was higher than in Singapore, but still contributed a relatively small fraction (¼–⅓) of their overall economic growth, implying that the substantial part of their rapid economic growth was due to factor accumulation.
In contrast, Sarel (1997) and Hsieh (1999) find that significant contributions were made by productivity growth. Sarel provides evidence in favor of strong productivity growth in Singapore, using capital shares that were constructed from sectoral data. Sarel’s capital share is about ⅓, much less than Young’s ½, and the difference in the capital shares accounts for 70 percent of the difference between the two estimates of total factor productivity. Hsieh presents evidence to show that the behavior of the return to capital is not consistent with the claim that Singapore’s economic growth was driven by capital accumulation without productivity growth. He then derives TFP measures based on factor prices and shows that Singapore has experienced a stronger productivity growth than Young has estimated. He attributes this difference to possible shortcomings in national accounts data in Singapore.
Clearly, measurement problems are at the heart of the debate. The usual difficulties in measuring the capital stock are particularly daunting in Singapore, which has gone through rapid changes in its economic structure at the same time as having frequent changes in investment incentives in the context of its capital intensive development strategy. Using more detailed information on the capital stock, Statistics Singapore recently conducted two studies of productivity growth in Singapore. A preliminary study in 1997 found evidence of substantial productivity growth in the late 1980s and 1990s. A more recent study—quoted in a recent speech by DPM Lee and soon to be published—finds that productivity growth in Singapore averaged nearly 2 percent in the 1990–97 period, while the productivity growth averaged ¾ percent in the 1973–90 period—only slightly higher than Young’s estimate for the period prior to 1990.
Sources of Economic Growth
Statistics Singapore (October 1997).
Sources of Economic Growth
| Young | ||||
| Time Period | Output | Capital | Labor | TFP |
| 66–70 | 13.0 | 13.4 | 3.3 | 4.6 |
| 70–80 | 8.8 | 14.0 | 5.8 | -0.9 |
| 80–90 | 6.9 | 8.4 | 6.6 | -0.5 |
| 66–90 | 8.7 | 11.5 | 5.7 | 0.2 |
| Sarel | ||||
| Time Period | Output per person | Capital per person | Labor per person | TFP |
| 78–96 | 5.1 | 6.5 | 1.1 | 2.2 |
| 91–96 | 4.9 | 5.6 | 0.8 | 2.5 |
| Statistics Singapore 1/ | ||||
| Time Period | Output | Capital | Labor | TFP |
| 80–85 | 6.0 | 11.2 | 1.7 | -0.6 |
| 85–90 | 8.1 | 5.6 | 3.0 | 3.8 |
| 90–98 | 7.5 | 8.1 | 4.4 | 1.2 |
Statistics Singapore (October 1997).
Sources of Economic Growth
| Young | ||||
| Time Period | Output | Capital | Labor | TFP |
| 66–70 | 13.0 | 13.4 | 3.3 | 4.6 |
| 70–80 | 8.8 | 14.0 | 5.8 | -0.9 |
| 80–90 | 6.9 | 8.4 | 6.6 | -0.5 |
| 66–90 | 8.7 | 11.5 | 5.7 | 0.2 |
| Sarel | ||||
| Time Period | Output per person | Capital per person | Labor per person | TFP |
| 78–96 | 5.1 | 6.5 | 1.1 | 2.2 |
| 91–96 | 4.9 | 5.6 | 0.8 | 2.5 |
| Statistics Singapore 1/ | ||||
| Time Period | Output | Capital | Labor | TFP |
| 80–85 | 6.0 | 11.2 | 1.7 | -0.6 |
| 85–90 | 8.1 | 5.6 | 3.0 | 3.8 |
| 90–98 | 7.5 | 8.1 | 4.4 | 1.2 |
Statistics Singapore (October 1997).
C. Competitiveness and Competition
9. In 1999, Singapore continued to be ranked first in the competitiveness ranking by the World Economic Forum (WEF), on the force of its strong macroeconomic factors. Despite the recent economic downturn during the Asian crisis, Singapore has preserved its traditional strengths: high levels of saving and investment; an efficient government with low marginal tax rates; sound government finance; strong financial sector; openness to trade; high-quality education; and flexible labor market. Also in the competitiveness ranking by the International Institute for Management Development (IMD), Singapore continues to be ranked as the second most competitive economy after the United States.
10. Nevertheless, Singapore was ranked twelfth in the microeconomic competitiveness index of the WEF, which is designed to measure the microeconomic foundations for productivity growth, and has lost some ground in the last two years (Table II.2). The WEF views the intensity of local competition as the most influential single variable in terms of the contribution to economic growth. In the study that formed a basis for the microeconomic competitiveness index, Porter (1990) argues that domestic competition is the training ground for international competition. In particular, the quality and the dimension of the network of domestic suppliers and related industries are identified as one of the key factors of national competitive advantage, and these are viewed as the main weaknesses of the national business environment in Singapore. According to the survey on management by the WEF, Singapore ranks particularly low in areas such as the presence of domestically established brand names, first-class business schools, and the capacity of managers to attract high-quality staff (Table II.3).
WEF Competitiveness Rankings
WEF Competitiveness Rankings
| Micro Index | Overall | ||||
|---|---|---|---|---|---|
| 1999 | 1998 | 1999 | 1998 | 1997 | |
| United States | 1 | 1 | 2 | 3 | 3 |
| Netherlands | 3 | 3 | 9 | 7 | 11 |
| Switzerland | 5 | 9 | 6 | 8 | 6 |
| Canada | 8 | 6 | 5 | 5 | 4 |
| United Kingdom | 10 | 5 | 8 | 4 | 7 |
| Singapore | 12 | 10 | 1 | 1 | 1 |
| Japan | 14 | 18 | 14 | 12 | 13 |
| Hong Kong | 21 | 12 | 3 | 2 | 2 |
| Malaysia | 27 | 27 | 16 | 17 | 9 |
| Korea | 28 | 28 | 22 | 19 | 20 |
WEF Competitiveness Rankings
| Micro Index | Overall | ||||
|---|---|---|---|---|---|
| 1999 | 1998 | 1999 | 1998 | 1997 | |
| United States | 1 | 1 | 2 | 3 | 3 |
| Netherlands | 3 | 3 | 9 | 7 | 11 |
| Switzerland | 5 | 9 | 6 | 8 | 6 |
| Canada | 8 | 6 | 5 | 5 | 4 |
| United Kingdom | 10 | 5 | 8 | 4 | 7 |
| Singapore | 12 | 10 | 1 | 1 | 1 |
| Japan | 14 | 18 | 14 | 12 | 13 |
| Hong Kong | 21 | 12 | 3 | 2 | 2 |
| Malaysia | 27 | 27 | 16 | 17 | 9 |
| Korea | 28 | 28 | 22 | 19 | 20 |
Survey on Management
Scores are 1 for “strongly disagree” and 7 for “strongly agree.”
Survey on Management
| Ranking | Score 1/ | Question |
|---|---|---|
| 10 | 5.44 | Overall, the quality of management in your country is truly world-class. |
| 12 | 5.09 | Product design capability is heavily emphasized. |
| 9 | 5.85 | Production processes generally employ the most efficient technology. |
| 8 | 5.42 | Total quality management is strictly applied in your country. |
| 11 | 5.19 | Firms in your country are very strong at marketing. |
| 8 | 5.54 | Firms in your country generally pay close attention to customer satisfaction. |
| 42 | 4.57 | Domestically established brand names are fairly common in your country. |
| 18 | 4.96 | Managers in your country know how to attract, retain and motivate high-quality staff. |
| 7 | 5.54 | Staff training is heavily emphasized. |
| 15 | 4.85 | Willingness to delegate authority to subordinate is generally high. |
| 3 | 5.40 | Compensation policies link pay closely with job performance. |
| 11 | 5.56 | Most companies in your country have highly competent financial officers. |
| 13 | 5.23 | Domestic companies are very effective at cutting costs. |
| 16 | 4.79 | It is more common for owners to appoint outside professional managers. |
| 11 | 4.83 | Corporate boards are highly effective in monitoring management performance and representing shareholder interests. |
| 22 | 4.81 | Your country has first-class business schools to train managers. |
| 14 | 5.60 | Managers in your country generally speak some foreign language and have good international exposure. |
| 1 | 6.31 | Managers in your country generally use computers and information technology extensively. |
Scores are 1 for “strongly disagree” and 7 for “strongly agree.”
Survey on Management
| Ranking | Score 1/ | Question |
|---|---|---|
| 10 | 5.44 | Overall, the quality of management in your country is truly world-class. |
| 12 | 5.09 | Product design capability is heavily emphasized. |
| 9 | 5.85 | Production processes generally employ the most efficient technology. |
| 8 | 5.42 | Total quality management is strictly applied in your country. |
| 11 | 5.19 | Firms in your country are very strong at marketing. |
| 8 | 5.54 | Firms in your country generally pay close attention to customer satisfaction. |
| 42 | 4.57 | Domestically established brand names are fairly common in your country. |
| 18 | 4.96 | Managers in your country know how to attract, retain and motivate high-quality staff. |
| 7 | 5.54 | Staff training is heavily emphasized. |
| 15 | 4.85 | Willingness to delegate authority to subordinate is generally high. |
| 3 | 5.40 | Compensation policies link pay closely with job performance. |
| 11 | 5.56 | Most companies in your country have highly competent financial officers. |
| 13 | 5.23 | Domestic companies are very effective at cutting costs. |
| 16 | 4.79 | It is more common for owners to appoint outside professional managers. |
| 11 | 4.83 | Corporate boards are highly effective in monitoring management performance and representing shareholder interests. |
| 22 | 4.81 | Your country has first-class business schools to train managers. |
| 14 | 5.60 | Managers in your country generally speak some foreign language and have good international exposure. |
| 1 | 6.31 | Managers in your country generally use computers and information technology extensively. |
Scores are 1 for “strongly disagree” and 7 for “strongly agree.”
11. One likely cause of the weakness in microeconomic environment is the very high degree of government involvement in Singapore economy. Following political independence in the mid–1960s, Singapore pursued the growth strategy based on export-oriented industrialization. With the viability of the economy in doubt due to small size of the domestic market, the government played a pioneering role in areas where the initial capital requirement exceeded the capacity of the private sector or where the project was viewed too experimental in nature (Krause 1990), as well as trying to attract foreign companies. As a result, the business landscape in Singapore is characterized by heavy government presence, through the Statutory Boards and a large number of Government Linked Corporations (GLCs). The government maintains significant equity positions in GLCs through Temasek Holdings which is the government holding company (Table II.4).
Temasek Equity Position 1/
First tier Temasek companies in which Temasek owns equity of around 20 percent or more.
Temasek Equity Position 1/
| Listed Companies | Percent | Unlisted Companies | Percent |
|---|---|---|---|
| Singapore Telecommunications | 79.7 | PSA Corporation | 100.0 |
| Semb Corporation Industries | 58.8 | Singapore Technologies | 100.0 |
| Singapore Airlines | 53.8 | Media Corporation of Singapore | 100.0 |
| SNP Corporation | 49.0 | Singapore MRT | 100.0 |
| Neptune Orient Lines | 32.7 | Singapore Power | 100.0 |
| Keppel Corporation | 32.3 | Tuas Power | 100.0 |
| DBS Group Holdings | 18.4 | Indeco | 96.4 |
| ECICS Holdings | 100.0 | ||
| PWD Corporation | 100.0 | ||
| ENV Corporation | 100.0 | ||
| UMC | 100.0 | ||
First tier Temasek companies in which Temasek owns equity of around 20 percent or more.
Temasek Equity Position 1/
| Listed Companies | Percent | Unlisted Companies | Percent |
|---|---|---|---|
| Singapore Telecommunications | 79.7 | PSA Corporation | 100.0 |
| Semb Corporation Industries | 58.8 | Singapore Technologies | 100.0 |
| Singapore Airlines | 53.8 | Media Corporation of Singapore | 100.0 |
| SNP Corporation | 49.0 | Singapore MRT | 100.0 |
| Neptune Orient Lines | 32.7 | Singapore Power | 100.0 |
| Keppel Corporation | 32.3 | Tuas Power | 100.0 |
| DBS Group Holdings | 18.4 | Indeco | 96.4 |
| ECICS Holdings | 100.0 | ||
| PWD Corporation | 100.0 | ||
| ENV Corporation | 100.0 | ||
| UMC | 100.0 | ||
First tier Temasek companies in which Temasek owns equity of around 20 percent or more.
12. Indeed, several studies find that the overall government influence is stronger in Singapore than in other Asian countries (Table II.5). La Porta, Lopez de Silanes and Shleifer (1998) have looked at the ownership structure of the twenty largest publicly traded firms in each of the 27 richest economies in the world. Associating control with the ownership of 20 percent of stocks, they find Singapore to have the second-highest proportion of state-controlled firms (45 percent, second only to Austria), and higher than Korea and Japan. Claessens, Djankov and Lang (1999) reach similar conclusions using a sample of 2,980 publicly traded corporations in nine East Asian countries. For cutoff levels of 10, 20 and 30 percent of the voting rights, Singapore has the largest proportion of state-controlled firms (24, 23¼ and 11¼ percent of the 221 firms, respectively for the three cut-off levels). Although the GLCs have been expected to operate on a competitive basis in both domestic and international markets (and indeed most of them have remained profitable, generating large operating surpluses), their overwhelming market power is likely to have crowded out local private enterprises and thus prevented the development of a large and dynamic network of local corporations, contributing to the widely perceived lack of corporate dynamism in Singapore.
Share of Companies Controlled by the State
(In percent of total)
La Porta, Lopez de Silanes and Shelifer (1998). Percent of companies in which government holds voting rights of more than 20 percent.
Claessens, Djankov and Lang (1999). Percent of companies in which government holds voting rights of more than 10, 20, and 30 percent.
Share of Companies Controlled by the State
(In percent of total)
| La Porta et al 1/ | Claessens et al 2/ | |||
|---|---|---|---|---|
| Above 20 percent | Above 10 percent | Above 20 percent | Above 30 percent | |
| Singapore | 45.0 | 23.6 | 23.5 | 11.3 |
| Hong Kong | 5.0 | 3.7 | 1.4 | 0.9 |
| Japan | 5.0 | 1.1 | 0.8 | 0.4 |
| Korea | 15.0 | 5.1 | 1.6 | 1.2 |
| Malaysia | … | 17.8 | 13.4 | 8.2 |
| Taiwan | … | 3.0 | 2.8 | 2.8 |
| Philippines | … | 3.6 | 2.1 | 2.1 |
La Porta, Lopez de Silanes and Shelifer (1998). Percent of companies in which government holds voting rights of more than 20 percent.
Claessens, Djankov and Lang (1999). Percent of companies in which government holds voting rights of more than 10, 20, and 30 percent.
Share of Companies Controlled by the State
(In percent of total)
| La Porta et al 1/ | Claessens et al 2/ | |||
|---|---|---|---|---|
| Above 20 percent | Above 10 percent | Above 20 percent | Above 30 percent | |
| Singapore | 45.0 | 23.6 | 23.5 | 11.3 |
| Hong Kong | 5.0 | 3.7 | 1.4 | 0.9 |
| Japan | 5.0 | 1.1 | 0.8 | 0.4 |
| Korea | 15.0 | 5.1 | 1.6 | 1.2 |
| Malaysia | … | 17.8 | 13.4 | 8.2 |
| Taiwan | … | 3.0 | 2.8 | 2.8 |
| Philippines | … | 3.6 | 2.1 | 2.1 |
La Porta, Lopez de Silanes and Shelifer (1998). Percent of companies in which government holds voting rights of more than 20 percent.
Claessens, Djankov and Lang (1999). Percent of companies in which government holds voting rights of more than 10, 20, and 30 percent.
13. Weaknesses in the microeconomic environment are also suggested by other indicators. First, local-controlled companies of Singapore are found to be less efficient than foreign-controlled companies. The Singapore authorities (1997) examined the efficiency of Singapore’s corporate sector over the early 1990s, by comparing the return on total assets (ROA) (see Table II.6.). The ROA of local-controlled firms—6.1 on average in 1990–95—is much lower than that of foreign controlled firms—9.4 on average in the same period—in the non-financial sector. Especially in the manufacturing sector, the ROAs of foreign-controlled firms were about twice as high as those of local-controlled firms (14.4 relative to 7.2). A major cause for the low efficiency of local-controlled firms was their small size: the average asset size of foreign-controlled firms was six times as large as that of local-controlled firms. The prevalence of small and low-efficiency firms in the domestic market is consistent with the assessment that domestic competition is weak in Singapore.
Rates of Return and Asset Sizes by Sector and Ownership
Rates of Return and Asset Sizes by Sector and Ownership
| Rates of Return on Total Assets (Percent; Average in 1990–95) | Average Size of Companies (Millions; 1995) | |||||
|---|---|---|---|---|---|---|
| Local | Foreign | Local | Foreign | |||
| Total | 5.0 | 3.4 | 11.7 | 75.0 | ||
| Financial Sector | 4.1 | 2.1 | 71.0 | 558.6 | ||
| Non-financial Sector | 6.1 | 9.4 | 6.3 | 18.2 | ||
| Manufacturing | 7.2 | 14.4 | 6.2 | 49.5 | ||
| Construction | 1.5 | 0.1 | 3.8 | 35.8 | ||
| Commerce | 5.1 | 7.9 | 2.9 | 13.2 | ||
| Transport, Storage, and Communications | 10.2 | 5.3 | 10.0 | 12.4 | ||
| Insurance, Real Estate, and Business Services | 5.0 | 4.5 | 11.8 | 12.6 | ||
| Others | 7.9 | 4.2 | … | … | ||
Rates of Return and Asset Sizes by Sector and Ownership
| Rates of Return on Total Assets (Percent; Average in 1990–95) | Average Size of Companies (Millions; 1995) | |||||
|---|---|---|---|---|---|---|
| Local | Foreign | Local | Foreign | |||
| Total | 5.0 | 3.4 | 11.7 | 75.0 | ||
| Financial Sector | 4.1 | 2.1 | 71.0 | 558.6 | ||
| Non-financial Sector | 6.1 | 9.4 | 6.3 | 18.2 | ||
| Manufacturing | 7.2 | 14.4 | 6.2 | 49.5 | ||
| Construction | 1.5 | 0.1 | 3.8 | 35.8 | ||
| Commerce | 5.1 | 7.9 | 2.9 | 13.2 | ||
| Transport, Storage, and Communications | 10.2 | 5.3 | 10.0 | 12.4 | ||
| Insurance, Real Estate, and Business Services | 5.0 | 4.5 | 11.8 | 12.6 | ||
| Others | 7.9 | 4.2 | … | … | ||
14. Second, the estimate of price-average cost margin is also consistent with the view that Singapore’s industries are likely to have been less competitive than in Hong Kong or in OECD countries. Table II.7 shows that the estimated price-average cost margin in Singapore is much higher than those in Hong Kong, the OECD, or the United States.3 The high level of price-average cost margin can be due to technological factors or pricing factors.4 Subject to the assumption that technological factors are similar across countries, which is likely to hold over a ten-year period, the high price-average cost margin reflects higher mark-up of price over marginal cost in the domestic economy, and is suggestive of the relative lack of domestic competition in Singapore.
Price-Average Cost Margins
Singapore authorities; staff estimates.
From SM/00/26, Hong Kong SAR Selected Issues paper.
Excluding 96–98.
Price-Average Cost Margins
| Industrial | Singapore 1/ | Comparator Countries 2/ | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Code | Industry | Hong Kong SAR | OECD | United States | |||||
| 80–89 | 90–98 | 80–98 | SAR | states | |||||
| 15 and 16 | Food and Beverages and Tobacco | 21.0 | 27.4 | 24.0 | 20.6 | 11.7 | 13.4 | ||
| 15 | Food and Beverages | 20.0 | 25.6 3/ | 22.13/ | |||||
| 16 | Tobacco Products | 33.8 | 38.7 3/ | 35.63/ | |||||
| 17 | Textiles | 28.5 | 26.7 | 27.6  | |||||
| 18 | Wearing Apparel | 23.6 | 26.5 | 25.0 | 9.5 | 9.7 | 8.8 | ||
| 19 | Leather Products and Footwear | 19.8 | 18.4 | 19.2 | |||||
| 20 | Wood and Wood Products | 20.9 | 22.7 | 21.7 | 10.4 | 11.9 | 13.6 | ||
| 21 | Paper Products | 31.1 | 34.1 | 32.5 | | ||||
| 22 | Publishing and Printing | 43.3 | 47.5 | 45.3 | 15.6 | 12.3 | 13.9 | ||
| 23 | Refined Petroleum Products | 13.2 | 16.8 | 14.9 | |||||
| 24 | Chemicals and Chemical Products | 40.0 | 40.8 | 40.4 |  | ||||
| 25 | Rubber and Plastic Products | 28.7 | 30.4 | 29.5 | 14.0 | 15.9 | 10.8 | ||
| 26 | Non-metallic Mineral Products | 30.5 | 31.7 | 31.0 | 13.6 | 8.4 | 9.5 | ||
| 27 | Basic Metals | 34.4 | 28.4 | 31.6 | 6.8 | 8.8 | 6.7 | ||
| 28 | Fabricated Metal Products | 28.5 | 30.0 | 29.2 | 12.3 | 15.1 | 12.5 | ||
| 29 | Machinery and Equipment | 33.7 | 30.8 | 32.3 | 15.0 | 10.1 | 10.0 | ||
| 30 | Electrical Machinery and Apparatus | 27.6 | 26.4 | 27.0 | |||||
| 31 | Electronic Products and Components | 23.3 | 24.1 | 23.7 | 19.3 | 11.0 | 17.4 | ||
| 32 | Instrumentation and Scientific Equipment | 35.7 | 35.8 | 35.8 | 10.3 | 14.5 | 6.3 | ||
| 33 | Transport Equipment | 51.7 | 50.2 | 51.0 | 16.3 | 6.4 | 5.1 | ||
| 34 | Furniture and Other Manufacturing Industries | 23.2 | 20.7 | 22.0 | 9.1 | 10.0 | 21.6 | ||
| 35 | Recycling of Waste and Scrap | 38.5 | 25.3 | 32.3 | … | … | … | ||
| Total Manufacturing | 24.9 | 27.6 | 26.2 | 12.6 | 11.5 | 11.8 | |||
| Total Manufacturing Excluding Refined Petroleum Products | 29.5 | 29.2 | 29.3 | … | … | … | |||
Singapore authorities; staff estimates.
From SM/00/26, Hong Kong SAR Selected Issues paper.
Excluding 96–98.
Price-Average Cost Margins
| Industrial | Singapore 1/ | Comparator Countries 2/ | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Code | Industry | Hong Kong SAR | OECD | United States | |||||
| 80–89 | 90–98 | 80–98 | SAR | states | |||||
| 15 and 16 | Food and Beverages and Tobacco | 21.0 | 27.4 | 24.0 | 20.6 | 11.7 | 13.4 | ||
| 15 | Food and Beverages | 20.0 | 25.6 3/ | 22.13/ | |||||
| 16 | Tobacco Products | 33.8 | 38.7 3/ | 35.63/ | |||||
| 17 | Textiles | 28.5 | 26.7 | 27.6 | |||||
| 18 | Wearing Apparel | 23.6 | 26.5 | 25.0 | 9.5 | 9.7 | 8.8 | ||
| 19 | Leather Products and Footwear | 19.8 | 18.4 | 19.2 | |||||
| 20 | Wood and Wood Products | 20.9 | 22.7 | 21.7 | 10.4 | 11.9 | 13.6 | ||
| 21 | Paper Products | 31.1 | 34.1 | 32.5 | | ||||
| 22 | Publishing and Printing | 43.3 | 47.5 | 45.3 | 15.6 | 12.3 | 13.9 | ||
| 23 | Refined Petroleum Products | 13.2 | 16.8 | 14.9 | |||||
| 24 | Chemicals and Chemical Products | 40.0 | 40.8 | 40.4 | | ||||
| 25 | Rubber and Plastic Products | 28.7 | 30.4 | 29.5 | 14.0 | 15.9 | 10.8 | ||
| 26 | Non-metallic Mineral Products | 30.5 | 31.7 | 31.0 | 13.6 | 8.4 | 9.5 | ||
| 27 | Basic Metals | 34.4 | 28.4 | 31.6 | 6.8 | 8.8 | 6.7 | ||
| 28 | Fabricated Metal Products | 28.5 | 30.0 | 29.2 | 12.3 | 15.1 | 12.5 | ||
| 29 | Machinery and Equipment | 33.7 | 30.8 | 32.3 | 15.0 | 10.1 | 10.0 | ||
| 30 | Electrical Machinery and Apparatus | 27.6 | 26.4 | 27.0 | |||||
| 31 | Electronic Products and Components | 23.3 | 24.1 | 23.7 | 19.3 | 11.0 | 17.4 | ||
| 32 | Instrumentation and Scientific Equipment | 35.7 | 35.8 | 35.8 | 10.3 | 14.5 | 6.3 | ||
| 33 | Transport Equipment | 51.7 | 50.2 | 51.0 | 16.3 | 6.4 | 5.1 | ||
| 34 | Furniture and Other Manufacturing Industries | 23.2 | 20.7 | 22.0 | 9.1 | 10.0 | 21.6 | ||
| 35 | Recycling of Waste and Scrap | 38.5 | 25.3 | 32.3 | … | … | … | ||
| Total Manufacturing | 24.9 | 27.6 | 26.2 | 12.6 | 11.5 | 11.8 | |||
| Total Manufacturing Excluding Refined Petroleum Products | 29.5 | 29.2 | 29.3 | … | … | … | |||
Singapore authorities; staff estimates.
From SM/00/26, Hong Kong SAR Selected Issues paper.
Excluding 96–98.
15. Finally, there is some evidence that Singapore’s international competitiveness may be weakening. Over the last three years Singapore has lost market shares in the United States, the European Union and Japan—accounting for around 52 percent of its total exports in 1998—against many of its neighbors (Figure II. 1). Focusing only on machinery and transport equipment of which 80 percent is made up of electronics and which represented 67 percent of total exports in 1998, Singapore has lost market shares in the United States against other regional economies, with the only exception of Hong Kong.
Singapore: Relative Exports in Major Export Markets
Citation: IMF Staff Country Reports 2000, 083; 10.5089/9781451834185.002.A002
Sources: IMF, Direction of Trade Statistics; and U.S. Census Bureau.Singapore: Relative Exports in Major Export Markets
Citation: IMF Staff Country Reports 2000, 083; 10.5089/9781451834185.002.A002
Sources: IMF, Direction of Trade Statistics; and U.S. Census Bureau.Singapore: Relative Exports in Major Export Markets
Citation: IMF Staff Country Reports 2000, 083; 10.5089/9781451834185.002.A002
Sources: IMF, Direction of Trade Statistics; and U.S. Census Bureau.D. Measures to Enhance Microeconomic Competitiveness
16. The need to strengthen the microeconomic environment of Singapore economy is well recognized by the authorities. A good example is the following quote from a speech by Senior Minister Lee Kwan Yew in February 2000:
For 30 years we concentrated on those industrial and service sectors which were suitable for our small economy. In that phase, the risks were taken and the entrepreneurship was provided by the MNCs. We produced the engineers, managers, professionals and skilled workers to help MNCs and our own companies to grow. The MNCs provided much of the enterprise and innovation.
For our next phase we need many of our own people to be more enterprising, innovative, and willing to strike out on their own, to create small and medium enterprises, and so create jobs and wealth.
17. Combining the perceived need for more lively entrepreneurial activity with the long-term strategies recommended by the Committee on Singapore’s Competitiveness in November 1998, the authorities have set a goal of turning Singapore into an advanced and globally competitive knowledge-based economy within the next decade. The vision is for Singapore to shift from a capital-intensive economy to a knowledge-intensive economy, with manufacturing and services as its twin engines of growth. Considering the limited size of the domestic market, Singapore aims to position itself as a base from which MNCs and local companies manufacture high value-added products and provide related services to companies in the region (see Box II.2).
Industry 21
The vision is for Singapore to become a vibrant global hub of knowledge-driven industries with a strong emphasis on technology and innovation capabilities, including becoming a choice location for company headquarters with product and capability development charters.
The quantitative targets include:
To develop knowledge-driven manufacturing and exportable services to constitute at least 40 percent of GDP and offering 20,000 exciting job opportunities each year;
Manufacturing to contribute 25 percent of GDP;
at least two out of three jobs in the manufacturing sector to be accounted for by knowledge-based and skilled workers; and
at least three out of four jobs in the exportable services sector to be accounted for by knowledge–based and skilled workers.
In order to realize the vision and quantitative targets, the Economic Development Board will adopt the following strategies:
Diversify among and within the key industry clusters. A balanced and robust mix of industries and markets will achieve sustainable growth and minimize vulnerability to fluctuations in specific sectors;
Build up global capabilities. By upgrading capabilities, Singapore can compete effectively and remain attractive to investors;
Promote innovation;
Develop local talent and attract foreign talent; and
Create a conducive business environment and world-class infrastructure necessary for knowledge-driven activities.
18. A comprehensive set of reform measures have been announced and implemented to facilitate the transition to a knowledge-based economy (see Annex for more details of measures discussed below).
To develop Singapore into a premier service hub, its traditional strength in financial services is being reinforced through broad-ranging liberalization measures (see Chapter III), at the same time as high growth services including info-communications and media are being promoted. The development in information and communication sector is intended to provide a platform to boost the performance of all sectors in Singapore’s knowledge based economy.
To upgrade the regulatory framework and corporate governance, the government has set up committees to review corporate regulation and governance setting, in areas of regulatory framework, disclosure and accounting standards, and corporate governance. Private sector efforts for the same cause led to the creation of the Singapore Institute of Directors (SID) which is currently laying out a Code of Professional Conduct for its member directors, as well as a Code of Best Practices in Corporate Governance.
To strengthen the competitiveness of the local corporate sector, support services will be provided to maintain the strong external orientation and improve the efficiency of the small and medium-sized enterprises that have grown as supporting industries for MNCs. To expand access to the global market by companies in Singapore, further trade liberalization will be pursued both on bilateral and multilateral basis. To help the small and medium local enterprises to compete effectively in the face of keener competition in the globalized economy, small and medium local enterprises are being encouraged to raise their technological capability and efficiency, including by pooling their resources to achieve synergy and economies of scale.
To build up human and intellectual capital that will form Singapore’s key competitive advantage, the authorities are intending to reinforce both domestic and foreign manpower in Singapore. To nurture domestic manpower, incentives are put in place for continuing education and retraining, including support through the Skills Development Fund. To overcome the constraints of a limited domestic talent pool and low population growth, measures are put in place to attract foreign talent to Singapore. One visible outcome of these efforts has been the opening of Singapore campuses by several foreign graduate schools including the University of Chicago, INSEAD, MIT, and the Wharton School.
To foster growth of businesses with technology and innovation capabilities, the authorities are providing tax incentives and funds as well as improving the educational system. Favorable tax treatment is provided for gains from the relevant stock options and investment; funds are provided as seed money to catalyze the development of a vibrant venture capital industry; and programs are introduced to overcome the drawback of exam-dependent college education system.
To infuse more market discipline and raise efficiency in the power sector, the electricity industry will be liberalized starting in 2001. Electricity generation and sales for businesses will be fully liberalized in April 2001. With further liberalization in electricity sales for households in 2002, the generation and distribution of electricity will be fully liberalized, while the transmission will remain under natural monopoly. The gas industry is under review for a similar restructuring plan.
19. Despite a broad array of measures announced thus far, there remain several areas where further deregulation would help to underpin Singapore’s growth potential. First, a knowledge-based economy requires not only a vibrant telecommunications sector but also needs to be buttressed by dynamic high-technology infrastructure and media services industries, which have strong synergies with one another. At present, the media service sector is still relatively tightly controlled: Singapore has one major newspaper company, one TV network, one pay-TV operator and one radio network, and foreign shareholding in local media companies is limited to no more than 3 percent. The authorities are reviewing the structure of the media industry, including options to allow a second TV operator, as well as measures to provide further support for technology infrastructure.
20. Second, a number of recent incidents suggest the advantages of a faster reduction in the role of government. In recent months, attempts by GLCs to acquire large stakes in foreign companies—Air New Zealand and Cable & Wireless in Hong Kong SAR—were not successful. These incidents have brought to the fore the recognition that GLCs—though commercially managed, efficient, and profitable—tend to be conservative, averse to aggressive profit-seeking, and sometimes overly cautious in business decisions, which puts them at disadvantage in the fast-paced atmosphere of worldwide mergers and consolidations. The authorities are considering ways to further divest government holdings of GLCs, including by putting them under unit trusts for distribution to the public.
21. Third, greater freedom of choice by the private sector would improve the efficiency of saving and investment decisions. Currently, about 20 percent of individuals’ wage income is tied up in the government-managed Central Provident Fund (see Chapter IV), the bulk of which is invested overseas by the Government Investment Corporation (GIC). This has contributed to the dearth of institutions that mediate the high savings of Singapore toward entrepreneurial private-sector investment opportunities, adding to the difficulty of implementing new business ideas in Singapore. While the GIC Special Investments is providing some funds (about half a billion Singapore dollars) to high-tech start-up companies to catalyze the development of the venture capital industry, care should be taken not to undermine the essence of the venture capital industry—which is to reward innovation and risk-taking—because of the involvement of the government.
E. Conclusion
22. Singapore has achieved remarkable economic development during the last three decades. The government-led growth strategy, defying conventional wisdom, has been successful up to this point. Going forward, however, Singapore faces a challenge to move on to the next stage of economic development, a knowledge-based economy with innovation and productivity growth. Confronted with this challenge, the authorities are pushing ahead with reform measures that are intended to facilitate Singapore’s development into a knowledge based economy.
23. While the measures undertaken by the authorities are all in the right direction, concerns remain on how quickly they can succeed in arousing the very private sector initiatives and innovative activities that are the ultimate goal of the authorities themselves. Coming from an economy with very strong role of government in business and where there have been few apparent rewards to risk-taking, the public may be inclined to wait for the lead by the government rather than to take risks in uncharted areas. Such a change in mindset would come around eventually, given the high capability of the public and the commitment of the government. However, too long a delay during the transition process could undermine the competitive edge that Singapore currently holds in the international market.
ANNEX Measures to Strengthen Competitiveness
This annex provides a more detailed description of the various measures that the authorities have announced or implemented to strengthen the competitive base of Singapore in the transition to a knowledge-based and globalized economy.
1. Information and Communication Technology 21
To bring an integrated perspective to the promotion and development of the information and communication technology (ICT) sector, a number of relevant government entities were merged into the Info-Communications Development Authority of Singapore (IDA Singapore). Under its auspices, ICT 21 Masterplan is being pursued with the following three key objectives:
Develop the ICT sector as the key sector of growth in Singapore’s economy. Foreign and local companies will be encouraged to develop and produce new products for the regional and international markets, with a view to position Singapore as a leading innovator and exporter of ICT products and services in the global marketplace.
Use ICT as a common platform to boost the performance of Singapore’s knowledge–based economy. The government will strive to build new and better ICT capabilities in every major economic sector.
Leverage on ICT to enhance Singaporean’s standard of living in the information society of the future. Key initiatives include Singapore ONE, e-Citizen and e-Government aimed at delivering a whole range of online interactive services for public convenience.
2. Liberalization of Telecommunications Industry
Starting with the corporatization of SingTel in 1992, market competition was introduced into the telecommunications sector in Singapore.
In April 2000, full market competition was introduced in the telecommunications sector, with 58 new business licenses issued for new entrants to the market and new businesses by incumbents. The government also lifted the direct and indirect foreign equity ownership limits for all public telecommunication licenses.
The broadband open access regulatory framework is under review to promote the interactive broadband multimedia industry. In addition, the government has pledged to continue to offset the costs of infrastructure and equipment needed to provide broadband access to residential and commercial buildings.
3. Enhancing Corporate Governance
The Ministry of Finance, together with the Monetary Authority of Singapore and the Attorney-General’s Chambers, is sponsoring a comprehensive review of corporate regulation and governance in Singapore. Three private sector-led committees will be given up to a year to come up with their recommendations on the major aspects of corporate regulation and governance in Singapore.
The Committee on Company Legislation and Regulatory Framework will review Singapore’s corporate law and regulatory framework, comparing Singapore’s approach and legal structure with the standards and best practices in major business jurisdictions. The committee will also provide proposals to enhance efficiency and reduce red tape in the administration of corporate regulation.
The Committee on Disclosure and Accounting Standards will review the process by which accounting standards are set, maintained and regulated in Singapore, in comparison with overseas jurisdictions. It will also review the development and promotion of best practices in disclosure requirements.
The Committee on Corporate Governance will review the development and promotion of best practices in corporate governance, relative to international best practice benchmarks such as the OECD Principles of Corporate Governance. The committee will look at how to develop and promote best boardroom practices, and improve the training of company directors.
4. Strengthening the Corporate Sector
Trade 21 sets out the objectives for Singapore’s trade development in the next five years, which are necessary to ensure a supportive external environment for the corporate sector.
Merchandise trade to grow by 4–6 percent annually to S$500 billion;
Offshore trade to grow by 3–5 percent a year to S$220 billion; and
Services exports to grow by 5 percent a year to SW billion.
Under Internationalizing Singapore Enterprises program, the TDB will provide support to companies at the three stages of international market development.
Preparation—international market evaluation and assessment, packaging and design development;
Developing access—international contact development, establishment of commercial presence; and
Positioning—international brand development, image enhancement.
The Small and Medium Enterprises 21 (SME 21) program will be implemented over a tenyear period to create vibrant and resilient SMEs, through the following key initiatives:
SME Mentoring Program allows SMEs to learn from the experiences of established company directors. A network of advisors will act as an external “board of directors” for SMEs to advise on strategic issues faced by the company.
CEO Learning Circles provide CEOs of SMEs a platform to network, share and exchange experiences. A consultant will facilitate the discussion so that the sessions are conducted in a systematic and structured manner.
Technology Network Program will facilitate connections between innovative SMEs, aspiring technopreneurs, researchers and venture capitalists. SMEs will be able to acquire new technologies more rapidly.
At the sectoral level, SMEs will be encouraged to develop collaborative partnerships and alliances for greater synergy. In the retail sector in particular, SME owners will be encouraged to make use of business groupings and other tools and technologies like supply chain management to increase their operational efficiency.
To upgrade the construction sector, support will be provided to promote training in core skills for the construction industry as well as encourage wider adoption of industry standards.
Foreign SMEs will also be attracted to Singapore to set up operations or to link up with local SMEs in collaborative partnerships.
5. Manpower 21
Manpower 21 is intended to develop the Singapore workforce as a key source of competitive advantage that will support economic growth in the knowledge economy, based on lifelong learning and innovation.
An enhanced Manpower Information System will be developed to provide relevant and timely information to policy makers, employers, training providers and individuals.
A National Skills Recognition System will be established to develop definitive workplace skill standards and accord recognition to the training that meets these standards.
To encourage more employer-based training, the ceiling of the Skills Development Fund levy was raised from $1000 to $1500, to be implemented from July 2000.
The appeal of Singapore to foreign talents will be enhanced by strengthening the operations of Contact Singapore, a resource center that gives information and advice on education and career opportunities in Singapore.
Guidelines will be issued to allocate foreign workers from low to high value-added sectors, to contribute to raising the skill profile of Singapore’s workforce.
Improvement in HR practices will be encouraged to attract and retain talents, both domestic and foreign.
Efforts will be increased to encourage World-class institutions that carry out R…D in workforce training/organizational development and high value-added global manpower companies to set up operations in Singapore—examples include the United States-based National Training Laboratories and the Center for Creative Learning.
Self-regulating manpower industry association will be formed to develop a vibrant manpower industry.
6. Technopreneurship 21
To build a conducive environment for the creation of knowledge-based, high growth companies in Singapore, initiatives are being undertaken in four areas: pro-enterprise environment, financing, facilities, and education.
Pro-Enterprise Environment
Tax treatment of Employee Stock Options (ESOPs) was improved first by allowing the deferment of tax payment resulting from qualifying ESOPs, and the authorities are reviewing further steps to improve the tax treatment for ESOPs in high tech startups.
Under Technopreneur Investment Incentive Scheme, qualifying investors and individuals will be allowed tax deductions on losses incurred from the sales of qualifying shares or from the liquidation of an approved technopreneurial start-up.
Bankruptcies resulting from normal business risks are given appropriate differential treatment from bankruptcies due to misdeed or mismanagement.
Technopreneurs will be allowed to use their residential premises as home offices.
The government tendering procedures were modified to facilitate tender awards to the start-ups without conventional track records.
Financing
Technopreneurship Investment Fund (TIF) of US$1 billion will be used to co-invest with private sector to provide seed money for technopreneurial start-ups. The TIF fund managers will also work with private sector venture capital firms to stimulate the venture capital industry in Singapore.
Facilities
The Buona Vista area is earmarked as a focal point for the development of a science and research center. The area is intended for social and residential uses as well as industrial and commercial uses.
Education
The National University of Singapore and the Nanyang Technological University have announced a new university admission system from year 2003 that will include reasoning tests, project work and extra-curricular activities to supplement the current reliance on exam results.
7. Liberalization of Electricity Industry
The liberalization of the electricity industry in Singapore began with the corporatization of the electricity and gas department of the Public Utilities Board (PUB). As a result, the electricity industry currently has three generation companies, one grid company (PowerGrid: transmission), and one electricity supply company (PowerSupply: sales). The government has recently announced measures to further liberalize the industry, by allowing full competition in the contestable parts of the market—generation and retail sales in particular.
Generation
Temasek will divest all three generation companies with no limit on foreign ownership, to increase competition and raise the industry standards to international levels.
Retail competition
To bring about retail competition, the electricity retail business of PowerSupply will be divested from April 2001, and several customer service functions—including meter-reading and field services—will be taken out of PowerSupply to prevent these activities from becoming barriers to entry. These measures are anticipated to bring in full competition for large industrial and commercial customers from April 2001. Retail competition for smaller customers is anticipated to take place after 2002 following the completion of a detailed study of the effect of competition on households.
Regulation of PowerGrid
Since the transmission and distribution network is suitable for a natural monopoly, the grid industry will continue to be regulated through performance standards and incentives to improve efficiencies.
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Prepared by Roberto Cardarelli (x38059) and Jaewoo Lee (x37331), who are available to answer questions.
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The results here are open to potential measurement problems given that the data for Singapore and other countries come from different sources.
The relation between the price-average cost margin (P/AC) and the markup of price over marginal cost (P/MC) can be written as follows: P/AC = (CU/RTS)(P/MC), where CU refers to capacity utilization and RTS refers to the scale of economy measured as the ratio of marginal cost to the minimum average cost.
