Singapore is small. But that doesn’t stop the city-state’s economy from posting big numbers. Last year, for instance, it grew by 14.5 per cent, while more developed markets were scrambling back on to the recovery curve. Its size, however, also means that the country’s economy faces unique challenges as it seeks to manage growth, Singapore’s Finance Minister Tharman Shanmugaratnam tells Devjyot Ghoshal in the last of a three-part interview. Edited excerpts:
Even as much of the developed world was returning to recovery, Singapore posted 14.5 per cent growth in gross domestic product (GDP) last year. What lies behind this extraordinary growth?
I think it is partly a matter of luck. We caught the wind as global trade started recovering and the global investment cycle started recovering. We were also fortunate that the industries that we specialise in started turning around quickly globally.
In some ways, we were well prepared for good fortune. We had put in place measures during the crisis that enabled us to take full advantage of the recovery, when it came. That’s always a useful lesson for us: What you do in crisis also shapes whether you are lucky coming out of crisis. So it’s not entirely random.
In particular, the fact that we helped companies keep their productive workers, rather than shed them at a time of very significant collapse in demand in 2008-2009. It meant that employers didn’t have to rehire, retrain and pass on a lot of tacit knowledge to a new pool of workers.
Second, I think confidence in Singapore as a business hub was reinforced during the crisis. How we manage the crisis has an important influence on how well we do after, and not just whether we stay afloat.
But given the rate of economic expansion, are there any fears of overheating?
To put 14.5 per cent, or even current growth rates, in perspective, we had two years preceding that with an average of close to zero per cent growth. So really what we have done is grow by five per cent on an average of over three years, which is a little bit on the high side for Singapore but within the range that we would call potential output growth.
All we did was to bounce back to a potential level of GDP quite quickly. By the International Monetary Fund’s (IMF’s) estimates, sometime in the second quarter of last year, we had reached back to the potential output level. Since then, growth has steadied somewhat because it was largely the first half of last year that had phenomenal growth.
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Five per cent was what we would have thought of as quite sustainable for the last decade. For the decade ahead, between three and five per cent (growth), averaging at about four per cent is achievable and we are not overheating from that perspective.
Your Budget featured support for local industry, including small businesses, with measures for increasing productivity. Why is there such an emphasis on raising productivity?
Growth in the last decade averaged a little over five per cent a year but productivity growth was below two per cent, and the rest was labour force growth. Going forward in the next decade, local labour force growth is going to slow significantly.
There is still some scope to improve labour force participation amongst women, but basically you are talking about a much lower rate of labour force growth. And because we don’t want the foreign work force to grow faster than the local work force, that, too, will be held down to the same rate of growth between one and 1.5 per cent.
That means in order to achieve average growth of about four per cent, you need much stronger productivity growth. So, we are going for 2-3 per cent productivity growth, sustained over a full 10 years for the economy at large.
It is an ambitious schedule for a country at this level of development but we think achievable.
What will be the growth drivers for Singapore going ahead?
We don’t intend to be a pure service economy. We are doing well in high-value manufacturing and we see that as sustainable for the long-term. We are quite different from Hong Kong in that regard.
We have a thriving manufacturing sector, with high productivity growth in the high-value end, in fact for the sector as a whole, and we are attracting a lot of new investments. Much of it is increasingly capital-intensive and knowledge-intensive, so the hiring is largely for engineers, researchers and skilled technicians. That’s a viable part of our future.
Pharmaceuticals, the biomedical industry, higher-end of electronics, aerospace and a whole set of industries that don’t come up in a very planned way, but firms are attracted to Singapore because they find there’s an adequate pool of skills.
Second, in services, the whole span of financial services will always be an important driver, particularly building on our role as a neutral international business centre.
Third, tourism, in a very broad sense. Medical, educational as well as entertainment and business convention traffic are very important drivers, and there is a broader menu of options in Singapore now. It is a small place but attracts a lot of people.
Logistics remains important. Just the fact that we are at the right place and have a relatively efficient port and airport generates a lot of activity, one way or another. I would say that those are important drivers.
And increasingly, viewing ourselves not just as a centre for production, but also as a centre for high-value consumption and lifestyles: For people to have second homes in Singapore, to visit Singapore every now and then, and find it a neutral venue to meet others who are in the business of Asia.
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