• High GDP growth may be a misleading proxy for citizens’ welfare: Rapid economic growth has already provided Singapore with one of the highest per capita incomes in the world, at US$37,597 in 2008. But, Singapore also has a very unequal distribution of that high income — profits take about 46% of GDP, which is extremely high in comparison with most developed economies. The available data also shows that foreign-owned companies receive almost half of this extraordinarily high profit share. That leaves an unusually low share of the GDP cake for the average Singapore citizen, whether he is an employee or a businessman. This could be why, even though Singapore’s per capita GDP is roughly 11% higher than Hong Kong’s, our per capita consumption is about 21% lower. If we take per capita consumption as a better indicator of welfare, then simply going for high growth per se does not guarantee that we will achieve the best possible welfare outcome for Singaporeans — which we assume is the ultimate objective of policy; and
• Pushing the economy to grow at such a high rate may even hurt Singaporeans: We only need to look at recent experience to understand this. Singapore grew at a rapid 7.8% in 2005 to 2007 but the result was some degree of overheating in the economy. To achieve that high growth, we pulled in hordes of foreigners, with lots of unintended effects. Allowing in unskilled foreign workers depressed the wages of lower-skilled Singaporeans, especially the older and more vulnerable members of our society. Such a huge inflow of people in a short space of time showed up in surging rental costs, higher inflation and worsening congestion. Sure, we achieved high GDP growth, but much of the growth was concentrated in the foreign-dominated enclaves of high-end manufacturing and high finance. The growth was driven by foreigners who also received most of the benefits. It really is not clear how much net welfare benefit the average Singapore citizen enjoyed from this period of high growth. In short, we need to think hard about whom all this growth is for. We would suggest that the objective of policy should be to maximise the welfare of Singapore citizens, where a range of indicators is used to assess welfare, not just GDP but its distribution for instance. And we need to learn from recent experience about the possible downsides of ramping up economic growth.

POST-CRISIS WORLD ECONOMY— A NEW MODEL OF GROWTH?
Second, we need to assess whether the changed nature of the post-crisis global landscape means that we have to re-think some of the assumptions and strategies we have used. The post-crisis world will be very different from the past:

• Global growth will be measurably lower, gains will be mainly in a few developing economies: The burdens of high public- and private-sector debt from the crisis will combine with weaker financial intermediation, higher oil prices and the rising costs of accommodating climate change to weigh heavily on growth prospects in the US, Europe and Japan. Chinese growth will surge in the coming year but, after that, is likely to be lower than the pre-crisis average as China shifts strategy to lower GDP growth but of higher quality. Other large emerging economies such as India, Indonesia, Brazil and Vietnam are likely to see high growth continue. Overall, external demand will not grow rapidly in the developed economies that are our main markets — the excitement will be in just a few key countries in other parts of the world to which we are building links but which are still far behind the G3 in importance for us;
• Global economy will be more volatile: Massive monetary- and fiscal-policy responses probably ensure that we will exit the crisis but the costs of such unprecedented policy actions will be high and not yet felt. There remain many stress points that have not been addressed, for example, the value and role of the US dollar and deteriorating conditions in highly indebted emerging economies such as in eastern and central Europe. The global economy will be subject to a series of shocks and stresses in coming years as these shoes drop. It is vital that we build resilience to these shocks.
• MNCs are likely to change strategies: Low transportation costs, strong home currencies and the willingness of recipient countries to offer tax and other incentives spurred the relocation of production from developed economies to places such as Singapore. But we could well see a consolidation of such supply chains; higher oil prices will translate into permanently higher transportation costs, weakening one factor that spurred relocation. As the crisis ebbs, it is almost certain that the currencies of the more successful Asian economies will have to appreciate relative to developed economies, weakening yet another factor. The fact is that Singapore’s growth strategy has been heavily skewed towards attracting large global corporations — whether in manufacturing or in finance. This makes us more vulnerable to such fundamental changes in corporate strategy; and
• Changing structure of competitiveness: Not only will Asian currencies appreciate, other factors will probably work to change the competitiveness landscape. China is moving up the value chain, becoming more competitive in several areas that Singapore focuses on. Indian manufacturing companies are restructuring, raising their efficiency especially in precision engineering and auto-related activities.

Basically, some really fundamental parameters will change. We may not be able to simply tweak our economic model. We might have to make more radical changes or at least add important new dimensions to it.

ENHANCING THE SINGAPORE ECONOMIC MODEL BY BUILDING INHERENT CAPACITY
Given the dire circumstances in which we found ourselves at independence in 1965, we had little choice but to take short cuts to growth. We relied on MNCs because they came as a package that combined capital, top-class management, cutting-edge technology, access to major markets and globally efficient corporate processes. That saved us the trouble and time needed to build that capacity in locally owned companies. Of course, locally owned privatesector companies did participate in Singapore’s growth but outside the banks, real estate and trade services, they were essentially passive bystanders rather than active drivers of Singapore’s growth.

The short cut to growth gave us a high standard of living and full employment relatively quickly and was therefore probably the right approach. But, now that we have achieved these, it might be worth making developing the inherent capacity of the economy a key policy objective. By inherent capacity of a country, we mean the critical software that incorporates the blueprints for successful economic activity held by the indigenous workers and companies of a country. This includes workers’ skills, locally-owned intellectual property, the accumulated intangible experience stored in our companies and the adapted cultural habits in society that enable economic agents to work together to produce results. If a good part of a country’s such capacity is located in footloose foreign companies, that capacity may not remain long in the country. But if it has considerable inherent capacity, then its prospects are much better.