Over the last 200 years, Singapore has overcome wars, international political upheavals and economic disasters to become a thriving city state. The next phase of its history may be no less daunting.
SINGAPORE (Jan 28): The various initiatives around Singapore’s Bicentennial — including making the statue of Stamford Raffles “disappear” — mark a momentous period in the city state’s history. Yet, this particular point in Singapore’s development would also be time to reflect on what is needed for the city state to endure the next phase of history.
Singapore’s success has been predicated on its being more adept and advanced than the other countries in its neighbourhood. By being the most efficient, and cleanest, economy on the block, it was able to leverage its historical advantages of a free and open port, to build a thriving hub for trade and financial services. The government has invested heavily to develop world-class ports — air and sea — that facilitate the movement of trade and services, and attracted investments and talent from across the globe to its shores.
Yet, some of the sectors that have hitherto enjoyed tremendous growth as a result are beginning to experience a slowdown. Medical tourism in Singapore — which fed the growth of the private healthcare industry, for example — has begun to slow over the last few years as higher costs drive regional patients to competing medical centres in Malaysia and Thailand. Separately, and one that may well be out of its control, continuous advancements in technology would make its ports irrelevant: Aircraft and ships would no longer be limited by range and be forced to call at Changi or Tuas while on a journey between the East and West.
Domestically, growth is beginning to slow. Last year, the economy grew 3.3% y-o-y, slower than the 3.6% recorded the year before. Non-oil domestic exports in December 2018 fell 8.5% from the year before, according to Enterprise Singapore, the worst performance since October 2016. Growth is expected to slow to 2.6% this year. And, as The Edge Singapore reported earlier this year, even with a new economic model, the heady days of 5% growth are unlikely to make a comeback.
To be sure, Singapore has built up its fiscal reserves to give it flexibility to respond to uncertain global market conditions. It also has had to look for new economic drivers, and has landed on certain areas, such as international arbitration services, which also leverage its core assets — political and economic stability and adherence to the rule of law.
Still, concerns over the mounting challenges ahead are exacerbated by a slowing global economic growth environment, geopolitical tensions and a battle for supremacy between the world’s two largest economies — the US and China. At the same time, there are growing worries at home stemming from the shift in Singapore’s demographics — a large young workforce is slowly but surely giving way to a greying population that needs to be supported for a lengthening period of time. That is compounded by issues of wage disparity and job displacement by technology.
There are two key challenges that Singapore faces: How should it navigate the increasingly murky waters that is its relations with other countries; and how can it keep ahead of rising regional competition? The responses would have implications for businesses and investors — anyone with vested interest in the continuing success of Singapore.
The Edge Singapore asked a number of economists and observers about how Singapore should chart its path ahead. Like most small states, it has always been outward looking. Its proposition as a regional and global hub for business has attracted MNCs to set up their headquarters and R&D centres here, creating jobs and boosting the local economy. But that process may get harder. One recommendation was to double down on investing in local talent and bolstering domestic companies. However, this also entails trial and error, and could mean a more risky environment ahead. It would also see the government playing a much greater role.
On the diplomatic front, as a small state, Singapore benefits from an open and organised world order. Yet, as that comes under threat, it may need to assert itself more strongly and, in the words of Prime Minister Lee Hsien Loong, “to stand up and be counted”.
Staying competitive: Diversity of ideas needed
The fact is, Singapore today is a very different economy than it was before. Compared with the rest of the region, the costs of doing business, including wages, are higher. For a while now, Singapore has enjoyed the lowest unemployment rates among developed economies. But this could soon change, as technological disruption displaces workers. Indeed, a recent report by IT firm Cisco Systems and Oxford Economics suggests that Singapore faces the biggest skills and jobs mismatch in the region. About one-fifth of the full-time working population will have their jobs displaced by 2028. At the same time, as a small and open economy, the external shocks and shifts in the international markets are felt more keenly than others.
“[For Singapore to] simply rely on being a hub for an open Asia and for multinationals to locate here may not be as successful going forward because of all these external [challenges],” says David Skilling, director of Landfall Strategy Group, an economic advisory firm based here. As such, small economies such as Singapore will need to build a more resilient environment. “To maintain political support and to enhance citizen welfare, they need to be quite deliberate and aggressive on inclusive growth,” Skilling says.
In the same vein, simply making small adjustments to current policies may not be enough to address the looming challenges ahead. “The Singapore way sometimes is to adapt and tweak and move on the margins — but it strikes me that there are some structural shifts that are required, which might require more determined, more aggressive efforts than we have seen,” Skilling adds. What is needed is for the country “to transition to a high-innovation, high-productivity and high risk-taking economy.”
Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho Bank, says: “What I do believe is we need more ideas and debates. We have become very focused and homogeneous [in our process to find success]. One of the important issues for Singapore [to address] is the ability to find itself in a heterogeneity of ideas. When global economic conditions are changing so rapidly, you need a dynamic mix of ideas, which allows for more well-thought-out and sometimes debatable [decisions or policies] being thrown forward.”
This is particularly important, according to Varathan, as economic cycles become tighter. There is a risk of lurching from one cycle to another, which is not the most efficient way of using resources. “Using the analogy of a swimmer, if you fishtail and lurch too much, you lose your efficiency and speed rather than if you used a balanced stroke. Let’s not put our eggs in the few digital baskets,” he says.
One way to do that is to expand skills-based courses to equip people with more applicable skills. Singapore’s SkillsFuture is but one step in that direction, he says. “The next challenge then is, do you put your money where your mouth is, will you tweak your scholarship schemes? Would we then select top performers based on a different set of criteria?
“While we can’t have current ministers relinquishing their degrees, what we can have is current ministers saying and showing that they employ a new set of people and give them prospects that are not second or subjugated to another class of people.”
Some social safety nets can also encourage more people to take risk and start their own businesses. What is needed, Skilling says, is “an economy in which people don’t feel like they will lose everything when they join a start-up and it goes bankrupt”.
Skilling suggests, among other things, a more generous approach to public healthcare.
Healthcare costs have been rapidly rising and, as the government has significantly increased its spending in the area, national healthcare spending is expected to reach 3% of GDP, exceeding $13 billion by 2020. But despite the various subsidies and schemes, the bulk of a medical bill is still borne by the individual. Alleviating that could change people’s approach to taking the risks needed to start a business, for example.
“Some countries use a more collective approach to [healthcare]. [It is important] to think beyond the individual household [taking the risk], but that the risks can be pooled across the board. It is not a free lunch; you have to be thoughtful about it. The key thing is enabling individuals to share risk so that they feel more inclined to build a start-up or join a younger firm as opposed to a brand-name firm,” says Skilling.
Against the backdrop of slower growth, worries over income inequality and stagnating social mobility pose another set of trouble for the city state, say economists. In 2017, median monthly household income growth was the slowest since 2009. The median monthly income grew 2% in nominal terms and, factoring in inflation, grew only 1.5% in real terms. This is for households headed by a Singapore citizen or permanent resident that had at least one working person.
Households in the 51th-to-90th percentile income group saw income for each family member rise 3.7% to 4.5% after inflation. In the top 10%, income grew 2.6% in real terms, while the bottom 50% grew between 2.1% and 3.6%.
Would greater public distributions alleviate the situation? “We are at the stage of growth to think about how distribution can be enhanced,” says Varanthan. “This is not to say it is a leftist ‘Robin Hood’ policy, but the central tenet is that if you raise the lot of the bottom by 30% to 40%, the hope is that it creates its own economic multiplier. I don’t believe in blind fiscal transfers. I mean to plough [funding] into training and education.”
Varanthan has also been a long-time advocate for estate duties in Singapore, though he admits it is a relatively unpopular idea. “The argument against it was that estate duties didn’t raise a significant amount. The second argument is that there are many estate planning devices to escape this,” he rues. “My comeback was that, even if it doesn’t materially change it, it is important from a signalling point of view [that shows a move towards] the redistribution of accumulated wealth.”
He notes that Japan has estate duties of up to 50%. He notes that the country gets about 2% of their tax revenue from that. “We don’t need to have it at exorbitant rates. Anywhere from 5% to 10%. It can be tiered and with the right exemptions in place so your average families doesn’t get caught by this.”
Others argue that, instead of higher taxes, there must first be growth to sustain stronger, more inclusive policies. “More welfare [policies] means you need more revenue, which means more taxes, which means higher financial burden for the next generation,” says DBS Group economist Irvin Seah. “You can’t put the cart before the horse.”
Seah believes the way forward lies in what he calls “borrowed growth” from Southeast Asia, which continues to be one of the fastest-growing markets globally. “Local companies need to be more innovative and venture into the region,” he says. “It is not about policy alone; it is about mindset. We have been too successful; maybe we have become complacent.”
But how much top-line growth does Singapore need before it can implement more accommodating social policies? How does one define “enough” in the first place? Detractors of welfare-leaning policies will argue they are unsustainable, as the country already faces the prospects of a costly ageing population. On the flipside, Singapore may not be any worse off for mandating a universal living wage or a more generous healthcare plan. But those initiatives may require taking a risk, and would certainly need a mindset change.
Diplomacy: Finding the right formula for Singapore to determine its future
At the latest World Economic Forum gathering, Singapore’s Finance Minister Heng Swee Keat singled out multilateralism and a rules-based free trade system as key for continuing global economic growth.
Heng’s call comes amid concerns of rising protectionism, and as Singapore wades into tricky external waters. The continuing rivalry between the US and China may be forcing small states such as Singapore to pick sides; meanwhile, prickly relations with neighbouring Malaysia have resumed, with both sides bickering over territory. How should Singapore navigate all this?
Some observers have advocated the role of Singapore as doorman, rather than pick sides. “A lot of people misunderstand Singapore’s foreign policy,” says Alan Chong, associate professor at the S Rajaratnam School of International Studies in Singapore. “We don’t align with a great power to the point where there is no more room to manoeuvre.”
He notes that, from the 1960s to the 1970s, as China was undergoing a revolution, Singapore kept trade open. “If you looked at it then, we should have been taking sides [and] stopped trade to China. But because we kept the trade open, we won from the political windfall once Deng Xiaoping came to power. A lot of people forget this.”
On the international stage, Singapore has tended to play a more subtle role. It plays host to summits, for example, such as the one between the US and North Korean heads of state last June. “Many people look down on the doormen at hotels, at shopping centres and so on. But these are important people,” Chong adds. “Because, one day, when you’ve lost something or you cannot talk to a neighbour, and you still need to resolve an issue, you go to a neutral party who is not high-profile. Who is willing to do it quietly for you. That is the greatest person you should thank, and [that’s] how Singapore gets by.”
Mustafa Izzuddin, a fellow with the ISEAS-Yusof Ishak Institute, says Singapore has always been a reluctant player on the international stage because it sees itself as a small state. Still, it has been making strategic moves to be more involved in the international issues that it perceives to be important for the stability of the region. “For instance, it sees East Asia’s stability to have implications for Southeast Asia. So, when Singapore had a chance to host the Trump-Kim summit, it did,” he says. “You would see us hosting more [of such] events that bring stability to the region. But we will not go beyond that and try to be a mediator because of our limited resources.”
Small states including Singapore, observers say, should stick together, particularly as superpowers come and go. “The new order, for now, looks fluid and multipolar,” says associate professor Peter Borschberg, a historian at the National University of Singapore. “Has the Anglo-American order of the last two centuries been the long-term historical exception rather than the norm? Looking back at a much longer period in history, the answer is affirmative. Orders have come and gone in long cycles. As for this part of the world, the 21st century seems a lot like in the 17th century when Singapore and its waters were spaces contested by regional as well as the early European colonial powers.”
Other observers caution that a more China-oriented world order may not benefit Singapore. “Singapore’s financial markets are much more diversified now. But if we see a Pax Sinica, then Singapore would look much more like Hong Kong or the way Hong Kong is emerging [to be]. We will see more contracts given to Chinese companies on projects in the region,” says Razeen Sally, associate professor at the Lee Kuan Yew School of Public Policy.
“If you are moving towards a more mercantilist order — something that is more bilateral, more hub-and-spoke, more reliant on state discretion, less rules-based, whichever way you look at it, it is going to be worse for the Australias, New Zealands, Singapores and Malaysias of this world.”
As such, Singapore’s future lies in its becoming a truly global city — much like London and New York, essentially hubs that connect the rest of the world. But even this goal is going to be hard to achieve if the world order become a less liberal one.
Ultimately, Singapore should set about determining its own future. “It’s more about winning friends and allies. This will require a less formal and more grounded approach to interaction and negotiation,” says Graham Ong-Webb, research fellow at the S Rajaratnam School of International Studies. “To be precise, what Singapore needs to adopt is what some American experts call ‘smart power’, which is finding that right blend of traditional approaches [of assertiveness] and soft power.
“The only way is to go out there into the main diplomatic and political streets, where life is largely thuggish and unfair, get a little dirty, roll and give better punches, earn our scars and get the kind of ‘street cred’ that isn’t begrudgingly bestowed on us for having always used the international legal rule book for cover. This is how corporate warriors, for one, are made and I think Singapore’s next generation of diplomatic leaders can take a leaf from that.” — With additional reporting by Jeffrey Tan
