Singapore Growth Falls But Still Doing Well

This year is the 50th anniversary of the founding of Singapore, the island republic that is considered the richest country in Asia by per-capita GDP. But according to a new analysis by Asianomics, The Hong Kong-based financial analysis firm, “there is undoubtedly a mood of frustration that the glory growth years are over.”

Although Asianomics doesn’t say it, the report comes at a time when the leadership has largely fossilized, with the country seemingly awaiting the death of Lee Kuan Yew, the founder in whose image the country has been built. Lee is now 91, fully retired, and appears increasingly frail. He led the People’s Action Party to eight straight electoral victories through 1990 before voluntarily giving way to Goh Chok Tong, whose own reign was only an interregnum that ended when Kuan Yew’s son, Lee Hsien Loong, took over in 2004 as premier. He has remained in power ever since

Government officials may be more pessimistic than they need to be, according to the report. “Searching for the next growth strategy appears to be the main pastime.” The answer, however, is to do less. The government, the report says, “just has to find a way to get involved in every aspect of economic life.” According to one source there are now over 200 schemes to incentivize business, some of them “so ill-thought-out that they would be better called scams than schemes (like paying business S$120 for every S$100 spent on robotic cleaning devices).”

Economic growth in the range of 2-4 percent looks to be the new normal for a country that ranked a spanking fifth in the world in growth from 1992 to 2012. The falling oil price is expected to curtail productivity in rig building and repair and refining, an important component of GDP.

The myriad incentive schemes often have unintended consequences. For example, by raising the levy on foreign construction workers the government intended to increase their skills base. Instead, search firms went out and looked for even lower skilled and cheaper labor to offset the effective tax increase. Instead of being productivity enhancing the higher tax has had the opposite effect.

Associated with the productivity-led growth policy was an open-border approach to labor flow. “While commendable in its intent,” Asianomics said, “the policy backfired politically in Singapore. From 2000-2010 the population on the island surged 26 percent, mostly as a result of foreign labor inflow. The result was a resounding reduction in the People’s Action Party’s share of the vote – and seats in parliament – at the 2011 General Election.” In that election, the final results saw the ruling People’s Action Party vote fall to 60.14 percent, the lowest margin since independence, although it won 81 of 87 seats due to gerrymandering.

Since that time, the open-door policy has been reversed and the government has focused more on social service provision, including universal health care is an example for the local population. Given that electoral shock and the government’s actions to remedy it, according to Asianomics, “it is difficult to see a serious challenge to the PAP given the wealth that it has created for Singaporeans over the past 50 years. However, it would do well to learn the lessons of ‘less is more’ and ‘sticking to the basics’ from now on. We doubt that that will be the case, however.”

Employment is almost at capacity, with only 2 percent unemployment. “Anyone with a brain is gainfully employed in Singapore,” the report quotes a source as saying. However, while fully employed, Singaporean workers have only just maintained their wage share of GDP at 42 percent and have seen some real income erosion as a period of high consumer price inflation followed the Western Financial Crisis and the forced reduction of interest rates to zero in the economy.

The slowing of GDP growth may look disheartening, the report notes, but Singapore is now a rich-country economy and “there is nothing the government needs to do or should be doing about increasing that range – although it would be well-advised to rationalize the various incentive schemes, as well as reversing some of the tax breaks for multinational companies who can do quite well enough without them.”

The manufacturing sector, now down to 17 percent of GDP, is high value-added and highly competitive. The country appears to be highly competitive in attracting high value-added service industries as well, judging from the lack of vacant commercial property and the steady stream of MNC regional headquarters being set up in the city.

The fortunes of the country, only 700 sq km, much of it built on sand hauled in from Indonesia, and with a population of 5.56 million as of July 2014, are tightly bound up with growth in both Asean and India. Singapore’s growth correlates rather closely with India’s, although there is no correlation at all with the growth rates of its closest neighbors, Malaysia and Indonesia, in effect the country’s hinterland. With India expected to take off economically under the business-oriented leadership of new Prime Minister Narendra Modi and the Bharatiya Janata Party, Singapore’ fortunes may improve as well.