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Future lies in knowledge

Turning The Corner, Looking Ahead[/by] The Republic may have to face a less favourable external regional environment, competition and find new ways to stamp its mark in trade

By LEE TSAO YUAN

AS THE Singapore economy makes its way into 1999 after a difficult year, there are two bright spots on the immediate horizon, which justify cautious optimism over the next 18 months.

First, there are signs of recovery in the global electronics industry. After contracting 11 per cent last year, the global semiconductor market is forecast to grow by 9 per cent this year and 15 per cent next year, led by a surge in memory chips, microprocessors and digital signal processors.

Fuelled by a boom in personal computer demand, semiconductor chip sales jumped 13 per cent in the last quarter of 1998 compared with the previous quarter, the largest sequential rise in more than three years. Prices for chips have also risen.

This is good news not only for Singapore, but also the Asian region where electronic components form a major share of manufacturing and exports.

For Singapore, a recovery in the global electronics industry will not only boost domestic growth and employment -- electronic products constituted 45 per cent of value added, 35 per cent of employment and half of output in the manufacturing sector in 1997 -- it will also increase demand for hub services as regional exports and incomes increase.

The second bright spot is that the region has stabilised and recovery, although fragile, appears to be well on its way. Trade balances have improved, nominal exchange rates have appreciated, interest rates have declined, industrial production has bottomed out and the painful process of bank recapitalisation has begun.

The recovery process, however, is likely to be uneven. While Thailand and South Korea are likely to achieve positive growth in the second half of 1999, Malaysia still has problems to sort out and Indonesia continues to face serious political and social difficulties.

There are, of course, a number of downsides. The Brazilian devaluation and subsequent floating of the real is a fresh source of financial instability and could cause investors to retreat from emerging markets. Hongkong could face more speculative attacks, especially given fears about the financial health of "red-chip" companies and their larger-than-anticipated bad debts.

Most important, the anticipated slowing of the United States and Europe and continued recession in Japan could limit export growth in Asia.

The continued fragility in the Asian economies is therefore likely to be reflected in a zig-zag, rather than a consistent, upward trend in stock market prices. In other words, a "W" is more likely than a "V".

LIKELY TO BE BUMPY

PROVIDED there is no major source of instability, growth this year will most likely be positive and even above the government forecast of minus-1 per cent to 1 per cent, with a pick-up expected in the second half.

There are already signs of easing. The rate of retrenchment has already fallen since mid-1998, from about 7,000 in each of the first two quarters to about 6,600 in the third quarter and 6,000 in the last quarter. Bank loans, which contracted 1.3 per cent in September and 2.3 per cent in October on a year-on-year basis, registered 0.1 per cent growth in November.

Private housing sales, of around 1,000 units for each of the first three quarters, began to pick up in October, so that the total figure for 1998, anticipated to be at least 6,000 units, could exceed 1997's figure of 5,500 transactions.

Dun & Bradstreet's business optimism index saw better readings for the first quarter of 1999 compared to the previous two quarters. And last but not least, the Government's cost-cutting measures will help business competitiveness.

So, in short, one can now see light at the end of the tunnel. The outlook for 1999-2000 looks decidedly better than for 1998, although it is likely to be a bumpy ride.

While the immediate concern is when Singapore will recover from recession, there are medium-term issues that need to be considered.

Over the next five to seven years, merely achieving positive growth will not be enough. The objective should be to achieve, not the heady growth rates of the pre-crisis 90s but fairly rapid and sustainable growth.

But this may not be easy, because there are some hard issues that need to be faced. Three stand out in particular.

The first is what if the external regional environment turns out to be less favourable than before? The state of the US, European and Japanese economies will be key in determining the medium-term outlook for the region, including Singapore. A slow-down in the US and Europe in particular, which are Singapore's major export markets, will be quickly transmitted to the region.

Last year showed how the crisis, initially purely economic in nature, had affected the political and social fabric of the countries around the region. Might the crisis have fundamentally altered the economic and political regional environment facing Singapore?

Recall that South-east Asia was one of the fastest-growing regions in the world during the last 25 years. In addition, the last two decades were marked by peace and stability.

But what if South-east Asia is unable to regain its economic dynamism in the next five to seven and is outstripped by other regions, notably north-east Asia (China in particular), Latin America and central and eastern Europe?

In particular, what if economic growth in Indonesia, and to a lesser extent, Malaysia, continue to be lacklustre because of political and social problems? What if, in addition, Singapore faces a decidedly less friendly political environment, where relations are coloured by nationalistic policies with ethnic overtones? How will a slow-growing and politically-tense South-east Asia affect Singapore?

Given the strong inter-linkages between the Singapore economy and those of the region -- Singapore is a regional hub as well as a substantial investor in Asia -- the impact will undoubtedly be negative.

While foreign investors have learnt to distinguish between individual countries in South-east Asia, high political risks associated with Indonesia and Malaysia will inevitably take their toll on the confidence with which investors can use Singapore as a regional base for manufacturing and services -- especially if economic dynamism is restored in North Asia.

To deal with this contingency, one of Singapore's options is to diversify from excessive dependence on a slow-growing South-east Asia, and focus more on opportunities elsewhere, such as in China, South Asia, and non-traditional markets like Africa, Latin America and central and eastern Europe.

This has begun to happen. The Trade Development Board has stepped up its promotional efforts in these regions. The positive growth in exports to both the Middle East and Mexico of over 20 per cent for the first 11 months of last year is a good sign, as is the expansion of exports to South Asia, 33 per cent, and to China, 16 per cent, for the first 10 months of last year.

Another strategy is to attract foreign companies which, like Caltex, will use Singapore for global, and not just regional, business operations.

What all this means is that the buzzword "regionalisation" -- used to encapsulate the strategy of investing overseas, with primary emphasis on the region -- needs to be changed to "internationalisation".

The crisis has taught us that putting all our eggs into the regional basket has its pitfalls, and that it is more prudent to aim at greater diversification. Considering that the external economy was already 16 per cent of the domestic economy in 1997 and is likely to rise over time, this change in orientation will not be insignificant.

UPGRADING PROCESS

TO SUCCEED internationally rather than just regionally, Singapore companies will need to upgrade their capabilities and resources.

This process, too, has started. In line with the global trend towards mergers, consolidation and streamlining, a number of major mergers occurred in Singapore in 1998, mainly among government-linked companies (GLCs).

In addition to the merger of DBS Bank with POSBank, there was also the merger of Sembawang Corporation with Singapore Technologies Industrial Corporation to form SembCorp Industries, which is billed as Asean's biggest infrastructure company. The Keppel group also embarked on a major consolidation exercise.

The second option to cope with regional uncertainties is to intensify regional foreign policy efforts; for instance, to ensure a cohesive Asean which implements its commitments on schedule, and to minimise any escalation of bilateral tension.

It is encouraging that at their summit meeting in Hanoi in December, Asean leaders agreed to advance the implementation of Afta (Asean Free Trade Area) to 2002 from 2003, to bring forward the Asean Investment Area to the year 2003, from 2010, and to relax foreign investment regulations by individual member countries.

A second tough issue that Singapore will have to face, post-crisis, is whether it can successfully meet the competitive challenge. There is little doubt that Singapore is likely to be up against stiffer regional competition in the years ahead, given the large nominal currency depreciations in the crisis-hit countries, which are unlikely to be matched by wage and price increases.

For example, the ringgit has depreciated nearly 30 per cent against the Singapore dollar in the past 18 months, and the Korean won, by 15 per cent.

The recent cost-cutting measures will help narrow the gap, but only partially. So what else can Singapore do?

The key lies in making a rapid transition to a "knowledge economy" where, as the report of the Committee on Singapore's Competitiveness (CSC) puts it, "the basis for competitiveness will be the capability and intellectual capital to absorb, process and apply knowledge".

The CSC report recommends eight strategic thrusts to help realise its vision: reliance on manufacturing and services as twin engines of growth; strengthening the external wing of the economy; building world-class companies; invigorating small and medium local enterprises; developing human and intellectual capital as a key competitive edge; leveraging on science, technology and innovation; optimising resource management; and using government as a business facilitator.

Many of these recommendations are already on-going policies and as such, represent a re-formulation and re-emphasis of existing trends rather than bold, new measures.

Nevertheless, the CSC report's vision and strategic thrusts deserve a fuller airing, and it is unfortunate that in the public eye, immediate short-term cost-cutting recommendations crowded out the longer-term considerations.

In moving to a knowledge-based economy, there will be two challenges which will pose particular difficulties.

One relates to the objective of developing a world-class workforce in Singapore in the 21st century. Upgrading the skills of the 700,000 Singaporeans with below- secondary-level education will not be easy.

The main difficulty with skills upgrading everywhere in the world is the reluctance of workers to undergo retraining (although rising retrenchment has eased the process lately in Singapore).

Another challenge is to develop a culture of innovation, risk-taking and entrepreneurship. In tightly-run Singapore, how much loosening, if any, is needed to encourage creativity remains an open question.

It is not a question of economic liberalisation and risk-taking per se: The Government has shown that it is both capable and willing to take bold measures -- for instance in the financial sector -- as well as calculated risks, an approach that is one of the hallmarks of its success in economic management.

Rather, what is not certain is whether a political loosening is necessary to foster a more innovative culture, and if so, how to do it without embarking on the slippery descent into chaos.

A controversial area concerns the role of the GLCs. The CSC report recommends that the GLCs can be developed into Singapore's own world-class companies. In order that they can do so, the CSC proposes various measures, including a review of the management structure and philosophy of GLCs, the need for these companies to recruit the best talent from around the world, and to streamline and consolidate their operations, with Temasek Holdings (the parent holding company for the majority of GLCs) playing a more proactive role in overseeing and monitoring the strategic business thrusts of the GLCs.

All this is welcome.

But there is another important issue that needs to be addressed, especially for the unlisted GLCs, including the holding companies.

This is the need for greater transparency and accountability, which the financial crisis brought to the fore across the region. One view that has been expressed by, for example, MP Sin Boon Ann in Parliament is that because the funds held in GLCs belong to the public, the operations of these companies should be made more transparent through greater public disclosures, and that their managers be subjected to the same forces of market discipline -- such as hire and fire -- that apply in the private sector.

A final issue that Singapore will have to face up to is: What if the Singapore economy's growth slows to around 4 per cent over the next five to seven years? While this is not a likelihood, it is a contingency that needs to be addressed.

Although it is inevitable that growth in Singapore will eventually slow down to the 2-3 per cent range which is typical for developed countries, a prolonged period of, say, 4 per cent growth, at this stage of economic development, could have far-reaching social and perhaps political consequences.

It will result in fewer job opportunities and slower upward mobility. Fresh graduates will take a longer time to find jobs and will no longer have the luxury of being choosy.

The Government's policy of attracting larger numbers of foreigners to supplement Singapore's domestic talent pool could face greater domestic resistance as the competition for jobs increases.

Large government surpluses will no longer be the norm as in the last three decades, which may result in a slower pace of upgrading of HDB flats and construction of public infrastructure.

In the political realm, a prolonged slowdown could mark the end of "politics of affluence". This could well coincide with political transition -- the handing over by Prime Minister Goh Chok Tong to a new team, as well as the possible eventual retirement of Senior Minister Lee Keen Yew, who will be 76 in September this year.

Singaporeans are not used to a prolonged period of slow growth. To the contrary, expectations have been predicated on sustained, rapid growth and increasing prosperity.

Can Singaporeans lower their expectations, or will slower growth result in greater social and political tensions?

Will it increase the rate of emigration, as some Singaporeans seek greener pastures elsewhere?

These are issues which are worth serious reflection and discussion.

A WATERSHED

THE regional economic crisis of 1997/98 is likely to be seen as a watershed event for Singapore.

Just as the 1985/86 recession accelerated the pace of economic restructuring in the economy towards higher capital intensity, the 1998/99 recession is likely to accelerate the pace of economic restructuring towards higher knowledge intensity in the economy as competition gets tougher and the pace of change, quicker.

There are grounds for hope. It is no accident that Singapore managed to achieve 1.3 per cent growth in 1998, in spite of the severity of the regional recession.

The Asian financial crisis has been a test not only of economic resilience, but also of political leadership and social cohesion.

It is because we have done relatively well on all three fronts that there is cause for optimism for Singapore's future in the years ahead.
The author is director of the Institute for Policy Studies (IPS). This article is adapted from a speech she delivered on Wednesday at the IPS conference on Singapore: The Year In Review 1998.

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