Economist Manu Bhaskaran of Centennial Asia Advisors wrote this article on the report of the Committee for the Future Economy. It was sent to Centennial’s  private clients in its regular newsletter. He has kindly allowed me to published it here. When the committee was formed, Manu wrote also wrote another article saying that it had its work cut out.

Singapore’s Committee for the Future Economy report abjures bold moves

The Committee on the Future Economy (CFE), chaired by Ministers Heng Swee Keat and S Iswaran, released its set of recommendations to chart Singapore’s economic strategy for the next five to 10 years. It aims to set the stage for the Singapore economy to benefit from emerging opportunities and equip its people and firms with the deep skills and knowledge to succeed in the long run.

Two key questions are raised by our assessment – what specific policy changes might emerge out of the CFE report and whether the CFE’s modest goals be achieved. On both these, we have a cautious take.

Key features of the CFE Report

The CFE lays out seven key points which it hopes will gear Singapore up for success, leading to an average annual growth rate of 2-3% and culminating in good jobs and meaningful careers for all Singaporeans while also ensuring that manufacturing continues to play a large role in its economy.

The seven broad and “mutually-reinforcing” strategies by the CFE are:

  1. Deepen and diversify our international connections
  2. Acquire and utilise deep skills
  3. Strengthen enterprise capabilities to innovate and scale up
  4. Build strong digital capabilities
  5. Develop a vibrant and connected city of opportunity
  6. Develop and implement Industry Transformation Maps (ITMs)
  7. Partner each other to enable innovation and growth

What policy changes should we now expect?

The CFE report carefully sticks with existing policy approaches, with few bold new initiatives, as noted by the Government itself in its press conference releasing the report. Virtually all the recommendations involved validating existing policy approaches such as:

  • Same old favoured growth sectors: Companies should look to high-growth sectors in Singapore such as finance, hub services, logistics, urban solutions, healthcare, the digital economy and advanced manufacturing, with the Government taking on a more active role to support growth and innovation.
  • Continued commitment to retaining a large manufacturing base: There will be stepped up efforts to ensure that manufacturing in Singapore is globally competitive and maintains its share of GDP at 20% over the medium term. The CFE’s strategy to do so is through the Industry Transformation Maps (ITMs) that were announced last year – industry-specific platforms to integrate planning and implementation in 23 industries and about 80% of the economy. Six have been launched to date.
  • No change to economic openness: Not surprisingly for an economy utterly reliant on external demand and foreign investment, the CFE reiterated Singapore’s commitment to economic openness in terms of trade and investment. Singapore will focus on progressing negotiations for the Regional Comprehensive Economic Partnership (RCEP) as well as fully utilising the privileges stemming from the ASEAN Economic Community (AEC) which is already in effect. No new initiatives for regional integration appear to have been contemplated.
  • Deregulation to spur innovation, digitisation and entrepreneurship: This was one area where some interesting policy moves were hinted at. The government will simplify the regulatory framework for venture capitalists and encourage the entry of private equity firms to provide smart and patient growth capital. It plans to design a regulatory environment supportive of innovation and risk-taking, such as through regulatory sandboxes and by issuing “no action” letters assuring disrupting companies that they would not be penalised if in pushing the envelope with new ideas they brush up against Singapore’s infamously rigid regulations. The Government will also act as a source of “lead demand” to support up-and-coming industries, particularly those which intersect which strategic national needs. It will also set up a Global Innovation Alliance to link Singapore’s institutes of higher learning and companies with overseas partners in major innovation hubs and key demand markets. Government to promote the adoption of digital technologies across the economy with a dedicated focus on building strong capabilities in data analytics and cybersecurity.
  • Scaling up and internationalising: Government to support the scaling up of high-growth local enterprises as well as the commercialisation of research findings and intellectual property of research institutions. The government will make a big push for agglomeration gains through enhanced international connectivity as well as by developing districts such as Jurong and Punggol into synergistic and vibrant clusters.
  • Tax reforms: The Government to maintain a broad-based, progressive and fair tax system while remaining competitive and pro-growth. This could be an intriguing reference to a hike in the goods and services tax (GST) in the near future.

Several commentaries in the usually pro-government media have noted the Report’s penchant for tweaks and expansions to existing policy approaches and the glaring paucity of new ideas and initiatives. Essentially, the CFE has brought together policies which are already in the pipeline or already being implemented into a coherent report. The Government is clearly in no mood to risk shaking things up through a bolder approach.

Can the objectives outlined by the CFE be achieved?

That means that the Government might struggle to attain its goals of 2-3% growth and the retention of a large manufacturing role in the economy.

First, without fundamental changes to Singapore’s economic model, it is not clear how these goals can be attained.

 The average annual 2-3% growth target is a marked downshift from the 3-5% range posited by the 2009 Economic Strategies Committee. Even so, it is difficult to see the Singapore economy hitting this target given lacklustre productivity growth and an ageing population.

  • Productivity gains have been abysmal in recent years with productivity barely growing.
  • Headwinds will grow in demographics as the population ages. Even though importing foreign workers and accepting immigrants are possible solutions to a greying Singapore, there are political constraints to doing so.

Since long-term economic growth is a function of productivity growth and labour force growth, it is difficult to see Singapore hitting the 2-3% growth target.

Additionally, external challenges could compound Singapore’s challenges.

  • A more hostile global environment beckons as the US and China jostle for hegemony in Singapore’s backyard. Should US President Donald Trump follow through with the rest of his anti-trade, anti-globalisation policies, export-oriented economies such as Singapore will be adversely and significantly affected.
  • Greater competition from unsympathetic neighbours will challenge Singapore’s status as the premier hub in the region. Bangkok and Kuala Lumpur are emerging as significant rivals to hub services which Singapore has focused on as a high-growth industry.

Second, the push for a large manufacturing base does not have sufficient under-girders.

Manufacturing, particularly for exports, has powered the initial stages of Singapore’s growth story and remains an industry integral to the economy. However, in light of rising costs, it has become uneconomical to manufacture most items in Singapore. Indeed, it is a wise choice to focus on advanced manufacturing which will be focused on high value production activities.

Yet, the question is whether a goal for the manufacturing sector to comprise 20% of the Singapore economy over the longer-term is feasible. A quick look at other advanced economies which are also production powerhouses (see chart) shows that maintaining a robust manufacturing base as part of the economy is very possible. Germany, Japan and South Korea are cases in point.

Chart 10
Singapore as compared to other advanced economies

Source: Calculated by Centennial Asia Advisors using CEIC Database

Singapore’s manufacturing share of GDP has been on a long-term downtrend from 26% in 2000 to 19% in 2015 – in line with economic experience around the world – while Germany and South Korea’s have remained largely unchanged while Japan’s has ticked down from 23% to 20% over the same period. Germany can count on its world-class Mittelstand while Japan and South Korea have strong national champions to undergird their respective manufacturing bases. However, Singapore has an unhealthy reliance on MNC-led growth and foreign direct investment and has not been making great inroads at nurturing a strong core of SMEs.

It remains unclear why Singapore should deviate from economic orthodoxy and attempt to sustain a relatively large manufacturing base even as costs rise and many production activities become uncompetitive. To this end, the ITMs appear to have a key role to play and we expect more sector-specific support schemes to materialise soon.

A big worry is that in the pursuit of this 20% target, the government will ramp up its big-ticket giveaways and sweeteners to entice MNCs to remain in or come to Singapore. This means more investment incentives, tax breaks, etc, pointing to a higher cost of attracting foreign investment and potentially skewing the cost-benefit analysis against Singapore’s favour.

Third, nary a mention on the overarching challenges Singapore faces

  • High cost structure inhibiting entrepreneurship and growth of SMEs: Costs in terms of rents, wages and compliance are mounting in Singapore resulting in a loss of cost competitiveness. High costs are also stifling entrepreneurial spirit and inhibiting the growth of local start-ups.
  • Rejuvenation of the local bourse: The Singapore Exchange (SGX) has seen stock turnover volumes plummet in light of the penny stock crash in October 2013. Average daily volume of stocks traded on SGX has declined to the SGD1bn level or less. There is a lack of liquidity in the equity market, resulting in uncompetitive valuations for firms thinking of listing on SGX. In light of the government’s pursuit of smart and patient capital from VCs and PE firms, rejuvenating our local bourse is imperative so that these companies have viable exit strategies from the start-ups they invest in.
  • Fiscal and social policies in age of upheaval: The CFE alluded to the more challenging global environment which Singapore finds itself in now; this is a time of technological change and a darkening of the mood against globalisation. Digitally-driven disruptions and dislocations will likely affect large parts of the economy and the working population and the Singapore Government needs to ensure that while the economy benefits from these changes, workers who are affected are, to some extent, protected and given assistance to transition.

All of which raises this critical question: Is the Singapore “premium” still deserved?

For some time, Singapore could charge a premium to activities that sought to locate in Singapore, because of a number of reasons:

  • First, Singapore had a clear edge in the quality of our regulatory and physical infrastructure, political stability, policy certainty, rule of law and incorruptibility.
  • Second, the economy delivered a premium return to investors so investors did not mind paying a higher entrance fee to be in Singapore.
  • Third, in the age of globalisation, Singapore was the paramount globaliser: we had a liberal immigration policy and emphasised heavily on free trade and FTAs.
  • Fourth, the Singapore Government offered tax and other inducements to businesses to locate here.
  • Fifth, the Government’s astute foreign policy won us advantageous FTAs and military alliances, Singapore could even befriend geo-strategic rivals such as the US and China at once, without having to choose between the two. We had the best of all worlds.

Now, some of these advantages are disappearing or fading. Singapore does not offer such a large premium return as before. Other regional hubs can offer enough of a good deal, even if they are wanting in some details, to pry companies and talent away from Singapore. Globalisation is reversing as well. Our tax arbitration offer to MNCs is now viewed with suspicion by large countries that we depend on, as part of the global shift against Base Erosion and Profit Shifting (BEPS). Our (tightening) immigration policies have made MNCs anxious. Key elements of our cluster are beginning to lose vibrancy – eg. the equities market – and if more of these lose their mojo, the entire cluster could weaken. Finally, China is deeply suspicious of Singapore while the US has become an unpredictable and undependable ally.

Most tellingly, the economy is not keeping up with changes. In an ageing society, where growth and dynamism depend more on innovation and productivity growth, Singapore does not seem to be able to deliver either. The country’s vaunted capacity to confront challenges head on and devise innovative solutions seems to have weakened. For example, policymakers knew that demographics would be a problem 30 years ago but could not come to grips with effective solutions.

The CFE ought to have addressed these issues and offered compelling ideas to take Singapore onto the next phase of economic development – a phase where economic growth might be slower but of higher quality, where traditional jobs might be disrupted by technology. Singapore needs to remain special in order to continue being competitive and adaptive in the ever-changing global economy.

It is not clear that the CFE report will bring Singapore sufficiently close to achieving that.