VZCZCXRO9988
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0113/01 0280544
ZNR UUUUU ZZH
R 280544Z JAN 10
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 7743
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 SINGAPORE 000113 
 
STATE PASS USTR 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV SN
 
SUBJECT:  ECONOMISTS QUESTION FUTURE OF SINGAPORE'S GROWTH MODEL 
 
¶1.  (SBU) Summary:  As Singapore recovers from another recession 
brought on by events outside its borders, local economists have 
begun to question Singapore's economic growth model.  In past 
decades Singapore utilized an extraordinary openness to foreign 
investment and labor to quickly grow its economy to developed 
status, but this same openness has exposed the small city-state to 
volatile economic swings outside its borders, as well as unforeseen 
domestic impacts from a steady stream of foreign workers.  In May 
2009 the government established an Economic Strategies Committee 
that will put forth preliminary recommendations next week to prepare 
the country for sustained and inclusive economic growth by looking 
for new growth opportunities.  Several noted local economists 
believe the committee's recommendations must address structural 
problems inherent in Singapore's growth model, including declining 
productivity growth, an overdependence on external markets and 
foreign enterprises and workers, and a widening income gap among 
Singaporeans.  End Summary. 
 
Is The Singapore Model Still Valid? 
----------------------------------- 
 
¶2.  (SBU) In the wake of Singapore's worst recession since 
independence in 1965, local economists are questioning whether the 
economic growth model that lifted Singapore into the developed world 
is still valid, or whether significant changes must be made to guide 
the economy forward.  The financial crisis that rocked the global 
economy in late 2008 impacted Singapore particularly hard, exposing 
its vulnerability to the economic ebbs and flows outside its 
borders.  As a small, open economy heavily dependent on trade, 
Singapore has ridden the wave of globalization to new heights of 
wealth, but economic crises over the years in the region and in its 
major markets have inordinately buffeted the tiny city-state.  Its 
openness to foreign workers and businesses brought new investment 
and talent, but also concerns of a widening disparity of incomes and 
declining productivity. 
 
¶3.  (SBU) Few would argue that Singapore could ever turn inwards and 
relinquish its long-standing role as a gateway in the region for 
trade and investment.  However, local economists have been 
considering how Singapore's economy could be restructured to fuel 
future growth, and for whom the economic growth should benefit.  As 
the country begins to retune the economy, economists believe that 
economic policymakers must take into consideration structural issues 
that may slow Singapore's path ahead, including lagging productivity 
growth, its dependence on external markets, low domestic demand, and 
growing income inequality. 
 
¶4.  (SBU) The Singapore government has joined the debate, announcing 
in May 2009 the establishment of an Economic Strategies Committee 
(ESC) composed of members from the government, labor and the private 
sector to develop economic strategies and examine new opportunities 
in the changed global environment.  The 25-member Committee has been 
studying how to seize new growth opportunities, deepening 
Singapore's corporate capabilities, growing human capital, creating 
good jobs, and optimizing use of scarce energy and land resources. 
The ESC will present its initial recommendations February 1 just 
ahead of this year's budget release later that month.  The 
committee's recommendations are intended to guide Singapore's 
economic strategy in the medium term.  A full report is due in 
mid-2010. 
 
Productivity on the Downtrend 
----------------------------- 
 
¶5.  (SBU) Singapore's productivity growth has been languishing since 
2004, and in recent years productivity has dropped into an outright 
decline.  Although Singapore has continually posted exceptional GDP 
growth rates rarely seen in the developed world, in recent years it 
has been growth in the labor force rather than productivity 
improvements that have driven GDP growth.  In a recent report, 
Citigroup calculated that of the 8.2% average growth from 2004-7, 
only one-fifth was driven by productivity growth.  Singapore's 
non-resident labor force grew almost 20% between 2006 and 2008, and 
foreigners now account for approximately 34% of the labor force. 
The influx of labor has meant that strong GDP growth has not 
translated into a similar growth in wages.  In the last five years 
overall nominal GDP growth has outstripped per capita GDP growth. 
The recent recession sent productivity into a further tailspin as 
companies used government incentives to keep workers on the payroll 
even as industrial production nosedived. 
 
¶6.  (SBU) Economists put much of the blame for the lack of 
improvements in productivity on the easy availability of imported 
low-cost unskilled labor.  Of the approximately one million foreign 
workers in Singapore, 80% are unskilled or semi-skilled workers, 
many of whom brought in on short-term contracts to work in 
 
SINGAPORE 00000113  002 OF 003 
 
 
construction and light manufacturing.  Dr. CHOY Keen Meng, professor 
of economics at Nanyang Technological University, told Econoff that 
the cheap imported labor had contributed to stagnant wages at lower 
income levels, helping to widen the income divide in Singapore. 
Choy said tightening the taps on immigration and foreign labor would 
push up wages and incentivize companies to substitute capital for 
labor and become more productive.  He conceded that Singapore would 
continue to need foreign labor as the country's fertility rate is 
below replacement level, but advocated being more selective by 
recruiting higher skilled laborers, which would also help improve 
productivity.  Although a more restrictive policy on foreign labor 
would inevitably reduce GDP growth rates, Dr. Choy said a slower 
pace of growth would in the end be more sustainable given 
Singapore's limited land and resources. 
 
¶7.  (SBU) More restrictive policies on foreign labor could have 
negative impacts that the GOS will need to consider.  Dr. Choy 
warned that the GOS had attempted to improve productivity through 
encouraging wage increases in the 1980s which contributed to 
Singapore falling into recession in 1985.  Higher wages could also 
spark inflation as Singaporeans would require higher wages to be 
enticed to take jobs currently held by foreigners.  Other jobs would 
likely disappear for good as low-wage industries move offshore as 
labor costs become uncompetitive. 
 
Offshore Waves Rock Singapore's Boat 
------------------------------------ 
 
¶8.  (SBU) The recent economic crisis reminded Singaporeans that 
their economic growth is highly dependent on overseas markets. 
Economists are concerned that Singapore's export industries have 
become dangerously dependent on their primary "G3" markets in 
Europe, Japan and the United States that have recently become 
volatile.  At its height the crisis cut Singapore's non-oil exports 
by over a third, and also crippled the country's extensive shipping, 
logistics and other service industries that support international 
trade.  International trade has long been the lifeblood of 
Singapore's economy, with its imports and exports totaling 350% of 
its GDP, one of the highest levels in the world. 
 
¶9.  (SBU) To offset its traditional export destinations, Singapore 
has been searching out new markets in Latin America, India and 
China.  Although trade with China has been growing rapidly, much of 
the trade is in intermediate products whose final markets tend to be 
the same G3 countries to which Singapore already exports heavily. 
NTU's Dr. Choy said that demand from China is beginning to 
contribute to regional growth, and said the government had made big 
efforts to expand markets in other regions like Russia and the 
Middle East, but that in the medium term they would not be able to 
replace traditional markets. 
 
Building Domestic Demand 
------------------------ 
 
¶10.  (SBU) As a small city-state Singapore has little option than to 
continue with international trade and foreign investment as major 
parts of its economy.  However, as Singapore's population crosses 
the five million mark, domestic demand is becoming a force to be 
reckoned with, and economists are considering ways to boost lagging 
domestic demand and reduce the economy's dependence on foreign 
consumption.  Domestic consumption is currently 40% of GDP, down 
from over 60% in the 1970s. 
 
¶11.  (SBU) Domestic consumption has been low in part to an unusually 
high savings rate.  Dr. Choy told Econoff that a regression analysis 
found that high property prices were one of the most significant 
depressors of consumption.  In a country where most residents own 
their own home, Singaporeans have become accustomed to saving large 
amounts in order to afford expensive housing purchases, leaving 
relatively little for other purchases.  The government also 
contributes to high savings rates through a compulsory nationwide 
saving plan, and by squirreling away budget surpluses into reserves 
and its sovereign wealth funds which hold hundreds of billions in 
dollars worth of assets.  The government insists high levels of 
reserves are necessary for emergencies, but Dr. Choy recommends 
transferring surpluses back to the population and selling off shares 
in government-linked companies to allow Singaporeans to hold a 
greater share of the nation's wealth. 
 
¶12.  (SBU) Economists also advocate policies to support local small 
and medium-sized enterprises (SME) which have often been ignored in 
the drive to attract investments from large multi-national 
corporations (MNC).  Manu Bhaskaran, head of economic research at 
Centennial Group, told a recent economic forum that Singapore had 
relied on MNCs early in its development to attract capital, 
management and technology.  However, recent data show that 
 
SINGAPORE 00000113  003 OF 003 
 
 
foreign-owned companies receive almost half of business profits. 
Bhaskaran said the time had come to develop the "inherent capacity" 
of the country, advocating development of worker skills and local 
intellectual property.  A recent Citigroup study also advocated 
encouraging SMEs by facilitating technology transfer, penetrating 
foreign markets for locally produced goods and services, and 
promoting domestic brands.  Bhaskaran said stronger local businesses 
would also stabilize and smooth business cycles. 
 
¶13.  (SBU) Economists also see a gradual shift from manufacturing to 
a services-based economy as a means to boosting domestic demand and 
smoothing the volatility in the business cycle.  As a small open 
economy like Singapore, an increase in domestic demand has typically 
been expected to bring a rise in imports rather than a commensurate 
boost to domestic production.  However, domestic demand in Singapore 
leans more to consumption of services, relatively little of which 
are imported.  Domestic service industries are also ripe for new 
export opportunities as markets in the region, particularly China, 
shift rising consumption from basic food and clothing into services. 
 Service industries expected to prosper in coming years include 
medical services, financial services, education, transportation, and 
other specialized services in which Singapore is a clear leader. 
Dr. Choy pointed out that service industries have also become more 
labor-intensive and are better sources of employment than 
manufacturing, particularly the high-end capital-intensive 
manufacturing that has found a niche in Singapore. 
 
Growing Income Inequality 
------------------------- 
 
¶14.  (SBU) Economists view Singapore's focus on rapid GDP growth as 
masking slower growth in overall welfare, and a growing income 
divide.  Singapore has one of the highest per capita incomes in the 
world; the IMF listed Singapore as 22nd highest in 2008 with a per 
capita income of US$38,972.  However, Centennial Group's Manu 
Bhaskaran estimates profits take about 46% of that GDP pie, almost 
half of which go to foreign companies.  Much of the economy's recent 
high growth was concentrated in high-end manufacturing and finance, 
dominated by foreign companies.  Bhaskaran notes that although 
Singapore's GDP per capita is roughly 11% higher than Hong Kong's, 
per capita consumption is 21% lower. 
 
¶15.  (SBU) Singapore's income divide as measured by the Gini 
coefficient has been rising steadily in recent years from .42 in 
1998 to .48 in 2008, one of the highest rates in the developed 
world.  The stream of unskilled foreign labor has depressed wages at 
the lower end and contributed to a widening income gap.  At the same 
time, cuts in corporate and personal income tax rates to encourage 
business have disproportionately benefited higher income groups. 
According to a recent Citigroup report, real household incomes for 
the bottom quintile of households actually fell in the years after 
the 1997 financial crisis and 2001 recession and have only recently 
begun to creep upwards again. 
 
¶16.  (SBU) The Singapore government has begun to recognize the 
growing income inequality and is changing policies to address it. 
In previous economic downturns the government focused its efforts on 
restraining wages and reducing costs for business, but last year's 
stimulus budget in reaction to the economic crisis used state funds 
to preserve jobs by extending worker retraining programs and 
subsidizing salaries.  The government has been reticent in the past 
about building a social safety net, fearing it would reduce 
incentives to work and damage Singapore's competitiveness.  However, 
economists expect the government to go beyond current health, 
housing and retirement programs and put in place programs to provide 
a cushion against economic downturns.  A more solid net would not 
only serve as an automatic fiscal stabilizer during difficult 
economic times, but would also improve social cohesion and guard 
against a potential reaction to globalization. 
 
SHIELDS