It gives me great pleasure to be here for the 2000 Singapore Business Award presentation.

I congratulate the winners of this year’s Singapore Business Award. They have demonstrated not only vision, but also the ability to turn the vision into plans and results. They have stayed ahead of the competition, and by their effort and enterprise strengthened and developed our economy in a rapidly changing environment.

They are real life examples of how Singapore companies and organisations can, through able leadership and clear vision, produce products and services of the highest quality. Their achievements have underpinned our good macro-economic performance over the years. For three decades since independence, our economy grew an average of 8% p.a.. Real per capita GDP has increased 8-fold, giving us one of the highest per capita incomes in the world in terms of purchasing power parity, according to the World Bank.

We have also established ourselves as one of Asia’s preferred business locations, and carved out some key niches in the global economy. In manufacturing, Singapore is the world’s largest producer of hard disk drives, accounting for about 40% of global output. In oil refining, we are the world’s third largest. In financial services, we rank as the fourth busiest global foreign exchange centre, after London, New York and Tokyo.

But notwithstanding the visible progress, a quiet academic debate has raged as to whether Singapore’s growth and transformation has been real or illusory. The issue is not just what the past meant, but what the future holds: can Singapore continue to sustain high growth over the long-term?

The American economist Alwyn Young, then at the Sloan School of Management in MIT, was the first to express his doubts. His paper "A Tale of Two Cities," published in 1992, drew a comparison between Singapore and Hong Kong. Young claimed that even though Singapore had invested more heavily than Hong Kong, Singapore had made minimal technical progress. The main reason Young gave was that Singapore was "a victim its own (industrial) targeting policies, which are increasingly driving the economy ahead of its learning maturity into the production of goods in which it has lower and lower productivity".

Paul Krugman, also from MIT, was the next to develop this theme. In 1994 he published an article, "The Myth of Asia’s Miracle", that made the striking if controversial claim that Singapore was an "economic twin of the growth of Stalin’s Soviet Union growth". Krugman argued that "the newly industrialising countries of Asia, like the Soviet Union, of the 1950s, have achieved rapid growth in large part through an astonishing mobilisation of resources. Once one accounts for the role of rapidly growing inputs in these countries’ growth, one finds little left to explain". In other words, Asia’s miracle was based on "perspiration, rather than inspiration".

More recently, the Heritage Foundation, in its 2000 Index of Economic Freedom Report, ranked Singapore as the world’s second freest economy after Hong Kong. It explained that Singapore failed to make the top spot because the Singapore Government had over-invested vis-à-vis Hong Kong, through enforced savings of the Central Provident Fund (CPF). Heritage Foundation alleged that these "savings were squandered over the years by Singapore’s policy of ‘industrial targeting’", and repeated Alwyn Young’s claim that as a consequence, Singapore has one of the lowest returns to physical capital in the world, and "the days in which Singapore can continue to sustain accumulation driven growth are clearly numbered".

These are grave charges about the weakness and non-viability of the Singapore economy. If they are indeed true, then we should immediately sound the alarm bells, and take decisive steps to put things right. The quick answer is that Young, Krugman and the Heritage Foundation have misunderstood our economy. Equating Singapore with the Soviet Union is like saying that SIA is similar to Aeroflot. And high CPF savings cannot be the cause of low investment returns in Singapore, because the CPF savings have not been used to fund domestic investment projects. But the question they have raised is a serious one, and deserves more thorough examination.

MTI has therefore carried out a detailed study of the patterns and trends of investment and productivity in Singapore, compared with the other dynamic Asian economies. While the study will surely not be the last word on the issue, it did reach some interesting conclusions. I shall share two key points with you tonight. First, have we invested too much? And second, have our investments yielded economic returns?

First, MTI confirmed that Singapore’s investment rate, as measured by the ratio of investment to GDP, was higher than other Asian countries, from the seventies to the mid-eighties. This is what Alwyn Young had pointed out. However, since then Singapore’s investment rate has come down, and is no longer the highest. In the nineties (1990-1998), Singapore’s investment rate of 35% p.a. was lower than Malaysia, Thailand and Korea, whose rates were close to 40% p.a.. Singapore exceeded only two economies – Japan and Hong Kong, both at 29% p.a..

To understand the investment rate data better, MTI examined the distribution of these investments between different sectors of the economy. The investments took place in three main sectors: (1) construction, (2) transport equipment, and (3) machinery.

For construction, our total investment levels were not abnormally high, although the public sector accounts for a larger proportion of construction in Singapore than in other countries. This is because of HDB’s public housing programme, and JTC’s role in developing industrial land. Public sector construction investment was especially high in the early 1980s, when HDB stepped up its building programme to meet the large number of applicants, and JTC developed more industrial land for new manufacturing investments.

In comparison, in Hong Kong for example, housing is left to private developers. Combining private and public investments in construction, Singapore’s average rate of 17% of GDP since independence (between 1966 to 1998) is only slightly higher than Hong Kong’s average of 15% of GDP over the same period. The returns have not only been economic, but also in the quality of life and the standard of our public amenities. Considering the heavy emphasis that Singapore has put on the standard of public housing, as well as on the quality of our economic infrastructure, such as our port, airport, and road and train networks, I think we have got value for money in our investments in construction.

Unlike investments in construction, investments in transport equipment and machinery do vary significantly between countries. They closely track the size of the manufacturing sector. Countries with large manufacturing bases like Korea and Thailand have also invested heavily in transport equipment and machinery (13% of GDP for Korea and 15% of GDP for Thailand). Singapore has a relatively large manufacturing sector, accounting for 24% of our GDP. In contrast, Hong Kong’s manufacturing sector is much smaller (6% of GDP), because many Hong Kong factories have moved to offshore into China. So Singapore has invested more in transport equipment and machinery than Hong Kong (18% of GDP for Singapore, compared to 10% of GDP for Hong Kong, for 1966-1998).

Significantly, most of our investments in transport equipment and machinery are by the private sector, and not by the government. These private investment flows, and not state directed or funded projects, account for most of the difference in investment rates between Singapore and Hong Kong.

Of course ultimately what matters is not the size of investments, but whether the investments yield economic benefits, as measured by financial returns, higher value added, or total factor productivity (TFP) growth. MTI therefore studied this question: have we been inefficient in our use of capital, and reaped poor returns on capital?

Investments flow where there are profits to be made. Over the last 10 years, manufacturing investments brought in by EDB grew on average 15% p.a., while total business spending in services grew 18% p.a.. Given such strong inflows of investments, prima facie we would not expect returns on investments to be poor.

MTI’s study confirmed that our returns were in fact respectable. Data compiled by the US Department of Commerce showed that in the 1990s (1990-1998) the average rate of return on US direct non-oil manufacturing investments in Singapore was the highest in Asia, at 29% p.a.. This was followed by the Philippines (24% p.a.), Hong Kong (19% p.a.) and Malaysia (17% p.a.). In services, for the same period US investments in Singapore earned an average rate of return of 19% p.a., similar to that of Taiwan, Hong Kong and Malaysia.

A second measure of investment efficiency is the Incremental Capital Output Ratio, or ICOR. This measures how many additional units of capital are required to produce each additional unit of output or GDP. Thus the lower the ICOR, the higher the investment efficiency.

Since 1990, Singapore’s average ICOR was about 5. This was higher than (i.e. not as good as) Taiwan’s figure about 4. But in terms of ICOR, we did better than other Asian countries for the same period. Thus Japan had an average ICOR of 18, and Hong Kong an average ICOR of 9.

A third benchmark for investment efficiency is total factor productivity (TFP) growth. TFP growth measures the increase in output that results from making better use of inputs – the factors of production including land, labour and capital. Here we can only compare ourselves against Hong Kong, because full data over the last 30 years is not available for most other Asian economies.

MTI’s internal calculations show that in the earlier phase, Singapore’s TFP growth was negligible and indeed often negative, whereas Hong Kong’s TFP growth was generally higher than ours. This corroborates what Alwyn Young had found. However, subsequently Singapore’s TFP growth improved significantly, and since the early 1990s has exceeded Hong Kong. Thus during 1973-1990 Singapore’s TFP growth was 0.7% p.a., while Hong Kong was 2.3% p.a.. But in 1990-97, Singapore’s TFP growth went up to 1.9% p.a., while Hong Kong’s figure was 0.2%.

This improvement in our TFP growth probably reflects better absorption of technology by our increasingly skilled labour force. In earlier years, we could not fully exploit our heavy capital investments because our workforce was relatively unskilled and uneducated. However, our heavy investments in education over many years are now paying off, and the education level of our workforce is rising steadily. The combination of capital and labour has become more efficient, which has raised our TFP.

In the light of MTI’s study, what do we make of the claims by Young, Krugman and the Heritage Foundation?

Alwyn Young was right to observe that our TFP growth was poor up to 1990. He was probably also right to attribute this to the economy driving ahead of its learning maturity. But he was mistaken to conclude that our growth was not sustainable. Over time our TFP growth has improved, because we had not in fact squandered our savings through a misguided policy of industrial targeting.

Krugman was also wrong about Asia’s Miracle being a myth. When the Asian crisis came, Krugman gained credibility because his article in Foreign Affairs had seemed to anticipate the crisis. But in the outturn the dynamic Asian economies – South Korea, Hong Kong and Singapore – have bounced back from the crisis, basically sound. They were not Potemkin villages waiting to be blown over in the first storm.

The Heritage Foundation should have updated Alwyn Young’s study, and examined more current data before reiterating Young’s conclusions, which had been made 8 years ago in 1992.

But these critiques have been useful in causing us to study this potential problem area more closely. The purpose of MTI’s study is not to defend our policies right or wrong, or to indulge in one-upsmanship as to which Asian economy has the higher batting average. It is to better understand the profile of our economy compared to the others, and identify where we need to improve.

The conclusion from the data is not that we will do better by investing less in Singapore, but that we must invest, and make sure that our investments yield good returns. Over the long term, it is investments that raise the quality of our people, renew our stock of capital, and equip us with new technologies and capabilities to continue to progress and prosper.

Investment is not just a matter of pouring in more money, but of coming up with new ideas which merit money being put on them. We must ceaselessly search for new ideas, novel ways to improve our performance. Fierce competition is not new, but our response to this competition must always be fresh. Once our response becomes stale, stereotyped or tired, we will progressively fall behind and eventually be overwhelmed.

It will not be easy, but I am confident we can succeed. The Singapore Business Award winners prove that there are Singaporeans with the calibre and dare to strike out on their own. I have been asked not to name the winners now, so as to keep up the suspense of the evening. But you will not be surprised to learn that the recipients are leaders with tenacity and vision, who have taken their organisations to the forefront of their respective industries. The company receiving the Enterprise Award has also distinguished itself as an outstanding success story of a Singapore company in an industry where competition is perhaps most intense. They are role models for all of us.

Once again, my heartiest congratulations to the winners.

=====