Singapore Government Press Release
Media Division, Ministry of Information and The Arts,
MITA Building, 140 Hill Street, 2^nd Storey, Singapore 179369
Tel: 837-9666

I am honoured to receive the Distinguished Comrade of Labour Award.

But I must say that many of those achievements you credit me with would not have been possible without teamwork. The ability of Government, employers, union leaders and workers to work together is the cornerstone of our success. It has provided a harmonious environment for businesses and workers to thrive. It has also allowed us to respond quickly and decisively to challenges that have come our way.

The best evidence of this is in the way we had overcome the three economic crises since independence.

Take first the global oil crisis in 1973. It started when OPEC countries raised oil prices abruptly in October 1973. Overnight, the posted price of a barrel of oil shot up by 70% from US$3 to about US$5. Oil prices more than doubled again in January 1974 to more than US$11 per barrel.

These OPEC actions led to a global economic crisis. The developed countries, heavily reliant on oil, could not immediately adjust to the sharp hike in oil prices. Global trade and economic growth declined. Many major economies went into recession, including the US.

The oil crisis came on top of an ongoing food crisis. Because of poor harvests, prices of agricultural products like wheat and rice had increased substantially. Together with the increase in oil prices, this caused global inflation to shoot up from 6% in 1972 to 14% in 1974.

Singapore, too, was badly affected. Our GDP growth fell sharply from 11% in 1973 to 7% in 1974 and 4% in 1975. Inflation rocketed from 2% in 1972 to 20% in 1973 and 22% in 1974.

To combat the general increase in prices, the S$, then tied to the US$, was floated in June 1973. It subsequently appreciated by 15% against the US$, helping to reduce prices of imports. The Government also lifted import controls of essential commodities, and took administrative action against profiteering. NTUC set up "Welcome" supermarkets.

Also, to help workers cope with the higher prices, the Government accepted NWC’s recommendation of a higher wage increase in 1973 and 1974.

By the end of 1974, oil prices had stabilised. Though there were periodic increases after that, the world had learnt to live with higher oil prices.

So had Singapore. Our economy grew by an average rate of 8% annually from 1974 to 1984, until the 1985 recession hit us.

In 1985, our GDP growth was –1.6%, down by 10 percentage points from 1984.

Unlike the 1973 oil crisis, this recession was due to both external and internal factors.

On the external front, both international trade and the US economy slowed.

At the same time, a fall in commodity prices affected our neighbours' economic growth. They were then dependent on commodities like palm oil, rubber and rice.

Domestically, the construction sector, which accounted for 10% of our economy, went into a downturn after several years of high growth.

But the more important reason for the 1985 recession was the high costs of doing business in Singapore.

In the '60s and early '70s, we had kept wages low to be competitive. We attracted a lot of labour-intensive, semi-skilled industries. As a result, labour became tight.

Soon after I became the Minister for Trade and Industry in 1979, the late Dr Albert Winsemius, Singapore's Economic Adviser, proposed to me a high-wage policy to compel companies to use workers more productively. The Cabinet approved the strategy.

The wage correction was meant to last only 3 years. But the economy continued to expand even as it was restructured. Wages, therefore, kept on climbing even after the 3-year wage correction period ended in 1982. The end result was that wages outstripped productivity growth. They rose by 14% per annum between 1979 and 1984, way above the annual productivity growth of 5%.

Apart from labour costs, other operating costs also increased substantially. Business profits were squeezed. Companies struggled to keep afloat.

To restore our competitiveness, we cut wages, amongst other business costs. I remember speaking to union leaders at the DBS auditorium. The union leaders were expecting only a 10 percentage points cut in employers’ CPF contribution. I explained that a half-hearted cut would not do the trick. They went along with me for a more drastic cut of 15 percentage points.

There were also calls for the Government to devalue the S$ to make our exports more competitive. We rejected this as a soft option. It would not improve worker productivity. Instead, it would have led to inflation, eroding workers' income and devaluing their CPF savings.

Our measures worked. When external demand picked up, our economy recovered and went on to grow robustly, averaging 9% annually between 1985 and 1997.

Then in the third quarter of 1997, out of the blue, the Asian financial crisis struck.

Just before the crisis, I was in Bangkok on a working visit. I was struck by the many signs of economic dynamism – the many new high-rise apartments and office blocks, and the gleaming industrial estates on the Eastern Seaboard.

I played golf with Prime Minister Chavalit Yongchaiyudh and Finance Minister Amnuay Viravan. Prime Minister Chavalit whispered to me that the Finance Minister was about to resign. The Finance Minister was under pressure from other Ministers. Apart from these signs of their internal Cabinet squabble, there was no warning that disaster was about to strike.

The Thai baht was the first regional currency to come under attack. It broke its peg with the US$ on 2 July 1997. Following that, all the regional currencies, including the S$ and HK$, came under attack. The contagion was dubbed the "tom yam" effect.

Singapore was not spared from the contagion. However, while the S$ went down against the US$, on a trade weighted basis, it actually went up. Between the second quarter of 1997 and the third quarter of 1998, the Singapore stock market fell sharply, by 51%, while property prices fell by 34%. GDP growth dropped to -2% in the third quarter of 1998. Retrenchments increased.

The Government’s response to the Asian financial crisis was swift, total and bold.

In June 1998, we implemented an off-budget package to cut business costs and injected an estimated S$2 billion into the economy.

In the following year, we implemented another package of cost-cutting measures amounting to S$10.5 billion. This included a 10 percentage points cut in employers’ CPF contribution.

In addition, we ensured that the framework for economic activity continued to function effectively. We managed our exchange rate more flexibly, and maintained confidence in the Singapore dollar. We also made strategic shifts in our policies that would enable the economy to grow on a sustained basis after the crisis. For example, we forged ahead with the liberalisation of the financial and telecommunications sectors.

The causes of the three economic crises were different. Hence, the solutions applied were not the same.

However, what was common and critical to all the three crises, was the swift and decisive way we were able to reach a national consensus on the medicine to take. And then to take the bitter medicine and bear with the short-term discomfort for our overall long-term health.

We were able to respond so effectively because of the high level of trust between the Government, employers and workers.

Indeed, one of the core reasons for our remarkable economic progress is the favourable labour relations environment in Singapore. We have one of the most stable labour climates in the world. This is largely due to the strong tri-partisan spirit among the Government, employers and workers.

But tri-partism cannot be taken for granted. Like marriage, it is a relationship that must be nurtured, developed and sustained. It is a relationship based upon mutual trust, respect and commitment to each other’s welfare.

As an example of how we are reinforcing this partnership, the Government is helping NTUC to build a new home in the Marina area.

NTUC has identified the site for its new headquarters at the junction of Raffles Quay and the proposed Marina Boulevard. It is a landmark site at the entrance to the new downtown. The proposed NTUC building is scheduled to be ready by 2004.

We deliberately set aside this piece of prime land for the labour movement because we believe that workers are equal to employers and government officials in contributing to the prosperity of Singapore. An NTUC headquarters in the heart of the new city area will enable union leaders to stand shoulder-to-shoulder with executives, managers, employers and civil servants.

The strength of tri-partism in Singapore might very well be tested again this year.

We are facing an economic slowdown after a dizzying 9.9% growth last year. Economic growth in the first quarter of this year has dropped to 4.6%, down sharply from 11% in the previous quarter. Non-oil domestic exports slowed to 3.6%, down from 6.3%. Manufacturing growth has also slowed rapidly to 2.3%, from 19% in the last quarter of 2000.

This slowdown is due largely to the slowdown in the US and the downturn in the global electronics cycle. From a peak of 8% in the last quarter of 1999, US economic growth has slowed rapidly to 2% in the first quarter of this year.

The electronics cycle has also turned down rapidly. Worldwide semi-conductor sales peaked in the second quarter last year and then decelerated sharply, from a growth of 49% in the second quarter last year to –4% in the first 2 months of this year.

The economies of our neighbours are also experiencing a slowdown as they are dependent on the US economy and electronics. For example, electronics exports constitute 69% of the Philippines’ total exports and 59% of Malaysia’s.

At the same time, the sluggish Japanese economy and the weak Japanese Yen have reduced domestic consumer spending and Japanese investments abroad.

More worrying are the political and social problems of several regional countries. These will not only cloud their economic prospects but also reduce investor confidence in the region.

Because of this unfavourable external environment, our growth will be much lower this year as compared with last year. The US accounts for 17% of our total exports. Electronics take up 60%. Several of our neighbours are having political and economic difficulties. When these three areas have flu at the same time, it is hard for us not to catch the virus.

Already, several MNCs like Creative Technology, Flextronics and Solectron have announced job cuts. Other MNCs with offices here such as HP, Motorola and Compaq have announced cutbacks in their global workforce. I am afraid Singapore will see more retrenchments, especially in the electronics sector.

But let us not be overly alarmed. This is an economic slowdown, not a crisis. It is cyclical, not a systemic problem. The retrenchments will not be as severe as in the 1985 recession and the 1997 Asian regional crisis. Our response should therefore be measured and specific.

Several of the temporary measures to reduce costs that we introduced in November 1998, in response to the Asian financial crisis, are still in place. We will be mindful of current economic conditions, and will not phase them out too suddenly. The recent Budget also contained a number of measures that will help workers and companies overcome the effects of the slowdown, especially the smaller companies.

However, as we ride out the economic slowdown, we need to continue restructuring our economy. Many lower-skilled jobs will be lost permanently in the next few years, to competition from lower-wage countries like China and other emerging economies in Latin America and Eastern Europe. China’s impending entry into the WTO will make it much more competitive and attractive to investors.

We have no choice but to intensify our move into higher value-added and more knowledge-based activities.

We know that not all our companies and workers are able to do so easily. The Government, employers and labour movement must work closely to help them move up the economic ladder.

Now, let me say a few words about the usefulness of flexible wages in countering an economic slowdown.

We have been relying on cuts to CPF contributions to keep down business costs in a slowdown. I want to caution against an excessive reliance on such a solution.

First, the CPF is a blunt instrument. Clearly, not all companies need to cut CPF in a slowdown, or by the same amount. Profitable companies should not be required to reduce their CPF contributions.

Secondly, the CPF is meant to be the nest-egg for workers in their old age. If we use it indiscriminately to control wage costs every time there is a slowdown, our workers would run into financial difficulties in their retirement.

The better solution is to implement a more flexible wage system. Companies can then respond faster to changing business conditions. More jobs can be saved if wage costs can be adjusted more quickly by the market when there is a sudden business downturn.

Indeed, our flexible wage system played a large part to help our economy recover quickly from the 1997 Asian financial crisis.

But that same crisis showed up a major shortcoming in our wage system. Companies have to wait for the year-end to make adjustments to the wages of their employees through varying the annual bonus payments. This is too rigid. In business, a delay of several months to cut costs may mean a loss of orders through uncompetitive pricing.

What we need to do now is build up a monthly variable component in our wage system. If we can adjust wage costs quickly, we may save many jobs when business is slow.

In conclusion, let me say that most economists do not expect a long, drawn-out slowdown.

The consensus is that the US economy will turn around gradually in the second half of the year. While manufacturing is down, there are some signs of bottoming out.

The outlook for the electronics industry is still unclear. New orders for electronics continued to drop in February this year. But, with the sharp cutback in inventories, some people in the industry think demand may pick up next year.

Overall, MTI expects economic growth to worsen in the second quarter, and perhaps the third quarter, before picking up. At this point, MTI is maintaining its growth forecast of 3.5 to 5.5 per cent.

Singaporeans should therefore be cautious about economic prospects this year, but at the same time, we have reason to be quietly confident. The three previous economic crises have tested our nerves, ability and cohesion. They were handled by a different team of Ministers, officials and union leaders. Each team did well because we have institutionalized quality and competence in our key organisations through careful succession planning. This has increased the level of confidence and trust in the Government and NTUC. Provided we maintain our teamwork and respond sensibly, we will ride out the current economic slowdown, as we have done time and again. Then when the dark cloud passes, we will pick up growth again and enjoy bright sunshine.

Have a Happy May Day.

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