Outlook in developed economies is clouded. Assessments of the US economy are tending to the pessimistic side. Europe and Japan expected to remain sluggish.

The war in Iraq has begun, but the uncertainty has not yet been removed. The outcome is not in doubt – the coalition forces must prevail. But how difficult will this be? How soon can it be done? What will happen after that? Meanwhile, the war is affecting consumer and investor confidence everywhere. Oil prices have been creeping up in the past few days (up from US$24 per barrel after the war started to around US$30 per barrel yesterday).

Now new problem - SARS (Severe Acute Respiratory Syndrome) problem. This will affect the airline and tourism industries in Singapore and across Asia. Businessmen are teleconferencing rather than travelling, while hotels occupancies and forward bookings have dropped sharply. It will be negative for our economy.

But we are reacting vigorously, and are containing the outbreak. By dealing with this problem transparently and professionally, we will earn the confidence of other countries. Even AWSJ published an editorial exhorting other countries to take Singapore’s approach in tackling SARS.

Optimistic view: swift and decisive war in Iraq, oil prices fall, things return to normal, and growth picks up in the second half. But downside risks: war may drag on longer than expected. Oil prices may not fall quickly, even after the war. Also, there are other longer-term issues facing the US and European economies. Therefore, 2003 is likely to be a difficult year for the global economy, and for Singapore. Our forecast is 2 – 5%, likely to be the lower end of the range. Full recovery only in 2004.

Dealing with the current situation:

CPF changes:

Non-restoration for 2-years.

Reduction of CPF salary ceiling from the current $6,000 for private sector employees to $5,500 in 2004, and then to $5,000 in 2005.

Lowering of employee contribution rates for older workers aged 50 – 55 from the current 20%, to 18% in 2004 and 16% in 2005.

Business Costs:

Property tax rebate for commercial and industrial properties till end-2003.

Extension of JTC and HDB rental rebates until end-2003.

Freeze in foreign worker levies until end-2003.

Helping Singaporeans to cope:

Skills training and upgrading.

Helping unemployed Singaporeans find work.

Older workers: structuring jobs to fit them.

Financial help for those who need it most:

First tranche of ERS.

Extension of Utilities Save Scheme for 1 year.

Enhanced rebates on S&C charges.

But we must also look beyond current difficulties to tackle longer-term issues, because Singapore is at a turning point.

Externally:

Globalisation.

China & India.

Regional uncertainties remain.

Domestically:

Maturing economy – slower growth.

Rapid restructuring – more job changes, structural unemployment.

Tighter fiscal position.

5 strategic thrusts of ERC recommendations:

Expanding external relations

Maintaining competitiveness and flexibility

Promoting entrepreneurship and Singapore companies

Growing Manufacturing and Services

Developing Human Capital

Rather than go through each one in detail, which has already been done when the ERC Report was released and during the Budget Debate, focus on a few of the key issues today.

Long term goal is to increase the wages and standard of living of Singaporeans. But must continue to ensure that wage increases do not outpace productivity growth. Need to watch this carefully, because of the emergence of low-cost economies like China and India.

Issue is not just wage levels, but also flexibility. With more volatile conditions, rapid restructuring and more job changes, we need to ensure that our labour market has as few rigidities as possible, and wages adjust quickly to market conditions, so that workers who lose old jobs can move into new jobs easily. e.g. Germany as a negative example. The Kündigungsschutz (Protection Against Dismissal Act), dates back to the 1950s.

The seniority-based wage system is still prevalent, where wages are linked to the seniority of a worker. Companies must restructure their remuneration schemes, to replace the seniority-based system with a Competitive Base Wage System.

Put simply, wages must be linked more to a worker’s performance and the company’s profitability. The monthly wage should incorporate a larger variable component than now. If necessary, they should reduce their fixed component of monthly wage, in order to build up the variable component.

The ERC has therefore recommended that all companies build up the MVC as quickly as possible. Companies which have not yet created an MVC, and those whose MVC makes up less than 2 per cent of workers’ basic wages, should top up their MVC to 2 per cent immediately from their basic wages. Companies which have 2 per cent or more MVC in their wage structure should work with workers to see if a further percentage of basic wages could be used for building up the MVC further.

Some companies need to go further than this. Overall our wage levels, adjusted for productivity, are competitive. But in some companies, wage costs have gone out of line, because of seniority-based wages or generous benefits in the past, or because market and industry conditions have changed. These firms will need to restructure wages to reduce the fixed wage component significantly, and incorporate a much larger performance or profit-related component. How exactly to do this will depend on the circumstances of individual companies. It will not be easy to do, so where there are problems these will have to be resolved jointly by the management and the unions.

To enhance labour market flexibility, we must also work toward portable medical benefits. As a worker grows older, he will need more medical services. If he has developed some medical condition, it becomes especially harder for him to change jobs. It does not matter whether he himself wants to move on, or whether his employer is retrenching him. A new employer will be reluctant to hire him, and take on the burden of his medical expenses. At most, the new employer will offer him limited medical benefits, less than those he enjoyed at his old job.

Some 5 years ago, a tripartite committee had recommended that the private sector adopt medical benefits schemes which are more portable. But implementation has been very slow. We need to encourage employers and workers to adopt more portable forms of medical benefits. We must ensure that older workers do not lose out on employment opportunities or adequate medical cover. At the same time, we must be careful that employers do not have to bear a significantly higher burden for older workers compared to younger ones.

Finally, the rapidly changing economic environment requires more flexible work arrangements. Some companies do not require employees to work on a regular basis when there is no demand, but require them to work overtime when they need to complete a task. The government will make the necessary legislative changes to allow companies whose nature of business justifies it, to employ more flexible work arrangements.

Labour market and wage flexibility concerns not only workers, but also managers and employers. Managers must push for reforms and restructuring, and explain the need for change to employees, rather than take the easy way out and maintain the status quo. In this task they will have the support of the unions, a precious and rare advantage.

Land cost is a major cost component for businesses. Overall, prices have come down. Industrial land and commercial land prices have fallen by about 45% since their peaks in 1996. Charts to show trends in industrial and commercial land prices.

We cannot match the land prices in China or Vietnam, or even Malaysia. But Government will ensure adequate supply of industrial and commercial land to achieve stable and internationally competitive prices. We can do that, because under the masterplan we have reserved at least 12,000 ha for industrial use, of which, only about 7,300 ha are currently in use by industries. As industrial land is held on a leasehold basis, the supply is renewable and ample to meet long-term demand. We have also been successful in intensifying the use of land.

Liberalisation and introduction of competition has led to lower prices.

Example:

Telecoms: As we liberalised the markets, charges have come down significantly.

Power: More difficult problem for us. We depend on imported fuel for our electricity generation, so electricity prices have to move in tandem with oil prices. e.g. with the recent 20% increase in oil prices over the last 3 months, electricity tariffs will be going up from April. But what we can do is to ensure that we operate as efficiently as possible, to keep the non-fuel costs of electricity generation low. The restructuring of the power industry has helped significantly. Productivity has grown (60% between 1995 and 2002). The non-fuel component of electricity prices has fallen (8.5% between 1995 and 2002).

Policy is to allow businesses to employ a proportion of foreign workers, especially for those firms which cannot find Singaporeans. This will help keep their overall cost of production down and make their operations in Singapore more viable.

But we must also manage the inflow, to benefit the economy and Singaporeans. We will do so through the foreign worker levy, setting it at an appropriate level to regulate demand and ensure that foreign workers ultimately create more jobs for Singaporeans. We can then loosen some of the administrative restrictions on the employment of foreign workers, to allow freer play of market forces.

One issue we need to review is the levy on skilled workers, which is now just $30. MOM will review the skilled worker levy this year to decide whether it is necessary to peg it at a more realistic level next year.

On their part, businesses must continually upgrade their capabilities and improve productivity. They must try to re-design their jobs to fit Singaporean workers. We understand that part of the problem lies in getting Singaporean workers to change their mindset: accepting different working environment, shift work, less than ideal location of work place etc. But we must work together to tackle these issues.

Upgrade ourselves and make Singapore a knowledge-based economy powered by innovation, creativity and entrepreneurship.

We cannot nurture a spirit of entrepreneurship and creativity by command. The passion, drive and work must come from entrepreneurs themselves. But what the government can do is to create conducive environment:

Trim rules and regulations to ensure that regulatory and licensing requirements do not bog down enterprise.

Strengthen a pro-business mindset in civil servants. Civil servants will be given greater exposure to business issues - be it in Civil Service College seminars where private sector CEOs are invited to talk to them, or in collaborative efforts such as the Pro-Enterprise Panel. This will help to make them more aware of business requirements in the administration of rules.

Help to facilitate a full spectrum of financing. Underlying philosophy must be that projects must be commercially viable. There must be a market test. There cannot be free money, otherwise it becomes just handouts. In a free market system, companies and ideas must compete for capital. Only the most innovative and enterprising business ideas get funded. The government will therefore undertake initiatives to improve the access of emerging enterprises to financing, but they must always be subject to the discipline of the market.

Create more space for private sector by outsourcing requirements whenever possible.

Institute a "Yellow Pages" rule. Government agencies will progressively withdraw from the market whenever private sector can supply the service or product. Divest enterprises owned by statutory boards through mandatory periodic housekeeping.

Help SMEs upgrade so that they are better able to compete. Various schemes are available:

Local Enterprise Financing Scheme (LEFS)

Startup Enterprise Development Scheme (SEEDS)

Local Enterprise Technical Assistance Scheme (LETAS)

Growing Enterprise with Technology Upgrading ("GET-Up"): New scheme which pools together resources and expertise from A*STAR, EDB, IE and SPRING to provide assistance to entrepreneurs, in areas like technology development, capability upgrading and venturing overseas.

Locally-based Enterprise Advancement Programme (LEAP): Another new scheme providing assistance to encourage industry associations and incubators to help upgrade clusters of SMEs.

But ultimately promoting entrepreneurship depends on change in culture. Greater self-reliance and a willingness to seize opportunities, take risks and make a difference in whatever we do. Not just to start business but attitude towards life. Government will do its part:

Changes in education system.

Refocusing social safety-nets etc.

Setting default key at "Yes" rather than "No" whenever possible in dealing with business.

It also depends on talent. We must actively welcome talent and enterprises from all over the world. We are doing so. Many countries have already established incubation centres for their indigenous companies in Singapore, including Germany, Japan, China, India, Australia, NZ, Israel, Chile, Norway and Korea. And many more are considering Singapore. Such a mix will create a greater buzz in Singapore and over time will change our society's DNA and makes for a more vibrant, exciting economy to work and live in.

Promoting entrepreneurship demands a long term, sustained effort. Hence designation of MOS Raymond Lim to be responsible for promoting and driving initiatives to develop a more entrepreneurial Singapore.

The ERC recommendations represent some fundamental changes in our economic policies and strategies. But our purpose was not to impress or shock people. Because the changes were major, all the more we have had to reassure people, and not cause unnecessary anxiety.

This is especially important in the current climate of uncertainty, where workers are already feeling insecure worried about their jobs. For example:

PSD put out a circular with details of the Civil Service Employment Adjustment Programme which provide the framework for existing early retirement schemes. Rumours followed that civil service staff levels will be trimmed by 10%.

Following reports of PSA, HDB and NParks restructuring, and this PSD circular, rumours spread that Temasek had directed its companies to rationalise manpower requirements and there would be a 70% cut in manpower in Senoko.

IRAS was doing a regular exercise to improve their work processes and journalists wanted IRAS to make a categorical statement that there would be no retrenchments. IRAS of course could not do and as a result the non-event became a front page story in Business Times.

It was therefore right for the ERC to put forward carefully thought through proposals to improve policies and practices, and make significant changes that would be understood and accepted by Singaporeans. They would quietly make the economy stronger and more competitive over the long term.

And we are working from a strong base:

Our FTAs will strengthen our links to our key economic partners, especially the US and Japan, which are our main sources of investment and technology, and also our major markets. They will help our manufacturing sector stay competitive.

We have built up considerable links to emerging economies like China and India.

Analysts know that our Government works, policies are carefully thought out, problems are squarely acknowledged and dealt with. Latest PERC risk rating for Singapore: "When it comes to domestic political risks, expatriates working in Singapore do not think there are any. They are extremely impressed with the quality of political leadership as well as with the quality of policies the government is pursuing. They are also impressed with the ability of the government to implement those policies. The risk of a disruptive political transition is seen as small-to-nonexistent."

We continue to offer an attractive business environment for foreign investments. We have been attracting the lion’s share of investments into Southeast Asia in the last few years. EDB is confident we can attract $8 billion of manufacturing Fixed Asset Investments and $1.9 billion of services Total Business Spending this year.

Must take a realistic view of the challenges ahead. But at the same time, we must keep our sense of confidence. If we stay resilient and strong, and work together to stay the course, we can look forward to a brighter future ahead.

=====