SUSTAINABLE GROWTH IN A RAPIDLY-CHANGING ENVIRONMENT:   SOME PERSPECTIVES FROM SINGAPORE

1                    I am honoured to address such a distinguished audience on my first visit to your beautiful country.

2                    Last month, I had the honour of calling on your President during his State Visit to Singapore.  President Gašparovič shared with me Slovakia’s remarkable economic and political achievements over the short span of 14 years.  I am therefore happy to visit your country to witness first-hand the exciting developments here.

3                    Although geographically distant, Slovakia and Singapore have some things in common.  Both our countries separated from a larger country to chart our own destinies.  Both of us are small countries, although Slovakia is, area-wise, much bigger - the Bratislava region alone can take in three Singapores.  You have a population of 5.4 million, a million more than Singapore’s.  Both countries have had to build up our economies post-independence.  Both have done well.  Singapore and Slovakia now serve as gateways for businessmen into Asia and Europe respectively.  We therefore have much to gain by sharing our experiences and forging closer relations.

4                    This afternoon, I wish to share with you some of my thoughts on how small countries like ours can sustain economic growth in a rapidly-changing environment.  I will draw heavily from Singapore’s growth experience over the past 41 years.

Four Key Pillars of Growth

5                    History has shown that the fortunes of countries can change dramatically over time.  Up until the 18th Century, Asia accounted for more than 60% of global GDP in purchasing power parity or PPP terms.  However, the next 200 years saw Asia’s economic dominance plummet.  By 1950, Asia’s share of global GDP fell to below 20%.  But in the past 50 years, the tide has turned again: Asia’s share of global output has now reached almost 40%, and is set to increase further over the next 50 years.

6                    Singapore separated from Malaysia in 1965, like a small boat cast adrift.  Two million people on a small island of 600 square kilometres.  No hinterland, no natural resources, an insecure neighbourhood.  Our main economic activities – entrepôt trade and export processing – were at risk as direct trade routes were being established between Southeast Asia and the developed markets.

7                    Besides grave external security threats, Singapore also faced daunting domestic challenges.  Unemployment was high, at nearly 9 percent, and external reserves low, at US$350 million.  Most pundits wrote Singapore off.  But Singapore not only survived.  It grew and prospered, with economic growth sustained over 41 years.

8                    How did Singapore do it?  Four main factors were critical:

·        First, a strong and pragmatic leadership, with the political will to succeed.

·        Second, a set of core values which differentiated Singapore from other developing countries.

·        Third, an efficient public service to formulate and implement policies effectively.

·        Fourth, the trust between people and government built through a strong social compact.

These are the four key pillars of growth.

Strong and Pragmatic Leadership

9                    First, a strong and pragmatic leadership, with the will to succeed.  The political leadership gives the country a clear sense of direction, anticipates and solves problems, rallies the people toward common goals and gives them hope.

10               From independence, the political leadership in Singapore has taken a pragmatic, not dogmatic, approach towards problem solving.  We studied and learned from others but were not afraid to adopt policies that went against conventional wisdom because our situation was unique and perilous.  For example, in the 1960s, it was fashionable to promote import substitution.  Such a strategy clearly could not work for Singapore.  So we embraced an outward-looking, export-oriented strategy and opened our domestic economy to foreign competition.  At a time when it was fashionable to view MNCs as exploiters of poor countries, we courted and encouraged them to set up operations in Singapore.  MNCs brought with them capital which we lacked, markets which we did not have, management which we had yet to nurture and technology we were not even aware of.

11               How do countries foster a strong and pragmatic political leadership?  Each country must create an environment that will encourage its good, bright and honest citizens to come forward to serve.  Far too often, the quality of the Cabinet in many countries does not match the Boards of bigger MNCs.  In Singapore, my party scours the whole country to find the best men and women, people who think beyond themselves and their families, to stand for elections and serve the country.

12               In many countries, politicians exploit the diverse social forces to get elected.  The society is stressed, divided, sometimes torn apart.  In Singapore, we try to unite the diverse forces for a common goal and for the common good.

13               One unique feature of Singapore politics is our ability to plan for orderly leadership succession.  At every general election, the ruling party replaces a quarter of its parliamentarians with younger ones.  This ensures that the party leadership stays young and in tune with the younger voters.

The Core Values of the System

14               The second pillar of growth refers to the core values that underpin our system.

15               First is the philosophy and practice of meritocracy.  Every person - regardless of race, religion, gender and family background - has equal opportunity to realise his or her potential.  Meritocracy helps to build an ethic of hard work and self-reliance, an incentive to strive and improve yourself and perform.

16               Second is the creed of tolerance.  This is key to harmony in a multi-racial and multi-religious society like Singapore.  We stress social cohesion and mutual respect for each other’s culture, language and religion.

17               Third, integrity and incorruptibility.  We run an honest, clean and transparent system.  Our strong stand against corruption and high standard of integrity has helped to distinguish Singapore from other emerging countries.  Our reputation for integrity is a big competitive economic asset.

18               Fourth, we are open to new ideas, change and foreign talent.  We import global best practices.  We adapt when the world changes.  We welcome foreign talent from all over the world to work in Singapore, and better still, to grow roots in our country.

Efficient Public Service

19               Let me now turn to the third key pillar of growth - an efficient, honest and enterprising public service, which is needed to anticipate problems, work out solutions and implement them.  Without an effective public service, no political leadership can deliver on its electoral promises and programmes.

20               From very early on, we built up our civil service, girding it with a firm commitment to good governance and integrity.  To ensure that the public service gets its fair share of national talent, civil servants are paid competitive salaries.  The salaries of civil servants and ministers are adjusted regularly to keep pace with the private sector’s.  Paying ministers and civil servants well is politically difficult to carry out but we have done it because the cost of not doing so is a weak and inefficient government, bad policies and implementation, and slow growth - an incalculable, high price for the country.

21               We also recognised the importance of harmonious industrial relations to economic growth and development.  The Secretary-General of the National Trade Union Congress sits in Cabinet as a full minister.  He is an elected Member of Parliament who also has to be elected by the union leaders.  Members of Parliament and young officers from the civil service are sent in to work with the unions to help raise the quality of union leadership.  The tripartite system, which we spent years to build, provides a constructive and stable framework for managing labour relations, wage increase and worker training and productivity.

Trust Between People and Government

22               Finally, growth can only be achieved if the people and government are united and have confidence in one another.  Even the best policies will fail if the people are not united behind their leaders.  A social compact has to be built, where the citizens support the government in return for policies that take care of their well-being.

The New Landscape and New Challenges

23               The four pillars that I have just mentioned – strong leadership, core values of the system, effective public service and a social compact – are the necessary conditions for sustaining economic growth.

24               However, policy-making is becoming highly complex because the environment is constantly evolving and the pace of change is accelerating.  Globalisation and technology are fundamentally transforming politics, society and business.  With the world becoming one global marketplace, we need new skills and abilities to overcome new competition and at the same time, seize the opportunities.

25               Globalisation has also brought new risks and challenges.  Financial contagion and even virulent diseases now spread quickly and aggressively.  Terrorism has become a global threat.  Even the effects of economic developments and policies are no longer contained within national borders.  While governments may be able to anticipate these changes, getting their people to constantly adapt to them is another matter altogether.

26               Let me now turn to developments in Asia and how Singapore is adapting to them.  The biggest of these changes is the re-emergence of China and India, which has altered the economic and geo-strategic landscape.  Both economies are large and growing rapidly, making them highly attractive markets for MNCs to set up operations.  For example, FDI inflows into China were less than US$2 billion in 1985, but in two decades, they have risen to US$79 billion.  While China has become a manufacturing power house, India has evolved into a major business outsourcing hub, especially in IT services.

27               The rise of China and India represents a profound supply shock to the world economy.  China and India together account for over a third of the world’s population and are estimated to have enlarged the global workforce by 80%.  This abundant supply of labour has had a dampening effect on global wages.  Both China and India have also had enormous impact on the demand for commodities, pushing up prices.

28               In such a rapidly-changing environment, policy-makers face tremendous challenges in sustaining growth.  There is an old Chinese saying – a boat sailing against the current must forge ahead or it will be left behind (逆水行舟, 不进则退).  Singapore is like a small boat exposed to the changing winds and currents that affect the region and the world.  Our progress depends on our response to external competition and domestic political pressures.  Essentially, we have to re-engineer our boat to give it more power.  Otherwise, we will be swept away.

29               For the next phase of Singapore’s economic development, we have focused on three strategic thrusts.

Increasing Cost Competitiveness

30               The first is to keep our cost competitive.  In 2003, we took decisive steps to reduce the cost of doing business in Singapore.  Wages were made more flexible, with an increasing portion tied to the performance of the company, while employers’ contributions to social security were trimmed.  In the public service, a portion of our remuneration is now tied to GDP growth.  Officers receive different performance bonuses.  Likewise for ministers and other political office-holders.

31               The tax system was overhauled.  We progressively lowered the corporate income tax rate to 20%.  Beyond cost savings, our corporate tax reform helped enhance firms’ competitiveness, encourage new investments, and promote our local enterprises.  I am told that in Slovakia, corporate taxes are 19 percent.  However, your Value Added Tax (VAT) is higher, at 19 percent, compared to our Goods and Services Tax (GST), currently 5%, which will be raised to 7%.  We also reduced personal income tax to make it competitive vis-à-vis other jurisdictions.  By 2007, the tax rate for the highest income bracket will fall to 20%.  Like the corporate tax rate, it was once 40 percent.  This will increase Singapore’s attractiveness for highly-mobile and skilled professionals from around the world.

Upgrading and Diversifying our Economy

32               The second strategic thrust is to upgrade and diversify our economy.  Singapore cannot compete on cost and tax rates alone.  We have to move up the value chain and develop capabilities in new growth areas.

33               We continue to make the most of our strategic location to increase our value as a hub for economic activities - from financial services, such as in wealth management and Islamic finance, to shipping, logistics and aviation.

34               We are building up our Research and Development sector.  In 2004, spending on R&D reached US$2.4 billion or 2.2% of GDP.  Today, there are 19,000 degree-holding research scientists and engineers in Singapore, three times the number in 1994.   We are actively wooing world-class firms to do R&D and high value-added production in Singapore.

35               We are also growing our biomedical sciences sector.  Within five years of promoting biomedical sciences, the industry now contributes an estimated 5% of GDP and nearly a fifth of manufacturing value-add.  Top pharmaceutical firms such as Novartis and Glaxo-SmithKline are manufacturing and doing research in Singapore.  Last year, we produced a commercial diagnostic kit for detecting the H5N1 avian flu virus in infected people, chicken and eggs.

36               More than ever before, the quality of a country’s human capital will determine the competitiveness of an economy.  The Singapore education system is well-known for producing competent and disciplined workers.  But we are revamping it to nurture a spirit of enquiry, innovation and enterprise.  Teaching approaches and curriculum are being reviewed.  These enhancements are aimed at unlocking the innovative spirit and creativity of our students.

37               In addition, we have to equip our people with the right skills to do well in a knowledge economy, as well as cultivate in them the mindset that their education does not stop upon leaving school.  In a hyper-competitive global economy, workers must continually upgrade their skills to increase productivity and stay employed.

Enlarging Singapore’s Economic Space

38               Our third strategic thrust is to enlarge Singapore’s economic space.

39               With our small domestic market, we have had to venture out from Day One of our independence.  We position ourselves to serve the region and the world.

40               We are expanding our economic relations with China, India, Central Europe and recently, the Middle East.  As multilateral negotiations at the WTO Doha Round were not moving fast enough, we have been pursuing Free Trade Agreements (FTAs) to safeguard our export markets.  So far, we have concluded 12, including with major partners like US, India, Japan, South Korea and Australia.  We are negotiating 11 more FTAs, including one with China.

41               Apart from FTAs, Singapore has collaborated with the key economies in the region through, for instance, jointly setting up Special Economic Zones (SEZs).  Singapore and India have agreed to set up an SEZ in India.  We are also working with Indonesia to develop SEZs there.

Conclusion

42               All countries want to find the elixir of eternal growth.  We are all too conscious that Singapore’s continuous growth in the last 41 years is no guarantee that prosperity can be sustained over the next 20, 30 or 50 years.  To give us the best chance of doing so, however, we focus on the key factors – the quality of the country’s leadership and public service, the politics of consensus and not confrontation, the quality and skills of the people, a practical approach in solving problems, and cooperating with others through FTAs and mutually-beneficial partnerships.

43               What I have shared with you is Singapore’s experience.  It is not a prescription for your country.  Each country must discover for itself the best way forward, while learning from others.  We have to be flexible, nimble and creative as circumstances change, and adapt, innovate and reinvent to stay ahead.

Thank you.