How S'pore has grown - from a policy perspective

Essays by economists show how policies have worked (or not) in the last 50 years as Singapore - and the world outside - changed.

TUE, MAR 08, 2016  LINDA YC LIM

LAST year, 17 economists, mostly Singaporean academics, got together to prepare 13 papers for an SG50 Special Issue of the Singapore Economic Review, that I guest edited. This has since been republished as a book, Singapore's Economic Development: Retrospection and Reflections.

We look at Singapore's economic development of the past 50 years from different policy perspectives: governance, lessons for other developing countries, role of the state, monetary policy, public financial management, labour and productivity, trade and foreign direct investment, demographics and population, housing, the Central Provident Fund (CPF), poverty and social welfare and energy and the environment. And we reflect on what lies ahead for the economy.

There are several common themes among our papers. The dominant theme is the primacy of economic growth in driving social as well as economic policies. This was maintained throughout our 50-year history, even after per capita gross domestic product (GDP) had risen well beyond the level at which growth tends to slow down in developed countries.

Examples of social policy being harnessed for economic growth include: ensuring affordable housing to keep factory wages low during the years of labour-intensive manufacturing; reducing employers' CPF contributions and government industrial estate rentals to lower business costs during growth slowdowns; the liberal foreign worker and talent policy underlying the extensive growth model based on factor accumulation; public finances oriented toward providing incentives and subsidies for investors; social welfare policies focused on human capital development; and energy and environmental policies focused on developing the oil and gas sector and lowering costs through energy efficiency.

A second theme is the interconnection between different policy arenas, which increased the effectiveness of individual policies. The best known of these is the mobilisation of individuals' CPF savings to finance their publicly-constructed housing, thus avoiding budget deficits, creating a home-ownership society and motivating national service. Racial quotas in public housing estates helped to foster national unity and prevent the formation of ethnic ghettoes and voting blocs. Housing Development Board (HDB), CPF and labour policy also served industrial policy conducted by the Economic Development Board (EDB). Housing, education and health policy were used to lower birth rates during the 1960s and 1970s, while budget measures such as tax relief and child payments were later employed to encourage births.

Third, there were sharp changes in policy direction, but within the same development model and institutional infrastructure. The HDB's goals moved from dealing with a chronic housing shortage and providing affordable basic housing in the 1960s through the 1980s, to upgrading, market deregulation and asset enhancement after 1990, with some return to a focus on affordability very recently. CPF moved quickly from retirement savings to mortgage financing, later adding non-housing investments, healthcare and education financing to its allowable expenditures.

Investment incentives and industrial policy moved up the technological ladder from labour- to capital- and skill-intensive, while foreign labour policy swung back and forth between heavy dependence and tightening. Population policy, which was emphatically anti-natalist in the 1960s and 1970s, was reversed in the 1980s to encourage higher fertility. There was a switch from public provision to partial privatisation of public and social services, reflecting an ideological shift from state to individual responsibility for social welfare, which has recently begun to shift back.

Fourth, the dominant role of the state in the economy was maintained, and even expanded. Rather than retreating with the development of markets and institutions, state and state-linked entities have reached into ever more areas of public and private life and the provision of commercial goods and services which in other developed-market economies would be undertaken by private enterprise.

Strong central executive control, an undivided legislature and what Associate Professor Tilak Abeysinghe of the National University of Singapore (NUS) calls "politicians with high opportunity cost", facilitated swift decision-making and policy implementation by the civil service, statutory boards, the government-linked companies (GLCs), NTUC and other state-linked units and their private-sector subcontractors. This pervasive state apparatus enabled the rapid mass mobilisation of resources for economic growth during different developmental phases.

These policies were very successful in achieving both the primary goal of rapid GDP growth (with low unemployment and inflation), and each policy's multifaceted social and economic goals. They were greatly enabled and enhanced by a favourable world market environment, which also benefited other Asian newly-industrialising economies. But focusing on maximising growth through factor accumulation proved to be unsustainable. The depression of both capital and labour costs preserved international competitiveness and attractiveness to foreign investors. But there were diminishing returns, especially given the extreme scarcity of land and the early appearance and continuation of low, and even negative, productivity growth.

Both public and private housing prices rose due to heightened scarcity values intensified by foreign demand (the result of open capital and labour markets). In response, Singaporeans saved more of their income to spend on housing, with a corresponding fall in the share of income spent on consumption of other goods and services to a very low level (40 per cent of GDP) by local historical and comparative international standards.

Becoming "asset-rich and cash-poor" in a rapidly-ageing society, where most retirement savings lodged at the CPF have been devoted to housing, poses serious problems for retirement-income adequacy. The integration of CPF savings with HDB housing policy, so perfect for a much younger, lower-income, higher-fertility society in a much lower-cost, faster-growth era, now presents difficult policy challenges in a much older, higher-income, lower-fertility society in a much higher-cost, lower-growth era. Higher land and property costs have also directly and indirectly reduced international competitiveness and hence, the capacity for growth through foreign investment.

While individual policies interacted to enhance their collective effectiveness, successful policy in one domain also had negative impacts on other policy domains. For example, during the labour-intensive era of development, low-skilled manufacturing jobs were plentiful for lowly-educated residents. Their employment and wages rose rapidly, reducing poverty and inequality and increasing their ability to pay for affordable public housing out of CPF.

But as Singapore's comparative advantage shifted, returns to internationally mobile capital and skills increased, while those to low-skilled domestic labour decreased, as in other developed countries also subject to intensified global competition and skill-biased technological change. This resulted in increased income inequality, intensified in Singapore by the massive import of low-skilled labour which depressed wages at the lower end of the scale, and reduced productivity growth by removing the incentive for firms to automate and innovate.

At the same time, the policy to attract global talent, especially into financial services, pushed salaries up dramatically at the high end of the labour force. Not surprisingly, earned-income inequality in Singapore is now greater than in most other developed countries, and overall inequality is even greater if wealth inequality is also taken into account. Combined with the rising cost of living, this has introduced challenges of poverty and retirement adequacy for significant proportions of the population.

Industrial upgrading through statist policies has also increased economic volatility, given concentration in a few volatile and capital-intensive industries. Volatility not only reduces growth and productivity, it also makes macroeconomic stabilisation more challenging, reducing the degrees of freedom which monetary and fiscal policy previously had to pursue other goals. Increased volatility has also arguably reduced welfare for workers by forcing them to shoulder higher risks, in the absence of an effective social safety net.

Industrial upgrading also increased the skill-wage premium, worsening income inequality, while prioritising heavily capital-intensive industries such as petroleum refining and chemicals also conflicts with environmental goals of reducing energy use and pollution. Growth based on large imports of foreign labour and talent has resulted in increased physical congestion, and increased risk of social divisions between indigenous citizens and the "new residents".

We collectively conclude that economic policy was both innovative and effective in the first two to three decades of independence, particularly in simultaneously delivering on both rapid economic growth and improved social welfare. In more recent decades, economic growth and social welfare for a significant minority of Singaporeans have begun to diverge. At the same time, external demand and domestic supply-side constraints have sharply lowered growth potential, even as the income, housing and healthcare needs of the ageing population rise.

Furthermore, prolonged dependence on foreign enterprises has left the economy lacking what economists Tan Kim Song and Manu Bhaskaran call the "inherent production capacity" and "core of strong vibrant local enterprise" - necessary to propel development into the future. "An investment approach - putting bets on many new industries with the expectation that some would pay off handsomely even if others fail - limited the likelihood of developing sufficient depth and globally competitive scale in any of these industries, since all would be competing for already extremely scarce resources."

Looking ahead, there is consensus that slower GDP growth, higher productivity, a more vibrant and innovative local private entrepreneurial class, and a relative shift from manufacturing to services, and from a global to a regional market orientation, are necessary for continued economic development. The big question here is whether and what the government can and should do in this transformation away from the development model it created.

There is also consensus that public policy must continue to pay greater attention to directly meeting the growing social needs of the population, especially the poor, low-income and elderly. Fortunately, we have the financial and institutional resources to effect the necessary transfers, which will be reduced if we also allow labour and capital markets to function more freely and efficiently.

• The writer is guest editor of "A Fifty-Year Retrospective on the Singapore Economy" published in a special issue of the Singapore Economic Review Vol 60, No 3 (2015), and republished as "Singapore's Economic Development: Retrospection and Reflections" in World Scientific Publishing Co's SG50 Series. She is also professor of strategy at the Ross School of Business, University of Michigan

Little Red Dot or the Apple of Nations?

Little Red Dot or the Apple of Nations?

Peter Ho  PUBLISHED   MAY 5, 2017

This is an excerpt from a IPS-Nathan lecture by Peter Ho, senior adviser to the Centre for Strategic Futures He talks about how citizen empowerment and changing expectations require governments to adapt. They must shift from a model of delivering 'government to you' and 'government of you' to 'government with you'.

In 2010, my friend, the futurist Peter Schwartz, described Singapore as the "Apple of Nations".

He was not using apple in its idiomatic form, but favourably comparing Singapore as a nation to Apple the company, which was then - as now - an inspiring paragon of innovation.

Apple is famous for its innovative and revolutionary products. Many think that this year, Apple will become the first trillion-dollar company in terms of market cap.

It was high praise from Schwartz. But of course, it begs the question of whether we can truly be the Apple of Nations, or whether we are in reality just a Little Red Dot.

Schwartz, who is no rosy-eyed admirer of Singapore, also warned: "The difference between Apple and Singapore is that the people of Singapore don't know how good they have it. They don't know just what a remarkable entity has been created here. They don't share yet that sense of passion that the people at Apple do."

This concern was echoed in Prime Minister Lee Hsien Loong's 2016 National Day Rally speech, when he said: "What I would like to have is that we be blessed with a divine discontent - always not quite satisfied with what we have, always driven to do better.

"At the same time, we have the wisdom to count our blessings so that we know how precious Singapore is and we know how to enjoy it and to protect it."

BIG GOVERNMENT VERSUS SMALL GOVERNMENT

Thrust into an unwelcome and unwanted independence (in 1965), the Singapore Government was in a hurry to turn the precarious situation around, and to transform Singapore into a "modern metropolis", in the matchless pledge of Mr Lee Kuan Yew in 1965.

With better access to information and higher expectations of governments, the view that "government knows best" is increasingly being challenged. The writer argues that governments should move toward a collaborative approach to policy-making, and connect, consult, and co-create with the people and private sectors.  

So, it is not surprising that in the beginning, governance in Singapore was characterised by big government - if you will - through strong regulation, seeking compliance with policy rules, and maintaining as efficient a system as possible, in order to get things moving and to get them done.

Through this approach, the Government embarked on a number of major initiatives that helped to lay the foundations for Singapore's prosperity and stability.

These included a massive public housing programme; heavy investments in infrastructure - in public transport, our port and airport; and an activist, government-led approach to attract foreign investments and build up the capabilities to support higher value-added activities.

In these and many other policy domains, the visible hand of government was as critical as the invisible hand of markets.

The Government's interventions enabled new markets and industries to develop. They also helped to ensure that economic growth throughout the 1970s and 1980s benefited all segments of the population.

GOVERNMENT VERSUS GOVERNANCE

Today, citizens and businesses alike have far higher expectations of government than before. Access to information has increased dramatically in scope and speed as a result of the Internet revolution.

Social networking platforms like Facebook, YouTube and Twitter have empowered citizens to express their views. Virtual communities are beginning to shape the debate and context of public policy issues.

The view that "government knows best" that perhaps characterised the situation in the beginning is increasingly challenged in today's world, in which citizens and businesses can easily gain access to much of the information that governments used to monopolise and control in the past.

THE FUTURE OF GOVERNMENT IN SINGAPORE

Today, the quality of government in Singapore is routinely listed at the top of a host of global rankings. That Singapore is already operating at the leading edge in many areas of governance means that it is no longer enough for Government policymakers just to copy and adapt from elsewhere.

For many of the emergent issues that we have to deal with, Singapore will have to evolve its own strategies and approaches. To achieve real breakthroughs, the Government will have to depend more and more on its own innovations.

And as a result, the Government will have to assume new levels of entrepreneurship with its attendant risks and uncertainties. A government that explores will also at times have to sacrifice some degree of efficiency in service of discovery. And it will need to become expert at conducting bounded experiments.

Indeed, the emergent, complex issues of the 21st century suggest the need for a new paradigm in governance - one that is Whole-of-Government, networked, innovative, exploratory and resilient in the way it confronts the challenges of our time - challenges rooted in complexity and accelerating change.

What is the appropriate model of governance for Singapore going forward?

The coming years will see a growing need for governance - which requires collaboration across the public, private and people sectors - rather than government acting as the sole, or dominant, player.

Today, the Government faces a myriad of complex public policy issues in which the trade-offs are much more difficult to make, because each could lead to unintended consequences and risks. Many of these public policy issues exceed the capacity of government working alone. Instead, they require the active contribution of private and people sectors.

A government-centric approach focused on efficiency and productivity will likely give way to a broader approach that leverages on the collective capacity of non-government actors, in order to achieve results of higher public value and at a lower overall cost for society.

How government interacts with the private and the people sectors will in turn determine how big a role each of these sectors will play. It is often overlooked that the Singapore Government has been a world leader in the engagement of the private sector.

A succession of five economic reviews - the Economic Committee of 1986, the Committee on Singapore's Competitiveness of 1998, the Economic Review Committee of 2003, the Economic Strategies Committee of 2008 and, most recently, the Committee on the Future Economy of 2016 - saw the public and private sectors coming together every few years to produce far-reaching policy recommendations for Singapore's long-term economic competitiveness.

FREE MARKET VERSUS MARKET INTERVENTION

A major factor that determines the size of our government has been our belief that free market forces should determine prices and economic outcomes. This is the approach that is the foundation of small government.

But in Singapore, faith in the market has not been uncritical or absolute.

Instead, the Government recognises that in certain cases, unfettered market forces can result in excessive volatility, negative externalities and under-provision of merit goods, like education, as well as public goods, like defence.

The economist Dani Rodrik outlined a framework that can be usefully applied to understanding how Singapore has chosen to blend the work of markets and government.

• First, the Government has sought to enable markets. This includes ensuring rule of law, property rights and public infrastructure - functions that most governments perform. In Singapore, enabling markets has also included industrial policy and capability development, subjects of some controversy in policy circles around the world, especially among proponents of small government that believe in the laissez-faire approach.

• Second, the Government has sought to regulate markets. This includes supervision of the financial sector, competition regulation and taxation of negative externalities, such as high charges for car ownership and road usage, and sin taxes on alcohol and tobacco products - and maybe in future, taxes on sugary drinks. But a key feature of Singapore's approach has been the shift towards lighter regulation accompanied by risk-based supervision, most recently exemplified by MAS' (the Monetary Authority of Singapore's) fintech regulatory sandbox.

• Third, the Government has sought to stabilise markets. This is the bread and butter of macroeconomic management. Singapore's basic approach in monetary and fiscal policy is not far different from global practices. But its efforts to address asset price inflation and credit crises are interesting examples of targeted interventions that harness market forces.

• Fourth, the Government has sought to legitimise markets. Globalisation, free trade and open markets lead to significant dislocations. Some of the sharpest debates over the role of governments centre on this: To what extent should governments facilitate adjustments, redistribute incomes or provide social safety nets, so as to maintain public support for market-oriented policies?

ENGAGING THE PEOPLE SECTOR

Complementing government and markets is the role that society will play in tackling the great challenges and wicked problems of the 21st century.

A key part of this governance process will be growing mutual engagement between the public and people sectors.

In his 2011 National Day Rally, Prime Minister Lee Hsien Loong underscored the importance of such engagement, pointing out that the nation needs to "harness diverse views and ideas, put aside personal interest and forge common goals". This is especially important because people's expectations have changed - and are changing, continuously.

WHY EXPECTATIONS ARE CHANGING

I think there are a couple of reasons for this development. The first reason is that as government policies lead to improvements, the needs of the people change in tandem.

This is explained by Maslow's Hierarchy of Needs. Maslow's proposition was that after the basic physiological needs of a person are met, more complex psychological needs will have to be fulfilled.

At the top of this hierarchy of needs are the need for self-actualisation, which is to realise the individual's potential, and transcendence, which is helping others achieve self-actualisation.

So, if you accept this proposition, then after government has delivered on the basic needs of food, security, shelter, transport and health, expectations of the people are going to change, not in demanding more of the basic needs, but in fulfilling their more psychic needs in the upper reaches of Maslow's hierarchy, including social, emotional and self-actualisation needs.

The challenge for governments everywhere is that success in delivering the material goods of life - housing, food and so on - is no guarantee that it can be successful in delivering "the good life", however defined.

I suppose the reverse is true as well, although it is hard to imagine the good life without the basic necessities of liveability.

THIRD GENERATION SINGAPOREANS

The second reason is what I term the third-generation effect. Singapore is now 51 years old and into its third generation of Singaporeans. The first generation of Singaporeans lived through the turbulence and uncertainties of Merger and Separation. The next generation started life on a firmer footing, but at the same time imbibed from their parents a sense of the vulnerabilities. But the third generation of Singaporeans have known only the affluence and success of Singapore.

For them, the uncertainties of the 60s and 70s are abstractions from their school history books. When their grandparents speak of the turmoil and danger that they experienced, they shrug their shoulders because it is an experience outside theirs. Of course, they are hardly to blame for this, and they certainly need not apologise for it.

Singapore's founding generation made the sacrifices in order that their children and grandchildren would enjoy peace and prosperity.

But clearly, what persuaded their parents and grandparents will not wash with the third generation. But as long as we are all in this together - and I hope that they feel they are in this together - the hopes and dreams of our youth must also appreciate the tough realities that endure. By all means, dream, but dream with your eyes wide open.

So, communicating to the third generation will require fresh arguments and different approaches.

PEOPLE EMPOWERMENT

Citizens today feel empowered, because of the social media and higher levels of educational achievement. Indeed, Singaporeans today are much better educated than their grandparents. In 1965, the cohort participation rate for university education was a minuscule 3 per cent. Today, it is 30 per cent.

The non-profit group Ground Up Initiative (GUI) points precisely to how attitudes are changing in Singapore. GUI operates a 26,000 sq m "Kampong Kampus" space in Khatib, with the aim of reconnecting urbanites to the natural environment. The group's founder, Mr Tay Lai Hock, said: "I think the top should set the example, but I also believe, you first and foremost, must take responsibility for your own life...Don't blame anybody. Don't blame the Government... I have a choice to decide that even though they have made this policy, I don't want to be a victim of their policies."

THE BUKIT BROWN CASE STUDY

In 2011, the Land Transport Authority announced plans to construct a road that would cut through Bukit Brown, the oldest cemetery in Singapore. Heritage groups protested, while the Government maintained its position on needing land in land-scarce Singapore.

When Bukit Brown Cemetery was placed on the World Monuments Watch in 2013, one member of the group All Things Bukit Brown said: "I hope it shows that we are serious, that we want a seat at the table, just so we can present what we have heard from the community, what we have heard from the people who have encouraged us... You want development, but let's have a discussion, perhaps."

The Government has to deal with an electorate that feels empowered, demanding and actively seeks participation. In this regard, Our Singapore Conversation, launched in 2013, signalled the Government's commitment to listening to the people's views.

THE CASE OF THE MISSING PM2.5

By looking at issues from the perspective of end-users - namely the citizen - the government is able to design better policies than if they were just developed using the usual top-down approach.

During the 2013 haze, experts had advised the Government to consider releasing another indicator besides the Pollutant Standards Index (PSI) readings: the PM2.5 readings, which measure particles smaller than 2.5 microns. This is because PM2.5 particles greatly affect people with heart disease, as well as children and the elderly.

When the haze began, the Government published the three-hour PSI readings and 24-hour PM2.5. But netizens and doctors pointed out that the PSI did not factor in PM2.5 readings as air quality indicators.

Members of the public also expressed concern that the PSI values appeared different from what they had observed. Singaporeans even resorted to taking their own real-time air quality readings with commercial equipment.

The Government said at first that it would be confusing for the public to have too many figures to read.

But in the end, because of persistence of the public, NEA (the National Environment Agency) began providing more information on PM2.5, and from June 20, 2013, publishing the PSI and PM2.5 figures hourly, six days after the haze began. And eventually, from April 1, 2014, Singapore moved to an integrated air quality reporting index, with PM2.5 incorporated into the PSI as its sixth pollutant parameter.

GOVERNMENT WITH YOU

I have spent some time explaining how and why society in Singapore is evolving, and how government itself has to evolve in tandem. Put simply, it means a shift from the paternalistic and interventionist "government to you" and "government for you" to "government with you".

The imperative is for government to move towards a collaborative approach to policy-making, and be prepared to connect, consult, and co-create with the people and the private sectors.