Teh Kok Peng

Economic sense of a second Singapore

In economic theory, when one factor of production - land - is largely fixed, and another factor - labour - can grow only slowly, adding more and more capital leads to diminishing returns. Should Singapore follow in the footsteps of the developed econ
In economic theory, when one factor of production - land - is largely fixed, and another factor - labour - can grow only slowly, adding more and more capital leads to diminishing returns. Should Singapore follow in the footsteps of the developed economies by having much more direct investment overseas even as it continues to work to attract high-quality direct investments?ST FILE PHOTO

Creating 'another Singapore' elsewhere would help us overcome our land and labour shortage

The concept of Singapore as a global city started much earlier than many of us realise. In 1972, Singapore's first foreign minister, Mr S. Rajaratnam, addressed the Singapore Press Club.

At that time, Singapore had already put in place a whole slew of policies that made it very attractive to international companies and financial institutions. In particular, he focused on the role that Singapore would play in the international supply chain that was already developing in Asia.

"By linking up with international and multinational corporations, Singapore not only becomes a component of the world economy, but is offered a short cut to catch up or at least keep pace with the most advanced industrial and technological societies. By plugging-in in this way, we can achieve in 20 to 30 years what otherwise would have taken a century or more to achieve," he said.

Most of us will agree that this development strategy, put in place so many years ago, has been spectacularly successful. This strategy, in essence, is to bring in capital and capabilities, including labour, from the rest of the world, to use Singapore as a production platform to access markets globally and in the region.

Despite some recent policy shifts, particularly on foreign workers, many of our public agencies, mindsets and skill sets continue to operate around this paradigm.

To Mr Rajaratnam's great credit, he was prescient enough to recognise the limits of his own vision. At the end of that very speech, he said: "I have dealt largely with the economic aspects of Singapore as a global city. But the political, social and cultural implications of being a global city are no less important... The political, social and cultural problems, I believe, would be far more difficult to tackle. These may be the Achilles' heel of emerging global cities."

Second pillar

I WOULD like to make the case that while the particular globalisation strategy that Singapore embarked on soon after independence was the right one - perhaps the only sensible one, given the circumstances and constraints then - we may have overstayed in applying this strategy as the dominant one.

As a result, our shortage of land, labour and other capabilities is becoming more obvious and severe. I believe it is timely to have a second strategic pillar, which I would describe in short as "creating a second Singapore outside Singapore" - the economic space of Singapore and Singapore companies should be much bigger than the geographical space of Singapore. A similar idea was mooted nearly 20 years ago, when there was talk of creating a second wing for Singapore.

Singapore's land and labour constraints are immutable.

In the long term, there is clearly a limit as to how much more we can do in land-use intensification, given how much we have already done.

With regard to labour, Singapore had actually run up against domestic labour constraints early on, and had begun importing foreign workers, mainly Malaysians, by the early 1970s.

Since then, our dependency rate of foreign workers, as a proportion of our total workforce, has risen sharply. It may well be that Singapore can support a population of 6.9 million without being congested or over-crowded, with clever planning and after the current massive construction of MRT lines, highways, hospitals, schools, HDB flats, etc, all reach completion.

The question also arises as to the marginal benefit of such further large capital investments in a limited space and, given the recent policy shift, with the limited supply of labour.

In economic theory, when one factor of production - land - is largely fixed, and another factor - labour - can grow only slowly, adding more and more capital leads to diminishing returns. About 20 years ago, the American economist Paul Krugman argued that Singapore's growth (and that of a few other East Asian economies) was driven largely by inputs of labour and capital, rather than productivity.

If this is true, are we in the process of doing more of the same, even if the declared intent is to develop a more innovation-based, productivity- driven economy?

At this stage, it is useful to look at the experience of more mature developed economies. All of them have been major exporters and importers of foreign direct investments for many years. The US Department of Commerce publishes annual returns on American companies operating in Singapore. These have shown attractive equity returns, higher than returns usually achieved by portfolio assets.

Singapore, because of its high savings rate, especially by the Government in the form of budget surpluses, has accumulated a very large stock of investments overseas. But unlike the mature developed economies, these investments are mostly in the form of portfolio investments, managed mainly by the Monetary Authority of Singapore and GIC. Singapore will continue to need to have a sizeable stock of overseas portfolio investments.

Nevertheless, it seems we have reached the stage where we should be able to follow in the footsteps of the mature developed economies by having much more direct investments overseas than we currently do, even as we continue to work to attract high-quality direct investments into Singapore. We have a high savings rate, a large stock of investible past savings, a per capita income level that is among the world's highest, and access to capabilities outside Singapore, in addition to what we have attained ourselves.

Expanding overseas

FURTHER expansion overseas by Singapore companies would ease the pressure on our land and labour market. It would ease the inflow of foreign workers since our companies would employ them in their home countries.

It would enable our small and medium-sized enterprises (SMEs) to achieve scale more easily. A McKinsey study released early this year found that Singapore SMEs, with their limited market size, need to go overseas at a much earlier stage of development, compared with those of other countries.

Because of the speed at which our land and labour costs have risen, many of our SMEs have useful technologies and capabilities which could enable them to continue operating profitably in a country where such costs are lower. Their chances of success could be lower if they remained totally in Singapore.

There are already clear efforts by public agencies, notably International Enterprise Singapore, to encourage and help Singapore companies expand overseas. But in terms of priority and resources allocated by the Government, this ranks lower than the present dominant strategy of attracting foreign direct investments into Singapore.

A strategic shift of this nature would require a change in mindset, institutions and skills. Mistakes will be made, and the risks will be greater in the short to medium term. It seems to me that the greater long-term risk is in staying with a strategy that has been largely unchanged for nearly half a century.


The writer is chairman of Ascendas.

This is a revised and edited version of a talk he gave at the Aprea (Asia Pacific Real Estate Association) Chairman/CEO Leadership Series In Conversation last month.