3. Industrial Policies in Singapore 27 1. Singapore Economy at a Glance
3.2. Singapore’s Industrial Policies: A Historical
3.2.2. Industrial policies after the recession
Industrial policies underwent significant changes after the 1985 recession.
The government recognized the exhaustion of the opportunities brought about by rapid industrialization. Increasing integration of global commodity and financial markets was also acknowledged. Newly developing coun- tries of Asia also started to compete in labor-intensive manufactures. These changes in the external economic environment led the government to revise its industrial policies and consider the promotion of industries with higher value-added such as electronics, chemicals, biotechnology, and precision equipment. New initiatives were put in place to improve the technological capabilities of firms. These were undertaken in collaboration with local and foreign firms, labor unions, and academic institutions. Milestones of the industrial policies following the reconstruction efforts of after the recession are explained below.
13These efforts later came to be known as the “Second Industrial Revolution.”
The Economic Committee(1985): As a response to the recession, the gov- ernment gathered representatives from different circles under the “Eco- nomic Committee” to detect the causes of the recession and to formulate a prescription to revive the economy.14 The report of the committee rec- ognized the importance of the manufacturing sector but also stressed the importance of financial and communication services for sustained growth (MTI, 1986, pp. 141–143). It was emphasized that Singapore could develop as a “total business center” via the integration of several high value- added manufacturing activities with financial and communication services to make Singapore a promising mediator for foreign investors looking for investment opportunities in the Southeast Asian region (Rodan, 1989, pp. 190–191).
With changing comparative advantages, the government allocated large amounts of resources to promote skill- and knowledge-intensive manufac- turing activities as recommended by the Economic Committee. The com- mittee’s report highlighted three big problems of the economy: the decline of some important industries (shipbuilding and oil refining), declining inter- national competitiveness, and inability of local companies to follow the government’s industrial restructuring efforts (Rodan, 1989, p. 192). Accord- ingly, the government placed more emphasis on the development of local enterprises (MTI, 1986, pp. 134–138), partially due to rising voice of local entrepreneurs who were affected adversely from the recession. The com- mittee also recommended the government to divest and privatize some public firms, but although some action was taken, the government did not show any explicit commitment for this purpose (MTI, 1986, p. 71). Finally, the committee emphasized the need to promote productivity by enhancing product design and development, investing in technology, training of labor, and creating a productivity-conscious workforce (MTI, 1986, pp. 123–126).
These measures are explained in depth in Chapter 4.
Apart from these long-run measures, the report also recommended some short-run cost-cutting measures to enhance competitiveness. Following
14Singapore government occasionally gathered committees to draw guidelines for policies as a response to changes in the economic environment. These committees consisted of representatives from the government, academics, domestic and foreign businesses, and labor unions. The government prefers flexible and changing policies in order to adapt or react to changes in the global economy.
these recommendations, employer contributions to CPF were reduced from 25 to 10 percent (see Figure 3.1), wage levels were frozen for a 2-year period, and both corporate (from 40 to 30 percent) and personal income tax rates were reduced. These measures proved to be successful; by 1988 Singapore was back on its high-growth track (see Table 3.6). In the labor market, most of the restrictions were removed after 1986 and a flexible wage system was introduced so that firms could pass some of the shocks of a recession to wage earners. Accordingly, NWC wage increase guidelines lost their functionality.
The Next Lap and the Strategic Economic Plan(1991): The government pre- pared the Strategic Economic Plan (SEP) to draw strategies for Singapore for the 1990s to achieve the status of a developed nation. In this plan, long-run strategies to maintain international competitiveness were strongly emphasized. Key strategies for growth include the improvement of human resources, establishing an external wing for the economy, improving domestic resource efficiency, improving the so-called “soft-infrastructure”
(i.e., technological infrastructure, an institutional structure which supports innovation, and a system that encourages cooperation between government, labor, and business), attraction of foreign talent, and encouragement of the internationalization of Singapore companies via overseas investments (EPC, 1991, pp. 5–9).
The Next Lap, the official development program of Goh Chok Tong, who took office from the long-serving Prime Minister Lee Kuan Yew in 1990, also set industry-specific plans for the year 2000 (Wong 1996b).Manufac- turing 2000targeted sustaining of the manufacturing sector’s share in GDP at 25 percent (which was achieved);Regionalization 2000aimed to build an external economy for growth;National Technology Planaimed at boosting Singapore’s innovative capacity;IT 2000targeted turning Singapore into an
“intelligent island”;Local Enterprises 2000targeted enhancing productivity in SMEs; andCo-Investment Programaimed at building and extending rela- tions between MNCs and SMEs in order to exploit the external economies arising from their subcontracting relations.
Majority of the targets were attained by the year 2000. Singapore became competitive in the production of certain manufacturing products, mainly in electronics, computers, and precision engineering industries. The share
of manufacturing in GDP was maintained at one-fourth level, electronics industry alone accounting for half of the manufacturing output. However, the goal of increasing the share of research and development expenditures in GDP to 2 percent could not be attained. In addition, manufacturing sector was still heavily dominated by large foreign firms. They accounted for over two-thirds of total manufacturing investment and value-added generation (Table 3.9). Significant institutional changes also took place in this period.
While EDB retained its position as the main implementing agency in industrial policies, new institutions were set up to assist EDB and the existing ones were restructured and given new tasks in industrial policies.15 Asian Financial Crisis and the Committee on Singapore’s Competitiveness (1998): The Asian financial crisis in 1997–98 hit Singapore hardly due to financial ties of local banks and portfolio investments and outward FDI by local firms in the region. Growth rate declined from 8.6 percent in 1997 to−0.9 percent in 1998; unemployment rate doubled from 1.8 percent in 1997 to 3.6 percent in 1999; and the Singapore dollar fell from 1.4 to 1.7 against the US dollar from 1996 to 1999 (see Table 3.6). The slump in world markets for high-technology products, mainly electronics, in the mid-1990s had already put Singapore into trouble (CSC, 1998). In May 1997, a little before the Asian crisis, the government set up the Committee on Singapore’s Competitiveness (CSC) to identify problem areas and to search ways to increase competitiveness over the next 10 years.
The report of CSC acknowledged the principles of SEP such as the importance of manufacturing and services sectors, strengthening of domestic SMEs, developing human and intellectual capital, leveraging science, technology and innovation, optimizing resource management, and enhancing the role of the government as business facilitator. The com- mittee drew two essential sets of recommendations to improve competi- tiveness through cost-cutting measures both in the short- and the long-run (MTI, 1998, pp. 3–5). Short-run measures stressed the need to ease the bitter effects of Asian financial crisis and maintaining investor confidence.
15Productivity and Standards Board was established in 1996 to assist local firms in labor training and to enhance productivity. Trade Development Board (TDB) was restructured in 2002 as International Enterprise Singapore. The Development Bank of Singapore (DBS) and business undertakings of the government-run Post Office Savings Bank, the largest banking entity, were merged into a dominant financial unit in the local capital market.
Long-run measures emphasized developing Singapore into an advanced and globally competitive economy with manufacturing and financial services as twin engines of growth. Attraction of FDI was also deemed necessary especially in high-technology industries, by way of public investments to enhance infrastructural facilities to be the best in the world and by increasing technological capabilities of domestic firms. For this purpose, research and development grants, tax and other incentives were continued (Table 3.8).
Slump in global markets and the Economic Review Committee (2003):
The revival after the Asian financial crisis lasted only for 2 years and for three consecutive years (2001–2003) the economy recorded low growth rates due to the slump in the global export markets of Singapore, mainly global electronic markets. As a response, the government established the Economic Review Committee (ERC) in December 2001 to review the development strategy and reformulate it for restructuring. The report of the committee which was published recognized the achievement of the developed nation status16 and the drastic changes in the external envi- ronment with the integration of China into the world economy (MTI, 2003, pp. 8–15). The report emphasized the need for Singapore to restructure further and build on its own strengths. To realize this, six major areas were addressed:
(i) expansion of external ties via multilateral trade relations;
(ii) enhancing competitiveness by reducing direct taxes, shifting toward indirect taxes, and competitive pricing of infrastructure and production factors;
(iii) promotion of twin engines, i.e., key manufacturing clusters (i.e., elec- tronics, chemicals, biomedical sciences, and engineering) and financial services;
(vi) enhancing manpower by training and welcoming foreign talent;
(v) promoting local firms, including SMEs and government-linked com- panies, by rationalizing, upgrading, and expanding into the external economy; and
16By the 1990s, per capita GDP level of Singapore passed the levels of some developed countries and it was raised to the rank of “developed country” by international economic institutions.
(vi) restructuring to upgrade skills even at the cost of structural unemployment.
Following these policy changes recommended by the ERC, Singapore recovered from the recession. The favorable conditions in the world economy helped the economy grow by 7.8 percent in average during 2004–2006. The government is expecting an annual average growth rate of between 4 and 6 percent for the next 10 years after 2007.