Singapore reviews high-tech plans

Press, 12 February 1986, Page 40

Singapore reviews high-tech plans

From the “Economist” Recession has persuaded the Government of Mr Lee Kuan Yew to look again at its long-cherished notions of how Singapore can quickly become a high-tech economy. The city-state can expect a cut in taxes, lower forced savings and curbs on wages for at least the next two years. And the Prime Minister’s son sounds keener on free markets than his father.

Singapore’s standard of living doubled between 1970 and 1980. Its aim in the following 10 years was to double it again. This would have required annual GDP growth of 8 to 10 per cent and annual productivity increases of 6 to 8 per cent for 10 years. In 1980-84, Singapore met its GDP growth target and managed an impressive increase of 4.9 per cent a year in productivity. But in 1985 the momentum faltered. GDP contracted by 1.7 per cent and, if Government forecasters are right, it will stagnate this year.

The first Deputy Prime Minister, Mr Goh Chok Tong, says the economy is unlikely to recover until the end of 1987. Unemployment is 6 per cent and rising.

The Government has spent the better part of a year trying to learn, mainly from businessmen, what went wrong. The answer it has come up with — and recently published — is that Singapore has been hit by three main problems: a structural decline in oil-related industries, a loss of competitiveness and a drop in domestic demand. Unit labour costs soared by 40 per cent between

1979 and 1984, while the Singapore dollar rose, on a trade-weighted basis, by around a quarter, rne country’s competitiveness deteriorated by 50 per cent against Hong Kong, by 35 per cent against South Korea and by 15 per cent against Taiwan. The rate of return in manufacturing more than halved to 16.5 per cent between 1980 and 1984, only one percentage point higher than the OECD average.

The city-state’s economic troubles were made worse by an excessively high savings rate. Singapore’s savings were 42 per cent of GDP in 1984; compare that with, for instance, the 24 per cent for South Korea the previous year. Singapore’s saving rate is among the highest in the world thanks to an official forced-savings scheme called the Central Provident Fund (CPF). Instead of investing the money more profitably in manufacturing, 63 per cent of the total capital formation of sSinglBß

(SUS9B) in 1984 went into construction (compared with 41 per cent of sSing6.lß in 1978). Some sSingl6B in private property was vacant at the end of last year. Investment in equipment and machinery has stagnated since 1981. In future, manufacturers may attract more of those savings because people are likely to be given more freedom in investing their CPF contributions.

Singapore’s tradeweighted exchange rate has been pushed down 5.4 per cent since the beginning of 1985. The Prime Minister’s son, BrigadierGeneral Lee Hsien Loong, who led the team investigating the country’s ills, thinks that any further depreciation should be left to the market. He says that it is more honest to persuade people to accept lower living standards directly through wage restraint rather than by means of a cut in Singapore’s international purchasing power. One of Mr Lee junior’s sub-committees suggests that controls on offshore lending of Singapore dollars should be relaxed by ending withholding tax on interest earned by nonresidents.

Mr Goh says that employers’ contributions to the CPF (which match that from employees) should be cut from 25 per cent of gross salaries to 10 per cent. Another of Mr Lee junior’s sub-commit-tees has recommended an immediate reduction in corporate tax from 40 per cent to 25 per cent (Hong Kong’s is 18*4 per cent) and even deeper cuts in levies on offshore income. Any shortfall in Govern-

ment revenuw, the subcommittee says, should be met from the SSinglß surplus hoarded by Singapore’s statutory monopolies, like the telecommunications authority. Successful Government companies such as Singapore Airlines, says the brigadier-general, should be sold into private hands in a divestment programme that is likely to take 10 years. The more difficult question, he says, is whether the State should in future invest in a profitable opportunity which looks too risky for private entrepreneurs. His answer is no.

“Can the Government consistently know something the market doesn’t know?” he asks. Now all the younger Lee has to do is to convince his father that he is right.—Copyright.