Economic Strategies Committee in safe hands

"The net has been cast wide," said the Straits Times, reporting the appointment of a 25-member Economic Strategies Committee, tasked with identifying "fresh ways to grow the Singapore economy." Nine of the 25 members are government ministers. [1] 

The tenth is from the Monetary Authority of Singapore and the eleventh is a People's Action Party member of parliament, representing the government-controlled National Trades Union Congress.

Beyond that are corporate leaders, among whom "two members... have in-depth knowledge of the all-important Chinese economy," noted the newspaper.

I glanced at the list of names that accompanied the news story. Indeed, 24 out of 25 were either government leaders or people from the business world. Only one was an academic -- Prof Bernard Yeung, dean of the National University of Singapore Business School. There were no fulltime economists or intellectuals (other than perhaps Yeung).

One has to wonder whether the composition of the committee serves its putative purpose. Without meaning to belittle their intelligence and capabilities, the fact remains that the non-government members are (a) already busy with their fulltime jobs running businesses, and (b) will tend to see the future through the perspective of the industry they are in. They are hardly going to tell the committee that theirs is a sunset industry, or one in which Singapore has no hope, and we should abandon it.

On top of that, we have nearly half the committee made up of government ministers, whom one can expect to get highly defensive should one criticise the very economic model that we have operated with. Can anyone expect truly counter-orthodox ideas to surface in this committee and be fairly considered?

Why do I have the feeling that the outcome of this showpiece will be a glossy booklet essentially saying that our economic model is sound, the direction is right, the fundamentals solid and all we have to do is to work harder, doing more of the same?

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Two weeks ago, the Straits Times published a guest article by Basant Kapur, professor of economics and director, Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore. It gives you a flavour of the kind of thinking that intellectuals do, which is likely to be missing from the committee of those 25 government and corporate bigwigs. Basant Kapur was not named to the committee.

In his article (archived here) Kapur discusses the macro issues rather than industry-specific ones. He first takes aim at the issue of research and development (R&D), pointing out how South Korea and Taiwan had R&D that was closely tied to corporations like Samsung and Acer. In the case of Singapore, he points out that the commercialisation loop is not closed, and therefore we aren't truly able to exploit our investments in R&D.

I thought it was interesting that he left unsaid another difference: Taiwan and South Korea, like Japan, had plenty of home-grown large manufacturing companies. Through investments in R&D, they bootstrapped themselves to be leaders in their fields. 

Singapore's economic model since the 1960s has been completely different. We focus on inviting foreign multi-nationals to base their manufacturing operations here. Their commitment to Singapore only goes as far as seeing in this place a cost-effective production base. This is not home-base, where cutting-edge products are meant to be invented and produced.

He also argues that our domestic market could have provided better support for our economy. The notion that because our population is so small, we can't but look to exports, is not as simple as it looks.

No economist worth his salt would argue that Singapore's domestic market should provide 100 per cent of the demand for its products. Instead, the argument is that domestic consumption's share of Singapore's gross domestic product (GDP) - which has been falling over the years, and is now less than 40 per cent - is much too low. By contrast, the figure for Hong Kong is more than 60 per cent.

If Singapore's figure could move closer to Hong Kong's, domestic consumption would be a stronger pillar of our economy - and a more stable one.

-- Basant K Kapur, Strategies for the future

A big reason why our consumption to GDP ratio has been declining is because property has eaten up too much of Singaporeans' income, Kapur argues. Private property, particularly, takes a huge bite, and since many public housing dwellers aspire to own private property, there is excessive saving.

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Singaporeans save too much for property, thus reducing domestic consumption

Coming back to our reliance on multinational corporations investing in Singapore, Kenneth Jeyaretnam, the Secretary-General of the new Reform Party and an economist by training, has pointed out that recent changes to the US tax code should be given more attention than has been the case so far.

These changes will deter US companies from basing operations abroad, and will pull the rug out from under Singapore's economic model. The government has yet to acknowledge this threat or explain what steps it intends to take to counteract it, he wrote.

Titled US tax rule changes and implications for Singapore: the Prisoner’s Dilemma, Jeyaretnam's article explained that traditionally, each country's government taxed companies only on the profits of its operations within its territory. The US government will soon tax US companies on the profits from their operations globally. This means, for example, that if a US company has operations in Singapore, it will not only have to pay tax to the Singapore government for its Singapore bits, but also pay tax to the US government for the same bits.

When that happens, why should US companies base any of their operations in Singapore? Why not keep them at home and pay tax only once?

The US is doing this to stem the outflow of industry to other countries, by penalising companies that export jobs, but the flip side is that "there are likely to be grave implications for Singapore as this will definitely lead to some, probably significant, loss of jobs and investment in Singapore. The situation becomes more serious particularly if the other major economies follow suit," wrote Jeyaretnam.

This is the threat we face after having depended so long on foreign investment and neglecting domestic enterprises. The present situation is one where Singapore has a lack of world-class exporters, "partly dictated by the small domestic market and partly the fault of the Government which has concentrated on boosting net savings and investing the surplus abroad."

As a first response, Jeyaretnam, like Kapur, argued too that "there is considerable room to expand the economy by increasing domestic consumption and investment. The lead here needs to be taken by the government sector through tax or service fee cuts... or increased infrastructure or education and health spending."

But the usual focus on government-linked companies (GLC) as engines of growth must be relooked, he said. "My preference would be to encourage private sector involvement rather than further growth of the GLC sector."

Needless to say, Jeyaretnam was not appointed to the Economic Strategies Committee either.

© Yawning Bread 

Footnotes

1. Straits Times, 26 June 2009. Diverse line-up for growth ideas
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