Prime Minister Lee Hsien Loong was shown on television last night saying that the GDP growth forecast issued by his government just 2 weeks earlier must now be revised. That forecast said that Singapore might see at best 1 percent growth in 2009, at worst, minus 2 percent. I assume it is the minus 2 percent figure that needs revision. 

[Update 21 January 2009: The Ministry of Trade and Industry, in a new press release, said the GDP forecast for 2009 is a contraction of 2 to 5 percent. See Addendum 1]

A week earlier, the Tourism Board revealed that we received 10.1 million visitors in 2008, 2 percent fewer than in 2007 [2].  The worst months were the more recent ones. November 2008 saw 9.7 percent fewer visitors compared to the same month a year earlier [3].  I don't seem to see the December figures anywhere, but I doubt if they are any rosier.

Singapore Airlines announced that it will be cutting 214 flights to Europe, Australia, China and India in the first quarter in response to falling passenger numbers. [4] 

Indeed, the economic gloom is a pretty global phenomenon and is now hitting us through our exports and tourism, but it should also be noted that of all the countries in Asia, we were the first to tip into a recession. This happened when our third quarter shrank 6.8 percent from the second, following the second quarter's 5.3 percent decline from the first. A recession is defined as two consecutive quarters in which the GDP shows negative growth. [5] 

I got the above figures from a Press Release dated 21 Nov 2008 issued by the Statistics Department:

"Singapore's GDP contracted by 0.6 per cent in year-on-year terms in the third quarter 2008. On an annualised quarter-on-quarter basis, growth declined by 6.8 per cent compared to a fall of 5.3 per cent in the second quarter." [6]

Preliminary indications are that the fourth quarter GDP would show a whopping, seasonally adjusted decline of 12.5 percent. On 2 January 2009, the Statistics Department said:

"Advance estimates show that Gross Domestic Product (GDP) in the fourth quarter contracted by 2.6 per cent in real terms over the same period in 2007, following the decline of 0.3 per cent in the preceding quarter. On a seasonally adjusted, annualised quarter-on-quarter basis, real GDP fell by 12.5 per cent compared to a decline of 5.4 per cent in the third quarter of 2008." [7]

Official figures are expected on 21 January.

Lay-offs have already occurred, but we have hardly seen the worst. Post-Chinese New Year, there will surely be a flood of bad news.

Next week, Parliament will begin debating the new budget, and a lot of focus, no doubt, will be on how we can alleviate the pain. While important, it is not the only kind of question we can ask. A different question might also be worth pondering: Are we following the right economic model?

* * * * *

 
There are number of features of our economic model that we should be aware of. Partly, they are a natural consequence of our small size and economic history, but equally, they are engineered through developmental policy. Have they been the wisest moves?

Consider this: We were the first Asian country to go into a recession, and then, not slipping by one or two percent in the declining quarters, but tumbling head over heels five, six and now twelve percentage points, as mentioned above.

If we look at a graph for the last 12 years, you'll see that our economic performance, while not bad overall, has tended to booms and busts. We've had two busts in the last decade and we're now into our third. It feels like we're riding rodeo.

I sometimes wonder how much of that is due to the way our economy is structured. A large percentage of Singaporeans produce goods and services for export; we do not produce for our domestic needs. Instead we import just about everything we need. Look around your own home -- from the corn flakes to the TV set, to the shampoo. Look too at the nationality of your domestic maid, if you have one, or the guy who is sweeping the void deck at 6 a.m. in the morning. (Yes, our town councils insist that municipal workers must wake up at that unearthly hour to do cleaning -- why, I have no idea.)

We earn money from abroad and we basically spend our money buying things and services from aboard. We are therefore highly exposed.

But if our economy were slightly different, and more of us were producing and consuming domestically, we'd be a bit better cushioned.

Let me give you a simpler, layman's example. Take a household where all adults go out to work and earn cash. None of them looks after the kids, cooks, does the laundry or cleans the house. Paid help comes in to do these things. In fact, no adult family member even knows how to cook, change diapers, mop the floor or wash clothes.

Everything's hunky-dory so long as the outside jobs are good and highly paid, but the moment the jobs disappear and cashflow dries up, the adults are stuck. They still have to pay the maid, cook, cleaner, gardener and washerwoman, not to mention the plumber, electrician and housepainter, because they don't have the ability to do any of these tasks themselves. If they don't keep the help, they go hungry and unwashed, so they have to retain the "imports". This is a household that can go from plenty to broke.

Take another household. Some adults go out to work, but they decide that one or two should stay at home to raise the kids, cook meals, do the laundry etc. In addition, they grow their own vegetables in the little plot of land they have, or maintain an aquaponics garden on their balcony. The situation still gets bad if outside jobs disappear, but at least meals continue to be cooked, the children are bathed, the clothes washed and mended.

Which household do you think Singapore resembles?

Our domestic economy is very weak and we have become too reliant on our export economy. Doubtless, our government will say that this cannot be helped, since Singapore is so small. We don't have the economies of scale to produce things for ourselves. And protectionism is no cure.

This is too glib. While indeed, we can never be as self-reliant as big countries are, I think there have been three policy "old faithfuls" that have contributed to the way things are and may need to be reexamined.

 
Investing in the export-oriented sector, neglecting the domestically-oriented sectors

The first is that we have consciously directed our investments at export-producing industries. And by investments, I mean investments in people as well. The technicians we train from among Singaporeans end up working in multi-nationals' (MNCs') factories. The technicians who come to fix our air-conditioner at home are from Myanmar. Why is that?

MNCs are treated royally when they locate here. They get all sorts of grants and research support. Local enterprises geared for the local market are, relatively speaking, starved of assistance, propagandistic news headlines notwithstanding. Over the years, one side thrives, the other side struggles and is eventually replaced by imports.

 
Widening income gap reduces domestic consumption, constraining market for domestically-oriented industries

The second factor is the income gap that we have allowed to widen. It is a well-known fact that rich people save more than poorer ones. Not only that, when they do spend, they spend proportionately more on luxuries, which must be imported brand names to have any cachet.

The result is that domestic consumption is kept down in favour of either money stashed away in bank accounts by those who have loads of them, or spent on BMWs and cooking lessons at Le Cordon Bleu in Paris. When domestic consumption is kept down, the industries that supply this side of the economy tend to wither.

 
Star-struck by economic fads

The third "old faithful" is our tendency to chase the latest economic fad in an attempt to maximise our external income. When IT was the rage, we put all our eggs in that basket. Then it was bioscience. More recently, when financial wizardry was in fashion, we let it nearly dominate our economy, and referenced the obscene salaries in that industry as our benchmarks. Each has led to grief.

But how else to grow fast unless we ride with the latest trends? What's wrong with hitching ourselves to the growth engines of the day?

They problem may well be that these "growth engines" tend to be bubbles. That's why they grow (inflate) the way they do. Why are we so starry-eyed? This characteristic may be why our economy goes into booms and busts.