Ethos Issue 6, Jul 2009

Singapore’s Economic Growth Model:
Too Much or Too Little?
Linda Lim

GLOBALISATION AND GROWTH
But doesn’t globalisation enable us to increase our resource base by importing labour, skills and capital; and to expand our market to the world and thus benefit from economies of scale, even though we are small? Don’t globalisation and technological innovation enable us both to tap more resources, and to utilise them more efficiently?

It is true that Singapore has benefited enormously from globalisation, in both factor and product markets. But there are also constraints, diminishing returns, and additional risks.

One risk was identified by Lee Tsao Yuan,⁴ then Alwyn Young^5,6 and Paul Krugman in the 1990s.⁷ They showed that Singapore’s economic growth in the 1970s and 1980s had occurred mainly through factor accumulation (the addition of inputs of labour and capital) rather than increased factor productivity (producing more with the same labour and capital).

Since 1990, however, Singapore’s growth has demonstrated increased product ivity (to which global competition and foreign inputs of capital, skills and technology have contributed). But the ready availability of foreign inputs potentially or actually deters better utilisation of domestic resources—because of the temptation to just add more input to get more output. Imports of unskilled foreign labour may artificially preserve the competitiveness of labour-intensive activities (such as construction), retarding the reallocation of complementary resources to more productive uses. Imports of skilled foreign talent and foreign capital may have the unintended consequence of "crowding out" or even "chasing away" local talent, capital and entrepreneurship, as would an over-present role of the state in the economy.⁸

Given Singapore’s land scarcity, foreign labour and capital contribute to domestic inf lationary pressures that could undermine the cost-competitiveness of various sectors. Imports of capital also add to persistent current account surpluses and large foreign exchange reserves in putting upward pressure on the exchange rate, again undermining cost-competitiveness.

CHALLENGES IN THE POST-CRISIS WORLD
Singapore’s small and open economy is extremely vulnerable to global contagion effects. As major markets in the US, Europe and Japan have fallen into recession, Singapore’s exports have declined, particularly in the highly capital-intensive, risky and volatile electronics and pharmaceutical sectors targeted by the state. Recessions also usually produce global consolidations of industry, with smaller, more peripheral locations the most likely to be abandoned first. Discretionary spending falls, especially for luxury consumption, and the global tourism sector—including the casino industry—has been hit hard.

Since the 1997-98 Asian financial crisis, the benefits of free capital flows have been increasingly challenged by academic research. Their costs have been heightened by the 2008 crisis, which saw even well-managed emerging market economies severely hit by capital flight. Capital deleveraging and increased risk-aversion and regulation worldwide post-crisis will shrink financial sectors and crossborder capital flows, with some possible retreat from globalisation toward "localisation of finance". Increased political risk and uncertainty will also discourage investment in sectors where government policy influences returns, such as pharmaceuticals and medical tourism by American consumers, with health-care reform under the Obama administration.

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