Singapore: prudent management and buoyant foreign demand sustain tradition of robust economic growth - Business Outlook Abroad

Business America, Nov 19, 1990

SINGAPORE

The Singapore economy is in its fourth year of robust, broad-based expansion and is performing well above expectations of its long-term growth potential. Singapore continues to reap the dividends of the austerity program imposed by the government to restore competitiveness during the 1985-86 recession, which shook the country out of the complacency induced by two decades of almost 10 percent average annual economic growth. It is also benefiting from buoyant demand for its exports of electronic products and the continuing economic dynamism of its major trading partners, especially in the booming Southeast Asia region.

Singapore's economic momentum slowed slightly in 1989 from the outstanding 11 percent real growth rate it achieved in 1988, to a nonetheless excellent 9.2 percent. A reduction in import growth by key trading partners and a cyclical downturn in the world electronics industry led to a sharp drop in manufacturing sector growth in 1989 and caused a sharp decrease in export expansion last year. However, exceptionally strong performances in the services industries, especially tourism, transport, and finance, offset much of that slowdown. The Singapore economy will likely register 8.5-9.0 percent real GDP growth for the whole of 1990.

In the past year Singapore has developed an exciting new initiative that could potentially eliminate the country's two most serious long-term economic constraints--its scarcity of land and labor. By convincing the political leadership of Malaysia and Indonesia to publicly endorse the "Triangle of Growth" concept that covers Malaysia's Johor state and Indonesia's Batam island, Singapore has taken a big step to integrate its economy with that of its neighbors, to the benefit of all.

Some Signs of Erosion

While overall economic performance should remain strong through 1991, signs of erosion exist in several key areas. Inflation has risen markedly over the past year, due to rising import costs and significant labor cost rises. Domestic demand increased by 7.6 percent in 1989, and at an 18 percent annual rate in the first quarter of 1990. Singapore's consumer price index is expected to climb by 3.5 percent this year, well above the 2.4 percent registered last year and the 1.5 percent in 1988. The government will keep appreciating the Singapore dollar, probably to 1.75 or even higher against the U.S. dollar by the end of 1990, to combat inflation. With full employment and an expanding economy, productivity growth rose from 4.6 to 4.8 percent from 1988 to 1989 and hit an impressive 5.6 percent annual rate in the first quarter of 1990. However, tightness in the labor market and sluggish investment will limit future productivity increases.

In the long run, Singapore must deal with its chronic labor shortage, redress the legacy of insufficient investment in education, and restructure its overly rigid educational system to generate the highly educated, technically competent work force needed if it hopes to achieve its goal of becoming a truly developed country by the year 2000.

During the 1970s and the early 1980s, a tremendous volume of U.S. direct investment capital flowed into Singapore. This inflow of U.S. capital financed the importation into Singapore of large amounts of American capital equipment for production facilities, leading to a perennial U.S. trade surplus. By the early 1980s, these factories began to come into production. Most of this investment was in the electronics/information technology industry and was used to manufacture intermediate goods and components for use in final products by the parent companies in the United States. However, as the capital equipment imports declined and the exports of these U.S. firms increased, the trade balance shifted into Singapore's favor in 1984 and has remained there since. Because of the significant presence of U.S. firms and the pattern of their exports back to their parent companies, the U.S.-Singapore trade relationship has shifted to the point where the United States now has a structural trade deficit. Ironically, the healthier the U.S. economy and the higher the capacity utilization of U.S. firms, the more imports they will need from their Singapore subsidiaries.

Although Singapore is a relatively small economy, it is both the United States' 12th largest import source and its 12th largest export market in the East Asian and Pacific area. There are virtually no barriers to trade in goods, and very few to trade in services. Capital goods are imported duty-free, with only a few expectations. The island state is an excellent location for a regional marketing, warehousing, and distribution base. The primary marketing region consists of Indonesia, Malaysia, and Brunei, but many firms also cover Thailand, India, and the Philippines. An excellent transportation and communication infrastructure allows U.S. firms to expand their marketing region even further if desired. Singapore's recent success in getting the official cooperation and support from the Indonesian and Malaysian governments for its "Triangle of Growth" will further add to Singapore's attractiveness as a regional hub.