DPM Tharman Shanmugaratnam at the Singapore Forum 2026

Mr Wong Kan Seng
Members of the Advisory Board of the Singapore Forum 
Distinguished guests
Ladies and gentleman

A World of Fragility and Opportunity

We are at an unusual period in regional and global affairs. It is marked by unusual fragility, as well as opportunity.

Fragility of a complex nature, because it is fragility in the economic sphere,  to do with jobs and incomes – particularly the incomes of the middle class all over the world; political fragility, with the increased polarisation in politics notably in the most advanced democracies; social fragility, itself due to the loss of a sense of broad-based prosperity, coupled with weakening social mobility and a loss of cohesion in multi-cultural societies; and the fragilities in the security sphere which many of you are familiar with.

There's a way in which these fragilities intersect and reinforce each other. We can’t quite define this, but anxiety levels are up as people sense the weakening of the middle: in the job market, in politics, in society. People feel it. And there’s a loss of faith in public authorities. Something has changed.

This is happening at the same time that we see tremendous opportunity before us. Most especially in Asia, and in the emerging world generally. But even opportunities for major rejuvenation of the most advanced economies – whether you are talking about the United States or Germany, most of the advanced economies – opportunity for rejuvenation of infrastructure, skills and capabilities.

So it’s a world beset with fragilities – economic, social, political, security – at the same time that we see opportunity before us. And to realise the opportunity and make the most of it, we have to tackle the issues at the heart of the anxieties that people feel all over the world.

We have to move away from the obsession with monetary policy. The markets and the headlines focus on whether a quarter point move will be made by the US Fed. Will it be made this month or later this year? This obsession with monetary policy has little to do with the big issues of the day. Middle class jobs are being threatened by technology and global competition, not whether the cost of borrowing is zero, -1, or +1.0. What do we do in education and skills training, in using technology to our advantage, to create new middle class jobs? Pensions and healthcare finances are at serious risk for fundamental reasons that have nothing to do with monetary policy; if anything, the problems are getting larger because of a long period of very low interest rates.

Will children do better than their parents? A new question. We never would have expected it ten or twenty years ago, but now major surveys, the Pew surveys for instance, show that in a range of advanced societies, the majority of parents do not expect their children to do as well as they have done.

These are the big issues for the day. The idea that the solutions lie in monetary policy is a real distraction from the true task of governments – to form a consensus on the priorities for the future, and to move on in tackling the structural issues to get there. The headlines and markets are focused on policy responses that have very little to do with the issues at the heart of people's real anxieties.

China’s two inflection points

First major theme, and this is both challenge and opportunity, is that of adjusting to the transformation of China. China is a country in transition. You could say it’s at an inflection point, in two fundamental regards.

China is, first, at the end of an era of cheap labour, which saw the migration of a huge number of people from rural areas into cities. It was an era of cheap labour, and China has reached the end of that era, especially in the belt of coastal cities. The Chinese workforce is no longer growing. There is still migration to urban areas, but it is less and less to the coastal cities, and in fact, we are now seeing some reversal of migrants from the coastal cities back to local towns in their home provinces. Real wages are going up quickly. That's a fundamental change not just for China but for the world.

A second major change is that China is becoming a major capital exporter. I don't just mean financial capital, but an exporter of direct investment. Starting from last year, China's direct investments abroad – its firms investing abroad – exceeded inward foreign direct investment. The gap increased this year. This is not a short-term phenomenon. This too marks a new phase of globalisation for China and the world economy.

There is of course a lot of complexity in what is happening in China, because China is also dealing with very large legacy issues, which greatly complicate its policy responses. The legacy of an overhang of corporate and local government debts, overhang in the property market, and in industry, particularly, steel, cement and other heavy industries. These are serious cyclical overhangs that explain the slowdown today. China is having to tackle these overhangs while moving ahead with structural reforms for the future.

But for all the concerns about China – valid concerns, because these are serious overhangs with implications for China as well as the rest of the world – it has to be recognised that China is the only major economy which actually has a plan for the medium and long term.  Not every country needs a five-year plan, but you’ve got to have some plans for the future, some strategies for achieving outcomes five years or ten years from now. Unfortunately, we are now in a situation where most major economies do not have plans beyond the short term, and beyond what the central banks are doing. China has a plan of serious structural reforms. It is greatly complicated by the legacies inherited from the last few years. But if China can implement 60 per cent of what it has set out in its 13th 5-year plan, China five years from now will be a transformed economy. And that will be an achievement for China and the world.

So let’s recognise that: China has the most complex economic policy task of any large economy in the world, but it has serious plans and programs and there's a lot to be said for that. Even if you don’t get it perfectly right, if you can move in the right direction and implement plans decisively, you get somewhere.

China's challenges in implementing reforms are real. It's having to deal with significant localised unemployment – that used to be an advanced country problem. We know how intractable these problems have been in many parts of the advanced world. The problems in the south of Wales or northern Britain, in Tennessee or Detroit. The problems don’t go away. The economists thought that people would move around: you lose a job in one place; you get a job in another place. It hasn't been happening. Can China avoid that type of experience? That is hard to say. It is difficult in every society for people to pluck themselves out from what they're used to, the places they are used to, particularly when they're middle aged or older.

So this is a problem for China, but it has to be viewed in perspective of an economy that as a whole is growing at a reasonable rapid rate and still transforming. If you compare it to China in the late 1990s, where 30 million workers in state-owned enterprises were displaced under Zhu Rongji’s restructuring – today’s problem is actually much smaller. It is significant for localised regions, Dongbei or the northeast, one or two other provinces, very serious problems. China will have to find a way of dealing with these problems in a fair and equitable way. But, that's not the big story.

The big story that we have to adjust to in the rest of the world is two-fold. First, as China moves out of an era of cheap labour, something else is happening. It is moving up the value curve. What used to be a big bulge in the global labour force when China entered – the big bulge in simple, low-cost manufacturing processes – that big bulge is now moving up the value curve, to middle-skilled jobs. And in many of the coastal cities, to highly sophisticated jobs. The big bulge is still there. China is still part of the global economy and its workforce is now competing with the middle class everywhere in the world. How do we adjust to that? How do we ensure that trade and investment is a win-win, not a win-lose? That’s a challenge, and an opportunity, for all of us.

The second major shift that I mentioned has to do with China is now becoming a significant exporter of direct investments. Its firms are investing abroad. In the first phase, there was a fair bit of anxiety about this. Part of the reason was that China's initial phase of direct investments was concentrated in natural resource industries and the firms sent a lot of their own workers abroad – Chinese workers in Africa and elsewhere. It led to some resentment, understandably. But China is evolving. The new direct investments are more broadly based. They are in a range of industries – manufacturing, commercial services, infrastructure and IT. If you think back to what happened when Japan started investing abroad in the 70s and 80s, there was great anxiety globally. But Japanese investors have transformed their strategies, and are now welcomed around the world.

The same opportunity exists for Chinese investment. As Chinese firms invest abroad – base themselves in the United States, Indonesia, Singapore or Europe – they also evolve their management methods, thinking and skills. That is itself a benefit to China. In other words, China is internationalising its management culture as it exports investments, as its firms plant themselves abroad. That’s a positive for China and the world economy. But we must also do the reverse, we must also ensure that China remains open to inward foreign direct investment, so that we get interpenetration between China and rest of the world. Then everyone stands to benefit from the growth in Chinese consumption, at the same time that China benefits by having its firms expand in markets abroad, evolving their management methods and contributing to economies abroad.

It must be two-ways. Direct investment flowing in both directions, and the rest of the world having both a vested interest in China’s stability, as well as the ability to prosper from China’s growth.

These are two major shifts. The structural shifts tare here for the long term. I believe China will tackle the short-term cyclical problems it has, which are very serious problems, in a way that ensures that these structural shifts continue – moving up the value curve, more prosperity for the Chinese middle class, export of the capital abroad – but the world benefiting at the same time from China’s growing consumer market. I was just looking at the McKinsey report that came out yesterday. They project, from detailed analysis that thirty percent of the consumption growth in cities all over the world will happen in China, between now and 2030, the next fifteen years. If you add Southeast Asia, India and Northeast Asia, Asia will represent close to fifty per cent of consumption growth in cities around the world. That's the opportunity.

We all have it in our interest to adjust to China's structural transformation, not see it as a threat, but take advantage of China’s transformation. Just as China has to see it as to its advantage to open up its economy further, maximise the interpenetrations, so that globalisation in this new phase is not win-lose but win-win.

The slowdown in productivity growth and its implications

My second theme has to do with the anxieties of the middle-class, around the world. We see it in the advanced world, especially. We are beginning to see it in a few Asian countries. The heart of it has been the stagnation of middle income wages. It’s well known in the United States – the median household has lower incomes today than it had fifteen years ago, in real terms. So it's natural that people feel anxious, and it shows up in a new pattern of popular sentiment, for example in the current round of primaries in the United States.

The heart of it is a problem that we have seen almost everywhere in the last ten years, which is a significant slowdown in productivity growth. Not everyone here is an economist, but everyone knows that you can only sustain middle income wage growth over time if you’ve got productivity growth. We have to ensure that within the firm there's a fair allocation of rewards, we have to pay attention to redistribution, but we need productivity growth to sustain income growth, anywhere in the world.

If you look at productivity growth last year, it was close to zero in the advanced world as a whole, and negative in the emerging world. That’s just one year but if you look at it over a period of years, there's been a significant slowdown of productivity growth.

There’s a raging debate over it in the United States. Some economists think it's the start of a whole new phase, what’s called ‘secular stagnation’. Some others are more optimistic, and see the slowdown as a passing phase.

When you look closer at it, a couple of things are striking. First, there have been very impressive innovations in individuals firms - we see them in Silicon Valley and in the leading global cities – but, the gap between the leaders and the majority of firms in the economy has been widening. Innovations in one firm are not spreading to the rest of the industry in ways that would be expected, and innovations in one industry are not spreading to other industries. Breakthroughs are not spreading from one firm to another, from one industry to another, for reasons that are not fully understood. Something has slowed down. The pace of diffusion of innovation and productivity, as the economists call it, the pace of diffusion has slowed down.

The second thing that's also behind the productivity slowdown is the weakening of investments in people. You see that again in much of the advanced world. It’s also about the wrong type of investments in people. There’s hence great anxiety over the skills and capabilities that new generations have as they enter the workforce. They are not equipped to find new jobs, and those already in the middle of their careers are not equipped to keep pace with technological change.

We have to work hard – governments, industry, individual firms, individuals themselves – work hard to make sure that technology works to our advantage, that it doesn’t create a society of digital haves versus digital have-nots, and that technology becomes a way of enriching every job. That’s going to be a lot of workouts in every society. Starting from young, in education, continuing in the workforce. Getting firms in the same cluster or supply chain to work together so that innovation can spread.

The slowdown in productivity has been global, but even in emerging Asia, this is a problem. Emerging Asia today is underperforming its potential in growth by at least two percentage points. Emerging Asia outside of China should be growing by two per cent more than it is. In fact, ironically, the gap is biggest in the country that is growing the fastest, which is India. India is the fastest growing economy, but it is also the economy where the gap between actual growth and potential growth is the largest.

Everywhere across Asia – ASEAN, India, everywhere – we are underperforming in productivity growth, and hence in total GDP growth. It needs a comprehensive approach.

If we leave it to the markets, things will change very slowly. The markets will eventually restructure, but it doesn’t assure us a broad-based improvement in living standards. It requires some intervention by governments, working together with industry – it needs market-friendly industrial policies. That’s in fact, what we are seeking to do in Singapore.

We have a problem of weak productivity growth in Singapore. But if you look closer at Singapore’s productivity growth, it reveals two pictures, one strongly positive and the other negative. It reveals a divergence between one half of the economy, and the other.

We have an outward-oriented sector of our economy which is about 60% of the economy – manufacturing, financial services, logistics, wholesale trade, and a few other industries – having to compete with the rest of the world. Whether in Singapore or abroad, these industries are competing with the rest of the world. This outward-oriented part of the economy has been doing extremely well as far as productivity growth is concerned, even after the cyclical recovery in 2010. If we look at just the last five years, productivity growth has been well over three per cent per year.

Then we have the remaining 40% of the economy, which is the domestic sector – the retail industry, restaurants, a range of domestic services and social services. When you add them up together, we’ve had virtually no productivity growth in the domestic sector in the last five years.

It’s a real divergence between the outward-oriented and domestic sectors, and what we essentially have is a dual economy, an economy of two halves. But whether you see the economy as a glass half-full or a glass half-empty, we have to fill it up full. And we can. We have to spread the lessons from the leading firms and the most innovative firms to the rest. We have to provide platforms that help spread innovations in each industry that every firm small and large can hop onto. We have to close this gap between the outward-oriented and the domestic sectors.

It's a familiar problem all over the world. The sectors most exposed to international competition are the ones that keep changing, keep having to innovate, and in Singapore if you don't, you die, because we are a small economy without a large market. So you have to keep improving. And we’ve seen that happen, in fact impressively by international standards of productivity growth. In the domestic sectors, areas like construction, we're beginning to see innovations amongst the leading firms. But we have to accelerate and spread this process.

It’s good that we’ve had firms across the economy moving up in their use of technology, automation, IT. But we have to go beyond that. We need more breakthroughs, more disruptors.  We have actively facilitate the spread of innovations, among firms within each cluster. And we have to enable market restructuring, where the more innovative, growing firms gain at the expense of the rest, and the competition leads to firm exits. Taken together, that’s our new phase, our Industry Transformation Programme.

Technology is in fact today much more of an enabler for small players than it used to be. The big players always had an advantage, because technology was expensive, and required large systems – R&D teams, large operations and revenues to absorb costs, and investing  with the expectation of payouts over a longer period of time. There was always an advantage of being large. But today, technology is giving new advantage to the smaller players.

E-commerce is an obvious example. The technology of e-commerce and the digital economy is allowing small firms to scale up and reach out to global markets quickly. Just look at Etsy – an aggregation platform for sellers. Within eight years, Etsy has grown to have one million sellers on it, and total sales of US$1.35 billion. It is one of several such platforms. We have similar platforms in our part of the world, Garena and others, growing very quickly. 3D printing is another example. It allows small players to prototype new products quickly within a few days, testbed, and reach out to the market.

So this is a real enabler – technology – and we intend to use technology, industry by industry, to benefit players small and big. It also means getting firms to collaborate, work more closely together. It's not a culture that comes naturally, because everyone is a competitor.  But, within the same supply chain, we can foster deeper collaboration. Secondly, even amongst competitors, we can foster a culture where firms realise that by sharing in common platforms - in training, and use of industry-wide technologies – every player can gain. That’s what we embarked on.

So we've achieved something, but we have a gap between the outward-oriented and domestic sectors that is still there, and we are going to work harder at it. And in every industry, we must speed up the spread of innovations, between firms large and small.

So that's my second theme, fundamentally because it's what will ensure that we secure income growth for the majority of our people over the long term. It must involve innovation and productivity, otherwise we just don’t achieve it.

New, multicultural social compacts

Finally, the third theme that of forging new models of multiculturalism in a world where sectarian strife has now entered a new phase. Sectarian strife used to be local and regional. It is now globalised. And in a curious way, what Europe and some other societies are finding, is that the second and third generation of migrants into their societies are now more disaffected than the first generation was. A first generation that often didn't speak the language, was different in their beliefs, quite pious, but they accommodated themselves very well and these societies accommodated them well. But something has happened over the last 30 years. Even in the United States, despite the achievements of the civil rights movement, segregation is now more pronounced in American cities than it was 30-40 years ago. Segregation in everyday life – where people live, the jobs they have, different rates of unemployment, different schools. The problem is also more severe in France, or in Belgium where you have more complete segregation. If we don’t recognise and start tackling this, we will not solve the problems that we are facing today.

We need a new social compact in multicultural societies, one that is inclusive. We need labour markets to be open so that the young and minorities are not excluded. This has been integral to Singapore's approach from day one because we have had no choice. We had to forge a multi-cultural society, or we would not have survived. It is ingrained in our thinking. There is continuous work to keep this going, but it’s been ingrained in our thinking from the start.

So that is the third challenge I want to highlight. No easy solutions, particularly when we’re dealing with legacies. Legacies don't go away. To tackle these legacies we need fresh approaches, and we need a certain frankness in politics to recognise the underlying problems. Acknowledging the problems, bringing people closer to the centre again, and getting everyone to focus on the real problems.

Conclusion

So it’s a world of fragility, but there is opportunity. There are ways of tackling the fragilities. We can all take advantage of China’s transformation, we can do things to spread innovations, invest in people and sustain broad-based prosperity, and we can, with time, forge more stable and inclusive multicultural compacts in all our societies.

I think that’s the optimistic note and I better end there. Thank you very much.

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