PM Lee Hsien Loong at Economic Society of Singapore Annual Dinner 2012

Prof Euston Quah
President, Economic Society of Singapore

Distinguished Guests

Ladies and gentlemen

INTRODUCTION

Thank you for inviting me to the Economic Society of Singapore’s annual dinner.

I last attended your dinner in 2003. We had then just emerged from a recession and were fighting an invisible enemy called SARS. The Economic Review Committee had just published its report. At dinner, I outlined in my speech how we could transform Singapore into a dynamic, global city.

The decade since then has been eventful. We experienced many ups and downs, particularly during the Global Financial Crisis, when our economy plunged and recovered more suddenly than we ever imagined possible. This roller-coaster ride gave Singaporeans many anxious moments. Overall, we have averaged 6.7% growth per year since 2003, faster than we had expected. But Singaporeans are also feeling the side effects in daily stresses and strains – more crowding in public places, housing and public transport falling behind the needs of a larger population, frictions between locals and new arrivals.

I understand your frustrations and am committed to resolving them. We are building more HDB flats and improving bus and train services. We are helping workers improve their skills, and cope with the changing job market. We are slowing the inflow of foreign workers and immigrants, and discussing our population policies with all Singaporeans. It will take some time, but we are making progress. We are determined to overcome these problems, and improve Singaporeans’ lives.

But even as we tackle these pressing issues, we need to look beyond them and ask some basic questions about our future. Where do we stand today, compared to other advanced countries? What will the world be like 20 years from now? Where does Singapore want to be in that world?

WHERE ARE WE TODAY?

In quantitative terms, our economy has performed well. Our per capita GDP was slightly above US$50,000 in 2011, which (according to the IMF) placed us 11th worldwide, ahead of the USA [Slide of international rankings by per capita GDP]. Adjusted for Purchasing Power Parity, our per capita GDP (almost US$60,000) ranked even higher: Third overall, behind only Qatar (US$102,900) and Luxembourg (US$80,100) [Slide of international rankings by per capita GDP in PPP terms].

But despite the impressive numbers, we have far from arrived. First, comparisons with other countries flatter us. Singapore is completely urbanised, whereas bigger countries have rural areas, even advanced countries like the US. Their leading cities are usually much wealthier than their national averages. Compared to global cities, Singapore is still some way behind. According to the Brookings Institution¹, our per capita GDP lags cities like Oslo, Paris and New York. In fact, we are not even among the top 20 cities worldwide [Slide comparing Singapore to global cities by per capita GDP].

Second, our wages are generally lower than in developed countries. We can take credit that our real median wages have risen in the last decade, while those in the developed countries have fallen or stagnated. But we remain significantly behind them in terms of productivity and wages.

Third, we are a small city-state, without the strategic ballast of bigger, more mature economies. We will always be vulnerable to the vagaries of external events, as the Global Financial Crisis reminded us.  We must always fend for ourselves. No one will bail us out if we falter. In a rapidly changing world, this is one fact that will not change for Singapore.

Thus we still have much work to do to assure ourselves of a brighter tomorrow.

WHAT WILL WORLD BE LIKE 20 YEARS HENCE?

What will the world be like 20 years from now? Nobody can predict exactly how events will unfold, but we can see several trends which will shape the landscape around us.

Globalisation will continue, barring extreme scenarios such as war. More economic integration will generate greater prosperity for many countries, but it also has its downsides. Shocks will be transmitted more quickly and widely, economic cycles will become shorter and more unpredictable, and the potential for worldwide contagion will be much greater, whether in financial crises or global pandemics.

Developed economies will gradually recover from the current crisis, though each will have its own problems: European countries will be troubled for many years by the Eurozone’s structural flaws, the US by its fiscal imbalances, and Japan by its ageing and shrinking population. Emerging economies will continue to grow in importance, even if their path will not be smooth. These include not just China and India, but also some countries in Latin America and even Africa. Our ASEAN neighbours like Malaysia, Indonesia, Thailand and Vietnam will be more prosperous, with bigger populations, and larger roles in regional and international affairs.

The leading cities will continue to attract capital and talent in a globalised world. Capital and talent in turn will attract more of the same, thus transforming these cities into even more vibrant centres of business, ideas, and influence. Cities like New York, Munich, and London can prosper even if the countries they are in run into problems, because their fortunes are tied to the global economy. And in the emerging economies, cities like Shanghai and Mumbai will become even more exciting places to live and work, long before their income levels catch up with the cities in the West.

Globalisation and technology will widen income distributions in many countries. This trend is evident in all developed economies, from capitalist USA to socialist France, over the last 30 years [Slide of Roine/Waldenstrom study]. Talented and enterprising individuals will continue to earn a high premium, while pressure will grow on jobs in the middle, where competition is intensifying globally. Angst and social pressures will increase.

WHERE DO WE WANT SINGAPORE TO BE?

This is the backdrop to our question: Where do we want Singapore to be in 20 years’ time? Do we want Singapore to be up among the global cities, or do we want to remain where we are today, while the world moves ahead?

I believe that if Singaporeans think of our future from this broader perspective, most will want us to be among the leading global cities. These cities are moving ahead, and so must we. Being near the front means that Singaporeans can enjoy a quality of life comparable to what people in advanced countries will be enjoying in 20 years’ time. Being near the front means that our children can look forward to better lives than our generation. Being near the front includes softer, intangible aspects too: Singaporeans showing more grace and compassion to one another; dedicated and passionate volunteers contributing to a better society; greater appreciation of the arts, and of our cultural and historical heritage. All these aspects are important, and in all of them we can do much better than today.

Beyond these broad aspirations, what tomorrow’s Singapore will be like is for all Singaporeans to imagine, and create, together. A new generation is growing up, brimming with fresh ideas on how to change Singapore for the better.  With imagination and hard work, we can turn vision into reality, and ensure that Singapore continues to be the best home for us all, and a shining red dot we will always be proud of.

A SUCCESSFUL, GROWING ECONOMY

But being near the front also means we must have a successful, growing economy. There is no other way we can achieve this. We cannot do it by spending what we have inherited from the older generation. We certainly cannot do it by pumping oil or gas from the ground. We can only do it if our economy is prospering and creating wealth that we can invest in our city and our people, to make life better for all of us.

Singapore cannot avoid slower growth in the next decade and beyond. [Slide showing Singapore’s declining growth rates]. This is natural because we are now more developed. We are also running up against land and labour constraints, especially as we reduce the inflow of foreign workers. Plus competition is fiercer, not only from hundreds of millions of hungry workers in the emerging economies, but also from new technologies that will transform industries in even the developed economies.

I know that some Singaporeans welcome the prospect of slower growth. Some go further, and want us to slow down even below our economy’s potential. They argue that we already have enough material success, and should give less weight to economic factors, and more to social considerations. And that we should spend more on ourselves, and put aside less for the future.

I respect their views. I agree fully that material goals are not everything in life. But we are not going for growth at all costs, nor have we done so. Growth is not an end in itself, but a means to improve our lives and achieve our goals. We must always maintain the balance between economic and non-economic objectives, and ensure that the fruits of growth are invested for social purposes which benefit the wider population.

Nevertheless, without growth, we have no chance of improving the collective wellbeing. Far more countries worry about growing too slowly, than growing too fast. For Singapore, slow growth will mean that new investments will be fewer, good jobs will be scarcer, and unemployment will be higher. Enterprising and talented Singaporeans will be lured away by the opportunities and the incomes they can earn in other leading cities. Low-income workers will be hardest hit, just as they were each time our economy slowed down in the last decade. Over time, our confidence will be dented.  Thoughtful Americans have told me that a major challenge for the US after years of slow growth has been a profound loss of optimism. The same is true for Japan, and will be true of Singapore too if ever our economy stagnates.

Beyond the issue of resources is the deeper question of spirit. We have been successful precisely because we have not taken success for granted. Our sense of vulnerability, and consciousness of the competition we face, are important parts of the Singapore psyche. Changi Airport strives to be the best airport in the world; it does not aim to be number two. Singapore too must aim to be outstanding. If we are content to just be above average in the league of cities, we will fail. That is the greatest danger if we tell ourselves to slow down, enjoy life today and not worry about tomorrow.

I am confident that the Singapore economy can remain vibrant and dynamic, provided we work together and set ourselves to it. We have the ability to invest in our workforce, in every worker, and catch up with the developed countries. Tripartite cooperation is strong, as is our will to upgrade and adapt.  We are open and confident, and embrace talent and enterprise from around the world even as we nurture Singaporeans to their fullest potential. Our reserves are a valuable buffer against external shocks, and give us the confidence to transform our economy. Not many other countries, or cities, in the world can claim the same.

AN INCLUSIVE SINGAPORE

Our vision of a global city cannot be defined by absolute economic numbers alone but also by how widely society benefits. Singapore has been a success because growth has benefited all. It is crucial that growth continues to benefit all in the next 20 years. Yet, this is more challenging too, as incomes are becoming less equal worldwide, and as our population ages.

Every society must strike a balance between individual rewards and social equity. Where to strike the balance, and how best to do it, is a fundamental question that each society must work out for itself.  Our approach has been firstly, to promote enterprise and create wealth and jobs, rather than merely redistribute a smaller pie. Secondly, to foster social cohesion, by investing in every child and helping all Singaporeans equip themselves for good jobs and own their own homes. Thirdly, to encourage self-reliance wherever possible, including saving for one’s future, rather than a sense of entitlement.  This approach has served us well.

Critics argue that we do not do enough for the less fortunate. The reality is that we do much more than we claim or get credit for. We have equipped people with the skills and ability to do well for themselves. But we also recognise that not everyone will do equally well, and have developed social safety nets and transfers, especially for the low-income and elderly. In the past five years, transfers added one-fifth to low-income household earnings. Over a lifetime, a low-income household will receive more than $500,000 from the government².

Unlike most other countries, we have emphasised boosting Singaporeans’ assets more than incomes. In particular, our HDB programme has been a major means of uplifting our people. The large majority of Singaporeans own their homes, including low-income households. They have used their CPF savings and received very generous subsidies from the Government. In recent years, we have gone further to enhance housing subsidies for low-income home buyers, through the Additional Housing Grant and Special Housing Grant. In fact, households in the lowest income quintile (20%) have on average more than $200,000 of equity in their HDB flat! This is the direct result of government policy. It is unmatched by any other country, but our capital grants do not show up in the Gini coefficients.

Therefore to assess the well-being of low-income Singaporeans, we cannot look at nominal wages alone. Nevertheless, in the next phase, we must do more to raise wages at the lower end. Skills upgrading and sharing productivity gains fairly with workers are key to this. Tightening up on unskilled foreign workers will help. So will progressively enhancing Workfare, which has some advantages over a statutory minimum wage. We cannot simply push up wages by command overnight, but we can and must through concerted and sustained efforts improve the earnings of our workers over time.

Beyond wages and Workfare, we will strengthen our social safety nets. This year’s Budget marks a significant new beginning. We introduced many new schemes that will be part of our social protection system: support to low-income households like the GST Voucher Scheme, and help for middle-income families such as subsidies for home-based medical care. We will progressively build on these schemes. It will cost the government significantly more in social spending, but I believe it is necessary and justified.

Some critics of Singapore’s approach propose the Scandinavian model as a more egalitarian and humane alternative. There are indeed much we can learn from the Scandinavian societies, such as their pro-family policies and their success in nurturing global companies. But there are basic differences between Singapore and Scandinavia, in our strategic situations and our approaches to growth and equity.

We face a fundamental choice as a society – do we want low taxes and targeted welfare benefits; or high taxes on all and comprehensive welfare? Singapore has chosen the first; the Scandinavians the second. The Scandinavian model works for them, because the Scandinavians are very different societies from Singapore, and developed Europe is a very different region from emerging Asia. The Scandinavians are rich in natural resources, with a large and affluent continent as their hinterland and major market. They live in a peaceful and stable continent, and can safely spend much less on defence. They have very long histories as homogeneous societies, whose members are willing to pay high taxes in exchange for high social protections for all. I do not believe that Singaporeans would be willing to pay the taxes that Scandinavians pay, or that our economy could be competitive at such heavy tax rates. [Slide comparing tax rates in Singapore and Scandinavia]

Of course without being as generous as the Scandinavians, we could still increase our social spending and raise our taxes moderately as part of a new social compact. Within limits, that is indeed what we need to do in the longer term, with an ageing population and growing health care needs. But the limits are tighter than many people realise. For decades we have gradually reduced our income tax rates, and partially made up with indirect taxes like the GST, in order to stay competitive with other Asian economies like Hong Kong. This has helped to foster growth, and increase the resources available to strengthen our social compact. Raising taxes will do the opposite, long before they reach Scandinavian levels.

We run an exceptionally lean system of government. Our expenditure is 17% of GDP, including defence. Our tax revenues amount to only 15% of GDP.  Returns from investing our past reserves contribute another 2%. As we enhance our social safety nets, expenditure will inexorably rise, and revenue must keep up. At some point – not in this term of government, but surely within the next 20 years – the Government will need new sources of revenue, which means raising taxes. I hope that when this becomes necessary, the Government of the day will have the courage to do so, and the electorate will understand why it is in everyone’s interests that we do so.  Otherwise we will eventually end up like the Southern Europeans, or the US.

We are a long way from that, but still we must proceed very carefully, because benefits once given can never be taken away. Spending is popular, but raising money to pay for it is not. For all our good intentions, the ever present danger is that step-by-imperceptible-step, over time good intentions morph into unintended outcomes. As Dr Goh Keng Swee once observed of welfare systems, their conception is always immaculate, but the ultimate results are often quite different.

Whatever we do, we must uphold and strengthen the spirit of self-reliance that has enabled us to succeed. We will always give Singaporeans the means and the incentives to help themselves, for personal effort and achievement are essential to our sense of dignity and self-worth, and the means to achieve our vision of becoming a leading global city.

POLITICS THAT WORK

While I have focussed mainly on economic issues this evening, in fact politics underpins our economic and social choices. For Singapore to rank among the global cities in 20 years’ time, and to achieve the social objectives that we hold dear, our politics must work. Only when citizens accept the political system as legitimate, and economic order as fair, will they give the government of the day the mandate to run Singapore in their best interests. And only with this mandate can the government do the best for Singapore and all of us.

We need to build public consensus to support sound policies and capable leaders. This is easier when growth is high, and incomes are rising across the board, as was the case in our first 40 years of independence. It becomes harder when growth is lower, incomes rise unequally, and dividing up the pie becomes more contentious. It is almost impossible when the economy is shrinking, policies are malfunctioning, and there is no way for the population to avoid severe pain. Under extreme stress, political consensus fractures. We see this playing out in many European countries today, and even in Japan. More than a dozen European governments have fallen since the financial crisis began.  Their successors have not had an easier time.

Singapore is beyond the phase of effortless growth. As we venture into the next phase of our development, Singaporeans have to understand what is achievable, what the options are, and what trade-offs we have to make. Only then we can collectively choose an optimal path forward.

The Economic Society can help forge this consensus. You can help bring home to the public the reality of global competition and Singapore’s strengths and vulnerabilities. You should help explain how economies work, and why policies which appear counterintuitive can nevertheless be the right ones. You can foster a constructive debate grounded on fact and reason. You can help us make considered collective decisions, based on clearly-defined trade-offs and our long-term interests.

Conclusion

The way ahead for Singapore is challenging, but we have reason to be confident. The odds were longer at independence, but we overcame them and thrived. We are in an enviably strong position today, with our world-class workforce, stable society and well-educated youth. For the first time in our history, the world’s fastest-growing economies are right at our doorstep.

I am confident that, by working together, we can build a strong economy, inclusive society and cohesive Singapore, and make ours one of the leading cities in the world in the next 20 years and beyond.

[1] Global Metro Monitor 2011

[2] In today’s dollars, i.e. adjusted for inflation.

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