Economist: Picking The Losers

Bad news for the poor

THE members of Singapore’s Economic Review Committee must be feeling heartily relieved. Amid the depths of the current recession, the government charged them with the task of restoring the country to the breakneck growth of the past 40 years. But before they could submit all their recommendations, the economy began to pick up. The latest package of proposals, unveiled on May 30th, was overshadowed by the welcome news two days previously that industrial output was finally growing again.

But even if the immediate pressure is off, the committee members cannot exactly relax. Lower-cost competition from abroad is eating into the country’s bread and butter, the electronics business. Hong Kong and China have supplanted Singapore and South-East Asia as trendy destinations for foreign investment. Even Singapore’s status as a transport hub is coming under threat from upstart ports and airports in neighbouring Malaysia. Growth may be picking up, but employment is not (see chart).

So far, the government has come up with three main strategies to meet these challenges. In the short term, it hopes to keep business costs down by cutting taxes and urging wage restraint. In the medium term, the government plans to use tax breaks and seed money to foster new high-tech industries such as pharmaceuticals and genetics. And in the long term, it says it will stand back from business, and encourage Singaporeans to become more free-spirited, entrepreneurial folk, capable of sustaining growth without government supervision.

All three strategies have their drawbacks. Singapore will never be able to compete on cost with poverty-stricken neighbours such as Indonesia, while the attraction of Hong Kong lies not in its slightly lower tax rates, but in its proximity to the rest of booming China. In the meantime, the government has raised consumption tax (which falls disproportionately on the poor) to make up for cuts in corporate and income taxes. What with the drive for wage restraint, the burden of Singapore’s economic transformation is falling squarely on the poor. “Let’s not pretend that the income gap won’t rise,” says Goh Chok Tong, the prime minister. Such candour has already prompted some grumbling among Singapore’s normally rather timid citizens.

Song Seng Wun, an economist at GK Goh, also has his doubts about the government’s ability to select industrial champions. He points out that some businesses the government was ready to write off, such as shipbuilding, have prospered, while targeted activities such as chip-making have not performed as well as expected. Last year manufacturing, for long the engine room of the economy, contracted by 12%, compared with growth of 15% in 2000. Inderjit Singh, an MP from the ruling People’s Action Party, complains that the government is biased towards prestige products, so has not helped to build the Singaporean likes of a Starbucks or a McDonald’s. He questions whether Singapore even needs an industrial sector, when Singaporean companies could earn as much money or more investing in similar projects in China.

Furthermore, the government’s habit of promoting particular businesses sits ill with its purported aim of withdrawing from business altogether. Supposedly privatised companies still have surprising numbers of former bureaucrats and soldiers on their boards, while state-owned firms dabble directly in everything from distributing stationery to roasting ducks. As Mr Song puts it, “The government has been in business so long, and has made so much money out of it, that it must be reluctant to stand back.”

True to form, the committee’s latest proposals reiterated the government’s commitment to privatisation, without proposing any specific measures to bring it about. And however sound its proposals, it is still a committee, rather than the market, that rules Singapore’s economy.

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