Singapore’s limits

The Wall Street Journal

It’s time to rethink the corporatist model.

It’s not often that a Singaporean official concedes the limits of the city-state’s economic engineering. But the downturn is proving so severe that the Finance Minister said in yesterday’s budget speech that the government’s stimulus package “will not get us out of the recession,” but rather “help avert an even sharper downturn.”

That ought to be a wake-up call for Singapore, where government built a modern metropolis by hoarding its citizens’ capital, plowing those savings into designated industries and opening itself up to foreign trade. Yesterday’s S$20.5 billion ($13.7 billion) package — a whopping 8% of GDP — looks like past stimulus plans: a broad mix of supply-side measures to help businesses, public-sector spending and cash handouts to stave off social discontent. What it doesn’t acknowledge is that Singapore’s growth model itself needs rethinking.

The export-led economy is falling on its face. Minister Tharman Shanmugaratnam predicts the city-state is “likely to experience” the deepest recession in its history. The government will tap its reserves to help pay for the stimulus package. Growth contracted 16.9% in the fourth quarter last year. The Ministry of Trade and Industry has revised down GDP forecasts twice this month already, and expects the city-state’s growth to contract 2% to 5% this year. The pain is now leaking into the domestic economy as consumers retrench.

Singapore’s economy would be more resilient if it were better balanced. Consumption composes only about 40% of GDP — far less than other developed Asian economies, nearer to 55%. Yesterday’s budget doesn’t do much to change long-term incentives to consume. The government announced a 20% income-tax rebate for one year, but no permanent cuts. Nor did it cut the 7% goods and services tax. Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That’s a measly payout compared to what private funds return over long investment periods.

The government could unleash more productive, sustainable growth by trimming back its public sector and allowing the economy to diversify on its own. Cutting the corporate tax to 17% from 18%, as it announced yesterday, will help attract investment. But the city-state’s bureaucrats have a habit of trying to pick winners, which sometimes works and sometimes doesn’t. In recent years the bets have been on financial services, biotechnology and gambling. Yesterday’s budget contained special tax incentives for the fund-management industry. Better to let private actors make those decisions based on market forces.

Mr. Tharman said yesterday that “no one knows how prolonged or deep this recession is going to be” and he pledged further measures to help if needed. The best help for Singaporeans would be expanded, permanent opportunities to work, save and invest with more of their own money, rather than relying on government to do it for them.