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Joseph Chong Thiam Fook
The recently-announced 3 percentage points cut in CPF contributions has sparked considerable debate. Whether it is right, wrong or half-right, it is done and water under the bridge. It is crucial now that we look forward, as value is created by our future actions.
And herein lies my concern: Are we still fighting the last war? Are we doing things right yet failing to see that we are doing the wrong thing? Is our national business model relevant going forward?
My fear is that our response appears to be like that of the buggy makers of the last century when the first cars hit the road – make better buggies.
Our current business model is essentially that of a base for G-3 (US, EU and Japan) MNCs to export goods and services to the rest of the world.
These are essentially in area of capital equipment and durables – the more
volatile segment of the G-3 economies. We are therefore often seen as a call warrant on G-3 growth. Our domestic economy has been a poor cousin.
This manifests itself in low domestic consumption of about 40 per cent of GDP (it is more than 50 per cent in Hong Kong), current account surpluses of about 24 per cent of GDP (among the highest in the world – Hong Kong’s surplus is only 6 per cent) and rapid growth in foreign reserves.
Indeed, according to published data, our official foreign reserves grew about S$10 billion or US$3.3 billion in the first six months of 2003 – Sars and GDP implosion notwithstanding.
Is our current business model of being primarily an export base for MNCs
sustainable going forward? Mathematically, it is impossible for everyone to have incessant current account surpluses. This is obviously possible now because the US is willing to import far more than it exports.
Also, being a base primarily for the volatile capital goods and durables
segment of G-3 economies makes our GDP more volatile and riskier.
Our economy needs to be more balanced – and we have the resources to afford such a domestic stimulus. In our rush to be more ‘competitive’, we have ignored the domestic economy. Indeed, by insisting that we move to a 5 per cent Goods and Services Tax rate by 2004, we are putting one more nail into the coffin.
The argument is that ‘the country needs to restructure the tax system and we need to avoid having structural deficits. Anyway, the domestic economy is too small.’
I agree that we need to restructure the tax system eventually. But do we need to force it now? An overweight man with a broken leg must eventually lose weight, but do we put him on a treadmill before his leg mends?
Scrapping GST for now would stoke domestic demand and this is what some of my business colleagues tell me – we need demand to come back. There is no point having low income tax when one is losing money because of poor demand.
Also, would we have a real structural deficit even if we ran yearly operating deficits of S$2.5 billion as projected for 2003? One could argue that the ballooning of our reserves in the first half of 2003 was a one-off event – a consequence of the authorities intervening to weaken the Singapore dollar. Nevertheless, our reserves are substantial and they should be producing substantial real income even if invested passively and conservatively.
S$150 billion in reserves ought to at least generate about S$3.3 billion in real (after factoring inflation) income annually or about S$6.4 billion in nominal terms. The investment performance of our reserves is not published but if we took it into account, I reckon that we could easily afford a big shot of fiscal stimulus without impairing the real value of our reserves. Maybe, instead of raising GST to 5 per cent, let’s slaughter a sacred cow by cutting it to zero for the time being, issuing consumption vouchers to the unemployed and offering business incentives to bring forward capital spending and entrepreneurship.
Our paradigm has always been that we are a small economy. Is this true? Our GDP is larger than that of Malaysia and the Philippines and only 25 per cent smaller than that of Thailand. Indeed, we are about 60 per of Indonesia’s GDP.
Thailand has done a pretty decent job of keeping its economy buoyant by
encouraging domestic demand. Economic management cannot be just focused on
accumulating current account surpluses and stashing the money away as reserves.
In the long run, it has to be a productive balance between investment, savings and consumption, with the goal of full employment and sustainable increases in the standard of living for all.
Stimulating domestic consumption may seem like throwing the proverbial kitchen sink at the enemy, but with unemployment rising so quickly, shouldn’t we try anything that might work? Moreover, I believe you need a vibrant domestic economy for entrepreneurship to flourish.
Virtually all the large MNCs that we are courting today were once small
companies selling to the domestic community around them.
Mr Joseph Chong Thiam Fook is the CEO of New Independent Financial Advisers