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Recently there have been quite a few articles in the international press speculating that the recent financial crisis and ensuing severe recession may lead to a lost decade of growth for countries such as Germany, (which have relied on exports rather than domestic demand for growth). The German economy is characterised by high net exports, a high savings rate and low domestic consumption.
But this is also true of the high-growth Asian economies, such as China, Korea and in a particularly exaggerated fashion, Singapore. The Singapore government has long relied on exports and on the U.S. to be the ultimate driver of demand to provide the stimulus for Singapore’s growth. Domestic saving has been increased through the forced saving mechanism of the CPF, government budget surpluses and curtailing domestic wage growth through the import of low-cost labour from overseas. This model is no longer viable.
In 2008 net exports were 19% of Singapore’s GDP (however this was down from 32% in 2007 due to the collapse in external demand)**, the current account surplus was close to 15% of GDP (down from 23% in 2007), while domestic saving was 47% of GNP. Personal consumption expenditure was about 41% of GDP in comparison with countries like the US where personal consumption expenditure is around 70% of GDP.
The U.S. Administration has stated that the US cannot continue indefinitely to be the world’s consumer of last resort. President Obama recently called for America to consume less and export more. Here, despite a fall in first quarter GDP of close to 20% at annualised rate, the government’s policies mainly consist of waiting for a revival of U.S. growth whilst announcing limited measures to cut business costs. Whilst a package of S$20 billion may appear large, the actual budget deficit was much smaller and after taking account of the income from overseas investments smaller still.
It must be remembered that Singapore lacks many of the automatic stabilisers, such as unemployment benefits, which increase spending in a recession and mitigate the multiplier effects from declining exports and falling demand. Cutting costs through wage reductions and other domestic income-reducing measures may work for one country but cannot work for the world economy in aggregate; a point which I thought was conclusively settled with the publication of Keynes’ General Theory. Lower wage costs (which are in any case likely to be a relatively small proportion of the costs of production) are unlikely to stop firms here from laying-off workers when their export sales have fallen off a cliff.
In my view, the government should be much more aggressive in taking steps to boost domestic demand to offset the contractionary impact arising from the export sector. It is completely unnecessary for Singapore to be saving 47% of GNP when the returns from our foreign investments have been so low. I would like to see the following steps (the list is not meant to be exhaustive) to boost domestic demand adopted as a matter of urgency:
· A minimum wage with exemptions for both old and young workers. This will also have the effect of discouraging employers from just importing cheap labour from poorer Asian countries which has depressed wages and led to declining productivity
· A reduction or suspension of the GST which disproportionately impacts lower-income households
· Higher tax credits for lower income households which will be clawed back as income rises
· Reductions in fees and service charges, including total elimination of school fees at the primary and secondary level
· Reductions in Employee CPF
· Massively increased investment in education and infrastructure, particularly aimed at increasing energy efficiency and developing new “green” technologies along the lines of the recent US stimulus package
Given the magnitude of the falls in GDP year-on-year we need a total stimulus (tax reductions plus additional spending) of the order of 8-10% of GDP, instead of 3.5% of GDP which is what was projected as the Overall Budget Balance in the Government’s 2009 Budget. It should be pointed out that whereas the Budget says S$5.8 billion will be spent by the government on stimulating bank lending this is not actual spending but is in the form of loans or loan guarantees. There will only be spending and losses to the taxpayer if the loans have to be written off. Therefore the actual stimulus arising from this scheme will only be a small fraction of the headline number. This is much less than the other central banks, such as the US Federal Reserve and the Bank of England, are doing on a massive scale already.
All this can be done without raising taxes on the higher earners and without raising the low marginal tax rates that make Singapore an attractive place to invest and do business in.
To conclude, Singapore risks a lost decade of economic growth akin to that suffered by Japan in the 1990s or even worse unless the Government recognises that the old model is broken and that we must reorientate the economy away from exports and saving towards higher domestic consumption and investment.
* ‘Germany’s Policy of Containment’, Financial Times, 6th April 2009
**Economic Survey of Singapore 2008