Look in the basket to see which economy has actually done better

PUBLISHED : Monday, 20 February, 2006, 12:00am
UPDATED : Monday, 20 February, 2006, 12:00am

I HAVEN'T DONE any real Singapore bashing recently and it's about time again. What with the persistent we-must-do-it-because-Singapore-has-done-it talk and the latest bit of Singapore crowing about economic growth, the itch just cannot be denied.

Here is one example of how we have not followed the Singapore way of doing things and are much the better off for it.

Singapore's fourth-quarter gross domestic product figures are just out and they show that manufacturing continues to account for a high proportion of overall economic effort, 26.8 per cent of GDP last year and rising.

Poor old Hong Kong is nowhere near, as the first chart shows. We used to be up there 20 years ago but manufacturing now accounts for only about 3 per cent of GDP and this figure continues to decline. How sad.

What we have done instead is make a transition to a services economy - banking, trade services, tourism and the like. Over the past 10 years the contribution to our economy from the net exports of these service industries has more than doubled to 16 per cent of GDP.

Meanwhile, the contribution from trade in services to Singapore's economy has plummeted, as the second chart shows. The figure for Singapore was higher than Hong Kong's 10 years ago. It is now in deficit to the tune of 2.5 per cent of GDP.

What happened here? Hong Kong and Singapore are otherwise much alike, small but wealthy city states serving a poorer hinterland.

What happened was that the Singapore government made a conscious decision to emphasise manufacturing on the grounds that it did not want all its eggs in a service basket while we just let things take their natural course.

That was all very well for you people in Hong Kong, say Singapore bureaucrats. You have a sovereign government in Beijing that takes tender loving care of you while we are an independent state and our neighbours do not particularly like us. What would happen to us if we were to let manufacturing go and then find our neighbours stealing our service industries from us too? We cannot afford the risk.

But water does not flow uphill and Singapore is not a natural manufacturing location. Its people's pay expectations are too high, it has too little land area, too strong a currency, too small a domestic market and too small a labour base.

To get around these problems Singapore opted for high technology. Electronics account for 50 per cent of non-oil domestic exports and 60 per cent of investment manufacturing commitments.

The trouble, however, is that electronics manufacturing is not particularly hi-tech. You import the fancy production machinery, you train the technician to push the buttons and you are in business. It is another matter whether that business is profitable.

To sustain it, the Singapore government has to offer sweetheart deals to foreign investors who account for 70 per cent of total investment. The remaining local investment is mostly the Singapore government.

And still it does not quite work. The electronics sector on the Singapore stock market, for instance, has underperformed the overall market by 50 per cent over the past two years.

The foreigners are happy. They get a cheap manufacturing base handed them on a plate and they have plenty of tricks to book their profits from it offshore. Singapore just gets an expensive headache.

But with its emphasis on industry, it has turned out that financial and business services account for an ever lower share of Singapore's GDP and the domestic economy, after you take out the trade surplus plus all the investment in machinery, is not growing much at all.

Meanwhile, in Hong Kong we have not tried to jam square pegs down round holes with a manufacturing base that does not fit here. We have moved ours across the border where it does fit and in contrast to Singapore, we still own it. This has left us free at home to make the services transitions that any prosperous city state must make if it is to continue growing.

Think of it, two cities with two baskets each. One city has no egg in one basket and a rotten egg in the other. The second city has a fresh egg in each basket. I think I know who has done better in this tale of two cities.