Singapore economics means many happy returns to foreign investors

PUBLISHED : Friday, 05 January, 2007, 12:00am
UPDATED : Friday, 05 January, 2007, 12:00am

'Singapore's economy grew at its fastest pace in the fourth quarter last year, thanks to sales of manufactured goods ...'

SCMP, January 4

I WONDER JUST how much thanks the average Singapore citizen should give for the blessing of these manufactured goods. They are not necessarily as much of a blessing as they may seem.

Let me tell the story my way. The red line on the first chart shows you the proportion that manufacturing contributes to its gross domestic product - just over 27 per cent last year - about as high as it has ever been.

As a contrast, the blue line shows you the equivalent figures for Hong Kong. We put almost as much of our economic effort into manufacturing as Singapore did 20 years ago but manufacturing is now down to 3.1 per cent of our GDP.

There is a reason for this. Wealthy cities with little land area are not the best places for manufacturing and ours is the more natural trend. Manufacturing has remained a major contributor to Singapore's GDP, however, because the Singapore authorities want it so.

They argue that we in Hong Kong can afford to let manufacturing go because we have a motherland across the border that will still take care of us if our service industries fail.

But Singapore, they say, has no such kindly neighbours in Malaysia or Indonesia and risks too much if it puts all its eggs in a services basket. Hence Singapore must keep up manufacturing to maintain a diversified economy.

Whether this is really true, and there are reasons for doubt, Singapore's big problem is that its citizens are not natural specialists in manufacturing. They must rely on outsiders to keep up these manufacturing industries. About 85 per cent of investment commitments in manufacturing last year were foreign ones.

And to get foreigners to pour in their money this way, Singapore must sweeten the pot for them, which it does with a wide range of inducements, all of which cost money. That money in the end comes from Singapore's citizens and the price is a heavy one.

My evidence for it is an income analysis of the Singapore GDP figures. The second chart shows you that since 2001, returns on labour (compensation of employees) have declined from 46 per cent of GDP to 41.5 per cent while returns on capital (gross operating surplus) have risen from 43 per cent to 50 per cent of GDP.

I do not have equivalent figures for Hong Kong but we can take the model for wealthy economies as being Britain and the United States where returns on labour absorb about 63 per cent of GDP. The Singapore economy could ordinarily be expected to show about the same figure.

But it obviously does not, nowhere near it in fact. The biggest beneficiaries of economic effort in Singapore are corporations, not working people as in Britain and the US.

More than that, a substantial proportion of these corporations are foreign ones because of the Singapore government's deliberate heavy commitment to manufacturing and the heavy reliance it has had to place on foreigners to provide the capital for manufacturing.

Put it another way. An official policy to encourage foreign investment in manufacturing industries that are not really suited to Singapore's circumstances has made the disposable income of ordinary working people in Singapore much lower than it really ought to be.

The only way to attract big western brand names in electronics to set up shop in Singapore is to ensure that they will be rewarded with high returns on their capital and the only way this can be done is to keep returns on labour low.

It may indeed help to push up Singapore's economic growth rate but what in the end is the point of this growth if it is not Singapore's own citizens who benefit first and foremost?

If they ever ask themselves that question they will also have good reason to ask whether manufacturing is really such a blessing to them.