Jake's View

Singapore and its manufacturing make an uneasy fit

Domestic production never took root in the city state; it was driven by foreign investors who sent their money back home overseas

PUBLISHED : Wednesday, 20 April, 2016, 2:57pm
UPDATED : Wednesday, 20 April, 2016, 2:57pm

Singapore’s central bank unexpectedly eased its monetary stance, adopting a policy issued last during the 2008 global financial crisis, as economic growth in the trade-dependent city state ground to a halt.

Business, Bloomberg, April 15

You get the sense here of listening to the smooth comforting voice of pilot Lee Hsien-loong telling the passengers not to worry. It’s just a mild spot of turbulence.

The real trouble for Singapore, however, is much more deep-seated. It stems from a decision many decades back that the city should not put all its eggs in one basket and must therefore encourage a manufacturing as well as a regional services economy.

Singapore is not really suited to manufacturing. It is too wealthy and has too little land, labour and manufacturing infrastructure. But any industry can be made to work for a while if government is willing to give it a push, which the Singapore government did with generous concessions to foreign investors. As a result, manufacturing was a bedrock of the economy for many years.

Singapore is not really suited to manufacturing. It is too wealthy and has too little land, labour and manufacturing infrastructure

But it never really took root. Domestic manufacturing investment has always been tiny. It has always been foreigners and they were fair weather friends. They just sent their earnings back home.

The first chart shows the recent trend. Over the last five years, net income on the current account has deteriorated from a deficit of 0.5 to 4.7 per cent of gross domestic product. That’s those foreign investors sending their money back home.

Contrast this with the line on top of the chart. There you have the equivalent experience of Taiwan, where a good number of the foreigners originate and where they have taken the money. Singapore’s drain is Taiwan’s gain.

It would not matter that much if the foreigners continued to be enthusiastic about manufacturing in Singapore, but they are not. Manufacturing now accounts for about 17 per cent of GDP. Ten years ago it was more like 27 per cent.

Nor would it matter that much if a huge foreign trade surplus, which has run at an average of more than 25 per cent of GDP for more than ten years, were wisely invested in foreign parts. But the first chart already shows you that this has not happened. The Singapore income deficit would otherwise be a surplus by now.

What actually did happen is that the Singapore government, which also routinely runs a huge fiscal surplus, scooped up most of the trade surplus with this fiscal surplus and invested it abroad on its own account, for the most part rather unwisely. The returns have been miserable.

And now the private sector, both foreign and S’porean (that’s the local newspaper’s term, not mine) increasingly want out. As the second chart shows, by the end of last year net private capital outflows were already running at a stinging 19 per cent of GDP.

This will not be fixed by a tweak of monetary policy to a zero per cent appreciation of the Singapore dollar (announced, by the way after an annualised eight per cent appreciation in the nominal exchange rate index over the first three months this year. Oh, well).

Talk won’t get you out this time, Mr Lee.