Time Singapore's eggs went into right basket

Singaporeans are congratulating themselves on their latest trade figures, which show non-oil domestic exports rose 5 per cent last month. Before heralding the end of their difficulties, however, they should think again.

The biggest difficulty with looking at monthly trade figures is that they go up and down like the needle of a seismograph in an earthquake. It is rare that a trend can be seen on anything less than a six-month average of such figures.

Another difficulty is that it is all very well to measure export growth in local-currency terms when local currencies are stable, but this is not the case in Asia at the moment and Singapore's currency has recently been weak. International trade is actually denominated in US dollars. It is almost all billed that way and should be measured that way.

So take Singapore's export growth on a six-month average basis in US-dollar terms and the result is shown on the first chart. Rather than rising, the latest figures show Singapore's exports declining by 11.5 per cent year on year. It is the same trend seen with the rest of Asean (the Association of Southeast Asian Nations), but worse.

Singapore's abiding problem is that its government wishes to retain a heavy element of manufacturing in its economy and has long funnelled public money into encouraging foreign manufacturers to set up shop.

The authorities worry that letting their economy swing more heavily into services would amount to putting all their eggs into one basket at a time when their neighbours want this basket too.

It is all very well, they say, for Hong Kong to let manufacturing slip from 20 per cent of GDP to barely 5 per cent during the past 10 years, but Hong Kong has the mainland to take care of it, while Singapore certainly has no nurturing parent in either Malaysia or Indonesia.

Thus, its manufacturing base is still propped up to account for more than 25 per cent of GDP.

But it is becoming ever harder to maintain. Relative to GDP, foreign manufacturing commitments slumped in the second quarter to almost their lowest level since the 1985 crisis. Singapore is becoming too expensive. It does not have much land left for manufacturing, its domestic market is tiny, and labourers for the factories must come from abroad. Singaporeans don't dirty their hands these days.

Times are hard for other manufacturers in Asean too, but they at least have cheap currencies, plenty of land, plenty of labour and much improved infrastructure in recent years. Singapore is increasingly pushing against a rope to maintain its lead in manufacturing.

It is increasing its lead, however, in services. Its strictly supervised banking system has been battered by the storm but has sprung no serious leaks, while banks in neighbouring countries are sinking.

This is an environment in which Asean regional finance will come back to its traditional home port and think twice about exposing itself again to communal tension and crony demands in Indonesia or capital controls in Malaysia.

The winning basket for Singapore is the one in which it didn't want to put its eggs.