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Singapore in 2012: balancing growth with domestic imperatives

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In Brief

Singapore has continued to skilfully pursue a business location strategy in 2012, the key requirements of which include keeping the share of wages in the national income below the share accruing to capital, and tapping into new commercial opportunities and economic partners.

Predictably, the external sector’s contribution to growth has been, and will continue to be, dominant.


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Singapore has officially projected real GDP growth of between 1.5 and 2.5 per cent for 2012, lower than the 4.9 per cent reported for 2011. Indications, however, are that growth in 2012 will be at the lower end of the projected range. In comparison, the IMF’s World Economic Outlook published in October 2012 projected a global growth rate of 3.3 per cent as a whole for 2012 and 1.3 per cent for high-income countries.

Despite the moderation in growth rates, official estimates are that the Singaporean economy will generate about 100,000 new jobs in 2012. This represents a credible achievement in relation to Singapore’s total labour force of 3.4 million. The total employment-to-population ratio at 62.4 per cent in 2012 compares very favourably with South Korea (48.7 per cent) and Australia (50.5 per cent). If the experiences of other aged countries hold, however, Singapore may not be able to rely on a high employment ratio in the future.

Total factor productivity (TFP) continues to be a major concern in Singapore. Over the last decade, Singapore achieved TFP growth, including that of labour, of around 1 per cent. The aim of Singapore’s policy makers is to raise TFP growth by between 2 and 3 per cent over the next decade. This will require a sustained shift toward a higher value-added and innovation-driven economy.

Inflationary pressures in 2012 are projected to remain elevated at around 4.5 percent, similar to 2011. High inflation is expected to intensify domestic public discourse about large inequalities in income. The Gini coefficient for wage income of Central Provident Fund members (which excludes foreign workers and expatriates) was officially reported as 0.47 in 2011. The Gini coefficient for total income, which includes very lightly taxed and unevenly distributed capital income, is expected to be even higher.

In addition to concerns about inequalities, there have been growing demands by Singaporean residents to mitigate congestion externalities due to heavy demand for transport networks and recreational amenities; manage competition for positional goods which, by definition, are scarce but highly desired; enhance the adequacy and fairness of old-age financing arrangements; and demands for a more equitable, transparent and accountable polity and society.

Underlying these concerns is the real possibility that the current growth strategy and domestic political arrangements may not provide sufficient upward economic and social mobility opportunities, while exacerbating current insecurities.

Balancing the requirements of Singapore’s growth strategy with domestic concerns will become even more challenging in the future, as individuals expect to exercise greater control, influence and leverage over decisions affecting their lives. Concerns have been expressed that proxies, such as the annual value of housing, which is used to determine eligibility for government benefits, do not take into account the needs of the older generation, which has experienced low wages and relatively high income taxes.

Continuing to pursue high growth under the current growth strategy is likely to intensify domestic concerns. However, if growth moderates to around 3 per cent, in line with experiences of other high-income countries, and becomes the new norm, re-examining current assumptions and practices concerning economic, social and political management will become even more necessary.

Current arrangements for financing old age illustrate this point. Two key assumptions underlying the current arrangements are that it is wholly possible to finance retirement expenditure by state-intermediated and micromanaged mandatory savings, and that the purpose of the pension system is to mitigate absolute poverty. But these measures are inadequate to address old-age risks, particularly longevity risk (risk that a person may exhaust savings before death), and inflation risk (keeping real values of retirement income constant). These assumptions also raise concerns about fairness, particularly by requiring those with greater need but limited annuity resources, such as women, to pay higher healthcare and annuity premiums while not extending even limited health insurance beyond the age of 90.

In contrast, the Singapore International Chamber of Commerce, which represents about 700 multinational corporations, publicly stated that the lack of clarity on foreign manpower policies is hampering business planning. Small and medium enterprises have also indicated a strong preference for the greater inflow of foreign workers. However, an increased inflow of workers has the potential to exacerbate domestic imperatives of mitigating congestion externalities and competition for positional goods.

Since the 2011 general elections the government has attempted to address a number of domestic concerns. These include making entry requirements for foreign workers more stringent, increasing investment in public transport, revising subsidies to the elderly for healthcare and expanding tertiary education opportunities. But the challenge of balancing requirements of the current growth strategy with domestic imperatives will continue to occupy policy makers for the next several years. Public policy choices about the nature and quality of balancing between the high growth strategy and domestic concerns will have far-reaching implications for Singapore’s future economic, social and political dynamics.

Mukul G. Asher is a Professorial Fellow at the Lee Kuan Yew School of Public Policy, National University of Singapore.

Chang Yee Kwan is a Research Fellow at the Lee Kuan Yew School of Public Policy, National University of Singapore.

This is part of a special feature on 2012 in review and the year ahead.

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