The Current Downturn

But first, let me touch on the current economic downturn.

When I met the media earlier this week, they told me that Singaporeans would expect me to speak in detail on the slowdown, and offer solutions.

I explained why I did not intend to do so. We have already discussed on many occasions our short-term problems. I want to deal with the long-term challenges. Of greater concern to me are the fundamental shifts in the global economic environment, and the fact that many of the jobs which are lost during this slowdown, might never return after recovery. We need a new strategy to respond to these developments.

Moreover, during the 1997 Asian financial crisis, we had put in place a major package of rebates and cost-cutting measures. Parts of this are still in effect, including the CPF cut. Then, in this year’s budget, Richard Hu cut corporate and personal taxes, and gave rebates on S&C charges, rentals and utility bills. Recently, George Yeo announced another package to deal with the current economic slowdown.

Let me assure you that if the slowdown drags on, we have the means and ability to do more to help you. And we will help you. My Ministers and I are watching the economy very closely. We are working out possible additional measures, just in case the economy continues to worsen and we need to administer a second package.

Our current problem is the consequence of being a small, open economy, highly dependent on external trade and foreign investment. When the US and other major economies were growing, we caught the strong winds and surged ahead. Now that the winds have died, our growth has slowed to almost a standstill. We do not have a large domestic market to go against changes in the wind in the external environment. We just have to cope with them. What the Government can do, however, is to make sure that the economy stays competitive over the long term, and soften the impact of downturns on businesses and workers through cost-cutting measures and rebates.

We are doing the right things. In a recent survey of 12 Asian countries by PERC, a Hong Kong-based risk-analysis consultancy, Singapore ranked number one for quality of government policies. PERC reported that:

So do not lose confidence. Do not walk around with your head hanging so low, as if we have been diagnosed with a grave condition. We might be a little out of sorts, but it is not life-threatening. When the global economy recovers, so will we. We should therefore keep our spirits up, and fight off any gloom. There is a bigger battle after this. We can succeed only if our morale is high.

Let us plan the next stage of our economic climb even as we deal with the current slowdown.

I had earlier given the media a booklet on the progress we made in the 1990s. A copy has also been given to you.

This record of our achievements sets the current downturn in perspective. The last few years have been volatile – good growth in 1997, sharp downturn in 1998, recovery in 1999, 10% growth in 2000, and now another downturn. But taking a longer view over the last decade, we have made considerable progress.

This should give us the confidence that we can climb higher. We have strong fundamentals. We have a tested team of experienced Ministers, MPs, grassroots and union leaders, and civil servants. We have capable people in the private sector and a united population. And we have the resources to invest in new ventures and capabilities.

Our economy grew faster in the 90s than in the 80s, despite the 1997 Asian financial crisis (7.7% per annum, as against 7.3%). I was also quietly satisfied that we realised our vision of reaching the 1984 Swiss standard of living last year. In 1984, we had set this as a target to be achieved by 1999, but we missed it by one year because of the crisis.

The Government distributed back to Singaporeans a good part of the wealth generated from this strong economic growth. We shared close to $14 billion through asset-enhancement programmes and endowment funds. We invested in better healthcare, housing and education. Singaporeans' standard of living went up considerably.

We also livened up the arts, cultural and leisure scene. Two years ago, Time magazine described our city life as "funky". More recently, Australia’s Canberra Times said that Singapore was "hip" and "cool".

Ahh! Now, we even have foam parties! I thought foam parties were for children, but I saw pictures of adults enjoying themselves too. That is all right, so long as the merry-makers prance around with the lights and their clothes on.

Fortunately, we also have high-browed stuff like plays, ballets and musicals. Tonight’s Rally is held here instead of the usual Kallang Theatre because I gave way to "Miss Saigon".

However, there were also areas where we could have done better. I will mention only two, just to remind Singaporeans not to be complacent.

Our service standards can be improved. Our newspapers carry many complaints of poor service in our shops and restaurants, by taxi-drivers, and even in our hospitals and banks.

We can also be more gracious and considerate, at home and in other countries.

For example, some Johoreans have described Chinese Singaporeans as "hao lian" or "show-offs". They claim that Singaporeans love to speed and beat traffic lights when in Malaysia; behave as if they are "ABC" or "American-born Chinese"; and love to shout "very cheap, very cheap!" while shopping.

I would add that we are too ‘kiasu’. For example, at buffets, we pile oysters on our plates as high as Mount Everest.

I think our less than gracious behaviour is because we have become affluent too quickly. Our social graces have not kept pace with our material progress. Let us be humble, courteous, and gracious in our behaviour and attitude. Let us make friends with our neighbours, especially Johoreans.

The next ten years will be tougher than the last ten.

Our operating environment has changed tremendously. We are now in a new phase of global development. There is only one pre-eminent world power – the US. Nevertheless, the US cannot ignore the rapid emergence of China.

Indeed, the US-China relationship will be the defining factor in global economics and politics in the coming decades. If it goes wrong, Asia will suffer. The US sees tremendous opportunities in China’s economic growth, but at the same time, it worries over China’s growing power.

How US-China relations will evolve is still too early to say. President George W Bush spoke to President Jiang Zemin on the telephone recently. According to President Jiang, "Although it was not a video phone where I could see his facial expression, from his voice, I could feel that he was a President we can do business with." I hope that when the two Presidents meet in Beijing in October, and see each other’s facial expressions, they will find that they can do business with each other.

Within East Asia, there are other flashpoints. Cross-strait relations between China and Taiwan are troubled. The momentum of reconciliation between the two Koreas has slowed down. In the South China Sea, several countries claim the atolls and reefs there. If this leads to conflict, sea-lanes of communication and international trade will be disrupted, affecting us.

The outlook for our immediate neighbourhood also remains uncertain.

Indonesia has just elected a new President, the third in three years since Soeharto stepped down in 1998.

President Megawati inherits a country in which parts are threatening to break away, and the economy is in a grave state. Indonesia will take many years to recover.

The Malaysian economy bounced back quickly after the 1997 Asian financial crisis. However, international investors remain wary.

Other countries in ASEAN are also facing various difficulties.

As a result, ASEAN is at a low point. Investors are negative about the region's prospects.

Singapore will feel keenly the effect of this uncertainty in the region.

Moreover, our economy is uncomfortably sandwiched between the developing and developed economies.

Many developing economies are fast catching up with us in technological capability. What’s more, they have much lower costs of production. For example, our wages for manufacturing workers are more than 12 times that in China and India. Our industrial land costs about US$300 per square metre. In Shenzhen, it costs below US$10. Fortunately, we are no longer competing in low-end manufacturing, where low wages and low land prices are critical.

But still, China poses a big economic challenge. Some economists describe China as an "800-pound trading gorilla". A Hong Kong newspaper added that this gorilla was "very hungry".

In the early 90s, China took 20% of the total foreign direct investment into East Asia (excluding Japan), while ASEAN absorbed 50%. Today, the numbers are reversed: China takes in 50% and ASEAN 20%. China is now dubbed the "sub-contractor of the world".

Even India is being flooded with cheap but good quality Chinese goods. Some Indian manufacturers are finding it hard to compete. So they have done the next best thing. They stick "Made in China" labels on their products to boost sales.

But China will soon be more than a sub-contractor. A July article in Asiaweek commented that:

Many Taiwanese companies are investing heavily in China, not just in low-end activities, but also high tech plants like wafer fabs. The companies are shifting their activities out of Taiwan into China. There are 200,000 Taiwanese businessmen in Shanghai and another 200,000 in Kunshan near Suzhou. The Taiwanese worry that their manufacturing industry is being hollowed out.

Richard Lim wrote an interesting article, entitled "A Wake-up Call from China", in the Sunday Times of 22 July. He has been to China several times over many years. He found China’s transformation to be:

He then urged that:

Richard Lim’s article attracted several letters. Many readers agreed with him.

I was, however, more than a little sad to read the response of a young reader, probably western-educated and had never been to China. He revealed that he had drafted his response with inputs from a few others like himself, all 20-somethings. He wrote,

"We do not feel any affinity to the Chinese people ……

He ended sarcastically by asking Richard Lim to consider migrating to China.

This young man is unable to see beyond his nose. He needs to grow up, and quickly too. Perhaps he does not know that Chinese are called "Orang Cina" in Malay. If we are not Cina, what are we? "Ang Moh"?

I have been to China many times, the first time in 1971. I have seen China’s transformation at close quarters. It is scary. You go to Beijing, Shanghai, Shenzhen, Dalian, Qingdao and scores of other cities, and you will be astonished by how quickly they have learnt and caught up. They write softwares for Microsoft. They are into life sciences and bio-medical engineering. They have even succeeded in making their toilets at tourist attractions shinier and cleaner than ours.

Our biggest challenge is therefore to secure a niche for ourselves as China swamps the world with her high quality but cheaper products. China's economy is potentially ten times the size of Japan's. Just ask yourself: how does Singapore compete against ten post-war Japans, all industrialising and exporting to the world at the same time?

I do not mean that China will overpower every other economy, and grow at the expense of everybody else. As China develops and exports more, its imports will grow too. There will be many opportunities for other countries to trade with China, and for foreign companies to invest in China. We must grasp these opportunities.

But many of the things we are now doing, in time, China will do better and cheaper. We will have to stay one step ahead, and move on to new activities.

Singapore has a window of about ten years to make this transformation, and upgrade to the next level of economic development. But as we do so, we compete head-on with the developed economies. We have to match their level of innovative, scientific, technological and managerial capability.

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