Singapore Competitiveness Report 2009

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Singapore Competitiveness Report 2009

  1. 1. Singapore Competitiveness Report foreword by Michael E. Porter Harvard Business School Christian Ketels Ashish Lall Neo Boon Siong with research assistance from Stevenson Q. Yu Susan Chung Lai Ling
  2. 2. b SINGAPORE COMPETITIVENESS REPORT
  3. 3. Singapore Competitiveness report foreword by Michael E. Porter Harvard Business School Christian Ketels Ashish Lall Neo Boon Siong with research assistance from Stevenson Q. Yu Susan Chung Lai Ling Singapore CoMpeTiTiVeneSS reporT 1
  4. 4. 2 SINGAPORE COMPETITIVENESS REPORT
  5. 5. Table of Contents Foreword ...............................................................................................................................7 Executive Summary ..............................................................................................................9 Chapter 1: Introduction Singapore’s Competitiveness Challenge in 2009 .......................................................................................... 19 The Report’s Conceptual Approach .............................................................................................................. 19 Report Outline............................................................................................................................................... 21 Chapter 2: Economic Performance Standard of Living .........................................................................................................................................25 Prosperity....................................................................................................................................................25 Equality .......................................................................................................................................................27 Quality of Life ............................................................................................................................................ 28 Components of Prosperity Generation ........................................................................................................ 28 Labour Productivity................................................................................................................................... 28 Labour Mobilisation .................................................................................................................................. 30 Purchasing Power ....................................................................................................................................... 31 Assessment ....................................................................................................................................................33 Chapter 3: Intermediate Economic Outcome Indicators Trade ..............................................................................................................................................................37 A Case Study: Electronics Exports ............................................................................................................. 41 Investment .................................................................................................................................................... 47 Innovation .................................................................................................................................................... 49 Entrepreneurship .......................................................................................................................................52 Assessment ....................................................................................................................................................53 Chapter 4: Competitiveness Fundamentals Assessing Competitiveness ...........................................................................................................................57 Endowments ..................................................................................................................................................57 Macroeconomic Competitiveness................................................................................................................ 58 Social Infrastructure and Political Institutions ........................................................................................ 58 Macroeconomic Policy .............................................................................................................................. 60 Microeconomic Competitiveness ................................................................................................................. 61 Business Environment Quality .................................................................................................................. 61 Factor Conditions ................................................................................................................................... 62 Context for Rivalry and Strategy .............................................................................................................73 Demand Conditions ................................................................................................................................75 Supporting and Related Industries ........................................................................................................ 76 Company Sophistication ........................................................................................................................... 80 Singapore’s Competitiveness in Perspective................................................................................................ 80 Chapter 5: Conclusions Summary of Findings ................................................................................................................................... 85 Implications .................................................................................................................................................. 86 Recommendations........................................................................................................................................ 87 SINGAPORE COMPETITIVENESS REPORT 3
  6. 6. Boxes Box 1 The Global Economic Context: What Changes Will the Crisis Bring? ............................................................. 44 Box 2 International Rankings of Innovative Capacity .................................................................................................70 Box 3 A Case Study of Singapore’s Interactive Digital Media Cluster .........................................................................78 List of Figures Figure 1.01 The Competitiveness Framework: Determinants of Prosperity ........................................................................20 Figure 1.02 Assessing Competitiveness ................................................................................................................................. 21 Figure 2.01 Singapore’s per-capita GDP per capita, in thousands of 1990 PPP$ ..................................................................25 Figure 2.02 Comparison of GDP per capita ...........................................................................................................................26 Figure 2.03 GINI Coefficient Comparisons, latest year .........................................................................................................27 Figure 2.04 Singapore’s Gini Coefficient among Employed Households..............................................................................27 Figure 2.05 Human Development Index and Components ..................................................................................................28 Figure 2.06 Labour Productivity and Growth ........................................................................................................................29 Figure 2.07 Relative Productivity and Prosperity ..................................................................................................................29 Figure 2.08 Change in Sectoral Labour Productivity.............................................................................................................30 Figure 2.09 Participation and Growth....................................................................................................................................30 Figure 2.10 Contributions to Change in Labour Mobilisation, 2000-2008 ...........................................................................31 Figure 2.11 Comparison of Female Labour Participation Rates, 2009 Estimates .................................................................31 Figure 2.12 Country-level Price Comparisons .......................................................................................................................32 Figure 2.13 Normalized Comparative Price Levels of selected Cities ...................................................................................32 Figure 2.14 Price Accessibility for Selected Products ............................................................................................................ 33 Figure 2.15 Total Factor Productivity..................................................................................................................................... 33 Figure 3.01 Trading Trends..................................................................................................................................................... 37 Figure 3.02 Extent of Re-Exportation ....................................................................................................................................38 Figure 3.03 Comparison of Global Manufacturing Export Shares ........................................................................................38 Figure 3.04 Share in Global Trade of Goods and Services .....................................................................................................39 Figure 3.05 Top Five Goods Export Destinations ..................................................................................................................39 Figure 3.06 Top Five Goods Import Origins ..........................................................................................................................39 Figure 3.07 Domestic Exports Destination in 2008.............................................................................................................. 40 Figure 3.08 Top Five Service Export Partners, by type of Service ........................................................................................ 40 Figure 3.09 Top Five Service Import Partners, by type of Service ......................................................................................... 41 Figure 3.10 Singapore’s Electronics Performance.................................................................................................................. 41 Figure 3.11 Top 25 Destinations of Singapore Electronics Exports ......................................................................................42 Figure 3.12 Singapore Electronics Production by Broad Segment .......................................................................................42 Figure 3.13 Electronics Demand versus Production .............................................................................................................43 Figure 3.14 Production of Electronics Components .............................................................................................................43 Figure 3.15 Investment Intensity ...........................................................................................................................................47 Figure 3.16 Relative FDI Inward Indicators ...........................................................................................................................47 Figure 3.17 Presence of Foreign Investment ......................................................................................................................... 48 Figure 3.18 International Comparison of Patenting Activity ...............................................................................................49 Figure 3.19 Comparative Organizational Patents .................................................................................................................50 Figure 3.20 Singapore-owned Patents in the USPTO (2004-2008) ......................................................................................50 Figure 3.21 Patent Applications by Field of Technology (2002-2006) .................................................................................. 51 Figure 3.22 Singapore Patent Applications in 2007............................................................................................................... 51 Figure 3.23 Papers in the Engineering Citation Index (2007) ..............................................................................................52 Figure 3.24 Measures of Entrepreneurship (average of available 2000-2007 data) ..............................................................52 Figure 4.01 Evolution of Singapore’s Macroeconomic Competitiveness ..............................................................................59 Figure 4.02 Government Effectiveness Scores of Top-Rated Countries............................................................................... 60 Figure 4.03 Evolution of Singapore’s Microeconomic Competitiveness............................................................................... 61 Figure 4.04 The Porter Diamond............................................................................................................................................62 Figure 4.05 Ease of Doing Business Ranks, 2008-2009 ........................................................................................................ 64 Figure 4.06 Comparison of Doing Business Components.................................................................................................... 64 Figure 4.07 Math and Science Test Scores, 2007 .................................................................................................................. 66 Figure 4.08 Innovation Input Trends .....................................................................................................................................67 Figure 4.09 Comparison of Private R&D Spending, 2006 .................................................................................................... 68 Figure 4.10 Relative Comparison of R&D Researchers, 2007 ............................................................................................... 68 Figure 4.11 Relative Comparison of R&D Personnel, 2007 .................................................................................................. 69 Figure 4.12 Attractiveness as Financial City ..........................................................................................................................72 Figure 4.13 Global Internet Use and Penetration ..................................................................................................................72 4 SINGAPORE COMPETITIVENESS REPORT
  7. 7. List of Figures Figure 4.14 Internet Use Comparisons ..................................................................................................................................73 Figure 4.15 Consumer Sophistication Survey, 2007 ..............................................................................................................75 Figure 4.16 Singapore’s Export Profile in 2007, Porter Cluster Methodology ......................................................................77 Figure 4.17 New Global Competitiveness Index and Singapore’s 2009 Ranks ..................................................................... 81 List of Tables Table 2.01 City Prosperity in 2005 ........................................................................................................................................26 Table 3.01 Profitability of FDI in Selected Industries......................................................................................................... 48 Table 3.02 Top Ten Non-OECD M&A Acquirers ..................................................................................................................49 Table 4.01 Ethnic Demographics in Singapore ....................................................................................................................58 Table 4.02 Social Infrastructure and Political Institutions Indicators ................................................................................59 Table 4.03 Macroeconomic Policy Indicators ..................................................................................................................... 60 Table 4.04 Factor (Input) Conditions and Components ......................................................................................................62 Table 4.05 Logistical Infrastructure Indicators ....................................................................................................................63 Table 4.06 Ranks in the 2007 Logistics Performance Index ................................................................................................63 Table 4.07 Shipping Statistics ...............................................................................................................................................63 Table 4.08 Administrative Infrastructure Indicators ...........................................................................................................63 Table 4.09 Innovation Infrastructure Indicators..................................................................................................................65 Table 4.10 Average Education Levels ....................................................................................................................................65 Table 4.11 Public Education Expenditures...........................................................................................................................65 Table 4.12 Comparative Reading Scores ...............................................................................................................................67 Table 4.13 Growth of Innovation Inputs ..............................................................................................................................67 Table 4.14 Academic Ranking of World Universities, 2009 ............................................................................................... 69 Table 4.15 Capital Market Infrastructure Indicators .......................................................................................................... 71 Table 4.16 Financial Sector Development, 2009 .................................................................................................................. 71 Table 4.17 Communications Infrastructure Indicators .......................................................................................................72 Table 4.18 Context for Rivalry and Strategy Indicators .......................................................................................................73 Table 4.19 Largest Companies in Singapore ........................................................................................................................74 Table 4.20 Demand Conditions Indicators ..........................................................................................................................75 Table 4.21 Supporting and Related Industries Indicators ...................................................................................................76 Table 4.22 Company Sophistication Indicators ................................................................................................................... 81 SINGAPORE COMPETITIVENESS REPORT 5
  8. 8. 6 SINGAPORE COMPETITIVENESS REPORT
  9. 9. Singapore Competitiveness Report FOREWORD The Asia Competitiveness Institute (ACI) was created to provide policy-relevant analysis on competitiveness in Singapore and the ASEAN region, based on rich data and a comprehensive framework. Singapore is widely known for its expertise within government, but Singaporean leaders saw clear value in objective outside ideas from an institution dedicated to understanding the “big picture” of where Singapore and ASEAN are heading. The Singapore Competitiveness Report 2009 is an important milestone in realizing this vision. On behalf of ACI’s International Advisory Panel, I would like to congratulate the ACI team for this important piece of work. The Singapore Competitiveness Report highlights the need for Singapore to define a new model of an innovation-driven economy that fits its specific capabilities and ambitions. Singapore cannot follow the same approach as the U.S., Japan, or other advanced economies. The Report highlights the virtue of a stable economic strategy in this time of global economic crisis and uncertainty. Singapore’s fundamental model is working and there is no need for drastic changes. Singapore has shown a remarkable ability to reinvent the key tenets of its competitive model in line with its rising level of development. The report suggests that government needs to support these changes and the overall resilience of the economy. A new approach towards ASEAN collaboration is one of the steps that can make a significant contribution in this direction. Our ambition with ACI and the Singaporean Competitiveness Report is to provide government leaders with data and frameworks to make more informed policy decisions, whether or not they agree with every conclusion or recommendation. My hope is that this first Singapore Competitiveness Report achieves this purpose and become a model for many other reports to follow. Michael E. Porter William Lawrence University Professor, Harvard Business School Chair of the International Advisory Panel, Asia Competitiveness Institute SINGAPORE COMPETITIVENESS REPORT 7
  10. 10. 8 SINGAPORE COMPETITIVENESS REPORT
  11. 11. Singapore Competitiveness Report Executive Summary SINGAPORE COMPETITIVENESS REPORT 9
  12. 12. 10 SINGAPORE COMPETITIVENESS REPORT
  13. 13. Second, Singapore is transitioning from an investment-driven economy to an innovation-driven economy. This is both an EXECUTIVE explicit ambition of the government and the assessment of many outside observers. How far has the country progressed on this SUMMARY path? What are the outcomes on innovation measures? And how much has the profile of Singapore’s competitive strengths shifted from one typically associated with investment-driven economies (strong business environment, especially physical infrastructure, solid skill base, rule of law, openness to trade and investment) Economies around the globe are in turmoil. The downturn is to one more in line with the needs of an innovation-driven significantly deeper and more global than anything experienced economy (strong innovation system, IP protection, quality of since the Great Depression. Unlike their predecessors at the time, life, company sophistication and strategy, demand sophistication, policy makers have now reacted strongly, bailing out banks, entrepreneurship)? launching stimulus packages, and using old and new monetary policy instruments. The outlook now seems slightly more positive, Third, despite the overall economic growth in the last few especially in Asia: the rate of decline has fallen and the hope years, there are concerns about Singapore’s ability to generate is increasing that while a drawn-out period of adjustment lies sustainable productivity growth, especially on total factor ahead, it will not be the abyss that bankers and exporters were productivity. Relative to the United States, Singapore made no facing in late 2008 and early 2009. gains on productivity between 1995 and 2008, after registering strong and consistent catch-up in the previous period. Is this However, in this period of dramatic shocks, forecasts have become slow-down a sign of structural problems, or is it largely cyclical much less accurate than in periods of stable trends and calm. or driven by external shocks? If it is structural, what explains There is little reliable experience on how consumers, investors, Singapore’s failure to continue the previous catch-up to the and producers will react to the massive government efforts under productivity levels of other advanced economies? way. This uncertainty affects not only the short term but also the longer term. Will the crisis only be a - albeit historically deep - Each of these questions could easily motivate an independent bump on the road? Or will it lead to changes in economic policy study. This Report addresses all three of them, drawing on and structures that alter the course of economic development one integrated conceptual framework to organize data from for individual countries and regions? multiple sources. The overall picture that emerges is guardedly optimistic: Singapore is not facing a fundamental threat to its The Singapore Competitiveness Report 2009, the first in this economic position, certainly not in the short- to medium-term. new series of regular assessments by the Asia Competitiveness But Singapore will have to refine its strategic direction and make Institute (ACI) at the Lee Kuan Yew School of Public Policy, some rather fundamental adjustments in its economic structure provides data and analysis to inform the discussions on the impact if it aims to move to a new level of competitiveness. of the crisis on the medium-term development of Singapore’s competitiveness. It does not aim to provide a better forecast on what will happen over the next six or twelve months; other The Report’s Conceptual Approach research centres, financial institutions, and government agencies provide in-depth coverage of this question. The Report’s analysis is grounded in the competitiveness framework that Professor Michael E. Porter of the Harvard Business School Instead, the aim is to put the short-term developments into the and Chairman of ACI’s International Advisory Panel, has developed context of the fundamentals that will drive economic development over the last two decades. This framework is flexible in capturing over longer periods of time. Clearly these are related: many of the role of many different types of factors on competitiveness. It the policy choices made today will impact the fundamentals that recognizes their interdependence and makes no prior assumptions exist tomorrow, even if their primary motivation now is to deal about the critical role of any individual factor. In fact, one of with the immediate crisis at hand. In this time of economic crisis, the framework’s explicit uses is to support the identification of the Report’s discussion of the medium-term fundamentals aims policy priorities based on the specific circumstances that exist to contribute to a better recognition of these linkages. in an economy at a given point in time, rather than providing generic policy advice. Key Competitiveness Challenges for Singapore The central tenet of the competitiveness framework is the notion that productivity – the ability to create valuable goods Improving competitiveness is a constant challenge all economies and services through the use of a country’s human, capital, face, no matter the level of prosperity they have already reached. and natural resources – is the ultimate driver of sustainable This constant challenge then translates into more granular questions prosperity. Productivity depends both on the value of the goods that individual countries face at a given point in time. For Singapore, and services produced and on the efficiency with which they we examine three such specific questions that currently shape the are being provided. High competitiveness, then, is ultimately competitiveness debate. For all of them, the Report suggests a reflected in high productivity. framework to address them, explores the relevant data available, and provides the authors’ evaluation. Productivity is as an outcome influenced by a large number of factors that are shaped by the collective action of all participants First, the global crisis has hit Singapore harder than many of its in an economy. One set of factors, organized under the heading Asian peers, despite the fact that Singapore ranks comfortably of macroeconomic competitiveness, set the overall context in among the most competitive locations in the region. Is the crisis which companies operate. These factors include the quality indicating that Singapore’s economic model does have serious of social infrastructure and political institutions as well as of weaknesses? Are there indications that the crisis has triggered or macroeconomic policy. They do not affect productivity directly accelerated the transition of the global economy towards a new but create the opportunity space in which productivity-enhancing scenario in which Singapore’s strengths are less valuable? actions can be taken. SINGAPORE COMPETITIVENESS REPORT 11
  14. 14. The other set of factors, called microeconomic competitiveness, important driver of prosperity growth, while productivity growth captures the way companies operate and the external dimensions has decreased in prominence. that have a direct impact on the results of their activities. These factors include the sophistication of companies, the strength High labour mobilization is typical for economies with a significant of clusters, and the quality of the business environment. All of share of immigrant labour. In fact, the data suggests that recent them have a direct impact on productivity. growth in labour mobilization has been driven as much by a rising share of foreign workers as by increasing labour mobilization of The Report uses multiple sources of data to assess Singapore’s Singaporean residents. Among residents, Singapore continues competitiveness in this broad framework. It focuses on analysing to register low labour mobilization among females, a group and presenting this data in an integrated fashion, while adding that in other countries has been driving increasing labour additional primary data only in selected areas where gaps exist. mobilization rates. The objective is to present the best possible analysis given the data available, rather than conducting extensive primary research Labour productivity is at a solid level, but the data does indicate as part of this Report. a significant increase in the volatility of productivity growth since 1995, driven by both cyclical trends and one-time shocks. Given The data is organized in a number of key categories that provide these shocks, the selection of time periods to look at can lead to different perspectives on Singapore’s competitiveness position: highly different results. Taking this volatility into account, the data suggests that there is a moderate slow-down in Singapore’s • The first group of indicators assess Singapore’s track record catch-up to the United States, but growth relative to the European on the indicators of economic performance: the quality of Union (EU-15) continued and parity was reached in 2004. life Singaporeans are able to enjoy as a consequence of the fundamentals present in their economy. Relevant data points Starting in 2006, labour productivity growth did stall and overall include prosperity levels, equality, and measures of human growth was driven entirely by higher labour mobilization. In development. this period, total factor productivity growth also slowed down significantly. This is consistent with the cyclical upswing during • The second group of indicators looks at economic outcomes this period; there are no conclusive indications that it is the result that are signs of and contributors to competitiveness but may of a structural change in trend. not be the ultimate goals of economic policy. This includes measures of foreign and domestic investment, international The demographic trends will make it increasingly challenging for trade, innovation, and entrepreneurship. Singapore to keep labour mobilization rates stable at current levels, as an increasing share of the population retires from the workforce. • The third group of indicators then tracks Singapore’s position on Future growth will have to come from productivity growth - with the broad range of macro- and microeconomic competitiveness capital stocks already high and skill levels improving, the main factors that ultimately explain the medium-term trends on driver of growth will have to be total factor productivity growth. the economic outcomes previously discussed. The indicators covered range from assessments of governance quality, the Intermediate Indicators provision of primary public services, and the solidity of public Singapore’s performance on intermediate measures of economic finances to the sophistication of companies, the dynamism of activity indicates that a good foundation has been built for current clusters, the quality of physical infrastructure, the intensity and future prosperity. The defining characteristic of Singapore is of local competition, and many more. its high level of integration into the global economy. While this has exposed the country to the onslaught of the current crisis, it is one of the key drivers of its medium-term prosperity. There are Summary of Findings no signs that Singapore’s position in the global trading system is eroding. The position is, however, slowly changing: Singapore is Economic Performance shifting from being a direct supplier to the US and Western Europe Singapore continues to be a highly prosperous economy, ranking to becoming a specialized supplier of services and components among the leading countries both within Asia and globally. to the Asian production system, and increasingly also to meet Singapore’s high standard of living is the result of high income the final demand from Asian consumers. levels and a strong position on life expectancy and basic education. A comparison with other cities reveals that Singapore has solid As an investment location, Singapore remains highly attractive levels of prosperity, but is also experiencing some challenges. for foreign companies. But Singapore is increasingly moving beyond being a host of FDI into becoming an important source Singapore’s environmental performance does not stand out of FDI, especially for other parts of Asia. This is fully in line with globally, but the country does perform better than most of its Asian the changes in Singapore’s role in the global economy revealed peers. The relatively high and rising income inequality suggests in its trading profile. These changes are largely driven by market that there are significant differences across Singaporean society forces, even though individuals policies - for example the growing in the standard of living. Many other countries have recently number of FTAs and the more active outward investment approach experienced a similar increase in inequality, most likely as the of government-linked companies - supported them. result of technological change. As Singapore’s economic strategy explicitly aims to accelerate the pace of technological change, A more recent development is Singapore’s growing position in the tendency for higher inequality is likely to increase, putting innovation. Over the last two decades, the country has developed pressure on the cohesive social model the country has adopted. a capable scientific development system around a core of strong universities, government-funded research institutes, and the Singapore’s prosperity is driven by high labour mobilization research activities of foreign investors. Patenting intensity is and solid but far from exceptional levels of labour productivity. high, although not quite at the level of the best Asian peers. Higher labour mobilization has over time been an increasingly Foreign multinationals play an important role as patentees but increasingly also local universities. 12 SINGAPORE COMPETITIVENESS REPORT
  15. 15. Electronics is by far the most important sector in which patenting Context for strategy and rivalry is very strong too. Singapore occurs, reflecting the strong position Singapore has in this area. particularly excels on its openness to global trade and investment. The challenge remains how Singapore can extend its significant However, there are some concerns about the strong role of investments in scientific research to the commercial exploitation government-linked companies (GLCs). Their high efficiency and of knowledge. This may include the development of innovations full exposure to global competition limit any negative impact that are not based on the hard sciences but that focus on new on the level of rivalry on local markets; they operate as private commercial ideas using existing technologies and knowledge, companies would. The evidence suggests that government linked including those discovered elsewhere. companies can match the performance of their best private sector-owned peers, if they are appropriately governed and the Start-up rates in Singapore are rising, but this is more likely market environment is right. a reflection of entry into activities serving the local markets, especially in retail and services. In the export-oriented sectors, the But there remains a question as to whether these GLCs are effective presence of private domestic companies is still very limited. And in existing markets but less nimble in pursuing entrepreneurial it remains uncertain as to whether or how fast foreign investors ventures in new fields. If this is the case, the attractiveness of or government-funded entities commercialize the outcomes multinational companies (MNCs) and GLCs for the best available of their Singapore-based research. This is not an indication of talent could explain Singapore’s disappointing performance failure, but a reminder that Singapore has now reached a level on entrepreneurship. The slightly lower ranking on domestic of performance where it has to consider more strategically which rivalry is likely to be a consequence of the small size of the local position it should aspire for in the global innovation landscape. market, which also explains the weaker position on the quantity of locally available suppliers. Competitiveness Singapore’s fundamental competitiveness remains strong, and Remarkably for a relatively small economy, Singapore ranks provides a solid foundation for the level of prosperity and the relatively high on other indicators of clusters or supporting and overall pattern of economic outcomes already achieved. Singapore related industries. This is a clear reflection of the economy’s high does particularly well on the quality of its microeconomic business level of specialization, and the government’s focus on developing environment and the rule of law. Its position in other areas is good, specific sectors. A relative weakness is Singapore’s position on but there it has less of an advantage relative to leading peers. company sophistication. This is quite typical for an economy dominated by foreign multinational companies, where the On macroeconomic competitiveness, i.e. policies and conditions ultimate control of global value chains and strategic decisions that set the overall context in which companies operate, Singapore rests with headquarters located elsewhere. does particularly well on the effectiveness of its public institutions. This is an area where the potential for creating value from exporting Overall, Singapore’s competitiveness fundamentals are strong, this competence in different ways remains underexploited. but remain broadly more in line with a high-skill version of the investment-driven model, rather than an innovation-driven Singapore’s somewhat weaker position on macroeconomic policy economy. Again, this is not an indication of failure, but a reminder is not a major concern. Differences between countries on the that Singapore has now reached a level of performance where specific indicators used are relatively small among the leading it has to consider in more detail which position it should aspire group, and there is little evidence that these differences are strong for in the global economy. predictors of economic outcomes. The data raises concerns about the risk that a dominant political group, unchallenged by a potent opposition or aggressive press, may become unresponsive to the Implications needs of society or focus on private benefits rather than overall competitiveness. In Singapore, this risk has not materialized. The analysis discussed above provides perspective on the three However, there remains a concern that the controlled nature of key challenges identified at the outset of this Report. Singaporean society might inhibit “creative” activities that tend to thrive in less-structured environments. Still, macroeconomic There is no indication that the changes in the global economy policy in Singapore is strong and provides an important pillar system currently under way will fundamentally challenge Singapore’s to support the general stability of the economic environment. competitive position. Fundamental competitiveness will remain crucial, or even increase in importance, and Singapore has clear On microeconomic competitiveness, i.e. the dimensions of the strengths to draw on here. Competition will increase, maybe overall context that have a direct impact on company productivity even more quickly than expected before the current crisis, and and innovation, Singapore ranks among the leading countries the geographic profile of markets and value chains globally will in the world. Factor input conditions are world-class across all continue to evolve, possibly at a faster rate. But Singapore seems dimensions, from physical infrastructure and administrative well prepared to adjust to these trends. In fact, the changes in efficiency to skills and innovation capacity. Singapore continues its trade and investment profile already reflect how its position to be ranked as the best country in the world in terms of the is evolving to meet new market dynamics. rules and regulations affecting business (World Bank, 2009). In innovation capacity, Singapore provides a strong mix of Singapore’s transition towards an innovation-driven economy, an world-leading quality in education with high R&D spending, ambition outlined by the Economic Review Committee in 2003, solid quality of research institutions, and effective collaboration remains a work in progress. The necessary scientific infrastructure between companies and universities. has been put into place. But, while MNCs and government-funded research institutes already draw on the scientific talent that has been attracted to Singapore, their operations here do not seem SINGAPORE COMPETITIVENESS REPORT 13
  16. 16. to be translating the scientific research into new products and First, while Singapore’s productivity catch-up has not stopped services at a significant scale. “Creative” activities are growing, generally versus other advanced economies, it has done so but they remain a small part of Singapore’s overall economy. versus the United States. Research suggests that the U.S. has Companies in these areas can draw on some clear advantages, done particularly well in taking advantage of new information like the high quality of life that attracts talent, but also face technologies to improve the productivity of its companies through some obvious challenges, like trying to instil innovative thinking the redesign of its systems and processes. It needs to be further and risk-taking in a highly organized society with a tradition investigated why Singaporean companies do not seem to be as of manufacturing for exports products that were created and effective in their response to these new opportunities. designed elsewhere. Second, Singapore’s productivity record has to be seen against These observations do not imply that Singapore has failed in its level of competitiveness: Singapore ranks 3rd in the world on the mission it has laid out for itself. But they indicate that the overall competitiveness, but only 19th on labour productivity. country needs a fundamental discussion to refine its ambition This gap may be the result of operational choices that companies along two key dimensions: make in response to the context of factor costs and business environment conditions they face. Companies face wage costs, First, there are many possible visions of an innovation-driven especially for low skill labour, at which it is not commercially economy that are feasible, and some might be a better fit for attractive to move to an operational model based on higher skills Singapore than others. Being an important global knowledge- and productivity. If future research supports the hypothesis of a innovation hub with focused research laboratories, world-class low-productivity equilibrium, Singapore will need to move to a companies, a secure legal environment, and highly attractive different view on productivity. In the past, the goal has been to conditions for talent is closer to Singapore’s current competitive create an existing product or service with fewer factor inputs. In strengths than is becoming a global R&D hub creating the next the future, the goal has to become creating more customer value generati0n of global technologies and products based on scientific with a better design for organizing a set amount of factor inputs. breakthroughs. Becoming a global connector of knowledge, bridging together scientific research (discovered locally or elsewhere) with companies able to draw on it and identifying Recommendations opportunities where existing knowledge is not fully applied in some geography or field, would also fit well with Singapore’s For policy makers, and particularly for the economic review tradition as a regional business hub. This would also build on process currently under way, this Report aims to inform decisions the existing scientific strengths that are crucial in understanding about possible government action. and leveraging the best knowledge available globally but with greater emphasis on commercializing research, capitalizing on The first recommendation from the analysis above is that unique business solutions implemented in Singapore and the Singapore should not overreact to the current crisis. Singapore’s region, and developing new business models and brands. fundamentals are solid and there is no obvious reason for making any dramatic changes. In fact, a longer term analysis of Singaporean Second, there needs to be a much broader view on what innovation competitiveness indicates how stable the country’s key competitive is. The current view is highly science-oriented - looking at advantages have been over time, despite frequent policy reviews innovation as the translation of knowledge generated in universities and action programs. Changes, like the development of a strong and research labs into products and services. But innovation can research system over the last two decades, have systematically be viewed from a broader perspective - the introduction of new built on existing capabilities to create new strengths. This remains concepts, new strategies, new processes or new business models, an important principle when considering new policies. independent of where the idea is coming from, and whether it is leveraging new knowledge or applying existing knowledge The second recommendation relates to fundamental existing or in different contexts. One of the areas in which Singapore has emerging challenges where staying the course will not be enough arguable been most innovative is public services, because of and decisions are required. The recent slowdown of productivity highly sophisticated local demand. From health care to city is the most immediate challenge to deal with. More research planning and public administrative services, Singapore has on disaggregated productivity and company-level operations always been willing to implement new solutions that create value data would clearly by useful. If this data substantiates the for its citizens. This is an area where huge potential exists for hypothesis of a low-productivity business model outlined below, creating value through exporting this expertise, by translating, there are significant policy implications. Changes in the labour for example, its experience into systematic knowledge that may market, immigration, and potentially wage policy may have to be sold by operating such services abroad or through training be considered. Collaboration with companies and clusters to and consulting. discuss the possible transition to higher-productivity business models should be on the agenda. Singapore’s disappointing recent performance on productivity growth is, to a large degree, a cyclical phenomenon. Since 2006, The third recommendation suggests a policy priority to increase growing demand, especially from domestic sources, has driven the potential for economic growth through trade and investment up labour mobilization, while labour productivity dropped as with neighbouring Asian countries. Singapore’s shift from direct the economy reached its capacity constraints. Looking at longer- exports to the United States and Western Europe, to becoming term trends, productivity growth has become more volatile an important part of the Asian production system and a supplier as Singapore’s economy has been hit by a number of external to Asian markets, is already underway. Singapore could benefit shocks over the last decade. But there is no clear evidence that more from these trends if its partners become more competitive productivity growth and the catch-up to other economies has and the ties within the region are more developed. ASEAN has structurally come to a halt. There are two reasons for concern, made ambitious statements of intent, but much remains to be however. done in order to turn these ambitions into reality. Part of the 14 SINGAPORE COMPETITIVENESS REPORT
  17. 17. reason could be that ASEAN has, in the past, followed a trade Inequality and the mobilization of the female labour force is a liberalization logic that is politically difficult, because it puts fifth challenge that is likely to become more pressing over time. negotiations into a zero-sum game of reciprocal market access Inequality has been rising, and the further transition towards concession. ASEAN would benefit from adopting an approach an innovation-based economy will continue to fuel this trend. aimed at improving competitiveness, where activities are focused Singapore needs to decide how to deal with these dynamics. It on areas where collaboration creates direct benefits to participants. has traditionally placed a high value on the cohesiveness of its society; there is no fundamental reason why this should not The fourth recommendation that concerns a medium-term be possible in the future as well, but it will not stay this way challenge Singapore should address, is defining the specific automatically. Female labour force participation is the result of model of innovation-driven economy that Singapore should individual choices, but government policies set the context in aspire to become. The data presented in this report indicate that which women look at the incentives they receive for entering Singapore has made clear progress on science-related innovation. and sustaining a professional career. Singapore should have an But its success in creative and entrepreneurial activities is more open debate about the type of environment it wants to provide limited, and is achieved in the context of a less favourable to women. business environment. Singapore has become an internationally respected model for a At the minimum, there needs to be a review of whether the policy country that is willing to continuously review its position, and approach in these areas needs to be adjusted. Policy tools that has taken decisive action where needed. This Report is written in have been successful in the attraction of capital-intensive activities this context, hoping to provide Singaporean policy makers with may need to be modified in new innovation-intensive fields our analysis and perspective of the key issues and some possible that rely more on talent and culture than capital investments. options to consider. This is the first Singapore Competitiveness A potential short-term opportunity is to work more intensively Report produced by the Asia Competitiveness Institute, and we with MNCs and GLCs to create programs that allow some of their intend to continue to use subsequent reports to highlight our local managers to create spin-offs, possibly with initial capital analysis and perspective of the competitiveness issues facing stakes of the anchor companies. This would sow the ground for Singapore in the medium term. more locally-rooted entrepreneurship and ultimately innovation. Going further, the potential for commercially exploiting innovation in fields like public services needs to be more deeply leveraged. This requires creative thinking on how such commercialization could happen; in some of these fields, markets do not traditionally exist. More fundamentally, a more textured policy debate is necessary to decide what type of innovation-driven economy Singapore wants to become. Too often, there is an uncritical benchmarking towards the U.S. model. This might be neither appropriate nor ideal for Singapore. Other models exist that can support high levels of prosperity as well, and could be more in line with Singapore’s capabilities. SINGAPORE COMPETITIVENESS REPORT 15
  18. 18. 16 SINGAPORE COMPETITIVENESS REPORT
  19. 19. Singapore Competitiveness Report Chapter 1 Introduction SINGAPORE COMPETITIVENESS REPORT 17
  20. 20. 18 SINGAPORE COMPETITIVENESS REPORT
  21. 21. Third, despite the overall solid economic growth in the last few years, Singapore has recently been struggling with falling rates INTRODUCTION of productivity growth, especially on total factor productivity. This slowdown has occurred in addition to a higher frequency of economic shocks that have hit the Singaporean economy over the last fifteen years. These trends have occurred despite a stable position on overall competitiveness and an explicit policy focus on productivity. What explains the challenges in Singapore has over the last few decades achieved impressive further catching-up to the productivity levels of other advanced success in moving from a young developing nation to become economies, especially the US? one of the most prosperous economies globally. One important reason among the many individual factors that played a role Each of these questions could easily motivate an independent in this process has been Singapore’s willingness to constantly study. This Report addresses all of them, providing the key review its position in an international perspective. Based on foundations to discuss the direction policy responses should take. these assessments, larger effort such as the Economic Strategy It draws on one integrated conceptual framework to organize Committee (ESC) process currently under way and many smaller data from multiple sources. The overall picture that emerges is reviews of individual policies, Singapore has again and again guardedly optimistic: Singapore is not facing a fundamental threat been able to take action and implement change in response to to its economic position, certainly not in the short- to medium- dynamic global challengers. term. But Singapore is facing some complex challenges on its future growth path. It will have to refine its strategic direction It is in this spirit that the Singapore Competitiveness Report and make much clearer choices about the type of economy it is being launched. Designed to be a recurring publication, it aims to become. Following the role model of successful peers will track multiple indicators of Singapore’s competitiveness is increasingly outliving its usefulness, and could even lead over time and in international comparison. The ambition is to Singapore on the wrong path. inform the policy dialogue in Singapore through data, analysis, and a conceptual framework that helps policy makers evaluate where Singapore stands and what policy priorities it needs to The Report’s Conceptual Approach address. The benchmark for this Report’s value is its ability to inspire informed action that helps Singapore reach increasing The Report’s analysis is grounded in the competitiveness framework levels of prosperity over time. that Professor Michael E. Porter, the Bishop William Lawrence University Professor at Harvard Business School and the chairman of the Asia Competitiveness Institute. The framework is flexible Singapore’s Competitiveness Challenge in 2009 in capturing the role of many different types of competitiveness factors, and is not wedded to a particular type of economy or Improving competitiveness is a constant challenge all economies economic ideology. It recognizes the interdependence among face, no matter the level of prosperity they have already reached. the many factors that matter, and makes no prior assumptions This broad challenge then translates into more granular questions about the critical role of any one of them. In fact, one of the that individual countries face at a given point in time. For framework’s explicit uses is to support the identification of Singapore, three such specific questions currently shape the policy priorities based on the specific circumstances that exist competitiveness debate. The Report explores the relevant data in an economy at a given point in time, rather than providing available and suggests a framework to address them. generic policy advice. First, the global crisis has hit Singapore harder than many of its The central tenet of the framework is the notion that productivity Asian peers, despite the fact that Singapore ranks comfortably - the ability to create valuable goods and services through the among the most competitive locations in the region. Is the crisis use of a country’s human, capital, and natural resources - is the indicating that Singapore’s economic model does have serious ultimate driver of sustainable prosperity. Productivity depends weaknesses? Are there indications that the crisis has triggered on both the value of the goods and services produced, and or accelerated the transition of the global economy towards a on the efficiency with which they are being provided. High new scenario in which Singapore’s strengths are less valuable? competitiveness, then, is ultimately reflected in high productivity. Finally, is there a need for new government intervention to put Singapore on a different path for dealing with the changes in Productivity is an outcome influenced by a large number of the global context? factors that are shaped by the collective action of all participants in an economy. One set of factors, organized under the heading Second, Singapore is transitioning from an investment-driven to of macroeconomic competitiveness, set the overall context in an innovation-driven economy. This is both an explicit ambition which companies operate. These factors include the quality of of the government, and the assessment of many outside observers. social infrastructure, political institutions, and macroeconomic How far has the country progressed on this path? What are the policy. They do not directly affect productivity, but create the outcomes on innovation measures? And how much has the profile opportunity space in which productivity-enhancing actions of Singapore’s competitive strengths shifted from one typically can be taken. associated with investment-driven economies (strong business environment - especially physical infrastructure, solid skill base, The other set of factors, called microeconomic competitiveness, rule of law, openness to trade and investment) to one more in line capture the way companies operate and the external dimensions with the needs of an innovation-driven economy (strong innovation that have a direct impact on the results of their activities. These system, IP protection, quality of life, company sophistication and factors include the sophistication of companies, the strength strategy, demand sophistication, entrepreneurship)? of clusters, and the quality of the business environment. All of them have a direct impact on productivity. SINGAPORE COMPETITIVENESS REPORT 19
  22. 22. FIGURE 1.01: THE COMPETITIVENESS FRAMEWORK: DETERMINANTS OF PROSPERITY The Report uses multiple sources of data to assess Singapore’s 2. The second group of indicators looks at economic outcomes competitiveness in this broad framework. It will focus on integrating that are signs of and contributors to competitiveness, but not and analysing this data in an integrated fashion, while adding ultimate goals of economic policy. These include measures additional primary data only in selected areas where gaps exist. of foreign and domestic investment, international trade, The ambition is to present the best possible analysis given the innovation, and entrepreneurship. data that is available, rather than conducting extensive primary research as part of this Report. 3. The third group of indicators tracks Singapore’s position on the broad range of macroeconomic and microeconomic The data is organized in a number of key categories that provided competitiveness factors that ultimately explain the medium- different perspectives on Singapore’s competitiveness position: term trends on the economic outcomes previously discussed. The indicators covered range from assessments of governance 1. The first group of indicators provides an assessment of the quality, the provision of primary public services, and the solidity quality of life Singaporeans are able to enjoy, as well as the of public finances to the sophistication of companies, the direct components of income generation at the economy-wide dynamism of clusters, the quality of physical infrastructure, level. Relevant data points include prosperity levels, equality, the intensity of local competition, and many more. measures of human development, labour productivity, and labour mobilisation. 20 SINGAPORE COMPETITIVENESS REPORT
  23. 23. FIGURE 1.02: ASSESSING COMPETITIVENESS Report Outline The remainder of the Report is organized in three chapters. Chapter 4 provides the assessment of the competitiveness fundamentals that underpin the economic outcomes observed. Chapter 2 looks at economic outcomes as indicators of revealed A short first part of the chapter reviews Singapore’s endowments competitiveness. The first part of the chapter addresses different in terms of geographical location, natural resources, and other dimensions of Singapore’s prosperity. While GDP per capita is a given factors. Policy can do nothing to change them, but they do central benchmark used in the analysis, this section widens the have an impact on the level of prosperity Singaporeans can enjoy. view to capture whether average GDP per capita gives a good sense of the quality of life for broad segments of Singapore’s society. The second part then looks at the two dimensions of macroeconomic competitiveness, e.g. the strength of social infrastructure and The second part of the chapter decomposes Singapore’s overall political institutions (SIPI) and the quality of macroeconomic performance on prosperity into its mathematical components policy. For SIPI, basic human capacity, the rule of law, and of labour productivity, labour mobilisation, and domestic price the effectiveness of the political system are key concerns. For levels. This decomposition provides insights into the strengths macroeconomic policy, the Report looks mainly at the general and weakness of Singapore’s economy, and also an initial focus in approach to fiscal and monetary policy. terms of critical policy areas. Key observations from this analysis are summarized at the end. The third part covers the three dimensions of microeconomic competitiveness, e.g. company sophistication, cluster strength, Chapter 3 looks at a series of intermediate economic outcome and business environment quality. The diamond, a concept indicators that, as signals and contributors of competitiveness, introduced by Professor Michael Porter that encapsulates factor tend to foreshadow future prosperity. They are important input conditions, the context for strategy and rivalry, demand analytical tools but not appropriate policy objectives. Targeting conditions, and supporting and related industries, will be used them directly, as many countries have done, often leads to to analyse the different dimensions of the business environment. better performance on the indicator but no improvement in This part of the chapter also includes summary observations from either prosperity or competitiveness. The economic outcome a case study on the Interactive Media cluster in Singapore, an indicators include measures of investment (domestic, inward interesting example of the country’s more recent push into new, FDI), global integration (FDI, exports, imports), innovation, knowledge-driven activities. Key observations from the analysis and entrepreneurship. This chapter includes a section written of competitiveness indicators are summarized at the end. by Manu Bhaskaran on the external economic environment Singapore is likely to face in the future as a consequence of Chapter 5 will draw on these different observations to derive a the global economic crisis. It also includes a short case study number of overall observations. The three strategic issues identified analysing the changes in Singapore’s global trading position earlier in the Report will be revisited, using the available data in electronics over time. Key observations from the analysis of and analysis to provide preliminary answers. For each of these outcome indicators are summarized at the end. issues, an integrated set of action recommendations are given. SINGAPORE COMPETITIVENESS REPORT 21
  24. 24. 22 SINGAPORE COMPETITIVENESS REPORT
  25. 25. Singapore Competitiveness Report Chapter 2 Economic Performance SINGAPORE COMPETITIVENESS REPORT 23
  26. 26. 24 SINGAPORE COMPETITIVENESS REPORT
  27. 27. Standard of Living ECONOMIC Prosperity PERFORMANCE Singapore’s current GDP per capita of SGD53,192 puts it among the most prosperous economies in the world. It ranks seventh globally and is second in Asia, behind Hong Kong, with prosperity at 90.3% of the US level. Singapore has done remarkably well in catching-up to the income levels of industrialized countries, and in outperforming its East Asian peers such as Taiwan and South Korea (Figure 2.02). A high standard of living for its citizens is the ultimate benchmark for high competitiveness and successful economic policy. The In 1965, Singapore had, at $2,667 (in 1990 PPP adjusted international most widely used indicator for assessing living standards is real dollars, a measure used for long-term comparisons of real prosperity per-capita Gross Domestic Product (GDP). trends across countries) the third highest PPP-adjusted GDP per- capita in East Asia, after Japan and Hong Kong. Singapore started GDP per capita is a central but imperfect measure of the from a higher initial level of GDP per capita, and kept its lead standard of living, for a number of reasons. First, average GDP over Taiwan and South Korea despite experiencing lower growth per capita might not give a good sense of the median citizen’s of about one-half to one percentage per annum over 1965-2008. income level if economic participation differs significantly across groups of society. These differences might be the result Singapore’s prosperity growth was stable at 4.8% between 1965 of a skewed distribution of income, but can also be based on and 1984 when the country was hit by a severe recession. After that gender, regions, social and ethnic factors. Second, GDP per capita crisis, Singapore moved in 1987 to a higher growth path, with an does not capture important non-income related dimensions of annual growth rate of 5.65% that lasted until the Asian financial the quality of life. Individuals value leisure time, good health crisis struck in 1997/1998. After the shock abated, growth rates and well-being, and a clean environment. There are many other rebounded to put Singapore back on the previous growth trajectory. issues that a more comprehensive analysis would aim to address The bursting of the internet bubble in 2001 again disrupted this (Stiglitz et al., 2009). While this Report does not capture all of development. Once again, Singapore recovered, and by 2007 these dimensions, it looks at both inequality and non-income had reached the level it would have reached if growth between measures of the standard of living. 1997 and 2007 continued at the pre-Asian crisis decade rates. GDP per capita is, in a simple accounting sense, the result of real Since 2002, Singapore has done particularly well compared not labour productivity and labour mobilisation. Purchasing power only to Taiwan and South Korea, but also to selected Scandinavian parity (PPP) adjustments then translate the income level into an and OECD countries. In late 2007 however, Singapore’s economy internationally-comparable level of consumption that citizens was one of the first in the region to go into a recession, despite can afford given local prices. This accounting exercise does not a positive spike in the first quarter of 2008. give insights into the ultimate drivers and causes of prosperity. However, measuring an economy’s performance along these different dimensions provides initial insights into the possible challenges and policy priorities it faces. FIGURE 2.01: SINGAPORE’S PER- CAPITA GDP PER CAPITA, IN THOUSANDS OF 1990 PPP$ Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre. SINGAPORE COMPETITIVENESS REPORT 25
  28. 28. FIGURE 2.02: COMPARISON OF GDP PER CAPITA Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI. In 2008, Singapore’s comparative PPP-adjusted per-capita GDP Even in advanced economies like the United States, the per capita ($51,226) was below only that of Norway ($53,738). Consensus income in urban areas is significantly higher than in rural areas, forecasts suggest that the worst will be over by the end of 2009, although different price levels, especially for housing, lead to much and Singapore’s GDP is expected to grow by 3.5% in 2010. All smaller differences in the actual living standards. But overall, other Asian economies are expected to show positive growth as there is evidence that among advanced economies, differences well in 2010. in urbanization rates are an increasingly less important factor in explaining prosperity differences. Singapore’s prosperity figures are influenced by its character as a city state. Urban areas tend to register higher GDP per capita levels A comparison with other major urban cities (Table 2.01) shows than surrounding regions. Higher density provides opportunities Singapore’s average prosperity level to be solid and comparable for higher productivity, and often offers significantly better access to leading Asian, European, and North American peers. to public infrastructure and services. Economic development, especially at lower and medium levels of prosperity, goes hand in hand with urbanization. TABLE 2.01: CITY PROSPERITY IN 2005 Sources: World Urbanization Prospects: The 2007 Revision Population Database (provided by the UN Population Division) and UK Economic Outlook March 2007 (published by PWC). 26 SINGAPORE COMPETITIVENESS REPORT
  29. 29. FIGURE 2.03: GINI COEFFICIENT COMPARISONS, LATEST YEAR Source: CIA World Factbook, retrieved on June 18, 2009. Equality Average GDP per capita figures can give a misleading view of actual The high level of inequality could, as the positions of Singapore standards of living if inequality is very high. A location’s GINI and Hong Kong suggest, be a function of being a city state. coefficient, a measure which increases with greater inequality However, available data on inequality across cities indicate that of income distribution, is an important indicator as to whether this explains Singapore’s high inequality level to a relatively modest that might be the case. degree (UN-HABITAT, 2008). In addition to Hong Kong, only New York City and a number of Latin American metropolitan At a value of 0.481 (0.462 after government transfers and taxes), areas register inequality at or above Singaporean levels. Singapore ranks as an economy with relatively high income inequality. Singapore’s inequality is higher than in the vast Inequality has risen significantly over the last decade, in Singapore majority of other advanced economies. Across a wider sample as well as in many other economies. The key reasons often cited of countries, only Hong Kong and a number of Latin American are: technological change providing higher returns to talented countries register higher levels of inequality. individuals, and more open markets creating greater opportunities for entrepreneurs to leverage their capabilities across larger China, after a significant increase of inequality over the last few markets. Singapore’s rise in inequality was more pronounced years, is the other Asian economy that comes closest to Singapore than in all OECD countries. However, some emerging economies, in inequality levels, followed by the Philippines. After government including China, Russia, and Indonesia, have seen even stronger transfers and subsidies are taken into account, inequality in jumps in inequality. China is even higher than in Singapore. FIGURE 2.04: SINGAPORE’S GINI COEFFICIENT AMONG EMPLOYED HOUSEHOLDS Source: Singapore Department of Statistics (2009). SINGAPORE COMPETITIVENESS REPORT 27
  30. 30. It is not obvious that inequality has created significant problems in Environmental quality is another factor influencing the quality Singaporean society. This is the result of the high level of public of life which is not well captured through income measures. The services available to all citizens, which disproportionately benefit demand conditions created by public policy measures trying lower income groups. But the dynamics in this area need to be to ensure environmental sustainability are also an increasingly further analysed. Singapore puts great weight on its cohesion. important factor, as many countries, including Singapore, aim As a relatively young nation of significant ethnic heterogeneity, to establish positions in clean technologies. cohesion is seen as a critical condition for developing as a peaceful society. As Singapore moves further towards a knowledge-driven A study by the ADB (2006) provides information on urban air economy, the forces pushing towards higher income inequality are quality in Asian cities. While no Asian city meets the World likely to strengthen. This could create tension if these dynamics Health Organization’s (WHO) guidelines of 20 micrograms per are not carefully considered in advance. cubic meter for PM10 (particulates with a diameter of no more than 10 microns), Singapore, which has adopted the United States Environmental Protection Agency Standards, was closest Quality of Life of all Asian cities to meeting the WHO standards with annual The exclusion of non-income indicators that have a significant average ambient concentrations of 30 micrograms per cubic impact on the actual standard of living is another reason that meter in 2006. There is also increasing evidence that mobile economic measures alone tend to be a potentially misleading individuals see better environmental quality as an important indicator. These indicators are an important signal of the overall reason to locate in Singapore. performance that a country reaches. Over the last few years, they have also become important factors in global competition. As countries compete for global talent, their quality of life and Components of Prosperity Generation attractiveness as a place to live, independent from the income level individuals can reach, have become increasingly important Income is ultimately the result of how productively labour is being assets. This is especially relevant for countries like Singapore used, and how effective the economy is in mobilizing available that thrive on their ability to attract foreign capital and talent. labour. These two factors, both important drivers of income, are driven by different dimensions of the business environment. The UN Human Development Index (HDI) extends the economic Understanding the relative strengths and weaknesses of an economy perspective by adding further information on health and education with respect to the drivers of its prosperity thus gives important as basic requirements for meaningful participation in society insights for policy makers on the action priorities they face. (UNDP, 2009). Singapore has improved its position on the HDI in the last 30 years. Starting from a low base in 1975, it has kept Labour Productivity up with East-Asian levels and reached the average HDI level of Singapore’s current GDP per employee performance puts it only OECD countries in 2005. marginally ahead of the weaker economies within the OECD (Figure 2.06). In 2008, most OECD, Scandinavian and Asian However, Singapore still comes in behind Japan and Hong Kong. comparator countries, with the exception of South Korea, had Leading European countries and the U.S. also rank higher. The higher labour productivity than Singapore. Similarly, the rate main reason for Singapore’s somewhat disappointing performance labour productivity growth from 1995 to 2008 was higher in is a particularly low rank on the education measure used: at a Asian comparator countries such as Hong Kong, South Korea combined gross enrolment ratio of 85%, Singapore only reaches and Taiwan, as well some Scandinavian and OECD countries. a level comparable to countries like Venezuela, Bolivia, Brazil, Singapore did perform better than Continental European countries or the Czech Republic. like Germany and France. FIGURE 2.05: HUMAN DEVELOPMENT INDEX AND COMPONENTS Source: UNDP, 2009. 28 SINGAPORE COMPETITIVENESS REPORT
  31. 31. FIGURE 2.06: LABOUR PRODUCTIVITY AND GROWTH Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI. Between 1965 and 1990, Singapore has registered stable productivity The productivity decline affects the entire economy and is not catch-up relative to the US and Western Europe. Since then, the principally driven by structural change. Between 1970 and 2005, picture has become much more volatile. Singapore has continued the change in Singapore’s labour productivity was, like in most to register higher labour productivity than its OECD peers from advanced economies, dominated by within effects of productivity 1990 to 2007. Since 2005, the country registers a labour productivity growth in individual sectors.1 levels above the EU and the OECD level. However, two periods of fast labour productivity growth (1992-1997 and 2003-2007) were Structural change did make a positive contribution, but was much interrupted by a period with low growth (1997-2003). Relative to smaller in size: over this period, the within effect accounted for the United States, a significant productivity gap, which shows 85% of the change in labour productivity, while the shift effect little signs of closing over the last decade, remains intact. (increase in employment shares of industries with above-average levels or above-average growth rates of productivity) accounted for 15% of the total labour productivity change.2 FIGURE 2.07: RELATIVE PRODUCTIVITY AND PROSPERITY Source: Total Economy Database (January 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 29
  32. 32. FIGURE 2.08: CHANGE IN SECTORAL LABOUR PRODUCTIVITY Source: Singstat Time Series Online, provided by the Singapore Department of Statistics. The patterns have changed over time. Before 1995, within industry Labour Mobilisation effects contributed 3.6% to labour productivity, with the shift Labour mobilisation reflects how well a country uses its human effect contributing 0.8%. After 1995, and up to 2008, within resources and gives an indication of possible policy challenges effects dropped to 2.1%, and shift effects declined to 0.1%. The in this respect. Since 1995, Singapore has registered a significant drop of the within effects was especially pronounced after the increase in labour mobilisation, growing the rate of employees in dotcom crisis in 2001. The shift effect made an ever-decreasing its working age population at a rate surpassed by only a very small contribution to labour productivity growth. number of countries globally. Singapore’s labour mobilisation rate was already relatively high at the beginning of this process; Sectoral productivity data reported confirms this view. Figure 2.08 it now ranks among the five countries with the highest rates of shows the change in labour productivity for selected goods and labour mobilisation globally. service sectors over 2003-2008. Together, these sectors account for about 65% of employment and 60% of real GDP. FIGURE 2.09: PARTICIPATION AND GROWTH Note: Utilizes combination of data sources. Percent of population aged 15-65 for 2007 was taken from the WDI and multiplied against population reported in the TED. Employment is from TED. Sources: Total Economy Database, January 2009 (The Conference Board and Groningen Growth and Development Centre) and World Development Indicators online (World Bank); calculations by ACI. 30 SINGAPORE COMPETITIVENESS REPORT
  33. 33. A closer look at the Singaporean data provides more insights The cost of a standard basket of goods in Singapore is relatively into the process of labour force mobilisation. The data on labour modest compared to the cost for the same goods in most comparable mobilisation among Singaporean residents shows a high level countries and cities. For the cross-country comparisons, the ratio of stability over the long term. Since 2000, 61% of the change in between purchasing power parities (PPP) and market exchange Singaporean labour mobilisation has been the result of higher rates is often used. Most European countries register high local activity levels among Singaporean residents. The remainder has prices, the United States comes in at a middle level, while Asian been driven by an increasing share of non-residents in the overall countries have more affordable local prices. Singapore, together with labour force and an increasing activity level among non-residents. Hong Kong, registers even lower relative local prices than Korea. Activity levels among non-residents are about 30%-points higher than among residents, but the gap has been slightly falling in the years of high economic growth prior to the current global crisis. Contrary to its overall profile, Singapore does only average on FIGURE 2.10: female labour participation. Singapore ranks roughly on par with CONTRIBUTIONS TO CHANGE IN LABOUR the OECD average but significantly below the Nordic countries. MOBILISATION, 2000-2008 High education levels of women, labour scarcity, and availability of domestic help should result in much higher participation rates, but Figure 2.11 shows otherwise. In Singapore, the decline in female participation starts in the relatively young age group of 25-29. This is different from South Korea and Japan, two Asian countries overall with relatively low female participation rates that are, however, much more stable over the women’s life cycles than in Singapore. Purchasing Power The final step in the evaluation of the standard of living is to understand the amount of products and services that can be bought in a location for a given amount of income. Data again provides important insights into the actual performance of an economy and on the policy areas that need attention. Japan, for example (Porter et al., 2000) was the classic example of an economy with Source: Singapore Department of solid labour productivity and mobilisation, but with very high Statistics; calculations by ACI. local prices that reduced the benefits citizens could ultimately gain from their income. Its challenge was a highly-inefficient local sector that drove up prices. The right policy response was to break up the local market structure inhibiting higher performance in this sector of the economy, not just implementing broad based policies for higher productivity. FIGURE 2.11: COMPARISON OF FEMALE LABOUR PARTICIPATION RATES, 2009 ESTIMATES Source: LABORSTA Labour Statistics Database, provided by the ILO. SINGAPORE COMPETITIVENESS REPORT 31

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