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(SINGAPORE) The call by Prime Minister Lee Hsien Loong for a reappraisal of long-term strategies for the Singapore economy by a new 'Economic Strategies Committee' is timely and critical. The global economic crisis has changed the dynamics of the world economy. For export-oriented economies, in particular, the crisis is a paradigm-shifter. Thus, the Singapore economy, like many others in East Asia, is at an inflexion point. Chances are that some strategies which worked well in the past will be less effective in a post-crisis world. There are also new forces that are emerging and accelerating in the region, to which Singapore, like others, will need to adapt.
Let's consider some of the emerging mega-trends facing Asia over the next few years.
Export-orientation will not be enough
While the export-based economic model on which many Asian economies have built their prosperity over the last four decades is far from dead, it will no longer be as powerful an engine as before. Faced with falling house prices, less job security and tighter credit, consumers in the US and Europe are rebuilding their balance sheets - reducing consumption, cutting back on debt and increasing savings. This process is likely to go on for several years.
For Asian exporters, this means a prolonged shrinking of markets. The reality of this shrinkage is already showing up in the closure of thousands of factories across the region as well as a dramatic fall-off in exports. Although exports will recover in the short term, because the fall was exaggerated by the temporary seizure of the credit markets, Asian export volumes are unlikely to return to what they were in the go-go years of high consumption up to 2008.
While their export sectors will still be important, Asian countries will need to add new engines of growth. In recent years, Singapore has been doing so, for example, through diversifying away from electronics by strengthening its chemicals and pharmaceuticals cluster within the manufacturing sector, broadening its financial services industry and adding leisure and entertainment - notably the two integrated resorts. It will need to find still more growth drivers.
Domestic demand is the new buzzword
One of the key recipes being proposed for Asian economies is that they should 'rebalance' growth away from a reliance on exports and towards domestic demand. While Asia's larger economies - China, India and Indonesia - have more scope to do this given their relatively large domestic markets, in smaller economies like Singapore, the scope is more limited - although by no means absent.
Asia will strengthen social safety nets
Economists reckon that one of the main reasons why most East Asian countries' consumption levels are relatively low - mostly 40-50 per cent of GDP, compared with more than two-thirds in the US - is that people are forced to build high levels of precautionary savings because of the dearth of social protection systems. As the economist Paul Krugman put it, in China, people who go to hospital first need to stop by their bank.
Thus, one of the keys to boosting domestic demand in Asia lies in strengthening social safety nets. This will involve increasing shares of public spending on health, education and pensions and other social protection programmes. Stronger safety nets will reduce the need for precautionary savings and will boost consumption. It will be a gradual process, because people are typically slow to change their behaviour, but it will gather pace in the coming years. Social safety nets will also help ease the process of economic and corporate restructuring.
Restructuring will accelerate across the region
As consumers in the west cut back on spending, as well as change their spending patterns, the industries and companies that supply them (many of which are in Asia) will have to retool. With bank credit being cut back, companies which in the past benefited from easy credit to their end-consumers - for example, suppliers of auto parts, building materials, certain capital goods - as well as luxury goods producers - will need to adapt their product offerings, or shift to lower-cost locations. Faced with tighter bank credit themselves, Asian companies will also need to find novel ways of raising funds, including through capital markets.
At the same time, some new industries will expand, in response to cost-dynamics, subsidies and technological change. Examples are alternative energy, healthcare, media and entertainment. Industries and companies in Singapore will, like elsewhere in Asia, be under pressure to restructure.
China and India will loom ever-larger
Even before the crisis, China and India were the fastest growing economies in Asia. Post-crisis, they are likely to widen their growth advantage over the other economies of the region. This will present both challenges and opportunities: challenges because the Asian giants will become hyper-competitive in certain sectors as producers, as well as attractive investment destinations; and opportunities in that they will offer rapidly growing markets for a variety of goods and services, especially as they boost their domestic demand. Singapore is well placed to deepen its engagement with both countries. But this will require a more granular approach to doing business, for instance by focusing more on individual states and provinces.
Regional integration will become more urgent
In an ideal world, Asean would be a 500 million-consumer-strong, seamless, single market. Both as production base and investment destination, it would be a stronger competitor to China and India.
But Asean is still a long way from such integration. The impetus for this will gather pace in the years ahead. Asean will be forced to move faster to free up trade and investment, harmonise product standards and procedures, as well as coordinate policies. To get there, member countries might have to sacrifice a degree of economic autonomy.
The Singapore economy will need to adopt bold new strategies and policies to navigate through these and other mega-trends in the post-crisis world.
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