Linda Lim, Professor Emerita at the Stephen M. Ross School of Business, University of Michigan, considers future directions for Singapore’s economy, including the need to reconsider existing approaches and reorient to a likely increasingly deglobalized world.
My recent commentary in the Straits Times discussed how the world and national economies are likely to change as a result of the COVID-19 pandemic. Here I consider the economic implications of these global trends for Singapore, assuming there will be future pandemics, like the five others of the past 17 years (SARS, H1N1, MERS, Ebola, Zika).
The end of ideology
Singapore has always been a state- rather than a private-enterprise-led economy, so the shift to a stronger role for government versus markets will not be particularly disruptive domestically.
However, the move in this direction of its major international trade and investment partners, particularly the US, UK and EU, on top of prior pressures to resurrect industrial policy to counter China’s statist practices, will constrain the efforts of the Singapore government to attract foreign investment, the bedrock of its development strategy for half a century.
Foreign companies will face demands from increasingly interventionist home governments and some shareholders to shift overseas activities to the home front, as part of corporate risk reduction and national security strategies. This will add to already growing international limitations on the use of tax incentives to compete for investment. Loan bailouts for business in major economies prioritize job preservation in those countries, and impose other conditions that may restrict the freedom of companies to invest internationally.
On the bright side, the crisis may force the Singapore government to abandon its decades-long insistence on running cumulative budget and current account surpluses. These restrain domestic consumption in normal times, resulting in the historically and comparatively low share of consumption in GDP. When expended, they have a regressive effect to the extent that they transfer income from typically poorer earlier generations to richer later ones, and from average household savers and taxpayers to higher-income (and foreign) employees and shareholders of businesses receiving subsidies.
COVID-19 policy responses around the world show that creditworthy governments do not need hefty “reserves” to fund deficit spending, since they can borrow readily, including from their own central banks, and at historically low interest rates. Requiring a government to balance its budget over a five-year electoral term, as Singapore does, further imposes an unnecessary constraint on its flexibility to respond to crisis. Chronic surpluses also risk undermining the international competitiveness of traded sectors (if they put upward pressure on the exchange rate), or lead to accusations of mercantilism and unfair trade through “currency manipulation” (if they do not).
The decline of globalization
As a global city more dependent than any other on foreign companies, markets, labor, talent, tourist and business visitors, and international trade, transport and capital flows, Singapore’s economy will always be severely affected by travel restrictions and business shutdowns to contain a pandemic. COVID-19 has already led to a worrying rise in protectionism, with countries restricting exports of medical supplies, and even rice.
Adapting to these disruptions and anticipated future pandemics, businesses around the world, especially large multinationals, will accelerate the deglobalization already ongoing for other reasons. They will reconfigure supply chains to diversify dependence away from a single source (China), return to the home country “footloose” activities like R&D, finance, training, meetings and other regional headquarter functions, and develop “multi-domestic” organizations that are as self-sufficient within a major market country as possible. These will be enabled by technological, infrastructural and organizational developments hastened along by COVID-10, such as automation, remote working, teleconferences and workforce distribution.
Singapore, lacking the necessary demand- and supply-side scale, risks being left out in the cold. Even its own few large globalized domestic enterprises—mainly banks, property and government-linked companies like Singapore Airlines, and a handful of manufacturers—will face increased state-supported national competition in overseas markets, and pressure to locate more value-chain activities there. Already Japan is providing loans for its companies to move home from China, while the US is considering paying American companies to do so.
At home, Singapore will probably have to reduce its reliance on foreign labor and talent, to reduce the travel risks, work disruptions and liability for healthcare costs they entail in a pandemic. COVID-19 has shown that it is necessary to provide foreign labor with better working and living conditions, which will increase its costs, while for foreign talent there will be reduced availability of both expatriate assignments and willing expatriates, as global companies pull back on overseas operations.
Enhanced social safety nets
Like other rich countries and especially other dense global cities like New York and London, Singapore is experiencing the negative consequences on its affluent majority of wide income and wealth disparities. Low-wage service workers in public-interfacing roles (e.g. cleaners, food service, transportation, retail, personal service and care workers), often foreign nationals, disproportionately succumb to the disease.
The extension of paid sick leave, health and retirement benefits, unemployment compensation, income maintenance and hazard pay bonuses to these workers and others like gig workers and the self-employed, sets a precedent standard and recognition of their worth as (in some cases) “essential workers”. This will be politically and morally difficult to walk back from after the pandemic.
This should lead to a more broad, secure and equitable social safety net available to all Singapore residents as universal entitlements rather than the current bureaucratically complex (thus costly), employment-based patchwork of deliberately inadequate and contingent payments. These are designed to avoid “rewarding” individuals or families considered “undeserving” for some reason, such as being lazy or making bad personal choices. But the crisis bailouts provided to business—especially rich large and foreign enterprises which by design contribute little to local tax coffers—make it appear petty and unfair to insist on precluding “moral hazard” by the poor for far smaller amounts of state aid.
It is also inefficient. In the Singapore context, greater financial security can improve family economic performance, including children’s schooling and parents’ work effort. Together with the post-pandemic increased cost of low-wage foreign labor, it may even increase productivity through improved organizational processes and technological innovations to attract, retain and upskill local labor.
Direct household transfers are also much more effective in stimulating demand than the tax abatements on which Singapore’s three COVID-19 Budgets to date focus, particularly as the domestic value-added share of personal consumption expenditure continues to rise. Transfers can be funded by eliminating budget surpluses, and by less generous tax provisions for higher-income households and foreign businesses which contribute less to domestic demand, given their greater import-intensity and earnings outflow to foreign shareholders.
Enhanced community engagement
A striking feature of responses to COVID-19 around the world is local communities self-organizing to combat the virus and the economic consequences of lockdown, without government direction. These include rigorously practicing social distancing even without any enforced official mandate, volunteering to shop and do errands for vulnerable neighbors, gathering resources to support healthcare and other essential workers, and developing creative solutions to keep shuttered neighborhood businesses alive.
This capacity for self-organization is an important contributor to the resilience of a community under stress. It can be a substitute for or adjunct to competent state authorities, and adds to psychological well-being. It is more likely to emerge in communities with strong civil society institutions and traditions of self-reliance. Going forward, Singaporeans long habituated to dependence on an efficient state apparatus would do well to develop more of such grassroots capability in the population at large. The state itself would improve its performance by collaborating with community and civil society organizations to anticipate and mitigate risks. For example, local NGOs long raised concerns about foreign worker working and living conditions, now a serious threat to public health: greater responsiveness to their concerns, and more space for such organizations to operate, will provide the country with greater bandwidth to deal with future pandemics and other social problems.
Enhanced national innovation
Innovation in terms of organizational capability, public policy, entrepreneurial and technological advances, is necessary to develop the indigenous productive capacity that Singapore needs to survive and prosper in a post-crisis world economy.
With lower global growth and increased deglobalization, demand is likely to be a greater constraint on Singapore’s future economy than supply. Yet it is supply that the current focus on training and retraining seeks to address, since “We don’t have the skills which multinational employers want”.
Now, to boost external demand, Singapore will need to become part of larger markets. This will most likely be within existing Asia-centered regional models like ASEAN, CPTPP and RCEP, but could include other groupings of small open economies like New Zealand, Norway and Switzerland, as a virtual global economy develops, accelerated by the COVID-19 experience. The low level of domestic demand will be boosted by increased public expenditure to fund an enhanced social safety net, as the state retreats from incentivizing the production of goods and services for rich distant markets that are increasingly closing their doors, while private enterprises step up to produce for lower-income nearer markets, and for Singapore’s own citizens and residents. Diversion of savings from overinvestment in housing into private entrepreneurial investments can also boost demand.
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