Dinner Remarks By Mr Lim Hng Kiang, Second Minister For Finance At JPMorgan Chase Asia Pacific Senior Directors' Conference

Date: 16 January 2003

Introduction

If we were having this dinner six years ago and looking into the future, not many would have envisaged the events of the last six years.  In January 1997, markets were becoming a little uneasy about the excesses in Asia built up over the boom years.  But nobody would have thought that when the Thai baht floated in July 1997, it would trigger off a chain reaction which led not only to financial and economic crisis, but also the collapse of several governments in the region. As the saying goes, the rest is history.

2   Today, Asia is at a crossroads.  The events of the last six years point to the political and socio-economic challenges ahead.  How Asian countries, individually and collectively, deal with these challenges would determine the future prospect of Asia.

Four key challenges in Asia

3   We can identify four key challenges facing Asian economies.

Clean up after Asian financial crisis

4   First, completing the corporate and banking sector reforms  in the aftermath of the Asian financial crisis. In general, Asian countries have done well, perhaps better than what we had dared to expect at the height of the crisis 5 years ago. But the track record  varies considerably across Asia.

5   Now that growth has returned to some extent, and financial pressures less threatening, Asian governments are faced with the choice of whether or not to pursue the reforms comprehensively and completely. In this regard, it is abundantly clear that countries that had decided to go through with painful reforms have emerged way ahead of those that had dithered.

6   Reforms in Southeast Asia have proceeded at a fairly sensible pace.  However, it is important that we persevere and complete the task.   Japan serves as a  reminder of how unresolved problems get compounded and become more difficult over time. Structural problems don?t just go away by themselves. These reforms, together with the building of a strong institutional framework of corporate governance and increased transparency, would go a long way to ensure that the Asian financial crisis will not recur.

Globalisation and technological advances

7   Second, pressures from globalisation and technological advances remain relentless.  Barriers to trade have been lowered.  Factors of production are more mobile.   Economies of scale and IT applications generate productivity improvements and opportunities for integration and consolidation.

8   An increasingly integrated and globalised economy operating in real time has also shortened lead times and increased economic uncertainty.   Whereas in the past a demand shock in the US would take 3 to 6 months to impact us; nowadays, we could feel it almost instantaneously. As the frequency of shocks hitting Asia has increased in recent years, this has complicated economic planning and stretched our ability to smooth out the fluctuations.

9   Competition has become intense in both the product and labour markets. Physical size has become less of a constraint and there is a significant premium on technical knowledge and skills. Highly skilled managers and scientists are in demand everywhere. Conversely, some of the old jobs that have been made redundant will never return. These rapid changes pose significant challenges to governments and societies to revamp their education system, build new competencies and continuously retrain their workers. For a small, open economy like Singapore, globalisation forces us to try and stay ahead of the curve and make the necessary changes to our economic structure or risk being overwhelmed by those rapid changes.

Rise of China and India

10   Third, the rise of China and India, and their increasing involvement in the world economy.

11   Over time, the rise of China and India is likely to transform the economic landscape in Asia. China has rapidly opened up its economy and trade has exploded. India, although trailing behind, is making impressive progress and the phenomenon of the license raj could soon be a thing of the past.   With Japan still trapped in its debt/deflation morass, the center of gravity has clearly shifted towards China, and, to a lesser extent, India. The emergence of China and India as attractive low-cost production centers ? what some called the factories of the world ? has created a significant supply shock particularly to the economies in the region. Severe margin pressures are forcing many more industries to consider moving to China or India.

12   The shifts pose considerable opportunities as well as challenges to regional economies. As incomes rise, China and India will soon become large markets in their own right ? indeed China is now the world?s largest market for mobile phones and demand for other consumer goods like cars and PCs is rising rapidly. Reflecting partly the shift in production patterns, most East Asian countries have seen their exports to China grow much faster than to the major industrialized markets.

13   China is also expected to be a major source of tourism for the region. The demand for travel is highly income elastic and the region can expect to see an exponential rise in Chinese tourists as incomes continue to grow at a fast pace.

14   But India and especially China, are also formidable competitors as well as enormous markets. Over the last several years, China has displaced Southeast Asian countries in the race for foreign direct investments. As it rapidly builds up its production capacity, China has also overtaken the ASEAN countries in the share of exports to the major OECD markets.

15   The emergence of China and India has dramatically altered the competitive landscape. The well-known economist Bhagwati had a very nice way of characterizing this increasingly competitive landscape. He called this kaleidoscopic comparative advantage to describe the phenomenon where a slight change in costs can lead to significant, and more volatile, shifts in comparative advantage.

16   Clearly, it is imperative that ASEAN countries rise up to the challenge, and adjust to the changing kaleidoscope. We need to constantly re-examine our comparative advantages and develop new capabilities. I am happy to note that there has been some notable progress in this regard. Malaysia has now reverted to the teaching of Math and Science in English in primary schools as a means to better prepare its people to meet an increasingly competitive global environment. Some countries have also looked beyond the manufacturing sector as a traditional engine of growth. Malaysia has decided to focus on the services sector and has given Singapore a run for the money in the area of port and airport services. Thailand has shifted its development strategy to focus more on its domestic economy, and quite successfully too, judging by its recent strong economic performance. Over the longer term, there is no doubt that this more intense, competitive environment will lead to increased economic efficiency and will expand the growth boundaries in Asia.

17   However, significant dislocations are to be expected during this transition period.  Job mismatches will rise and so will structural unemployment. Accordingly, countries in the region will have to find a way to balance economic reforms and restructuring (which tends to be deflationary) with programs to support incomes and attract new investments.

International terrorist threat

18   Fourth, international terrorist threat and the geopolitical security consequences of the Iraqi and North Korean situation. Even as the ASEAN economies are still working through the aftermath of the Asian crisis, the recent security and geopolitical concerns have added another layer of risk to the economic and business environment. As a result of this heightened risk aversion, businesses are now less prepared to invest in the region until these concerns have been addressed. This has in part led to a slowdown in FDI, which, in turn, has hampered growth and dimmed the outlook for new investments.

19   Beyond the more immediate challenges posed by Iraq and North Korea, the rise of political Islam in Southeast Asia, and the presence of extremists linked to Al-Qaeda, will have longer term consequences for the region. Home to one of the largest concentrations of Muslims in the world, this issue will have to be dealt with carefully and with great political skills.

20   It is clear that ASEAN governments must tackle the security problems resolutely and decisively before a new growth cycle led by investments can begin. In this regard, I am happy to note that ASEAN has implemented practical measures to enhance counter-terrorism co-operation, including the sharing of intelligence and working with external parties to ward off terrorist threats. In August last year, ASEAN and the US signed a Joint Declaration for Cooperation to Combat International Terrorism. In Singapore, the arrest of many members of the Jemaah Islamiyah network has crippled the terrorist organization.  There is now a growing recognition of the regional network of terrorist organisations and a growing confidence that by working together, we can effectively contain the terrorist threat.

Implications for the Singapore Economy

21   As I said earlier, Asian countries have responded to these challenges, albeit to varying degrees.  There is also greater collective action to address these challenges.   As a region, the prospects for Asia is bright.

22   In the case of Singapore, we will continue to restructure and reposition ourselves  to harness the benefits of the region?s growth. As a strategic response to the increasingly competitive external environment, the government established the Economic Review Committee to undertake a comprehensive review of Singapore?s development approach and formulate a new blueprint to restructure the economy. The recommendations made by the committee are aimed at creating a competitive infrastructure and business cost environment, and encouraging innovation-driven activity. 

23   Overall, our approach to these longer term challenges, including the ERC recommendations, can be grouped into four broad categories:

24   First, measures to reduce costs and increase Singapore?s competitiveness.  One key initiative is the reduction of corporate and personal income taxes to encourage new investments, attract global talent, and reward enterprise, even as the government seeks to strike an optimal balance between direct and indirect taxes.  With this in mind, the top tax rate for both corporates and individuals was reduced to 22% in 2003, with the aim of lowering it further to 20% by 2005.  To offset the revenue loss from direct sources, the GST was increased from 3% to 4% at the beginning of this year, and will be raised further to 5% next year.

25   Second, measures to upgrade the manufacturing sector and develop the services industries to diversify the Singapore economy.   Within the manufacturing sector, the life sciences industry is being developed as a fourth pillar of growth, in addition to the electronics, chemicals and engineering clusters. This would reduce our dependence on any one industry as we move up the value added ladder. In the services sector, the recommendations include developing Singapore?s education industry, promoting Singapore as a regional arbitration and intellectual property centre, as well as encouraging more research activities in areas such as medicine and healthcare. 

26   However, the greatest progress has been made in the telecommunications and financial services sectors, where liberalisation measures started a few years ago.  As global trends pointed to the consolidation of financial centres around the world, we modified our approach to supervising and developing the financial sector.  We shifted to a more risk-focused supervision, to provide a more conducive regulatory environment to foster greater dynamism and innovation, while not sacrificing the safety and soundness of our financial sector.  At the same time, key financial industries were liberalised, including retail banking, insurance and stock-broking activities, while steps were taken to broaden and deepen the local debt markets and asset management activities.

27   While these measures have largely focussed on enhancing domestic competitiveness, as we move forward, we need to identify new sources of growth, and develop new competencies and niches in ?sunrise? industries. These new competencies should be less location dependent, and more technology and knowledge intensive, areas where Singapore has a comparative advantage. The Committee has identified wealth management, technology-intensive processing activities and risk management as among the regional or global niches that Singapore should develop, and steps will be taken to develop these areas. 

28   Third, measures to increase our exports and seek out new growth markets.  In an effort to open up more trade opportunities, we have signed Free Trade Agreements with Japan, Australia, New Zealand and the European Free Trade Association. We have also substantially concluded negotiations for an FTA with the United States.  Parallel to these, we have also made efforts in diversifying our export markets, chiefly through enhancing trade linkages with East Asian economies. Although intra-East Asian trade flows are still too small to shield against external demand shocks originating from the industrial countries, such trade flows are expected to grow over time and eventually provide a buffer against cyclical swings in the G3 economies. 

29   Fourth, measures to counter the rise in structural unemployment.  Workers too need to brace themselves for this volatile environment. The risk of structural unemployment is very real, not only in the manufacturing sector as firms shift some of their operations to China and other lower cost countries, but also from the global shake-out in the services industry. Structural unemployment used to be a term associated with blue-collar jobs, but it is now affecting all segments of the job market. To address this, the key is clearly in skills upgrading, manpower training and retraining. New skills and competencies must be developed to meet the needs of new growth industries.  In this regard, the government has set up various funds for this purpose, including the on-going Skills Redevelopment Program targeted at lower skill levels, as well as a Financial Sector Development Fund aimed at skills upgrading in the financial sector.

30   To conclude, East Asia is now at an important crossroads. The external environment has become more challenging as new forces have emerged even as the regional economies continue to grapple with the damage inflicted by the Asian financial crisis.  While economic fundamentals have remained strong, the old policy packages are no longer adequate to meet the challenges.  Here in Singapore, we have undertaken a comprehensive review of our economy and policy framework and come up with a new development strategy that we hope will lead us on to greater prosperity in the years to come.  Thank you.