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Singapore’s economy: What does the future hold?

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In the past 50 years, Singapore enjoyed rapid catch-up growth from being less economically advanced to one of the more developed economies in the world. We started from having less than a third of the USA’s purchasing-power-parity-adjusted gross domestic product (GDP) per capita in 1965, to being on par with the USA today.1

Our open economy and free trade policy were critical catalysts to our economic growth. Many multinational companies (MNCs) set up their bases in Singapore, in turn allowing Singapore to access key overseas markets, as well as frontier technology and ideas from abroad.

However, our future economy will face different challenges and constraints. Economic cycles are getting shorter. We have a developed economy with less room for catch-up growth, and much sharper constraints in terms of land and people resources. How we adapt to these changes will pave the way for Singapore’s next economic success.

Challenge 1. Transition to trend growth

Singapore will move from a phase of rapid catch-up growth to a phase of trend growth, marked by a likely GDP growth of less than 2% per annum.

Relying solely on adopting technologies that are developed abroad is no longer sufficient to boost our economic growth. To maintain trend growth, Singapore must focus on SMEs to provide local innovation.

Local SMEs will be increasingly important in supporting the future economy because they provide a constant flow of new businesses that rejuvenate the ecosystem. Today, SMEs make up 99% of companies in the country, employ 70% of the workforce, and constitute 50% of the GDP.2 While SMEs have a tougher time competing with large firms, those that eventually survive the competition grow faster than large firms, drive productivity and support overall economic growth. These quality SMEs become the top local brands, and over time internationalise and become key stalwarts of Singapore’s economic growth.

At the same time, SMEs provide a buffer for employees after a recession. Studies conducted using U.S., French and Danish data show that small firms create jobs faster than large firms during the early stages after a recession.3 This buffer will be critical given future shorter economic cycles and more frequent recessions.

Relying solely on adopting technologies that are developed abroad is no longer sufficient to boost our economic growth. To maintain trend growth, Singapore must focus on SMEs to provide local innovation.

Attracting MNCs to Singapore remains an important strategy. MNCs in general are still more productive and offer better pay compared to SMEs. They provide an abundant supply of job opportunities, and create jobs at a more rapid pace when the job market is tight. MNCs also train and expose employees to the different facets of running a business, which is important for encouraging entrepreneurship.

Therefore, policymakers should do more to invest in and support SMEs to innovate, while continuing to attract top MNCs into Singapore. Policies should also facilitate collaborations between MNCs and SMEs, which would strengthen our SMEs and also anchor the MNCs in Singapore.

Local SMEs will be increasingly important in supporting the future economy… SMEs provide a buffer for employees after a recession.

Synergies between MNCs and SMEs

MNCs and SMEs both benefit through collaborations. 

MNCs, by virtue of their size, provide SMEs with expertise, economies of scale, and access to the latest technologies. 

SMEs, being smaller organisations, operate nimbly, make quick decisions, and rapidly iterate in the development of new products. SMEs are also an important source of ideas for MNCs. Read more.

Challenge 2. Decline in future citizen workforce size

People create ideas. Ideas drive innovation. Hence, a larger workforce and population tend to generate more innovation. Academics have termed this as the “Mozart effect”.4

However, growth in the local workforce will slow from now to 20205 and the local workforce size is expected to decline thereafter. This reduces the “Mozart effect”, and could also have implications on businesses’ decisions to locate in Singapore if they think that they would not be able to get the workers they need, at a reasonable price.

Besides quantity, the quality of the workforce is also crucial for supporting an innovative economy. The educational system should prepare students to be creative, think critically, with a ‘never-say-die’ attitude. SkillsFuture will help Singaporeans continuously upgrade and keep with the times.

Remaining open, but in a calibrated and selective way, to skilled foreigners would also help to supplement our shrinking local workforce and boost attractiveness to businesses to create jobs. In addition, a greater diversity in the workforce will increase the "Mozart effect" and help with innovation and generation of new ideas which are critical as our economy transits to trend growth.

Challenge 3. Emergence of disruptive technologies

Technology is a double-edged sword. Whoever is able to cope with rapid technological changes and seize the opportunities it brings, emerges the winner.

Technological advancements provide organisations with new business opportunities. For example, technology has lowered communication costs, enabling more businesses to enter the global market. It has also led to new product developments, which means more production. Many new businesses like AirBnb, Grab, successfully capitalised on technology to seamlessly match demand and supply, creating their niche markets.

However, with technology advances and automation, certain jobs, especially those which are of routine nature, may be replaced. New types of jobs will also be created.

To prevent unemployment and skills mismatch, the workforce should continuously upgrade their skills. SkillsFuture will prepare the workforce for new jobs as old ones become obsolete.

Challenge 4. Change in job preferences

The education profile of Singaporeans is improving. Currently, 4 in 10 residents hold diploma qualifications and above, compared to 3 in 10 residents a decade ago.

It is estimated that by 2030, 2 out of 3 Singaporean workers will be professionals, managers, executives and technicians (PMETs) compared to about half today.6

To ensure that we continue to have sufficient and attractive PMET jobs for our future workforce, we need to press on with restructuring our economy to be of even higher value-add and less reliant on the need for lower-skilled workers. Technological improvements will also create new attractive jobs.

Conclusion

Singapore’s economy faces four challenges in the future: a growth transition, demographic transition, technology disruptions, and higher aspirations of jobs. These imply a need to shift from our old growth strategies and to adapt to the new landscape.

While changes can be daunting, our strong fundamentals remain: the ability to develop political consensus, and support social and economic institutions that embrace openness. These fundamentals will continue to support our future economic growth and create a healthy supply of attractive jobs.


1 Ho Kong Weng and Hoon Hian Teck, 2009, "Growth Accounting for a Technology Follower in a World of Ideas: The Case of Singapore," Journal of Asian Economics, 20(2): 156-173.
2 Public data available in 2013. http://www.channelnewsasia.com/news/specialreports/parliament/videos/smes-an-important-part-of/856032.html.
3 Moscarini, Giuseppe and Fabien Postel-Vinay, 2012, "The Contribution of Large and Small Employers to Job Creation in Times of High and Low Unemployment," American Economic Review, 102 (6): 2509-2539.
4 If we suppose that innovation requires creative and talented people, and the probability of being a creative and talented person is independently distributed among people, then we should find a greater number of creative and talented people within a larger population. This has been termed the “Mozart Effect” by economist Edmund Phelps. (http://lkyspp.nus.edu.sg/ips/wp-content/uploads/sites/2/2013/06/Conference-Proceeding_Hoon-Hian-Teck.pdf)
5 Annex to MOM’s Statement on Labour Market Developments, Mar 2016 (http://www.mom.gov.sg/~/media/mom/documents/press-releases/2015/statement-on-labour-market-developments-mar-2015-annex.pdf)
6 Singapore (National Population and Talent Division), Population White Paper 2013, page 32

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