Written by Ng E-Jay
01 Feb 2009
Has the Government been caught with its pants down with regards to the sharp downturn in Singapore’s economy?
As recent as August 2008, just a couple of months before the US credit markets totally froze up, the Ministry of Trade and Industry was projecting an economic growth target of between 4% and 5% for the year — a projection that now seems far too optimistic.
To the Government’s credit, their budget statement for 2008 acknowledged the presence of “major downside risks” to the economy, with the possibility of a sharper than expected decline in US growth adding to the turmoil in the financial markets, and deepening the credit crunch.
However, the Government has spent most of 2008 fighting inflation rather than preparing for deflation, which is what the global economy, and in particular Singapore, is likely to experience in the months ahead.
In April 2008, MAS announced that it would shift the Singapore dollar nominal effective exchange rate (S$NEER) policy band upwards without changing its slope or width, in an attempt to combat inflation by allowing a faster appreciation of the Singapore dollar. Subsequently, the Singapore dollar rose to as high as 1.35 USD/SGD.
Such a policy measure seemed appropriate at that time, but later proved too strict when the collapse of oil prices and other commodity prices such as those of base metals in the second half of the year erased inflation expectations from their artificially and temporarily elevated levels.
It was only in October 2008 when the global credit crunch had exploded in our faces, the downturn was well underway and the spectre of deflation was rearing its ugly head that MAS shifted its policy stance to a zero percent appreciation of the S$NEER policy band. However, MAS maintained the level of the policy band, without re-centering the band or changing its width.
These half-measures shows us that even as late as October last year, the Government was still too complacent about the future prospects of economic growth, and did not fully appreciate the potential devastation to the global economy that could result from the ongoing credit crisis and the meltdown of major financial institutions in US and Europe.
Budget 2009, touted by the mainstream press to be “generous”, “decisive”, “bold”, and “scoring on superlatives”, is designed to benefit businesses first and foremost, in the hope that by helping companies cut staff costs and gain easier access to credit, jobs can be saved.
But will jobs really be saved by such measures? The current sharp downturn in the global economy has caused a collapse in global demand. Given that our economy is still very much export oriented, helping businesses cut costs and gain access to credit would not necessarily translate into job gains because companies have no reason to expand but every reason to scale down to survive. If no one out there is buying your goods and services, the cheapest labour in the world or the easiest source of credit is not going to help your company stay afloat.
Budget 2009 is also noted for its conspicuous lack of retrenchment benefits.
Beyond these shorter term considerations, longer term issues like transparency and accountability in the accumulation, investment and use of our reserves remain unaddressed.
Despite the restructuring of our economy that was supposed to have taken place in response to the previous downturn in 2000-2002, Singapore was still the first economy in ASEAN to fall into a recession last year. Our diversification away from electronics manufacturing to the biomedical and services industry proved to be a double-edged sword, as the biomedical industry was severely hit last year due to exposure to its counterparts in US and Europe.
Consumption accounts for only about 40% of our GDP — far less than other developed Asian economies whose share of GDP in consumption is nearer to 55% (read Wall Street Journal’s commentary here).
Singapore is thus hit by a double-whammy, in that efforts to stimulate consumption by putting cash into people’s pockets will have less results as compared to similar measures employed in other economies like Hong Kong, and our over-reliance on exports for growth leaves us acutely vulnerable to the sharp global downturn.
Clearly then, efforts to remake the Singapore economy in recent years have not made us more resilient. They have instead only further entrenched our GLCs and other Government-sponsored monopolies and made us less competitive as a nation. High office rentals have been allowed to run amok, hurting SMEs in the upturn and further damaging them in the downturn.
The Government has truly been caught with its pants down, both in its inadequate response to deteriorating global economic conditions, as well as its failure to put Singapore’s economy on a sound footing in what has proven to be a very volatile start to the 21st Century.
Yet today, even after the recent pay reduction, our Ministers are still drawing salaries several hundred times that of their US counterparts when compared to the size of the nation’s GDP (see here).
Perhaps it is time that they vacated their seats for politicians who are able to recognize that the old top-down approach to economic management that allows bureaucrats to pick winners via administrative edicts is no longer relevant in the 21st Century, and who reject as false the choice between a strong political economy and a sustainable one.