I REVIEW OF THE ECONOMY

The causes of the present recession have been well documented in the Economic Committee's Report. Externally, we have had to contend with a slowdown in international trade as a result of growing protectionism as well as structural changes in global demand and supply conditions affecting key sectors of our economy. The low and falling commodity prices which adversely affected the growth of our ASEAN neighbours have also resulted in less trade and tourist arrivals for us.

Internally, profit margins have been steadily eroded as wage costs outstripped increases in productivity. This has been aggravated by a sharp decline in construction and related activities following the completion of major private sector projects and the scaling down of our public housing programme.

The basic thrust of the Government's response to these problems has been elaborated by the First Deputy Prime Minister and I shall not repeat them. I would, however, like to emphasize that we do have considerable control over internal factors. Measures to reduce cost can and have been taken. We have among other things suspended payroll tax, cut skills development levy, and reduced CPF contributions. This will restore the international competitiveness of our firms and traders to a considerable extent. We can supplement these measures by striving hard to increase our productivity and the quality of our products and services. In essence, how we overcome the internal problems depends on ourselves and the sacrifices we are prepared to make.

The external factors we have little control over. We are a price taker in world markets. How we fare will depend on the world economy in general and the US economy in particular. The recent fall in world oil prices will hopefully quicken the upturn in activities expected for the US and other industrial economies.

Restoring economic growth must be the priority for the coming financial year. But while we tackle our present problems, we must not lose sight of longer term issues, in particular our future place in the world economy.

Industrial Development

Our industrial development in the years ahead will depend on the pace of auto- mation, and, increasingly, on research and development. The present level of R&D expenditure is not high, accounting for only 0.6% of our GNP in 1984, although it has actually more than doubled since 1982.

This increasing trend should be encouraged to continue. More specialized research-oriented institutions along the lines of the Institute of Systems Science and the Institute of Molecular and Cell Biology must be established. However, this is only feasible if we have the necessary manpower. In this respect, the National University of Singapore (NUS) and Nanyang Technological Institute (NTI) should not let up in their efforts to train and acquire a wider pool of scientific experts. The Government will continue to assist by providing tax incentives and R&D grants to encourage private firms to undertake applied R&D activities. I will elaborate on this further when I come to the section on tax changes.

The structural changes accompanying the rapid rate of technological innovation in the developed countries will impact significantly on our future industrial development. Foreign companies that are currently automating their plants and operations will have insufficient resources to undertake any new investments overseas. Moreover, given the increased productivity from automation, there will be less economic advantage in establishing new facilities abroad simply to take advantage of lower wage costs.

It is, therefore, all the more critical that our manufacturers continually upgrade their operations and diversify their products. They should be more outward looking and seek out opportunities overseas. Being a small economy, we can never provide them with a big enough domestic market for them to survive and thrive.

Trade Development

Until the industrialized countries restore the health of their economies and increase employment, protectionism will continue to be rife. Last year, we were not spared. There was no letting-up in countervailing duties and anti-dumping investigations on our exports.

Our best defence is to increase our productivity. At the same time, we must be nimble and adapt to changes in world markets and in demand and supply. For example, third country trade in commodities such as crude oil, rice, sugar and other products is estimated to be worth some $45 billion annually. Countertrade is another area which will grow in importance. A recent study has estimated that countertrade currently accounts for between 8% and 10% of world trade. Firms must grasp the complexities of these new trading activities quickly and translate them into realizable gains. It has been observed time and again that our entrepreneurs are not as quick to sense changes in demand and tastes and keep in step with these changes. It has been said that if a new product is showed in Japan today, it will be on sale in Hong Kong tomorrow, (the very next day) and Singapore stores will only have it the following week.

Our traders must be much more aggressive in their marketing strategies. They must know who their competitors are and what their consumers want. The Trade Development Board (TDB) will spearhead the Government's drive to expand and seek new markets for our traders. More export promotion activities will be devised and tailored to meet the needs of local exporters. The TDB will also help disseminate information to traders so as to assist them in penetrating non-traditional markets such as Latin America, Africa and South Asia. Greater efforts will be made at the same time to expand our traditional markets closer to home.

The Government will also minimize trade restrictions, simplify trade documentation and weed out bureaucratic red tape. Ultimately, however, it is the drive and the business acumen of our manufacturers and traders that will determine whether they succeed in the world.

Financial Services

The demand for financial services in this region will continue to expand, considering that the Asia Pacific Region has been identified as a high growth area in the coming decades. Financial services, identified as having potential for growth, centre around fee-based activities,such as fund management, and new financial instruments, such as financial futures. Fiscal incentives have been implemented to encourage the fund management industry, and these will be augmented by further incentives which I will shortly announce. The Singapore International Monetary Exchange has progressed satisfactorily and currently lists four financial futures contracts. Later this year, a stock index futures contract will be introduced. SIMEX is also expected to introduce options trading early next year.

On the domestic front, steps will be taken by the Government to develop a fixed rate securities market so as to pave the way for companies to raise fixed rate funds. In the equity market, the resolution of the problems currently facing the local stockbroking industry and the introduction of a new Securities Industry Act will mark a new chapter in the annals of our stock market. The corporatization of the industry has begun with the big four local banks gaining membership on the Stock Exchange of Singapore. This increased institutional participation will strengthen the industry and help regain investors' confidence in our stock market. Later this year, the unlisted securities market is expected to begin operations. This will provide an avenue for companies with good potential for growth, but which are unable to obtain a listing on the main board because of their limited track record, to raise capital.

A necessary prerequisite for further growth in any financial market is a sound and stable financial system. Therefore, in pursuing a strategy for growth, we must not lose sight for the need for uncompromising prudential standards. We will continue to monitor and maintain such standards.

The Property Market

The Property Market Consultative Committee (PMCC) was formed to look specifically into the ills of the property sector. They have identified three major causes of the present slump, namely, unpredictable demand, excessive supply and a loss of market confidence. They have made a number of recommendations to nurse the property market back to health. These proposals are now under active consideration by my ministry.

While property value will generally rise, given the scarcity of land in Singapore, one should expect it to peak and trough in accordance with the economic cycles. In time, the property glut will be absorbed. I would nevertheless like to assure the House that the Government will not do anything to aggravate the situation.

Manpower Development

The development strategy of many newly industrialized countries has shifted from the cheap "sweet-shop" type labour policy to one of cheap but high quality skills. We must, therefore, prepare ourselves for the competition. How have we fared so far? Are our workers better educated? Do they have the expertise necessary to cope with technological changes?

The proportion of professional, technical and skilled manpower has risen steadily from 13.6% in 1980 to 16.2% in 1985. At the same time, the proportion of production and related workers, and transport equipment operators declined from 38.8% in 1980 to 36.3% in 1985. This is mainly due to greater automation and mechanization in factories and speaks well for our drive towards higher productivity.

Despite our progress in education, our workforce is still less educated than those in the US, Japan and even Taiwan. Presently, only 5% of our total workforce have tertiary education compared to 19% in the US and Japan and 6% in Taiwan. At the bottom end, about 53% or more than half our workforce have no education or at most primary level education compared with 15% in the US, 35% in Japan and 45% in Taiwan. We must therefore continue to upgrade the education level of our population. This is a necessary prerequisite for future growth as industries increasingly automate and mechanize.

There is a limit to the number of graduates and skilled manpower that we can ultimately produce in the long run. Given a declining population growth rate,our workforce is expected to increase by only 1% per annum by the year 2000. It is, therefore, crucial that we educate each individual to his or her maximum potential. What we lack in quantity we must make up for in quality.

It is essential that employers realize that they carry the main responsibility for upgrading and retraining workers. The workers must also play their part by being willing to attend retraining and upgrading programmes. Only then can we hope to improve our productivity and be prepared for the next phase of our growth.

Concluding Remarks

Over the last two decades we have made considerable progress - from a low wage, low skilled, low value-added economy to one based on higher skills and higher value-added. Despite the present setbacks and the urgency to implement measures to restore the health of the economy, we should not ignore the need for a longer term perspective.

In the short term, the Government has and will continue to take measures to overcome this recession. We will continually monitor the economic situation - both domestic and abroad, and prepare for the worst. We must regain our competitive position by ensuring that costs are minimized and red tape cut.

In the long term, we must all work together to maximize our potential. New investments must be found and the entire economic environment must be made favourable to business and enterprise.

The Government will continue to provide efficient infrastructure, educate and train our population to its fullest potential, and assist private enterprise to identify and seize new opportunities. In this regard, the Economic Committee's Report is timely. It has identified a number of growth areas which we will do well to exploit. If we do so and deal with the present recession correctly, we will be well placed to take off again.