How will Singapore adapt to a rougher world?

From uncertain beginnings in 1965, the then relatively undeveloped city-state has enjoyed a stunning transformation into one of the wealthiest places on earth. At US$78,000 ($104,874) per head, its per capita national income is higher than that of the US and most other countries except oil-rich Norway and Qatar.

As the country indulges in a bit of well-deserved self-congratulation on Aug 9, it is also an appropriate time to ask — where does Singapore go from here? 

At one level, one could be a tad concerned about the future. The unarguable fact is that the world has been, and will continue to be, rocked by changes that are not helpful for a small, highly open city-state.

Geopolitical frictions, threats to globalisation, rising competition from lean and hungry rivals, big demographic shifts, climate change and dislocations from technological advances such as AI will make for an unfamiliar and troubled world.

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Those with a more positive bent will say that Singapore has seen much of this before and has always risen to the challenges. And they are quite right. So, the question is not whether a menacing new world will overcome Singapore. Rather, it is what Singapore must do to get around these challenges — and whether it has the gumption to do so.

A few points strike us as we think about this. One is that the changes in the world around us are quite intimidating and require big and bold but risky responses.

Some of this may require us to reform the way we conduct policies, but we must be prepared to do so.

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With the right strategies, Singapore can leverage its nimbleness to retain a prominent position as a dynamic global hub and emerge stronger out of the likely tumultuous changes in the coming decade.

The changing DNA of the outside world

We will start by sketching out the unsettling trends that will introduce new dynamics in the world around us.

First, there is a whole set of international political issues beyond just the US-China tussle that everyone focuses on. The US and China are certainly engaged in contestation in our backyard, increasing the risk of conflict, a divided Asean, a world economy destructively divided into American and Chinese camps and big power attempts to influence and perhaps even divide our society.

But in addition to the US-China tussle, we also have middle powers throwing their weight around in some regions.

For example, in our part of the world, North Korea has developed missile and nuclear technology that shields it from retaliation from its rivals — and that could embolden it to undertake provocations. More fundamentally, the few frameworks that existed to protect small nations from threats from the big and middle powers have diminished in effectiveness.

The United Nations system is broken. The World Trade Organization’s trade arbitration mechanism has been neutered by America’s vetoing of judges to its panel. That means small trading nations have little recourse once a big power bullies them on trade issues.

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China’s refusal to abide by the findings of the International Tribunal of the Law of the Sea has undermined that agreement on maritime issues.

As the ancient Greek historian Thucydides said a couple of thousand years ago: “The strong do what they can, the weak suffer what they must” — that is the world we could potentially have to endure.

Second, many large and consequential economies are suffering greater political polarisation, as culture wars and discord over rising inequality create social frustration.

That leads to more inward-looking policies, including trade protectionism and industrial policies that foreswear the give and take that allowed world trade to flourish.

That means Singapore’s totally trade-dependent economy cannot avoid intensifying protectionism and policies in major markets that will reduce the scope for economies such as Singapore to benefit from their domestic markets.

Third, it does not look like the world can muster the consensus needed to prevent further global warming.

Small countries such as Singapore must accept that temperatures will rise beyond the 1.5°C considered a danger point and find ways to live with a world of rising sea levels and extreme weather.

Fourth, there are big demographic changes underway as well. Population growth is plunging in developed economies while staying relatively robust in poor ones.

The pressures for large-scale illegal immigration can only grow and these flows of desperate humans seeking a new life in other countries could become destabilising.

Another major demographic change is the rise of massive urban agglomerations — large urbanised regions such as China’s Greater Bay Area, which offer economies of scale and scope to their cities that existing global hubs like Singapore cannot match.

Fifth, technological changes are accelerating. Many of these will be for the good — new medicines and therapies to help us deal with diseases such as diabetes, malaria and cancer.

However, there is also likely to be lots of dislocation as many jobs are destroyed, and incumbent companies are rendered irrelevant.

We could go on, but the point is made — the environment around Singapore will become much more troubled. It will be a far cry from what Singapore has enjoyed, especially from the 1980s onward — when global trade grew rapidly and international capital and people flows expanded vigorously. It will be a world where puzzling new dynamics will replace the thinking and behaviour we have become used to.

Small countries like Singapore will face a rougher time from bigger economic partners. The world economy, politics and climate will be beset by frequent shocks, many of which would have been difficult to foresee.

New approaches in a different world

It will be a rough world indeed, but not necessarily one that is impossible to manage if Singapore faces up to what needs to be done. We believe there are two keys to holding our own in this new world — resilience and adaptability.

First, we need resilience to bounce back quickly from the inevitable shocks that will hit us from time to time in the turbulent world we expect.

That means diversifying our economic engines as much as possible, building large buffers such as a big pool of reserves, strengthening the capacity to rapidly implement innovative policies, maintaining competitiveness and ensuring that balance sheets in banks, companies and government are strong.

The recent record of dealing with the Covid pandemic suggests that we have a great deal of resilience — even though a small country like Singapore is highly vulnerable.

Still, there are a few areas we need to improve if we are to remain resilient.

One is to recognise that we need to do something about Singapore becoming such a costly place to do business. There is a tendency to feel that high costs are an inevitable part of becoming a developed nation.

However, we believe that a recalibration of some signature policies in Singapore could help make the cost structure more manageable. These include land pricing and the use of pricing mechanisms to achieve policy goals such as limiting congestion and reducing dependence on foreign workers.

Some of these policies seem appropriate from a theoretical perspective. Still, in a second-best world where our competitors do not adopt such policies, Singapore could lose cost competitiveness.

The second thing we need to build is the capacity to adapt to structural shifts in the global and domestic economies. There are two components of this capacity — planned top-down policies and more spontaneous bottom-up adjustments.

It is fair to say that Singapore is pretty good on the top-down strategies. The government has a well-developed and systematic approach to anticipating trends and devising strategies to help us prosper along with these trends.

However, there are a few areas where we can rethink our approach.

The following are just two examples.

1. We can modify our economic policy goals to shift away from simply favouring economic growth. The government does recognise this to some extent and changes have been underway since 2011 but there is still an assumption that high growth is still the highest priority. To keep society cohesive enough to deal with a turbulent world, we need to prioritise issues relating to income distribution. We do not need to mimic the welfare state approaches in Western countries, but we can do more to devise our own approaches.
    
2. The world is too complex a place for policymakers alone to understand and manage. Singapore needs to allow more space for the informed public to question and debate policies. That has to start with a substantial effort to provide key data to the public. We need a better system to ensure rigorous self-inspection is possible without fear of offending the powers that be. We cannot do well if our intellectuals are too scared to speak truth to power.

However, Singapore needs to step up its game in generating more efficient and spontaneous bottom-up adjustments.

One key requirement is locally owned companies that can innovate, take bold risks and experiment with new ideas.

The Singapore economy has become very reliant on multinational companies — these do a good job but need to be complemented by a much stronger local corporate base. After all, in a crisis, it will be the local companies that stay behind, not others.

However, as the moribund state of the local stock market suggests, there is a dearth of strong local companies — indeed, there are too few for an economy of our size.

Malaysia, with an economy that is slightly smaller than ours, does a better job of generating exciting new companies.

Taiwan, a place with similar cultural traits to ours and whose economy is about 50% bigger than ours, has been super-impressive in creating world-beating companies.

This suggests that there is nothing inevitable about having a weak corporate base.

In recent years, the government has stepped up efforts to boost local enterprises and there has been some progress.

For example, the start-up scene has improved and there is a growing pipeline of promising companies that might grow into unicorns.

However, more can be done. We should review longstanding policy thinking that opposes ideas such as a strongly empowered agency to promote local enterprise, an export-import bank, a bank dedicated to lending to local enterprises, and changes to local procurement rules.

Winners and losers

Singapore has performed impressively in recent decades, but that does not guarantee a repeat performance in the coming decade. In many ways, the city-state is in uncharted waters and will have to innovate its strategic responses.

The global environment described above will test everyone. There will be winners and losers. If Singapore wants to be a winner, it must be prepared to cast aside old nostrums and experiment with new ideas.

Only then can we develop the resilience and the adaptive capacity to come out well in this more troubled world that we will see in the coming decade or longer.

Manu Bhaskaran is CEO of Centennial Asia Advisors

Photo: Samuel Isaac Chua/The Edge Singapore