Professor Aaron Thean, Deputy President (Academic Affairs) and Provost, National University of Singapore
Professor John Quah, Distinguished Professor/ Head, Department of Economics, National University of Singapore
Distinguished guests,
Ladies and Gentlemen, and my MTI colleagues
Introduction
1. Good afternoon to all of you.
2. I am happy to join you today for the 16th annual MTI Economic Dialogue. Since its inception in 2008, this annual dialogue has been an important platform for the Ministry to share its views with students on key economic issues and challenges facing Singapore, as well as to reiterate the importance of the role that the Economist Service will play in policy making.
3. The theme for today’s dialogue is ‘Growing Singapore’s Economy Amidst Global Economic Fragmentation and Domestic Challenges’. This is indeed a very timely theme.
a. Just last month, we published a report on our transformation of the Singapore economy over the past 8 years.
b. On the whole, we have done reasonably well.
i. Between 2016 and 2023, the Singapore economy achieved real value-added growth of 2.8% per annum. This is higher than that achieved by most other small advanced economies such as New Zealand, Denmark and Switzerland.
ii. Over this same period, our labour productivity grew by 2.1% per annum. This is also higher than most other small, advanced economies.
4. Going forward, we aim to grow our economy by about 2 – 3% each year on average over the next decade. This is an ambitious goal given our advanced stage of economic development. Indeed, if we look at most other small advanced economies, to achieve 2 – 3% GDP growth per annum is no mean feat. This is especially since the global and domestic operating environment is expected to become more complex, challenging and constrained.
Key Driving Forces
5. Let me highlight three key driving forces that have major implications on our economic growth: (i) Geopolitical tensions, (ii) Disruptive Events and (iii) Domestic Constraints.
6. First, internationally, the space to do business with the world is coming under tremendous pressure.
a. A few weeks ago, both Bloomberg and Reuters published reports on the US’ intention to further tighten its export controls on high-bandwidth memory chips and chipmaking equipment to China. Export controls by the US have been in place for many years now but with each successive year, we see that the ‘small yard, high fence’ strategy of the US is getting larger and taller at the same time.
b. Semiconductors is but one sector that we have seen growing nationalist and protectionist tendencies. Just three months ago, the US announced that it will impose a 100% tariff on Chinese-made electric vehicles (EVs) to protect US manufacturers from cheap imports from China. The EU followed suit shortly after, imposing tariffs of up to 38% on Chinese EV imports. You can imagine, from economic theories, if the US has a 100% tariff and EU has a 38% tariff, the Chinese EV exports will not be able to go to the US and EU. Where will they go to? All the rest of the countries. This is going to have a major distortion in the market, not just EVs, but in fact many other products. This is how the world is fast changing. This is a key global trend that will see impact on global economies, and particularly smaller economies, like Singapore, will be at the receiving end. We hope to have cheap imports, not just EVs, but for many things. At the same time, we want to make sure global economic order is maintained.
c. At the same time, many economies are increasingly using generous state subsidies to build up their own domestic industries, especially in strategic industries like semiconductors and clean energy. These efforts have resulted in investments being diverted there.
d. Our own ability to attract foreign investments will also be challenged by the implementation of the Base Erosion and Profit Shifting (or BEPS) 2.0 initiative. With the introduction of a global minimum effective rate of 15% for large multinational enterprises, the effectiveness and impact of our tax incentives will be blunted. Singapore relied heavily on such tax incentives in the past to attract key investments, but now, we will need to have new tools for investment promotion.
7. Second, we must brace for more frequent disruptions that will challenge our policy settings as well as long-term planning assumptions.
a. Indeed, one of Singapore’s strengths is the consistency of our policies, which enables businesses to have certainty when they make long-term investment decisions. This is complemented by our ability to take a long-term view when dealing with structural issues such as climate change, and to ensure continuity in the implementation of our policies.
b. However, we must equally be prepared for more disruptions in the external operating environment.
i. In the area of climate change, we are already seeing signs of how politics in the US and Europe may lead to changes in climate policies.
I. For example, the recently concluded European Parliament election saw gains made by right-wing and far-right parties, which among other things, have promised to relook EU climate measures under the Green Deal, including a 2035 ban on the sale of internal combustion engines.
II. Former US President Donald Trump has also made it clear that if he is re-elected, he will roll back subsidies under the Inflation Reduction Act, which has been the backbone of the clean economy investments in the US.
ii. Advances in technology also have the potential to disrupt and reshape major industries. The most important of this is AI. We are already seeing AI being deployed in many areas, including in assessing customer preferences on e-commerce sites (such as Amazon) or analysing data and trends for trading in financial markets.
I. One area in which I think AI will be transformative in the future is in research and development – already, pharmaceutical companies like Pfizer are using AI to speed up drug research and development.
II. Coupled with the use of robotics to speed up drug production, AI is likely to help companies achieve a quantum leap in innovation.
III. This is good for the economy, but will also place pressure on the Government to review our regulatory frameworks and continuously invest in the upskilling and re-skilling of our workforce, to keep up with the leaps in technology.
8. Lastly, when we look at domestic issues, we will face sharper constraints particularly in two areas.
a. The first is manpower.
i. Over the last decade, our resident workforce grew at 1.2% per year.
ii. We expect the growth to decline even further over the next decade. Today, about 1 in 5 Singaporeans are above 65 years old; by 2030, that number will grow to 1 in 4. We are also facing falling fertility rates – last year, our total fertility rate hit a historic low of 0.97. Not many countries are below us.
iii. This will in turn have implications on our ability to grow our economy – we will need to leverage productivity and innovation to grow.
b. Second, on carbon.
i. We had earlier committed to achieve net-zero emissions by 2050, and reduce our emissions to around 60MtCO2e in 2030 after peaking earlier.
ii. To achieve this, we have introduced a carbon tax to send a clear signal and encourage our businesses and consumers to reduce their carbon footprint, while pursuing alternative energy pathways through renewable energy imports and investing in low-carbon technologies.
iii. The pace of decarbonisation will have to take into account how fast technology evolves, as well as the cost of adopting such technologies. For example, we are experimenting in an ammonia experimental power plant and ammonia bunkering terminal. We hope it will work out and give us knowledge and technology that we can use and deploy in Singapore.
iv. Navigating this transition to a lower carbon future is like walking a tightrope – if we move too fast, the impact on businesses may make us an uncompetitive location for business; if we move too slowly, we may ultimately fall short of our climate commitments. It is a calibration and balancing act, making sure that we continue to move towards our target of zero emission by 2050, but at the same time, pacing ourselves to make sure that it does not inadvertently affect the competitiveness of our industries.
Growing our Economy
9. Despite these challenges, we must continue to aim high, so that Singapore can keep moving forward, and our people can continue to enjoy more opportunities and a better quality of life. I have been challenging our MTI team – how can we do better?
a. Can we aim to grow not just at 2 – 3% per year, but even higher, over the next few years, or even longer than that, That challenge, will fall onto the new economists joining MTI in time to come, and that is many of you seated here.
10. Let me outline three areas through which we will aim to grow our economy.
11. First, we must continue to push the frontier of productivity and innovation.
a. We continue to be able to attract investments here because companies recognise that we offer a good return on capital despite higher business costs. And we must continue to offer that return on capital, by building capabilities, facilitating innovation and welcoming new ideas and attracting talent.
b. To further boost our innovation ecosystem, the Finance Minister announced in Budget 2024 that we will invest a further S$3 billion on top of the earlier S$25 billion to support our Research, Innovation and Enterprise 2025 (or RIE2025) programme. This will support innovation in our key economic sectors, including semiconductors, biotech and other advanced manufacturing sectors.
c. We must foster a culture of innovation and enterprise across the whole economy, not just among a few large MNCs.
d. Last year, we also released our National AI Strategy 2.0, which among others, lay out how we will invest in AI to drive productivity and innovation.
i. This includes (i) working with tech partners to avail AI tools, models and compute to our companies; (ii) supporting and attracting companies to develop AI technology and applications here from Singapore; and (iii) establishing sectoral-based Centres of Excellence to develop AI solutions for common use-cases.
e. As I had mentioned earlier, given how our resident workforce growth is expected to slow down over the coming years, it will be even more important for us to push the bounds of productivity and innovation to overcome the limitations of our workforce and drive the growth of our economy.
12. Secondly, we must continue to refresh and expand our trade architecture.
a. Trade has been critical to our progress over the last 60 years, not just Singapore, but for the whole world. In the last 40 to 50 years, you will find that trade has played an important role in allowing economies of the world to grow, to expand, and the lower income economies to develop and mature and provide a better quality of life for everyone. Even as the multilateral trading system comes under pressure from economic nationalism and protectionism, we must therefore continue to find new ways to do business with the world.
b. For example, the ASEAN economy is projected to grow by another US$1 trillion by 2030, making it the fourth-largest economy in the world. We want our businesses to be able to tap the growing opportunities in the region.
i. We have the ASEAN Trade in Goods Agreement that aims to achieve free flow of goods within the region.
ii. We are also exploring cooperation in new domains and modalities, such as in sustainability and the digital economy.
I. We are in the process of negotiating an ASEAN Digital Economy Framework Agreement, that will allow our businesses to tap on growth in the digital economy, which is projected to double to $2 trillion by 2030.
iii. We also have in place ASEAN’s Free Trade Agreements with Australia and New Zealand, China, India, Japan and the Republic of Korea to trade with our partners.
c. In recent years, we have also participated in new plurilateral groupings that have emerged, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (or CPTPP) and Indo-Pacific Economic Framework for Prosperity (or IPEF). These are important platforms for us to enlarge our network of trading partners, evolve new trade architecture, and establish new connectivity with the new markets.
13. Third, we must continue to invest in developing a skilled and agile workforce.
a. Over the years, we have established different initiatives to ensure that our workforce continues to offer industry-relevant skillsets. These include developing Jobs Transformation Maps in various sectors, and establishing programmes such as Career Conversion Programmes and Company Training Committees to help the workforce re-skill and up-skill.
b. Going forward, we must continue to explore new avenues to help our workers refresh their skills regularly.
i. For example, the new SkillsFuture Level-Up Programme is intended to support mid-career Singaporeans in their re-skilling and up-skilling efforts. In addition to providing a SkillsFuture credit top-up of S$4,000, the Government will provide subsidies for Singaporeans aged 40 and above to take up a full-time diploma at our polytechnics, ITE and arts institutions, as well as monthly training allowances to support these workers who are enrolled in full-time courses.
c. With technology driving faster and shorter product cycles, we must double down on continuous skills upgrading to enable our workers to always stay relevant and competitive in a dynamic and ever-changing economy. This way, we can continue to attract high-quality and high-value investments to create good jobs for Singaporeans.
Reinforcing the role of economists
14. As we look ahead to the next phase of our economic transformation, I believe that economists will have an even more important role to play.
a. One, to develop our long-term economic strategies. Take for example our aim to uplift productivity. Economists help us to understand through both economic theory and empirical evidence what drives productivity growth at the firm, sectoral and overall economy levels; assess whether there are market failures that necessitate government intervention; and recommend the strategies that we need to put in place to achieve higher productivity growth over a longer period – our own “higher and longer” approach, not in interest rate but growth rate.
b. Two, to monitor and assess nearer-term shifts in our operating context. For example, economists are monitoring and assessing the impact of US-China tensions on the reconfiguration of supply chains globally, and how the region and Singapore have been, and will be, affected by these shifts.
c. My third point – economists can help to inform our policy making by assessing the potential trade-offs that we may need to make.
i. One area that the Government is paying close attention to is business competitiveness.
ii. Over the last few years, businesses have seen rising cost pressures on several fronts, including on labour, electricity and rentals. To some extent, the strong Singapore Dollar has helped businesses to mitigate some of these externally-driven cost pressures, although this in turn affects our export competitiveness.
iii. But some of the cost increases are also driven by domestic policies, such as our foreign workforce policies or policies such as the Progressive Wage Model.
iv. There are good reasons for these policies.
I. In the case of tighter foreign workforce policies, the objective is to bring in foreign workers who are complementary to the local workforce and not competing with our local workers.
II. While in the case of the Progressive Wage Model, the intention is to increase the wages of our lower-skilled workers.
v. These policies are all done with good intentions, but the cumulative cost increase to businesses is not small. We will need to do so carefully, pace ourselves carefully, so that Singapore does not inadvertently become uncompetitive. Economists play a key role in monitoring our labour productivity and our cost increases relative to other economies, so that we can make informed decisions on how to calibrate our various policies.
Conclusion
15. Let me conclude. We are entering a more complex, challenging and constrained economic climate, with major global structural shifts, near-term uncertainties and limitations to our resources. But we should also take heart in how much we have achieved since our independence, and in particular, in how we have accomplished so much with so little, which some have termed an “economic miracle”.
16. To ensure that we can continue to have good jobs, and have the resources to support our social needs, we must continue to grow our economy, by pushing the frontier on productivity and innovation, expanding our space to trade with the world, and ensuring that we have a skilled, agile and competitive workforce.
17. Economists play a key role in supporting the Government’s policy-making, in developing our long-term economic strategies, monitoring near-term changes in our operating environment and informing our policy responses.
a. Today, we have more than 100 economists in the Economist Service who are deployed across many agencies in the Government.
b. I am pleased to present the Economist Service scholarship and academic awards to our budding economists, and I look forward to your contributions when you eventually join the service in time to come.
18. For those of you who are planning to join the private sector, I wish you have stayed on in the Government, but I still wish you all the best in what you do because it is also important for the private sector to have good economists like you. I am confident your education in the Economics discipline will serve you well wherever you are, by providing you the rigour, analytical thinking and creativity to drive innovation in our private enterprises and industries. And any time, you feel like coming back to the Government service, let us know, and we will welcome you back.
19. Together, we can continue to build a strong and vibrant economy for Singapore, based on sound economic policies, innovative enterprises, a resilient tapestry of trade relationships, as well as a competitive and competent workforce.
20. Thank you.