Tug Of More: How Might Global Economic Changes Affect Singapore

Singapore faces the inevitable rise of China and response from the US, as well as competition from other growing Asian economies. How might such developments affect Singapore?

China is expected to become the world’s largest economy by 2035. While its ascendance won’t be a smooth trajectory, China is still bound to become more assertive in pursuing its political and economic interests. The US and China thus have to make strategic adjustments, as both powers find ways to reach a new accommodation with each other. This naturally provokes a range of reactions, both in the Asia-Pacific region and on the global stage.

Singapore has always welcomed the involvement of powers in the region. Its first foreign minister, Mr S Rajaratnam, described this in a speech to the Asia Society in New York in 1973: “Like the sun, the great powers will, by their very existence, radiate gravitational power. But if there are many suns then the smaller planets can, by judicious balancing of pulls and counter-pulls, enjoy a greater freedom of movement.”

Singapore’s judicious balancing has meant balancing its interests between China and the US. Although informal relations between Singapore and China have long been in place, for years Singapore kept China at arm’s length, formalising diplomatic relations only in 1990, the last of the original five ASEAN countries to do so.

Ambassador-at-Large Tommy Koh, among others, has explained that this was to preserve Singapore’s commitment to a multi-ethnic, multi-religious identity, and to avoid being viewed as a Chinese satellite state. Singapore has similarly eschewed the notion that it is a US outpost, and instead emphasised its role as a bridge between the US and China.

Today, Singapore has close economic ties with both countries. Singapore is China’s biggest foreign investor and one of its biggest trading partners. On the other hand, the US is Singapore’s biggest foreign investor. But ties between the US and China are also growing in number and complexity, reducing the need for third-party interlocutors.

Singapore’s position as a key economic hub could also change as China moves up the “value-added ladder” in global supply chains, says Ms Mariam Jaafar, Managing Director of Boston Consulting Group (Singapore) and a member of the the Committee on the Future Economy (CFE).

Like the sun, the great powers will, by their very existence, radiate gravitational power. But if there are many suns then the smaller planets can, by judicious balancing of pulls and counter-pulls, enjoy a greater freedom of movement.

Singapore’s increasing dependence on China as an engine of growth has brought about economic opportunities, but also made it vulnerable to shocks from the Chinese economy.

Not only has China’s central place in the global production network grown significantly, it has also shifted from being a supplier of components to become a core production hub, making its own mobile phones and laptops, for example.

As the Chinese no longer buy such goods from overseas — and even compete to export them — business for other manufacturing centres in the region, including Singapore, has slowed down.

“Singapore will have to learn to live with this new reality and continue to identify niche areas where we can value-add,” says IE Singapore Chief Executive Lee Ark Boon.

An advantage is that Singapore still has more familiarity than other countries on how to access the Chinese market, says Mr Lee. But this familiarity needs to be sharpened even more.

This can be achieved by immersing more Singaporean public officers in Chinese culture over the course of their careers, says Mr Ervin Yeo, a former public officer in the manpower and foreign affairs ministries who participated in the NS2035 exercise. “Future public service leaders should seek opportunities to spend meaningful time in China, whether it’s for study, postings or other work experience.”

Rising Asia, more competition

The ASEAN region is also on the rise, as its share of the Asia Pacific gross domestic product (GDP) is projected to grow to 7.4% by 2030, from 5.5% in 2010, according to the Euromonitor. With its GDP projected to grow at 6.5% year-on-year, ASEAN is the third largest growth engine in the Asia Pacific region after China and India.

“The region is on its way to becoming one of the largest markets in the world… and continues to show steady growth amid a global economic slowdown,” says Mr Lee.

The region comprising Cambodia, Laos, Myanmar, Vietnam and Thailand is taking up a growing share of Singapore’s exports to the world, compared with China’s share that has remained stable in the past few years.

Indonesia presents another “compelling opportunity”, says Mr Lee, as it has the world’s fourth-largest population (approximately 248 million people), and a high GDP growth of 4.7% for 2015, with forecasts for higher growth in the coming years. It also aims to become Southeast Asia’s largest digital economy by 2020 — a huge opportunity for Singapore companies looking to capture value in e-commerce.

For Singapore to stay relevant as a gateway for companies venturing to do business in Southeast Asia, having regional expertise and networks in ASEAN are crucial, he adds.

More broadly, Singapore, as a key hub, must participate in their growth and facilitate flows of goods and services to and from these new markets, says Ms Mariam.

As the region develops economically, it will likely see improvements in stability, as well as higher trade and investment. But ASEAN’s development brings with it challenges as well as opportunities. Singapore’s neighbours will also attempt to become hubs for investment and trade, and encourage multinationals and highly educated international business leaders, including Singaporeans, to relocate.

With these opportunities and challenges in mind, the CFE is looking to develop economic strategies to ensure a vibrant and resilient economy over the long term. The committee is focusing on issues such as connectivity, and growth industries and markets to future-proof Singapore’s economy.

Public officers will need to better know the region to effectively put these strategies into action. Mr Yeo encourages public officers to travel to and work in Southeast Asia. Not only would this develop their personal understanding of these countries’ cultures and governance systems, but it would also enable them to identify opportunities for cooperation, propects for increased trade and investment, and threats to Singapore’s competitiveness.

    May 11, 2016
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