Singapore WT/TPR/S/130
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. Singapore's sound macroeconomic policies and relatively high degree of openness helped it to
recover rapidly from the effects of the Asian crisis. GDP growth in 1999 and 2000 averaged 8%
compared with -0.9% in 1998. However, Singapore's heavy dependence on export markets, especially
for its manufactured products, has resulted in a sharp economic slowdown since then, primarily due to
the global economic slowdown; the emergence of Severe Acute Respiratory Syndrome (SARS) and
events in the Middle-East in 2003 also prevented a more rapid recovery. There is also a longer term
concern about Singapore's relative costs of production compared to neighbouring countries and rising
unemployment owing to structural changes. As a result of these factors and possibly a slowdown in
total factor productivity (TFP) growth, which appears to have set in during the mid 1990s, the
authorities have been re-assessing some aspects of the development strategy that had previously
served Singapore well, at least as concerns economic growth.
(2) RECENT ECONOMIC PERFORMANCE
2. During the period under review (2000-04), Singapore has had to adapt to several additional
shocks subsequent to the Asian financial crisis: the global economic slowdown in 2001, which
weakened demand for electronics in particular; the war in Iraq; and the SARS outbreak in 2003,
which badly affected tourism. The outcome was that, after growing at almost 9.7% in 2000, real GDP
fell by 1.9% in 2001 and remained sluggish in 2002 and 2003 (Table I.1). As a consequence, the
unemployment rate rose to 5.2% in 2002 and 5.4% in 2003. There was some deflation in 2002 but the
situation reversed in 2003 (Table I.1). Real GDP grew by 1.1% in 2003 and according to projections
by the Ministry Trade and Industry economic growth in 2004 is expected to be around 3.5-5.5%.
While a decline in external demand was the main reason for lower growth in the short run, there are
several longer run challenges that Singapore faces. For example, the emergence of strong regional
competitors in trade and FDI poses a challenge, particularly for Singapore's manufacturing sector.
Table I.1
Selected macroeconomic indicators, 1999-03
1999 2000 2001 2002 2003
National accounts (Percentage change)
Real GDP (1995 market price) 6.9 9.7 -1.9 2.2 1.1
Private consumption 8.6 14.5 3.3 2.4 -0.5
Government consumption 6.5 18.5 4.1 3.0 -0.2
Gross fixed capital formation -4.9 8.7 -4.5 -9.9 -3.8
Net exports of goods and non-factor services 7.1 -13.2 21.1 17.1 36.5
Unemployment rate (%) 4.6 4.4 3.4 5.2 5.4
Productivity (Percentage change)
Labour productivity in manufacturing 17.0 11.5 -13.5 10.3 5.3
Total labour productivity 7.3 5.4 -5.2 3.6 2.3
Total factor productivity 3.2 3.7 -6.8 1.0 ..
Prices and interest rates (Per cent)
Inflation (CPI, %age change) 0.0 1.3 1.0 -0.4 0.5
Three-months fixed deposit rate (period average)a1.7 1.7 1.5 0.9 0.5
Prime lending rate (period average)a5.8 5.8 5.7 5.4 5.3
Savings deposit rate (period average)a1.4 1.3 1.1 0.6 0.3
Table I.1 (cont'd)WT/TPR/S/130 Trade Policy Review
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1999 2000 2001 2002 2003
Moneyb,credit (end period) (Percentage change)
Money supply (M3) 7.3 -1.8 4.0 -0.8 5.9
Credit to private sector (end period)c-2.9 4.7 5.8 -1.0 6.3
Exchange rate
Nominal exchange rate index (1995=100) 101.2 101.6 103.0 102.1 ..
Real effective exchange rate index (1995=100) 95.1 95.2 96.0 93.7 ..
Fiscal policy (Per cent of GDP, unless otherwise indicated)
Fiscal balanced3.4 2.5 -1.8 0.1 ..
Operating revenuee21.5 21.0 19.7 18.6 ..
Tax revenue 15.9 16.0 16.0 13.7 ..
Operating expenditure 10.4 11.5 12.2 12.3 ..
Development expendituref7.2 5.9 5.8 5.0 ..
Fund transfers and transfer paymentsg0.5 1.1 3.5 1.1 ..
Public sector total debt 90.1 84.2 96.7 99.2 ..
Domestic debt 90.1 84.2 96.7 99.2 ..
Savings and investment
Gross national savings 50.6 46.3 43.6 42.5 44.2
Gross domestic investment 32.0 32.0 24.9 21.2 13.4
Savings-investment gap 18.6 14.3 18.7 21.4 30.9
External sector
Current account balance 18.6 14.3 18.7 21.4 30.9
Net merchandise trade 15.1 13.7 18.3 22.5 32.1
Value of exports 151.0 161.3 155.4 155.5 172.8
Value of imports 135.9 147.5 137.2 133.0 140.7
Services balance 2.5 2.1 0.8 0.3 1.2
Capital account -0.2 -0.2 -0.2 -0.2 -0.2
Financial account -17.2 -6.2 -16.6 -15.3 -27.5
Direct investment 10.4 12.9 -2.4 2.3 6.4
Balance of payments 5.2 7.4 -1.0 1.4 7.4
Terms of trade, 1995=100 90.2 84.7 75.8 72.1 73.1
Merchandise exports (%age change) 5.7 22.4 -8.3 2.7 12.1
Merchandise re-exports 0.2 30.7 -2.3 4.9 7.4
Merchandise domestic exports 9.8 16.9 -12.9 0.8 16.3
Merchandise imports (%age change) 10.8 23.4 -10.5 0.3 7.0
Service exports (%age change) 13.3 13.5 2.8 2.9 -0.3
Service imports (%age change) 25.0 15.0 7.5 4.7 -3.2
Gross official reserves (S$ billion) 128.5 139.3 139.9 142.7 163.2
in months of imports 8.2 7.2 8.1 8.2 8.9
Gross official reserves (US$ billion) 77.2 80.4 75.8 82.3 96.3
Gross external public debt (S$ billion) 0.0 0.0 0.0 0.0 ..
.. Not available.
a Refers to average of end-of-month rates of ten leading banks.
b M3 = M2 + net deposits with non-bank financial institutions; M2 = M1 + fixed, savings and other deposits + Singapore dollar
negotiable certificates of deposit held; M1 = currency in circulation + demand deposits.
c Refers to bank loans and advances (including bills) to non-bank customers.
d Based on fiscal year, ending 31 March. Calculations do not include net investment income contribution.
e Includes net investment income contribution from FY 2000.
f Excludes land-related expenditure from FY 2001.
g Including e.g. medical endowment fund, elder care fund.
Source: Ministry of Trade and Industry, Economic Survey of Singapore, various issues; Monetary Authority of Singapore,
Annual Report, various issues; and the authorities of Singapore.Singapore WT/TPR/S/130
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3. The economy is dominated by services, at 63% of GDP, followed by manufacturing, with a
share between 23% and 26% during the period under review (Table 1.2). The Government believes
that manufacturing and services should remain the "twin engines of growth" and reports indicate that
it will make a concerted effort to build on existing competitive strengths to sustain manufacturing at
20% or more of GDP.1However, because of the pressures from low cost regional manufacturers,
there has been a structural shift in Singapore's manufacturing sector from low-cost to high-value-
added production (Chapter IV). The share of employment in the manufacturing sector continues to
fall (from 21% to 18% in 1999-02), raising concerns about training and re-employment.
Table I.2
Basic economic and social indicators, 1999-03
1999 2000 2001 2002 2003
Real GDP (S$ billion) 147.8 162.2 159.1 162.5 164.3
Nominal GDP (S$ billion) 139.6 159.7 154.1 158.1 159.1
GDP per capita (S$) 35,338 39,740 37,296 37,893 38,023
GDP by industry at 1995 prices (Annual percentage change)
Agriculture, fishing and quarrying -1.8 -4.9 -5.9 -5.8 -0.4
Manufacturing 13.0 15.1 -11.6 7.8 2.8
Utilities 3.4 7.2 1.8 3.8 1.8
Construction -9.0 -0.7 -2.6 -10.8 -10.7
Services 6.3 8.0 2.4 1.4 1.0
Wholesale and retail trade 6.5 14.8 -3.3 2.7 6.7
Hotels and restaurants 5.4 8.5 -0.2 -2.9 -12.2
Transport and communications 7.6 7.7 3.9 4.9 -2.0
Financial services 5.7 3.6 2.3 -6.3 3.7
Business services 5.5 5.7 2.4 1.2 -1.8
Other servicesa6.3 8.5 8.5 4.6 2.1
Owner-occupied dwellings 7.8 6.3 4.5 2.1 2.6
Less: FISIMb1.4 -2.0 4.2 -0.7 1.6
Add: taxes on products 8.1 9.7 -4.1 0.7 5.8
Share of gross value added (per cent)
Agriculture, fishing and quarrying 0.1 0.1 0.1 0.1 0.1
Manufacturing 23.1 26.8 23.7 25.8 26.3
Utilities 1.6 1.5 1.9 1.7 1.7
Construction 7.9 6.3 6.1 5.4 5.0
Services 63.6 61.9 64.5 63.5 63.4
Wholesale and retail trade 12.8 12.7 12.4 12.3 13.1
Hotels and restaurants 2.3 2.3 2.4 2.2 1.9
Transport and communications 11.8 11.6 11.3 11.4 11.1
Financial services 12.4 11.3 12.4 11.9 11.6
Business services 13.9 13.7 14.4 13.6 13.3
Other servicesa10.3 10.4 11.8 12.1 12.3
Owner-occupied dwellings 3.6 3.4 3.6 3.5 3.6
Table I.2 (cont'd)
1See for example, Economic Review Committee (2002).WT/TPR/S/130 Trade Policy Review
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1999 2000 2001 2002 2003
Share in employmentc
Manufacturing 21.0 20.8 18.8 18.2 17.9
Construction 6.9 13.1 6.1 5.9 5.6
Services 71.1 65.5 74.2 75.0 75.6
Wholesale and retail trade 14.8 13.7 14.8 15.1 14.6
Hotels and restaurants 6.4 5.5 6.3 6.2 6.3
Transport and communications 10.8 9.4 11.1 10.8 10.6
Financial services 5.5 4.6 5.3 5.3 5.1
Business and real estate services 10.4 10.8 11.9 11.8 11.9
Public administration and education 11.1 .. 11.1 11.8 12.5
Personal, health and social services 12.0 .. 13.7 13.9 14.5
Otherd1.0 0.6 1.0 0.9 0.9
Education (% of labour force)
Primary 22.0 25.1 19.9 19.1 18.4
Secondary 43.4 38.3 42.2 42.1 40.6
Higher 34.7 36.6 37.9 38.7 41
.. Not available.
a Includes public administration and defence; education, health and social work; other community, social and
personal services; and domestic work.
b Refers to financial intermediation services indirectly measured.
c Data are sourced from the June Labour Force Survey (LFS) conducted by Ministry of Manpower. As the survey is on
households, it excludes construction workers living at worksites and workers who commute daily from abroad to work in
Singapore. Data for 2000 are from the Census of Population conducted by Singapore Department of Statistics, Ministry of Trade
& Industry.
d Includes agriculture, fishing, mining & quarrying, utilities, and activities not adequately defined.
Note: Services data show an inconsistency in definition because different sources have been used for share in GDP and share in
employment.
Source: Monetary Authority of Singapore, Annual Report, various issues; and the authorities of Singapore.
4. Singapore's long-term economic performance depends to some extent on whether it can
reverse the recent decline in its total factor productivity (TFP), which after growing at an average
annual rate of 2.1% during 1981-94, fell by an average of 0.3% annually during 1995-03 (Chart I.1,
and Table I.3), influenced by an adverse economic environment and the cyclical nature of TFP
growth. Nevertheless, Chart I.1, which is based on a three year moving average, suggests a long-term
downward trend in TFP since 1994. This development comes on the heels of research indicating that
during 1966-91, Singapore grew almost exclusively through factor, particularly capital, accumulation,
with only a modest contribution from TFP (Box I.1). This was also true during the period 1995-03
when growth in output (as well as labour productivity) was largely due to capital accumulation. A
broadly similar conclusion was reached by the IMF in a recent study, which found that capital
accumulation has accounted for more than half of Singapore's growth since 1960; this pattern appears
to be similar to that found in other East Asian economies. The study also suggests, however, that TFP
has contributed to around one-fifth of Singapore's growth during this period (between 0.9-1.6% on
average between 1960 and 2003), in line with TFP growth in other advanced economies.2
2IMF (2004).Singapore WT/TPR/S/130
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-3.0-2.0-1.00.01.02.03.04.05.06.0
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Chart I.1
Total factor productivity growth, 1983-03
Per cent, 3-year moving average
Information provided by the authorities of Singapore . Source :a
a Preliminary.
Table I.3
Sources of productivity growth, 1981-03
(Per cent)
1981-94 1995-03 1981-03
Output 7.6 4.4 6.4
Capital 4.1 3.5 3.9
Labour 1.4 1.3 1.4
TFP 2.1 -0.3 1.1
Labour productivity growth 4.8 1.8 3.6
Capital/labour 2.6 2.0 2.4
TFP 2.1 -0.3 1.1
Capital productivity growth -0.5 -2,4 -1.2
Note: Figures may not add up due to rounding.
Source: Based on data provided by the authorities.
5. The developments in TFP growth since the mid 1990s has meant that while Singapore's very
high rates of national saving and domestic investment have continued to raise labour productivity,
capital productivity appears to have declined since 19943, raising concerns about high savings rates
and/or capital allocation.4
3During the period 1995-98, for example, capital productivity fell by an average of 2.9% annually (see
Wong and Sim (undated).
4See for example Fernald and Neiman (2003); Wong, Soon Teck and Sim, Benson (undated); and
Ministry of Trade and Industry (2002).WT/TPR/S/130 Trade Policy Review
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Box I.1: Sources of growth in output and labour productivity
Total factor productivity (TFP) reflects the efficiency with which factors of production are used, and is thus
a key determinant of an economy's performance. TFP should be distinguished from labour productivity,
which is the amount of output per employee. Among the main determinants of improvements in labour
productivity are changes in the volume of investment and total factor productivity (TFP). Growing
investment contributes to improvements in labour productivity by increasing the amount of capital that
employees have to work with. In the absence of accompanying improvement in TFP, however, higher
labour productivity can only be achieved at the expense of lower capital productivity. One of the most
important sources of TFP growth in the long run is technological progress.
During 1995-03, growth in the capital stock accounted for over three-quarters (3.5 percentage points) of
output growth and the entire growth in labour productivity (Table I.3). The slight fall in TFP reduced
growth in both output and labour productivity. The lack of improvement in TFP during this period meant
that the growth in labour productivity was accompanied by a substantial decline in capital productivity. Of
the 3.2 percentage point drop in average annual output growth between the periods 1981-94 and 1995-03,
2.4 percentage points can be attributed to the fall in TFP growth.
Some research on TFP in Singapore (Alwyn Young, 1992, 1995 and 1998, for example) indicates that
growth was attributed to factor accumulation rather than TFP. This view has not gone unchallenged;
another study (Chang-Tai Hsieh, 2002) found that TFP in Singapore grew reasonably quickly. However, a
more recent study (see Fernald and Neiman, 2003) is more consistent with the earlier findings of Young.
According to Fernald and Neiman (2003), market distortions (such as market power, favourable access to
capital and tax preferences), which in many cases grew over time, favoured parts of the economy, possibly
reducing the cost of capital of firms operating in the favoured sector and enabling them to earn large
economic profits. As a result, output in the favoured sector grew nearly 10% annually for two decades,
with negative TFP growth. By contrast, the relatively unfavoured sector had slower output growth, about
6% per year, but rapid TFP growth of around 2.5% annually. Another possible explanation for Singapore’s
low TFP is high investment in less productive assets, such as buildings, relative to more productive assets
(Wong and Sim, undated). In fact, Singapore implemented a public housing ownership scheme in the early
1960s, which has resulted in most Singaporeans becoming home-owners, with a substantial amount of
Singapore’s capital stock in the housing sector. Calculations of TFP, which have, inter alia , removed
residential housing from the total capital stock, suggest that TFP in Singapore has been underestimated
(Ministry of Trade and Industry, 2002). A study by the IMF (2004), finds that although capital
accumulation accounts for around half of Singapore's economic growth since 1960 (similar to levels found
in other east Asian economies), TFP growth was not as insignificant as suggested by Young. The IMF,
however, also suggests that in light of diminishing returns from capital and labour, TFP must be improved,
possibly through higher investment in human capital and education.
Source: Young, Alwyn, (1992), "A Tale of Two Cities: Factor Accumulation and Technical Change in
Hong Kong and Singapore", in Olivier J. Blanchard and Stanley Fisher, eds, NBER Macroeconomics
Annual 1992 , Cambridge, MA: MIT Press; Young, Alwyn, (1995), "The Tyranny of Numbers:
Confronting the Statistical Realities of the East Asian Growth Experience, Quarterly Journal of Economics
(August), pp. 641-680; and Young, Alwyn, 1998, "Alternative Estimates of productivity Growth in the
NICs: A Comment on the Findings of Chang-Tai Hsieh", NBER Working Paper No. 6657; Chang-Tai
Hsieh, 2002, "What Explains the Industrial Revolution in East Asia? Evidence from Factor Markets",
American Economic Review ; Fernald, John and Brent, Neiman (2003), "Measuring Productivity Growth in
Asia: Do Market Imperfections Matter?", Federal Reserve Bank of Chicago, October 2003, WP 2003-15;
Wong, Soon Teck and Benson, Sim (undated), "Multi- (or Total) Factor Productivity Trends, 1980-1998,"
Statistics Singapore Newsletter ; and Ministry of Trade and Industry (2002), "Total Factor Productivity
with Singaporean Characteristics: Adjusting for impact of Housing Investment and Foreign Workers,"
Economic Survey of Singapore, Third Quarter 2002.Singapore WT/TPR/S/130
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6. Singapore’s high savings rate finds its reflection in its strong external indicators. National
saving, although declining, continues to greatly exceed domestic investment. The excess saving
(averaging 20.78% of GDP during 1999-03) has been invested abroad. This net outflow of capital has
resulted in large financial account deficits, particularly portfolio investment; net inflows of FDI were
negative in 2001 but have since become positive. The counterpart of these financial account deficits
is persistently large current account surpluses (also averaging 20.78% of GDP during 1999-03). In
this regard, the merchandise trade surplus remained healthy, reflecting the importance of merchandise
trade for Singapore, particularly external demand. The surplus in the services balance has narrowed
slightly since 1999. With the current account surplus exceeding the financial account deficit during
much of 1999-03 (the exception was 2001), Singapore has run surpluses in its balance of payments
and accumulated official reserves of more than S$160 billion, equivalent to over eight months of
imports.
7. The importance of external demand to Singapore's economy clearly means that the external
environment plays a role in TFP developments but the associated seeming decline in capital
productivity does raise certain concerns, including Singapore's industrial policy. Singapore's past,
highly successful, economic strategy has involved, inter alia , a reliance on its openness to
international trade and one of the highest saving rates in the world, averaging 45.4% of GDP during
the period 1999-035and consequent high levels of investment in the business sector, including
government linked companies (GLCs), in an active industrial policy. This opens the issues of: large
amounts of savings generated by the mandatory fully-funded state pension scheme, the Central
Provident Fund (CPF); the role of GLCs and state-owned enterprises under the statutory boards,
which, according to the authorities, account for 13% of GDP; and the widespread use of tax and non-
tax incentives to direct investment into certain activities. The past strong supportive state role may
have been necessary in the early stages of Singapore's economic development to address market
failure, when product and factor markets were far from perfect, but considerable improvements in the
functioning of these markets could well suggest a need for less government involvement in the
economy. Indeed the authorities have reconsidered and are redefining the State's role in the economy.
Thus, for example, the Government is gradually divesting its stake in GLCs and has allowed
competition in several services.
(3) MACROECONOMIC POLICIES
(i) Monetary and exchange rate policy
8. There have been no major changes in the monetary policy framework since the last review.
Singapore continues to apply an exchange rate centred monetary policy framework focussed on
"promoting price stability as a sound basis for sustainable growth".6Monetary policy consists of
managing the Singapore dollar, which is pegged to a currency basket that includes the major trading
partners and competitors and moves flexibly within a policy band.7The Monetary Authority of
Singapore (MAS) announces the level and direction in which the Singapore dollar will fluctuate
within the band semi-annually. The MAS implements this policy through direct sales or purchases of
5The high rate of national saving can also be attributed to the fact that capital-owners appear to receive
slightly more than half of total factor income (51.8% during 1990-98), a very high share by international
standards. Given that capital-owners' propensity to save is usually much greater than that of wage-earners, the
higher the capital owners' share of total factor income, the higher the overall saving rate. Capital-owners' large
share of total factor income may be related to the continuing setting of wages by the National Wage Council. It
is also the consequence of pure profits' high share of GDP (one-quarter, according to estimates by Fernald and
Nieman, 2003), owing perhaps to the market power of some large companies, including GLCs.
6This framework has been in place since 1981.
7Monetary Authority of Singapore (2000a).WT/TPR/S/130 Trade Policy Review
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the Singapore dollar in the foreign exchange market. Money market operations supplement the
foreign exchange intervention and are used to offset short-term fluctuations in banking liquidity.8
9. In 1999, MAS maintained a neutral policy stance, following an easing of monetary conditions
in the second half of 1998, and narrowed the exchange rate band to its pre-crisis level. The nominal
exchange rate came down significantly from its peak in 1998 and was relatively stable in 1999. The
real effective exchange rate (REER) also declined, reflecting the effect of the Government’s cost-
cutting measures in 1998. The easy monetary conditions were also reflected in low domestic interest
rates (Table I.1).
10. After maintaining a neutral policy stance in 1999, the MAS allowed a gradual appreciation of
the Singapore dollar in 2000 and mid 2001 (Table I.1). After shifting to a neutral policy stance in mid
July 2001, in October 2001, the MAS widened the band to accommodate higher volatility in
international markets. In 2002, the band was narrowed again as market volatility eased, but the
neutral monetary policy stance has been maintained with a 0% appreciation path for the Singapore
dollar.9This policy stance was maintained after reviews in July 2002 and January 2003. However, in
light of the uncertain economic outlook given the hesitant recovery of the external economic
environment, in July 2003, MAS re-centred the exchange rate policy band, while maintaining a 0%
appreciation policy path, with no change to the width of the band. The high degree of liquidity in the
banking system has kept domestic interest rates down. Despite low interest rates, demand for credit
weakened considerably in 2002 (Table I.1). Consumer prices rose by 1% in 2001, but the significant
slack in the region has contributed to mild deflation since end 2001; prices declined by some 0.4% in
2002. Inflation was also contained in 2002 as a result of a package included in the FY 2002-03
Budget, which reduced the cost of key consumer goods.10Inflation is expected to remain subdued
while economic activity recovers moderately.11
11. While there are no formal exchange controls, some restrictions remain on lending to financial
entities for speculative purposes against the Singapore dollar. As a result, extending Singapore dollar
credit facilities of more than S$5 million to non-residential financial entities in Singapore dollars is
prohibited.12In addition, non-resident financial entities must convert Singapore dollar proceeds
obtained from Singapore dollar loans, equity listings, or bond issuance into foreign currency before
using them to finance activities outside Singapore.13
(ii) Fiscal policy
12. Singapore follows a prudent fiscal policy aimed at keeping expenditures below operating
revenues and at attaining moderate budget surpluses over the business cycle. According to the
authorities, Singapore has traditionally eschewed counter-cyclical policies. However, during the
period under review, every fiscal budget appears to provide measures, such as tax incentives for
households and businesses or direct support to help them overcome economic difficulties.14For
instance, tax measures introduced in FY 1998/99 were extended in FY 1999/00 to sustain the
8The money market tools used by MAS include foreign exchange swaps, inter-bank
lending/borrowing, and sales and purchases or repurchases agreements in government securities.
9Monetary Authority of Singapore (2003a).
10In particular, it is estimated that the motor vehicle-related measure introduced by the FY2002
Budget, pushed down private road transport costs by 1.4% thereby containing inflation; road taxes were also
reduced by around 20%. (Monetary Authority of Singapore (2003b).
11Monetary Authority of Singapore (2003c).
12Information provided by the authorities.
13IMF (2002a).
14Monetary Authority of Singapore (2003b).Singapore WT/TPR/S/130
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economic recovery; incentives were also introduced to enhance Singapore’s "competitive edge", and
encourage the growth of knowledge-intensive and high-value-added activities. The Budget for
FY 2001/02 provided a series of incentives to increase the attractiveness of the Singapore economy,
as well as to facilitate its transition to the next phase of economic development (based on knowledge-
intensive industries). In addition, the government announced two off-budget packages in 2001
amounting to 8.4% of GDP, to help households and businesses overcome the recession.15Economic
recovery in 2002 remained weak; as a result, some of the measures contained in the two off-budget
packages were extended until June 2003.16On the revenue side, taxes were restructured to maintain
Singapore’s economic competitiveness; there was a shift towards indirect taxation as personal and
corporate income tax rates were cut and the Goods and Services Tax (GST) was raised
(Chapter III(4)(ii)).17InFY 1999 and FY 2000, Singapore was able to maintain a budget surplus;
however, the situation was reversed in FY 2001 and FY 2003. According to the authorities, these
deficits are not structural and the Government remains committed to a prudent fiscal policy.
13. The Budget for FY 2003/04 introduced further measures to stimulate the economy. Two
additional relief packages were announced in 2003: a S$230 million SARS Relief Package (0.2% of
GDP), and package (of 0.7% of GDP), including various rebates and an acceleration of some
infrastructure projects. As a result of these measures, the deficit for 2003 is expected to be 1.1% of
GDP.18
(iii) National wage policy
14. Wages continue to be regulated according to recommendations to the Government by the
National Wage Council (NWC).19The NWC’s annual recommendations are based on reviews of
wage trends in relation to economic performance and projections.20In good years, the NWC has
recommended wage increases and additional bonuses and in times of adversity, it has recommended
wage cuts to help companies remain viable and preserve jobs. In 2003, in response to the SARS
outbreak, the NWC recommended, inter alia, a wage freeze for most companies, a reduction in wages
for companies directly affected, and the granting of bonuses in companies doing well.21
(4) STRUCTURAL MEASURES
15. With Singapore’s manufactured exports facing intensified competition in the longer term
from other countries in the region with lower input, particularly labour, costs, the Government intends
to carry out major structural reforms as recommended by the Economic Review Committee (ERC) in
2003. These reforms are aimed at addressing the immediate problem of competitiveness as well as
the longer run challenge of moving into high-value-added industries.
15These off-budget packages feature a series of tax reductions and fee rebates for individuals and
businesses, as well as transfers to the public via the New Singapore Shares, the Skills Development Fund the
ElderCare Fund, and the Community Assistance Fund (Monetary Authority of Singapore, 2003b).
16These measures include property rebate, rental rebates, reduction of the diesel tax on taxis, and
reduction of petrol excise duties.
17The Government is committed to bringing down both corporate and personal income tax rates to
20% within three years (Ministry of Trade and Industry, 2003).
18Data provided by the authorities based on FY 2003 budget estimates.
19The NWC is a tripartite advisory body, created in 1972, which includes representatives from the
Government, employers, and the trade unions.
20It is not clear to the Secretariat whether these recommendations are generally followed.
21Ministry of Manpower, Procedures/Guidelines [Online]. Available at:
http://www.mom.gov.sg/MOM/CDA/0,1858,1276-----4469_1760---3945----,00.html [6 February 2004].WT/TPR/S/130 Trade Policy Review
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16. To address the ERC's recommendations on lowering costs, the Government has lowered the
corporate tax rate from 26% in 2000 to 22% in 2003/04 (thereby reducing the value of certain tax
incentives).22It has also cut CPF contribution rates from 40% to 33% (20% for employees and 13%
for employers) in 2003. Despite this reduction, rates remain high by international standards.
Moreover, the CPF apparently fails to provide individuals with sufficient income security during
retirement. This has been attributed to the low returns from CPF investments and the heavy pre-
retirement withdrawals allowed for the purchase of housing. In order to address the situation and the
rising dependency ratio caused by an aging population, the Government announced key changes to the
CPF scheme to ensure that Singaporeans have enough savings when they retire.23The ERC also
suggested that factor costs, such as wages and land charges, should be kept down to lower overall
costs of production. The Government considers that, in order to facilitate the ongoing structural
adjustment of the economy, the labour market needs to be more flexible, allowing workers to easily
change jobs, and companies to hire or fire workers as required. It believes that companies should be
allowed to adopt flexible working and compensation arrangements, and that wages need to be linked
to performance and firm’s profitability, and less on seniority.24To keep land costs manageable, it was
recommended that the Government ensure an adequate supply of industrial land at internationally
competitive prices to enable Singapore to attract investment in manufacturing. In accordance with
this recommendation, the Government has reserved enough industrial land to meet the needs of the
manufacturing sector25, and has published a list of industrial sites available for sale.26
17. The longer-run challenge of moving Singapore into higher-value-added manufacturing and
services is being addressed principally through investment in infrastructure and incentives to attract
investment in the targeted areas, and through further regulatory reform.27The ERC also expressed
concern about the apparent lack of an "enterprise culture" in Singapore. Steps are being taken to
attract multinational companies, especially in targeted sectors, and to provide assistance to local
companies to become "enterpreneurial". In this context, a new Minister of State for entrepreneurship
and for services has been established. For services, in particular, it was felt that Singapore has "not
been as aggressive and proactive" as in manufacturing, and therefore steps had to be taken to rectify
this imbalance.28
18. The Government has also undertaken regulatory reform in services (telecommunications,
electricity, and gas) and raised or removed foreign investment limits (for example in
telecommunications, financial services, electricity). Some steps have been taken to curtail the role of
GLCs, which operate in many sectors; some enterprises have been privatized during the period under
22In the Budget Speech introducing the FY 2004 Budget to Parliament, the Finance Minister indicated
that the corporate tax rate would be reduced further to 20% by FY 2005.
23For a detailed list of these changes, refer to Central Provident Fund Board (2003 and 2004).
24Ministry of Finance (2003).
25Minister of Finance (2003).
26This list of industrial sites available for sale is known as the Reserve List; interested parties can
make an application for the site, indicating their minimum bid price. If the application meets the Government’s
reserve price for the site, it will be launched for open tender. The minimum bid must be at least 85% of the
Chief Valuer's estimated market value (EMV) for the site for the bid to be accepted. The EMV is determined on
the day the tender closes. All bids matching this minimum amount are sent to the land sales agency for
evaluation. The Reserve List is published online at: http://www.ura.gov.sg.
27Singapore has developed infrastructure to support its biotechnology industry and the industrial parks
cater to special needs of targeted industries. Many of Singapore's incentives relate to R&D related industries or
services.
28Economic Review Committee (2003a), p. 154. The ERC report states that many of Singapore's
service industries are not yet world class, citing as a main reason the belief that Singapore has not been
sufficiently proactive and aggressive in developing the service sector.Singapore WT/TPR/S/130
Page 11
review, although it is not clear what market share they represent (Chapter III(4)(i)(c)).29Moreover,
after long eschewing an over-arching competition law, the Government has announced its intention to
enact such a law.
(5) DEVELOPMENTS IN TRADE
19. The economy's openness to trade and investment has played an important role in Singapore’s
development. Since 1999, trade in goods and services has accounted on average for some 360% of
GDP. Nevertheless, growth in merchandise exports and imports has been erratic during the period
under review.30Growth in services trade has slowed (Table I.1). Singapore is a major supplier of
services (e.g. seaport and airport services, and trading services), but it is now facing competition from
other service suppliers in the region. The quality, efficiency and cost of infrastructure services could
be further improved; for instance, port charges need to decline.31
(i) Composition of merchandise trade
20. Singapore continues to export mainly manufactured products; office machines and
telecommunication equipment remain the main exports despite a 14 percentage point decline since
1999, attributable to the downturn in the global demand for electronics (Chart I.2). Exports of fuel
have increased since 1999.32Manufactured goods accounted for roughly 80% of imports in 2003
(down from 83.2% in 1999). As in the case of exports, manufactured imports consisted mainly of
office machines and telecommunication equipment; imports of fuel are also important. Entrepôt trade
remains a major income-generating activity, accounting for 44.7% of Singapore’s total exports in
2003, up from 40.1% in 1999. In 2003, re-exports also consisted of manufactured goods, again
mainly office machines and telecommunication equipment.
(ii) Direction of merchandise trade
21. In 2003, Singapore's main market for domestic exports was the European Union (16.0%),
followed closely by the United States (15.5%). However, both regions have declined in importance
since 1999 (Chart I.3). The authorities attribute this partly to an increase in domestic exports to China
and other Asian countries. The East-Asian countries as a group remained Singapore’s main market.
ASEAN absorbed 25% of Singapore’s domestic exports in 2003, up from 19.6% in 1999. China’s
share has increased since 1999 for total exports and as a source of imports. Major import sources in
2003 included Malaysia (16.8%), the United States (13.9%), the European Union (12.5%), and Japan
(12%). Since 1999, Malaysia has displaced the United States as Singapore's main source of total
exports and imports. The share of the East-Asian countries in total imports has remained almost
unchanged, while the share of imports from ASEAN countries has increased. This, together with
ASEAN's increasing share of Singapore's domestic exports, suggests perhaps some trade diversion
due to the AFTA.33Malaysia is also an important source of re-exports.
29There is very little information available on the GLCs, the sectors in which they are active (their
contribution is estimated by the authorities at around 13% of GDP although other studies puts the share higher),
or future plans by Temasek to reduce its shareholdings in these companies (Chapter III(4)(i)).
30The sharp rebound following the Asian crisis in 1999-00 was followed by a decline in 2001 and
moderate growth in 2002. Rapid growth resumed in 2003 (Table I.1).
31Ministry of Finance (2003).
32This was due to a 49% increase in oil prices from 1999 to 2002.
33The share of the ASEAN countries in total imports increased from 23.7% in 1999 to 24.4% in 2003.WT/TPR/S/130 Trade Policy Review
Page 12
Chart I.2
Product composition of merchandise trade, 1999 and 2003
1999 2003
Imports
Source :Data provide by the authorities of Singapore.Per cent
Domestic exports
Re-exportsTotal: US$111.0 billion Total: US$127.9 billion
Total: US$68.6 billion Total: US$79.7 billion
Total: US$46.0 billion Total: US$64.4 billionChemicals 6.0
Office machines &
telecommunication
equipment
38.1
Other manuf.
8.9Agriculture
4.4Other semi-manuf. 5.5
Other electrical
machinery 7.6Transport
equip. 4.9Other 3.3Fuels 9.1Non-electrical
machinery
9.8
Textiles & clothing
2.5Manufacturing
83.2Chemicals 6.7
Office machines &
telecom. equipment
38.4Fuels
13.6
Textiles & clothing 2.3Other manufactures
7.2Agriculture 3.7Other
semi-manuf.
4.6
Other electrical
machinery 5.8Transport equipment
5.6Other 3.0Non-electrical
machinery
9.3
Manufacturing
79.8
Office machines &
telecommunication
equipment
56.2
Other manuf.
8.5Chemicals 8.9
Other 1.2Fuels
13.0
Other electrical
machinery
5.0Non-electrical machinery
3.6
Agric. 1.7
Manufacturing
84.1Other
semi-manuf.
1.8
Non-electrical
machinery 4.3
Office machines &
telecommunication
equipment
42.0Chemicals
17.0
Other manufactures
9.3Fuels
18.3
Other electrical
machinery
3.8Other 1.6
Manufacturing
78.3Agriculture 1.7Other
semi-manuf. 1.9
Chemicals 6.3Office machines &
telecommunication
equipment
47.8
Textiles & clothing
3.8Agriculture
5.6
Other manuf.
7.7Other semi-manuf.
5.2
Other electrical machinery
7.6Other 4.2Non-electrical machinery
9.1
Transport equip.
2.7Manufacturing
90.2Chemicals 5.3Office machines &
telecommunication
equipment
55.8
Textiles & clothing 2.9Other manuf. 6.6Other semi-manuf. 3.6
Other electrical machinery
6.8Non-electrical machinery
7.9
Other 2.5Agriculture 2.9Fuels 2.4
Transport equipment
3.4Manufacturing
92.3Singapore WT/TPR/S/130
Page 13
Chart I.3
Direction of merchandise trade, 1999 and 2003
1999 2003
Imports
Source :Data provide by the authorities of Singapore.Other
7.0
EU15
12.7
Malaysia
15.6Japan
16.6Per cent
Domestic exports
Re-exportsChina
5.1Other East Asia
10.2
Chinese Taipei
4.0
Oceania 3.4United States
13.9
Thailand 4.3Chinese Taipei 5.1
Japan
12.0EU15
12.5
China
8.7Other East Asia
9.6
Other East Asia
10.0United States
24.6
EU15
18.7China 3.4
Japan 7.7Chinese
Taipei 4.3Other East Asia
11.4Other
4.3United States
15.5
EU15
16.0Other
2.8
Japan
7.8South Asia 2.8
China
7.2
Thailand 5.4United States
11.1
EU15
9.9
Chinese
Taipei 5.8
China 3.5Other E. Asia
6.5
Korea, Rep.of
4.0
Malaysia
22.1United States
10.7
EU15
10.0
China
6.8Other East Asia
5.1
Middle East
2.4Other
3.8
Japan
7.0Chinese Taipei
5.2Total: US$111.0 billion Total: US$127.9 billion
Total: US$68.6 billion Total: US$79.7 billion
Total: US$46.0 billion Total: US$64.4 billionThailand
4.7United States
17.0Other
8.5
Chinese Taipei
4.4
H.K., China
9.9
Other
4.7
Japan
5.4East
Asia
56.2
Middle East
7.1
East Asia
57.8East Asia
65.5East
Asia
51.5East
Asia
45.1East
Asia
56.5Middle East
8.6
Malaysia
16.8
Hong Kong,
China 7.6Other America
4.7Oceania
5.1South Asia 2.8
Other America
2.5
Malaysia
12.1Malaysia
10.7
Middle East 2.4Korea, Rep. of
5.5
H.K., China
7.8Malaysia
23.3South Asia 4.1Oceania 3.7
H.K., China
10.1South Asia 4.9
Thailand 5.3Oceania 3.5WT/TPR/S/130 Trade Policy Review
Page 14
(iii) Composition of trade in services
22. Singapore remains a net exporter of services; services exports (in terms of GDP) have been
growing since 1999, from 32.4% to 33.6% in 2003. Consistent with Singapore's role as an entrepôt,
transportation, despite a slight decline since 1999, remains the most important service export. The
share of exports of "other business services" in total services exports has increased since 1999.34In
2002, services imports were also dominated by transportation and "other business services"
(Table I.4).
(iv) Direction of trade in services35
23. The European Union, Japan, and the United States continue to be Singapore’s major service
export markets and the largest suppliers of services imports. The combined share of exports of these
three trading partners has not varied much since 1999; the United States' share decreased from 18.8%
in 1999 to 16.5% in 2001, the EU's share showed a slight increase since 1999 (from 14.5% to 15.1%),
while Japan’s share fell from 9.9% in 1999 to 9.1% in 2001. In 2001, the major services suppliers to
Singapore were the United States (32.4%), the European Union (16.6%), and Japan (5.6%).
Table I.4
Trade in services, 1999-03
(S$ million and per cent)
1999 2000 2001 2002 2003
Services balance 3,550.1 3,382.9 1,293.0 443.7 1,980.5
Export of services 44,683.3 50,699.7 52,139.9 53,676.1 53,494.9
of which in %:
Transportation 40.5 40.4 39.4 40.0 38.4
Travel 19.3 17.8 15.9 14.9 13.0
Insurance 1.4 1.7 2.3 2.5 2.8
Government services 0.3 0.3 0.3 0.3 0.3
Construction 0.6 0.5 0.7 0.7 0.6
Financial 4.5 4.7 4.1 4.3 5.9
Computer & information 0.9 0.8 1.1 1.1 1.0
Royalties 0.3 0.3 0.6 0.6 0.6
Social 0.0 0.1 0.1 0.1 0.1
Other business services 32.2 33.4 35.7 35.6 37.2
Import of services 41,133.2 47,316.8 50,846.9 53,232.4 51,514.4
of which in %:
Transportation 45.7 46.7 43.6 43.0 45.4
Travel 15.9 16.5 19.3 21.2 16.7
Insurance 4.7 5.4 5.1 5.6 6.2
Government services 0.5 0.4 0.5 0.5 0.5
Construction 0.8 0.5 0.6 0.5 0.5
Financial 1.3 1.5 1.3 1.3 1.2
Computer & information 0.7 0.8 1.0 0.7 0.7
Royalties 15.9 13.2 12.0 10.6 11.3
Social 0.1 0.1 0.1 0.1 0.1
Other business services 14.4 15.0 16.5 16.4 17.4
Source: Data provided by the authorities of Singapore.
34Other business services include accounting, advertising, architectural, business management,
engineering and technical, legal, research and development, and trade-related services.
35Based on information provided by the authorities, which is not complete; it includes only the eight
major trading partners and excludes services such as travel and government services.Singapore WT/TPR/S/130
Page 15
(6) DEVELOPMENTS IN FOREIGN DIRECT INVESTMENT (FDI)
24. Singapore has traditionally been a major recipient of FDI, third in the region after China and
Hong Kong, China.36However, inward FDI decreased from S$27.2 billion in 1999 to S$19.9 billion
in 2002. Net FDI as a share of GDP also decreased substantially, from 10.4% in 1999 to -2.4% in
2001; but recuperated in 2002 and to 2003 (Table I.1).
25. In 2001, inward FDI was mainly in services (56.7%), but there has been a substantial decline
in foreign investment in this sector since 1999, when it absorbed 73.2% of total FDI.37The major
decline in investment occurred in commerce and financial services. In contrast, FDI flows in
manufacturing have increased substantially since 2001. The United States is the major single
investor, followed by Japan. U.S. investment in Singapore has almost doubled since 1999; Japan's
investment has also increased. The European Union also continues to be a major investor in
Singapore, but its investments have declined since 1999 as have investments originating in Asian
countries as a group.
26. Singapore’s total outward FDI stock was S$131.19 billion in 2001 (Table AI.1). Investment
abroad was mainly in financial services (56.5%) followed by manufacturing (20.7%). Since 1999, the
proportion of investment in manufacturing has decreased while that in services has increased.38
Singapore invests mainly in the region, with Asian countries absorbing some 48% of Singapore’s
investments abroad. The major recipient in 2001 was China (12.6%). A substantial share (36%) of
Singapore’s investment abroad goes to "other countries." (e.g. Latin American countries)
(Table AI.2).
(7) PROSPECTS
27. As a small open economy, Singapore's future growth depends heavily upon the recovery of its
main trading partners, particularly their demand for electronics, which would not only boost
manufacturing but also trade-related services. Sustained recovery in services after the post-SARS
rebound of the sector also depends on a more favourable external environment. The Singapore
economy rebounded in the second half of 2003 in tandem with improvements in the external
environment and, according to the authorities, the immediate outlook is healthy as growth in the major
economies is expected to be sustained into 2004.
28. The prospects for growth in the longer run, however, depend upon Singapore’s ability to
reverse the slowdown in TFP growth since the mid 1990s and meet the challenges from low cost
regional competitors. Such a reversal requires, inter alia , a re-evaluation of certain aspects of
Singapore's development strategy, including its active industrial policy, which arguably served
Singapore well in the past, at least as concerned economic growth, but may not be up to the
challenges now facing the economy, particularly the emergence of other countries in the region.
Singapore is tackling these issues, including through: reforms of the state pension scheme (the CPF
scheme); cuts in the corporate tax rate (which reduces the value of certain tax incentives, although
these are still widely used); and the announcement by the Government of its intention to enact an
over-arching competition law, after long eschewing such a policy; steps have been taken slowly to
reduce government holdings in the GLCs, which operate in many sectors. These, together with other
ongoing structural reforms, notably those aimed at opening up services (financial and
telecommunications) to more competition and making labour markets more flexible, should increase
the resilience of the economy in meeting present and future challenges.
36UNCTAD (2003).
37Services include "other".
38Services include "other".