projections. Moreover, domestic demand has been
fuelled by steep declines in the Canadian personal
savings rate, raising questions over the capacity of
private consumption to support economic growth.
However, recent gains in household net wealth, driven
mainly by rising equity prices, have provided consumers
with the impetus to finance current consumption without
eroding personal sector balance sheets, tempering a less
sanguine view of domestic demand (Chart 12). In the
medium term, the economy is expected to gain
momentum and, as the effects of current economic
stimuli wane, it is likely that savings and investment
rates will adjust to more sustainable levels.
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- Contents
p. 16
p. 17
p. 18
p. 19
p. 20
- Issue Table of Contents
National Institute Economic Review, No. 188 (April 2004) pp. 1-118
Front Matter
ECONOMIC OVERVIEW
AT A GLANCE… The world economy [pp. 2-2]
The UK economy [pp. 3-3]
COMMENTARY
THE UK ECONOMY [pp. 4-7]
THE WORLD ECONOMY
Recent Developments [pp. 8-12]
The Dollar, the Jobless Recovery and Technical Progress [pp. 13-15]
New Fiscal Programmes in the US and Canada [pp. 16-20]
A Downturn in China Would Threaten East Asia and Japan [pp. 21-24]
Accelerating World Demand to Underpin Euro Area Recovery [pp. 25-35]
THE UK ECONOMY
PROSPECTS FOR THE UK ECONOMY [pp. 36-55]
RESEARCH ARTICLES
SIMULATING HOUSEHOLD SAVINGS AND LABOUR SUPPLY: AN APPLICATION OF DYNAMIC PROGRAMMING [pp. 56-72]
THE EFFECTS OF AN INCREASE IN PETROL EXCISE TAX: THE CASE OF NEW ZEALAND HOUSEHOLDS [pp. 73-82]
þÿ�þ�ÿ���E���C���O���N���O���M���I���C��� ���P���E���R���F���O���R���M���A���N���C���E��� ���I���N��� ���F���R���A���N���C���E���,��� ���G���E���R���M���A���N���Y��� ���A���N���D��� ���T���H���E��� ���U���N���I���T���E���D��� ���K���I���N���G���D���O���M���:��� ���1���9���9���7�������2���0���0���2��� ���[���p���p���.��� ���8���3���-���9���9���]
THE VOLATILITY OF THE OUTPUT GAP IN THE G7 [pp. 100-107]
STATISTICAL APPENDIX [pp. 108-117]
Back Matter
Singapore’s Trade Policies: Priorities and Options
Author(s): Margaret Liang
Source: ASEAN Economic Bulletin , April 2005, Vol. 22, No. 1, Revisiting Trade Policies
in Southeast Asia (April 2005), pp. 49-59
Published by: ISEAS – Yusof Ishak Institute
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https://www.jstor.org/stable/25773843
ASEAN Economic Bulletin Vol. 22, No. I (2005), pp. 49-59 ISSN 0217-4472
Singapore’s Trade Policies
Priorities and Options
Margaret Liang
This paper analyses Singapore’s multi-pronged approach in pursuing multilateral, bilateral,
and regional liberafization initiatives to secure and expand its political and economic space.
The paper evaluates trade policy trends pre- and post-Asian crisis. It focuses on Singapore’s
priority interests and concerns in the Uruguay Round and its role in moving the negotiating
process. Looking ahead, the paper discusses prospects in the Doha Round and what it means
for Singapore. The WTO and the Doha Round negotiations remain Singapore’s top priority in
international trade. The paper also discusses the underlying political and strategic rationale
in Singapore’s pursuit of FTAs/RTAs and examines future challenges faced by Singapore in
seeking greater liberalization and open markets. It is contended that strategically such FTAs
have strengthened and expanded Singapore’s economic linkages globally, as well as helped to
anchor the economic interests of major economies beyond the region in Southeast Asia.
I. Introduction
Singapore’s trade policy directions are underpinned
by its dependence on the global economy, and the
constraints of a small domestic market with limited
natural resources. The policy option for Singapore
was thus driven by a compelling need to plug into
the global economy early in its development. It
pursued an export-driven industrialization policy,
slashed trade barriers and actively sought foreign
investments.
With a small domestic market and limited
natural resources, Singapore was forced to plug
into the global economy early in its development.
When Singapore separated from Malaysia, it lost
its hinterland. It had no choice but to swiftly
shift to an export-driven industrialization policy,
slashing trade barriers and actively seeking foreign
investment. This change in orientation brought
Singapore an average growth rate of 10 per cent
from 1965 to 1979. In 1965, when Singapore first
became independent, its total trade amounted to
S$6.8 billion. Today, Singapore is the fifteenth
largest trading nation in the world with its total
merchandise trade in 2004 amounting to S$580
billion, three times Singapore’s GDP. By tapping
into the global grid of trade, investments, and
capital, Singapore recorded an average annual
growth rate of 7.3 per cent and the nominal value
of its non-oil domestic exports have grown by an
average of 12 per cent per annum. Singapore’s
trade to GDP ratio is the highest in the world. The
importance of trade to Singapore is illustrated by
the fact that since 1999, Singapore’s total trade in
goods and services has accounted on average for
ASEAN Economic Bulletin 49 Vol. 22, No. 1, April 2005
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nearly 360 per cent of GDP. Singapore is thus an
advocate of the multilateral trading system as free
trade has been crucial for its survival.
Being plugged into the global economy makes
Singapore vulnerable to the global environment.
Singapore has reached a crossroad in its economic
development. The global landscape has changed.
After more than two decades of high growth, the
Asian financial crisis plunged Southeast Asia and
Singapore into political and economic turmoil.
The September 11 attacks in 2001 and subsequent
terrorist activities has cast a cloud of uncertainty
in the world. Globalization and rapid technologi
cal advances had their impact on trade-dependent
Singapore which is facing significant challenges
on the external and domestic fronts.
In Singapore’s short history of thirty-nine years,
it has suffered three recessions: in 1985,1998, and
2001. Despite its strong fundamentals, Singapore
did not escape unscathed from the financial
crisis that buffeted the region in 1997-98, due
to its close economic interdependence with the
neighbouring economies. Real GDP growth fell
sharply from 8.9 per cent in 1997 to 0.3 per cent in
1998, although Singapore was less badly hit than
many of its neighbours, who slipped into negative
growth for the first time in more than a decade.
Nevertheless, Singapore’s sound macroeconomic
policies, coupled with its openness helped it to
recover rapidly from the effects of the Asian crisis.
The Singapore economy recovered in 1999 and
2000 to register GDP growth of 6.9 per cent
and 9.7 per cent respectively. This growth was
fuelled by growth in IT spending as a result of the
dot.com boom.
Given Singapore’s high dependence on export
markets, it was again subject to a series of external
shocks in 2001-03. The global economic downturn
and the aftermath of the September 11 terrorist
attacks resulted in the Singapore economy entering
a recession. In 2001, Singapore experienced its
worst recession since independence when its
economy contracted by 1.9 per cent (Table 1).
This drastic contraction was brought about by a
sharp slump in external demand, as a result of
the downturn in the global electronics industry, the
TABLE 1
Singapore: Key Economic Indicators
Indicator 1999 2000 2001 2002 2003
Gross Domestic Product:
At Current Market Prices
(S$ million) 139,615.9 159,662.1 154,078.0 158.064.1 159,135.0
Annual Change (%) 1.8 14.4 -3.5 2.6 0.7
At 1995 Market Prices
(S$ million) 147,834.4 162,162.3 159,073.0 162,493.2 164,265.9
Annual Change (%) 6.9 9.7 -1.9 2.2 1.1
Per Capita GNI in S$ 36,097 39,599 37,634 37,834 37,555
Gross Fixed Capital Formation:
At Current Market Prices
(S$ million) 47,091.9 47,538.2 45,586.0 40,705.0 39,573.4
Average US$/S$ 1.6949 1.7239 1.7917 1.7906 1.7422
Inflation Rate (CPI Change, %) 0.0 1.3 1.0 -0.4 0.5
Unemployment Rate (%) 3.5 3.1 3.3 4.4 4.7
Productivity (Annual Change, %) 7.3 5.4 -5.2 3.6 2.3
Source: Department of Statistics, 2004.
ASEAN Economic Bulletin 50 Vol. 22, No. 1, April 2005
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U.S. recession, weaker regional growth, and the
severe impact of the September 11 attacks on the
global airline industry.
Notwithstanding a difficult year in 2002, the
economy managed to grow by 2.2 per cent in 2002.
However, in the first half of 2003, Singapore’s
economy was again hit simultaneously by the
outbreak of Severe Acute Respiratory Syndrome
(SARS) and the war in Iraq which affected regional
tourism. With SARS being contained by June
2003, and a more positive external environment,
Singapore’s economy turned around in the second
half and registered a growth of 1.4 per cent for the
whole of 2003. The Singapore economy rebounded
strongly in 2004 with a growth of 8.4 per cent.
With a positive global environment, the Singapore
economy is expected to gain momentum through
2005. The economy is forecast to grow between
3 and 5 per cent in 2005 (MTI2004).
In the above context, this paper analyses
Singapore’s multi-pronged approach in pursuing
multilateral, bilateral, and regional liberalization
initiatives to secure and expand its political and
economic space. The remainder of this paper is
organized as follows. Section II analayses the
macroeconomic and policy trends of the Singapore
economy. Section IE analyses Singapore’s role in
multilateral trade liberalization in the WTO,
while Section IV analyses its rationale for and
involvement in bilateral and regional trade
liberalization by pursuing free trade agreements
(FTAs). Section V analyses the future directions of
Singapore’s trade policy and concludes the paper.
II. Macroeconomic and Policy Trends
Singapore is a small economy accounting for only
1.2 per cent of East Asia’s GDP and 0.3 per cent
of world GDP. Its economy is, however, highly
dependent on external demands. Manufacturing,
together with services, make up Singapore’s twin
engines of growth. The manufacturing sector
accounted for 26.3 per cent of Singapore’s GDP
whilst services accounted for 63 per cent of GDP
in 2003. The services sector is a major employer,
accounting for 75 per cent of total employment.
Agriculture is of very limited significance to the
Singapore economy. The sector contributes less
than 0.1 per cent of Singapore’s GDP. Currently,
only about 2 per cent of the land area is used for
agricultural purposes and about 90 per cent of
Singapore’s food items are imported.
Ill Trade in Goods
Singapore’s external trade pattern reflects the
conditions in the external environment. Total trade
recovered in 1999 as external conditions improved
after the Asian financial crisis. Following a 22.9
per cent expansion in 2000, Singapore’s external
trade contracted sharply by 9.4 per cent during the
2001 recession (Table 2). It has, however, stayed
positive since 2002 with a 9.6 per cent expansion
in 2003 and an exceptionally strong growth of
22.5 per cent in 2004, largely due to the rebound
in global electronics demand, increase in pharma
ceutical exports and pick up in demand from key
markets. Malaysia, the United States, EU, Japan,
and China were Singapore’s top five trading
partners, accounting for 59 per cent of total trade
in 2004. Singapore’s main exports and imports are
electronics, oil, and chemicals. Total trade growth
is projected to be in the range of 7.0 per cent to
9.0 per cent for 2005, consolidating from the high
22.5 per cent achieved in 2004.
IL2 Trade in Services
Singapore’s total trade in services increased
steadily from 51 per cent of GDP in 1998 to
approximately 63 per cent in 2003. Its major
trading partners in trade in commercial services
are the United States, EU, Japan, and the regional
developing economies. The top ten trading
partners accounted for more than three-fourths
of Singapore’s trade in services in 2003. The
geographical pattern of Singapore’s trade in
services is thus broadly similar to trade in goods.
Singapore’s export of services can be broadly
divided into traditional transportation and travel
services and the emerging trade-related financial,
business, and technical services. Although the
export of services grew at an annual rate of 9.4 per
cent during the period 1998-2002, it slowed down
ASEAN Economic Bulletin 51 Vol. 22, No. 1, April 2005
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TABLE 2
Singapore’s Trade Performance, 1999-2003
Singapore’s Trade Performance Annual Percentage Change
(At current prices, S$ billion) in Trade (%)
Trade 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003
Total Trade 382.4
Imports 188.1
Exports 194.3
Domestic Exports 116.3
Non-oil 101.2
Oil 15.1
Re-Exports 78.0
470.0 425.7 432.2
232.2 207.7 208.3
237.8 218.0 223.9
135.9 118.4 119.4
113.1 96.7 98.6
22.9 21.7 20.9
101.9 99.6 104.5
473.9 8.1 22.9
222.8 10.8 23.4
251.1 5.7 22.4
138.9 9.8 16.9
113.5 9.5 11.8
25.4 12.4 51.0
112.2 0.2 30.7
-9.4 1.5 9.6
-10.5 0.3 7.0
-8.3 2.7 12.1
-12.9 0.8 16.3
-14.5 1.9 15.1
-5.0 -3.9 21.7
-2.3 4.9 7.4
Source: IE Singapore, 2005.
to 2.8 per cent and 2.9 per cent in 2001 and 2002
respectively, with a contraction of 0.3 per cent in
2003 due to the external impact of the September
11 attacks, SARS, and the Iraq war (Table 3).
The two most important components of services
imports were transportation and travel. Imports
of services recorded an annual growth of 11 per
cent during 1998-2002, though it slowed down
during the 2001-03 period amidst a deteriorating
labour market, high retrenchments, and the
occurrence of SARS.
1L3 Foreign Direct Investment
The Singapore economy has remained as one of
the largest recipients of foreign direct investment
(FDI) in the region in 2002. The United States,
EU, and Japan were the three largest foreign
investors in Singapore, which demonstrates a
close relationship between trade in services,
trade in goods, and FDI. The EU accounted for
two-fifths of FDI as at end 2002. Investment from
Asia constituted almost a quarter (23.6 per cent)
followed by investment from Caribbean/Latin
America (19 per cent) and North America (15.6
per cent). The industrial structure of FDI remained
relatively unchanged over the period 1998-2002,
with foreign investors attracted largely to financial
services, manufacturing, and commerce sectors.
Inward FDI stock amounted to S$239 billion in
2002 (Department of Statistics 2004).
With respect to outward investments, Singapore
has made significant progress since it launched its
regionalization programme in 1993. Between 1993
and 2002, Singapore’s investments in the region
has increased from S$6 billion to S$25 billion,
more than fourfold. Singapore companies, which
initially started out in the region, has over the
years moved beyond the region to invest in North
America, Europe, Latin America, South Asia, and
the Middle East.
Since 1993, Singapore’s outward FDIs have
increased fivefold, reaching S$148 billion in 2002.
The Ministry of Trade and Industry expects this
figure to reach S$300 billion by 2015, with annual
returns of up to S$23 billion. Singapore’s FDI
abroad is concentrated mainly in financial services
and manufacturing. Singapore is a significant
investor in ASEAN, China, India, and Australia
(Department of Statistics 2004).
HA Policy Options
Singapore’s trade policy directions are under
pinned by several factors:
Constraints of a small domestic market with
limited natural resources.
ASEAN Economic Bulletin 52 Vol. 22, No. 1, April 2005
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TABLE 3
Singapore’s Trade in Commercial Services, 1999-2003
Singapore’s Trade in Services Annual Percentage Change
(at current prices, S$ billion) in trade in services (%)
Indicator 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003
Total Trade in
Services 85.82
Exports of Services 44.68
Transportation 18.12
Travel 8.63
Insurance 0.61
Govt Services 0.15
Construction 0.28
Financial 2.02
Computer &
Information 0.39
Royalties 0.11
Social 0.02
Other Business
Services 14.37
Imports of Services 41.13
Transportation 18.79
Travel 6.56
Insurance 1.95
Govt Services 0.20
Construction 0.31
Financial 0.55
Computer &
Information 0.31
Royalties 6.53
Social 0.02
Other Business
Services 5.92
98.02 102.99 106.91
50.70 52.14 53.68
20.50 20.53 21.47
9.01 8.27 7.99
0.87 1.19 1.32
0.17 0.18 0.18
0.23 0.35 0.36
2.40 2.12 2.33
0.43 0.56 0.57
0.15 0.31 0.33
0.03 0.04 0.03
16.92 18.59 19.09
47.32 50.85 53.23
22.10 22.18 22.87
7.82 9.81 11.30
2.56 2.61 2.98
0.20 0.25 0.26
0.21 0.31 0.28
0.69 0.64 0.71
0.39 0.49 0.39
6.23 6.09 5.65
0.04 0.05 0.06
7.08 8.41 8.73
105.01 18.6 14.2
53.49 13.3 13.5
20.55 19.4 13.2
6.97 12.0 4.5
1.52 15.3 42.6
0.16 -5.2 13.1
0.32 -15.1 -17.3
3.14 0.8 18.8
0.56 -7.1 10.1
0.34 15.7 32.7
0.04 42.0 27.6
19.90 10.4 17.7
51.51 25.0 15.0
23.41 17.3 17.6
8.58 29.9 19.3
3.19 7.3 31.4
0.27 1.6 0.7
0.25 -4.1 -31.7
0.60 36.0 26.0
0.38 18.6 26.8
5.81 108.6 -4.6
0.06 95.0 67.9
8.96 3.5 19.5
5.1 3.8 -1.8
2.8 2.9 -0.3
0.1 4.6 -4.3
-8.2 -3.4 -12.8
37.1 11.3 15.1
7.1 -1.8 -8.8
49.4 3.0 -10.8
-11.4 10.0 34.6
31.0 1.2 -1.8
105.7 7.8 2.8
44.4 -6.7 2.0
9.9 2.6 4.3
7.5 4.7 -3.2
0.4 3.1 2.4
25.4 15.3 -24.1
2.1 14.3 6.9
24.5 3.9 6.2
44.5 -10.8 -10.7
-6.6 10.8 -15.2
27.3 -21.3 -1.7
-2.2 -7.3 2.8
28.5 24.2 2.1
18.9 3.8 2.6
Source: Department of Statistics, 2004.
Its dependence on the global economy;
Singapore’s economy is plugged into the inter
national grid and cannot be insulated from key
global trends. It is vulnerable to developments
around the world.
Its dependence on free access to markets around
the world for its economic survival and growth.
Singapore’s prosperity is thus inextricably linked
to that of the region and the world. To secure
and expand its political and economic space,
Singapore has adopted a multi-pronged approach
in pursuing trade liberalization initiatives through
the multilateral trading system, bilateral free trade
agreements (FTAs), regional trading arrangements
(RTAs), and through regional groupings such as
ASEAN, APEC (Asia-Pacific Economic Co-opera
tion), ASEM (Asia Europe Meeting), and FEALAC
(Forum for Asia-Latin America Co-operation).
m. Singapore’s Approach to Multilateral
Trade Liberalization1
On the multilateral front, Singapore continues
to give primacy to the WTO multilateral trading
ASEAN Economic Bulletin 53 Vol. 22, No. 1, April 2005
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system. Whilst Singapore played a limited role
during the Tokyo Round, it was proactive and
played a leading role during the Uruguay Round in
pursuit of its trade interests and to move the trade
liberalization process. Singapore hosted the first
World Trade Organization (WTO) Ministerial
Conference in 1996 and has since been in the
forefront with other like-minded countries in
facilitating the launch of the Doha Round and the
post-Doha negotiating process to maintain the
momentum of multilateral trade liberalization.
///. 1 Uruguay Round (1983-93)
The Uruguay Round (UR) was the first truly
comprehensive Round, going beyond tariffs and
trade in goods to cover important areas such as
agriculture, services, and intellectual property.
The Uruguay Round eliminated the so-called
Voluntary Export Restraints (VERs), decided to
remove by 2005 the textile quota restrictions
under the Multi-Fibre Agreement (MFA), and
adopted agreed modalities to liberalize trade in
agriculture. More significantly, the Uruguay
Round brought into being a radically new set of
rules and disciplines to govern trade in services as
well as trade-related intellectual property rights
(TRIPs). Indeed the Tokyo Round achievements
paled in comparison with the Uruguay Round
in terms of scope, depth and impact on the
multilateral trading regime. Singapore played a
key role during the Uruguay Round, from the
preparatory phase (1983-86) to the launch of the
Round at Punta del Este (September 1986) until its
final conclusion in December 1993 and the
establishment of the WTO in April 1994.
Singapore’s main policy objectives in the
Uruguay Round were:
(a) to secure greater market access in goods;
(b) to achieve strengthened rules in trade remedy
measures (anti-dumping, safeguards, and
countervailing duty measures) so as to
ensure that market access benefits are not
negated by these non-tariff measures;
(c) to ensure that rules in the new areas like
services and trade-related intellectual rights
(TRIPs) would provide a legal framework
that would be conducive to world trade
expansion; and
(d) to improve the dispute settlement rules to
make them more effective in resolving trade
disputes.
The four years between 1983 and 1986 that
were spent in trying to launch the Uruguay Round
were extremely difficult. Strong opposition from
some developing GATT contracting parties such
as India, Brazil, Egypt, and Argentina against the
launch of the New Round forced a group of nearly
fifty countries, comprising both developed and
developing countries, to take the negotiating
process out of the GATT building. Singapore was
among this group of “like-minded” countries
which met daily for over several weeks in
the EFTA building2 to come up with a draft
Declaration that provided the basis for the launch
of the Uruguay Round in Punta del Este (Uruguay)
in September 1996. The main concerns of those
developing countries against the New Round was
the inclusion of new subjects like services and
intellectual property rights. Although Singapore
had some initial reservations about these “new
issues”, it strongly supported the launch of the
Uruguay Round to protect its interests as a small
trading nation that is heavily dependent on a free,
open, and stable global trading regime.
With a small team of three negotiators based in
the Singapore Permanent Mission in Geneva,
Singapore prioritized its negotiating approaches.3
The Geneva team was supported by experts
from the capital, for example, in TRIPs, financial
services, and telecommunications negotiations. To
achieve strength in numbers, Singapore and other
countries coalesced themselves into groupings
according to issues of common interests rather
than along regional or north-south lines. Thus,
for example, Singapore worked with Hong Kong
to form a group of like-minded countries on
anti-dumping, whose common interest was to
push for strengthened anti-dumping rules and
procedures to prevent the abuse of anti-dumping
measures as a disguised protectionist tool.
Singapore and Hong Kong also worked together to
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push for MFN safeguards and the elimination of
Voluntary Export Restraints (VERs). Singapore’s
services negotiator recalls that they took almost
two years to conceptualize and to finalize the four
modes of delivery in trade in services.4 GATT
members would then negotiate how much market
access and national treatment they would accord
to foreign service suppliers.
There was good co-operation between Singapore
and the other ASEAN-5 countries. Unlike the
EC, ASEAN did not negotiate as a bloc with a
single spokesman. Even in the “Green-Room”5
discussion, individual ASEAN members were
invited in its national capacity and not as ASEAN
spokesman. Singapore, Malaysia, and sometimes
Thailand or Indonesia were invited depending on
the issues.6 Whilst each of the ASEAN countries
negotiated on an individual national basis, there
was regular exchange of information between them
and where feasible, inputs would be provided to
each other. This arrangement worked well because
there was good rapport between the individuals,
and much effort was taken to consult with each
other at different levels which led to broad
convergence of views among ASEAN on key
Uruguay Round issues. This was the strength of the
ASEAN co-operation during the Uruguay Round,
and when ASEAN spoke as a group in GATT, it
was listened to as a moderate force.
Singapore’s commitments in the Uruguay
Round tariff negotiations were in the form of tariff
bindings as more than 98 per cent of all its
tariff lines were already at zero rates. Singapore
increased its tariff bindings from less than 0.5 per
cent pre-UR to 70 per cent of all tariff lines in the
industrial and agricultural sectors, with binding at
zero rate in sectors such as agriculture equipment,
construction equipment, steel, pharmaceuticals,
furniture and medical equipment. Singapore’s
bindings on industrial products increased from
near zero to 65 per cent of all lines, and its
average bound rate on industrial products, on a
trade-weighted basis declined from 12.4 per cent
to 5.1 per cent. Singapore has bound 100 per cent
of its tariff lines in agriculture. With the exception
of tobacco and liquor products, agriculture tariff
lines were bound at a ceiling rate of 10 per cent.
In services, Singapore’s schedule of specific
commitments covered sixty-one sectors. It
cornmitted to maintain its then-current level of
openness in a wide range of sectors including
business services, communication services,
construction and engineering-related services,
financial services, environmental services, tourism
and travel-related services, and transport services.
Post-Uruguay Round, Singapore amended its
legislation in the light of the TRIPs and Customs
Valuation Agreements ahead of the transition period
available to developing countries. In services,
Singapore signed both the Agreement on Telecom
munication Services (Fourth Protocol to the GATS
that entered into force in February 1998) and the
Agreement on Financial Services (Fifth Protocol
to the GATS that came into force in March 1999).
Under the Agreement on Telecommunications
Services, Singapore committed to grant up to two
additional operators for public switched services
and leased circuit facilities from 1 April 2000. This
replaced the previous offer, under which exclusivity
was granted to Singapore Telecommunications
(Singtel) until 2007.
Under the Agreement on Financial Services,
Singapore’s commitments included an offer to
increase offshore bank lending limits to residents
of Singapore from S$100 million per bank to
S$200 million, and to allow up to 49 per cent
aggregate foreign equity ownership in locally
owned insurance companies.
Singapore also signed on to the Information
Technology Agreement (ITA I) that was concluded
during the first WTO Ministerial Conference held
in Singapore in December 1996, and a subsequent
ITA II that was negotiated in 1999. The ITA I
provided for elimination of tariffs on five main
categories of information technology products that
included computers, telecommunications products,
semiconductors, semiconductor manufacturing
equipment, and scientific equipment. The ITA II
expanded the product coverage to other interactive
multimedia products.
Singapore was a strong supporter of the Uruguay
Round and believed that the WTO Agreement
would have a positive impact on its trade. It is
estimated that the full implementation of tariff
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commitments by WTO members would result in
accumulated potential tariff savings of at least
US$333 million for Singapore’s exports to its major
markets. ITA I also resulted in S$1.49 billion of
accumulated tariff savings for Singapore’s exports
with the full implementation of tariff elimination
by 1 January 2000. Singapore also saw benefits
stemming from enhanced market access, improved
transparency, and a more efficient and expeditious
dispute settlement mechanism. On the latter, it was
significant that Singapore was the first WTO
member to seek recourse to the WTO Dispute
Settlement Mechanism in January 1995 when
it initiated a dispute settlement case against
Malaysia’s Approved Permit Scheme for the import
of Polyethylene (PE) and Polypropylene (PP). The
dispute was resolved after three consultations under
the WTO proceedings, and Singapore did not
proceed to the panel phase. This was indeed a good
test case on the effectiveness of the strengthened
WTO Dispute Settlement Rules.
To ensure global competitiveness, Singapore
continued with autonomous liberalization in several
services sectors, such as in the telecommunications,
energy, and financial services sectors post-Uruguay
Round. Despite the financial crisis, Singapore
implemented in 1999 the first phase of a five-year
programme which progressively increased foreign
participation in Singapore’s domestic banking
market. These autonomous liberalization measures
have in a sense widened the gap between
Singapore’s GATS commitments in the Uruguay
Round and its current applied practice.
III.2 Doha Round (2001 Onwards)
From Uruguay to the Doha Round, Singapore
continued to play a leading role in the WTO
to maintain the momentum of multilateral trade
liberalization. Working with a group of like-minded
countries (which called themselves “Friends of the
Round”), Singapore was proactive in pushing the
negotiating process, starting at the first WTO
Ministerial Conference (MC) held in Singapore in
September 1996, followed by the second WTO MC
held in Geneva in May 1998, the third WTO MC in
Seattle in December 1999 (which unfortunately
failed to launch the “millennium round”), but
which finally culminated in the successful launch
of the Doha Round in November 2001.
As in the Uruguay Round, Singapore’s priorities
in the Doha Round are to work towards greater
market access in goods and services. Singapore’s
key interest is to secure greater market access in
industrial goods and hence would like a substantive
outcome in the the Non-Agricultural Market Access
(NAMA) negotiations. Singapore has proposed that
members bind 100 per cent of tariff lines in the
NAMA negotiations. Singapore, together with
other “Friends of NAMA” is seeking an ambitious
“harmonizing” formula that would tackle tariff
peaks and tariff escalation and achieve real market
access opportunities.
On the services front, Singapore has undertaken
autonomous liberalization in several sectors. As
Singapore is essentially a services economy with
export interests, particularly in markets in the
region, it is also in Singapore’s interest to secure
greater market access in the services negotiations.
In the area of rules, the main issue is anti
dumping. As a non-user of anti-dumping measures,
Singapore has an interest in tightening the
Anti-Dumping Agreement and to ensure that the
negotiations do not lead to a weakening of the
Agreement that would negate market access
benefits and be detrimental to its exporting
interests. In addition, given Singapore’s overall
policy objectives to achieve greater market access
in the Doha Round, achieving a good framework
agreement on trade facilitation that would further
expedite the movement, release and clearance of
goods is another area of interest.
IV. Singapore’s Bilateral and Regional Trade
Liberalization Strategies: Rationale and
Implications
In tandem with its commitments to the WTO and
the Doha Round process, Singapore has embarked
on an aggressive drive since the past six years to
negotiate FTAs and regional trading arrangements
(RTAs). In fact there has been a dramatic rise in the
number of FTAs/RTAs since the Uruguay Round.
To date 285 RTAs and FTAs have been notified
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to the WTO and these have been driven by economic
as well as strategic and political calculations
(WTO Secretariat 2003). Increasingly developing
countries are turning to FTAs/RTAs to open markets
in developed as well as developing countries.
IV1 Singapore’s Bilateral FTAs
On the bilateral front, Singapore has concluded
FTAs with New Zealand (entered into force on
1 January 2001), Japan (in force 30 November
2002), EFTA (European Free Trade Association
comprising Switzerland, Iceland, Liechtenstein and
Norway ? in force 1 January 2003), Australia (in
force 28 July 2003), the United States (in force 1
January 2004,) Jordan (expected to enter into force
early 2005), and South Korea. Singapore is cur
rently engaged in FTA negotiations with Canada,
India, Mexico, Panama, Sri Lanka, Qatar, Kuwait,
and Peru. It is also negotiating the Pacific Three
FTA (P3) with New Zealand and Chile, which is the
first trilateral FTA linking economies from three
different continents’? Australasia, Latin America,
and Asia. Further, it is expected to launch FTA talks
with Bahrain, Egypt, UAE, Pakistan, and China,
and explore talks with Iran and Oman. All these
initiatives will result in opening up markets in the
Americas, Middle East, South Asia, and North Asia.
Singapore describes its FTA policy as complimen
tary and synergistic with its commitments to the
WTO and the multilateral trading system. In this
respect, Singapore’s FTAs are considered to be
WTO-consistent and WTO-plus. Singapore’s FTAs
cover “substantially all trade” that includes
commitments in agriculture. The elements of
Singapore’s FTA include the main areas of trade
in goods, services, contingency measures, trade
facilitation, investment, government procurement,
competition policy, protection of intellectual prop
erty rights, and broader economic co-operation. The
FTAs also include provisions for dispute settlement.
IV2 Singapore fs Role in Regional Economic
Integration
On the regional front, Singapore is a founding
member of ASEAN, APEC, and ASEM. Of the
three regional fora, the ASEAN economic agree
ments provide the most comprehensive and deepest
commitments. Singapore has already implemented
its AFTA commitments insofar as its applied tariff
is zero for all items from ASEAN with no product
exemptions in the sensitive or highly sensitive list
or in the General Exclusion List.
Besides the market for goods, Singapore aims
to achieve full integration of market for services
under the ASEAN Framework Agreement on
Services (AFAS) which was signed in 1995. On the
investment front, Singapore is committed to the
Framework Agreement on the ASEAN Investment
Area (AIA), signed in 1998, and which envisages
liberalizing the investment environment in ASEAN
to ensure a free flow of investment in the area by
2020. The Agreement covers direct investment in
manufacturing, fishery, forestry, mining, and
agriculture (excluding portfolio investments) and
services incidental to these sectors.
Together with other ASEAN countries,
Singapore is working towards achieving an ASEAN
Economic Community (AEC) by 2020 which is
aimed at creating a single market and production
space with free flow of goods, services, investment,
and skilled labour, and freer flow of capital.
IV.3 Singapore’s Rationale behind Pursuing
Bilateral and Regional RTAs
Singapore’s pursuit of FTAs/RTAs has been driven
by perceived economic benefits of regional integra
tion as by strategic and political considerations.
Singapore believes that FTAs complement the mul
tilateral trading system in the following manner:
1. FTAs can provide impetus to multilateral trade
liberalization. FTAs allow countries to identify
compatible partners with whom to pursue
.faster and broader liberalization, thus acting as
catalyst for multilateral trade liberalization.
2. FTAs create positive competitive dynamics
that spur further liberalization. FTAs put
pressure on those that are slow to liberalize
and in the process, help to push everyone
towards liberalization at the regional and
multilateral level.
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3. FTAs engender the internal economic reform
processes. FTAs can help governments to
overcome domestic resistance to reforms of
sensitive sectors. Governments may be more
willing to initiate difficult domestic reforms if
they can be carried out on a preferential basis
and in measured steps.
4. FTAs improve the economic competitiveness
of businesses and provide greater access to
the markets of FTA partners.
Singapore maintains that what is central is the
need to ensure that FTAs/RTAs are WTO-consistent
and WTO-plus whereby FTAs would contribute
towards catalysing the WTO liberalization process
and regional integration. In Asia, there is an
increasing acceptance that FTAs have become a
reality in trade policy options. Even those
ASEAN countries which wefe initially sceptical of
Singapore’s pursuit of FTAs are now engaged in
broad-ranging FTA negotiations. Beyond advancing
its economic interests, Singapore believes that these
intra- and inter-regiohal FTAs help to build a web of
strategic linkages for Singapore within the region
and with countries outside the region. They serve the
broader strategic interest of anchoring the presence
of its major trading partners in Southeast Asia, and
ensuring that they remain stakeholders in Singapore
and the region. The FTAs also help to sustain
an open regional orientation that prevents the
formation of inward-looking trading blocs. This
web of interlocking economic and strategic interests
help contribute to regional stability, security, and
prosperity.
V. Future Challenges to Singapore’s
Trade Policy
For more than two decades until the Asian
financial crisis in 1997, Singapore had enjoyed
consistently high growth. However, this phase of
double-digit growth is over. Singapore now has to
respond to the challenges posed by both external
factors and domestic challenges. These include,
inter alia: (i) globalization and technological
advances; (ii) the emergence of China and India;
(iii) regional political and economic uncertainties;
(iv) a maturing economy, and (v) accelerating
economic restructuring.
The Economic Review Committee (ERC) that
was established in 2001 completed a fundamental
review of Singapore’s past and existing policies in
February 2003 and proposed strategies to remake
Singapore into a globalized, entrepreneurial, and
diversified economy. In charting out a blueprint for
Singapore’s next phase of economic development,
the ERC reviewed the principles which had guided
Singapore’s strategies in transforming its economy
over the last fifteen years. These principles will
continue to include, inter alia, keeping an open and
flexible conomy that rely on free market forces,
pursuing rational and prudent macroeconomic
policies and expanding external ties. The Review
sets out the ERC’s vision of remaking Singapore in
fifteen years into a globalized economy, a creative
and entrepreneurial nation, and a diversified
economy. To realize this vision, the ERC has
identified five key thrusts: (i) expand external ties;
(ii) manage Singapore’s competitiveness and
flexibility; (iii) grow domestic enterprises and
encourage entrepreneurship; (iv) promote the
twin engines of growth ? manufacturing and
services; and (v) develop human capital (ERC
2002a, 2002*, 2003).
In the years ahead, Singapore needs to ensure
that it remains integrated with the rest of the world
through deeper multilateral, regional, and bilateral
links. In light of these challenges, Singapore’s
policy is to continue to promote greater integration
at the multilateral, regional, and bilateral levels. It
will continue to adopt a multi-pronged approach
to trade policy by engaging in bilateral and
regional FTA negotiations. It will continue to
play a proactive role at the WTO to keep the
momentum of multilateral trade liberalization.
For this reason, the WTO and the Doha Round
negotiations remain Singapore’s top priority in
international trade.
However, the road ahead in the Doha Round
negotiations will not be easy. The negotiating
dynamics have changed with the expansion of the
WTO membership. With 148 members now in the
WTO, all with unique needs and diverse voices,
it is not easy to achieve consensus. Furthermore,
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a large number of new entrants are from the
developing world where their development
concerns have to be taken into account in the Doha
Development Agenda. Singapore could help move
the negotiating process by acting as the interface
between developed and developing countries.
NOTES
1. This section draws on WTO, Trade Policy Review, Singapore (May 1996, February 2000, and May 2004). A few
paragraphs in this section and section V have been earlier cited and incorporated in a Business Times article of
30 March 2005, on the WTO, by K. Kesavapany.
2. Office of the members of the European Free Trade Association.
3. Then Permanent Representative (PR) See Chak Mun was the overall chief negotiator as well as negotiator for
services and trade-related investment measures (TRIMs). The author of this paper was die negotiator for the rules
areas, namely anti-dumping, safeguards, subsidies, and countervailing duty measures, dispute settlement, GATT
Articles and functioning of the GATT System. Another officer took charge of market access in goods.
4. They are cross-border (e.g., mail order), consumption abroad (e.g., tourists visiting abroad), commercial presence
(e.g., setting up a bank subsidiary), and movement of natural persons (e.g., doctors, engineers).
5. The Green Room process involved a small group of about twenty-five key players to thrash out problems with
the aim of working out compromise solutions in a smaller and intensive set up. Members were invited based on
their active participation, intellectual contributions, and value-add to the negotiating process.
6. ASEAN had an informal’but effective arrangement whereby there was some sort of division of labour among
ASEAN members, with Singapore taking die lead in the rules negotiations (anti-dumping, safeguards, subsidies,
and countervailing duty measures and dispute settlement), Malaysia on tropical products and TRIPs, Thailand on
agriculture, Philippines on TRIMs, and Indonesia on textiles.
REFERENCES
Balakrishnan, Vivian, “Trade and Development ? 40 Years On”. Speech at UNCTAD XI, Sao Paolo, Brazil, 16 June
2004.
Department of Statistics, Singapore. Singapore Investments Abroad 2001-2002. Singapore: Department of Statistics.
-. Foreign Equity Investment in Singapore 2001-2002. Singapore: Department of Statistics.
-. Yearbook of Statistics 2004. Singapore: Department of Statistics, 2004.
Economic Review Committee. Entrepreneurship and Internationalisation Subcommittee: Recommendations on
Government in Business. 2002a.
-. Subcommittee on Manufacturing. The Pursuit of Competitive Advantage: Value Manufacturing in Singapore.
2W2b.
?-. New Challenges, Fresh Goals: Towards a Dynamic Global City. 2003.
Goh Chok Tong. “Anchored in Singapore, Connected to die World”. Speech at International Enterprise Forum,
Singapore, 2 February 2005.
International Enterprise Singapore. Review of2004 Trade Performance and Outlook for 2005. 17 January 2005.
Ministry of Trade and Industry (MTI). Report on Performance of the Singapore Economy in 2004 and Outlook for 2005,
Singapore: MTI, 2004.
See Chak Mun, “Changing Global Trade Scenario and Responses”. Financial Express of India, 22 June 2004.
World Trade Organization (WTO). Trade Policy Review: Singapore. Geneva: WTO, May 1996.
-. Trade Policy Review: Singapore, Geneva: WTO, February 2000.
-. Trade Policy Review: Singapore, Geneva: WTO, May 2004.
WTO Secretariat. The Changing Landscape of RTAs, Seminar on Regional Trade Agreements and the WTO.
Geneva: WTO, November 2003.
Margaret Liang has had extensive experience in trade policy and was Singapore’s Deputy Permanent Representative
to the WTO from 1998 to 2002. She is currently consultant to the Ministry of Foreign Affairs for WTO and Trade
Issues, and Adjunct Fellow at the Institute of Defence and Strategic Studies, Singapore.
ASEAN Economic Bulletin 59 Vol. 22, No. 1, April 2005
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- Contents
p. 49
p. 50
p. 51
p. 52
p. 53
p. 54
p. 55
p. 56
p. 57
p. 58
p. 59
- Issue Table of Contents
ASEAN Economic Bulletin, Vol. 22, No. 1 (April 2005) pp. 1-116
Front Matter
Introductory Overview: Revisiting Trade Policies in Southeast Asia [pp. 1-2]
The Political Economy of Trade Policy in Indonesia [pp. 3-18]
Trade Policy in Malaysia: Liberalization Process, Structure of Protection, and Reform Agenda [pp. 19-34]
Trade Policy in the Philippines: Treading a Cautious Path [pp. 35-48]
Singapore’s Trade Policies: Priorities and Options [pp. 49-59]
Trade Policy in Thailand: Pursuing a Dual Track Approach [pp. 60-74]
Vietnam’s Trade Liberalization and International Economic Integration: Evolution, Problems, and Challenges [pp. 75-91]
Whither Trade Policies in Southeast Asia? The Wider Asian and Global Context [pp. 92-115]
Back Matter
Singapore’s Rising Income Inequality and a Strategy to Address It
Author(s):
Tan Meng Wah
Source: ASEAN Economic Bulletin, Vol. 29, No. 2 (August 2012), pp. 128-145
Published by: ISEAS – Yusof Ishak Institute
Stable URL: https://www.jstor.org/stable/43184870
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ASEAN Economic Bulletin Vol. 29, No. 2 (2012), pp. 128-45 ISSN 0217-4472 print / ISSN 1793-2831 electroni
c
DOI: 10.1355/ae29-2d
Singapore’s Rising Income Inequality
and a Strategy to Address It
Tan Meng Wah
This paper starts by tracing how Singapore’s path of incessant economic upgrading and
restructuring over the decades has led to the emergence of a two-speed dual economy
characterized by falling productivity and a widening income gap. This is followed by an in-
depth analysis of government efforts to foster absolute inclusive growth through redistribution
against recent suggestions of building relative inclusive growth through more equitable
distribution of gains from economic development using a wage-shock approach. Finally ; the
paper explains why the Government’s strategy of linking wage adjustments to productivity
growth may be no panacea to bridging the income gap and how relative inclusive growth can
be better achieved by adopting a more incremental approach of wage adjustments, starting
first with businesses and workers providing non-critical services in non-tradable sector.
Keywords: Income gap, wage adjustment, productivity, Singapore.
Over the past four decades, numerous accolades
have been sung about Singapore’s economic
success. Despite a bleak economic outlook at the
time of its independence, the city-state went on
to engineer an astounding transformation from a
regional trading port in the 1960s to a low value-
added labour-intensive manufacturing base in
1970s and eventually ending up today as a high
value-added, technology-intensive manufacturing
base as well as a hub for providing professional
business and financial services.
The success is not merely just in terms of
economics. In almost all social, environmental and
political aspects, Singapore has won adulations
from not only the developing but also the
developed countries. The achievements, however,
did not come easy for Singapore. Given the lack of
natural resources and absence of a large hinterland,
Singapore had to stay ahead of its competition by
incessantly upgrading its economic structure and
investing heavily to build up its soft and hard
infrastructures.
I. Incessant Upgrading of Singapore’s
Economy since the 1970s
Singapore underwent its “First Industrial
Revolution” during the 1960s when it embarked
on its export-oriented industrialization efforts
to drive economic growth as proposed in the
ASEAN Economic Bulletin 128 Vol. 29, No. 2, August 201
2
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1961 Winsemius Report.1 Efforts to upgrade its
economic structure started as early as the 1970s.
As the economy expanded and approached full
employment, dependence on foreign workers
grew. By 1970, there were a total of 72,590 foreign
workers making up about 1 1 per cent of the work
force.2 Increasingly, there were worries about the
sustainability of the economic growth driven by
labour-intensive industries, prompting a shift to
capital- and technology-intensive industries.3 The
National Productivity Board (NPB) was set up in
1972 to improve productivity in all sectors of the
economy. As a “disincentive” for companies to
remain labour-intensive, wages were set to increase
in stages under the guidance of the National Wages
Council (NWC). Unfortunately, this initial attempt
to upgrade the economy was disrupted by the first
oil crisis in 1973 and the ensuing world recession
in 1974-76. As foreign direct investment (FDI)
inflow declined sharply almost by half in 1973,
economic growth fell to 6.1 per cent in 1974 and
4.1 per cent in 1975.4 The fear of recession and
unemployment caused the economy to cling on
to labour-intensive industries. Consequently, as
economic upgrading slowed down, wage increases
were delayed and high growth resumed by the late
1970s.5
By the 1980s, many national governments
began to emulate the success of the four Asian
Tigers by abandoning their import-substitution
developmental model and “liberalizing” their
economies to receive FDI to drive export-led
growth. As competition mounted, it became
apparent that the shift towards capital- and
technology-intensive industries could wait no
more. In 1980, the Singapore Government
launched the “Economic Development Plan
for the Eighties”, which heralded the city-
state’s “Second Industrial Revolution”. The
plan outlined Singapore’s efforts to diversify its
economic activities into new information-based
services, such as computer, medical, consultancy
and warehousing services.6 To spread the use of
information technology (IT) and automation in
raising productivity, the government launched
the National Computerization Plan (1980-85) in
1980. This was followed by the National IT Plan
(1986-91) in 1986. Besides offering incentives
to encourage multinational corporations (MNCs)
to switch to capital-intensive manufacturing
methods, education and training programmes for
the labour force were also introduced to upgrade
their skills. In addition, to encourage companies
to climb up the value chain, the NWC initiated
wage increases of about 20 per cent from 1979 for
three years in a row. In 1980-84, high economic
growth continued with real GDP growth averaging
8.5 per cent per annum.7 By 1985, however, there
was a slowdown in global demand and exports
declined drastically. For the first time since
its independence in 1965, the city-state’s GDP
contracted by 1 .4 per cent. To make matters worse,
Singapore was losing its competitiveness. The
high- wage policy of 1979-84 squeezed profits at
the same time as external demand was declining.
The strategy to nudge enterprises up the value-
ladder also did not produce the desired results.
Instead of “upgrading” their operations, many
industrial MNCs chose to relocate to locations
where factor costs were lower.8
The recession in 1985 also exposed the peril
of overdependence in a few industries such as
electronics and chemicals. In 1986, a report entitled
“The Singapore Economy: New Directions” was
released by the Economic Committee set up a year
earlier to look into the recession. It reaffirmed
Singapore’s limitation in human and natural
resources and recommended that Singapore be
made into a “total business centre” with not only
manufacturing but also services (international
services, transport and communications, logistics,
and finance and banking) sectors as the backbones
of the economy.9 To regain cost competitiveness,
the government froze wages for two years and
reduced employer Central Provident Fund (CPF)
contribution from 25 per cent to 10 per cent. By the
second half of the 1980s, the Singapore economy
again accelerated. Between 1986 and 1990,
growth rates averaged 8.5 per cent per annum.10
More importantly, there was a strong expansion in
new, higher value-added computers, electronics,
machinery, printing, and pharmaceuticals
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industries. In particular, the city-state succeeded in
attracting many major electronics multinationals
and emerged to be an important production
platform for computers and hard disk drives.
In 1991, the government introduced another
new national economic development strategy
known as the “Strategic Economic Plan”. The
objective was to propel Singapore into the league
of developed countries within the next 30 to 40
years. By then, Singapore would be a global city
with economic dynamism, a high quality of life
and a strong national identity.11 To overcome the
key constraints of shortages in people and land,
the plan suggested firstly to set up a Growth
Triangle linking Singapore with Indonesia’s Riau
Islands and Malaysia’s Johor so that production
works could be distributed according to the
comparative advantages of the three locations.
Secondly, Singapore also needed to improve
resource efficiency internally. The service sector,
in particular, was plagued with low productivity. In
1989, for example, the sector employed 39 per cent
of the workforce but contributed only to 9 per cent
of the GDP. Thirdly, to meet increasing competition
from neighbouring countries, Singapore needed
to re-position itself and build up new capabilities
to reduce the technological gap with advanced
economies in niche areas. In particular, investment
in technological infrastructure would be increased
to amass a pool of trained manpower in key
technologies as well as to build a network of
research institutes capable of doing R&D. In 1991,
the first five-year National Technology Plan was
formulated to steer the development of science
and technology in Singapore. Meanwhile, the push
for widespread use of IT continued in the 1990s
with the release of the IT2000 Report in 1992.
The report painted a grand vision of an ‘Intelligent
Island’ based on an advanced nation-wide National
Information Infrastructure (Nil) that interconnect
computers in virtually every home, office, school
and factory.
Economic growth peaked in 1993 at 11.9 per
cent before hovering around 8 per cent from
1995 to 1997. Growth, however, was disrupted
when the Asian Financial crisis erupted in 1997.
The weakening of the regional currencies made
Singapore’s exports relatively less competitive. In
1998, Singapore underwent its second recession
when GDP contracted by 1.4 per cent.12 However,
a S$2 billion cost-cutting package proposed by
a Committee on Singapore’s Competitiveness
(CSC)13 as well as the depreciation of Singdollar
help the economy to regain competitiveness.
Overall, Singapore weathered the crisis relatively
well and by 1999, the economy rebounded
strongly with a growth of 7.2 per cent.14 To
address the separate issue of the loss of long-
term competitiveness, the CSC also recommended
another cost-cutting package amounting to S$10
billion or about 7 per cent of Singapore’s GDP.
The move would in effect reduce the total wage
costs by 15 per cent from the 1997 level to bring
the wage competitiveness back to the level in
1994. Furthermore, to enhance the capabilities of
businesses and workers in leveraging on science
and technology, the second five-year National
Science and Technology Plan was launched in
1996. In the same year, the Singapore Productivity
and Standards Board (PSB)15 was established to
work on raising the total factor productivity (TFP)
of the workforce.
As for the economic structure, besides
reaffirming the strategy of building both the
manufacturing and services sectors as the twin
engines of the economy, CSC also suggested
capitalizing on the existing hub services (e.g.
financial services, international trading, transport
and logistics, exhibition management and
tourism) where Singapore had already achieved
international repute to develop new high-growth
hub services (e.g. health care, education, media,
communications and IT services, e-commerce and
direct marketing). In addition, the negative impacts
of the regional crisis demonstrated the need for
Singapore to incorporate a global dimension in
its effort to nurture an external wing. To achieve
this, Singapore needed to have its own world-class
companies (WCCs) with core competencies that
could enable them to compete effectively in the
global market. In that regard, many government-
linked companies (GLCs) were dynamic enough
by then to even be leaders within their industries
not only in Singapore but also regionally and were
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good candidates to be developed into WCCs. As
for the small and medium enterprises (SMEs),
they needed to be strengthened so that they could
become more productive. In 1999, for example,
even though SMEs employed 51.7 per cent of the
labour force, their total value-add to the overall
economy was only 30.4 per cent.16 In 1999, PSB
introduced its first ten-year plan, Productivity
Action 21, with the aim to sustain TFP growth
and make Singapore one of the world’s ten most
productive countries in both manufacturing and
services sectors. Another ten-year plan, SME 21,
was formulated in January 2000 with the aim to
create vibrant and resilient small and medium-
sized enterprises in the new economy.17 Finally,
the CSC report also recommended that Singapore
should continue to develop a world class workforce
by adopting a dual approach – maximizing
the potential of the domestic workforce while
enhancing the attractiveness of Singapore to
foreign talent.
As we can see from the evolution of Singapore’s
economy since independence till the end of the last
century, the incessant need to move up the value-
add ladder to keep ahead of competition posed a
great demand on its lean labour force to upgrade
its skills and knowledge continuously. See Figure
1 for the various phases of Singapore’s economic
development and the government’s efforts in
upgrading the economy. In other words, human
resource had been a binding constraint that limited
economic growth since as early as the 1970s.
The problem was not only the small size of the
population. When the labour force was young and
adaptable in the 70s, 80s, and 90s, new skills could
be assimilated quickly. However, as the population
aged, upgrading became increasingly tedious. New
skills required were also more complex than in
yesteryears. In time, there would likely be more
and more dislocation among the older workers
as the economy continued with its restructuring.
This mismatch in supply and demand of skill sets
as the economy moves up the value ladder would
result in more structural unemployment. It also
meant that Singapore’s dependence on foreign
workers would increase because of the shrinking
and ageing population.
II. Emergence of a Two-Speed Dual Economy
and its Impact on Productivity and Income
Distribution
Moving into the new century, just as the regional
economy was recovering from the Asian financial
crisis, a series of shocks again rattled the Singapore
economy. In 2000, the NASDAQ dot.com bubble
reached its peak and by 2001 was deflating at
full speed. On 11 September of the same year,
airplanes hijacked by terrorists collapsed the Twin
Towers of the World Trade Center in New York
City. In 2003, the combination of bird flu and
the Severe Acute Respiratory Syndrome (SARS)
near-pandemic outbreak severely affected regional
economies. In March of the same year, the United
States launched its war against terrorism by
invading Iraq. Singapore’s GDP declined by 2.4
per cent in 2001. Given its strong fundamentals,
the economy recovered the following year, as
external environment improved, to register 4.2 per
cent growth but slowed again to 3.1 per cent in
2003.
Global demand, however, was beginning to
pick up strongly in 2003. As MNCs increased
their investments in Singapore, the city-state again
was faced with the problem of labour shortages.
Policy-makers were faced with the dilemma of
letting the economy grow beyond its potential by
bringing in more foreign workers and dealing with
the problem of over-reliance on imported labour
later or turning away those investments and grow
at a slower and more comfortable pace. In the end,
policy-makers chose what has been termed as the
“growth at all costs” strategy and allowed the influx
of more foreign labour. In effect, policy-makers
sought to ride on the recovery of the global demand
by pushing out the economy’s aggregate supply
curve through importing more foreign labour and
talent. The strategy had the benefit of allowing the
economy to diversify quickly into new industries
by importing skills sets which Singapore lacked
and at the same time keeping costs competitive.
Between 2004 and 2007, the economy grew an
average of 8 per cent in real term, in comparison
to the average of 5.7 per cent chalked up by its
other NIE peers.
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ASEAN Economic Bolletin 132 Vol. 29, No. 2, August 2012
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The sterling economic data, however, hid an
increasing strain attributable to the ballooning
foreign population. The strain was already
beginning to show before the onset of the global
financial crisis in 2008. Even when the economy
was expanding prior to the crisis, Singapore was
faced with a bewildering predicament of having
both an excess and a shortage of workers at the same
time. Efforts to position Singapore as a global city
and to move into higher-end technologically- and
knowledge-intensive industries led to the shortage
of professionals with both the relevant skills and
international exposure. On the other hand, the
hollowing out of low value-added manufacturing
operations resulted in an excess of unskilled
workers. The problem was exacerbated by the fact
that Singapore was importing not only highly-
skilled professionals. Many unskilled low-cost
labourers were also brought in to do menial works
shunned by the unemployed Singaporeans.18
There is no simple solution. The government has
set a target of 6.5 million as the optimal population
size that can provide the economy with a critical
mass without overstretching the limited natural and
social resources. With fertility rate plunging from
1.60 in 2000 to 1.28 in 2008, far below the 2.1
needed for a population to replace itself, foreign
newcomers are expected to make up the bulk of the
increase in population over the next few decades.
Between 2000 and 2009, for example, the foreign
population increased by 70.9 per cent while the
number of citizens increased by only 7 per cent.
In terms of composition, citizens now constitute
only 64 per cent of the total population, a decline
of 10 per cent over the same period (see Table 1).
Gradually but surely, voices of discontent grew,
first and foremost with the issue of job poaching.
In 2005, for example, about 49,800 (44 per cent) of
the 113,300 jobs created went to foreign workers
even though foreign workers made up only 28.9
per cent of the labour force. Foreign labour growth
of 8 per cent was double that of local labour
growth.19 In 2007 and 2008, as many as 300,000
foreigners took up jobs in Singapore.20 Compared
to other high immigration countries, the influx
of foreigners has a greater impact on Singapore
because they comprise a larger percentage of the
total work force. By 2009, they accounted for a
third of the three-million-strong labour force, up
from only a quarter in 2004. To make matters
worse, while these foreign workers occupied
mainly the top and bottom rungs of the job ladder
in the past, there are indications today that they are
competing with Singaporeans for jobs on almost
every rung.21
Besides being accused of taking away jobs,
foreign workers are said to be also exerting demand
pressures on Singapore infrastructures, pushing
up housing prices, and taking up places in school
at Singaporeans’ expense. More fundamentally,
TABLE 1
Change in Composition of Population Between 2000 and 2009
Number (‘000s) Composition in %Citizenship
2000 2009 % Change 2000 2009 Change
Resident population 3,278 3,733 13.9% 81.2 74.8 -6.4
Citizens 2,990 3,200 7.0% 74.1 64.1 -10.0
Permanent residents 288 533 85.1% 7.1 10.7 3.6
Non-resident population 755 1,250 65.6% 18.7 25.1 6.4
Total population 4,033 4,983 23.6% 100.0 100.0 –
Foreign population 1,043 1,783 70.9% 25.8 35.8 10.0
Source: Straits Times , “The Singapore Story in Figures”, 31 December 2009.
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there is now a sufficient critical mass of foreign
population that results in divergent growth patterns
between different income groups and businesses
which in turn contributes to the emergence of
a two-speed dual economy comprising of two
segments known as the “global periphery” and the
“domestic core”.22
The “global periphery” segment is made up
of workers and large businesses (mostly MNCs)
serving predominantly regional and global clients
involved in subsectors like offshore finance, private
banking, asset management, high-end residential
market, marine and aviation transport services
and equipment, and pharmaceutical products. This
segment has not only been able to benefit directly
from the recovery of global demand, it also enjoys
favourable policies offered by the government to
entice foreign investments. Given that a higher
level of skills and international exposure are
needed to carry out activities in this segment, the
number of foreigners and permanent residents here
is significantly larger than the national average.
Because of the high value-added nature of the
activities, the workers in this segment command
higher wages and the segment as a whole accounts
for a disproportionately larger share of the total
GDP even though it employs less than a quarter of
the labour force.
In contrast to the “global periphery” segment’s
external orientation, the “domestic core” segment
is comprised of businesses and workers serving
the domestic market. Their activities cover
subsectors including retail trades, construction, the
mass residential market, catering trade, transport,
public services (for example, health care), hotels
and restaurants, and domestic Singapore dollar
financial activities (for example, retail banking).
In other words, growth of this segment depends
directly on the state of the domestic economy.
Most of the workers in this segment are either
Singaporeans or unskilled foreign workers. Because
the activities have lower value-added, workers
here command lower wages than those in the
“global periphery” segment. Hence, even though
this segment employs about three-quarters of the
total labour force in Singapore, it accounts for a
disproportionately smaller share of the country’s
overall GDP. Similarly, at the firm level, profit
margin is comparatively lower in the domestic core
segment because of high domestic competition and
because their prohibitive size excludes them from
reaping any benefits from long-term investments
for economies of scale. Finally, at the industry
level, while the global periphery segment’s
activities enjoy high growth as a result of rising
opportunities in regional and global markets, the
domestic core segment’s activities remain sluggish
because of people’s habits of high saving and low
consumption.
Besides being accused of poaching jobs and
depressing wages, foreign workers have also
been partly blamed for causing productivity
to plummet in recent years. While the overall
economy has grown with the enlarged workforce,
the productivity of each worker has fallen. The fall
is thought to be caused by the easy availability of
low-cost foreign workers which enable employers
to employ more workers instead of investing
in capital equipment to raise productivity. The
issue spells a bigger problem for policy-makers
when looked at from the perspective of the two-
speed dual economy. Generally, companies in the
global periphery segment are mostly MNCs and
large local firms (predominantly the GLCs). They
are more capital intensive and hence productive.
In contrast, the SMEs, in particular those in the
construction, retail, and hospitality industries,
either have no incentives and resources to upgrade
or do not have the knowledge to redesign their
work processes to increase the productivity of their
workers. The productivity level of the construction
industry in Singapore, for example, is estimated to
be only one-third that of Japan’s and half that of
Australia’s.23
The productivity gap between the foreign and
the local companies in Singapore is also evident in
the falling contribution to GDP by the latter. The
share of GDP contributed by resident companies
and individuals declined from about two-thirds in
1998 to about 54.3 per cent in 2008. In terms of
contribution to GDP growth, the figures are even
more worrying. In 2004, residents contributed
slightly more than half of GDP growth. That figure
fell to less than a third by 2008. Finally, while the
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overall per capita GDP was S$53,192, the resident
per capita GDP reached only S$38,372.24
The net effect of the two-speed dual economy
is that wage differentials between workers in the
two segments began to widen. The trend of rising
income inequality became increasingly noticeable
after the Asian financial crisis. Even though there
was an increase in mean income and social welfare
had increased in terms of better education, health
and standard of living, the Gini coefficient rose
from 0.44 in 1990, 1995 and 1997 to 0.45 in 1998
and 0.47 in 1999.25 Another study by Chia and
Chen (2003) also arrived at a similar conclusion.
They found that, contrary to Kuznets’ prediction,26
ratios of the top to bottom quintiles of households
by income from work fell from 14.4 in 1980 to 1 1 .4
in 1990 and rose again to 20.9 in 2000, showing
that income inequality improved initially (i.e. the
Gini coefficient fell) in the 1980s but deteriorated
(i.e. Gini coefficient rose) in the 1990s.27
After the turn of the century, even though the
economy as a whole registered impressive growth,
in particular after 2004, the unequal distribution of
income persisted. While headline GDP grew 6.4 per
cent in 2005 and 10.6 per cent in 2006, domestic
demand expanded only by 3.3 per cent and 4.9 per
cent for the two periods, respectively.28 Again, the
disproportionate growth in the two segments shows
up in the growth of household income. While the
higher income groups saw their income grow 2.8
per cent annually between 2000 and 2005, the lower
income groups suffered income contraction. The
11th to 20th income decile group saw an annual
4.3 per cent fall in average household income,
while the 21st to 30th income decile group saw a
0.5 per cent decline.29 Consequently, between 2000
and 2007, Singapore’s Gini coefficient climbed
from 0.444 to a high of 0.489. It moderated to
0.481 in 2008 and 0.478 in 2009 only because of
the financial crisis (see Figure 2).30
FIGURE 2
Gini Coefficient among Employed Households (2000-09)
Source: Singapore Department of Statistics, “Key Household Income Trends, 2009”, February
2010.
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Increasingly, the unrestrained influx of cheap
foreign labour has been blamed for depressing
both productivity and wages, especially at the
lower end of the economic spectrum.
During the 1970s and 1980s, Singapore’s
industries were more capital intensive and the
labour shortage was more in terms of quantity
than quality. Domestic workers were also in their
prime. Foreign workers were brought in then to
supplement, not to supplant them. In the end, the
influx of foreign workers helped to raise wages
across the board.
However, when Singapore again upgraded its
economic structure to focus on knowledge-based
and innovation-driven industries after the turn of
the century, the floodgate for unskilled foreign
workers destined for non-tradable services sector
– such as public transport, cleaning, retailing
and construction – should have been narrowed
or closed, so that the jobs in that sector could
go to the older Singaporean workers who were
becoming increasingly unemployable with
the relocation of jobs out of the city-state by
MNCs.
The fact that more low-skilled foreign workers
continued to stream in to help keep costs low
worked to the disadvantage of the low-income
workers. The practice especially benefited the
higher-income workers, as they enjoyed not only
rising wages but also lower costs of living made
possible by the low-cost foreign workers.
An appreciating Singapore dollar helped to
constrain imported inflation but it was the use of
low-cost foreign labour that helped to maintain
price stability in the domestic sector. Inflation
averaged about 1 per cent between 2000 and 2007
but that impressive low inflation was arguably
achieved in part at the expense of the low-income
wage earners.
In short, globalization and advancement of
technology contributed to structural unemployment
but it was the foreign labour policy that exacerbated
the plights of the dislocated low-income wage
earners. Had the strength of low-cost foreign
workers been reduced in tandem with the pace of
economic restructuring, the wages of low-income
Singaporean workers in the domestic sector would
have undoubtedly risen along with the tide.
III. Government Responses to Widening
Income Gap: Relative or Absolute Inclusive
Growth
To begin with, inclusive growth can be viewed
from two perspectives: the absolute perspective
and the relative perspective. In the absolute
perspective, poor people benefit in absolute terms
even though their income is growing slower than
the population’s average. The relative perspective
of inclusive growth, on the other hand, seeks
to grow the income of poor people faster than
the population’s average so that the income gap
eventually narrows.31
Despite much debate, the discourse over
relative and absolute inclusive growth is far from
conclusive. For instance, Ravallion and Chen
(2003) argue that it is possible for the poor to
derive no absolute gain from distributional changes
that are pro-poor. Conversely, it is equally possible
that pro-rich distributional policies can come with
absolute gains to the poor. Also, Ianchovichina and
Lundstrom (2009) caution that jumping too hastily
to the conclusion that growth is against the poor has
its danger. By focusing on inequality, for example,
governments could adopt distortionary policies
that eventually lead to sub-optimal outcomes for
both poor and non-poor households.
Still, the debate points to two fundamental
approaches of addressing the issue of widening
income gap. The first boosts absolute inclusive
growth by increasing transfer payments to
compensate those who have lost out. The key,
then, according to welfare economists like John
Hicks and Nicholas Kaldor, is to seek a Pareto
optimal outcome by taking from the people who
benefit from an economic policy to compensate
the people made worse off by it. As long as the
net effect of the policy is positive, society benefits
as a whole.32 Alternatively, the government can
foster relative inclusive growth by adjusting the
development model to take into consideration the
interests of those with lower bargaining power
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right from the beginning so that they can enjoy a
larger share of income as wages.
In general, the more successful policy-makers
are in achieving relative inclusive growth through
more equitable income distribution at the onset,
the less need there will be over time to adopt
remedial measures for absolute inclusive growth
through income redistribution.
Singapore’s government actions all along
appear to have been guided more by the absolute
definition of inclusive growth. The government’s
fundamental position is that in a maturing society,
it is inevitable that the Gini coefficient, which
is a relative concept, rises as a consequence to
increasing global competition. Instead of worrying
about bringing down the indicator, the government
should focus on providing everybody with a job.33
Opting for slower growth for the sake of achieving
equality would have ended up hitting those at
the bottom the hardest. In contrast, by allowing
the economy to grow beyond its potential for a
few years when external environment permits,
everybody benefits although those in the higher
income groups benefit more.
Indeed, the booming economy helped to create
more jobs and raise income in recent years. The
resident unemployment rate, for example, fell
from 6 per cent in late 2003 to 2.4 per cent by
the end of 2007. Even though the low-income
earners suffered income contraction in 2000-05,
their wages rose in real terms, 16 per cent between
2006 and 2008, or about 7 per cent for the last
decade as a whole.34 Also, the median individual
monthly income rose from S$ 1,840 in 1999 to a
high of S$2,450 in 2008 before settling at S$2,420
in 2009, indicating that income has generally
increased over the decade for all.35 If judged by
this yardstick, growth has brought absolute gains
to the poor.
In their defence also, policy-makers have
been quick in pointing out that the low income
wage-earners in Singapore enjoy a higher living
standard compared to the latter’s counterparts in
other developing countries. Right from the start,
the government has put in place measures that
provide subsidized public housing, education
and health care. These services help to ensure
that the lower-income group are able to maintain
a minimum standard of living and that their
offspring receive quality education so that there
is equality in opportunity. The greater amount of
subsidy received by the low-income groups also
helps to lower the post-subsidy Gini coefficient
(see Figure 2).
On top of these permanent measures, the
government has also initiated several programmes
to help the poor and the dislocated since the 2001
General Election when the opposition drove a
“new poor” campaign to make the plights of the
low income a political issue.
High on the list of those programmes is the
provision of subsidies by Workforce Development
Agency for approved training courses as well
as bonus payments when training under the
new Workfare Training Supplement scheme is
completed. The emphasis on retraining ensures
that dislocated workers can as far as possible be
re-equipped with new technical skills and diverted
into emerging industries. Besides assistance
associated with retraining, financial support in
the form of cash supplements from the Workfare
Income Supplement (WIS) has also been offered
to families in financial distress. Older low-wage
workers also received a boost in their retirement
funds through the CPF component of the WIS.
In addition, the government put forth a host of
measures covering education, housing and health
care. In public housing, for example, other than
the concessionary loan from the Housing Board
for the housing mortgage, various grants are
also provided for the purchase of public flats.
For education, in addition to bursaries, students
received top-ups to their Edusave accounts. As
for health care, the government has also set up a
Medifund from which low-income families can tap
to pay for their medical bills.36 In the 2012 annual
budget, the GST voucher scheme, targeted at low-
income families, was made a permanent feature
of Singapore’s social safety net. At the same time,
concrete efforts, not just rhetoric, were made to
improve both employability of senior workers,
through the enhanced Special Employment Credit,
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and their gross income, through the hike in CPF
contributions.
Furthermore, in times of extreme economic
hardship, the government has also been quick
to implement relief packages to ameliorate any
adverse impacts of economic shocks on the
lower-income households. In February 2008,
for example, to help Singaporeans cope with the
rising inflation, relief measures including Growth
Dividends, enhanced Marriage and Parenthood
measures, personal income tax rebates, and utility
rebates were implemented as part of the Budget.
In November the same year, in the aftermath of
Lehman Brothers’ collapse, the Skills Programme
for Upgrading and Resilience (SPUR) was
introduced to ramp up training and at the same time
to help keep workers employed. In February 2009,
as the global financial crisis evolved into the Great
Recession, a S$20.5 billion (8.2 per cent of GDP)
Resilience Package was introduced to cushion the
impact of the worst economic contraction since
Singapore’s independence. Even though many of
the measures were for companies, the aim was to
help workers stay employed.37
Finally, to quell discontent over stagnating
income, the government launched a new economic
strategy based on recommendations from the
Economic Strategies Committee on 1 February
20 10.38 Among other things, the new strategy
calls for a switch from the “growth at all costs”
to an “inclusive growth” approach to ensure that
weaker segments of the population would not be
left behind. This would be achieved by a push to
raise productivity from the 1 per cent recorded
over the last decade to 2-3 per cent over the next
ten years so that wages, in particular for the lower-
income segments, can rise in tandem. The aim is
to raise the median income by an average of 2.8
per cent a year or a total of one-third to S$3,100
by 2020.39 For the strategy to succeed, businesses
must try to grow qualitatively by upgrading, not
just by expansion using more low-cost unskilled
foreign workers. To “persuade” businesses to
invest in better equipment in order to raise
productivity, measures to increase foreign worker
levies based on a tiered system were announced
in February 2010. These measures would make
it increasingly costly to employ many lower-
and semi-skilled foreign workers. On its part,
the government is committed to spending S$5.5
billion on productivity-related initiatives over
five years.
Similar productivity movements were also
launched in the 80s and 90s but policy measures
implemented then were not “exploited” fully
because of a ready supply of low-cost foreign
labour. As such, there is no shortage of sceptics
that the current renewed effort will peter out
again especially when global demand improves.
Their scepticism is based on the projection that
to achieve a GDP growth rate of more than
6 per cent, employment growth rate must exceed
4 per cent.40 With a population that is expanding
at less than 2 per cent annually, a substantial
jump in productivity is needed to compensate for
shortfall in the number of workers. Given that
discernible productivity improvements are not
likely to materialize in the short term, there seems
to be no alternative to importing more foreign
workers. Hence, despite the official rhetoric, the
number of foreign workers looks set to continue
growing albeit at a slower rate than in the previous
decade.
More pertinently, despite all the efforts to
mollify the pains of the low-income workers, it
is hard not to notice that the measures introduced
so far are mostly redistributive measures that help
in fostering only absolute inclusive growth. While
such measures are indispensable in alleviating
hardship among the poor, they do not address the
issues of depressed wages suffered unfairly by
the low-income workers and the related trend of
widening income gap.
IV. Shock Therapy Approach vs. Government’s
Productivity-Linked Approach
In a recent public lecture entitled Economic
Restructuring II, Professor Lim Chong Yah,
who was the founding chairman of National
Wage Council (1972-2001), reported that low-
wage workers in Singapore today are being
underpaid by much more than 100 per cent when
compared with their counterparts in other equally
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affluent economies like Japan, Hong Kong, or
Australia. To narrow the income gap, Professor
Lim proposed easing the city-state’s dependence
on foreign workers and increasing the pay of those
earning less than S$ 1,500 a month by 50 per cent
over three years while freezing wages of those
with a monthly income of S$ 15,000 or more.
This radical shock therapy approach that
aims to foster relative inclusive growth elicited
quick and strong response from the government,
which pointed out that rapid wage adjustments
during Economic Restructuring I in the early
1980s resulted in deterioration of Singapore’s
economic competitiveness and exacerbated the
1985 recession triggered by a fall in global
demand. Concerned that any rapid and substantial
adjustments in wages may again derail economic
development, the government chose to fall back
on the hard-to-refute economic maxim that links
wage to productivity growth, a position consistent
with the new economic strategy proposed by the
2010 Economic Strategies Committee.
However, that “no productivity growth, no wage
adjustment” strategy has its own failings. Firstly,
it assumes that low productivity is the key, if not
the sole cause, for the low-income growth suffered
by the unskilled workers. In reality, a host of other
factors may also be at play. For example, business
costs may have gone up rapidly in recent years,
leaving employers, in particular the SMEs, with
little room to raise the pay of their employees.
Rental for retail outlets, for instance, has shot up
because of growth of Real Estate Investment Trust
(REITs) activities. The rapid rise in rental has
important ramifications on the share of income as
wages for a large number of low-income workers
employed in the retail sector.
Secondly, increasing workforce productivity
both at the sectoral and the national levels is
easier said than done. For MNCs in high value-
added manufacturing operations, aggressive
capital investments to raise productivity can be
easily recouped because of their high profit margin
and the economies of scale they enjoy. Local
manufacturing SMEs, on the other hand, will face
difficulty in defraying their capital investment
because their limited scales do not afford them
the same cost advantage. For SMEs in low value-
added labour-intensive services sector, the room
for productivity growth through capital investment
is even more limited. How else, for example, can a
bus driver who is already driving a double-decker
bus increase his total value-added? Drive two
buses at the same time?
The elusive nature of productivity growth
is hardly peculiar to Singapore and the same
experience is shared by other economies, especially
those developed ones. A developing economy
like China has tremendous room for productivity
growth in the coming years because of, among other
things, market inefficiencies attributable to anti-
competitive and rent-seeking actions and policies.
For an ultra-efficient economy like Singapore’s,
any such room for productivity growth has long
been exploited.
A research by McKinsey in 2004, for example,
revealed that over a period of thirty years, Japan’s
economic growth had been generated more by
increases in the number of hours worked and the
amount of capital equipment used than by increase
in the productivity of the workforce.41 For a much
smaller economy like Singapore’s, the room to
generate growth through increased used of capital
equipment is even smaller once development
has reached a certain stage and further capital
investments elicit diminished marginal returns.
To have higher income, what is left for workers
in Singapore then is to work longer hours, as
exemplified by SMRT Corporation’s recent move
to raise the basic monthly pay of its Singapore
bus drivers only to also extend their work-week
from five to six days. Alternatively, more family
members have to join the workforce to help the
family meet rising living costs, which explains
policy-makers’ growing preference to talk about
household, rather than individual, income.
Next, the concept of productivity has the
tendency of undervaluing the efforts of our low-
wage workers while overvaluing those of the top
executives. In a tightly integrated value chain, the
whole is usually more than the sum of its parts.
Productivity growth takes into account the increase
in work done directly by the workers but not the
surplus value created by thhe company as a whole.
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That surplus value, which shows up as profit, ends
up frequently as generous bonus and pay packages
to top management as well as fees to the board of
directors who have oversight over top-executive
compensation. In the end, top management has
the incentive to scrimp on compensation for
employees so that their burgeoning pay packages
can be justified by ever-growing profit spurring the
company’s rising stock price.
In the United States, for example, even though
output per hour rose by 70 per cent between 1981
and 2006, average real hourly wages were virtually
flat, increasing from US$7.88 in 1981 to US$8.23
in 2006. In contrast, share of corporate profits in
national income in 2006 was close to the highest
levels since 1947 and the share of wage income of
the top 1 per cent wage earners was almost double
the level recorded in 1980.42
Furthermore, the definition of wages solely
from an economic perspective is also too narrow.
The social harmony and political stability that
Singapore enjoys do not come free and should not
be taken for granted. That price must be borne by
all, if not more, by the higher income groups given
that the harmony and stability represent greater
value to them. The full value of the wages for low-
income earners, therefore, must reflect not only
the economic value created by them but also the
social cost and political costs needed to preserve
harmony and stability.
Wages for Low-income Workers =
Economic value + Social cost + Political cost
(Productivity) (Harmony) (Stability)
Finally, blaming the income gap on productivity
may conceal underlying and fundamental issues
that need to be relooked at. The unfettered
pursuit of market fundamentalism, for example,
has allowed market power to be skewed towards
increasingly well-organized capital owners. The
system seems to be gravitating towards rewarding
capital owners who seek higher and higher returns
from their capital while shunning workers who
have to sweat and toll to barely earn a decent living.
It may therefore be time that policy-makers re-
evaluate the priorities so that workers can reclaim
the dignity and the full value of their labour.
In the end, productivity growth is hardly the
panacea to the problem of rising income gap. Even
if productivity growth is achieved, it is likely that
growth of income for the PMETs will continue
to outstrip that of the unskilled workers, further
widening the wage gap down the road. In effect,
wage policies underpinned by productivity growth
allow incremental pay increases supposedly to
keep up with inflation but can do little to narrow
the sizeable income gap that already exists.
Moreover, objections to the bold wage
adjustments for the low-income workers and wage
moratorium for high-income workers also sound
sensible but may not stand up to scrutiny.
For example, the argument that a moratorium
in pay raise for all high-income wage earners
may lead to mass exodus of talent is a moot point
since they are probably already earning more in
Singapore than in many other places. Where else
can they go for such high income while paying one
of the lowest income taxes around and still enjoy
social harmony, political stability, clean and green
living space, and most importantly, an excellent
education system and family-friendly environment
for their children? Some, especially the singles,
may indeed choose to leave but for the majority
with families, their options for greener pastures
are probably limited.
Next, the government is indeed justified in
worrying that any efforts to help the poor risk
cultivating a crutch culture. Ironically, however,
the government is doing exactly what it professes
ought not to. By offering a slew of redistributive
measures to mollify the pain of the low-income
wage earners now, the government undertakes the
full cost of trying to narrow the income gap. As the
population ages and if inflationary pressure persists
and productivity growth fails to materialize, which
is very likely if past experience is any indication,
then Singapore’s future government may be forced
to increase their redistributive efforts, doling out
more measures to help an even greater number
of poor in dire straits. Over time, a dependency
culture becomes progressively entrenched.
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In contrast, by resolutely attacking that imbalance
at its root now while we are still at a position of
strength, the costs of adjustment will be borne
not just by the government but by all, including
employers and high-wage earners. Low-wage
earners still have to work for the higher pay which
affords them not only a decent living standard but
also a reasonable amount of savings so that they
do not have to depend on the government upon
retirement.
Lastly, any substantial wage adjustment for
the poor will certainly lead to higher costs. This
may sound especially worrying because of the
already higher-than-average inflation. However,
the high inflation is precisely the reason why
wage adjustment for the low-income should not
be delayed for any longer. This is because the
rising prices exert comparatively more stress on
the poor with their meagre income. Moreover, pay
increases for high-income earners in the past also
contributed to higher costs which were also borne
by low-wage earners in the form of depressed
wages to keep inflation down. It is time the high-
wage earners reciprocate.
Furthermore, the current high inflation is more
attributable to rising prices of private housing
and cars. In March, for example, while headline
inflation hit a high of 5.2 per cent, core inflation
was only 2.9 per cent. Hence, core inflation has
room to rise if asset inflation can be curtailed.
Comparatively, core inflation due to rising wages
for the poor does more good for closing income
gap than rising asset inflation which worsens the
already lopsided wealth distribution.
Also, the hike in wages is a one-time adjustment
like GST. The government needs to help the SMEs
in the short term but as costs become more diffused
among all stakeholders, including the government
through a reduction in fees and other cost-sharing
measures, the high-income wage earners through
a pay-raise moratorium, the landlords through
lower rental, and to a lesser extent the consumers
through price increases, the financial assistance to
the SMEs from the government can be weaned
off. Future adjustment in wages will then be
underpinned by productivity growth as well as
in the form of bonus in times of good economic
performance.
In short, simplifying the issue by falling back on
an economic maxim makes good economic sense
but loses out in overall logic.
At the end of the day, the whole debate really
hinges on whether the low-wage workers have
been unfairly denied an otherwise higher income
had the unskilled foreign workers been kept out
when structural unemployment became more
widespread and the domestic services sector
became the last haven for the increasingly
unemployable older Singapore workers, especially
over the past decade.
While rapid pay increase for high-income wage
earners were allowed to be effected through the
working of market forces, selective intervention
through in-sourcing of foreign workers in the
lower-end labour market prevented similar rise in
pay for low-income workers. Inequitable policy
measures certainly exacerbated their plights.
Hence, even if the costs of adjustment are going
to be substantial, the wrong must first be put right.
The pay for low-income wage earners has to be
substantially adjusted to a more equitable level
before its future movements can be capped by
corresponding movement in productivity.
V. An Incremental and Sectoral Approach of
Fostering Relative Inclusive Growth
The government’s fear of economic derailment
from a wage-shock therapy is understandable. Any
sharp increases in wages at a time of already rising
inflation risk sparking a wage-price spiral that
can dent Singapore’s external competitiveness.
Therefore, to minimize the adverse impacts on the
tradeable sector, adjustments can be implemented
in stages in a carefully controlled manner starting
first with businesses and workers in the non-
tradeable sector.
One of the keys in narrowing the widening
income gap is the reduction in the supply of
unskilled foreign workers. Notably, the government
has begun a process of “calibrated reduction” of
foreign workers. From 1 July 2012, foreigners
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will be reduced from 65 per cent to 60 per cent
of the workforce for manufacturing companies
and 50 per cent to 45 per cent for the services
sector. That rate of reduction, however, may be too
conservative. For selected industries in the non-
tradeable sector providing non-critical services,
the pace of repatriation of foreign workers can be
boldly quickened.
To get the momentum started, government
agencies or government-linked companies can take
the lead by cutting down the number of foreign
workers that they directly or indirectly employ.
With fewer low-cost foreign workers to do cleaning
and to drive public buses, for example, the reduced
labour supply will drive wages upward and attract
more workers from other industries to take up jobs
in the cleaning and transport sectors. The resultant
labour shortages created in other industries will
push up wages for low-income wage earners in
those sectors. Over time, given Singapore’s labour
mobility, a new equilibrium wage level based
on market forces can be reached across the non-
tradeable services sector. To regulate the speed
and magnitude of the wage adjustments, these
government-related entities can also increase the
pay of Singapore workers within their folds to set
benchmarks for businesses in the private sector.
There are several reasons why it is good to start
with the non-tradeable services sector. Firstly,
in Singapore’s dual-track economy, the workers
in the lower-growth domestic track have seen
slower income growth over the years than those
in the higher-growth export-oriented external
track. Secondly, working on the non-tradeable
sector helps to ensure that Singapore’s export
competitiveness will not be adversely affected
in the short term. Policy-makers will have more
time to better monitor the negative impacts on
the rest of the economy and fine-tune supply-side
microeconomic and administrative policy measures
to manage the transmission of those impacts.
There will no doubt be adjustment pains and
strong government actions are needed to mollify
those pains. Firstly, the government can provide
subsidies to SMEs to help share the burden
of the higher wage costs. At the same time, a
thorough review of the overall cost structure can
be carried out to help reduce business costs for
SMEs. More importantly, it is necessary to look
into how gains in the value creation process are
currently distributed among other stakeholders.
To prevent the government and the SMEs from
being disproportionately burdened, these other
stakeholders within the value chain must help
share the adjustment costs. What are costs to SMEs
are revenues and profits to other stakeholders.
Adjustments in wages for the low-income earners
therefore need to be accompanied by re-distribution
of profits among different stakeholders within the
value chain. A small amount of the costs may
also be passed on to consumers, especially those
earning higher income, while any inflationary
impact on the low-income wage earners can now
be better met with their higher wages.
There are also concerns that local workers
are less hard-working than foreign workers.
Part of the adjustment can therefore also be
performance-based. Companies may also prefer
to recruit younger workers (for example, those
in their forties) who are attracted by the higher
pay. More senior workers (those in their fifties
and above) may become dislocated in the short
term. However, as the supply of foreign workers
dwindles and if appropriate financial incentives
and measures are in place to make employing
them attractive, demand for senior workers
should again rise. In fact, the higher pay may
attract more retirees to take up jobs that were
once deemed financially unrewarding. To wean
Singapore off dependence on foreign workers, all
pairs of hands must be on deck.
In the end, some SMEs may fail to adjust and
will be forced to close down or relocate. The
government may also have to bear with a few
years of fiscal deficits during the adjustment phase
while new revenue sources are being sought to
cover the higher fiscal layouts and the lower
foreign worker levy collections. However, as the
new normal settles in and companies return to
profitability over time, assistance measures from
the government can be phased out.
Detractors may voice their opposition on the
ground of the difficult external environment that
the country currently faces. On the contrary, we
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should take advantage of the lull and bite the
bullet now so that Singapore is ready to ride the
wind again when new opportunities emerge.
Given the exceptionally strong political
leadership and foundation this country has, the
impacts of the adjustments will be painful in the
short term but diffusible and totally manageable in
the long term.
VI. Conclusion
In the course of a country’s economic development,
especially for developing economies, early
successes of growth very often are built upon
sacrifices from a disadvantaged segment of the
population. After the founding of New China in
1949, for example, the growth of the Chinese
urban sector was built on sacrifices by the rural
sector as a result of Mao’s singular focus to
industrialize the Chinese economy in order to catch
up with Developed West. Even after the advent of
ground-shattering economic reforms initiated by
Deng Xiaoping after the demise of Mao, the urban
population continued to gain disproportionately
from China’s phenomenal economic growth over
the past three decades. That resultant growing
disparity in income and wealth distributions
has led to rising social tension in recent years,
prompting the Chinese government to aggressively
initiate policy measures to raise income and living
standards of the peasants.
Singapore’s GDP per capita is among the highest
in the world and therefore can hardly claim to still
be a developing economy. Furthermore, living
costs in Singapore have also risen so rapidly
that the city-state is among the most expensive
cities in the world. Hence, it is neither realistic
nor fair for Singaporeans to demand First World
living standards while still expecting to pay Third
World prices for services rendered by their fellow
citizens.
If indeed the income inequality can be attributed
in part to inequity, then the government has the
responsibility to act, even if the adjustment
measures could inflict high short-term costs. For
too long, globalization, technological change, and
an ageing population have become convenient
excuses to justify lopsided income distribution.
Welfarism is also no substitute for relative inclusive
growth that boosts incomes at the bottom end.
Fundamental adjustments to address the widening
gap can realistically take place only by giving
employees a larger share of the economic pie. This
entails encroaching on deep-rooted vested interests
of other stakeholders and can only be effected by
leaders with strong political will.
Meanwhile, efforts to raise productivity
through mechanization, business process re-
engineering, and trainings must be kept up. The
concept of productivity still explains at least in
part why workers in different economies enjoy
differing living standards. Given an increasingly
competitive external environment, the stark
message for Singapore workers, especially those
in the low- and middle-income segments, is that,
in the long term, they still need to increase their
productivity to keep their higher living standards.
Raising productivity to ensure that Singapore
remains competitive is therefore not an option but
an absolute necessity.
As for foreign workers, they should still be
welcomed but only to supplement and strengthen
Singapore’s workforce, not to unfairly supplant
our domestic unskilled workers.
The Singapore government has done an
excellent job laying down a firm foundation
that can facilitate the switch to a truly more
inclusive society. It also has political dominance
as well as economic clout, through its extensive
web of government-linked companies and their
subsidiaries, to carry out fundamental if difficult
reforms to halt or reverse the trend of a widening
income gap.
After forty years of impressive economic
development, Singapore is in a uniquely privileged
position to grow not only as an economic entity but
more so as a caring and compassionate society. This
can be better achieved by building a truly inclusive
society not through redistribution as an afterthought
of economic development, but by distributing gains
from economic development equitably at the onset.
The alternative will be an increasingly divided,
squabbling, welfare-oriented, and eventually debt-
laden society we see in the West.
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NOTES
1. See Rodan (1989).
2. See Soon and Tan (1993).
3. See Hon Sui-Sen (1973).
4. See Singapore Department of Statistics (2008).
5. See Goh Chok Tong (1980).
6. See Tselichtchev and Debroux f 2009V
7. See Economic Committee (1986).
8. See Krause (1987). For example, in 1989, labour costs on Batam Island, Indonesia were only 25 per cent of those
in Singapore on average. See Kumar and Lee (1991).
9. See Economic Committee (1986).
10. See Singapore Department of Statistics (2008).
1 1 . See Ministry of Trade and Industry (1991).
12. See Tselichtchev and Debroux (2009).
13. The committee was put together by the government to review Singapore’s long-term competitiveness just about
the same time the crisis started. But as the crisis wore on and spread, the committee began to also deliberate on
strategies that could help Singapore deal with the crisis. In the end, the committee first proposed strategies to deal
with the crisis. Next, a separate package of measures was proposed to deal with the issue of the lost of long-term
competitiveness caused by the high wage policies in the previous years.
14. See the Singapore Department of Statistics website .
15. The Productivity and Standards Board (PSB) was formed from the merger of the National Productivity Board
(NPB) and the Singapore Institute of Standards and Industrial Research (SISIR) in April 1996. It is a statutory
board under the Ministry of Trade and Industry with a mission is to raise productivity so as to enhance Singapore’s
competitiveness and economic growth for a better quality of life for her people.
16. See SPRING Singapore Annual Report 2001-02.
17. See PSB Annual Report 1999/2000, Chairman’s Statement at
report/ar 1 999_2000/review/index.html>.
18. Factories, for example, have difficulties recruiting Singaporeans to staff their night shifts without which the unit
cost of production would be much higher.
19. See Chua (2006).
20. Straits Times , “Don’t let foreign workers become a soft option”, 9 January 2010.
21. The Economist. Singapore and immigration: A PR problem”, 14 November 2009.
22. See Chua (2006).
23. Straits Times , “What ails Singapore’s building industry?”, 13 March 2010.
24. Straits Times , “Go for Goldilocks Growth”, 23 January 2010.
25. See Singapore Department of Statistics (2000) and Mukhopadhaya (2001).
26. Kuznets’ hypothesis posits that as development proceeds and mean income grows, inequality in income
distribution first increases and then decreases, producing an inverse-U shape Gini coefficient curve. See Kuznets
(1955).
27. See Chia and Chen (2003) for a summary of various studies conducted by different economists on how income
distribution in Singapore changes at different phases of economic development.
28. See Chua (2006).
29. See Singapore Department of Statistics (2006).
30. Straits Times , “A Global, Vibrant Singapore “, 3 1 December 2009.
31. See Rawls (1971).
32. See Hicks (1939) and Kaldor (1939).
33. Straits Times , “MM Lee: Social divide inevitable”, 29 October 2009.
34. Straits Times , “Singapore’s well-being goes far bevond GDP”, 21 Jul v 2010.
35. Straits Times , “Goal 2020 timely and significant”, 16 July 2010.
36. Straits Times , “No lack of help for low- wage workers”, 5 March 2010.
37. One of the key features of the package, for example, was the S$4.5 billion Jobs Credit Scheme, which involved
giving cash grants to employers to subsidize part of their local wage bill.
38. See Economic Strategies Committee (2010).
39. Straits Times , “Goal 2020 timely and significant”, 16 July 2010.
40. Straits Times , “Shift to ‘quality’ growth a big change: Experts”, 27 January 2010.
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41. Lewis (2004).
42. Lawrence (2008).
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Riau Experience , edited by T. Y. Lee, pp. 1-35. Singapore: Institute of Southeast Asian Studies, 1991.
Kuznets, S. “Economic Growth and Income Inequality”. American Economic Review XLV, no. 1 (March 1955).
Lawrence, Robert Z. Blue-Collar Blues: Is Trade to Blame for Rising US Income Inequality?. Washington, D.C.:
Peterson Institute for International Economics,
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University, 2005a.
Leggett, C. J. “The fourth transformation of Singapore’s industrial relations”. University of South Australia, 2005&.
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Mukhopadhaya, Pundarik. “Changes in Social Welfare in Singapore – 1982-1999”. Working Paper No. 0120,
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Rawls, John. A Theory of Justice. Cambridge, MA: Belknap Press of Harvard University Press, 1971.
Rodan, Gary. The Political Economy of Singapore s Industrialization. Kuala Lumpur: Forum, 1989.
Singapore Department of Statistics. “Is Income Disparity Increasing in Singapore. Occasional Paper, May 2000.
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Soon, Teck- Wong and Tan C. Suan. The Lessons of East Asia: Singapore Public Policy and Economic Development.
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- Contents
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- Issue Table of Contents
ASEAN Economic Bulletin, Vol. 29, No. 2 (August 2012) pp. 85-170
Front Matter
The Growth Effects of Services Trade Liberalization in ASEAN [pp. 85-100]
Thailand’s Outward Foreign Direct Investment: The Case of the Garment Industry [pp. 101-115]
Foreign Direct Investment and Firms’ Productivity Level: Lesson Learned from Indonesia [pp. 116-127]
Singapore’s Rising Income Inequality and a Strategy to Address It [pp. 128-145]
RESEARCH NOTE
Trade Policies and Trade Misreporting in Myanmar [pp. 146-159]
BOOK REVIEWS
Review: untitled [pp. 160-162]
Review: untitled [pp. 162-164]
Review: untitled [pp. 164-166]
Review: untitled [pp. 166-167]
Review: untitled [pp. 168-170]
Back Matter
Long-term Economic Performance in
Thailand
Author(s):
Peter Warr
Source: ASEAN Economic Bulletin, Vol. 24, No. 1, Bridging the ASEAN Developmental
Divide: Challenges and Prospects (April 2007), pp. 138-163
Published by: ISEAS – Yusof Ishak Institut
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ASEAN Economie Bulletin Vol. 24, No. 1 (2007), pp. 138-63
DOI: 10.1355/ae24-lh
ISSN 0217-4472 print / ISSN 1793-2831 electronic
Long-term Economic Performance
in Thailand
Peter Warr
Thailand’s long-term economic growth has been remarkable. This progress has been reflected
in the very significant improvement in indicators of well-being, such as life expectancy ; infant
and maternal mortality ; and literacy. Poverty incidence has declined dramatically, but
economic inequality has increased. The performance of the education system is chronically
weak. Environmental problems and institutional failures in resource management are
ongoing. Reform is needed in several areas, including political and corporate governance,
trade policy, regulation of industry and the education and health systems. This article
attempts to clarify these issues and to suggest the most important areas for reform.
Keywords: Thailand, economic growth, poverty reduction, inequality, productivity
growth.
I. Introduction: Thailand and Its Neighbours
in Long-Term Perspective
The economies of Southeast Asia are diverse.
Efforts to achieve closer economic integration
among them are desirable, but these efforts must
be based on an understanding of the economic
circumstances of each of the economies
concerned. The present article attempts to draw
out the important features of the Thai economy
which must be taken into account in this exercise.
There is a further, and possibly deeper, reason
for studying individual country experiences in
depth. The countries of Southeast Asia have
employed quite different development strategies.
How have these strategies worked out, and what
lessons might others draw from this experience? A
good example is the comparison between Thailand
and neighbouring country Burma/Myanmar. The
two have similar natural resource endowments,
and half a century ago these two countries were
similarly impoverished. But the development
strategies employed since then and their
subsequent economic outcomes could not be more
different. The countries of Southeast Asia provide
several natural experiments of this kind. To extract
their lessons, the individual country experiences
must first be examined closely.
II. Long-Term Economic Growth
In 1945 Thailand was one of the world’s poorest
countries. Its economy had been stagnant for at
ASEAN Economic Bulletin 138 Vol. 24, No. 1, April 2007
© 2007 ISEA
S
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least a century (Sompop 1989), and it had suffered
significant war damage. Most economic observers
of the time rated its prospects poorly (Ingram
1971). By the mid-1990s, half a century later,
these negative assessments had been reversed.
Thailand was widely considered a champion of
sustained development, having achieved a
combination of rapid growth, macroeconomic
stability and steadily declining poverty incidence,
extending over several decades. The twin currency
and banking crises of 1997-99 interrupted this
process, eroding some of the gains that had earlier
been made, but subsequent recovery has partially
restored Thailand’s long-term growth path.
This growth performance is summarized in
Figure 1, showing the level of real GDP per capita
in each year (vertical bars) and its growth rate
(solid line) for the period 1951 to 2006. The figure
identifies four periods of Thailand’s recent
economic history: I – pre-boom (until 1986); I
I
– boom (1987 to 1996); DI – crisis (1997 to
1999); and IV – recovery (2000 to 2006). Over
the period 1968-86, the average annual growth
rate of Thailand’s real GNP was 6.7 per cent
(almost 5 per cent per person), compared with an
average of 2.4 per cent for low and middle-income
countries (World Bank 1998). Then, over the
decade 1987-96 the Thai economy boomed. It was
the fastest growing in the world. As we shall see
below, this boom was driven primarily by very
high levels of investment, both domestic and
foreign, in physical capital.
Even more remarkable than the rate of growth
over this long period was the stability of the
FIGURE
1
Thailand: Real GDP Per Capita and Growth of Real GDP Per Capita, 1951-2006
Source: Author’s calculations, using data from National Economic and Social Development Board.
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growth. Not a single year of negative growth
of real output per head of population was
experienced over the four decades from 1958 to
1996, a unique achievement among oil-importing
developing countries. Thailand’s performance was
often described as an example others might
emulate. Its principal economic institutions,
including its central bank, the Bank of Thailand,
were often cited as examples of competent and
stable management.
The crisis of 1997-98 shattered these assess-
ments. Domestically, the economy was in disarray:
output and investment were contracting; poverty
incidence was rising; the exchange rate had
collapsed, following the decision to float the
currency in July 1997; the government had been
compelled to accept a humiliating IMF bailout
package; the financial system was largely
bankrupt; and confidence in the country’s
economic institutions, including the Bank of
Thailand, was damaged. Internationally, Thailand
was now characterized as the initiator of a
“contagion effect” in Asian financial markets,
undermining economic and political stability and
bringing economic hardship to millions of people.
The economic damage done by the crisis of
1997-99, and the hardship that resulted were both
substantial. The crisis eroded some of the gains
from the economic growth that had been achieved
during the long period of economic expansion, but
it did not erase them. At the low point of the crisis
in 1998 the level of GDP per capita was almost 14
per cent lower than it had been only two years
earlier, in 1996. Nevertheless, because of the
sustained growth that had preceded the crisis, this
reduced level of 1998 was still higher than it had
been only five years earlier, in 1993, and was
seven times its level in 1951.
Since the crisis, Thailand’s economic recovery
has been moderate. The rate of growth of real
GDP, at 5 per cent, has been somewhat below its
long-term trend rate of well over 6 per cent (see
Table 1), and it was not until 2003 that the level of
real GDP per capita had recovered to its pre-crisis
level of 1996. Foreign direct investment (FDI) has
declined dramatically since 1998 and private
domestic investment has remained sluggish. In
2006 the level of real economic output per person
was 19 per cent above its 1996 pre-crisis level and
almost 10 times its level 55 years earlier, in 1951.
The average annual rate of growth of real GDP per
person over this entire period of five and a half
decades was 4.2 per cent.
Figures 2 and 3 place the last two decades in a
comparative East Asian perspective. Data on real
GDP are presented for eight East Asian
economies, including Thailand. The point made by
these comparisons is the very large difference
between the periods before and after 1996. The
pre-crisis period of 1986 to 1996 is covered in
Figure 2, with each country’s 1986 level of real
GDP indexed to 100. The crisis and post-crisis
periods of 1996 to 2006 are shown in Figure 3,
with 1996 real GDP this time indexed to 100.
TABLE 1
Thailand: Growth of GDP and Its Sectoral Components, 1968-2006
(Per cent per annum)
Pre-boom Boom Crisis Recovery Whole period
1968-86 1987-96 1997-99 2000-2006 1968-2006
Total GDP 6.7 9.5 -2.5 5.0 6.4
Agriculture 4.5 2.6 0.1 2.7 3.3Industry 8.5 12.8 -1.7 6.2 8.4Services 6.8 9 -3.6 4.3 6.1
Sources: Bank of Thailand, data for 1968 to 1986; National Economic and Social
Development Board, data from 1987.
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FIGURE 2
Real GDP in East Asia, 1986-96
Source: Asian Development Bank, Development Indicators, various issues.
Figure 2 shows that Thailand’s boom was the
laigest of the countries shown, but only marginally
so. Singapore, Malaysia, Indonesia, Korea, and
Taiwan were not far behind.
Figure 3 shows that in 1998 serious contractions
occurred in Korea, Malaysia, and Indonesia, but
that, relative to 1996, Thailand’s initial contraction
was the most severe. Along with Indonesia, its
contraction has also been the most long-lasting.
Thailand’s contraction was initially larger than
Indonesia’s, but Indonesia did not experience a
recovery as large as Thailand’s in 1999. It is
commonly said that Indonesia’s economic crisis
was more severe than Thailand’s, but these data
reveal a somewhat different story. Using the pre-
crisis year of 1996 as a base, their time paths of
real GDP, relative to that 1996 base, were
remarkably similar. The main difference is that
since 2002 Indonesia’s recovery has been
marginally slower.
III. Sources of Aggregate Growth
Where did Thailand’s economic growth come
from? Explaining long-term growth involves dis-
tinguishing between the growth of the factors
of production employed and the growth in their
productivity. We now discuss a growth accounting
exercise for Thailand, covering the years 1980 to
2002. The present section presents this analysis at
an aggregate, economy-wide level, and the
following section disaggregates the analysis by
major sector.
The assumption being made in this kind of
analysis is that during the period covered output
was primarily supply-constrained, meaning that
aggregate demand was not the binding constraint
on output. This assumption seems reasonable for
the period prior to the Asian crisis of 1997-99, but
the crisis and recovery periods from 1997 onwards
were characterized by a deficiency of aggregate
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FIGURE 3
Real GDP in East Asia, 1996-2005
Source: Asian Development Bank, Development Indicators , various issues.
demand. A growth accounting framework, which
focuses on the determinants of aggregate supply, is
therefore of limited relevance for such periods.
The data relating to that period are included here
mainly for completeness.
Data on labour inputs are adjusted for changes
in the quality of the workforce by disaggregating
the workforce by the educational characteristics of
workers and weighting these components of the
workforce using time series wage data for the
educational categories concerned. Data on land
inputs are similarly adjusted for the changing
quality of land inputs by disaggregating by
irrigated and non-irrigated land and then
reaggregating these components using data on
land prices. In Table 2, the resulting estimates of
factor growth rates are contained in the first
column. The second column provides average
factor cost shares over time, compiled from factor
price data. These factor cost shares impose the
assumption of constant returns to scale. The factor
cost shares used in the calculations vary over time.
The summary data shown in the table are the
averages of these shares.
The third column on factor contributions to
growth weighs the growth rates of factors by their
cost shares, producing an estimate of the degree to
which the growth of output (6.01 per cent) is
attributable to growth of each component. These
data are then used to calculate total factor
productivity growth (IFF) as a residual. The
final column shows the estimated percentage
contribution of each component to the overall
growth rate.
The outstanding point is the rapid growth of the
physical capital stock. The capital stock grew
more rapidly than output in both the pre-boom and
boom periods. This growth of the capital stock
accounted for 71 per cent of the growth of output
over the period 1980-2002. Growth of the size of
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TABLE 2
Thailand: Aggregate Growth Accounting, 1980 to 2002
Annual Average Contribution Per cent
growth rate cost share to total growth contribution to
(% per year) (%) (% per year) total growth
Output 6.01 n.a. n.a. 100All factors 5.41 100 5.41 90.0Raw labour 2.19 40.2 0.88 14.7
Human capital 2.49 11.2 0.28 4.6Physical capital 9.05 46.9 4.24 70.6Agricultural land 1.12 1.8 0.02 3.3
Aggregate TFP growth n.a. n.a. 0.60 10.0
Note: n.a. means not applicable.
Source: Author’s calculations, using data from National Economic and Social Development Board. Further detail
on these calculations is provided in the text and in Warr (2005a).
the labour force contributed about 15 per cent of
the growth of output, but improvements in the
quality of the labour force made only a modest
contribution, explaining less than 5 per cent of
overall growth. Indeed, the performance of
Thailand’s educational sector has been among
the weakest in East Asia. Secondary school
participation rates were low and did not improve
greatly during the pre-boom and boom periods
(Sirilaksana 1993). Similarly, since the 1960s the
expansion of the cultivated land area has been
small. Growth of the stock of land was not the
source either. TFP growth was only moderately
important, accounting for 10 per cent of output
growth.
It is perhaps unsurprising that the explanation
for Thailand’s impressive growth lies primarily
with growth of the physical capital stock. Both
domestic and foreign investment grew rapidly, but
the growth rate of foreign investment was larger,
from about 1987 (Warr 1993). Foreign investment
plays an important role in introducing new
technology and in development of export markets.
Nevertheless, the quantitative importance of
foreign investment in Thailand’s capital stock
accumulation is easily exaggerated. Figure 4
makes this point by decomposing Thailand’s total
annual level of investment into three components:
domestic private, public, and FDI. It does this for
each of four years, 1975, 1985, 1995, and 2005.
Of these three components, domestic private
investment is by far the largest and FDI by far
the smallest. In 2005 their percentage
contributions to the overall level of investment
were: private domestic – 69.5, public – 26.8,
and FDI – 3.7. Private investment by Thais
themselves was the dominant contributor to
overall capital accumulation.
How was the investment financed? Did the
funds come from domestic savings or from
borrowing from abroad? Table 3 presents an
accounting of this issue based on the identities
that: (i) total investment = household savings +
government savings + foreign savings; and (ii)
foreign savings = long term capital inflow + short
term capital inflow – change in international
reserves of the central bank. By far the most
important source of finance was the private
savings of Thais themselves.
Contrary to the common perception that
Thailand’s boom (1987-96) was financed largely
by foreign capital, this source, consisting of
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FIGURE 4
Thailand: Composition of Net Annual Investment, 1975-2005
Source: Author’s calculations using data from National Economic and Social Development Board.
private FDI plus foreign government investment
(overseas development assistance, or ODA),
accounted for an average of only 5 per cent of total
investment. During the pre-boom period, FDI
accounted for about 61 per cent of this inflow of
long-term foreign capital, and ODA accounted for
the other 39 per cent. During the boom period, these
proportions were 73 and 27 per cent, respectively.
Short-term capital inflows, consisting of borrowing
from abroad plus portfolio inflows plus domestic
bank accounts held by foreigners were a more
important source, accounting for 23 per cent of total
investment. During the boom, government dis-
saving (budget deficits) reduced the funds available
for investment by 1 1 per cent, and increases in the
international reserves of the Bank of Thailand
reduced it by a further 9 per cent.
It is instructive to compare the boom period
(1987-96) with the pre-boom period (1973-86).
The major difference between these periods was in
the proportion of total investment that was
financed by short-term capital inflows. This
proportion increased from 2 per cent before the
boom to 23 per cent during the boom. The inflow
financed investment, but it also sowed the seeds of
the crisis of 1997-99. The accumulated stock of
mobile foreign-owned capital grew to levels far
exceeding the stock of the Bank of Thailand’s
foreign exchange reserves. If the owners of these
funds chose to withdraw them from Thailand, the
Bank of Thailand would be unable to defend its
fixed exchange rate. Unfortunately, this is what
happened in July 1997 (see Warr 1999 and 2005a).
In summary, growth of the physical capital
stock was the most important contributor to
Thailand’s aggregate growth, accounting for 71
per cent of all growth over the period 1980-2002
(Table 2). Most of this investment was financed
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from Thai domestic private savings. The notion
that Thailand’s accumulation of physical capital
was financed by FDI and/or foreign aid is a myth.
Total foreign capital inflows, FDI plus ODA
accounted for only about 5 per cent of total
investment. ODA was less than one-third of this
foreign capital inflow. That is, the quantity of
ODA explains only 1.5 per cent of total
investment over this period, and thus under 1 per
cent of total growth.
Before leaving the subject of Thailand’s
aggregate economic performance, one further
topic requires discussion. Why has Thailand’s
recovery been so slow? As noted above, the crisis
was a contraction in aggregate demand, rather than
a contraction in productive capacity. Labour and
capital were underutilized because there was
insufficient demand for Thai output. Where did
this contraction in demand come from? Table 4
addresses this point. The upper section of the table
shows contributions to the composition of
expenditure on GDP in Thailand during the pre-
crisis boom (1987-96), the crisis (1997-99) and
the post-crisis recovery period (2000-2005).
During the crisis the share of investment in GDP
collapsed by 13 percentage points. Investor
confidence was severely damaged by the events
surrounding the crisis, and during the post-crisis
TABLE 4
Thailand, Indonesia and Malaysia: Contributions to Expenditure on GDP, 1987-2005
(Per cent of GDP)
Country/Period Consumption Investment Government Net exports Total
Thailand
Pre-crisis(1987-96) 54.8 38.9 9.9 -5.0 100
Crisis
(1997-99) 54.9 25.7 10.9 9.9 100
Post-crisis
(2000-2005) 56.9 24.8 11.2 4.9 100
Indonesia
Pre-crisis(1987-96) 55.0 27.8 9.1 0.4 100
Crisis(1997-99) 76.1 29.1 8.5 7.5 100
Post-crisis
(2000-2005) 60.6 20.8 8.7 6.2 100
Malaysia
Pre-crisis
(1987-96) 48.8 37.2 12.8 1.2 100
Crisis
(1997-99) 42.8 30.5 10.5 16.2 100
Post-crisis
(2000-2005) 43.6 23.0 12.9 20.6 100
Source: Author’s calculations, using data from World Bank, World Development Indicators. Negative
entries for net exports mean that gross imports exceed gross exports.
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recovery period this share did not recover
sufficiently to restore Thailand’s long-term rate of
growth.
Why has this occurred? High interest rates are
not the answer. Figure 5 shows that although
Thailand’s interest rates increased during the
crisis, they have been at historically low levels
since the year 2000. A clue is provided by Figure
6, which shows the relationship between the stock
exchange index for Thailand (SET) and the level
of private investment. Investment follows the SET,
but with a lag. The stock exchange index may be
viewed as an indicator of investor confidence.
Investors have lost confidence in the capacity of
the Thai economy to generate a satisfactory return
on their investments.
This problem is not unique to Thailand. Table 4
shows similar calculations for two other crisis-
affected economies, Indonesia and Malaysia. The
pattern is very similar. Finally, Figure 7 shows
annual data on the share of investment in GDP in
five crisis-affected East Asian economies:
Thailand, Indonesia, Malaysia, the Philippines,
and Korea. Although the contraction -of private
investment in Thailand is at least as large as any
other (Malaysia is similar), the figure shows that
the problem of sluggish recovery of investment is
shared by several East Asian economies. It would
not seem appropriate to look for country-specific
causes. The decline of investor confidence is
regionwide.
IV. Sectoral Economic Performance and
Productivity Growth
How do the major sectors of the Thai economy
compare in terms of productivity growth? Table 1,
above, summarizes the sectoral composition of
FIGURE 5
Thailand: Real and Nominal Interest Rates, 1994-2006
Note: The real rate is the nominal rate minus the annual rate of CPI inflation.
Source: Bank of Thailand.
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FIGURE 6
Thailand: Private Investment and the Stock Exchange Price Index
Note: Units on the left axis are the level SET index (Stock Exchange of Thailand). Units on the right axis are millions
of baht (1988 prices).
Sources: National Economic and Social Development Board and Stock Exchange of Thailand.
Thailand’s growth performance since 1968. The
growth of industry, especially export-oriented
manufacturing has far outstripped agriculture,
implying that agriculture’s share of GDP has
declined significantly. This point is confirmed by
Figure 8, which shows the rapidly changing
composition of output in Thailand.
Observations of this kind are typical for rapidly
growing economies. As aggregate output per
person expands, agriculture tends to contract as a
share of total output, while the share of industry
expands. But a common misinterpretation of this
phenomenon is that the agricultural sector is
“stagnant” while industry is “dynamic”. The
misinterpretation lies in mistaking the fact that the
level of factor productivity in agriculture tends to
be lower than in industry (and in services) with
differences in the rate of growth of productivity.
The data for Thailand indicate that although the
level of factor productivity is indeed lower in
agriculture, the growth of productivity has been
much more rapid there than in other sectors. The
key point is that Thai agriculture has been
expanding its output, albeit more slowly than the
rest of the economy, with declining shares of the
nation’s resources.
The evidence for this conclusion is summarized
in Table 5. This table summarizes a set of
calculations for agriculture, industry and services,
which mirror the aggregate analysis reported in
Table 2 above. The data used in this analysis again
cover the years 1980 to 2002 and include:
• employment of labour by educational category
by sector;
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FIGURE 7
Investment Shares of GDP in East Asia, 1993-2005
Source: Author’s calculations, using data from World Bank, World Development Indicators .
• physical capital used by each sector;
• use of land in agriculture, adjusted by the extent
of irrigation coverage; and
• cost shares for each of the above factors of
production by sector.
For convenience, the first column of Table 5
repeats the findings at the aggregate level,
discussed above. The sectoral findings may be
summarized as follows. First, although output
(value added) grew more slowly in agriculture
(2.64 per cent) than in either industry (8.09 per
cent) or services (5.53 per cent), it was the only
major sector to record positive TFP growth. This
TFP growth in agriculture contributed one-
twentieth of the overall growth of GDP. In
agriculture, the growth of output of 2.64 per cent
per year was achieved by factor input growth of
0.47 per and TFP growth of 2.17 per cent. TFP
growth therefore accounted for 82 per cent of the
growth of value-added in agriculture.
Second, the analysis decomposes the aggregate
productivity growth component just described into
one component due to growth in productivity in
individual sectors, each weighted by its share of
GDP, and a second component due to the
reallocation of resources among sectors of
differing TFP. This distinction was apparently first
identified by Jorgenson (1988) in the context of
U.S. productivity growth. This analysis indicates
that the level of factor productivity in agriculture
remained significantly lower than elsewhere in the
economy, despite its higher TFP growth over this
period. The movement of factors of production out
of agriculture thus further contributed to economic
growth by raising the productivity of these factors.
Indeed, this reallocation effect contributed 24 per
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FIGURE 8
Thailand: Sectoral Shares of GDP, 1965-2005
(In percentages)
Source: World Bank, World Development Indicators , various issues.
cent of the growth of aggregate output that
actually occurred. It was almost five times as
important for overall growth as the growth in the
productivity of the factors that remained within
agriculture.
The results of the analysis reveal that
agriculture’s contribution to economic growth in
Thailand included impressive rates of TFP growth.
But its main contribution occurred through
releasing resources which could be used more
productively elsewhere, while still maintaining
output, rather than through expansion of
agricultural output. It is seriously wrong to
characterize Thai agriculture as “stagnant”, based
merely on the fact that output growth is slower in
agriculture than in other sectors. If agriculture had
really been stagnant economic growth would have
been substantially lower because it would not have
been possible to raise productivity significantly
within agriculture or to release resources
massively while still maintaining moderate growth
of agricultural output.
Table 6 summarizes the results of this analysis
by showing in the first column, the contributions
to overall growth of aggregate factor growth (90
per cent of total growth) and aggregate measures
TFP (10 per cent). It then decomposes this
aggregate TFP growth into its sectoral components
and the part that is due to the reallocation of
resources from low productivity sectors (mainly
agriculture) to higher productivity sectors (mainly
industry). Although agriculture generated positive
TFP growth, in other sectors TFP growth was
negative. Indeed, when each of these other sectors’
contributions to aggregate TFP growth are added,
the total is slightly negative. Of the 10 per cent of
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TABLE 5
Thailand: Total Factor Productivity Growth by Sectors, 1980-2002
Aggregate Agriculture Industry Services
Average growth rates (per cent per annum)Output 6.01 2.64 8.09 5.53Raw labour 2.19 1.50 5.25 3.47
Human capital 2.49 9.43 11.35 6.90Physical capital 9.05 8.50 13.84 18.47Agricultural land 1.12 1.12 0 0
Average cost shares (per cent )Raw labour 40.2 59.0 30.4 31.0Human capital 11.2 3.9 12.0 9.2Physical capital 46.9 13.0 57.6 59.8Agricultural land 1.8 24.1 0 0
Decomposition of output growth (per cent per annum)Output growth 6.01 2.64 8.09 5.53Factor growth 5.41 0.47 9.20 7.04TFP growth 0.60 2.17 -1.11 -1.51
Decomposition of aggregate TFP growth (per cent per annum)
Aggregate sectoral TFPG -0.85Reallocation effect 1.45
Source: Author’s calculations, using data from National Economic and Social Development Board. Further detail on
these calculations is provided in Warr (2005a).
TABLE 6
Thailand: Percentage Contributions to Aggregate
Growth, 1980-2002
(In percentages)
Whole Pre-crisis
period period
1980-2002 1980-96
Aggregate factor growth 90.0 80.3
Aggregate TFP growth 10.0 19.7
Agriculture TFP growth 5.0 2.9
Industry TFP growth -7.1 -1.1
Services TFP growth -12.0 0.7
Reallocation effect 24.1 17.3Total 100 100
Source: Author’s calculations, using data from National
Economic and Social Development Board. Further
detail on these calculations is provided in Warr (2005a).
aggregate GDP growth which can be attributed to
aggregate TFP growth, all of this amount is
accounted for by the reallocation of resources
among sectors. Finally, the second column of
Table 6 shows that these qualitative conclusions
are not reversed if the analysis is confined only to
the resource-constrained, pre-crisis
period.
V. Poverty Incidence and Inequality
Is economic growth really so important? Do the
poor actually benefit from it, or only the rich?
Within Thailand, as elsewhere, there is
considerable debate about these matters. Before
turning to the relationship between poverty
incidence and economic growth in Thailand, some
characteristics of poverty in Thailand will be
reviewed. Despite much dispute about measure-
ment and conceptual issues, all major studies of
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TABLE 7
Thailand: Poverty Incidence and Gini coefficient, 1988 to 2004
(Headcount measure, per cent of total population)
Poverty incidence Inequality
(headcount measure, per cent of population) (Gini coefficient)
Aggregate Rural Urban Aggregate
1988 44.9 52.9 25.2 0.4821990 38.2 45.2 21.4 0.5201992 32.5 40.3 14.1 0.5411994 25.0 30.7 11.7 0.5221996 17.0 21.3 7.3 0.5181998 18.8 23.7 7.5 0.5152000 21.3 27.0 8.7 0.5252002 15.5 19.7 6.7 0.5012004 11.3 14.3 4.9 0.499
Note: Higher values of the Gini coefficient indicate greater inequality.
Source: National Economic and Social Development Board website:
http://poverty.nesdb.go.th/poverty_new/doc/NESDB/wanchat_2004 1 22004 1 907.ppt
poverty incidence and inequality in Thailand agree
on some basic points:
• Poverty is concentrated in rural areas, especially
in the northeastern and northern regions of the
country.
• Absolute poverty has declined dramatically
over the last four decades, but inequality has
increased.
• The long-term decline in poverty incidence was
not confined to the capital, Bangkok, or its
immediate environs, or to urban areas in
general, but occurred in rural areas as well.
Since 1988, the largest absolute decline in
poverty incidence occurred in the poorest region
of the country, the northeast.
• Large families are more likely to be poor than
smaller families.
• Farming families operating small areas of land
are more likely to be poor than those operating
larger areas.
• Households headed by persons with low levels
of education are more likely to be poor than
others.
The following discussion draws upon the
official poverty estimates produced by the Thai
government’s National Economic and Social
Development Board (NESDB) which, like all
other available poverty estimates, are based upon
the household incomes collected in the National
Statistical Office’s Socio-economic Survey
(SES) household survey data. Despite their
imperfections, these are the only data available
covering a long time period. These survey data
have been collected since 1962. The early data
were based on small samples, but their reliability
has improved steadily, and since 1988 the raw data
have been available in electronic form. Table 7
summarizes the available official data for the four
decades from 1988 to 2004.
VI Declining Poverty Incidence, Rising
Inequality
Table 7 focuses on the familiar headcount measure
of poverty incidence: the percentage of a
particular population whose household incomes
per person fall below the poverty line. The table
confirms that most of Thailand’s poor people
reside in rural areas. Until recently, the SES data
were classified according to residential location in
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the categories municipal areas, sanitary districts,
and villages. These correspond to inner urban
(historical urban boundaries), outer urban (newly
established urban areas), and rural areas,
respectively. Poverty incidence is highest in the
rural areas, followed by outer urban, and lowest in
the inner urban areas. When these data are
recalculated in terms of the share of each of these
residential areas in the total number of poor people
and then the share of the total population, as in the
last two rows of the table, respectively, a striking
point emerges. In 2004, rural areas accounted for
93 per cent of the total number of poor people but
only 64 per cent of the total population.
The final column of Table 7 shows the Gini
coefficient of inequality. This index takes values
between 0 and 1, with higher values indicating
greater inequality. The index rose significantly
over the three decades for which data are
available. Combined with the reduction in
absolute poverty which also occurred, this means
that the real incomes of the poor increased with
economic growth, but the incomes of the rich
increased even faster.
Over the eight years from 1988 to 1996,
measured poverty incidence declined by an
enormous 21.4 per cent of the population, an
average rate of decline in poverty incidence of 2.7
percentage points per year. That is, each year, on
average 2.7 per cent of the population moved from
incomes below the poverty line to incomes above
it. Over the ensuing two years ending in 1998
poverty incidence increased by 1.5 per cent of the
population. Alternatively, over the eight years
ending in 1996 the absolute number of persons in
poverty declined by 11.1 million (from 17.9
million to 6.8 million); over the following two
years the number increased by 1 million (from 6.8
to 7.9 million). Thus, according to the official
data, measured in terms of absolute numbers of
people in poverty, the crisis reversed 9 per cent of
the poverty reduction that had occurred during the
eight-year period of economic boom immediately
preceding the crisis.
From Figure 9, it is apparent that the northeast
region dominates poverty incidence in Thailand.
This one region accounted for 51 per cent of
Thailand’s poor people in 2004, but only 34 per
cent of the total population. Every other region’s
share of the total number of poor is smaller than
its share of the total population. Poverty is an
especially important issue for rural people,
particularly in the northeast.
More dramatic than any of these data, however,
are recently released data on the relationship
between poverty incidence and education.
According to the NESDB’s data, of the total
number of poor people in 2002, 94.7 per cent had
received primary or less education. A further 2.8 per
cent had lower secondary education, 1.7 per cent
upper secondary, 0.48 per cent had vocational
qualifications, and 0.31 per cent had graduated from
universities. Thailand’s poor are overwhelmingly
uneducated, rural, and living in large families. But
they are not necessarily landless.
V.2. Poverty Reduction and Economic Growth
What caused the long-term decline in poverty
incidence? It is obvious that over the long term,
sustained economic growth is a necessary
condition for large-scale poverty alleviation. No
amount of redistribution could turn a poor country
into a rich one. Long-term improvements in
education have undoubtedly been important, but
despite the limitations of the underlying SES data,
a reasonably clear statistical picture also emerges
on the short-term relationship between poverty
reductions and the rate of economic growth. The
data are summarized in Figure 10, which plots
the relationship between changes in poverty
incidence, calculated from Table 7 above, and the
real rate of growth of GDP over the corresponding
period.
Although the number of data points is small, the
implications seem clear. Periods of more rapid
economic growth were associated with more rapid
reductions in the level of absolute poverty
incidence. Moderately rapid growth from 1962 to
1981 coincided with steadily declining poverty
incidence. Reduced growth in Thailand caused by
the world recession in the early to mid-1980s
coincided with worsening poverty incidence in the
years 1981 to 1986. Then, Thailand’s economic
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FIGURE 9
Thailand: Poverty Incidence by Region, 2004
Source: Author’s calculations, using data from National Economic and Social Development Board.
boom of the late 1980s and early 1990s coincided
with dramatically reduced poverty incidence.
Finally, the contraction following the crisis of
1997-98 led to increased poverty incidence. The
recovery since the crisis has been associated with
significant poverty reductions.
On the other hand, no such simple short-term
relationship can be found between the change in
inequality over time and the rate of growth. The
rate of growth does not seem to be a significant
determinant of short-term changes in the level of
inequality. Other social factors are undoubtedly
playing a role, but research on this issue remains
inconclusive.
VI. Non-economic Social Change:
Population, Health and Education
The economic transformation that Thailand has
experienced was achieved with environmental and
other costs. Pollution of air and water sources has
been well documented, and expansion of the
cultivated agricultural land area has been partly at
the expense of deforestation, with negative effects
on land erosion and the siltation of rivers and
dams. Economic change has coincided with
massive social change as well. Thai and foreign
commentators agree that not all of this social
change was necessarily beneficial. For example,
the decline of village institutions and traditional
values are widely lamented. Narcotics trafficking,
including both illegal export of drugs such as
marijuana and heroin and domestic use of drugs
such as meta-amphetamines has had a corrupting
influence. Other social evils such as trafficking in
women and child prostitution reportedly persist. In
addition, rising wages in Thailand have attracted
illegal migrants from neighbouring countries
such as Myanmar, Cambodia, and Laos, with
occasional social conflict resulting. Not
surprisingly, it is difficult to assemble solid
evidence on the extent of these problems.
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FIGURE 10
Thailand: Poverty Incidence and Economic Growth
Source: Author’s calculations using poverty data as in Table 1.4 and GDP data from National Economic and Social
Development Board.
Despite these genuine problems, evidence can
be advanced for substantial social progress
accompanying Thailand’s economic growth. The
discussion will focus on five components of social
change: population growth; infant and maternal
mortality; literacy; access to clean drinking water;
and HIV/AIDS infection levels.
VI. 1 Population Growth
In the 1960s, Thailand’s population growth rate was
around 3.5 per cent per annum. Population growth
at these rates puts enormous strain on a country’s
education and health systems. A programme of
family planning was instituted in the 1960s, and
these efforts have been an outstanding success.
Four decades later, population growth was well
under 0.8 per cent per annum and still falling
(Figure 11). Thailand’s population will reach its
peak around the year 2025. The nation’s capacity to
provide improved education and health services for
its youth is greatly enhanced by these demo-graphic
changes. But declining population growth rates
brings adjustment problems as well. Rural
depopulation is an inevitable consequence of de-
clining overall growth rates and rural to urban
migration. Thailand’s population is rapidly urbanizing,
and this requires adjustment to the provision of
government services and infrastructure facilities.
V7.2 Infant and Maternal Mortality
Improvement in the quality of life has been
accompanied by startling improvements in
standard health indicators. Important examples
are shown in Figures 12 and 13. In 1960 infant
mortality rates were around 50 deaths per 1,000
births at the national level. In 2002, the
corresponding morality rate was 6.5 (Figure 12).
This dramatic decline occurred in all major
regions of the Kingdom. In 1960 no region had
an infant mortality rate below 40 per 1,000
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FIGURE 11
Thailand: Population Growth Rate, 1960-2003
(Per cent per year)
Source: National Statistical Office, Bangkok.
FIGURE 12
Thailand: Infant Mortality, 1960-2002
(Deaths per 1,000)
Source: Public Health, Division of Vital Statistics, Ministry of Public Health, various issues.
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FIGURE 13
Thailand: Maternal Mortality, 1960-2002
(Deaths per 1,000 births)
Source: Public Health Statistics , Division of Vital Statistics, Ministry of Public Health, various issues.
births; by 2002 no region was above 7.5 deaths
per 1,000 births.
Maternal mortality rates have declined even
more rapidly. The data are summarized in Figure
13. In 1960 the average rate of maternal mortality
was 4.2 deaths per 1,000 live births, at the
national level. By 2002 this same national rate
was 0.15 deaths per 1,000 live births. These
achievements in public health were widespread
throughout the Kingdom. In 2002 no major
region had a maternal mortality rate above 0.3
deaths per 1,000 live births.
Thailand’s economic progress has contributed
to demonstrably improved health conditions for
the Thai population.
VI. 3 Literacy
Data on literacy rates are available from the
National Census, conducted by the National
Statistical Office every ten years, beginning in
1960. These data are summarized in Figure 14. In
1960, literacy at the national level was 71 per cent.
For males it was 80 per cent and for females 61
per cent. In 2000 the corresponding rates were 95
per cent at the national level: 97 per cent for males
and 94 per cent for females. Clearly, the overall
level of basic literacy has improved significantly
and the gap between male and female rates of
literacy, which often characterizes poor countries,
has declined. Figure 15 shows that at a regional
level these same trends are evident throughout the
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FIGURE 14
Thailand: Literacy Rates among Males and Females, 1 96Q-2000
Source: National Statistical Office, Bangkok, National Census, various issues.
FIGURE 15
Thailand: Literacy by Region, 1960-2000
Source: National Statistical Office, Bangkok, National Census, various issues.
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country. For example, in the northeast, the
country’s poorest region, literacy rates at the
aggregate level increased over the corresponding
four decades from 75 per cent to 92 per cent. For
males, the increase was from 83 to 94 per cent,
and for females from 68 to 91 per cent.
VIA Access to Clean Drinking Water
Because water-borne diseases are a major health
problem in all poor countries, improved access to
clean drinking water is a necessary condition for
improved public health. Since 1981 data on this
aspect of public health has been available from the
Socio-economic Surveys conducted periodically
by the National Statistical Office. These data are
summarized in Figures 16 and 17. Increasingly,
Thai people have enjoyed access to privately
provided piped water, the proportion of the
population with such access increasing from 16
per cent in 1981 to 23 per cent in 2000. Two-thirds
of the Thai population still reside in rural areas
and access to clean water remains a problem
throughout rural Thailand.
One aspect of the data provided in Figure 17 is
especially notable. The proportion of the
population of Greater Bangkok with access to
piped water actually declined from 1981 to 2000.
The reason is that the population increase in
Greater Bangkok has been concentrated in outer,
peri-urban areas. The population of inner Bangkok
has actually declined. These outer areas of
Bangkok have received migrant populations from
rural areas and provision of basic public services
to these peri-urban areas remains poor. Only half
of the population of Greater Bangkok has access
to piped water.
VL5 HIV/AIDS
The Thai public health system was slow to
recognize the dangers of the worldwide HIV/
AIDS epidemic. Throughout most of the 1980s the
problem was denied. Concerted efforts began in
FIGURE 16
Thailand: Access to Piped Water, 1981-2000
Source: National Statistical Office, Report of the Household Socio-Economic Survey , Whole Kingdom (various
issues).
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FIGURE 17
Thailand: Access to Piped Water by Region, 1981-2000
Source: National Statistical Office, Report of the Household Socio-Economic Survey ; Whole Kingdom (various
issues).
the late 1980s with campaigns encouraging
condom use. Thai non-government organizations
(NGOs) were on the forefront of these efforts. The
efforts paid off. Today, Thailand is considered a
success story in the global fight against HTV/
AIDS. Figure 18 shows a significant reduction in
the number of new HIV infections reported,
beginning in 1996. From Figure 19, this reduced
infection rate resulted in a reduction in both the
total number of Thai people suffering from AIDS
and the number of AIDS-related deaths, beginning
in 1999. Thailand has demonstrated to the world
that concerted action to reduce HIV infection rates
can reduce the social costs of the HTV/AIDS
problem. Regrettably, it cannot eliminate these
costs.
VII. Thailand and the ASEAN Development
Divide
Thailand is a highly unequal economy, both within
and between the major economic regions of the
country. Moreover, the inequality within Thailand
has increased over recent decades. This fact has
contributed to some of Thailand’s most intractable
regional problems. For example, the continuing
conflict in the southern Muslim provinces of
Narathiwat, Pattani, and Yala has at least a partial
foundation in the pronounced and growing
impoverishment of these provinces (Warr 2005b),
compared with adjacent southern provinces. These
three Muslim provinces are markedly dis-
advantaged relative to the southern region as a
whole. This conflict has in turn produced cross-
border disagreements which have raised tensions
with Malaysia.
Inequality between Thailand and its northern
neighbours has been a source of international
tension as well. The affluence of Thailand
compared with Myanmar, Laos, and Cambodia has
led to inflows of low-skilled workers from those
countries, especially agricultural workers. In
normal times, these inflows have been overlooked.
This has been especially true during periods of
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FIGURE 18
Thailand: New HIV Infections Reported, 1984 to 2003
Source: Center of Epidemiological Information, Bureau of Epidemiology, Ministry of Public Health.
FIGURE 19
Thailand: Total AIDS Infections and Deaths Reported, 1984-2003
Source: Center of Epidemiological Information, Bureau of Epidemiology, Ministry of Public Health.
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rapid growth in Thailand, when rising wages have
led to shortages of rural labour. At such times,
Thailand’s immigration authorities have been
willing to overlook the illegal status of economic
migrants. But crackdowns occur from time to
time, and temporary migrants are often treated
badly, exacerbating resentment in their home
countries towards Thailand.
In short, inequalities within Thailand itself and
inequality between Thailand and its poorer,
northerly neighbours have been an impediment to
the ASEAN integration process. Unfortunately,
ASEAN as an institution has been able to make
only minor contributions towards resolving these
problems. But this is not to say that an enhanced
contribution of this kind cannot occur in the
future. By promoting continued economic
integration between Thailand and its neighbours,
ASEAN could improve the prospects for
achieving its stated goal of an Economic
Community by 2015.
But is this goal truly feasible? Establishing an
Economic Community implies three things. First,
erecting a common protective trade policy
barrier around the ASEAN countries, thereby
discriminating preferentially in favour of intra-
ASEAN trade relative to trade with outsiders. This
corresponds to the textbook case of a customs
union. Second, it also implies establishing full
mobility of capital and labour within the group.
This is the definition of a common market. Third,
an economic community (economic union)
implies establishment of a common currency and
therefore the surrender of independent exchange
rate and monetary policies.
There seems little prospect of even the first of
these three conditions being implemented. More
than half of all intra-ASEAN trade currently
involves Singapore, which has virtually no pro-
tective trade policy barriers. Unless Singapore
was willing to abandon its very high degree of
eco-nomic openness, which has been the
foundation of its prosperity, a common tariff
barrier would mean Singapore’s trade regime –
no protection at all. While this might well be
desirable, it is hardly likely that Thailand, the
Philippines, Indonesia, not to mention the new
ASEAN members – Lao PDR, Cambodia,
Vietnam and Myanmar – would agree.
Moreover, such an agreement would undermine
all of the bilateral and multilateral preferential
trading agreements involving the ASEAN
countries which are currently in place or under
consideration. The prospect of an ASEAN
Economic Community being established within
the foreseeable future therefore seems remote.
VIII. Conclusions: Thailand’s Economic
Prospects
The experience of Thailand over the past half-
century confirms the importance of sustained
economic growth, at least in poor countries, for
the achievement of basic social objectives of
poverty reduction, improved education, and public
health. Life expectancy, infant and maternal
mortality and literacy have all improved
dramatically. Absolute poverty incidence has
declined markedly, but inequality has increased.
Thailand’s recovery from the crisis of 1997-99 is
now complete, despite unexpected setbacks
including rural drought, Asian influenza, SARS,
political violence in the south, the tsunami of
26 December 2004, and political turmoil in 2006.
The government of Thaksin Shinawatra (2001-
2006) did much to restore economic confidence
but did little to reform or strengthen Thailand’s
key institutions, particularly those mandated by
the 1997 Constitution to provide checks and
balances on the operation of the central
government. Many observers claim that it did the
opposite, by undermining these institutions. Key
issues of reform remain to be addressed
adequately. The country’s archaic education
system must be the most important of these areas
needing reform, and the promotion of improved
competition within the domestic economy is
probably the second. The continuing problem of
high and rising levels of inequality within
Thailand remains to be addressed at a policy level
and its underlying causes are not properly
understood.
Thailand’s continuing macroeconomic problem
is the restoration of investor confidence, severely
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damaged by the crisis and its aftermath. Private
investment has declined as a share of GDP, and
getting it back to levels consistent with the
maintenance of high rates of growth has proven to
be surprisingly difficult. This applies to both
foreign and domestic investment, but because
domestic investment is so much larger,
encouraging it is the most crucial issue. Political
turmoil has not helped, including both the military
coup of September 2006 and the continued
security problems arising from insurrection in the
Muslim south. Restoration of the rates of
investment of the boom decade from 1987 to 1996
would not be a sensible target, but the current
level of private investment needs to be increased.
As the discussion in this paper has shown,
Thailand shares this problem with several other
crisis-affected ASEAN countries.
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- Contents
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- Issue Table of Contents
ASEAN Economic Bulletin, Vol. 24, No. 1 (April 2007) pp. 1-180
Front Matter
Bridging the ASEAN Developmental Divide: Challenges and Prospects [pp. 1-14]
Bridging the ASEAN Development Divide: A Regional Overview [pp. 15-34]
The ASEAN Developmental Divide and the Initiative for ASEAN Integration [pp. 35-44]
The Developmental Gap between the ASEAN Member Countries: The Perspective of Indonesia [pp. 45-71]
Prosper-Thy-Neighbour Policies: Malaysia’s Contributions after the Asian Financial Crisis [pp. 72-97]
Transitional Economy of Myanmar: Present Status, Developmental Divide, and Future Prospects [pp. 98-118]
Closer Trade and Financial Co-operation in ASEAN: Issues at the Regional and National Level with Focus on the Philippines [pp. 119-137]
Long-term Economic Performance in Thailand [pp. 138-163]
Approach to Development Gaps in ASEAN: A Vietnamese Perspective [pp. 164-180]
Back Matter
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