Challenges Facing the Singapore Economy

Summary

Introduction and Summary

If the global economic recovery unfolds as expected, the Singapore economy should enjoy a reasonably good year in 2014 and beyond. The G3 economies to which Singapore remains highly geared are poised to recover in 2014 and build further momentum after that. Singapore's prospects are also boosted by the fact that it sits at the centre of a region that is enjoying a dramatic economic transformation. Even if China's growth slows a tad, its impact will remain powerful while the growth in India and ASEAN will add further vibrancy to Singapore's regional hub.

However, under the surface of this cyclical recovery are deeper challenges to which Singapore must adjust. Despite a supportive external environment, the easy phase of Singapore's rapid development is over. The key issue is that while Singapore's economy has certainly performed well, it has also had to face a number of structural issues in recent years:

1. • In the short to medium term, the impetus from the recovery in external demand will be offset by headwinds in the domestic economy arising out of necessary but potentially painful policy changes.

2. • Beyond this cyclical issue, an issue that has become a focus of policy concern is that of income inequality. Unlike in the past, where high economic growth filtered through to impressive gains in the living standards of the vast majority of Singaporeans, the translation of economic growth into broadly distributed welfare gains that the citizenry expects is proving harder to achieve.

3. • In addition, Singapore faces a number of challenges stemming from changing demographics. As the population ages and total fertility rates remain low, Singapore has to drive economic growth through productivity and innovation rather than adding more workers. But it is not clear if Singapore has enough of the pre-requisites to execute such a transition. Moreover, it is not clear that the existing arrangements for healthcare support and retirement funding are adequate to the task.

4. • Finally, Singapore's competitiveness is being challenged. Costs in Singapore have risen ahead of its competitors, directly undermining Singapore's competitiveness. More significantly, there are potential challenges for Singapore's status as one of Asia's pre-eminent regional hubs.

This chapter aims to set out these challenges and assess their likely impact on the Singapore economy. It will consider each of these challenges in turn before concluding with an assessment of their implications.