03 Jan 2003

This time last year, we forecast that the economy would grow by between -2 and +2 percent in 2002. The US economy had slowed, the global electronics industry was in a slump, and the war against terrorism had just begun.

2002 has turned out slightly better than that initial forecast. Growth was 2.2 percent. Had conditions not softened in the second half of the year because of corporate scandals in the US and the possibility of war in the Middle East, growth would have been even higher.

Looking ahead, the external environment remains uncertain. War against Iraq seems likely. If war does break out, its impact on the world and on us will depend on whether it is quick or protracted, and on how the Muslim world reacts. Until these questions are answered, the global economy will remain uncertain.

Nevertheless, there is a reasonable chance that 2003 will be better than 2002. Although the EU and Japanese economies are slowing down, the US economy is expected to pick up. The global electronics industry is also likely to improve. Hence, MTI's preliminary 2003 forecast for the Singapore economy is 2 to 5 percent growth. However, there are downside risks, and most likely, we will have to wait till 2004 for a full recovery.

Even as we manage immediate problems, we must press ahead with the longer-term remaking of Singapore. We must build on our strengths, and remedy our weaknesses.

Our economy is fundamentally sound. Analysts rate Singapore's economic competitiveness highly. For example, this year, the World Economic Forum ranked Singapore the 4th most competitive economy in the world, the same as last year, while The Economist Intelligence Unit ranked our business environment the best in Asia.

Our workers are important contributors to Singapore's economic competitiveness. The Business Environment Risk Intelligence has consistently given our workers top marks for many years now. Investors place a high premium on our workers not only because of our skills, but also our positive work attitude. In the face of severe business pressures, Singaporeans accepted lower wage increases, and tightened their belts. Many who were retrenched took on lower-paying jobs, changed professions or went for retraining. They did not sink into despair and inaction. Our strong tripartite culture also contributed to keeping industrial relations harmonious.

Our expanding network of Free Trade Agreements (FTAs) adds to our competitiveness. Our FTA with Japan has just come into effect. Our FTA negotiations with the US have almost been completed. These and our other FTAs will save us hundreds of millions of dollars in tariffs, strengthen Singapore as a hub for manufacturing and services, and give us an advantage in developing creative and knowledge-intensive industries.

This is why despite the problems in Southeast Asia, Singapore continues to draw in high-value investments and the latest technology. Toshiba and Matsushita jointly opened a LCD (Liquid Crystal Display) plant here last year. This is one of the world's most advanced 4th generation LCD plants. ExxonMobil has set up a $3.5 billion chemical plant, its largest investment in Asia. These, and the $9 billion of new investment commitments in the manufacturing sector this year and the more than $2 billion commitments in the services sector, will create new jobs and help to upgrade our economy.

In turn, Singaporeans are investing in the region and developing new business opportunities. We are the 4th largest investor in Vietnam, 6th in China and 8th in India. We are also major investors in Malaysia and Indonesia. These regionalisation efforts and our FTAs have enlarged our economic space, and will create many openings for enterprising Singaporeans to do well.

But in a rapidly changing world, no country can remain strong or stay ahead of others forever, unless it adapts and re-adapts itself to changing conditions and new competitors. A country which fails to adapt itself will perish. This is the law of evolution, the survival of the fittest.

We therefore have to reposition Singapore to thrive in the new environment. The Economic Review Committee (ERC) is finalising its report, and the Remaking Singapore Committee is completing its consultation process. The ERC report will be ready for debate in Parliament in the upcoming Budget session.

Restructuring means change and dislocation. This will be difficult for many, and painful for some. For example, we have to increase the GST as we lower income taxes, in order to make up the loss of revenue. While lower income taxes will create more jobs by benefiting companies, higher GST will push up the cost of daily living. The increase is not large, but understandably, Singaporeans are concerned.

I am glad that most Singaporeans accept the need to increase the GST. To ease the transition, we are phasing in the increase over two years, and implementing a $4 billion GST offset package over the next five years. This package includes the Economic Restructuring Shares (ERS) and other rebates. On 1 January, we will be giving out the first of three tranches of ERS. In total, each Singaporean will receive between $600 and $1,400 worth of ERS.

Many more adjustments will become necessary as we continue to restructure the economy. We cannot put off essential changes without risking our long-term prosperity. But wherever possible, we will buffer their impact, particularly on lower-income households. On their part, Singaporeans must make the effort to adapt, as many are already doing. Since the Skills Redevelopment Programme was launched four years ago, more than 100,000 workers have attended training and retraining courses funded by the Government.

We have to address our higher cost structure compared to other countries in the region. For instance, our manufacturing workers are paid 13 times more than workers in China. Our workers are more productive, but the Chinese are catching up fast. Companies are feeling the pressure to shift their Singapore operations to China, to save costs.

We must make a concerted effort to lower our costs to attract investments and keep jobs in Singapore. Land and rental costs, taxes, fees and wages will have to be reviewed. We are also adjusting the CPF system to focus on essentials, as recommended by the ERC. To be sustainable over the long term, the CPF structure and contribution rates have to balance the need to save for old age with the need to keep the burden on employers as light as possible.

I am also concerned about structural unemployment. As we move further up the economic and technological ladder, our unemployment rates may stay high, in spite of steady economic growth. Already, there are fewer jobs for those without the skills demanded in a knowledge-based economy. Older workers are more affected because they have a lower level of education. We are working hard to tackle this problem.

We face tough times, but we have good reasons to be confident. Our people are well educated. We have built a vibrant economy. We have accumulated strong reserves over many years. We are well able to face the uncertainties and challenges.

In the early days of our independence, and in previous recessions, we showed the courage to take bitter medicine, the resolve to outlast the lean times, and the spirit to bounce back. I am confident that this time will be no different. However gloomy the current outlook, we can ride through this rough patch. The clouds will eventually part as we climb on and reach the sunny highlands.

I am encouraged to see that in adversity, Singaporeans open their hearts to the less fortunate.

Last year, they donated $380 million to charities, up from $325 million in 2000. And more people are volunteering their time. The volunteerism rate has gone up to 15 percent from 9 percent two years ago.

We are also strengthening our social cohesion and harmony, especially after September 11. Singaporeans understand the grave threat posed by Al Qaeda and Jemaah Islamiyah to our multi-racial society. They are reaching out to one another, building confidence and trust.

This spirit of community will see us through the difficulties ahead. Let us continue to work together as one people, and do our best to strengthen our society and economy.

I wish all of you a Happy New Year.

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