Never break Piggy Bank

SPEECH BY MR GOH CHOK TONG, SENIOR MINISTER, AT MARINE PARADE’S CHINESE NEW YEAR CELEBRATION LUNCH , 01 FEBRUARY 2009, 12:30 PM AT ROLAND RESTAURANT

1. First, let me wish everyone here good health, good fortune and a very happy new year. This Chinese New Year gathering is timely. It is like a big family reunion and it draws us closer together. Such bonding will help us overcome difficult times together.

2. By now, all of you know that the economic outlook for the world and Singapore this year is grim. There is no need for me to elaborate. All I want to say is that in dealing with our problems, the Minister for Finance and his officials are like a team of doctors. Before they can prescribe the right medicine to cure our economic ills, they must make the right diagnosis. Fortunately, they could draw on the collective experience of the Singapore Government. As you know, many members of the Cabinet have successfully dealt with several recessions before.

3. Let me recount briefly how the Government handled previous economic crises. I do so to show that while each one of them was different and required different solutions, there were also common approaches.

4. The first one was in 1964, soon after we joined Malaysia. I remember this well because I had just started work in the Economic Planning Unit. It was a severe recession and there was high unemployment. The older amongst you here may remember that Singapore was banking on the common market with Malaysia to grow our economy. That, however, did not materialise. To make matters worse, we had to deal with domestic political turbulence, communal tension and racial riots. Tense relations with the central government in Kuala Lumpur, and Konfrontasi by Soekarno compounded our problems. Singapore’s trade fell sharply, reaching the lowest level in a decade. After we left Malaysia in 1965, our Government decided that Singapore could not depend on the region as a hinterland. The solution was to leapfrog the region and make the world our market and hinterland. Against the conventional wisdom at the time, we attracted multi-national companies to set up factories here and we exported to the whole world. By implementing such an export-led industrialisation strategy, we grew strongly for the following two decades.

5. The next recession was in 1985. The seeds were sowed a few years before, in 1979, when we instituted a high-wage policy to compel employers to use labour more efficiently. I had just assumed office as Minister for Trade and Industry. We decided that it made no sense for Singapore to grow on the backs of low-skilled, lowly paid workers. We wanted to upgrade the skills of workers and move up the value chain so that our people could earn more. With a favourable external climate and full domestic employment then, it was timely to restructure our economy from labour-intensive industries to higher value-added production. So the National Wages Council recommended high wage increases and we upped the CPF contribution rate to 50%. The economy began to transform itself. The high-wage policy was meant to last only 3 years but we could not put a brake to it as the demand for labour remained high. Soon, our wage increases outstripped productivity increases. Wage costs became too high and our exports became uncompetitive. Growth fell to -1.4% in 1985.

6. Since wage costs were the main cause of the recession, we cut the employer CPF contribution rate by 15%. Taxes and fees were also cut to further reduce costs. But more than cost cutting, we also invested in our future. We upgraded our workforce through higher education and skills training. We introduced fiscal incentives to attract higher value-added industries. The measures worked. We arrested the recession and growth quickly resumed.

7. After another decade of strong growth came a succession of economic crises, beginning with the Asian Financial Crisis in 1997 and followed by the dot-com bust in 2001 and the SARS attack in 2003. The collapse of the Thai Baht in 1997 triggered steep devaluations in the Rupiah and the Korean Won and led to a crisis of confidence in the region. The East Asian miracle unravelled. Foreign investors and fund managers pulled out their investments from Asia. The Singapore dollar fell by some 15% and our stock market plunged by half. Several countries resorted to IMF help. With IMF intervention and tough governmental measures, confidence was eventually restored in the affected countries. Singapore did not need IMF or other external help because of our strong reserves, prudent budgets and sound economy. Nevertheless, we seized the opportunity to adjust our costs, liberalise our financial sector and reform the economy. Within a year, our growth resumed.

8. Then the internet bubble burst. The dot-com bust in 2000/2001 exposed our dependence on the electronics sector. This sector contributed close to two-thirds of Singapore’s non-oil domestic exports then. We responded by diversifying our manufacturing base from electronics to other high value-added sectors like petrochemicals and pharmaceuticals. We signed free trade agreements with our major trading partners. We also promoted entrepreneurship and promising local enterprises. We grew rapidly. Other than for one quarter in 2003 when SARS scared the hell out of us, our growth was uninterrupted until this year.

Key lessons of fighting economic crises

9. I recount our various economic crises to draw lessons in dealing with the current recession, the worst since 1964. Let me highlight three.

10. First, we must remain united and resilient in the face of crises. In past recessions, no matter how bitter the medicine, workers and employers swallowed them and worked hand-in-hand with the Government to tackle our common challenges. The whole population rallied together to pull the economy out of recession. Likewise, we must now confront our problems together, endure short-term pain, and plan for the long term. This year’s Budget has prescribed the right medicine but the pain will not go away immediately. The financial sector in the US and Europe is in deep trouble. The IMF has forecast zero growth for the world economy this year. The International Labour Organisation expects some 51 million jobs to be lost. Global demand for goods and services has shrunk. We can do very little to increase demand for our exports. But we can help companies cut costs and save jobs. Together, we can make the "Resilience Package" work. Companies should only retrench staff as a last resort and landlords should pass on the property tax rebates to their tenants. Banks, both local and foreign, should overcome their risk-aversion and continue to lend as in normal times. Otherwise the credit crunch will choke many sound businesses and stifle new enterprises.

11. Second, we will help you cope with the bad times. We will extend a special helping hand to those amongst us who are most affected by the slump, and cushion the impact on the most vulnerable. This is not to be done by the Government alone but also by the family and the community. Family members who are better off should help out other members of the extended family who may need help. Similarly, each community, like our Marine Parade community, should reach out to the needy and those badly hit by the downturn. But we must do this in a way that does not entrench a crutch mentality or erode our ethos of hard work and sacrifice.

12. Third, do not be demoralized by the current recession but look beyond it. The global recession will end and we will bounce back. So invest in our future. Upgrade our knowledge and skills and remake ourselves to ride the upswing which will surely come. You will notice that we are revamping our primary school education and pouring in billions of dollars into your education and training even though these do not directly help to solve our short-term economic problems. This is to build up our capabilities for the future.

A speed boat in open sea

13. But some of you may wonder: If our economy is fundamentally sound, why is Singapore so prone to recession? Why have we fallen into recession so many times in recent years? Why were we the first in the region to go into a recession last year? Why is our economic outlook so bleak this year when some other countries in our region are forecasting positive growth? The reason lies in the nature of our economy. We are not only a small economy but also an open one which is fully plugged into the global economic grid. Our total trade is 3 1/2 times our GDP, one of the highest in the world.

14. Let me use an imagery to illustrate the nature of our economy. Think of Singapore as a small speedboat out in open sea. There are also other ships out there like container ships, bulk carriers and supertankers. When the sky is clear and the sea is calm, we can easily outrun the larger ships and tankers. But when the winds rise and the waves are high, we have to slow down or seek shelter in the nearest harbour.

15. This is what we are doing now – hunkering down in the harbour. What is important is our attitude while in the harbour. We must not idle and wait for the storm to pass. Instead, we should use the time wisely to maintain our vessel, upgrade our engines, go for training, keep ourselves fit, and conduct drills to prepare for the next race.

16. This is precisely what the "Resilience Package" seeks to do - saving jobs, building new infrastructure like a national high speed broadband network, re-training our workers through SPUR and investing in R&D and education.

Not breaking the piggy bank

17. In tackling this recession, we have taken the unprecedented step of seeking the President’s approval to use a small portion of past reserves. A former Ambassador to Singapore, knowing how carefully we protected our reserves, teased me recently that we were finally "breaking the piggy bank!" I promptly corrected him. To break the piggy bank is to allow all the notes and coins to spill out, with no controls over how much is spent. We are not doing that. Our reserves must continue to be protected. In this instance, before approaching the President, the Minister for Finance had first to convince the Prime Minister. They then had to convince the Cabinet. After that, the Government had to convince the President to use his second key to unlock the safe. Not only that. The Government had also to convince the Council of Presidential Advisers. So you can see that the procedure is stringent and many minds are brought to bear on the use of reserves before approval is given.

18. We must continue to exercise great discipline and not dip into our reserves at the first sign of difficulties. We should tap it only as a last resort and when there are compelling reasons. Hence, I am in favour of putting up three "No" signs even as we draw on our reserves in this recession. First, no use of the reserves to support social assistance programmes. As a general principle, the Government must continue to fund such programmes out of revenues raised in the current term of government, not past reserves. Second, no draw for permanent programmes. Permanent programmes like Workfare and ComCare, no matter how meritorious, should be funded by current revenues and reserves. Third, no draw except under dire circumstances when one-off extraordinary measures are required to ward off catastrophe or prevent irreparable damage to the economy.

19. When this economic recession is over, we must continue our policy of growing our reserves by living within our means and running a modest budget surplus. As the present situation shows, our reserves are the best insurance for our own and our children’s future. Use them wisely and sparingly. Never break the piggy bank.

Conclusion

20. Let me now conclude. While the outlook for this year may be uncertain, I am confident we have prescribed the right measures. The Year of the Ox may have coincided with the previous recessions of 1997 and 1985 but the Ox has shown its ability to survive them. It possesses traits such as dependability, hard work and endurance. These are the traits which have seen us through past recessions, and will be indispensable in this time of uncertainty. If we work together and support each other, we will emerge from this stronger than before. This was what happened in previous crises and this time will be no different. In 6 to 9 months’ time, we will know whether President Obama can turn the US economy around. When the US economy recovers, we will bounce right back.

21. And we will bounce back to a very different Singapore. In 3 to 5 years’ time, many development projects which we have started will be completed. Take a stroll along Marina Bay then. You will be astounded by the beauty of our new skyline, the new botanic gardens and the glittering lights at night. Or jog along the park connectors and the waterways. Or go to the old HDB estates which have been upgraded to look like new, with lifts stopping at every floor. It will be a revitalised, vibrant and beautiful Singapore which all of us have a hand in building.

22. I wish all of you good health and much cheer in the Year of the Ox.