Keeping the economy on course for about 7 per cent annual growth will be a real challenge. The nature of global competition has changed with the entry of new and big players, like China and India into the international economy. Closer home, as ASEAN countries progress, they will increasingly compete against us for foreign investments, even as their development generates new opportunities for economic cooperation.

In Malaysia, economic growth has averaged 8.9 per cent per year in the last 8 years. Per capita incomes have grown by 6.3 per cent per year in real terms. Malaysians are proud of their country's achievements, and are galvanised by Vision 2020 to make Malaysia a developed country.

Malaysia has been systematically building up a diversified manufacturing base. In recent years it has attracted industrial projects that are as sophisticated as those coming to Singapore. They include high-end activities like disk drives and wafer fabrication, which Singapore is also pursuing. The productivity and quality at electronics factories in Penang are high.

In successive budgets, the Malaysian government has liberalised the economy by lowering or abolishing tariffs, and promoted more competition in both the manufacturing and services sectors. It has improved the business environment, and relied on sound policies, a conducive business climate, and skilled manpower to move up the technology ladder. It has introduced tax incentives similar to ours, like Operational Headquarters (OHQ) incentives for both manufacturing and services and pioneer status for wafer fabrication companies.

Singapore welcomes Malaysia's pro-growth economic policies, even though Malaysia's success will put pressure on Singapore. We will just have to push ahead, raise our skill and productivity levels, and continue to attract still higher quality investments here, if we are not to be displaced. This pressure to improve ourselves is positive and constructive. Malaysia's success is an opportunity, not a threat to Singapore. It opens up fresh possibilities for win-win economic cooperation, and much closer trade, investment and business linkages between our two countries. A more prosperous and self-confident region makes for a better environment for further growth, even as healthy competition pushes each country to achieve its best.

Domestically, our lack of domestic market, small size and ageing population can become handicaps. For Singapore to continue to attract manufacturing and services investments, we need to remain significantly more efficient than other countries. We must mobilise and maximize our resources to respond to the exciting changes in the business world.

For example, major semi-conductor companies are racing to build new capacity, to meet the severe worldwide shortage of semiconductors. EDB is working hard to attract some of these wafer fabs to Singapore. The Singapore port had another record year in terms of containers handled but faces keener competition as regional ports gear up for a slice of the transhipment business. In financial services, new forms of service delivery like automated teller machines, Internet banking and electronic cash cards are being introduced. Several cities in the region are gearing up to become financial centres, and rival Singapore.

Singapore must respond to and take advantage of these business changes. We need to strike a judicious balance between long-term strategic considerations and tactical moves in the short- to medium-term. This will help us to set our sights on a steady growth path while accepting temporary deviations from trend.

The Government's basic philosophy is to keep the supply-side fundamentals sound and ride on opportunities as they arise, in order to strengthen our long term competitiveness. We must improve our own performance in an expanding market, instead of hoping that our competitors or potential competitors will fail. Much as some sections of the business community would like us to, we cannot artificially depress cost levels or resort to protectionist measures to gain an advantage over the competition. These palliatives are detrimental to economic efficiency. They will slow down growth and cause us to misallocate and waste resources. This will benefit nobody in the long term. This is what economists mean when they speak of distortions to supply and demand.

One important way to avoid distortions is to price factors of production correctly. The prices of key inputs to the economy, such as land, labour, electricity, fuel, and telecommunication services must reflect their scarcity and the cost of producing them. For example, the cost of electricity includes the cost of the fuel oil or natural gas consumed, the manpower costs of Singapore Power staff, the rental or depreciation of the equipment used as well as the land occupied by the power stations and grid. In addition, the cost also includes the cost of the capital in the form of loans and equity which finances Singapore Power's business. In the case of loans, this cost is the interest on the borrowings. In the case of equity, this cost is a competitive rate of return on the equity.

Pricing factors of production too high places a burden on the rest of the economy, and damages economic growth. But pricing them too low - i.e. below the cost of producing them, including the cost of capital - is also harmful, as it encourages over-consumption of these resources. When consumers and firms do not see or bear the true cost of these factors, they will use these factors even when they are worth less to them than what they really cost. As a result, instead of adding value, they will be subtracting value.

It is painful to have to raise prices of important factors of production like electricity, because this affects almost all households and firms. Yet these are precisely the resources where mis-pricing does the greatest harm.

The former Soviet Union and the Communist countries of Eastern Europe, provide a dramatic if extreme example of the harm caused by mis-pricing key factors of production. These centrally-planned economies deliberately under-priced factors of production like oil, coal, electricity and steel, and then allocated them to favoured industries and consumers by central command, instead of by using market forces. They believed that oil, electricity, etc. were "strategic" sectors of the economy, and that pricing these resources cheaply would reduce costs for the targeted consumers of these resources, and help them to grow faster.

Unfortunately, the results massively disappointed these hopes. Far from low factor prices boosting the economy, they distorted structures of production so badly that sometimes the real value of the output was even less than the value of the material inputs. The Economist described it as: "Valuable metal, plastic, cardboard, rubber, energy go in at one end; Trabant cars worth less than the sum of these parts emerge at the other". Eventually the whole system collapsed. The former Easter European countries have, to varying degress, carried out economic reforms. The adjustment to a market economy has been a very painful process for them, particularly in Russia, where it has casued major social and political upheaval. They have all had to recognise explicitly what has always been the case, thaunder-pricing energy and other inputs have a market price and an opportunity cost, and this true cost was much higher than the nominal price the central planners had set.

Singapore is far from the predicament of the former Communist economies. But it is the same logic which forces us to recognise that Singapore Power's electricity tariffs are too low, and that we must raise them gradually over several years, to enable SP to earn an adequate return on its capital.

Because we make these adjustments promptly when they become necessary, we need to make only small changes each time, and the process need not be a traumatic one. This is the real reason for raising SP's tariffs. It is not to raise more money for the Government, or to enable the Government to float SP on the stock exchange.

Many Singaporeans ask: why does the Government need to raise SP's tariffs and other government charges, when it runs comfortable budget surpluses? The answer is that when the Government runs surpluses, it will share the fruits of growth with Singaporeans. But it must do so in ways which help Singaporeans build up their assets and strengthen their stakes in Singapore, and not ways which hinder the working of our economy, and damage the growth on which our future depends.

The amounts which the Government has given back to the people, in the form of HDB housing subsidies, rebates on service and conservancy charges and HDB flat rentals, SOTUS share top-up schemes, and discounted Singapore Telecom shares, are much larger than the additional revenue which SP will earn from the higher tariffs. Later I shall be announcing a scheme of rebates to PUB bills for lower income HDB households. The amounts per household from this new rebate alone will also exceed by many times the projected increase in their electricity bills. This proves the point that the purpose of the SP tariff revision is not to enable the Government to collect more money, but to get an important factor of production, namely electricity, priced correctly, so that our economy will function properly and grow, tbenefit all Singaporeans.

Let me now turn to the other supply-side fundamentals. These are:

1. keeping the business environment clean and efficient,

2. maintaining prudent and stable macroeconomic policies, and

3. improving human resources.

Fortune magazine has ranked Singapore the Number One city to do business in. This is not because Singapore has the lowest cost, but because Singapore is an easy place to do business in. Singapore may be more expensive in terms of upfront costs, but there are no hidden extras. This is no accident but a matter of design. There should be no slackening of standards of integrity and efficiency in Singapore even as we adapt our practices to suit the different markets in which we invest. Singapore is welcomed as an investor in the region partly because of the way we do business and our reputation. This "brand name" distinguishes us from other investors and should not be tarnished.

A prudent and stable macroeconomic environment creates the best conditions to sustain investor confidence. Consistently low inflation, a strong currency, sound public finances with low taxes, and a triple-A credit rating reduces to a minimum the risk of investing in Singapore. The Government's conservative fiscal policy has enabled us to build infrastructure and pay for essential public services like education and basic health care while setting aside savings for future needs. Later, I will discuss in greater detail how fiscal policy can be further refined to maintain competitiveness.

As Singapore faces keener international competition, the quality of our human resource becomes a critical competitive advantage. So far, investors have been prepared to pay a premium because they recognise the quality of our workers, and because our overall business environment enables them to make the most of their workers here. But this edge is a finite one, and we cannot take it for granted. We need to educate and train each Singaporean to his maximum potential in economically relevant areas. We also need to press on with the flexible wage system, and avoid ossifying cost levels and structures as the labour force ages.

In the developed countries, especially in Europe, wage costs are inflated by social security taxes and other non-wage payments, as well as shorter working hours and longer paid holidays. For every $1 of wage cost to employers, 25 to 30 cents go towards taxes and levies in these countries. In Singapore, the proportion is only 16 per cent, due mainly to employers' contributions to the Central Provident Fund (CPF).

There is a fundamental difference between the CPF and social security taxes in other countries. Our CPF contributions, though compulsory, are not put in a common pool to be re-distributed to others. CPF savings belong to individual members who can use them for their retirement needs and to buy a home or invest in a wide range of instruments like education, shares, gold and property. Furthermore, the level of discretionary savings is high. Even with $66 billion worth of savings in the CPF, Singaporeans have $20 billion worth of deposits with the POSB and another $72 billion with commercial banks.

The emphasis on fundamentals is sound, as they, unlike short-term cost advantages, are harder to replicate. Getting the fundamentals right is a matter of building sound institutions, investing for the long-term, and continuously building on and improving our systems. There are no short-cuts and no compromises. Meticulous attention to detail ensures the success of our plans. Fortunately for us, these competitive advantages also take some time to be eroded.

For example, China has an enormous number of highly talented workers, professionals and government administrators. But China will take many years to build up the institutions, the management systems, the legal framework, and the respect for transparent, impartial rules, all of which are necessary before talented individuals can work together to realise their full potential running outstanding organisations. China realises this, and is working hard to master this "software". The Suzhou Industrial Park project is only one of the ways China is trying to pick up ideas from other countries, adapt them to local conditions, and then apply them in more areas.

At the same time, we are mindful that the world around us is changing. What works for one industry today may not work for another industry tomorrow. We must never mistake a sea change for "noise" and fail to respond. We need to keep our ears close to the ground, keep in close touch with our customers and find out what they want. We then adjust our policies to ride on opportunities as they arise.

The Government has always taken a developmental approach. It will customise advantages to suit the needs of different investors, especially those who can make a significant contribution to Singapore's economic development. We have used tax incentives like pioneer status extensively over the years. But increasingly, other countries, better endowed than us, are offering similar or even better incentives to ride the global electronics boom, while investors are looking for more partnerships to share the high costs of product and market development. So we have adapted our tactics, e.g. by co-investing with investors in strategic projects or by setting aside enough land for key projects.

When there is an upsurge in demand, the Government has made supply-side adjustments, like relaxing controls on foreign workers, so that companies' operations are not hampered. We are also consciously streamlining paperwork and red tape in order to cut down response time to investors.