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The Singapore Economic Model Works

04 Feb 2009

Your Jan. 23 editorial, ''Singapore's Limits,'' argues that Singapore's export-led growth model is failing, and recommends boosting consumption by cutting taxes and allowing citizens to save and invest more of their own money.

Singapore's economic structure reflects the realities of a small country. It is diversified across manufacturing and services, but both are heavily exposed to global markets. As a city-state with a population of four million, businesses have far greater incentive to serve global markets than domestic consumption.

The government is not crowding out private consumption by being too big, or by excessive mandatory savings. Operating revenues, at 15% of GDP, are lower than in any developed economy. The vast majority of businesses and households enjoy effective tax rates that are the lowest in Asia. Government incentives aim to spur on broad activities that the market players assess worthwhile, but do not seek to pick individual winners.

Mandatory savings are higher than elsewhere because the Central Provident Fund (CPF) is a fully-funded, defined contribution pension scheme. The government has never funded its expenditures using CPF funds. CPF members are allowed to invest part of their savings independently, but most have not done better than leaving their money with the CPF, where they are assured of minimum returns of 3-4% per annum, risk free. This is surely not to be sniffed at given the impact of the financial crisis on 401(k)-type schemes in the United States and elsewhere, leaving older workers with significantly reduced retirement savings.

Personal consumption is 85% of personal income net of taxes, which is not low. Consumption is only 40% of GDP because foreign enterprises have a larger share of profits compared to many countries, itself a reflection of Singapore's openness to capital.

Singapore will constantly review and update its economic strategies, but we have not done too badly. The economy has grown by over 5% per year on average in the decade since the Asian crisis, well above any economy with broadly comparable income levels. Unemployment rates have also been amongst the lowest in the world. This hardly suggests that Singapore is a failed model.