Challenges Facing Singapore's Economy (Part 3) - Implications of Rising Costs on Industrial Policy

As briefly explained in the Part 1 of this series posted on Dec 20 below, rising costs have an impact on industrial policy here as well. The implications of these rising costs are the viability of low-cost industries operating in Singapore. As other more cost-competitive countries, such as China and Vietnam, exist in this region, we have been forced to push the level of economic activity in Singapore up the value-chain and forcing lower value-added activities to lower cost countries. An analogy for this is like the Business Process Outsourcing (BPO) strategy that multinationals have adopted in decentralizing production processes. Most developed nations also adopted a similar strategy.

Advocates of this policy may argue that moving up the value chain is a positive development for the economy as we will benefit from greater technological and capital advancement. The point I feel that should be reevaluated is the rate at which this transition has occurred for Singapore. The Manufacturing Value-Added (MVA), which reflects the composition of a country’s higher value-added activities in its aggregate production, helps to put my point in perspective.

Source: United Nations Conference on Trade and Development Trade Development Report                                                                          

Looking at Singapore’s MVA in the table above, it can be seen that our share of medium and high value-added activities in the world has increased by 4.5 times in these 23 years. Singapore’s rate of transition is more than other developing countries over the same time period. Even China, which experienced an unprecedented level of industrialization and technological adoption over this time period, increased its MVA by only 2.5 times with the group of developed countries, which was 64.5 percent of the world’s share in 1980, and grown to 73.3 percent by 2003, had its MVA increased by only 1.1 times during this period. Hence we can derive that Singapore’s transition up the value chain has occurred too rapidly. In my next post, I will discuss why this quick transition up the value chain has been a problem for Singapore and may continue to do so.