For the next few years, we can achieve a growth rate of around 5% to 6% provided we keep our competitiveness on an even keel and the world economic situation remains stable. In the longer term, however, high growth rates require new policy orientations to overcome the supply-side constraints of labour, land and services within Singapore. Emerging NIEs in the region are better endowed with land, labour and natural resources. They are becoming more competitive. Singapore must find the right response, to avoid becoming a failed NIE, namely, one which did not fulfil its early promise and failed to make it to become a developed country. In the race of nations, it is impossible for us to stand still and try to preserve what we have. Efforts to improve productivity and restructure the domestic economy to squeeze more out of each unit of resource will face diminishing returns, as we are already starting from a relatively high base. This has happened in all developed economies. The way out is to build an external dimension to our economy, in order to help us to overcome the problems of a small mature domestic market and a limited resource base. This is what the other NIEs have done in the past 5 years and what some developed countries like Switzerland and Japan have done over a much longer period. Many new business opportunities are to be found in the high growth countries around us. Foreign MNCs which come to Singapore have not done so with the primary aim to sell to the domestic market. They have always depended on markets in the developed countries and, increasingly in recent years, the fast-growing Asia-Pacific region. Singapore entrepreneurs must do likewise. The potential of the Asian market is vast, but sometimes underestimated. China and India both have official per capita GNP of less than US$400, but they have pockets of an emerging middle class in urban areas. It is reckoned that at least 5 Chinese cities - Shenzhen, Guangzhou, Shanghai, Beijing and Tianjin - have per capita incomes above US$1,000. This places them on par with countries like Thailand. In India, the middle class is estimated to number between 100 and 350 million. This is up to 100 times the size of the Singapore market. The emerging middle class is demanding consumer durables like TV sets, refrigerators, motor-cycles and eventually cars. Moreover, the Asian region is expected to grow faster than the more established markets in the OECD countries where growth will be no more than 2% to 3%. The size of the Asian market and its growth potential represent a source of business opportunities for Singapore entrepreneurs, which we cannot afford to neglect. Some Singapore entrepreneurs have already ventured abroad to do business in the region. As at end-1990, Singapore companies had invested a total of $27.8 billion overseas. Direct investments amounted to $7.5 billion which is equivalent to 12% of GNP. This is lower than Switzerland's and the Netherlands'. They have the equivalent of one-third of their GNP in direct investments overseas. Over time, as Singapore entrepreneurs gain experience, our overseas assets will also grow. In a recent study, the Ministry of Trade and Industry found that two-thirds of our direct investments overseas were in Asia and Australasia. Malaysia was the largest single destination, with $1.7 billion invested. In the last few years, we have become the largest foreign investor in Johor in terms of the number of projects. We have also participated in large projects in Batam and Bintan. Since the economic reforms in China, Singapore companies have also established a presence there. Singapore companies are involved in a wide variety of businesses in China - property development, industrial estate development, leisure and resort development, manufacture of computer peripherals and parts, software development and confectionery. In Vietnam and Cambodia, Singapore companies have invested in the food and beverage, textile and furniture industries. Statutory boards and Government-linked companies are well-represented in infrastructure projects in the region - industrial estate development, airport planning and design, and telecommunications. To be realistic, the external economy will not supplant the domestic economy as the main engine of growth. Even in Switzerland and the Netherlands, income earned from overseas assets accounts for only 8% to 9% of GNP. The external economy is however valuable because of its ability to improve the economic structure in two ways. First, it generates business and economies of scale for companies operating in Singapore, making the domestic economy more productive. Second, it strengthens our links with other rapidly growing countries in the region, so that we will not be so heavily dependent on the developed countries for growth and markets. Regionalisation is not just a matter of sheer numbers. It requires that we find the right projects and the right firms with the ability to turn a promising idea into a profitable business. Since the subject was highlighted, many Singaporean entrepreneurs have contributed their ideas on the subject. They have among them accumulated valuable experience in working and investing in the region. Such people are still far too few, however, compared to opportunities waiting to be seized. If we can overcome the hindrances that hold others back, more entrepreneurs will in time emerge. The difficulties of getting Singaporeans to work abroad have been discussed extensively elsewhere and I will not repeat them here. We must be realistic about our weaknesses and find ways to overcome them. We must also build on our strengths. Our main strength is in organisations with proven professionalism and collective competence, not an abundance of individual mavericks with the touch of gold. Companies like SIA, Keppel, Sembawang, and Singapore Telecom, and statutory boards like PSA and PUB, have created strong management teams, with a depth and breadth of expertise equal to their competitors in the region. Some of them are starting to make their presence as corporations felt outside Singapore. We must leverage on this strength to go offshore, not only as individuals, but systematically in corporate teams. Government-linked companies (GLCs) and statutory boards are among our strong companies. We should tap their expertise to spearhead the regionalisation drive. Some concerns have been expressed that statutory boards and GLCs are not ready for this role because their priority is their domestic mission, or worse, because they are not business-minded. I believe that once the broad direction is set and the proper incentives are put in place, they will give more emphasis to their overseas operations. For example, STI, the international arm of Singapore Telecom, has invested US$150 million in 11 countries. It is involved in mobile phone ventures in Vietnam, India, Sri Lanka and Pakistan. Keppel, Sembawang and the companies in the Singapore Technologies stable have also participated successfully in regional ventures. These examples give us confidence that these companies can do much more. The question is how can they link up with the private sector, which is also doing regional business on its own. The Government will find ways for statutory boards and GLCs to work with private companies in overseas ventures. This could take the form of consortiums or joint ventures where both parties take the risks and share the rewards. Commodore Teo Chee Hean's Committee to Promote Enterprise Overseas will be examining this and many other related issues over the next few months. The private sector has proposed changes in tax incentives and tax rules to facilitate the drive to go offshore. The Government will take up some of these proposals in this Budget. I shall elaborate on these later in my speech. Whilst there is merit in building into our tax regime incentives for specific offshore activities, the more comprehensive approach is to lower direct taxes, both corporate and personal income taxes, across the board. This will encourage enterprise, both within and outside Singapore, and in whatever activities that businessmen choose. Individuals will be encouraged to take part in risky but highly profitable ventures, knowing that if they dare and succeed, Government will not cream off a large share of their rewards. This is why the Government will reform the tax structure to reduce corporate and personal income taxes, and introduce a Goods and Services Tax (GST) next year. The Government is sometimes accused of levying increasingly heavy taxes on Singaporeans. Figures, however, disprove this. Since 1988, Government operating revenue, which includes Government taxes, ARF, COEs and foreign worker levy, have formed about 20% of GDP. This compares with about 22% of GDP before the 1985 recession. The figure for 1992 was slightly higher, at around 23% of GDP, but this still gives no reason for alarm that taxes and levies are consuming an unprecedented and unsustainable share of national income. (See Chart 4 (Cols. 583 - 584)) Chart 4 - Government Operating Revenue As A Proportion of GDP (Cols. 583 - 584) Our figure of taxes making up 23% of GDP is comparable to that in other Asean countries and NIEs, and significantly below the 40% to 60% in OECD countries. (See Table 1 (Cols. 585 - 586)) The gap between us and the developed countries gives us a competitive advantage and helps us to attract investments. Table 1 - Government Revenue As Proportion of GDP (Cols. 585 - 586) The only Government with a significantly lower operating revenue than Singapore is Hong Kong. In Hong Kong, operating revenue forms 15% of GDP, compared to Singapore's 20%. However, there are fundamental differences between Hong Kong's circumstances and ours. Hong Kong is not a nation. Singapore is. Hong Kong does not have to provide for defence, which alone consumes 5% of our GDP each year. Nor does it have a heavily subsidised public housing programme, which is a major component of the Singapore Government's social policy. This is why Hong Kong's corporate tax and top personal tax rates can be much lower than Singapore's. It is impossible for Singapore to emulate Hong Kong's example. Although the overall tax burden on Singaporeans is not high, our revenue structure needs to be improved. Over half of our operating revenue is from direct taxes, while the bulk of indirect taxes fall on only a few items. We need to shift the burden of tax from direct taxes to indirect taxes with a broad base. Hence the introduction of the GST. This major change in our tax system is in line with tax reforms in other parts of the world. In the 1960s and 1970s, countries like the UK and New Zealand relied heavily on direct taxes to fund Government expenditure, including generous welfare programmes. Top marginal tax rates were as high as 75% in the UK, 70% in the US and 50% in New Zealand. This "soak the rich" approach did not work. In practice, high nominal tax rates were tempered with various loopholes that allowed the rich to avoid taxes. The result was that few really paid taxes at the very high rates, while unproductive work was expended on tax avoidance and lobbying to enhance or maintain special concessions. Talented people who could not dodge taxes voted with their feet by moving to lower tax countries. These countries have since reformed their tax systems and reduced income tax rates. Usually the result has been higher, rather than lower tax collections from the high income groups. We should never forget these costly experiences of other countries, and unwittingly diminish the incentive to work and to invest. It is far better to encourage the talented by taxing them lightly than to tax them punitively and force them to under perform, evade taxes or leave. Recent international developments give greater urgency to tax reform. Our last major revision of direct tax rates was in 1986, during the recession, when both the corporate tax rate and the top personal tax rate were reduced from 40% to 33%. This, and other cost-cutting measures, gave a significant boost to our competitiveness and helped the economy to recover speedily. However, since then many other countries (including the developed countries) have reduced their tax rates significantly. (See Table 2 (Cols. 587 - 588)) This trend has eroded the margin we enjoy. Although we cannot match every country's tax rate reductions, we must take cognizance of such developments and make the necessary adjustments in good time. We must also note that Singapore has comparative disadvantages in higher land and labour costs compared with many emerging economies in the region. A lower corporate tax rate will help to offset this disadvantage. Table 2 - Top Personal Tax Rates (Cols. 587 - 588) In the long term, Government aims for a 25% corporate tax rate and a slightly higher top personal tax rate. Given sustained economic growth, we can achieve this with the 3% GST, without needing to raise the GST rate further. The GST rate will stay at 3% for at least 5 years and thereafter for as long as revenue needs are not pressing. The re-orientation of our economic development strategy and the change in the tax system will take time to work through. I am confident that the private sector will respond favourably to the steps outlined. Those who succeed will encourage others to emulate them. Momentum will build up. The results will no longer be constrained by Singapore's size but by the ingenuity of individual and corporate Singaporeans. In time a second pillar of the Singapore economy, comprising strong local companies and their foreign operations, will become a major contributor to our national wealth. At the same time, we will continue with our efforts to be attractive to foreign MNCs, who will always remain important to us. We will continue to welcome foreign capital and encourage R&D. There will be no let-up in the development of human resources and physical infrastructure. When we develop this external dimension, Singapore's economy will have the prospect of many more years of prosperous growth.