The external environment has improved. The successful conclusion of the Uruguay Round of trade talks has given a clear signal that most trading nations are committed to the continued liberalisation of world trade. Among the developed economies, the USA, which is Singapore's largest export market, is expected to continue on a path of sustained recovery. Germany and Japan are now in recession but are expected to recover gradually during 1994. This should have a positive impact on the rest of continental Europe and Asia. In Asia, growth is expected to continue at a brisk pace as domestic consumption and investment boost demand. Singapore will benefit from the improved economic prospects in the world because we are competitive, and continued investments in infrastructural development, education and skills upgrading will help us to maintain our competitive edge. Our local entrepreneurs have continued to seek out opportunities in the region. The Government has also put in place major programmes like the regionalisation drive, the Goods and Services Tax (GST), the health care cost containment measures, and improvements to our education system to build the foundation of our future well being and success. The Ministry of Trade and Industry has forecast 1994 growth to be in the range of 6-8%. In view of the continued good growth of the economy, the Government will proceed as announced in the last Budget to make the final 1.5 percentage point adjustments to CPF contribution rates. From 1 July 1994, the employers' CPF contribution rate will be increased from 18.5% to 20% while the employees' rate will be reduced from 21.5% to 20%. Employers and employees should take this adjustment into account in their wage negotiations. I will now turn to longer-term issues in economic management. Preparing for the future Singapore has sustained rapid economic growth over the last 20 years. Singaporeans today enjoy high incomes, a good standard of living and an excellent health care system. Good education and our system of meritocracy allow Singaporeans to start from the same starting line and succeed on the basis of ability and hard work. We achieved rapid economic development not solely through good luck. Otherwise many more countries would similarly have succeeded. It was the result of the deliberate efforts of the Government, strongly supported by Singaporeans. The Government was able to garner the support of the people to pursue tough policies that helped economic development. And Singaporeans had the tenacity to try out unconventional solutions to daunting problems. We succeeded against the odds. But it was also fortuitous that a generally benign world economic environment, with strong US leadership and a liberalising trade regime, gave developing countries like Singapore a chance to grow out of poverty. Today, we are at a turning point. We have become a Newly Industrialised Economy (NIE), and are on the threshold of the First League of nations. Our per capita GDP has overtaken some OECD countries. But Singaporeans must not be lulled into thinking that we have arrived, and start relaxing and taking progress and prosperity for granted. We have some way to go before entering into the First League of nations. Manpower is Singapore's only resource. Our educational profile has improved greatly, but it is still far below that of the developed countries and even the NIEs. Among the NIEs, we have the lowest educated workforce. Only about 54% of our labour force have attained at least a secondary school education, compared to over 70% in Hong Kong, Taiwan and South Korea. And only about 25% of our labour force have at least a post-secondary education, compared to about 50% in Taiwan and South Korea. In the developed countries, about 75% of the workforce in Japan and Switzerland have at least a post-secondary education, and 87% in the USA. Our economic structure is also very much that of a developing country. We depend heavily on foreign technology. Our R&D expenditure as a percentage of GDP is about 60% of Taiwan's and South Korea's, and only 40% of the developed countries. Very few of our companies rank as world-class corporations. The great challenge facing Singapore is how do we collectively manage the leap into the ranks of the First League. The path will be uphill, as we face tougher competition for investments and in the market place from other developing countries and NIEs. In the next phase, the role of Government will be no less important than that during our take-off stage. I shall now review the role of Government in economic management in Singapore, and examine its relevance in our current stage of development. Role of Government in economic management That governments have a role to play in the economic affairs of a nation is not disputed. Even Adam Smith, the advocate of the "invisible hand", envisaged a minimum level of state provision. Economic history in the last 80-90 years has defined two models for economies - central planning and the free market system. The former has proved to be a dismal failure. However, the question of the proper role of government is not settled as even in so-called market economies, the role of government varies considerably. A market economy encourages competition and the efficient use of available resources. But, carried to the extreme, market solutions are harsh on the less able who become the poor and low income earners. On the other hand, heavy government intervention and subsidies entail high taxes, which discourage hard work and enterprise. In the face of sluggish growth and high unemployment, many Western countries have been critically re-assessing the role of government, especially in the provision of welfare benefits. Everywhere in the OECD, governments are trying to reduce welfare benefits to improve the incentive for work, reconfigure the education system towards skills relevant to the economy, and reduce the tax burden on the productive sectors. This re-assessment is now more urgent as these mature economies face strong competition from younger economies in East Asia. The East Asian countries have been the subject of a serious two-year study by the World Bank, in an attempt to discover lessons that can be applied to other countries. The results are summarised in a report entitled "The East Asian Miracle: Economic Growth and Public Policy". The emphasis on public policy is noteworthy. It suggests a positive role for government, if it can be applied in those areas that support private initiative. For example, while heavy investments in basic education up to secondary level are highly productive, generous welfare provisions are not. In particular, the World Bank has identified two elements in the role of government. The first is in "getting the fundamentals right". This means high levels of domestic savings, broadly based human capital, good macro-economic management, and limited price distortions. Rapid productivity growth was helped by liberal policy on the acquisition of technology either through openness to direct foreign investment or licensing. Public investment complemented private investment while education policies stressed universal primary schooling and improvements in quality at primary and secondary levels. The second element is in careful policy interventions that had strict limits on their cost and caused minimal distortions to the economy. The developed countries have come to a similar conclusion. The OECD undertook a study into the problem of high unemployment in 1992. It concluded that high unemployment results from a combination of weak macro-economic policy, weak human resource development policies, rigid labour markets and technological change. Its advice is for governments to focus on three areas: providing a stable macro-economic environment; ensuring flexibility in the labour market through education, training, re-training, enterprise promotion and flexible wage-setting process; and a better-designed system to maintain a degree of social solidarity in the face of high unemployment. After painful experiments in central planning and painstaking studies, the role of government in economic management is now more clearly understood. The government's role is to provide a conducive environment for private initiative while intervening directly only in areas where there is market failure. These are precisely the areas where the Singapore Government has focused its energies. Singapore Government's role Singapore's philosophy of economic management is that the Government's role is not to supplant the private sector but to help its development, so as to provide Singaporeans with a good life. With this guiding principle in mind, Government's intervention has been, and will continue to be, in four main areas. These are: a) providing a conducive environment for economic growth and social stability; b) maximising the employment potential of Singaporeans through a practical and rigorous education system; c) upgrading economic structure through selective direct investments in strategic projects; d) ensuring Singaporeans have relevant skills by providing up-to-date training and skills upgrading programmes. Economic growth and social stability This is a natural area for Government involvement, because there are substantial factors, both internal and external, that individuals and the private sector cannot on their own control or take into account of. Examples include maintaining a stable macro-economic environment with a strong currency, low inflation and high savings; the planning and development of infrastructure; the provision of education and training facilities, public housing and public health care. While governments do not create wealth, they can create the conducive environment necessary for economic growth. The Government cannot adopt a totally laissez-faire approach, and blindly hope that market forces will make everything work out in the end. For example, we embarked on the design and building of the MRT system long before traffic congestion in the city became serious. Similarly, the Government built Changi Airport, and subsequently Changi Terminal Two in anticipation of significantly increased air passenger traffic. These were high risk decisions that commercial banks would have balked at financing. Had the Government not taken the lead, the private sector would never have built an MRT or a Changi Airport, and Singapore would have been worse off. We must continue to plan well into the future to keep our infrastructural development ahead of demand. At the same time we must further streamline administrative procedures and reduce the Government involvement in areas where it is no longer necessary. The Government is also responsible for ensuring social stability, especially given our potentially volatile multi-racial and multi-religious mix. For example, left to natural forces, people will find it more comfortable to gravitate towards the like-minded. But the cumulative result of many such individual choices will be racial and religious enclaves, a sure formula for social strife as we have seen in other parts of the world. We must continue to ensure that our housing estates are racially and socially well integrated, and strengthen social tolerance and harmony. The Government will continue to uphold our system of meritocracy. It has enabled Singaporeans to enjoy high social mobility. Those who are capable and prepared to work hard can move ahead regardless of their social background. This reduces social tensions and benefits everyone, able and less able alike. The Government must also intervene to provide the necessary social infrastructure. Left to market forces alone, most Singaporeans will not have decent housing and many will not have adequate access to medical services. The Government will therefore continue to provide the necessary social infrastructure for lower income earners, and adequate subsidies for essential health, education, and housing. Education We must maximise the potential of every Singaporean. The Government has an indispensable role in keeping the education system, and the knowledge and skills that it imparts to students, relevant to the needs of the economy. Those entering the workforce must possess the knowledge and skills to make them employable, and give them and their employers a competitive edge over their foreign competitors. With our limited manpower resources, it is vital that we minimise wastage of precious human talent. We must continually find ways to improve our education system, and reduce drop-out rates. The Government will continue to plan and anticipate demand for the different types of post-secondary school manpower required to support our economy, so that universities, polytechnics and the ITEs can provide the relevant types of courses and intake capacity. We will publicise the demand and career prospects for the various professions, and encourage school leavers to apply for the available courses. While the choice of courses ultimately depends on individual applicants, we cannot passively accept these individual choices as the final word, and admit everyone into the course of their choice, regardless of employment prospects. We must guide and channel students towards more promising areas and disciplines. Where the supply of students exceeds the number of places we need, we have to ration these places, according to merit. Let me give an example. Manufacturing is a cornerstone of our economy. Our education system must produce sufficient numbers of computer scientists, engineers, technicians and skilled workers to support the manufacturing sector and to attract high technology companies to locate in Singapore. Many Singaporeans may find it interesting and rewarding to pursue a career in Medicine or Law. But, if too many of our best and brightest gravitate towards these disciplines, not enough will become engineers and computer scientists. The viability of our economy will therefore be at risk. Upgrading the economy The rapid economic development and growth of the regional economies will mean more competition for Singapore. They will be able to produce at a lower cost some of the products currently produced here. Our companies will need to continue upgrading into higher value added activities in order to remain competitive. But, because we are already at a higher base with higher cost levels, we need to be even more imaginative in finding competitive niches. Changes in technology and markets necessitate our taking a total approach to strengthening our competitiveness. Singapore must find niches for ourselves, either as a critical node in the global network or as the host of a key industry cluster. This involves building up mutually reinforcing sets of core capabilities that will help to reduce the cost of the finished product. The Government will play an active role in identifying, building up and selectively investing in such industry clusters. This is why the Government has set up the $1 billion Cluster Development Fund. The Fund will make strategic investments, together with private sector partners, to bring to Singapore projects which develop core capabilities within our industry clusters. This is similar to the catalytic role played by the Government in the earlier days of our economic development. In the 1960s, we needed to build a new economy that could absorb the large number of people entering the labour force. The Government started various new enterprises like Sembawang, Jurong and Keppel shipyards, DBS Bank, NATSTEEL, Neptune Orient Lines and Singapore Airlines. When necessary, the Government even took significant equity shares in private sector projects which involved higher risks than usual, but which were strategically vital because they brought in new jobs, new technology and access to markets. One good example is the petrochemical complex. Our initial equity investment of $520 million in 1977 paved the way for major investments by prominent international companies in this key sector. Total petrochemical investments amounted to $2.7 billion by the end of 1993, and 1993 output totalled $1.7 billion. The Government did not go into these activities to "crowd out" the private sector. It did so only when the private sector did not have the necessary expertise or capital, or when entrepreneurs found the risks of the ventures too high. The Government will continue to invest directly in strategic projects to promote the development of key sectors of industry, especially in manufacturing. The Cluster Development Fund will enable us to invest in selective strategic projects in the coming years. This will help to spark off other complementary projects, and promote medium and long-term growth in the industry groups involved. Our local enterprises already play an important role as supporting industries to MNCs. The Cluster Development Fund will also be used to help the more promising ones develop their operations to keep pace with their customers, and to become MNCs in their own right. Furthermore, the Fund will be used to invest in the region, together with local and multi-national companies, to bring about spin-offs for our domestic industry clusters. Skills training and upgrading As we progress up the technological ladder, capital investment per worker will increase. We must therefore ensure that our workers possess the relevant technical and operational skills to work optimally and productively. Only then can employers compete effectively in the international market place, obtain a reasonable return on their investments, grow and create more employment opportunities for Singaporeans. Our economy will continue to restructure as competitors develop and become more competitive. Companies will need to continually upgrade their technology and product lines. Some may have to relocate to neighbouring countries because they are no longer viable here, and be replaced by new companies. In this whole process, workers will need to continually acquire new skills. Others will be displaced and need re-training to take up new jobs. The Government will work with the trade unions and employers to upgrade the skills of older workers, and re-train those who are displaced. The Skills Development Fund (SDF) will continue to play a key role in the skills training and upgrading of our workers. In FY92, the SDF disbursed more than $50 million in support of training programmes to upgrade workers' skills. This is much more than the $15 million collected through the Skills Development Levy that year. The Levy is based on an employer contribution rate of 1% of the pay of each employee whose monthly salary is $750 or below. Over the years, collections through the Skills Development Levy have been falling. This is because fewer people earn monthly salaries of less than $750 with each passing year. At the present SDF disbursement level, the Fund will eventually be depleted. As we step up the training, upgrading and re-training of the workforce in the coming years, SDF disbursements will also increase. The Government has therefore decided to revise the salary ceiling for Skills Development Levy collection from $750 to $1,000, with the levy rate remaining at 1%. This revision will take effect from FY95. We will need to further revise this salary ceiling over time to match the annual Skills Development Levy collection with actual disbursements. SDF can then have adequate funding to help our workforce into the 21st century. Evolution in the role of the Government But while Government needs to remain engaged in economic management, there are limits to its direct involvement. Greater Government role must translate into higher Government expenditure, and eventually, into higher taxes. This will reduce our ability to compete in world markets. In the developed countries, government expenditures vary from about 30% of GDP as in the case of the United States to over 60% of GDP in Sweden. As a result, these countries have had to impose high personal and corporate taxes. They have in the process eroded their national competitiveness. In Singapore, the Government has prudently kept Government expenditure low. Government expenditure in FY93 was below 17% of GDP. The Government has always budgeted for and achieved a modest surplus each year, in order to accumulate sufficient reserves to tide us over bad years, as well as prepare for the rapid ageing of the population. The low Government expenditure and the surplus have enabled the Government to reduce tax rates over the past years. Singaporeans today pay one of the lowest tax rates in the world. Total Government operating revenue in 1993, which includes income taxes, motor vehicle taxes and customs and excise duties, amounted to only 22% of GDP. This compares with 31% to 58% in the developed countries, and 25% in South Korea and Taiwan. At the individual level, married Singaporeans earning below $25,000 per year in fact pay no income taxes, while those earning $50,000 per year pay only 4% of their earnings in income tax. Contrary to popular perceptions, the vast majority of Singaporeans certainly do not pay high taxes. The actual areas in which the Government acts also cannot remain static. These must change with new circumstances. We will need to change the way some public services are managed, giving them greater operational autonomy, to make them more efficient and responsive to the needs of the public. For example in health care, the Government has restructured hospitals, allowing them greater autonomy in day-to-day operations while retaining Government oversight of the health care system. This has kept the hospitals efficient, kept costs low and ensured that basic health care costs remain affordable for all Singaporeans. Singaporeans now enjoy good service in restructured hospitals while those who cannot afford to pay the full cost of treatment can still enjoy varying amounts of subsidies. Even in tax administration, conventionally seen as a core area of Government responsibility, the Government has converted the Inland Revenue Department into a statutory board - the Inland Revenue Authority of Singapore. The improvement in the level of service and the attention paid to customer service are clear to the taxpayers. In this, Singapore is not alone. Several countries, for example, the UK and New Zealand, are also converting previously government functions into executive agencies with well-defined goals and service targets.