1999 began on a sombre note, our economy having just contracted by 1.6% in the second half of 1998. With a highly uncertain outlook, we braced ourselves for a difficult year ahead. As it turned out, 1999 was a year of remarkable economic turnaround. After a modest 0.8% growth in the first quarter, the economy rebounded strongly for 3 consecutive quarters, recording a high of 7.1% growth in the last quarter. For the whole year, we enjoyed a respectable 5.4% growth. The Asian economic crisis is largely behind us. Singapore's V-shaped recovery benefited first from the strong upturn in global electronics. In particular, global semiconductor sales rebounded by a robust 17% in 1999, after having contracted 8.4% a year ago. This surge in external electronics demand provided a fillip to our manufacturing sector, and contributed to its stellar 14% growth last year. The second boost to our recovery came from the concurrent turnaround in the regional economies. Buoyed too by the rebound in global electronics demand and stabilised regional currencies, most Asian economies returned to positive growth by the second quarter of 1999. This boosted intra-Asian trade and further fuelled Singapore's growth, as intra-regional trade accounted for about half of our total trade. Region-dependent services like tourism also benefited from the 14% surge in visitor arrivals last year from our key Asian markets. One critical factor which enabled Singapore to seize the opportunities presented by the rising external demand was our improvement in cost competitiveness. In particular, the 10 percentage point cut in employers' CPF contribution rate and the wage restraint last year made a significant difference. They helped to lower the unit labour cost of the economy by 10% and the unit business cost of our manufacturing sector by 12% last year. In line with the strong external demand, domestic demand gradually recovered, helped by 2 main factors. First, job losses moderated. Last year, the total number of retrenched workers fell to 14,600, about half that in 1998. In fact, many companies have begun to rehire by third quarter 1999 as employment levels increased. Second, asset prices recovered strongly. The stock market, in particular, saw strong rallies. The Straits Times Index set 11 record highs last year and ended 1999 78% higher than the start of the year. The property market also firmed, with prices climbing by 28%. Collectively, increased job security and the wealth effect in the asset markets renewed consumer confidence and boosted private consumption spending by 6.2% last year. Against a healthier backdrop of aggregate demand, the Consumer Price Index rose marginally by 0.4%. Although the economy has largely turned around, not every sector has recovered. The construction sector remained in recession; it contracted a severe 12% last year, compared to a growth of 4.4% in 1998. Due to the oversupply in residential and office properties, contracts awarded had continued to decline. Dragged down by weak commercial lending and poor regional demand for funds, growth in the financial services sector was flat last year. Growth in the business services sector was also feeble, at only 0.1% due to poor real estate earnings. OUTLOOK FOR 2000 But overall, the prospects for this year are bright. We can expect the pockets of weaknesses in the economy to improve as growth momentum picks up. We can be confident because the external environment looks favourable. First, the strength of the global electronics demand remains firm. According to industry forecasts, world-wide semiconductors and PC sales are expected to grow by 20% and 15% respectively over the next 2 years. Second, the recovery of the Asian economies is likely to be sustainable. Regional monetary and fiscal policies are expected to remain accommodative, which will fuel growth ahead. So far, recovery has been concentrated mainly on exports and consumption, which will continue to strengthen on the back of healthy external demand and better job prospects. In addition, investment demand has also shown glimpses of improvement after having remained negative for most regional economies last year. Already, capacity utilisation, capital imports and foreign direct investment applications have picked up across Asia, although the pace differs across economies. Given a benign external environment, our Composite Leading Index (CLI), which leads economic growth by about 9 months, has been rising over the last 6 quarters. Trade prospects remain very positive as non-oil retained imports, a leading indicator for future exports, continues its double-digit growth. Consumer sentiments have also turned visibly upbeat. Retail sales growth is up, as consumers increase their spending in anticipation of better pay increases and a partial restoration in employers' CPF contribution rate this year. However, this favourable outlook for 2000 is conditional on a soft landing in the United States and a sustained recovery in Japan and Europe. In particular, the risk of a sharp correction in Wall Street triggering a reverse wealth effect and causing a marked slowdown of the US economy, cannot be discounted. Macroeconomic imbalances in the US economy, such as the widening current account deficit, the falling personal savings rate, and the rising corporate leverage, are not sustainable at current rates and will need to be corrected at some point. In Japan, while recovery is slowly taking shape, its economy is not yet out of the woods. Recovery continues to be underpinned by fiscal stimulus as consumption and private investments are likely to remain fragile due to the ongoing corporate restructuring process. The pace of recovery is further complicated by the prospect of a rising Yen. Within the region, the main concern is whether the crisis-hit countries can sustain investor confidence by making progress in financial and corporate restructuring. In addition, the political stability of Indonesia remains a key uncertainty. Flash points have again erupted in various parts of Indonesia: communal clashes in Maluku, Lombok, Ambon, and even Bintan, and secessionist movements in Aceh and Irian Jaya. Nevertheless, there are more reasons to be optimistic, than to be pessimistic about our growth prospects for 2000. The Ministry of Trade and Industry (MTI) is maintaining its forecast of 4.5 to 6.5% for this year. The lower end of the range reflects the potential risks in the external environment. But the upside for the economy appears bright. Competing In The New Millennium Although the Asian economic crisis was brief, it has left a trail of destruction in its wake, and brought great hardship to many regional economies. The cost has been exacting. Some governments were toppled. Great fortunes were lost. Many companies went under; millions of livelihoods were destroyed. Several regional countries have had to take on large public debts to restart their economies. In contrast, Singapore has weathered the regional crisis well and emerged largely unscathed. There were no widespread unemployment and bankruptcy, social dislocations or political upheavals. Strong economic fundamentals underpinned by years of consistent and rational policies have ensured this. For example, due to the prudent supervision of our banks and financial institutions, our financial system was never in distress. Our banking sector's non-performing loans constituted less than 10% of total loans at its peak, compared to 80% in Indonesia, 48% in Thailand and 15% in Malaysia. Because we did not have to recapitalise our banks, our fiscal health has remained intact. We have avoided the sharp rise in public debts seen in the regional economies - to as much as 100% of GDP in the case of Indonesia - and the ensuing heavy debt servicing burden in future years. We have successfully ridden out the Asia economic storm with the economy remaining in shipshape. Our strong recovery has enabled us to start the new millennium on a firm footing, and we have every reason to look ahead with optimism and confidence. However, this does not mean we can afford to slacken. Competitiveness will remain the prime economic challenge for Singapore in the new millennium. In fact, competition will become increasingly intense as more countries join in the economic race. More importantly, globalisation and the onslaught of technological advancement will quicken the competition tempo further. It used to take several months for a new product in one market to reach another part of the globe. Today, virtually any good and service can be bought and sold anywhere in the world with the click of a mouse. The Internet has dramatically reduced the geographical barriers to economic competition. The twin forces of IT and globalisation have prompted a wave of alliances, mergers and acquisitions around the world as companies consolidate to gain market share and critical mass in preparation of tougher competition ahead. Last year, the value of mergers in Europe surged 50% to US$1.2 trillion, while that in the US has remained high at US$1.6 trillion for the last 2 years. These mergers cut across a spectrum of industries, from traditional ones like oil and automobile, to New Economy ones like info-communications and banking. In recent months, we have witnessed mega-mergers of giant corporations such as Mobil and Exxon, Vodafone and Mannesman, and AOL and Time Warner. The new AOL Time Warner conglomerate, for instance, has a market capitalisation of about US$360 billion, almost 4 times Singapore's GDP. Not only are the deals getting bigger, the tie-ups are also increasingly cross-border, as globalisation of the market place gathers pace. For instance, spurred partly by the Euro, 60% of Europe's mergers last year crossed national boundaries. [Estimate by JP Morgan. Business Week 24 Jan 2000]. The scale and quality of competition have thus risen to a whole new dimension. In this new competitive landscape, it is no longer viable for economies and businesses to think and act only on a national basis. We need to adopt a global mindset, innovate and advance with global trends, or risk being rendered redundant. Unless we are among the world's best, we will be relegated to playing a peripheral role in the global economy. To thrive, our businesses need to adopt a global outlook, and boldly seek out new markets and alliances for expansion. Already we are seeing signs of this happening. SIA has recently acquired 49% of Virgin Airways, DBS is expanding its regional presence through its stakes in Thai Danu Bank and Hong Kong's Kwong On Bank, and SingTel is engaging in merger talks with Cable & Wireless Hong Kong Telecom. To be successful in global competition, our companies will also need to draw in top talent - not only from Singapore, but from the world. Only then can we over time build up a stable of our own world class transnational companies. In post-crisis Asia, one economy that will bring profound changes to the competitive equation is China. Even without WTO membership, China has been attracting more foreign direct investments (FDI) than the rest of Asia combined. With its impending WTO accession and the ongoing reforms of its state-owned enterprises, China can be expected to become even more competitive both as an exporter as well as FDI destinations. [Goldman Sachs estimated that FDI into China would rise to US$100 billion a year over the next five years as a result of its WTO entry. Wu, Fred WTO Membership: What This Means for China, Goldman Sachs, Apr 99.] Moreover, China's exports are no longer confined to low value-added or labour-intensive products. Increasingly, they will move towards more sophisticated and higher value-added products in direct competition with the NIEs. China has already made impressive inroads in the electronics industry. In 1996, China's share of the US and Japan electronics market was only 6% and 7% respectively. These shares have now increased to around 10%, comparable to that of Taiwan and South Korea, and higher than most of the ASEAN countries. But China's rise is not all negative for the other Asian economies. Global trade is never a zero-sum game. China's rise offers tremendous opportunities for all. For example, with the liberalisation of China's tariff regime, ASEAN economies can function more effectively as production bases and export gateways to China's markets. The key challenge for the regional countries, including Singapore, is to devise ways to complement investments and growth in China, to ride on the rise of China. In any case, China will not be the only source of competitive threat to Asian economies. Outside Asia, Latin America and Eastern Europe have similarly geared up for the new competitive challenges. Argentina, for example, has seen a four-fold increase in its GDP in the last decade as a result of economic reforms. The transitional economies in Eastern Europe are estimated to triple in size in the next decade, if they continue with the privatisation, enterprise restructuring and other institutional reforms. [Estimates by the European Bank for Reconstruction and Development. 'Eastern Europe - Transitional Economies' Output May Triple, July 1999, Reuters.] At the same time, the developed economies are not resting on their laurels. They too are strengthening their competitive lead. Japan is embarking on fundamental reforms to its economic structure and banking sector. The US is in the throes of its New Economy powered by innovations and technological start-ups. The EU countries are reforming their tax systems and trying to inject more dynamism and flexibility into their economies. It would therefore be a grave mistake to think that it is business as usual in the post-Asian-crisis world economy. Rapid technological change and globalisation are intensifying competition and posing new challenges for our economy. To thrive in the new millennium, we need to sharpen our competitive edge further, stay nimble, and constantly reinvent ourselves. Implementing Long-term Economic Strategies To meet these competitive challenges, the Committee on Singapore's Competitiveness (CSC) has mapped out a comprehensive set of long term economic strategies. These strategies have been adopted by the Government as the blueprint for developing Singapore into an advanced and globally competitive knowledge-based economy within this decade. The Government is actively pursuing these strategies, which address both the hardware and software aspects of our competitiveness. In hardware, Singapore already has a competitive edge. We have invested heavily in many key economic and business infrastructure and international surveys have consistently ranked us highly on infrastructure, citing our world-class sea and air ports, modern telecommunications facilities, and advanced IT infrastructure. Private sector investments have also been strong. Some observers and analysts have commented that Singapore has over-invested and become inefficient in our use of capital. MTI has studied this in detail and has found that this is untrue. Except for the period in mid-80s, our investment rates are not disproportionately high compared to the regional countries. In addition, trends in our Incremental Capital Output Ratio (ICOR), a measure of the additional unit of capital required to produce each additional unit of output, also show that we have not been using capital inefficiently. MTI will be releasing details of its findings in due course. Physical infrastructure, however, can be easily replicated. In fact, latecomers can often leapfrog ahead using state-of-the-art technology. The challenge is for Singapore to differentiate ourselves by finding creative ways to add value to our infrastructure. The Jurong Island project is one such example. Amalgamated from 7 offshore islands, Jurong Island aims to become a world-class integrated chemical hub, the first of its kind in the region. Through clustering and the sharing of common facilities, it will generate significant synergistic linkages across a wide spectrum of petrochemical industries. For example, the provision of centralised logistics and common corridors for material flows will significantly reduce feedstock transportation and handling cost. With the recent launch of the JurongIsland.com internet portal, companies on the island can now be easily linked up with one another on the island, and with Government agencies on the mainland. When the masterplan to dot-com Jurong Island is fully completed, companies on Jurong Island will be able to conduct business electronically and reduce product cycle time and costs. Jurong Island will truly be an intelligent island. On the software aspect of our competitiveness, the quality of our people will be key. The New Economy is about exploiting knowledge as the source of competitive advantage. As a small country, every Singaporean matters. The key is for everyone to consciously improve their skills and look for new ways to do the job better. The more well trained and educated our workforce, the better our chances are in achieving this goal. Currently, about 65% of our yearly cohort of students enter universities and polytechnics - a First World standard. However, if we look at the total stock of our workforce, less than half of Singaporeans above the age of 40 have secondary and higher education. We need to level up this group of workers, numbering some 834,000 or 42 % of our workforce, through training and retraining to help them cope with the new economy. A key priority of the Government will therefore be manpower training. The Ministry of Manpower will press ahead with its various initiatives under the Manpower 21 programme to upgrade the skill level of our people. However, training our indigenous workforce alone will not be enough. Even with a highly educated workforce, our small population size would limit the talent pool in Singapore. We will need to augment both the quantity and quality of our workforce by actively attracting foreign talent. In the knowledge age, top talents make a big difference and contribute disproportionately to the economy. With a larger pool of talent, we can enlarge our economic pie, create more jobs and bring higher wages for all. Another important software aspect of competitiveness is the ability of the economy to leverage on science, technology and innovation to keep pace with the global economy. The Government will continue to build up our research and development capabilities. At the same time, we will create a conducive environment to grow and develop a strong pool of entrepreneurs who can combine technology and business acumen under the Technopreneurship 21 programme. Manufacturing and Services One key development strategy is to make manufacturing and services the twin pillars of our economy. We already have a strong manufacturing sector, which has been the key locomotive of growth. EDB's Industry 21 Blueprint aims to further enhance our manufacturing capabilities, and diversify among and within our existing key manufacturing clusters of electronics, chemicals and engineering. This will maximise growth opportunities by leveraging on all possible linkages and complementarities among the clusters. At the same time, the EDB is continuously looking into the development of new, high growth emerging industries. Life sciences is one such example. Analysts have predicted that the 21st century will belong to biotechnology. With our established cluster of leading companies in pharmaceuticals, biotechnology and agri-biotechnology, coupled with our world-class healthcare facilities and institutions, Singapore is well positioned to become a major player in the life sciences. While our manufacturing sector is globally competitive, the same cannot be said of our services sector. One reason is that we have been slow in opening up our services sector to foreign competition. The productivity of our services sector has been significantly weaker than manufacturing. The gap has actually widened over the years. Between 1985-1992, the average annual productivity growth in the services sector was 0.4 percentage point below manufacturing. In 1992-1999, this gap has increased to 4.7 percentage points. In the new economy, services will play an increasingly important role. Goods will increasingly have a higher service content, as more goods are bundled with services to form an integrated product package. In any case, the line between goods and services is blurring. The logistics industry, for instance, has evolved from just providing transportation and warehousing to delivering value-added services in supply chain management. At the same time, technology will render more services tradable. The Internet is accelerating this trend. Even highly personalised services like education and healthcare can now be offered over the Internet to people located thousands of miles away. Natural monopolies in certain service industries will also become increasingly threatened. For example, mobile phone service providers can now effectively challenge fixed line operators in the telecommunications field. The implication is that the services sector in every country will increasingly be subjected to global rather than domestic, or even regional competition. SIA, PSA and Changi Airport are fine examples of our service companies which are globally competitive. They competed globally from day one and showed that we can be world-class. Their success gives us confidence that the way forward is not to confine our services sectors to mere domestic market or to shield them from foreign competition. The way forward is to subject them to global competition, as we have done for manufacturing for years. Deregulation of the Services Sector MAS has led the way in opening up the financial services sector. Financial markets are now more globalised due to lower transaction barriers across economies and world-wide deregulation. Rapid advancements in financial and informational technology are creating new and sophisticated financial products. The demarcations between financial products are blurring, and the Internet has opened up new service delivery possibilities. To retain our role as a key financial centre in Asia, Singapore needs to attract and develop new growth activities and players into the market. MAS has therefore embarked on regulatory reforms in banking, fund management, debt and equity markets so as to promote a more flexible and conducive environment for these financial activities to thrive. More recently, the IDA brought forward the introduction of full market competition in the telecommunications sector by 2 years, starting from 1 April 2000. Direct and indirect foreign equity limits for all public telecommunications services licences were also lifted. The decision to accelerate the liberalisation schedule was not an easy one, in view of our earlier commitments. But it was a necessary and right decision. With the rapid and dramatic changes in the telecommunications industry world-wide, the original liberalisation schedule would have stunted the growth of our telecommunications sector and severely undermined our competitiveness. It would have also set us back in our endeavour to develop a strong and vibrant info-communications industry, which depends on globally competitive telecommunication rates and services. By opening up the telecommunications sector sooner, we stand a better chance of attracting the major players and realising our aim to be an info-communications hub. Deregulation of the Power Industry Power is another critical sector where we need to be globally competitive. It is a key component of business costs. We started to deregulate the sector in 1995 when we corporatised the electricity and gas operations of the Public Utilities Board (PUB) to form Singapore Power Ltd. Since then, we have taken systematic steps to prepare for further deregulation. Within the next 2 years, we plan to open up the contestable parts of the electricity sector fully and also introduce competition in the natural gas industry. Through our deregulation efforts, we hope to ensure long-term efficiency in our power industry and achieve more competitive electricity tariffs for our businesses and households. Liberalisation also brings many other benefits for all consumers, including better service quality, greater product innovation and more choice of suppliers. If we can achieve a systematic deregulation process in our services sector, it can bring substantial spin-offs for the rest of the economy. It will further enhance the global competitiveness of our manufacturing sector. Harnessed properly, the forces of deregulation can strengthen Singapore's competitiveness in the new economy. Conclusion Singapore enters the new millennium on a cheerful note. The global economic environment is favourable. Our capacity to compete globally is strong. We should return to pre-crisis growth soon. However, sustained growth in the long term cannot be taken for granted and will not come effortlessly. The economic contest has become more intense with globalisation and as countries worldwide enhance their competitiveness. The Singapore economy will need to be responsive to these global developments and stay relevant and competitive. Apart from improving our physical infrastructure, and continuing to upgrade our people, there is a need to further deregulate our services sector. Many of our services are performing below their potential. The problem is insufficient industry competition. Singapore as an economy cannot hope to be globally competitive, if our services sector is a laggard at home. The Government will step up its deregulation efforts to bring our services sector and the economy to new heights.