Manufacturing Sector Growth: A Case Study of Singapore

Abstract

This paper attempts to highlight some of the challenges faced by the Singaporean economy in general and the manufacturing sector in particular. Statistical analysis is used to demonstrate the role of human capital and foreign investment on manufacturing output for the period 1980–2004. The paper shows that a long-run relationship exists among the real manufacturing output per-unit of employment, real foreign investment per-unit of employment and real human capital per-unit of employment. The paper also provides time series forecasts for the growth rates of real output, productivity and investment in Singaporean manufacturing sector.

Keywords:

• Asian financial crisis
• foreign direct investment
• economic growth

Acknowledgments

The author is indebted to Bob Catley and Sam Wells for valuable comments. The remaining errors and omissions are the sole responsibility of the author.

Notes

1. The outflow of capital exacerbated the depreciation of the Thai bath, the Indonesian rupiah, the Malaysian ringgit and the Philippine peso. It has been argued that these currencies were over-valued due to the rigidity of the underlying exchange rate regimes. The over-valued exchange rates resulted in: (a) massive increases in the current account deficit; and (b) relatively free availability of foreign currency loans. The situation was further complicated by a weak-banking sector equipped with poor credit assessment and financial risk management that resulted in poor quality investments. Short-term loans were sought to shore up financial systems collapsing under non-performing loans. Foreign investors, realizing the weaknesses of the investments that they had funded, rapidly withdrew significant amounts of capital. Inadequate supervision of the financial system, cronyism and the lack of transparency in fiscal accounting and economic data contributed to an increase in the number of non-performing loans, thereby worsening the crisis (see Corsetti et al., 1999; Summers, 2000). Bustelo (2000) provides a comparison of three crises that emerged during the 1990s: the Asian financial crisis, the European crisis and the Mexican crisis. Christofferson and Errunza (2002) provide an excellent analysis of the underlying risk management issues.

2. Other steps taken by Singapore government included a wider exchange rate band and a reduction in employer's Central Provident Fund Contribution, 10% corporate tax rebates, rebates on rental and port-related tariffs, cut in foreign worker levy, etc. Cotton (2000) has highlighted the differences in the effect of the Asian financial crisis on Singapore, South Korea and Taiwan. Also see Huff (1995, 1999) and Yeung (2000) for a discussion of the role of government policies in Singapore's economic growth.

3. The unemployment rate increased from 1.9% in 1997 to 4.5% in 2003. The unemployment rate in 2005 was 4.3% (see Department of Statistics, 2006; Economic Survey of Singapore, 2005).

4. The issue of possible over-investment in Singapore is explored by Toh and Ng (2002).

5. It is perhaps worth mentioning that recent studies have argued that, in addition to foreign investment, advanced technology transfer and management skills have also played a major role in Singapore's rapid economic growth (Lim & McAleer, 2002).

6. For a discussion of the political aspects, see Rodan (2001).

7. It is well-known that the number of scientists and researchers is a better indicator of human capital in a country. However, in the case of Singapore, such information is available only from 1989 onwards and hence government spending on education is used as an indicator of human capital for the period 1980–2004.

8. The p-value is the minimum value of the level of significance that leads to the rejection of the null hypothesis (Ashenfelter et al., 2003; Gujarati, 2006).

9. See Hansen and Johansen (1998) for an explanation of the hypothesis testing involving long-run estimated coefficients.

10. Malaysia remains Singapore's major trading partner. Its share of Singapore's total exports in 2005 was more than 13% (Department of Statistics, 2006).

11. Singapore's export share to China and India has not increased much—the share of Singaporean exports destined for China increased from 6.3% in 2003 to 8.6% in 2005 whereas the corresponding figures for India for the same period were 1.9% and 2.5%.

12. Singapore signed a free trade agreement with Australia in 2003.

13. The total stock of Singaporean investment abroad expanded by 5.1% to S$293.69 billion at the end of 2003. The direct investment component at the end of 2003 was S$153.48 billion, which represents an increase of 3.1% from S$148.92 billion in 1999. After British Virgin Islands, China was the largest recipient of Singapore's foreign investment abroad (12.4%), followed by Malaysia (8.7%), Bermuda (7.6%), and Hong Kong (7.5%) (Department of Statistics, 2006).

14. See Nee (1993) and Koh and Wong (2005) for a discussion of the steps taken by the government to encourage innovation.