Growth And Unemployment In Singapore Economics Essay

Traditionally, Singapore has adopted an FDI-centric, export-oriented growth strategy. The economic spin-offs generated by Government-linked companies (GLCs) and Multinational Corporation (MNCs) have over the years fuelled and sustained Singapore’s economic growth. The manufacturing and the service industries are identified as the twin driver for the economy growth. Throughout the years, the city state has urbanized into a business hub with a well-developed infrastructure and has become one of the leading financial centres in the world.

3.1 Singapore’s Economy Trend

General Trend of Growth and Unemployment

Figure 1: Evolution of GDP Growth and Inflation Rate

During the period 1990 to 1997, the Singapore economy showed positive growth rate. Continuing the economic growth of the mid-80s, 1993 to 1997 showed an above-average economic expansion of about 9% to 12% annually. (Singapore. Manpower Research and Statistics Dept., 2004). The Singapore economy registered an impressive double-digit growth of 10.4 per cent in year 1993 and 10.2 per cent in year 1994 per cent before moderating to a more sustainable rate of 8.9 per cent in 1995. This expansion over the five-year period created as many as 474,800 jobs or close to 100,000 every year. The labour market was tight with unemployment hovering at only 2%.

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However, during 1998-2003, a series of external shocks hit the Singapore economy. Many workers from China and India entered the global market during the growth period of 1993 to 1997, causing structural changes in the Singapore labour market, which were exacerbated by the sudden outbreak of the currency crisis, global economic slowdown, terrorism and SARS. Singapore suffered its first employment contraction in 1998 during the Asian Financial Crisis (AFC) since the mid-80s recession. Though the economy made a remarkable recovery in 1999 and 2000 which more than compensated for the loss, this did not last. The global slump brought about by the bursting of the technology bubble in US in 2001 caused the Singapore economy to crumple. The condition was further worsened by the September 11 terrorist attacks on the US. These external shocks hit the Singapore employment market severely, and in 2001 the country suffered its worst recession since independence. A sharp decline of 22,900 in employment was observed from 2001 to 2002 and unemployment rose to hit 4.4% in 2002. In the second half of 2003, the economy was again hit by uncertainties caused by SARS, terrorism and the Iraq war. After SARS was successfully contained, a slow recovery in the economy increased employment. This increase was barely enough to offset the losses suffered earlier in the year. By the end of 2003, unemployment rose to average 4.7% (Singapore. Manpower Research and Statistics Dept., 2004).

After the AFC the Singapore economy has appeared relatively fragile and much more at risk to boom-bust cycles. From 2004-2007, the economy slowly regained its robustness and expanded at a strong pace of 8.7% and 6.4% in 2004 and 2005, respectively, with the growth momentum being sustained in 2006-2007 (Rajan & Thangavelu, 2009).

Singapore entered the 2008/2009 recession in the second quarter of 2008 but emerged from it in the second quarter of 2009 (Soon, 2009). Employment rebounded and by the end of 2009, had exceeded pre-crisis levels to hit a new high of 2,991,200. Year 2009 marks the first calendar year in which Singapore experienced positive employment growth (1.3 per cent) with negative GDP growth (-2.0 per cent).

Figure 2: Singapore’s Annual Unemployment Trend

Need for Entrepreneurship

Since the AFC in 1997, many Southeast Asian economies focus on SMEs development to boost employment and to widen opportunities for entrepreneurs. As countries shift from industrial to knowledge-based economies, human capital became the main source of value creation. When Singapore suffered its first recession in 1985, attention shifted towards entrepreneurship. The 1985 and 2001 downturn in Singapore exposed the susceptibility of being over-dependent on foreign capital and its less than satisfying SME sector (Choo, 2005). Among other things, the downturn revealed two key structural flaws in the economy. One was an unhealthy reliance on the electronics sector that made up 50 percent of total exports; another was a lack of entrepreneurial culture amongst Singaporeans.(Lim). In addition, with emerging developing economies such as China and India having bigger production capacity and lower business cost, Singapore is facing tough competition on both its FDI and exports. To sustain its competitiveness, Singapore needs to move up the value chain. As mentioned in Tan (2002), there is a essential need for entrepreneurship in Singapore as it faces the challenges of globalization.

3.2 SME in Singapore

Role of SMEs in Singapore

There is in fact a growing body of econometric evidence suggesting that entrepreneurship is a key determinant of economic expansion in a knowledge-based economy. The dynamic role that SMEs have played varies across countries. In Singapore, even though SMEs are not as significant in terms of numbers and employment, they are important in providing a flexible skilled production base that attracts larger MNCs (Hall, 2001; Lee & Tan, 2002). They complement large enterprises by being partners and suppliers for resources such as domestic materials, thereby creating a harmonious global business network. SMEs also provide job opportunities, stimulate competition and create economic wealth. According to statistics, SMEs employ nearly six out of every ten workers and generating almost half of the enterprises’ value added. These figures indicate the critical role of SMEs in our economy making it an important component in policy making.

Current State of SME and Businesses in Singapore

Despite its importance, it is believed that the current state of SME in Singapore is less than satisfactory. Based on the Global Entrepreneurship Monitor (GEM) 2001, one of the most significant researches on entrepreneurship, Singapore had one of the lowest rates of Total Entrepreneurial Activities (TEA) among the GEM countries, only higher than Belgium and Japan. Singapore together with Russia and Finland are outliers: high GDP growth but with modest levels of entrepreneurship. In 2003, only 5 percent of Singapore’s adult population engaged in entrepreneurial activity. Experts had also identified the 3 most important issues in Singapore for entrepreneurship: Financial support, Government policies and Government programs. On average from 2001 to 2009, Singapore is ranked 52nd among other 66 countries with an average TEA rate of 5.72% [1] .

According to a study by Business Times (BT) and Singapore’s Accounting and Corporate Regulatory Authority (ACRA), a sunny economic climate appears to have a positive impact on the level of entrepreneurial activity in Singapore. The formation of companies between 2007 and 2009 shows that when the economy advances, the growth rate of companies created went up. Cessation of companies however does not appear to correlate with the economy. NUS Entrepreneurship Centre director Wong Poh Kam noted that it is possible that there is a time lag between deteriorating business condition and cessation growth.

Government Initiatives

The Singapore government has long recognized the significance of nurturing local entrepreneurship. For instance, the city state’s ex-Minister for Manpower, Lee Boon Yang, noted that the new economy is driven by innovation and value-creation through creativity, innovation and entrepreneurship. He also said that to succeed in this environment, one must be creative and entrepreneurial (Rajan & Thangavelu, 2009).

The Singapore government is committed to create an environment conducive for entrepreneurial activity and to nurture a culture of learning and experimentation. In this regard, it has offered a number of targeted incentives to promote it, especially in the area of high technology (i.e. “technopreneurship”). Singapore is also one of the few countries in the world to have a SME Master Plan addressing the entire scope of SME development issues from both demand and supply perspectives. Key agencies supporting the growth of businesses in Singapore include SPRING Singapore, Economic Development Board (EDB) and International Enterprise (IE). To motivate and award SMEs that have demonstrate excellent growth and innovation, the government have also introduced the ranking exercise of “Singapore SME 500”, “Fastest Growing 50” and “Singapore International 100”.

Consistently ranked as one of the best place in the world for business, Singapore features strong corporate governance, sound legal framework, highly developed supply chain efficiency and a favourable tax regime. Singapore also tops the World Bank “Ease of Doing Business” report for the fifth consecutive year in 2011.