SINGAPORE other services, and oil refining. It offers a politically stable location; pro-free enterprise and corruption-free regulatory environment; developed infrastructure; efficient and non-ideological labor; and significant tax concessions. - Singapore's rapid economic growth -- averaging over nine percent in real terms for its twenty-five years of independence (1965-90) - has created a tremendous demand for imports, including those from the United States. During this period, Singapore has moved from a labor surplus to a labor deficit economy and now imports a growing number of foreign workers to supplement the country's indigenous workforce. Large flows of foreign investment capital and services receipts more than offset large trade deficits and Singapore has been able to steadily build a sizeable foreign exchange reserve position. During the late 1970s and the first half of the 1980s, the government adopted expansionary fiscal policies through development expenditures, especially for infrastructure and housing. It also encouraged increases in real wages and non-wage benefits and improved its provision of social services for the general population. In 1985 Singapore, with a largely labor-intensive economy and an overvalued exchange rate, had lost competitiveness. This loss of competitive edge combined with a decline in investment and a sharp fall in world commodity prices that led to a recession in the region caused an 18-month recession, shocking the nation and government that had come to assume steady economic growth. Shaken by recession, the government moved quickly to restore competitiveness by imposing a draconian two-year wage restraint policy and cutting taxes for both individuals and businesses. Spurred by rising demand for its exports, Singapore's economy recovered modestly in 1986. Exports accelerated sharply in 1987 and have maintained their momentum since. Complemented by rising domestic demand, this export boom has led to four years (1987-90) of strong overall growth and a consequent rise in imports, including imports from the United States In addition to restoring competitiveness, the recession scare caused Singapore to step up its efforts to restructure the economy by shifting from labor-intensive industries to capital intensive, higher value-added production technologies and to services. The government is now much more selective in its efforts to attract foreign investment and has begun to encourage and assist more mature industries to relocate to neighboring countries with lower labor costs. The government has had some success in its restructuring effort. However, many obstacles have to be overcome, the most serious being the continued shortage of manpower at all skill levels. Since independence, Singapore has run budget surpluses in most years. However, the sharp tax cut stimulus imposed to deal with the recession led to a budget deficit in 1987. In 1988 the surplus was 1,862 million Singapore dollars (SD), or 3.8 percent of Gross Domestic Product (GDP). The surplus in 1989 rose to SD 4,764 million, or 8.6 percent of GDP. It is expected to remain at about this level in 1990. The government has traditionally been quite conservative fiscally, usually overestimating expenditures and underestimating SINGAPORE revenues. Development expenditures have remained low for several years as infrastructure projects have been largely completed, while high rates of economic growth have swelled revenues. One particularly significant structural factor of the Singapore economy is its tremendously high national savings rate. Compulsory savings in the form of employer and employee contributions to the Central Provident Fund (the Singapore equivalent of our Social Security Fund) have formed the basis of a national savings rate that has averaged about 40 percent of GDP during the 1980s. These savings have funded the government's heavy investment in housing and infrastructure. But as investment projects have been completed, total national investment has fallen behind savings, leading to current account surpluses. Over the medium term the government will need to reduce forced savings and stimulate domestic consumption to bring savings and investment back into line. With such a small economy and relatively insignificant deficit to finance, Singapore's money and bond markets, although not underdeveloped, are not very active. The government issues treasury bills and government bonds with the primary intent of having an investment vehicle for financial institutions' reserve requirements and to provide liquidity to the money market. Accordingly, as of the end of 1989, the government had only SD 42.4 billion (US$22.4 billion) in outstanding paper. The government's monetary policy has also been quite conservative. Its reserve requirement is that 24 percent of each financial institution's deposit liabilities must be held in liquid assets. The Monetary Authority of Singapore (MAS), the country's central bank, engages in limited money market operations to influence interest rates and ensure balanced liquidity in the banking system. Its operations during the past year have involved use of swaps and the interbank market to recycle funds into the domestic banking system. Singapore is such a small and open economy that its money supply and domestic interest rates are primarily determined by international, rather than local, conditions. As Singapore is so dependent on trade, effective management of its exchange rate keeping the Singapore dollar strong is the government's most important tool to control inflation. There are no controls on capital movements, a condition that limits the scope of the government to maintain an independent monetary policy. For example, the government does not set targets for monetary aggregates. 2. Exchange Rate Policies The Singapore dollar's exchange rate is determined by an MAS-managed, market-related float against an undisclosed trade-weighted basket of currencies. The MAS uses currency swaps and direct purchases or sales of foreign exchange as tools to keep the Singapore dollar within the desired trading range. The U.S. dollar is its intervention currency. The Singapore dollar's value versus other currencies is determined by the cross rates of its daily fluctuations against the U.S. dollar in the international foreign exchange markets. The Singapore dollar is freely convertible; only a single rate SINGAPORE exists. Forward quotations against the world's major currencies are available in the very active local foreign exchange market. The government contends, and most observers including the International Monetary Fund agree, that the Singapore dollar grew relatively overvalued during the first half of the 1980s due primarily to the government's policy of maintaining a strong currency to keep inflation low. However, after the 1985-86 recession and the fall of the U.S. dollar induced by the Plaza Agreement, the government limited the appreciation of the Singapore dollar against the U.S. dollar to about 20 percent through 1989. This limited rise reflected its previously overvalued level. During the first 10 months of 1990, however, the Singapore dollar has appreciated by 9.74 percent against the U.S. dollar. 3. Structural Policies Singapore maintains an open, free trade orientation supported by moderately expansionary macroeconomic policies that play a neutral to positive role in attracting U.S. exports. Prices for virtually all products, from food to electronic goods to interest rates, are market determined. The government maintains tariffs on a few imports and significant excise taxes on cigarettes, alcohol, petroleum products, and motor vehicles. There are no non-tariff barriers on foreign goods. U.S. exports can enter the market and compete freely. In fact, Singapore's imports of U.S. goods rose 29 percent in 1988 compared to 1987, another 12.5 percent in 1989, and for the first eight months of 1990 were up 14.3 percent. Singapore's prudent and conservative fiscal and tax policies have had a basically positive long-term effect on it as a market for U.S. exports. While more stimulative policies might have boosted U.S. exports to Singapore in some periods, its conservative long-term economic policies and steady development have made it a consistent and reliable market. Indeed the Singapore's fundamentally sound economic management is an important reason why U.S. companies have invested so heavily there. For example, in the wake of the 1985-86 recession the government introduced a package of cost cutting measures and tax incentives. It reduced corporate and maximum individual tax rates from 40 to 33 percent; cut by 60 percent employers' Central Provident Fund contributions (from 25 to 10 percent of an employee's salary); and increased the property tax rebate to 50 percent. In addition, to encourage further investment, investment allowance incentives were liberalized; offshore income earned by investors from funds managed in Singapore was made tax exempt; incentives for venture capital projects were improved. The expansion incentive scheme was modified to allow companies an effective tax rate of as low as 10 percent upon expiration of "pioneer" status (usually 7 to 10 years, but varies with each case). Tax incentives were introduced for investment in research and development and oil trading. All these "supply side" measures have helped foster Singapore's economic recovery and its economic growth rate of 11 percent in 1988 and 9.2 percent for 1989, and an expected 7.5 to 8 percent in 1990. Singapore's external debt is negligible, a mere US$82.3 million at the beginning of 1990. That figure required service payments of US$52.8 million in 1989, resulting in a debt service ratio of less than 0.1 percent. Singapore's external debt peaked in 1982 at US$709 million. The country has had current account surpluses for most of the past decade, and inflows of investment capital have facilitated overall balance of payments surpluses for practically its entire independent history. As a result, Singapore's reserves have grown sharply in recent years. From US$7.5 billion in 1981, Singapore had an official foreign exchange reserve position of US$24.8 billion at the end of July 1990, giving it the highest per capita reserve level in the non-oil exporting world. With the exception of two areas addressed below, there appears to be no barriers in Singapore to U.S. exports of goods. Import licenses are not required, customs procedures are minimal, the standards code is reasonable, and the government actively encourages foreign investment. All major government procurements are by international tender. One area in which there are several, albeit minor, problems has been in services. The government telecommunications monopoly excludes competition, thereby prohibiting introduction of U.S.-owned value added network services. The government also bans the issuance to foreigners of new licenses to set up insurance companies, banks, and brokerages. The expansion of automated teller machines is also restricted. American accountants, lawyers, doctors, and architects have experienced problems in obtaining local certification of their professional qualifications. Another problem area is the case of cigarettes, where the government imposes import duties on foreign products that, relative to the excise taxes collected on locally manufactured cigarettes, put the American products at a competitive disadvantage in the market place. During the first four years of this decade the United States ran a trade surplus with Singapore. A subsequent structural change (unrelated to the exchange rate) in the U.S.-Singapore trade relationship has led to U.S. bilateral trade deficits since 1985. Specifically, after a number of years of heavy inflows of U.S. investment capital into production facilities, subsidiaries of U.S. companies are now exporting back to their parent companies. The exports of these subsidiaries of U.S. firms have led to structural trade surpluses for Singapore in our bilateral trade relationship. Thus the healthier the U.S. economy, the more U.S. companies will need the output of their Singapore subsidiaries, which will in turn maintain Singapore's bilateral trade surplus. 6. Export Subsidies Policies The government does not subsidize exports. However, it does actively promote exports, since the Singapore economy is extremely export-oriented and trade is its life blood. The SINGAPORE government offers significant incentives to attract foreign investment which, because of the small size of the domestic market, is almost all in export-oriented industries. It does not use any of the usual policy tools to promote exports, such as multiple exchange rates, preferential financing schemes, export promotion funds, or import cost reduction measures. 7. Protection of U.S. Intellectual Property Singapore is not a member of the World Intellectual Property Organization nor any of the major intellectual property conventions. In January 1987 following close consultations with the U.S. government, the government of Singapore enacted strict, comprehensive copyright legislation that significantly strengthened the government's ability to prosecute copyright violators. U.S. copyrighted works receive national treatment under the Singapore copyright law based on a bilateral arrangement concluded between the two governments in 1987. Under the new law, burden of proof requirements were relaxed, so that copyright owners may more easily press charges for infringement. The law enacted stronger civil and criminal penalties; and codified unauthorized possession of copyrighted material as an offense in certain cases. The Singapore government is reportedly considering drafting similar legislation designed to protect patents and trademarks. - The enforcement system under the copyright legislation relies heavily on copyright owners to combat infringement. Industries or individuals discovering pirating may press claims through civil or criminal courts. The Commercial Crime Division of the Ministry of Law when presented with evidence investigates copyright violations and then refers the case to the attorney-general's office for a decision on prosecution. In this new framework, U.S. manufacturers have set the pace in cracking down on copyright violations. pirating operations have shut down or moved out, and while limited clandestine sales of pirated material continue (notably software programs), Singapore's new law and strict enforcement are proving quite successful. Most During 1988 and 1989 the government undertook a highly publicized and largely successful campaign against sales of counterfeit designer watches and leather goods. The hoped-for trademark and patent legislation should further strengthen enforcement. In terms of overall impact, government intellectual property policy is positive and improving. Singapore wants to encourage high technology industry, and its strong new intellectual property laws are now serving to help attract U.S. investment. Judging from the positive government response to manufacturers who uncover illegal pirating operations, we estimate that losses to U.S. firms from counterfeiting are minimal and decreasing. 8. Worker Rights * a. Right of Association The Constitution gives all citizens the right to form associations, including trade unions. Parliament may, however, impose restrictions based on security, public order |