http://www.businesstimes.com.sg/prem...tiveness-slope

Published May 31, 2012

S'pore slips on competitiveness slope

It drops out of Top 3 as costs climb; restructuring still seen as its best chance of bouncing back

By Teh Shi Ning


[SINGAPORE] Amid rising costs - in part due to ongoing economic restructuring - Singapore has slipped one rung to an unfamiliar fourth place on the latest global competitiveness rankings compiled by Swiss business school IMD.

While Hong Kong retained pole position, Singapore fell out of the top three spots on the annual World Competitiveness Yearbook's (WCY) ranking for the first time since 2003. Switzerland overtook Singapore to rank third out of 59 economies, behind second-placed United States.

"What Singapore is struggling with is everything relating to inflation," said Hischam El-Agamy, IMD executive director for Southeast Asia, Southeast Europe, Africa and the Middle East.

The Republic's 2012 score was pulled down by criteria such as consumer price inflation, real growth and real growth per capita, and received a lower "economic performance" ranking of 9th, down from 5th last year.

But competitiveness is multi-faceted, Dr El-Agamy stressed. Singapore showed improvement relative to other economies on matters such as the government's budget surplus, investment inflows, tourism receipts and cost of capital.

Economists BT spoke to said the policies introduced to shift the economy to productivity-led growth have exacerbated cost pressures built up over 2004 to 2007 when excess demand and supply constraints pushed prices higher.

DBS economist Irvin Seah thinks that with regional competitors "now hot on our heels" the surge in business costs is detrimental to overall competitiveness. That is, "unless Singapore can improve productivity quickly, which is not easy", he said.

While cost competitiveness has not been a major selling point for Singapore, worsening cost conditions would be cause for concern if the economy stagnates or slips on other fronts, such as government efficiency, business efficiency and infrastructure.

Barclays Capital economist Leong Wai Ho said: "The ability to make strategic decisions over the long term without worrying too much about security, political uncertainty, policy discontinuity, solid connectivity and social upheavals - these are far more important factors driving long-term investments."

"We should not be distracted by these rankings, but focus on following through with the adjustment," Mr Leong said.

A separate global competitiveness ranking released by the World Economic Forum last September shows Singapore overtaking Sweden to claim second place, behind Switzerland.

Though higher costs stemming higher foreign worker levies and stricter quotas may again affect competitiveness standings next year, Mr Leong sees the policies as driving "a necessary structural adjustment the economy has to undertake to reach a new level of competitiveness".

Supporting his view is the fact that Singapore took a tumble in the "productivity and efficiency" rankings from second place last year to 14th this year.

Dr El-Agamy thinks labour efficiency, which Singapore is traditionally weaker in on WCY's data, likely had a large part to play in this. The WCY rankings, being relative, strip out some of the cylical nature of absolute productivity.

He agrees that restructuring will be critical to sustain growth. In particular, "helping SMEs become more productive and innovative - this is at the heart of it all, the success of and competitiveness of an economy", Dr El-Agamy said.

Such help would range from appropriate regulation and funding, to ensuring conditions are right to attract talent, and research and development (R&D).

IMD's report surfaced hints that Singapore is seeing more relocation of services and R&D facilities relative to other economies, factors which may influence competitiveness in the longer term, Dr El-Agamy said.

Some economists think there are still ways for Singapore to improve its cost-competitiveness - by tackling price pressures not produced by restructuring, such as undue profit margins.

"Is the structure of particular industries allowing companies more pricing power than might otherwise be the case?" asked Citi economist Kit Wei Zheng, who thinks the Competition Commission may have a role to play.

There may also be room for the government to offset some restructuring-related cost increases by providing rebates or tax reliefs, as long as these do not impede the adjustment of relative prices, Mr Kit added.