Restructuring Singapore series: Promoting domestic consumption 0 comments

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As had been mentioned in the earlier blog, any country trying to build up its service sector has to have a strong domestic base. This is because services and manufacturing are different in their nature of end product delivery: service providers have to be close to the customer, while manufactured goods can be exported overseas. With the advent of IT the need for proximity has somewhat been mitigated (eg call centre outsourcing in India) but by and large the distinction remains (eg. healthcare, education).

At the same time, it is generally the case that developed nations, besides transforming from being manufacturing-based to services-based, also become consumption-based as opposed to investment- or export-based (considering GDP components). The initial phase of expansion of supply capabilities has been built up: hard capital such as infrastructure (transportation and communication links, utilities) and fixed capital (factories and buildings). Export growth is bound to taper off. To build higher value-add manufacturing and services one needs ideas and innovation, and for ideas to flourish they need support: that is the gap a strong domestic consumption sector fills. At the same time, the consumption model can tap on substantial national savings accumulated over the earlier years, providing a ready flow of liquidity that ultimately drives a benign rate of asset inflation (eg property prices) that is sustainable. This is the model that the US and Europe a generation earlier, has tracked. Consumption forms as much as 60-70% of the US economy today.

If one has been observing the Singapore government's moves these few years, they will have noted a few broad moves to generally stimulate domestic consumption. Generally, they can be classed into three categories: (1)relaxation of consumption-related rules, (2)stimulating tourism and encouraging immigration, (3)building an economic hinterland. It is no complex model: in a sense it is similar to how one maximises income from say, the Google Adsense program (employed on my blogs) where website owners get paid when readers click on the advertisements shown. The idea is: drive web traffic to your site hence increasing the overall readership base (compare to points 2 and 3 above), and then try to increase the click rate (ie. total advert clicks / total readership) by customising the site and adverts (compare with point 1 above).

Just some examples. Point 1 is illustrated by the relaxation on downpayment rules for purchases of cars (in 2003, from 30% to 0%) and property (in 2005, from 10% to 5%), the two single biggest consumption items of households typically. In a way the planned building of casinos (sorry IRs) can also be seen as increasing taxable consumption that would otherwise have leaked away (to Genting and cruise ships). Point 2 is well-documented: annual tourism figures is targeted to double to 15M (from 8M today) within 10 years, with a plethora of attractions being planned, the most significant being the abovementioned IRs and the revamping of Orchard Road retail properties. Immigrants provide a new source of consumption: I believe about a quarter of Singapore's population today are non-citizens. That is the value of a developed country: you can attract people to move to your shores in search of a quality lifestyle. Even so, a population of say 5 million is inadequate to provide to critical mass of domestic consumption. Hence Point 3, which is illustrated by the multitudes of FTAs that have been signed these few years to facilitate easy passage of goods and services. In particular, an ASEAN free trade area would effectively open up the entire ASEAN market to flow of goods and services. With a combined population of ~500 million, that would surely provide the consumption hinterland needed, albeit with lesser spending power.