How Can Singapore Remain Competitive in a Globalising World Economy?

How Can Singapore Remain Competitive in a Globalising World Economy?

Sam Choon Yin (2003)



Everyone in Singapore has a role to play in at least maintaining the country’s competitiveness. Households must participate to influence decisions, make use of the decisions released by the government and businesses and match their ability with actions. Firms must raise their standards of corporate governance, curb corruption, focus on raising both productivity and quality and establish informal norms. The Singapore government can further improve the country’s corruption ranking, establish better relations with other countries, retain its ownership of core government-linked companies and fine-tune its CPF-related policies to increase voluntary savings.


1. Introduction

Microeconomics is a branch of Economics that tries to explain human behaviour at the individual level. Economics is a science of choice. Individuals are literally compelled to make hard choices because of scarcity. A relative concept, scarcity exists when the amount of resources that one possesses is not sufficient to satisfy all of his/her wants. Accordingly, the person has to rank the various choices that he/she has and choose the one which yields the highest net benefit.

The three main economic agents in the microeconomic system are households, firms and government. This paper suggests specific roles for the economic agents to (at least) maintain Singapore’s competitiveness in a more globalise world.  The fact that competition exists implies that the ‘winners’ in the race have not been determined. Can Singapore emerge as one of the winners?


2. Households

Households can play different roles. As shareholders, householders are theoretically powerful persons in public listed companies. The retirees can be powerful individuals in dictating how the aged society is to be managed. The young can make their voices heard to indicate how the leisure industry is to be handled. Every householder has a role to play.

Participation is important if households want their views to be heard. Individuals are generally rational thinkers. Both speakers and listeners are. When rational individuals are confronted with a problem, they assess all the alternatives that are available to them, compute their benefits and costs, and then choose the alternative which yields the highest net benefit. As rational individuals, they prefer to have more and not less. To me, rationality represents a valid concept to predict an individual’s thinking process. It tells us what goes into the person’s mind when he/she makes a decision without going into the extreme in giving the answer as to what the actual decision is. Let me put this in another way. Rationality tells us that ultimately an individual wants to choose the option that yields the higher net benefit but it does not go into the extreme in telling us for whom the benefits were accrued to. A person can be rational egoist (in which the benefits are accrued to the person and no one else); rational altruistic (in which the benefits are accrued to others) and rational communitarian (in which the benefits are accrued to the community).

To influence one to make a certain decision, the listener must be convinced that the decision will bring forth more desirable benefits than its alternatives. If households are not convinced about certain decisions made by the government, their views must be made known to the policy makers (the listeners). Likewise, shareholders can make their voices heard by informing the board members. The objective is to make the other parties (government and board members) aware of views from the ground. With help from legislations, they, the rational listeners, are likely to incorporate these views. It can be said that households have won at least half the ‘battle’ if they participate. A recent battle partially won by households in Singapore was the revision of GST rate from five percent to four percent in late 2002. This took place after the public voiced their unhappiness over the initial proposal to raise the rate to five percent from the previous three percent. The government responded and increased the GST rate to four percent instead.

Households need information to make rational and informed choices. The problem arises when households make decisions without seeking the necessary information even if the information is available at a reasonable cost. Of course, there can be instances where information is not available and costly to obtain. These problems are getting less serious here. Singapore incorporated companies are moving towards greater transparency. They are slowly adapting to the disclose-based philosophy as recommended by the Disclosure and Accounting Standards committee (headed by Singapore Technologies group consultant Ng Boon Yew). So is the government. Households must do their part. They should make use of the information released so that better decisions are made. Ultimately, the households, the companies and the country will be better off. For example, the country’s resources can be better allocated as issues are thought over more thoroughly before decisions are made.

Despite having the information, households may not necessarily be successful in initiating changes. The possibility of not making use of the information can be significant particularly if the thought of being a free rider prevails. Also, a single voice from minority shareholders may not be sufficient. They can be easily outvoted particularly in smaller family owned businesses. Collective bargaining cannot be underrated in this respect. Roles currently played by organizations like Consumers Association of Singapore, Securities Investors Association (Singapore) and National Trade Union Congress in Singapore must be retained and possibly strengthened to provide the necessary support.

Households act in different roles: as consumers, savers, investors and suppliers of labor services. Rationality directs their thinking process. Wanting more and not less, they choose the alternative which will yield the highest net benefit although only they themselves can tell what their respective utility functions are made up of. Outsiders cannot predict a person’s personality in an accurate manner. Typically, a person’s tastes or preferences towards certain issues can influence the alternatives’ benefits and costs. They can tell us the person’s willingness to consume, save, invest and work. The issue on ’ability’ however is given lesser attention. This should not be the case because households’ decisions can be influenced by their ability to choose among various alternatives. Do decision makers have the purchasing power to carry out the necessary tasks in relation to their decisions? Do they have the necessary talent or ‘fitness’? These questions need to be addressed. The key is to match ability with actions. Resources are better allocated if the actions conform to ability. Utility can also increase because the probability of failure is effectively lowered. Failure to consider the issue on ability may lead to rejections and individuals’ unwillingness to proceed with their initial choices. They create wastages of resources. The society’s resources could have been used more productively elsewhere.

Consider the following example: A student has recently completed his ‘O’ level examinations. He needs to make a decision as to whether he should take up the science stream or arts stream at the college. He has a strong ability to pursue arts related subjects. His peers however, seem to be very interested in choosing the science stream. He also perceives that the science stream will give him a better career prospect in the future. There is also a higher prestige of being a science student. He fears that he will lose out to others if he chooses the arts stream.

If the issue of ability is insufficiently addressed, a rational individual is likely to choose the science stream. The perceived net benefit of making that choice appears higher than its alternative. But, he fails to ask himself, ‘Do I have the ability to pursue a science-related career?  Will I be able to cope with the science subjects?’. Past events must be taken into consideration. Did he enjoy studying science when he was in the secondary school? Did he understand the contents of the subject or did he pass his science subject based on ‘memory’? Considering past events reminds him of his strengths and weaknesses so that present opportunities can be better addressed. It helps him to make better decisions. Addressing the ‘ability’ issue is essential. The ultimate decision chosen must conform to the ability to study, not merely to one’s willingness to study. The society benefits because the resources allocated to the decisions can be better utilized. The boy for example may be able to contribute more to the society by pursuing the arts stream. His insistence to pursue the science stream will create external cost to the society. Not only is he contributing lesser to society, his place in the science stream can actually be given to someone else who perhaps deserves the place more than him.

The idea presented above can be applied to other instances involving households. For example, the Singapore government’s call to encourage more elder workers to take up computer skills may create social losses if the workers do not have the necessary ability to take them up. Merely looking at the more objective issues like getting well paying jobs is insufficient. Lack of ability to take up the computer courses may lead to individuals ceasing to continue with the courses halfway. This creates wastages of society’s resources in training the persons in the first place. While opportunities may be available, households should be reminded to consider their abilities to better tap the opportunities and contribute to the country. Only they themselves will be able tell how able they are.


3. Firms

It is useful to note that firms are business entities. They do not function like human beings. Unlike human beings, firms are without a brain, a heart and other parts of a human body. ‘Firms’ do not make decisions. The persons-in-charge of the firms do. In small private corporations, the founders, their family members and close friends are the main persons making decisions. In public listed companies, professional manager are engaged by the board of directors (on behalf of the shareholders) to run the companies. They have the discretionary power to see how the companies’ resources are allocated.

Since the outbreak of the Asian financial crisis, calls have been made to reform the corporate sector in Singapore. Constructive steps were undertaken to raise the standards of corporate governance. One of the initiatives calls for separation of power between the Chief Executive Officer (CEO) and Chairman of the Board. The founder of the company can assume the role of the board chairman while a professional manager can be engaged as its CEO. The latter implements the board’s decisions. However, such an arrangement is justified only if the professional manager can add value to the existing system. It should be noted that it is not mandatory for the companies to have a separate CEO and chairman of the board. The initiative is merely a guideline as stated in the Singapore Code of Corporate Governance. It can be said that having separate persons to hold the two top positions is not very much desired by first generation of businessmen particularly in smaller family-owned businesses. The major shareholders in these businesses still want strong control of their companies. Their control over the businesses will be diluted when outsiders (professional managers) are engaged. Many do not want this to happen to their organizations. The professional managers may also dislike working in an environment where families and close friends are still very much in control. Their freedom to act and making decisions are limited. Lack of freedom demotivates the managers from working more productively. They may not work very long for the companies.

The progress to raise the standards of corporate governance may also be hindered to some extent because the present culture considers acts of non-compliance to leaders and elders as something that is not generally acceptable. There were but infrequent cases (in relatively larger listed companies) where shareholders voiced their concerns at annual general meetings (AGMs). It is generally more difficult for first generation businessmen to accept changes which can result in them losing their dominant power at AGMs.

Because of the above constraints, it may perhaps be more constructive for the founders and their family members to have full control of the small and medium sized family owned businesses, rather than using their resources to engage professional managers, if the latter were not given the autonomy to make independent judgments in the first place. This should be the case at least until the founders’ mindsets are changed which include more willingness to trust ‘outsiders’. My view is that it will take several years to see a complete transition. This is when the second and third generation businessmen take over the businesses from their fathers. I do not see this as a serious problem. The pace to raise the standards of corporate governance must be comfortable to the companies. It should not be done too hastily.

An emerging problem relating to the financial aspect of the firm is manipulation of accounting information. There are increasingly more of such cases around the world. Managers hide liabilities from balance sheets and inflate profits to expropriate shareholders funds. Creative accounting is a form of corporate corruption. Singapore companies are also susceptible to this problem. Availability of incentives and opportunities motivates managers to carry out the illegal and unethical acts. Lax corporate governance standards for example provide opportunities for managers to manipulate accounting information. There are also high rewards awaiting successful expropriation. Some companies offer share options plan to their managers to entice them to work harder. The problem arises when the managers resort to illegal means to raise the company’s share price. They can manipulate accounting information to give investors the impression that the company is doing well. The managers hope that with such ‘false’ information, the share prices will rise. Accordingly, they will be able to reap higher returns when the share options are exercised. It should be noted that managers are often offered large lots of shares, which means that they can be eligible to millions of dollars in rewards from the share options plan. The incentive to act improperly is thus very large.

Greed remains the main motivation which explains why individuals commit illegal acts like those mentioned above. There is nothing wrong with being greedy but individuals’ acts must be ethical. From the firm’s perspective, it calls for higher standards of corporate governance. Proper checks must be present to see that illegal and unethical acts are not easily committed. The board members must assume the responsibility to spot irregularities or wrong entries in the financial statements. Expand their roles to include nominating board members and determining the members’ remunerations. These were noted in Singapore’s Code of Corporate Governance. The companies must translate these words into actions. The company should not discount the role of its staff. Because of their intimacy with things happening on the ground, employees are more able to spot ethics-related problems in the company. They should be encouraged to voice out their concerns to the board members so that the problems can be looked at and rectified. The company must assure the staff that their interests will be protected after blowing the whistle.

Private corporations in Singapore can learn from the government’s experience in curbing illegal acts. The Singapore government for example strengthened the anti-corruption legislations to reduce opportunities for corruption. More power was given to the anti-corruption agency. Probability of catching the offenders and penalty costs imposed on offenders were raised. Public sector officers were paid salaries that were comparable to the salaries of their counterparts in the private sector. The objective was to reduce the incentive for corruption. There was also a strong political will among the politicians to contain the problem. They constantly appealed to the moral consciousness of public servants and reminded them of the benefits of doing good and the negative implications of corruption to the country. These lessons are worth learning by private corporations although they should modify the lessons accordingly to suit their local settings. 

Competitiveness can be treated very crudely as a combination of productivity and quality. To raise firms’ competitiveness, firms must attempt to raise both productivity and quality. The problem arises when the former is improved but only at the expense of lowering the latter. This problem is particularly acute in services. Efforts to raise productivity like leveraging on information technology and lowering costs may be done without paying adequate attention to their impact on quality. For example, customers may find it frustrating for having to wait long to get their queries answered on the phone because of the need to get through the long-winded automated telephone operator. Worse, the problem may not be resolved after the long wait. Or efforts to lower training cost and bonuses may create unhappy service providers who may vent their anger and frustrations on the customers. While productivity may have increased in the short-term, loss of customers due to poorer quality of services can cost the company in the longer-term. Managers must recognize the potential trade-off between productivity and quality, and see that they do not happen in their organizations. It is unfortunate that many companies in Singapore are caught in this predicament. In one service organization I know, training costs and bonuses were cut to boost productivity (to qualify for SPRING’s Singapore Quality Class Award) while bad practices like unnecessary bureaucracy and time consuming administrative routines remain. Frustrated staff could vent their anger at the customers. It is not impossible to resolve this issue. In an excellent book ‘Service Management and Marketing: A Customer Relationship Management Approach’, its author Christian Gronroos discusses how productivity and quality in services can be increased without sacrificing one or the other. This book should be consulted by all organizations (Gronroos, 2001, pp. 205-223).

It is generally agreed that the professional managers and their workers are the ones who run the organizations. While the shareholders are the rightful owners of public listed companies, the professional managers have the discretionary power to determine how the companies’ resources are used. Even in non-public listed companies, owners have to rely on their workers. Knowing whether the agents are doing their jobs diligently or not is often difficult. They have hidden knowledge and actions that are unknowable to the owners. Even if contracts are signed with the agents, problems like shirking and expropriation of funds can still occur. The contracts cannot dictate exactly how agents are to spend their time in the working place nor can they specify exactly how the organizations’ resources are to be allocated at all times. Even if they are specified, the cost of monitoring the agents to ensure that they are properly complied with is high.

It is the challenge to the principals (owners or shareholders) to see that the agents make choices for the benefit of the principals and not for their private benefit. In other words, efforts must be put in to align the interests of agents with that of the principals.

The usual recommendations to solve this problem include the use of incentive contracts like offering stock options plan and ‘pay for performance’ remuneration system. But there are problems with these approaches. Stock options plan for example requires the managers to wait for several years before allowing them to exercise their options. Those who are short sighted are less responsive to the plan. Some may perceive that they have lesser ‘control’ of the share prices. This can reduce the effectiveness of the plan to entice workers to work harder. Those who are more powerful in the companies may resort to manipulation of accounting information so that they can be rewarded more than what they deserve when the share options are exercised. For the pay for performance principle to work well, the companies must have in place a very good staff appraisal system which can assess their staff objectively and fairly. An appraisal system that is not so sophisticated may fail to entice the agents to work toward maximizing the principals’ interest.

In a recent article, I have suggested the establishment of informal norms to supplement the strategies (Sam, 2003). Workers are mostly followers of group norms. Setting norms is thus useful in organizations to provide the necessary guidance in decision-making. What I have proposed is not to set formal rules which some may not conform particularly those who dislike rigidity and formality. Accordingly, they will not be able to see how the formal rules can bring benefits to the companies in general and themselves in particular. Instead, workers generally prefer a more pleasant working environment where trust, cooperation, caring, sharing, flexibility and responsibility are present. These informal norms can be in written or unwritten forms. The managers must walk the talk and remind the worker about these intangible values in corporate functions. The key thing is for a majority of the workers to inculcate such virtues for they can bring significant benefits to the organization.


4. Government

A good discussion on the role of government to at least maintain a country’s competitiveness can be found in Michael Porter’s article on ‘The Competitive Advantage of Nations’ initially published in the Harvard Business Review (March-April 1990). In Porter’s world, government matters. The government’s role is to act as a catalyst to aspire companies to gain competitive advantage through means defined in Porter’s diamond model. The diamond model defines four determinants of national competitiveness namely factor conditions, related and supporting industries, demand conditions and firm strategy, structure and rivalry. Singapore can definitely learn from Porter. In fact, Porter advises the Singapore government on matters regarding competitiveness. Thus, it does not make sense for me here to further use his model and suggest how his model can be applied to the Singapore case. Porter has already done this himself.

Like firms, the government is a non-human entity. ‘Governments’ do not make decisions. It is the people in charge of the government who make the decisions. How the country is shaped thus depends strongly on the persons’ values. In a democratic society, the key decisions makers (or executives) are appointed by the country’s electorates to run the country on their behalf. The cabinet ministers in Singapore are part of the executives. They define the public’s interest. They come out with strategic and long-term plans for the country. They have the responsibility in seeing that the government officers working in ministries, statutory boards and government-linked companies (GLCs) implement these plans in an effective and efficient manner.

It is thus useful to discuss the principal-agent problem in the context of public sector management. The principal-agent problem is normally described in the context of private sector management.  However, because of a number of commonalities, it is also useful to discuss the problem in the context of public sector management. In public corporations, the state (ministers in the cabinet and members of parliament) acts as the agent working on behalf of the public. The public (like the voters) is the principal. The state has the authority to regulate production and consumption, impose taxes, and redistribute income. In the ideal case, its choices are motivated by the well being of citizens. The state, as the principals, must ensure that their subordinates (like the civil servants) make the best use of available resources. The principal-agent problem arises when the interests of civil servants conflict with those of the state.  It is possible for the public servants to shirk in their jobs and expropriate funds from the taxpayers. The public servants may deliberately slow down the way things are done to compel individuals in the public to bribe them with ‘gifts’, monetary or non-monetary (or both). These unethical acts can be treated as a form of corruption.

Singapore has been ranked highly as one of the least corrupt nations in the world. In the IMD World Competitiveness Report 2003 for example, Singapore was ranked the fifth least corrupt economy among 29 countries with population less than 20 million (after Finland, Denmark, New Zealand and Iceland) up from the ninth position in 1998. There’s certainly room for improvement. Why not strive to become the least corrupt nation in the world? Moreover, the rankings represent past achievements. Because individuals are marginal thinkers, excelling in the past cannot guarantee that the government will remain almost corrupt-free in the future. To maintain Singapore’s competitiveness, the government must continuously improve to maintain its clean and honest administration. Good rules must be enacted so that people are encouraged to comply with them on a voluntary basis. If people perceive the rules to be bad, they will be encouraged to participate in the underground economy (UGE) to bypass the government. Acts of corruption will become more common then. Government officers will be bribed to get things done for businessmen such as allowing them to under declare their earned income. Because some businessmen are not willing to pay the bribes, countries with rampant corruption are likely to suffer from lower investments. The country’s economy will be adversely affected. The Singapore government must see that this does not happen.

As countries become more integrated, a country’s competitiveness in the global economy relies very much on its ability to relate with other countries. Foreign business and political culture must be understood. This is one area in which the government of Singapore can improve on. There were evidences suggesting that government officials in Singapore were arrogant and uncaring towards others. For example, one of the reasons why the Suzhou Industrial Park project failed was that the Singapore government officials did not pay sufficient respect to the Suzhou Municipal authority. Any matters or problems that Singapore encountered during the venture did not pass through the Suzhou officers. Instead, Singapore dealt directly with Beijing without considering the negative feelings that Suzhou officials might have. Basically, Singapore did not give sufficient ‘face’ to their counterpart in Suzhou (see Pereira, 2003, pp. 134-139). Such incidents must not be repeated.

Calls have been made to the government in selling off its shares in GLCs that are non-strategic. Recent calls were made by the subcommittee on ‘Entrepreneurship and Internationalisation’. The committee was part of the larger Economic Review Committee. It presented the working paper on ‘Government in Business’ - submitted to the government on 30 May 2002. Twelve members from the public and private sectors supported the subcommittee’s leader, Inderjit Singh - a Member of Parliament and Executive Chairman of TriStar. The committee made recommendations to the government on issues relating to the future roles of the GLCs.  The committee called for the government to establish and maintain GLCs that were responsible in managing critical resources (such as airports and seaports), achieving public policy objectives (such as those related to health and education) and developing new growth engines (for example, the life sciences). Divesting non-strategic activities held by the government was recommended so that private sector companies could take over. How far the divestment goes and the speed of its progress are difficult to predict, and depend very much on the top leaders of the country. With the appointment of Ho Ching in the realm of the Temasek Holdings Pte Ltd and her connection with Lee Kuan Yew (her father-in-law) and Lee Hsien Loong (her husband), her decisions to break up the GLCs will be powerful provided that she is in support of divesting the GLCs. With regards to the THL, the committee requested the holding company to be constantly on the look out for any possibilities of consolidating and divesting the companies controlled.  Obviously the committee will like to see that these words are translated to actions.

Bhaskaran (2003) noted that divestment of the GLCs was not attractive to the government during economic downturns. One reason was that the assets prices were valued lowly during this period. Accordingly, selling off the government’s stake at this juncture would mean lower revenue takings for the government. While it is generally agreed that maximizing the selling price is the right thing to do in any business transaction, Bhaskaran felt that the government could look at the cost-benefit equation for the whole economy over time. He said, ‘they (policy makers) should consider the dynamic benefits for the economy as a whole if privatisation were pursued aggressively even if government earned less from divestment in the short term. If – as we believe – privatisation leads to a much more efficient and competitive economy with a better change of surviving the challenges ahead, the resulting incremental GDP would probably offset the government’s loss’ (p. 58).

My view is that there is no urgent need for the government to diversify the GLCs. The government does not need the funds. It can well afford to incur expenses in running the companies. While some are losing money, others are generating profits.  Proper mechanisms are in place to see that the GLCs are properly run. High standards of corporate governance are adopted as insisted by the Temasek Holdings Private Limited (THL). To an average consumer, it does not really matter who owns the GLCs as long as the goods and services are of high quality and reasonably priced. So far, the GLCs do not seem to have failed in meeting these criteria. To the private sector businessmen, divesting the GLCs may not give them the level playing field they had wanted. The divested GLCs can still win business orders if they provide value for money to their clients with or without government’s ownership. It is also useful to recognize that diversification efforts cannot be done hastily. The government must do it at a pace which it finds comfortable.

It is generally not true that the Singapore GLCs are less effectively managed as compared to those that are not linked to the government. GLCs can be effectively managed provided that right mechanisms are in placed. The tasks in seeing that the GLCs in Singapore are properly run are handed over to the Temasek Holdings Private Limited (THL), a wholly government-owned institution. The THL ensures that the GLCs are properly managed in its attempt to protect the interest of shareholders, the citizens of Singapore. The THL exercises its right as a shareholder to; first, vote on decisions to establish employee compensation schemes (including stock options), and to vote on succession and development plans in the GLCs; second, scrutinize material transactions (for example, the THL votes on mergers and acquisitions propositions involving the GLCs); and third, institutionalise corporate governance and disclosure practices. These were noted in the keynote speech delivered by S. Dhanabalan, Chairman of the Temasek Holdings Limited. The speech was read in the Asian Business Dialogue on Corporate Governance 2002 on 31 October 2002. The performance of the GLCs in Singapore has been impressive. For instance, several of the companies are listed on the main board. These include Singapore Airlines, Singapore Telecommunications, SMRT Corporation, Neptune Orient Lines, Keppel Corp, SembCorp Industries and others. Many have also won prestigious corporate awards.

If the purpose of divesting is to develop Singapore’s equity market, the Asian financial crisis reminded us that investors’ herd instinct could lead to massive capital outflows. A country’s economic fundamentals appeared to be of secondary importance. If the purpose of divesting is to diminish government control, then it is logical that the government’s resources gained in the process are transferred back to the public. Is the Singapore government willing to do so? Many observers may be reluctant to answer yes. These considerations essentially diminish the urgency of divesting the GLCs.

Let me turn to the issue on savings. Because of liberalization of the CPF, many observers feel that the CPF balances are not sufficient for the retirees to use during their retirement years. Low private and voluntary savings among Singapore residents worsen the situation. Some of the households are less willing to increase their savings because doing so will involve a change in their lifestyles from one with more consumption to one that involves less. It will take a ‘shock’ or perhaps a strong influencer to alter the household’s mindset. Some of the households also blame the government for the predicament that they are in – the constant reminder that their current savings are not sufficient to meet retirement needs despite their monthly contributions to the CPF accounts.

One of the problems pertains to the low CPF deposit returns. It is known that CPF cash reserves (contributions less withdrawals for purchase of housings, stocks and others) are tied to the returns equivalent to deposit rates in local banks. Mukul Asher estimated that the real rate of return on CPF balances and insurance funds for the 1987- 2000 period averaged 0.82 and 2.74 percent respectively which were substantially lower than real GDP growth (8.26 percent) and growth in average monthly nominal earnings (7.49 percent) (Asher, 2002). The government’s call for higher voluntary savings therefore will fall on deaf ears if the government does not rectify the situation and improve the CPF deposit returns accrued to CPF account holders. Asher (2002) suggests setting up the Provident and Pension Funds Authority (PPFA) to manage the retirement funds with its governance and practices internationally benchmarked. Manu Bhaskaran suggests allowing the external private sector fund managers to manage the CPF cash reserves (Bhaskaran, 2003). The current proposal to allow for a privately managed pension fund for CPF members is, in my view, a right approach to adopt. It at least gives the investors an additional investment choice to deliver higher returns over the long term.

The other problem relates to the payment of implicit tax by the CPF holders. The implicit tax is equivalent to the difference between interest earnings from CPF cash balances accrued to the holders and returns which the government received from investing the CPF cash. Because the latter is not repaid back to the CPF account holders, the households are literally paying an implicit tax to the government. The actual size of the tax is unknown. Bhaskaran believes that the GIC is doing reasonably good which assures us that the implicit tax is very much in the positive region. He urges the government to return the implicit tax back to CPF account holders ‘so at least partially overcome the problem of inadequately funded requirement’ (Bhaskaran, 2003, p. 55). Mukul Asher considers the elimination of the implicit tax an urgent matter to consider (Asher, 2002). He suggests ‘crediting the weighted average of returns of government investment companies, which are actually making decisions on the deployment of the CPF funds…..full returns must be credited to the Government Pension Fund, and other provident and pension funds’ (ibid, p. 32).

It is imperative that the government fine-tunes its CPF-related policies to increase voluntary savings. When savings for retirement years are corrected, desire to save voluntarily for emergency and retirement purposes may correspondingly increase because the households will have a large disposable income by then (for example, cash top-ups to pay for housing loans may no longer be necessary). The ability to some to set up their own businesses will also be strengthened. Correcting the CPF-related policies can also reduce the incentives for households to participate in the UGE.

It is generally perceived that the government is not very willing to reveal how effectively (or badly) the CPF funds have been utilized. This may unwittingly increase one’s desirability to engage in underground activities to avoid contributing any further to the government’s pocket. This should be avoided. A thriving underground economy (UGE) brings problems to the country. Let me highlight three of them. First, taxes are usually not paid in the UGE. The quality and quantity of government services will be negatively affected thus lowering the overall standards of living. Second, the government may try to recoup the loss revenue through higher tax rates. Further problems arise when those who are currently abiding to the regulations find that they are being unfairly treated. Some taxpayers may try to evade taxes in the next and subsequent fiscal years. Third, because knowing what is going on in the UGE is generally difficult, economic statistics like national income, unemployment and balance of payments are distorted. Government policies introduced base on the recorded statistics will not be effective in addressing their concerns.

5. Conclusion

This paper documents the challenges facing the households, firms and government to at least maintain Singapore’s competitiveness in a more globalise world. Every individual in the society plays a role to bring about a more competitive nation. The government can act as the facilitator to encourage voluntary participation from the households and firms in running the country. Good rules must be enacted so that people voluntarily comply with them. The households must accept policies directed to them. Likewise, firms must accept those policies that affect them. Together, they can push the Singapore’s economy forward.



1.         Asher, Mukul (2002) The Role of the Global Economy in Financing Old Age: The Case of Singapore. Research Report Number 2-2002, International Center for Pension Research (downloaded from

2.         Bhaskaran, Manu (2003) Reinventing the Asian Model: The Case of Singapore. Eastern Universities Press (Singapore).

3.,        Gronroos, Christian (2001) Service Management and Marketing: A Customer Relationship Management Approach. Second Edition.  John Wiley & Sons, Inc (United Kingdom).

4.         Heckett, James; Sasser Earl, Jr. and Schlesinger, Leonard (1997) The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value. The Free Press (United States).

5.         Pereira, Alexius (2003) State Collaboration and Development Strategies in China: The Case of the China-Singapore Suzhou Industrial Park (1992-2002). RoutledgeCurzon (Great Britain).

6.         Sam, Choon Yin (2003) ‘Productivity and Informal Norms’, in Productivity Digest (December 2003 issue), SPRING (Singapore).