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Structural Changes and Domestic Reforms in Singapore 1 1 Structural Changes and Domestic Reforms in Singapore: Challenges and Implications to Regional Co-operation in ASEAN and East Asia Hank Lim 1 1. Stru ctu ral Sh ift in Global an d Region al En viron m en t Singapore’s remarkable economic transformation in the last four decades has been, to a large extent, due to its capacity to leverage on external sources and external markets to achieve economic output far beyond its domestic production possibility curve. Such sterling policy performance was the result of far-sighted policy makers in managing and optimizing emerging favourable external environments. Specifically, the Government provided world-class infrastructure, transparent and effective institutions and sound macroeconomic policy framework to create economic value for the global marketplace. As a result, Singapore has been one of the favourite investment destinations for multinational companies in this part of the world. Lately, there have been several major events occurring in the global and regional environments that have serious long-term implications to Singapore’s economic viability and performance. Firstly, the Asian financial and economic crisis in 1997 has devastated the financial and real sectors of many Southeast Asian economies that serve as Singapore’s hinterland for resources and market. The quick economic recovery in ASEAN and in Singapore in 2000 was primarily due to export expansion from low export bases and stimulus from highly devalued regional currencies. It would take many years for the ASEAN economies to fully recover from the debilitating financial sector mismanagement and non-performing loans in the financial and banking sector. As a regional hub, Singapore cannot prosper as long as the regional hinterland remains economically weak, and socially and politically instable. Singapore needs a prosperous and dynamic Southeast Asia to complement it in an environment of competitive regional clustering. 2 Asian Development Experience, Vol. 3 The second major external change is the accelerating market liberalization and borderless nature of the global economy. The global marketplace has become strikingly more competitive and more complex as a result of this relentless process of global production networking. The new global economic structure, widely known as the New Economy, is the product of three major elements, namely, information technology, changes in government policy and corporate restructuring. Information technology is an important force shaping the contours of the global economy and contributing to the shortening of the product cycle and changes in the comparative and competitive advantage of trading countries. The shift to information technology as the basis for industrial production is forcing a change in industrial organizations. Economic globalization, together with the IT revolution, is undermining the competitiveness of the large, vertically integrated industrial organizations that have been the mainstays of the East Asian industry in the age of industrial technology. Networking organizations that utilize out-sourcing and supply-chain management are more suited to the new IT environment than self-contained organizations. As a result of this IT revolution, the comparative advantage of many industrial economies, including Singapore, is affected by this new configuration of industrial location. With the process of globalization and IT revolution, the “flying geese” model is becoming less relevant to describe the pattern of development in East Asia. Differences in the adaptability of East Asian economies to these external changes are disturbing the pattern and distribution of industrial locations in East Asia. The third major external factor is the accession of China to the World Trade Organization (WTO) in November 2001. When China acceded to the WTO, ASEAN countries were alarmed by the prospect of a head-to-head competition for trade and investment with China. Even before becoming a formal member, China had been enjoying the Most Favoured Nations (MFN) benefits accorded by the US and EU on a year-to-year basis. However, after the formal accession, China now has to abide by the binding commitments and responsibilities on liberalization and de-regulation of its largely closed domestic economy. On the other hand, China is assured of market access to the world’s richest industrial economies and accorded full privileges as a member of the WTO. To take advantage of China’s huge domestic market and more transparent domestic economic policies, the flow of foreign direct investment (FDI) has been directed to China, even before China officially became a WTO member. In the early 1990s, ASEAN economies received almost two-thirds more of FDI than China. During 2000–2001, China received more than double in FDI than ASEAN economies. This is...

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