Last month, South China Morning Post ran a somewhat scathing article about manufacturing in Singapore. I’m not too sure if Jake was deliberately turning off his economics knowledge and putting on a journalist hat when he made the statement:
Singapore is not really suited to manufacturing. It is too wealthy and has too little land, labour and manufacturing infrastructure.
In any case, for a long time, Ha Joon Chang has argued that the ‘decline’ of manufacturing is mostly just a statistical illusion of outsourcing – the shifting of direct hiring of supporting services to having these workers attached from service companies who are paid to keep up with the services. Not sure whether manufacturing and services can really be thought of as mutually exclusive.
Buttonwood’s recent blog post threw out a similar point when trying to scrutinize the ‘source’ of productivity and hence value-creation:
Manufacturing generates lots of spin-off service jobs, from the accountants who audit the firm’s books to the shopkeepers who sell the resultant goods or the restaurants that feed the factory workers. How many service jobs would disappear if the manufacturing sector went bust?
Singapore has had its time in manufacturing with most of the manufacturing capacity and output generated through attracting foreign manufacturers. These European and American firms provided the jobs, training, foreign direct investment; but Singapore also worked hard – through a combination of incentives, education policies that helped to churn out the necessary manpower and produce the effective labour market. Infrastructure investments that were necessary to ease the passage of goods out of Singapore to the targeted markets were made by the government. Returns on these investments took the form of trade surpluses, higher domestic incomes, which generated tax dollars. Combined with strong state capacity, an ecosystem was bootstrapped into being.
The SCMP column hit pretty hard on a few points:
- Singapore’s cost base is increasingly unattractive to foreign manufacturers (Jake’s point about them being fair-weather friends)
- Profits do get repatriated to investors’ home countries rather than reinvested into Singapore’s economy when times are bad
- Overall investments made abroad by Singapore economy as a whole might not have been yielding attractive returns (Jake’s point about unwise investments) – note that this point is really harder to prove or substantiate
I have little doubt that manufacturing is incredibly important to our economy nevertheless; and while Singapore is supposedly ‘moving’ into service economy, the truth is that our domestic economy has always been service-oriented, providing services that helps to drive the (foreign-owned) manufacturing sector forward. The link between manufacturing and services is well displayed in Singapore where we are beginning to see cracks even in our service economy as manufacturing sets on a path of decline. The question then, is whether as capital and manufacturing capacity increasingly moves beyond our borders, we can continue to capture value generated by them through the services that we can offer abroad. And more importantly, how are we going to ensure that this value really pipes back to Singapore economy at the end of the day?
The next generation of our economy will most likely to show up in figures as being more service-oriented but we should actually rely on high-value manufacturing and also work increasingly with hardware that has to be integrated with software. This is an area where we can have more of an edge and more to offer since over the years, we have built a solid base of firms doing an excellent job in system integration; involving both hardware and software components, often injecting their own value add, across several industries. So can we manufacture? Perhaps in a different way from what is traditionally thought. But we really ought to shift from just incentivising localisation of manufacturing to investing into new niches that we want to get into and surpassing those foreign investors who have given us our first shot at having a manufacturing base.
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