Singapore has fallen to fourth place - from third a year ago - on business school IMD's latest ranking of the world's most competitive economies. This came as Hong Kong rose to top the annual scoreboard, unseating last year's leader, the US, to third place behind Switzerland.
Local economists were unruffled by the one-place drop in the yearly rankings shuffle but said the IMD World Competitiveness Yearbook (WCY) 2016's analysis highlights perennial issues of high costs and talent attraction as growing challenges to Singapore's long-term competitiveness.
"Singapore has consistently been within the top five most competitive economies, so we're still talking about a very, very competitive economy despite the drop," said Christos Cabolis, chief economist at the IMD World Competitiveness Center, which ranks 61 economies annually on a mix of statistics and survey responses. Hard data - such as GDP and prices - accounts for two thirds of the total score, while the final third is drawn from IMD's survey of executives based in each location.
Opinions gleaned from that survey however, prompted Mr Cabolis to flag the quality of talent Singapore produces and attracts, as one area to watch. "The sentiment seems to be that Singapore has to strengthen its production of qualified engineers and managers. It relies mainly now on talent that is coming into the country and while Singapore remains one of the best places to live, given the cost of living, this becomes relatively more difficult," he said.
The cost of doing business too, features negatively in the IMD report. Cost competitiveness has in previous years been at or near the bottom of a list of "attractiveness indicators", going by the IMD poll. But only 1.5 per cent of respondents picked cost competitiveness as a pull factor in 2016 - down from 7.3 per cent in 2015 - and a level that Centennial Asia Advisors founding director Manu Bhaskaran describes as "abysmal".
"Clearly costs and the consequent relocation of activities out of Singapore are a problem," said Mr Bhaskaran. These threats stand against the positives at the other end of list: "policy stability and predictability" and "business-friendly environment", each voted for by over 70 per cent of respondents.
Mizuho economist Vishnu Varathan sees the cost issue as linked to the daunting task of Singapore reinventing itself to retain its edge as regional competition picks up.
"Low and simplified tax rates are perhaps the new norm as countries like Indonesia move in that direction and baseline manufacturing is increasingly looking to relocate out. Even service exports are rapidly becoming commoditised and increasingly viable from around the region."
"The proverbial low-hanging fruits are simply not available and it is only with continued enhancement to our education and skills framework that we can scale high up enough in the global economic tree to reap any kind of harvest," said Mr Varathan.
For now, competitiveness of regional economies appears to be waning. Apart from Hong Kong and Singapore, Asian economies such as Taiwan (14th), Malaysia (19th), South Korea (29th) and Indonesia (48th) all tumbled down this year's WCY rankings. "The general decline has been caused by the fall in commodity prices, a strong dollar and the deterioration of balance sheets in both the private and public sectors," said Arturo Bris, director of the IMD World Competitiveness Center said.
But it may not be useful to rank Singapore, a city-state, against larger economies with large rural populations, said UOB economist Francis Tan. And the reality of regional competition is that labour in other Asian economies is becoming increasingly skilled, yet not as expensive as Singapore's.
Infrastructure is being built rapidly in other ASEAN economies and knowledge transfer is taking place too. In fact, some of this is thanks to Singapore companies taking advantage of business opportunities in those economies, said Mr Tan. All this could erode Singapore's relative competitiveness further.
And, as labour costs are sticky upwards, Singapore will have to ensure that its value proposition is even more attractive to offset its higher costs, he said.
The details of the IMD report were not all bad news. Indicators such as productivity, labour market, attitudes and values and basic and scientific infrastructure showed slight improvements from a year ago.
These "appear to be long overdue fruits from the restructuring efforts", said Ms Ling. It would also square with the more nuanced and industry-specific measure of productivity gains which suggest that productivity growth may not have been as dire as earlier headline numbers suggested, said Mr Varathan.
However, Ms Ling cautioned that there is still room for further progress in real growth of overall productivity and SMEs. Also, there are data points - outside of the IMD report - which show a slow decline in Singapore's competitiveness, said Mr Bhaskaran. These include Singapore's share of world exports, both in services and manufacturing, and of world foreign direct investment, he said.
Mr Varathan believes that Singapore's policy response to the competitiveness challenge - from SkillsFuture to productivity incentives, to government initiatives to boost certain industries and start-ups - is "encouraging, but falls short of a guarantee".
"The nature of the beast is that the endeavour must be ongoing and the ability to seize opportunities is as much preparedness as it is adaptability," he said.
This article was first published on May 31, 2016.
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