Next Singapore PM faces the economic challenge of China

By FRAN O'SULLIVAN


Like New Zealand, Singapore is a small nation with a giant economy next door. Lee Hsien Loong, the city-state's next leader, talks about his plans for the future.

Can Singapore's Prime Minister-designate Lee Hsien Loong turn China's Rising Dragon from its biggest threat to its greatest opportunity?

This question will define Lee's premiership when he takes over from Goh Chok Tong some time before the 2007 elections.

The eldest son of Lee Kuan Yew, Singapore's first post-independence Prime Minister, Lee, 51, has long been destined to follow in his father's path.

Known by the sobriquet "BG" - he was a Brigadier-General before entering politics - he will face challenges his father could only have dreamed about.

The first is how to position Singapore to cope with the rise of China, whose rampant growth and industrialisation is rapidly eroding the tiny city-state's competitive position.

A micro-manager like his father before him, Lee is a pragmatist when it comes to discussing China's advance. As finance minister he has already cut income taxes and pushed Singapore further up the value chain to become a "knowledge economy" .

"We have certain advantages being a small country that will enable us to move faster than bigger ones," says Lee. "We've prepared well for this.

"You have to have that sense of danger and at the same time a sense of confidence."

Singapore seems to be over its own bad case of economic Sars: once one of the region's best performers, enjoying 10.3 per cent growth in 2000, it then fell into its worst recession since the 1960s. Growth recovered in the third quarter this year, but is flat-lining at an annualised rate of 1 per cent, well behind China's 9 per cent.

Sweeping tax changes have been made, some borrowed from former Labour Cabinet minister Mike Moore, "who told me the only way to do it was to harden your heart and say no to all special interests and have no exemptions across the board".

Income tax will be at 20 per cent next year and GST will rise from 3 to 5 per cent.

"Nobody likes a high tax - even if you bring something else down and bring this up - it's not welcome.

"What we were able to do was to buffer it with an offset package, so we could tell Singaporeans that those on low incomes - or below average - could be sure their offset package was enough to offset more than five years' worth of their new extra taxes.

"It was a very important part of selling the package - without that I think it would have been very difficult. But it's fair."

Singapore is being reinvented. International players have been invited to invest and comfortable, risk-adverse Singaporeans are being cajoled to become entrepreneurs.

But getting buy-in has required radical new practices by workers and employers.

"If you tell them, 'You have to train your workers', they say 'Somebody else can do that - I know my business better than you'," says Lee. "That may be so in the short term for an individual company. But as a country it will lead it to ruin."

To get over this the Government sent trade unionists and employers to Shanghai - "a salutary effect".

"Suddenly you are there and you see the changes," says Lee. "It is not a backward place - it is vibrant, it is thriving, people are getting ahead.

"Their Government has bright people inside it - their shopping centres are as swanky as anything you would find down Queen St here. They are going to arrive. They do not consider they are catching up. They want to be ahead of you.

"As one of them once said to us in an unguarded moment, 'We will prosper and Southeast Asia can supply us with agricultural products'."

Lee clearly admires the speed with which one generation has totally changed China and expects rampant growth to continue for another 20 years. He doubts whether the next generation will maintain it with the same intensity.

"Having grown up in one-child families in this very affluent environment, they will want to smell roses, as has happened to so many other countries."

In a perceptive analysis of post-1997 crash Asia which Lee gave to the recent Seriously Asia Forum, he urged his high-profile audience to take account of four salient factors: dire predictions of gloom had not been fulfilled as most of the crisis-ridden economies had recovered; rising China was a new engine of growth for the world economy - not a threat; the rapid emergence of India as the home for outsourcing business processes; and the importance of sending a signal at next year's elections that Indonesia eschews extremism and remains committed to secularism and modernisation.

Terrorism, North Korea and Taiwan posed potential geopolitical and security threats to the region, but Lee's general assessment was upbeat.

"Over the next two decades Asia will be the most vibrant and dynamic region in the world."

For Singaporeans this means no letting up. "I think living in Southeast Asia, the reality will strike you," says Lee. "There's no place you can go off and just commune with nature and let your hair down.

"You are engaged and you have to be - you can't get off the treadmill. You have to keep running and get ahead of other people otherwise you will be left behind."

Despite a well-heeled population with per capita income of US$24,000 ($37,000), Westernisation has gone only so far.

"You can still get in trouble with police if you walk around your house naked, have oral sex or fail to flush a public toilet," noted one journal.

Singapore's Government still exerts an almost legendary degree of social control. And talk (half-jokingly) about a "marrytocracy" is suppressed.

The Lee family is at the centre of a powerful web of cohorts - many direct relatives, others former Cabinet ministers.

As well as finance minister, Lee is deputy chairman of the Government Investment Corporation (which his father has chaired) and chairman of the Monetary Authority.

His wife, Madam Ho Ching, is executive director of Temesek Holdings, the powerful but secretive holding company of Singapore Inc which has shareholdings in a raft of companies including Singapore Airlines, Singtel and DBS Bank.

His 44-year-old brother, Brigadier-General Lee Hsien Yang, is chief executive of Singtel, and there are wider family links.

Goh has defended the family against nepotist claims.

"It is an exceptional family," he told the Financial Times.

The People's Action Party - which Lee snr founded - still has a stranglehold on modern Singapore. But chinks will inevitably emerge.

After confirming Lee as Prime Minister-designate, Goh cautioned that some Singaporeans were uncomfortable with his leadership style.

His public persona was of a no-nonsense, uncompromising minister, but Singaporeans would like him to be more approachable.

Foreign Policy journal summarised: "Like his father, and despite his facility with three of Singapore's four official languages, he finds it harder to relate to the ordinary Singaporean than to Harvard-trained administrators, global investors, and the international policy community."

A first-class education at Cambridge University - where he majored in mathematics, then later studies in Russian to cope with the Cold War - and a Harvard qualification in public management have clearly prepared Lee for his political career.

His "snappish intolerance" is now under control and a charm offensive launched through Singapore's compliant media in response to Goh's comments praised his empathetic nature.

During his New Zealand visit Lee met Cabinet ministers to discuss the Growth and Innovation Framework, toured Wellington's Weta Workshop to examine the creative development behind The Lord of the Rings and visited scientific institutions such as Wellington's McDiarmid Institute and the Liggins Institute in Auckland.

Goh has said Singapore faces competition for talent from New Zealand and other nations in the knowledge economy area.

But, says Lee, "it's a big pool we're fishing in - every country which wants to get ahead needs talent, needs networks.

"It's not so much the capital but the ideas and the wherewithal to come up with something that is valuable to make itself relevant."

It is on this score that New Zealand Cabinet ministers who talked to Lee wonder if Singaporeans living under their controlled economy have sufficient creative spark.

Singapore and New Zealand forged a closer economic partnership (CEP) after the Seattle World Trade Organisation talks collapsed.

'We are both small countries perched on the edges of big continents so we see the world in a certain way," says Lee.

Singapore has pledged to assist New Zealand with its lobbying efforts for an AFTA-CER deal - a free trade agreement between the Asean nations and the CER countries, Australia and New Zealand.

Lee acknowledges there has been antipathy from some Asean players.

"Part of it, really, is just an emotional thing," he says. "You are not Asian, therefore we don't let you in.

"But you have to link up with Asia because this is where your interests lie. Your big companies are already in the region.

"We have a big industrial park in Singapore and Lion beer is there ... I think they're doing quite well.

"The smaller ones find it harder. Maybe there is some way you can help them come over and use an incubator and take advantage of what the region offers without having to incur too much of an overhead or risk."

But the major differences are also cultural. Do New Zealanders want to buy into Singapore's tough work ethic - and lack of social safety networks - when even the Prime Minister-designate admits there are issues?

"Too many safety nets actually create new problems because then the effort to strive and achieve is lessened," says Lee. "And why should anybody try to get themselves out of a rut if he can sit there quite comfortably and be fed and clothed and looked after?

"We continue to have to make efforts - the drive, of course, is the hope of a better life."

But his premonitions about the potential softness of China's next generation could just as easily be applied to Singapore.

"If you are looking at second or third generation of professional families then I think there will be more of a tendency to say "Well, how about I take a year off and do something interesting without putting my nose to the grindstone straight away'.

"Hopefully with time they will find that life is not such a bed of roses."