Singapore is going through a testing time. Since the financial crisis in 1997 we have been through one painful wringer after another. Each time as we were recovering, a new disaster sets us back. Terrorist attacks on the Twin Towers and the Pentagon on September 11, 2001 set back travel and business. Fortunately we were able in December that year to stop Jemaah Islamiyah from blowing up 7 targets in Singapore. The terror bombing of Bali on 12 October 2002 and then the Iraq war caused uncertainty. In March this year, SARS struck Singapore. The travel, tourism and retail industries were worse hit than by 9/11, increasing unemployment. People are tightening their belts, taking pay cuts and unpaid leave.

I know that many of your workers are worried about getting retrenched and I read Straits Times reports that people are troubled that the PAP government has not been able to get Singapore out of this rut. This made me worried enough to immerse myself in this unemployment problem in order to speak to you and dispel your unwarranted gloom for the future. The retrenchment numbers for the following 12 months is between 10,000 to 15,000 and it will probably bottom out after that.

Let me begin with the SARS epidemic. I have experienced fear. People in Singapore were terrified in February 1942 when Japanese troops captured Singapore and in 1964 when race riots caused panic and fear. In 1968 when Britain announced their troop withdrawal from Singapore, I was worried of unemployment for 30,000 employees when the British Armed Services retrenched. Another 50,000 people in provision shops, dry cleaners, bars, restaurants and domestic help that catered to British troops were about to lose their customers. In each crisis, people and leaders shared this worry for their future. This deep sense of crisis helped us rise to the challenge. The retrenchments began in 1968 but by 1973 we were short of workers.

SARS is special. Fighting SARS from mid-March to end of May, we were united as one people to protect the health and safety of every one. This experience bonded us as one people, regardless of race, language or religion. So I have renewed confidence that we have the unity and strength to overcome our difficulties.

Already there are signs of an economic recovery. The US economy is picking up and our exports to US will increase. If there are no upsets, we will make positive growth this year of between 0.5% to 2.5%. But tourists are still only at 75% of the pre-SARS level. Taiwan was cleared by WHO only on 6 July. It will take several months before travel and tourism return in full force. Already hotels, shops, taxis and Changi airport are not so empty.

The job market will be difficult for the next few years. When our economy was growing at 8-10% yearly in the 80�s and 90�s, we created twice as many jobs as there were Singaporeans. Foreign workers helped meet the demand, kept total wages down, and improved our competitiveness.

Now our growth will be slower. The world economy is slower. Because we are getting higher value added investments they will generate jobs although each job will have higher value-added. Companies will still need large numbers of foreign workers for work Singaporeans do not want to do. We have at present 200,000 foreign workers in the manufacturing and services sectors. This is twice the 89,000 people unemployed as at March this year.

To get employed old workers must adjust their wage expectations, their lifestyle and take less comfortable jobs. Even those previously working in the manufacturing industry need further training to acquire new skills needed for the new jobs whether in industry or services. Such economic re-structuring is inevitable because jobs and industries become redundant, and the new industries that emerge require new skills.

Competition from skilled workers with lower wages in China, India and the Eastern European countries means we have to cut costs or lose jobs. Our companies � especially our more mature companies like PSA, SIA and the local banks which have seniority-based wage structures � are now uncompetitive because their competitors have lower cost structures. If they are unable to persuade unions and workers to agree to painful wage restructuring, they may have to outsource work to low priced countries and retrench their older and expensive workers, adding to unemployment. I am glad to note that the SIA unions, four of which are affiliates of NTUC, have reached agreements with their management. I also understand that good progress has been made with unions in PSA. I want to commend leaders and members of these unions for making the right decisions even if it causes pain. Wage restructuring is painful but is necessary to save jobs.

But to reduce our unemployment further, we will also have to change our lifestyles. Many jobs in retail, restaurants and hotels require employees to work in split shifts, and on weekends and holidays. One of our top young entrepreneurs in the retail industry told MOM that despite paying well and offering a nurturing environment by training and developing the young people who work for her, she had difficulty hiring enough good staff. They objected to working weekends shifts and on festive holidays because they wanted to be on holiday with their friends. This is why many companies hire Malaysians or PRC workers who are willing to working longer hours, and on weekends and during festive seasons.

These are new realities. MOM reported that minimum salary expectations among job seekers has dropped 20%. That may not be enough, especially if in the last job, the retrenched worker collected a higher salary in a seniority-based wage system. At present NTUC is engaged in tripartite wage restructuring. Union leaders must help in this effort. Sectors dominated by older companies with seniority-based wage systems must restructure, if these companies are to remain competitive and jobs saved.

Despite the global economic downturn, Singapore is drawing in new investments and generating new jobs. During the 6 years since the financial crisis in 1997, Singapore has done much better than other countries in attracting a steady flow of foreign investment in manufacturing.

1. Foreign Investments Flows into Manufacturing � Selected ASEAN Countries (US$ billions)

Source: 2002 ASEAN Secretariat FDI Database, based on member countries' submissions.
(Singapore's data is based on FAI commitments as monitored by EDB.)

These investments will generate between 20,000 and 25,000 new jobs yearly � 75% for skilled (NITEC and above, including professionals) and 25% unskilled.

Let me give examples of major countries that did not make the basic changes necessary and so did not regain their economic momentum. They were two stellar world economies between 1960s and 1990s � Japan and Germany.

Japan is in trouble because of the bubble in the 1980s. They have not recovered because they have not made basic changes in their economic model for growth and were unwilling to take painful measures to revamp their system. Nissan bit the bullet with Frenchman Ghosn, retrenched workers. Nissan has recovered.

West Germany was the best growing economy in Europe and second best in the world after Japan. East and West Germany reunited in 1990. Now the economy is mired. German unions are not willing to adjust to a different world where Eastern Europe with low wage workers is drawing investments from Germany. German unions are still not willing to give up the gains that they had made in the boom years of the 1970s and �80s.

America is in sharp contrast. In the 1980s America lost their industrial lead to Japan and Germany. They were overtaken in the auto industry, electronics, petrochemicals, steel. But they were willing to take the necessary hard decisions to downsize, retrench and increase productivity. Their entrepreneurs created new businesses like Microsoft, Cisco, Oracle in computers, software, the internet and dotcoms, that made them the world�s fastest growing developed economy.

Nearer Singapore is the story of Hong Kong. It had high growth from the 1960s right up till reunification in July 1997. They are still suffering from the effects of the financial crisis, the bursting of the property bubble and the peg of the HK$ to the US$. Despite their changed circumstances as part of China, in one-country two systems, they delayed their integration with China, especially the Pearl Delta. They strictly controlled the entry of mainland professionals and workers to keep Hong Kong wages up. To keep Hong Kong property prices up and protect Hong Kong retailers, restaurants and shops, they restricted the opening hours of the crossing points with Shenzhen. But Hong Kong people went to Shenzhen for their tailoring, shopping, and dining. Unemployment rate in Hong Kong is now over 8%. After 6 difficult years, Hong Kong�s prospects for some recovery is through a close economic partnership agreement that was signed with China on 30 June.

Taiwan has also been slow to accept new economic realities. No three links, postal, air, sea, with the mainland plus restrictions on Taiwanese investments in China has caused losses on Taiwan�s economy.

Singapore has to change its economic structures. Technology has changed. Competition sharpened when China joined the WTO. Furthermore, the economies of Indonesia, Malaysia, Thailand, and the Philippines have not recovered their former buoyancy, so depriving Singapore of that added boost.

Jobs we lost because of SARS will come back in 6 or 12 months. After East Asian economies recover, air travel in the region will grow more strongly than anywhere else. So there will be a big demand for pilots and cabin crew. However the structure of the airline industry will change. As is happening in America and Europe, budget carriers will compete against the mainline airlines and carry many more new travellers in short-haul flights, those under 3 hours, though not for long haul flights, because of the cramped uncomfortable conditions. So pilots, cabin crew and ground staff, temporarily unemployed, can expect a return of demand.

But jobs lost because labour-intensive factories have relocated China, will not return. This is a problem for countries as far away as Mexico and Brazil. Unlike previous downturns, retrenchment this time has affected white collar workers, including middle management. Management world-wide has flattened their hierarchies by using IT. This restructuring is taking place in US and Europe and is working its way in Singapore.

This downturn is different from that in 1985. Our unemployment rate is 4.5% (89,000). The increased unemployment this year is due to SARS. If SARS does not return, the worst of the retrenchments in areas such as travel and tourism will be over by the end of this year. But the underlying problem is decreased demand. Although lowering costs cannot push up demand, it will induce employers to keep their workers on their payroll in order to expand their business rapidly when tourists return and business picks up. But even when demand returns retrenchments will continue because companies are restructuring their operations, relocating their factories in lower cost countries and outsourcing parts of the business from lower cost countries. While Singapore has its share of new investments and business activities, there could still be unemployment if our workers lack the right skills at the right price for the jobs created.

Hence meeting the competition from China and India is a long term problem. The NWC has recommended most companies to freeze their wage levels this year. We are also cutting other costs through lower rents, fees and taxes, especially company income tax. But we cannot compete only by cutting costs. Singapore wages can remain moderately higher than those in these low wage countries. However, we can justify this premium only if we have better educated and higher skilled workers, with higher productivity. The quality of the workforce is the decisive factor. Hence the efforts we are putting into educating our young. And we are setting up a statutory board for life-long learning to retrain the older workers on a large scale. Then our workers will be competitive in spite of their wages being higher than those in China and India, because they are better educated and trained.

At the same time we must make our wage structure flexible, and keep the burden of statutory costs low like CPF, or social insurance. Hence our emphasis on wage reform.

Finally it is the morale and spirit of a people that decide the outcome. Let me spell out our strengths that have seen us through several major crises. We have the best educated and skilled workers in Southeast Asia. We have world class infrastructure and the people to run and maintain them at world class standards. We have an international reputation for incorruptibility, and the ability to tackle sudden crises because we are nimble, flexible and supple in our response to problems. The way in which we managed the financial crisis, countered the JI terrorists before they could explode their truck bombs, and fought SARS methodically and tenaciously, has differentiated us from the pack. The present team of ministers has been tried, tested and proven. Apart from the PM, Tony Tan and myself, they are all in their forties and early fifties and can provide Singapore with strong and capable government for the next 10-15 years. This means more investments, more factories, more regional HQs and therefore more jobs, higher skilled jobs that can justify higher wages because they work with complex machines, robots and computers.

To expand our markets, over the last two years the government has woven a net of closer economic ties with the biggest economies in the world, giving Singapore an edge: FTAs with the US, Australia and New Zealand, JSEPA (Japan Singapore Economic Partnership Agreement) with Japan and soon an FTA with China and a CECA (Comprehensive Economic Co-operation Agreement) with India. US and Japan together they are the world�s biggest economies, while China and India are the world�s potentially giant economies. Others in ASEAN will also conclude FTAs and CECAs in the coming years. But we have a lead time of several years. This means products made in Singapore enjoy an advantage in exports to these countries, i.e. creating more jobs. EDB officers worldwide have reported that foreign investors have shown great interest in these FTAs because they will increase their exports. And investor confidence in the capabilities of Singapore ministers in managing unexpected difficulties has increased after they watched how we handled the SARS crisis.

However there is one big difference between 2003 compared to 1965: Singaporeans have grown accustomed to a higher level of comfort and prosperity. So many find belt tightening uncomfortable and the fear of unemployment makes them nervous. Let me assure you that the ministers have thoroughly studied all the options and know that the best approach is to meet the challenge head-on, even if this calls for painful measures. They know what they are doing. And they are doing it in close consultation with NTUC leaders in order to soften and lighten the burden on workers; we have kept the rise in the cost of living down at 1% per annum over the last few years. This long standing symbiotic relationship between the PAP and the NTUC has been a foundation stone of our success in coping with change. Without a responsible and strong NTUC leadership, able to work together with management and government to manage yearly changes in economic conditions through the NWC, we would not have enjoyed industrial peace and stability � another reason for EDB�s confidence in drawing in more investments and jobs.

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