Singapore’s cost of living and global business competitiveness

Several different currents flow through today's Singapore. Some of these must be cause for consternation to policymakers. They ebb and flow at a differing pace but all combine to form a torrent as ordinary citizens vent frustration at the government.

Ensuring Singapore's economic competitiveness is one of the most vexing issues for policymakers, especially in light of increasing costs. Some analysts believe travel to Singapore has suffered lately due to the city's high cost structure. Surely, some of the higher costs are due to the appreciation of the Singapore Dollar (SGD) versus the US Dollar (USD).

Increasing the value of the SGD is an explicit tool in the government's fight against inflation.

Singapore's increasing cost of living threatens to impact the city-states international competitiveness

There is more than a kernel of truth in the idea that Singapore is becoming an increasingly expensive city. According to Mercer's Worldwide Cost of Living Survey conducted in March 2011, Singapore joined the top ten most expensive cities of the world for the first time in the country's history. In 2010, Singapore ranked eleventh.

Undoubtedly, enlisting in the ranks of the world's most expensive cities is not in itself cause for concern. That is, as long as the Republic's economic activity continues to move up the value chain, i.e. towards sophisticated manufacturing, research and technology, etc.

However, if placed in the context of Singapore's regional competitors then Singapore's soaring cost base is reason to worry.

Singapore has prided itself on being a more cost-effective business environment than Hong Kong. In 2011, again according to the Mercer survey, Hong Kong became a cheaper city than Singapore. The change is significant.

Additionally, none of Singapore's Southeast Asian regional competitors made it into the top 50 list of most expensive global cities. Kuala Lumpur, Bangkok and Jakarta are all absent.

Of course, there is more to evaluating a business environment than simply the cost of living, that too for expatriates. Issues such as quality of life, taxation, legal system, size of domestic market and regional connectivity all must be considered.

Clearly, Singapore has competitive strengths in several of these other factors. To date, few businesspersons have abandoned Singapore for Melbourne solely on the basis of Melbourne ranking number twenty-one in the Mercer cost of living index.

Singapore's test lies in reducing costs without affecting earnings growth for its residents. Arguably, the short term answer is cutting taxation. Longer term, focusing on developing clusters of value added industries might prove to be the answer.

The government's focus on establishing Singapore as a medical and life sciences research and development hub seem to be having some success. Singapore's emphasis on positioning itself as a broader knowledge / education hub feeds into this effort. If successful, these types of initiatives will catalyze the city-state into creating higher paid, value added jobs.

Short term, cutting taxes may be economically difficult in an atmosphere where populist pressure to increase expenditure on social welfare programs is rampant. However, given Singapore's historically prudent fiscal management and high level of reserves the taxation option deserves greater study.

Decades of painstaking efforts resulted in Singapore transforming itself as Southeast Asia's commercial hub. It is naive to believe Singapore's relevance as a regional hub will disappear anytime soon. However, policymakers are faced with difficult choices ahead.  

Singapore's financial managers must ensure the city's higher cost of living does not eclipse other positive factors (e.g. transparency, low taxation, English speaking). Regional cities like Kuala Lumpur, Bangkok and even Jakarta are attractive options in their own way. During the last decade, the trio has improved their physical infrastructure. Moreover, these cities have the added advantage of large domestic markets. Singapore must quickly adapt to the newer, more sophisticated regional environment if it is to retain its appeal as a regional business center.

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Imran is a business and management consultant. Through his work at Deodar Advisors, Imran improves the profitability of small and medium sized businesses. He can be reached at imran@deodaradvisors.com.