Whatever happened to the nanny state? Singapore was always known for its government-led plans that pointed to certain future success. For more than 30 years, the government has orchestrated the city-state's emergence as a manufacturing powerhouse. In the 1990s, the government began to lure in the multinationals. And in recent years, Singapore pushed its businesses up the manufacturing value chain, making big investments in semiconductors. Upmarket manufacturing and creativity were supposed to guarantee Singapore's place in the information age. But the plans just didn't work out. The chip market collapsed, and the global economic downturn, exacerbated by the Sept. 11 terrorist attacks, has hit Singapore like a tsunami. The value of the Singapore dollar has fallen despite the government's efforts to prop it up. In the third quarter, the economy contracted 5.6 percent from a year earlier. For 2001, GDP is expected to fall 3 percent, the worst performance in the city's 36-year history.

If things look grim in orderly Singapore, the rest of Asia is facing equally dire straits. Signs around the region suggest the approaching recession could rival — and in some cases exceed — Asia's sharp downturn in 1997 and 1998. Personal bankruptcies are soaring in Japan and Hong Kong. Exports have plummeted around the region. In August, Japan's current account surplus fell for the ninth straight month, down 27 percent from a year earlier. Hong Kong's Chief Executive, Tung Chee-hwa, lamented the worsening situation in an annual address to legislators on Oct. 10 and warned of "drawn-out economic hardship." Hong Kong's media howled that his $1.9 billion economic stimulus package, which cut government levies for property owners, created 30,000 short-term jobs and provided some money for additional government spending, wasn't nearly enough.

But Singapore is ready to offer a paternal helping hand. The government just announced a $6.2-billion stimulus package, more than wiping out the island's budget surplus. The plan, which followed a $1.2 billion offering announced in July, includes well-directed infrastructure spending, tax rebates and salary cuts for civil servants. In a speech shortly after the stimulus package was announced, Prime Minister Goh Chok Tong suggested Singaporeans didn't appreciate the government's tough job: "Singaporeans live in a cocoon. Tonight, I want to share with you the burden that the government is carrying."

Singapore has understood for some time that it needed to diversify away from products like commodity computer chips better-suited for producers in low-wage economies. It bet big on higher-value semiconductors just before the entire electronics industry started twirling down the drain. Government-directed companies have invested more than $5 billion in sophisticated semiconductor manufacturing plants in the last three years. Government- linked companies also have spent nearly $3 billion in the past three years on the petrochemical and chemical industries. Health care and biotechnology — officials have said they'll invest $2 billion over the next year in biotech research — have also been beneficiaries of such government-directed investment. Despite the diversification, electronics still represents more than half of Singapore's manufacturing output, and manufacturing is one-quarter of the economy. As the computer industry slumps, Singapore suffers. Says Graham Parry, a regional economist for Lehman Brothers in Tokyo: "Too much dependence on a single sector, however high-end it might be, can still create problems."

Singapore's long-term recovery will depend more than ever on the government's ability to follow through on its most unlikely plan: creativity. Overhauling the educational system — a goal for the past several years — will be key. Singapore used to be famous for a Confucian educational structure that forced children to study long and hard, but within a narrowly defined band of subjects. In recent years, that emphasis was discredited for failing to produce graduates capable of adapting to changing employer needs. Vincent Lam, executive president of a Singapore NGO called Youth Challenge that helps shape the career goals of the city's young people, says students have long complained that they feel "packaged" in Singapore. Says a top legislator with the ruling party, Tan Cheng Bock: "We are slowly changing."

Too slowly for multinational companies in Singapore that feel they need to hire foreigners to find the skills they need. Currently, almost 30percent of Singapore's 2-million workforce are foreigners. Most are low-end workers doing street-cleaning or other manual labor. There are also a small number of highly paid foreign managers. But the increasing numbers of middle-ranked foreign professionals — the people companies feel they need to keep hiring — have sparked a backlash among ordinary Singaporeans afraid of losing their jobs. In response, the government has advised employers to give local job seekers preference for job openings, and it has raised the minimum salary required for foreigners wanting a work permit. "That's a good start," says legislator Tan Cheng Bock. "Singaporeans have always been a bit worried that their jobs are taken away because of the influx of people with qualifications that aren't as good as theirs."

But it's not a solution. As it is, unemployed Singaporeans are finding fewer and fewer opportunities as the ranks of the unemployed swell. In the first six months of this year, companies in the Lion City laid off 9000. But now, after the World Trade Center disaster and slumping consumer spending around the world, that number could easily surpass the 20,000 predicted by the government for 2001 and rival the 29,000 laid off in the worst year of the crisis three years ago.

Ultimately, Singapore may have to wean itself away from its big plans altogether. Some analysts argue that only risky investments will generate long-term growth. "You need a more vibrant private sector, which you haven't had because Singapore has been a managed economy," says Cliff Tan, an economist with Salomon Smith Barney in Singapore. "Singapore is a nation in transition. Before the crisis, the government was backing away from the old manpower planning scheme. It would be wrong to do a backflip on that now." In the wake of the terrorist attacks, the island's economic difficulties are heightened by the fact that its neighboring countries are sinking even faster. The war on terrorism has stirred anti-American sentiment in Muslim Indonesia and Malaysia, scaring investors. Even the best-laid plans can't solve problems like that.

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