As the world slides towards recession, Singapore has been forced to confront the fact that an economic model which has been the foundation of its affluence may never work as well again.

The tiny city state's role as a transport and financial hub, coupled with a dependence on electronics for its manufacturing sector, means it is being hit from all sides.

The economy is on course for a three percent contraction this year after 9.9 percent growth last year.

The emergence of China as a major exporter and magnet for foreign direct investment, the bursting of the global technology bubble and the prospect of an extended period of low growth in the United States means this is more than a cyclical downturn.

Analysts say the events of September 11 and the U.S. war on terrorism have exacerbated these trends for the former Asian tiger but not fundamentally altered them.

WARNING SOUNDED

Prime Minister Goh Chok Tong has recognised the changes afoot and began a major effort to alert Singaporeans in August.

"Our biggest challenge is therefore to secure a niche for ourselves as China swamps the world with her high quality but cheaper products," Goh said at a National Day rally. "We will have to stay one step ahead and move on to new activities."

Goh estimated the city state had about 10 years to make the transformation and move to the next level of development.

"We will need new energy, a clear sense of direction, a New Singapore, to compete in this new environment," he said.

But some analysts believe the time frame may now be shorter.

"The next two or three years are going to be very trying times for all of Asia," said Steve Brice, a global markets economist at Standard Chartered Bank.

But Brice said Singapore required more than a change in economic policy.

"We're going to need an even more dynamic economy going forward and a change in culture," he said.

Most economists argue Singapore is well-positioned to make the change as it carries no debt, has no fiscal constraints and boasts huge reserves of about US$73 billion.

The banking system is also relatively well-capitalised and was recently rationalised. The central bank is held in high regard by the financial markets and has a good track record in managing inflationary trends and the Singapore dollar.

NEW SOCIETY SEEN

Against this backdrop, the government has already begun to put into place the changes it hopes will transform society.

"New Singapore will be one of the world's finest, most liveable cities," Goh said.

The government recently announced investments in education, theatres, libraries and sports facilities. The policy is aimed at attracting foreign talent, largely university educated expatriate workers, to enlarge and raise the quality of its pool of human capital.

A package of measures on October 12 amounting to more than six percent of gross domestic product (GDP) introduced a scheme called New Singapore Shares through which the government plans to return much of its accumulated surpluses to citizens.

Corporate and personal taxes were also cut and the overall budget has been shifted into deficit.

Daniel Lian, an economist at Morgan Stanley, estimates the fiscal surplus is being reversed from an average of nine percent of GDP over the decade prior to 2001 to a projected 2.2 percent in 2001 and 0.6 percent in 2002.

Lian argues the October 12 package signalled a sea change in the economic philosophy of policy makers in Singapore that was more secular than cyclical.

The features of Singapore's new development model are becoming clearer and include a lower savings and investment rate, allowing greater household income and private spending.

It allows for an expanded role for the private sector, especially for small and medium sized companies rather than multinational corporations, although these will remain important.

There will also be a greater emphasis on education, medicine and biotechnology as areas in the services sector to replace lost electronics manufacturing.

Lian argues that Singapore is attempting nothing short of "a watershed change in development strategy".

The question is whether this new Singapore ultimately creates its own change in the domestic political system.

"It is increasingly anomalous to continue, with Singapore's economy being so integrated into the world system, as a single-party dominant state in absolutist terms," said Chua Beng Huat, a sociology professor at National University of Singapore.