This young, successful nation, however, is now facing its worst-ever economic challenge since independence - an export-reliant economy crippled by the US slowdown and the electronics industry down cycle. The economy's performance in the next one to two years and the government's ability - or lack of it - to pull the city-state out of economic doldrums will have profound implications on the social fabric and the party's mandate to remain in power.

After 20 years of hypergrowth at an average of 8 percent per annum, an estimated economic decline of 3 percent this year came as a huge blow to the national psyche. In the third quarter, the economy shrank by 5.6 percent compared with a year earlier, and the contraction looks even more staggering on a quarter-by-quarter basis - a whopping decline of 9.9 percent. "Singapore headed for worst slump in over 30 years": The headline carried by the main business daily Business Times pretty much sums up the mood.

For the younger generation, economic growth and continued material prosperity have been taken for granted; as if "recession" is a word that plagues other countries and its neighbors with not-so-wise government policies and not-so-world-class bureaucrats. Singapore was, after all, one of the few countries that were spared from the financial crisis that swept the region by storm during 1997-98. It is, however, not so lucky this time around - it is not only one of the first to plunge into a recession but is also in worse shape than others.

"We need to remake Singapore," Senior Minister Lee Kuan Yew said recently when addressing the young graduates of the National University of Singapore. The elder statesman's golden advice has echoed throughout the island amid a growing concern that the high savings and investment-led growth strategy that has propelled it to become a metropolitan and prosperous city is losing its luster.

To illustrate this point, two areas of the Singaporean economy are worth highlighting.

As an economy grows and matures over time, the manufacturing sector's share of national output or gross domestic product (GDP) will shrink and the services sector's share of GDP will increase. This is a graduation from one who uses his hands to make a living to one who utilizes his brains. Manufacturing industries, from the yarning of textiles and sewing of clothing to wafer fabrication, typically involves more physical capital than human capital compared with the services industries. Financial, legal and information-technology (IT) consultants need more human than physical capital to run their businesses. Economic development in the United States saw the manufacturing share of national output decline from 28.6 percent in 1950, to 24 percent in 1970, and to 17.9 percent in 1990. The manufacturing sector accounts for no more than 16 percent of national output in the US today.

In the process of transformation from a manufacturing-based to a service-based economy, labor has to make the necessary adjustments. That is to say people must be equipped with the right skills for them to take on a new role as a financial consultant from their previous role as a factory foreman - metaphorically speaking. Of course, government plays a critical role of providing a conducive environment for people to learn and acquire relevant skills. But not all will be able to make it from the factory floors in Jurong to the financial center of Shenton Way in Singapore. There will inevitably be some losers in the process. Structural adjustment is always painful, meaning unemployment will rise, which could be potentially unnerving to the social and political fabric of the country but is somehow necessary for the economy to progress over time.

Over the course of economic development in the past 20-30 years, many East Asian economies have been through this process. Since the 1980s, Japan has seen many of its industries, starting with the labor-intensive makers of textile and clothing and consumer electronics, migrating to neighboring South Korea and Taiwan, then to the Southeast Asian countries of Thailand and Malaysia, and more recently to China. Hong Kong provides an even more illustrative example: like Singapore, it is scarce in land but not in population. Once upon a time, Hong Kong made itself famous by being a "sweatshop factory" of High Street fashions, a maker of toys and plastic flowers (that provided a humble beginning for many tycoons who later turned themselves into media moguls). Hong Kong's manufacturing sector accounted for 23.7 percent of GDP in 1980. Over a course of 20 years, factory owners packed up and moved from Hong Kong to Guangdong and Shanghai, where land is abundant and labor costs are one-fifth as much. Manufacturing accounts for no more than 6 percent of GDP today in Hong Kong. With the "hollowing out" of manufacturing industries, some jobs were lost to nearby Shenzhen, some gave way to more service-oriented employment, and those without the relevant skills remain structurally unemployed and may never return to the job market.

Singapore, however, defied gravity - at least until recently. Until a few months ago, the Economic Development Board of Singapore (the investment promotion agency that has spearheaded industrial development on the island) has single-mindedly aimed at maintaining the manufacturing share of national output at no less than a quarter. According to figures from the Asian Development Bank, the manufacturing sector's share of GDP has remained largely unchanged in the past 20 years (see table below). Until recently, the government was still courting semiconductor companies to set up more wafer fabrication plants in Woodlands, and chemical companies to build more crackers on Jurong Island. By pumping in huge investment and providing various incentives to lure multinational capital, Singapore has largely resisted the painful adjustment of labor relocation and rising unemployment. But it can resist no more - the number of unemployed is expected to climb to a historical high of 25,000 (out of a workforce of 2 million) - and will have to swallow this bitter medicine.

Singapore also needs to move away from its "abnormally high savings" rate to boost private consumption, argues Daniel Lian of Morgan Stanley. Singapore has one of the highest saving rates in the world, thanks to the compulsory savings scheme that imposes mandatory savings of no less than a quarter of workers' salaries. The excess saving over investment has produced large current-account surpluses of US$15-$20 billion every year, which is used in turn to finance a vast external trade sector. Singapore is heavily reliant on trade (exports account for more than 300 percent of its GDP) and yet the small island is a price taker on most of the goods it produces and exports. Lian argues that the institutionalized high saving rates have distorted the consumption-saving preferences of households and corporations. Only in "war-torn" countries is private consumption running at as low as 40 percent of GDP as in Singapore. Singapore's economic growth is largely powered by investment (gross capital formation) and trade, which together accounted for roughly half of its GDP in 2000. But in most countries private consumption typically accounts for two-thirds of GDP, and investment, trade and government consumption make up the rest. This makes Singapore particularly vulnerable to external shocks such as the electronics industry's cyclical downturn, since private consumption or domestic demand is weak.

Can Singapore be remade? We'll have to wait and see. But one thing is for sure - government policies to reallocate scarce resources to desired industries come at a cost. Singapore is paying for that now.

Is Singapore an aberration?

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