The 78-year-old founder, ex-prime minister and now senior minister of Singapore complains during an interview with Institutional Investor that "there is a dearth of entrepreneurial talent" among Singapore's 4 million people.

The root of the problem, he explains, is "an East Asian reverence for scholarship":

The Chinese typically value education above all, so the ultimate aim is to become a mandarin - a shi, or scholar. Second in esteem is the nong, or farmer; third is the gong, or worker; and fourth and last is the shang, or merchant - the entrepreneur.

What Singapore must do, therefore, says its elder statesman, is overcome this antientrepreneurial ethos by promoting "little Bohemias": informal enclaves where the sometimes stifling sense of order that pervades this sophisticated city-state will give way to creative chaos (measured out carefully, to be sure) so as to generate innovation, stimulate entrepreneurship and ultimately spawn the kind of ferment epitomised by early Silicon Valley.

It's an astonishing notion: Lee, the micromanager of one of the most successful (and controversial) socioeconomic experiments of the latter half of the 20th century

Singapore achieved dazzling 8.9 percent average annual growth from 1965 through 2000 is now proposing, along with Prime Minister Goh Chok Tong, that this straitlaced, all-encompassing command-and- control economy nurture, well, free spirits.

This is a country that was built, after all, on discipline and conformity, in which the government owns six of the ten largest companies on the Singapore Stock Exchange and bans everything from Cosmopolitan magazine to chewing gum.

"We have to start experimenting," Lee insists. "The easy things - just getting a blank mind to take in knowledge and become trainable - we have done. Now comes the difficult part. To get literate and numerate minds to be more innovative, to be more productive, that's not easy.

"It requires a mind-set change, a different set of values."

The idea - no, plan - is for Singapore to hothouse budding entrepreneurs capable of starting companies that can go on to expand regionally and globally.

Headquartered in and committed to Singapore, these indigenous enterprises would show no inclination to decamp to China or other ostensibly greener pastures.

And by producing brand-name and knowledge- and technology-intensive products and services that countries with cheaper labour cannot readily copycat, these Singapore Inc. start-ups would allow the city- state to maintain its competitive edge for years to come. Or so its leaders believe.

All the same, Singapore's old "values" are not quite ready to be chucked out like one of the old videocassette recorders the city- state used to manufacture.

The country grew prosperous by attracting big business, not by nurturing start-ups, and Singapore's current business model has plenty of muscle and momentum left, especially for high-end manufacturing of disc drives and other computer paraphernalia (though no longer DVDs, much less VCRs).

Some 6000 multinationals, including such technology stalwarts as Hewlett-Packard Co., Philips Electronics and Seagate Technology, account for 42 percent of the city-state's GDP. "What has worked, better keep at it," says Lee.

Yet the senior minister and Prime Minister Goh recognise that Southeast Asia - Singapore's customary commercial zone - has lost much of its drive and, more important, that China poses an enormous long-term challenge as contractor to the world.

Politicians from Tokyo to Delhi are reeling from China's rapid emergence as a manufacturing powerhouse.

Even as Southeast Asia has struggled to recover from 1997's financial crisis and last year's global downturn, China has surged ahead. It recorded GDP growth of 7.9 percent last year and 8.1 percent in 2000. This year it's expected to grow a further 7 percent.

"It's scary," declared the Singaporean prime minister in a National Day speech last August. "China's economy is potentially ten times the size of Japan's. Just ask yourself: How does Singapore compete against ten postwar Japans all industrialising and exporting to the world at the same time?"

What's more, warns Rajeev Malik, a senior economist at J.P. Morgan Chase Bank in Singapore, "China is catching up faster than Singapore is leaping ahead."

And as Christopher Gee, head of research at ING Baring Securities (Singapore) notes, it takes a "long while to shift an economy, so the government must start to act and to act decisively."

Can Singapore pull off this commercial and cultural metamorphosis?

That is an intriguing issue. Singapore has had to be flexible before, shifting from textiles to rudimentary electronics and then to sophisticated electronics, chiefly computer gear.

But the transformation to an entrepreneurial mind-set is of another magnitude culturally, and some think that the city-state's rigid society may have irreparably blunted its people's entrepreneurial spirit.

"Risk-taking is not part of the culture here," contends PK Basu, Credit Suisse First Boston's chief economist for Southeast Asia. "Creativity does not flow naturally."

"Singapore's authoritarian system of governance is incompatible with an innovation-led economy," adds one foreign critic.

Senior Minister Lee guffaws at this, calling it "that argument that I've heard over the past four decades."

If you make the case that a "free-for-all society" is needed to produce great innovation, he asks, "how come so few countries in the developing world have succeeded?"

In seeming to tamper with its successful formula, Singapore is in reality confronting the distinct possibility that its long-standing business model is well on its way to becoming obsolete.

Last year the city-state suffered its worst recession since independence in 1965: The economy contracted 2 percent, the sharpest decline of any major Asian country.

Unemployment hit a 15-year high of 4.7 percent. The global downturn, compounded by the September 11 terrorist attacks, rattled the country's dominant electronics sector:

Sales of integrated circuits Ä the city-state's principal export Ä fell nearly 33 percent, and disc drive shipments were off almost 26 percent.

Rest assured, however, that Singapore's prosperity is not in any immediate danger.

Even amid last year's gloom and doom, Singapore was able to attract S$9.2 billion (US$5.1 billion) of foreign investment, about the same amount as in 2000.

Minister of Trade and Industry George Yeo asserts with a certain understatement that "even if we do nothing for the next five to eight years, we still can get by."

Most economists see Singapore bouncing back as soon as this year, along with the US, its biggest customer. CSFB's Basu predicts a "huge growth surprise" and points out that the economy grew 9.9 percent as recently as 2000. Goldman, Sachs & Co. doesn't anticipate that kind of spike but still expects solid 3.5 percent growth in 2002.

As it is, Singapore, whose per capita GDP has grown more than 30-fold over less than four decades, now has a higher per capita income ($24,740) than France or the UK, reckons the World Bank.

And a recent World Economic Forum survey of global competitiveness that considered everything from creativity to the availability of financing to the business climate ranked Singapore fourth, down from second in 2001, but behind only Finland, the US and Canada.

On the distant horizon, however, are clouds as thick as the smoke pouring from the factories in Guangdong.

Back in the early 1990s when the Southeast Asian tiger economies were in overdrive, they absorbed 60 percent of all the foreign investment in Asia; China had to content itself with less than 20 percent, and the rest was divvied up among Japan, India and Northeast Asia.

But in 2000 Southeast Asia attracted just 10 percent of total investment in Asia; China, meanwhile, sucked up 30 percent, or some $41 billion worth. The remainder went mainly to Northeast Asia.

China, says Lee, is "a vacuum cleaner for foreign direct investment." And although Singapore does not yet compete head-on with China in electronics - the city-state manufactures those higher-value-added computer devices, while China turns out mainly TVs and radios - that time will surely come if investment trends persist and Singapore doesn't succeed in shifting its strategy.

Indeed, in mid-April Dutch electronics giant Philips Electronics, one of the largest multinational investors in Singapore, indicated that it would shift its Asian regional headquarters to Hong Kong to save costs and be nearer China, its biggest Asian market.

Ironically, a government committee tasked with advising Singapore on how best to retain manufacturing companies is headed by Philips Electronics Singapore CEO Johan van Splunter.

Another threat to Singapore's vitality can be found in its own backyard.

As the provider of financial, logistical and other business services for neighbouring Indonesia, Malaysia and Thailand, Singapore feels the pain when their economies suffer, and none has fully recovered from the 1997 financial crisis. Politics have thwarted vital corporate and bank reforms.

"Singapore is sitting in a part of the world that is in serious danger of becoming an economic backwater," says Bruce Gale, Southeast Asia analyst for political and security risk consultant Control Risks Group in Singapore.

"The trend of investment moving away from Southeast Asia to China was apparent even before September 11. It will accelerate as a result of September 11, because investors are going to say, 'Where are the large Muslim populations in Asia? Southeast Asia, so let's stay away.'"

To address these mounting concerns, Prime Minister Goh set up an Economic Review Committee in December to draw up a blueprint for building the new Singa-pore.

To complement the work of the ERC, he also formed a Remaking Singapore Committee to determine what kind of political and social changes the city-state should adopt.

Headed by Lee Kuan Yew's son Lee Hsien Loong, who is minister of Finance and co-deputy prime minister, the Economic Review Committee comprises more than 60 prominent private sector members, such as Singapore Airlines chairman Koh Boon Hwee and Deutsche Bank Asian- Pacific CEO Robert Stein, as well as top government officials, including co-deputy Prime Minister Tony Tan and Minister of Trade and Industry Yeo.

The ERC's brief is broad. Is Singapore too dependent on multinationals and electronics products, which account for 61 percent of the city-state's nonoil exports?

What can Singapore do to meet the Chinese threat? Should manufacturing still account for one quarter of GDP in the Information Age?

Can the lack of local entrepreneurship be traced to a paternal and overbearing government that remains too involved in the economy?

The ERC's seven subcommittees are examining specific issues ranging from how to promote entrepreneurship and new service industries to how to win and retain manufacturing investment.

"We are having to work harder and harder to bring multinationals in," confides co-deputy Prime Minister Lee. "At what point do you decide this one is worth my while bringing in but that one I will have to incentivize so heavily that I will allow it to go some other place?"

Coming under the committee's scrutiny will be critical components of Singapore Inc's existing economic structure, such as the role of the mandatory pension scheme and of state-owned enterprises.

Also on the agenda: taxes, wages and land costs. Although the ERC isn't expected to deliver its report until August or September, some preliminary recommendations designed to spur competitiveness in the short term were unveiled in mid-April.

Key among these: a proposal that top corporate and personal tax rates be slashed from 24.5 percent and 26 percent to 20 percent over three years.

"The status quo is not tenable," declared Senior Minister of State for Trade and Education Tharman Shanmugaratnam, chairman of an ERC subcommittee on taxation, wages and land.

"Companies are moving, jobs are being lost, and more importantly, even when the economy recovers, the jobs aren't necessarily going to come back."

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