While Hong Kong is integrating at breakneck speed with mainland China, Singapore seems intent on keeping a prudent distance from its volatile neighbours by tinkering with its growth engine in ways that reinforce its self-sufficiency.

But to succeed, economists say Singapore will have to rise to two huge challenges: replicate in services its stellar record in manufacturing productivity, and burnish its attraction for multinational firms by reinventing itself as a "lifestyle" hub.

"The challenge in the next 10 years is to try and improve productivity in the services sector," said Adam Le Mesurier, an economist with Goldman Sachs in Singapore.

As the historical gateway for trade with China, Hong Kong's gradual fusion with the mainland economy was always going to be matter of time.

But it was not inevitable that manufacturing as a share of Hong Kong's output should shrink to about five percent from more than 20 percent in the last two decades, as firms moved to cheaper China, while in Singapore it stayed around 25 percent.

The answer lies in productivity, according to Le Mesurier.

China's manufacturing productivity has easily outstripped Hong Kong's, luring thousands of firms across the border.

Singapore, by contrast, has outpaced Malaysia by notching up blistering 6.6 per cent growth a year in manufacturing productivity. As a result, with the exception of lower-end businesses such as port handling and electronics assembly, firms have had no need to quit the city state.

"Singapore simply has not had a hinterland hollowing out its manufacturing sector," Le Mesurier said in a report. The story is the same with services; survey data show Malaysia accounted for just five percent of Singapore's services trade in 1997.

CREATIVE SINGAPORE

This combination of high productivity and low integration -- influenced by political considerations -- helps explain why the neighbouring Malaysian city of Johor Bahru has not exported deflation to Singapore like Shenzhen has to Hong Kong.

"Singapore's ability to maintain an independent, autarchic economy rather than evolving into just another city servicing Southeast Asia means that there's less pressure on non-traded goods prices to equalise with its hinterland," Le Mesurier told Reuters.

How to retain that degree of independence is Singapore's constant preoccupation. The government has worked hard to promote high-value-added industries such as life sciences, taxes have been cut and a S$600 million (US$339 million) arts centre opened earlier this month as part of a drive to become a cultural hub.

"The idea is to be one of the top cities in the world to live, work, and play in, where there is an environment conducive to creative and knowledge-based industries," the Ministry of Information and Arts says.

Sanjev Sanyal, an economist with Deutsche Bank in Singapore, said it might seem absurd to try to "plan" a creative economy.

But he said a growing body of academic research -- as well as the success of the likes of London and New York -- shows that innovative, creative cities generate economic benefits that outweigh drawbacks such as congestion or a high cost of living.

"From Singapore's perspective this model has two important advantages: it is less sensitive to labour costs and...it is not dependent on the cities' immediate hinterland," Sanyal said in a report.

"This is a key strength of the model because of concerns about the economic and political future of the Southeast Asian region," he added.

Sanyal said Singapore already satisfied many preconditions of the successful metropolis: it is multicultural and open to foreign talent, boasts good civic amenities and its education system compares well with that of its Asian rivals.

Critics point to Singapore's strict censorship as just one reason why it is fanciful to think of the city state as a new Manhattan, and Sanyal said it was very difficult to judge whether Singapore would succeed in turning itself into a global city.

But he said the policy direction was correct. "We feel, therefore, that investors should re-examine the framework in which they view the City of Singapore," Sanyal said.

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