Singapore Prime Minister Lee Hsien Loong said encouraging citizens to have more children is the biggest challenge confronting the island nation if it wishes to remain an economic juggernaut in the developed world.
The government hasn't succeeded in impressing on citizens that "this is going to be a retirement home and not a vibrant city" if the population is unsustained, Lee, 60, said in an interview in his office in Singapore on Nov. 26. "We'll be dealing with it over the next 10 years, and longer," he said of the legacy of a falling birthrate.
Lee, in his ninth year as prime minister, plans to unveil a package of measures in January aimed at boosting the fertility rate from 1.2 per woman. At stake is maintaining the achievements of an economy transformed by the embrace of free trade, fostering of higher-value manufacturing and nurturing of businesses and services such as gambling and health care.
"You have to be able to institutionalize what we have achieved," Lee said of the most important tasks for the country after its development under the leadership of former Prime Minister Lee Kuan Yew, his father.
While developed nations from Germany to Japan have struggled with falling birthrates, Singapore's size -- at 5.3 million on an island smaller than New York City -- means it lacks the domestic demand that larger economies can stimulate to sustain growth. Non-oil domestic exports are equivalent to more than half of the country's gross domestic product.
"It's an issue which many countries are dealing with," Lee said. "None of them have come to any very satisfactory solution because the trade-offs are difficult ones."
More than four decades after independence, women in Southeast Asia's only advanced economy are barely producing enough children to replace one parent. Policy makers have tried and failed to reverse the declining trend since 1987, and handouts of as much as S$18,000 ($14,700) per child, extended maternity leave and tax breaks have done little to sway Singaporeans to have more babies.
The government will debate its population policy in Parliament in January, Lee said in the interview. Areas being considered include priority housing for couples with young kids, paternity or shared parental leave, the defraying of childhood medical expenses, better pre-school and improved cash benefits for having children, Lee said in August.
The median age of Singaporeans will rise to 43.1 in 2020 from 37.6 in 2010, Bank of America Corp. analysts estimated in an April report. That compares with 23.9 in the Philippines, 31 in Indonesia and 28.4 in Malaysia at the end of this decade.
"It's going to be tough, and we may only see a marginal increase in the birthrate," said Chua Hak Bin, an economist at Bank of America who has studied the impact of Singapore's immigration and foreign-worker policy. "Past attempts have met with little success. Without immigration and foreign workers, Singapore may suffer the same fate as Japan, which is a bleak outcome."
Immigration has filled the gap for employers, highlighted by a strike among dozens of Chinese national bus drivers in Singapore this week that disrupted some services. The city is host to 2 million foreign residents, compared with 3.3 million citizens, and the increase in the non-citizen population has put strains on the housing market and public services.
Home prices climbed to a record in the third quarter, even after the government introduced six rounds of measures since the beginning of 2010 to rein in demand.
"We have had a property boom, almost a bubble," said Lee, who previously headed the central bank, served as finance and trade minister and studied mathematics at the University of Cambridge. "It's because liquidity is sloshing around worldwide and real interest rates are negative," he said. "That's a difficult problem for us on the overall property market."
Singapore, which uses the exchange rate to manage inflation, probably won't shift to an interest-rate regime to have more control over its borrowing costs, the prime minister said.
"It would be very difficult," he said at his office in the Istana, which was constructed in British colonial days and renamed after self-government in 1959 for the Malay word for palace. "Our economy is so open. We are a financial center. For us to sustain high interest rates at a time where interest rates worldwide are at almost zero, I think is very hard. We'd be flooded with money."
A widening wealth gap also has contributed to angst among voters, and rising support for the political opposition. The ruling People's Action Party last year saw its lowest share of the popular vote since independence in 1965, at 60.1 percent. Lee, the country's third prime minister, said the diminished PAP take hasn't been a surprise.
"It's what you would expect to happen as we have a change of generations amongst the population -- you are in a new age, much more open and interconnected," said Lee, who entered politics in 1984 after leaving the army, where he held the rank of brigadier general. "The question is in that environment, can we still get governments which take a long-term perspective beyond the immediate election."
The government is under pressure to placate voters without disrupting the influx of talent and labor that has helped the economy to more than double in size since 2004. Authorities have made it more expensive for companies to hire overseas workers by raising levies and requiring better educational qualifications for some categories of foreigners.
Even so, Singapore topped 185 economies to take first place in the World Bank's ranking of business conditions for 2013, and has attracted the likes of Facebook Inc. (FB) co-founder Eduardo Saverin, who renounced U.S. citizenship in 2011 to work and live in the city.
Nominal GDP, which isn't adjusted for inflation, more than doubled to $240 billion in 2011 from about $109 billion at the end of 2004, the year Lee took office. Singapore, located off the southern tip of the Malaysian peninsula and home to one of the world's busiest container ports, has diversified by luring pharmaceutical companies to build plants and ending a four- decade ban on casinos.
"Economically, it's been a great success," Lee said of the contribution of the casinos run by Genting Singapore Plc (GENS) and Las Vegas Sands Corp. (LVS) to the island's growth. "Socially, the impact has been about what we expected it to be," he said. "I think we did the right thing."
Turning to foreign policy, Lee said negotiations on maritime disputes between Southeast Asian nations and China should be between countries that are claiming the waters. The Philippines and Vietnam, fellow members with Singapore of the Association of Southeast Asian Nations, have seen tensions escalate in the past year with China over areas of the South China Sea that may hold energy reserves.
Asean members have disagreed over whether to pursue talks on the dispute in multilateral gatherings, such as the East Asia Summit earlier this month attended by U.S. President Barack Obama. The Obama administration has elevated the role of Asia in American foreign policy, in a so-called pivot toward the region.
Lee said the U.S.'s focus on Asia should be "sustained over a long period of time, rather than spasmodically."
"I think it needs to be done across the board and in a benign but powerful approach, rather than in a belligerent fashion," he said.
With the next national election not due until 2016, Lee declined to identify his most important contribution as a leader, saying "I don't think we should give ourselves report cards."
"You cannot come to a verdict yet because these are long- term issues -- talking about population, talking about immigration, whether it works or not. You will only know after a generation but you have to think about them now," he said.