Asian Tiger
In this section
Current strategy : We strive for economic growth
Aside from the observation that Singapore ranks as #1 on the Economic Freedom Index, there are other sources of evidence that Singapore’s economic strategy has absorbed elements of the liberalization agenda in direct testimonies by Ministers and political leaders and history of policy decisions. One recent example is the response in Parliament in 2020 by Singapore Minister of Trade and Industry Chan Chun Sing to a Parliamentary Question “What is Singapore’s economic strategy?” (Chan Chun Sing, 2020).
We strive for economic growth to achieve three objectives
to give our people better job and better lives
to provide our people the opportunity to fulfil their potential and aspirations
to grow Singapore’s economic strengths for strategic relevance in the world.
Our economic strategies are developed to improve the quality of life and livelihood for Singaporeans. Quality jobs provide good wages and good wages and opportunities enable Singaporeans to pursue our dreams. Quality jobs come from quality investments. [...] Without natural resources we strive hard to create our competitive advantage and build up a strong reputation and trusted brand name for a Singapore based on the following ;
political stability. rule of law, consistency of policy execution over the long term
a progressive business environment, intellectual property protection
cohesive tripartite relations
skilled workers
physical and non-physical connectivity of air, land, sea, data, finance, talent, technologies and regulations
- Chan Chun Sing, 4 Feb 2020 Parliamentary Question response
Singapore’s economic strategy has been in a state of transition since 2011 with the status quo paradigm characterized by the following features ;
Embraces framework and institutions of capitalism
Measures success by income and Gross Domestic Product (GDP)
Comparative advantage defined as the export-oriented deepwater port
Open trade relationships reflective of strongest global economies
Attractive to foreign inputs of private capital and specialized skills
Grow scale of the economy with input of foreign migrant labor and natural resources
Long term structural investments and consistency of policy execution
Eyes wide open : Not if, but when
The consequences of economic strategy manifests through policy to many aspects of society and the economy from the structure of industries, labor relations, fiscal policy, trade patterns and everyday life experience for Singaporeans. These themes have been a consistent part of economic strategy throughout Singapore’s independence ;
Asymmetry of volume of trade from far flung trade partners in Europe, US, China compared to neighbors Malaysia and Indonesia (Singapore Statistics Economy snapshot 2019)
Foreign inputs of labor, energy, water, materials and intellectual capital
Public investments directed to physical forms of capital that support industry such as the creation of Jurong Island and the maintenance of it's security checkpoint
Publicly funded subsidies into education and healthcare services
Preferential role of private capital vs public institutions as risk bearer, decision making for investment allocations and imported vs domestic factors of production in materials, labor and capital.
The strategic trade-off between factor-assisted, rapid growth vs a slower, productivity driven growth model has been a continual conscious “eyes-wide-open” choice.
The question we must answer sooner or later is this: “When do we stop growing?” Or to be more precise, at what point do we stop importing foreign workers and cease to encourage foreign entrepreneurs and capital in Singapore? Because of our limited land area, industrial expansion together with the concomitant population expansion will produce overcrowding to increasingly uncomfortable limits. - 1972, Goh Chock Tong, (Singapore Prime Minister 1990-2004), Source (LKYSPP, 2016)
As illustrated in Figure D.9, throughout Singapore’s rapid growth period, factor accumulation of capital and labor accounted for 80% contribution of growth and only 20% from total factor productivity (Bercusson, 1995). These outcomes were intentional and facilitated by design through agencies such as the Economic Development Board (EDB) which set up high capital intensive industries in electronics, petrochemicals, precision engineering (Menon, 2015, Bercuson, 1995).
Not only the sources of inputs, but also the economic structure are long term changes which have been anticipated for decades. The Economic Committee's report into the causes and remedies to the 1985 recession identified the need long term for Singapore to reflect on it's comparative advantage. The report identified long term structural shifts towards services exporting industries - banking, tourism, engineering and professional services, and to go "beyond manufacturing" so that companies do not only perform assembly and production but also design, engineering and management functions. These functions utlize Singapore's comparative advantage of a highly skilled workforce with limited land area (MTI, 1986).
An evolving strategy
Singapore’s economic development strategy post independence is presented here in three periods (Menon, 2015). The evolution of the economic strategy dynamically interacted with global developments as both a reflection of and an influence on international trends and domestic developments.
Development periods
Figure D.10 illustrates the structural changes that correspond to the major inflection points of policy strategy. Two changes in particular are the rapid rise of manufacturing and shrinking of wholesale trade services from post independence until the 1970’s and the peaking and then decline of manufacturing in 2005-2010 substituted with knowledge intensive services.
Import substitution → Export oriented Industrialization (1965-1985)
The period from post independence in the 1950’s until the mid 1960’s shared similarities with the thinking of Latin America “import-substitution” that was complimentary to a common Malayan Federation economic zone and included an inward-orientation with high tariffs and other external barriers for foreign capital accumulation (Bercuson, 1995). This period was brief as Singapore was ejected from the Federation in 1965 coinciding with the British exit from the Federation in 1967 (Bercuson, 1995). The economic priorities at the time were to address the high unemployment rate of 9% in 1965, low skilled workforce, and slum living conditions through rapid industrialization, boost exports, large public housing investments all facilitated by attracting investments from foreign multinationals and importing foreign migrant labor (Bercusson, 1995).
The post-independence period marked a shift to an outward-oriented strategy focused on higher valued manufacturing for exports (Menon, 2015). This strategy -- Export oriented industrialization -- was “sharply at odds with the conventional economic wisdom at the time” (Menon, 2015) and persisted until the first recession in 1985. The industrialization was a period of rising incomes, human development, labor force participation and build-up of physical infrastructure with a balance of tripartite leadership between unions, business and government (Bercuson, 1995). The capital accumulation period was rapid in the first phase from 1965-1975, and starting from the 1970’s shifted to prioritize higher value-added skill-intensive industries, phase out of low wage industries such as textiles and intentional increase in wages faster than productivity through National Wage Council and increasing employer share of contribution to pension fund Central Provident Fund (CPF) up to 50% (Bercuson, 1995).
Liberalization (1986-2010)
In 1985 the country experienced it's first post-independence recession (Bercuson, 1995). By the late 1980’s Singapore was already classified as very high in human development with an HDI of 0.718 and 89% home ownership rate (UNDP, 2018 ; Data.gov.sg, 2020). Despite these achievements the belief at the time was that GDP growth was critical to achieving further welfare gains and the situation was portrayed as a national crisis. the pivot to more liberalization seemed a natural continuation of the trends from the prior period and complementary to the Reagan-Thatcher ideology “in the air” at the time (Birdsall, 2010) . The post-colonial city-state trading ports of Singapore, Hong Kong represented an ideal opportunity to pioneer the liberalization agenda. The strategy aimed to attract foreign direct investments and keep labor costs low and competitive (Bercuson, 1995).
In 1985 a task force, the Economic Committee EC led by Prime Minister Lee Hsien Loong was set up to determine the cause and recovery solution (LKYSPP, 2016 ; MTI, 1986). The policy recommendations and general strategy descriptions closely matched and likely served to validate the emerging “Washington Consensus” - support for multinationals, open borders for free flow of trade, capital and immigration, deregulation, privatization, less rigidity of labor relations. The recommendations from the EC presented a more formal intention to shift the balance of influence in the tripartite alliance from the labor unions to bilateral negotiations between employees and employers (MTI, 1986). This shift in influence can be observed by contrasting the negotiating influence of organized labor through the Labor Front at the time of the Hock Lee Bus strike of 1955 (Ho, 2014) to the influence of large multinationals holding board position in today’s government agencies responsible for economic development - Economic Development Board (EDB) and the Ministry of Trade & Industry (MTI). The policy decisions on economics and in other spheres retained consistency to the liberalization strategy up until the global financial crisis of the 2008 and 2011 election.
By the 2nd quarter of 1986 the recession had ended and GDP growth started to rise again (Bercuson, 1995). The economic policies adopted in response to the 1985 recession the trend of attracting foreign capital through deregulation, privatization and low taxes. The policies of lower taxes and wage containment guidance were further accelerated following the recovery from the Asian Financial Crisis of 1997 (LKYSPP, 2016). Between 1985 and 2011 the corporate tax rates were cut from 40% to 17% (Bercuson, 1995; Singapore statistics).
Signs that the strategy had run its course
Even after reaching high levels of human development in education and health outcomes, the policy reforms continued further into the turn of the century by lowering the tax share of GDP, rising incomes and rising population from foreign immigration. The structure of the economy also evolved in adaptation to the rising cost of labor and land with manufacturing becoming balanced with services and tourism. While the burst of growth appeared to validate the strategy during the 1990’s, several trends began to emerge. Each of these developments may be signs that the strategy may have run its course and exposing the economic and political trade-offs of the free-market rapid industrialization.
Emerging trends at the turn of the millennia
Income inequality - the gini index before taxes and transfers increased from 0.41 in 1990 to 0.48 in 2007 and remains high compared to other advanced economies. (MOF, 2015 ; OECD, 2020)
nativist popular opinion concern on foreign immigration (Weng, 2004)
structural shifts to new demands of the service economy
slowing labor productivity and increasing volatility from exposure to global conditions.
slowing global trade growth
Labor productivity plays a central role in the economic strategy from both the export oriented industrialization and the liberalization periods. The economic strategy of liberalization depends on labor productivity growth to translate private investments into real income growth. While labor productivity was high in the early periods the total factor productivity has lagged the similar Asian open market economy of Hong Kong from 1990 to the present, although this is contested by Singapore authors as sensitive to the measurement method applied whether and in particular how the cost of capital is determined (MTI, 2010).
International trade growth is another important role of the economic strategy. Throughout the period until the late 1990’s the strategy has been based around the primacy of the deepwater port as the central source of economic competitiveness (FAS, 1997;Chia, 2014). While the global environment from 1980’s until 2008 was a period of consistent annual growth in global trade, the period after the 2008 global financial crisis has been more uncertain with shifts in global supply chains and disruption from automation, greater international trade barriers to control capital flows and the open uncertainty of future global carbon emissions pricing and policies on freight costs (Hoekman, 2015). One of the consequences of the liberalization was exposure and dependency to global developments. During this period Singapore experienced numerous economic shocks which originated from disruptive events outside Singapore, such as the bankruptcy of Hin Leong in the wake of the coronavirus pandemic and collapse of crude oil markets in 2020 (Bowie, 2020). While many of the policies of liberalization continue to the present, a number of global and domestic developments challenged the status quo strategy and 2011 marked a transition point.
Transition (2011-present)
Following the 2011 election where the PAP received the lowest level of support and a number of important shifts began to occur politically and economically as part of longer term trends in the years following the 2008 global financial crisis and, as illustrated in Figure D.11, peaking of immigration rates and global trade. In that year the People’s Action Party (PAP) had the lowest election support in history with top voter concerns related to immigration and cost of living which prompted a response in a number of policy reform areas. The point marked a shift in policy to ease the push for more GDP growth and adopt more public welfare goals targeted specifically at the low income groups to discourage very low wages and provide a number of measures to curb rising cost of living. Examples of policies included targeting higher wages for immigrant labor using income quotas on work visas, foreign worker levy penalties for employers who pay lower salaries, fees and other measures to discourage over-consumption in the real estate market and increasing the affordability and availability of new public housing units and introduction of new progressive social policies and safety nets (Lee, 2017 ; Chia, 2011).
That year was the peak of net immigration (Macrotrends), peak of manufacturing share of GDP (Singapore statistics) Figure D.10, and increased attention in policy reports on inequality, service sectors and productivity. A number of policy changes were made reflecting a shift from the previous strategy that can be characterized as progressive and placing greater emphasis on social policies, wealth inequality and digital, knowledge intensive industries. So far these shifts have been gradual (Lee, 2017) and so the current period can be more accurately characterized as Transition as it still retains many of the Export-oriented growth, liberalization legacy from the prior periods.
Looking ahead : Decisions to make
Singapore is at a transition point, the empirical data of rapid growth and rise of human development, standard of living from the post-independence period strengthen the support for retaining liberalization elements, however the election results and productivity, inequality outcomes point to signs that the current strategy can’t last forever. Where is the right balance?
Optimal policy choice should start with the end in mind with a clear, measurable definition of prosperity and be guided by a flexible evidence-based methodology. Singapore’s governance has experience with both periods of heavy state-led development such as in the pre-independence period and free-market phase from 1965 until present. Throughout, one of its enduring comparative advantages is also one of the strengths of the liberalization ideology - strong governance, low tolerance for corruption in either government or the private sector, faith in the long run public investments and a penchant for implementation capabilities no matter the strategy. There are warning signs of the risks of continuing with the unfettered free-market liberalization agenda, however it would be equally naive to reject all of the elements of liberalization and benefits of free markets, strong governance institutions. In time Singapore may be willing to consider a more nuanced, balanced approach. The evidence of liberalization policy effectiveness is reviewed in the next section. While the evidence links some of the basic features of free-market capitalist institutions to good economic outcomes on a range of measures, there are important qualifications of the complete picture of the range of human behavior, measures of success, development stage of the economy and trade-offs between pace and equity of growth.
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