Singapore's Economy Transformation

INTRODUCTION

In 1994 the World Bank described Singapore as the most successful economy in the world and moved Singapore from a third World country to a First World nation within a generation.

From the Singapore Department of Statistics, Singapore’s gross domestic product (GDP) has grown approximately 7% annually from 1965 to 2009. This was accompanied by a low inflation rate of averaging about 2.1% yearly. Singapore’s 2009 per capita income of US$36,537.00 is the second highest in Asia after Japan and about 78% of the level of the United States (US). According to 2010 Global Competitiveness Report by the World Economic Forum, Singapore’s economy is now ranked third in the world ahead of the United States, hosting to over 7000 multinational companies (MNCs).

Table 1 provides a summary of Singapore’s economic and social progress over the past 44 years.

|1965 |1970 |1975 |1980 |1985 |1990 |1995 |2000 |2005 |2009 | |GDP (S$ Million) |8,891 |16,207 |25,259 |37,959 |51,702 |77,299 |118,963 |162,379 |180,496 |265,057 | |GDP Growth (%) |7.5 |13.7 |4.1 |9.7 |-1.4 |9.0 |8.0 |9.6 |8.4 |-1.3 | |Inflation (%) |0.3 |0.4 |2.6 |8.5 |0.5 |3.4 |1.7 |1.3 |1.7 |0.6 | |Per capital GDP (US$) |512 |914 |2,505 |4,854 |6,466 |12,110 |23,806 |23,043 |25,191 |36,537 | |Gross Domestic Savings (% of GDP) |10 |18 |29 |38 |41 |43 |50 |48 |47 |44 | |Total Population (Million) |1,887 |2,075 |2,263 |2,414 |2,736 |3,047 |3,526 |4,018 |4,250 |4,987 | |Unemployment Rate (%) |9.2 |8.2 |4.5 |3.5 |4.1 |1.7 |2.7 |4.4 |5.3 |3.2 | |Literacy Rate (% above 15 yrs old) |73 |78 |83 |86 |89 |91 |93 |94 |95 |96.3 | |Life Expectancy (years) |66 |68 |70 |71 |73 |74 |76 |78 |79 |81 | |
Table 1. Singapore’s Economic and Social Progress, 1965 – 2009

Sources: World Bank Development Indicators, 2010, The World Bank; Singapore Department of Statistics and Ministry of Health, Singapore.

Since independence, Singapore had enjoyed an impressive economic growth record. This essay aims to analyze the contributing factors towards the successful transformation of the Singapore economy by adopting the Trinity development model. The Trinity development model includes the EGOIN theory, the Triple C theory and the S-curve. This model seeks to provide a common principle for development through functional solutions to ease poverty and supports economic growth.

CATEGORIZATION OF THE SINGAPORE ECONOMY (THE S‐CURVE)

The S-Curve classifies the global economy into three groups: turtle (low income, slow growth), horse (middle income, rapid growth), and elephant (high income, slow growth). The growth rate of the per capita income is shown by the slope of the S-Curve, the steeper the slope will correspond to higher growth rate. According to Lim Choon Yah, in terms of per capita income growth rate on a yearly basis, elephant economies normally grow at less than 3-4%, whereas horse economies grow at more than 4%. Turtle economies, like elephants, will grow at 3-4% at best.

In 1965, Singapore was categorized as a mature turtle economy afflicted by low savings and foreign investments, poor infrastructure and massive unemployment. Since then, Singapore experienced a spectacular economic transformation and has moved into the Horse economy. Nowadays, Singapore is between the Horse and Elephant economy as it has an ageing population, but still has high savings and high investment rates.

The common characteristics of the high growth the Horse economies are:

1. Control population growth
2. High saving function
3. Export-oriented industrializing policy
4. High investment in economic infrastructure
5. High investment in human resource development
6. Priority on economic achievements
7. Emphasis on market-forces as an engine of growth

Singapore has all this characteristics established by the government to enable her to enjoy superlative growth rates. Remove any of this characteristics, the growth engine will slow down. As stated earlier, Singapore has ageing population issues which are common in Elephant economies. The issues created a labour shortage and furthermore, affect the output produced. The government tries to solve the problem by attracting high skills foreign workers into the labour market.

The following diagram shows Singapore’s economy in comparison with the other East Asian countries using the EGOIN per capita rates.

[pic]

Figure 1, S-Curve for the 17 East Asian Economies

Source: Lim (2005).

EGOIN is closely associated with the S-Curve. The higher the level of EGOIN, the higher the economy will be on the S-Curve. Economies with rapidly improving EGOIN would enjoy rapid growth, and these economies belong to the horse category like Hong Kong and Singapore. On the other hand, turtle economies are those with low and stagnant levels of EGOIN such as the North Korea and Myanmar, and the EGOIN levels of elephant economies are very high but growing very slowly at the same time like Japan. The EGOIN theory distinguishes between rate and level of growth. Economies that experience quantum-leap improvement in their EGOIN, for example a move from planned economies to market-oriented economies (E), or adoption of pro-development investment and trade policies (G, E, I), will enjoy a jump in their economic growth rates. EGOIN has a direct role on the cause of economic growth of a country and it would be used to further elaborate Singapore’s economy success.

MIRACLES OF THE SINGAPORE ECONOMY (THE EGOIN AND TRIPLE C THEORY)

The EGOIN and Triple C theories would provide a good analysis to the economic transformation of Singapore.

EGOIN Theory

EGOIN represent the five domestic co-determinants of economic development: Entrepreneurship (E), Government (G), Ordinary Labor (O), Investment (I) and Natural Resources (N). The EGOIN theory adopts a human-centred approach, where E, G and O are considered as the active agents because they possesses the social capacity of an economy to accumulate and utilize the available physical and natural resources. I and N are passive agents providing the tools, infrastructures, resources and physical capital to support economy development. Two key features of the EGOIN theory are:

1. EGOIN is multi-causal and its focus on government provides a higher degree of realism to the theory.
2. EGOIN emphasizes on the human determinants of development, in particular the quality of government and its bureaucracy.

Triple C Theory

This theory suggested that economic growth is propelled by three engines: domestic, regional and global. The domestic engine is fuelled by the EGOIN of the economy, while the regional and global engines are lubricated by trade and investment openness. Trade and investment are necessary for an economy to benefit from the inventions and technological advancement of other economies. Trade and investment also assist to increase market size and enhance competitiveness. Hence a horse economy that embraces open trade and investment policies stands to grow at a much higher rate than a turtle economy that adopts close trade and investment policies. The theory also highlighted that in order to drive the other two engines, it is necessary to have a strong domestic engine. If the domestic engine fails, in particular “G”, the regional and global engines will stall. So it is paramount for the government to harness the benefits of globalization.

The following would give an insight into how Singapore’s economic growth and success is government-made through market-supporting public policies.

Industrialization Led the Road to Economy Triumph (EGOIN’s G, I and N)

The Singapore government is the creator of a disciplined and result-orientated society and it has penetrated every aspects of the socio-economic life through public campaigns, governmental agencies and regulations. The EGOIN’s ‘G’ plays a pivotal role in the successful industrialization of the Singapore’s economy. Example is the setting up of the Economic Development Board (EDB) to promote industrialization and economic development. Singapore forged ahead towards a highly industrialized economy, encouraging foreign investment and protecting businessmen’s interests to acquire the highest and fastest economic effects, which related to high EGOIN’s ‘I’. They are listed in the following:

(i) Physical and human capitals. It consists of a broad range of development activities, like the establishment of physical infrastructure, construction of industrial parks, upgrading of human capitals, and creation of a legal and administrative framework for industrial promotion.

(ii) Fiscal incentives. There are attractive tax benefits to attract foreign investors to Singapore for the manufacturing sectors. Other incentives include the Investment Allowance, Warehousing and Service Incentive, Expansion Incentive, and Accelerated Depreciation and Technical Advisory Services, which contributed towards the industrialization of the economy.

(iii) Transformation through industrialization. The initial surge was on labour-intensive industries. However, the orientation towards labour-intensive industrialization has shifted towards higher skilled and higher value-added activities since 1979.

In relation to EGOIN’s ‘N’, the government maximizes the use of its unique natural resources as the entrepot. By early 1970s, with industrialization gathering momentum, and trade in services expanding in tandem, the development of the transport and communications sector also accelerated. Singapore’s geographical advantage allowed it to successfully develop its air transportation, telecommunications, shipping and cargo handling activities. The government invested heavily in the physical infrastructure, making Singapore an attractive manufacturing place. Besides the excellent communication networks also helped to increase its competitiveness by reducing the cost of manufacturing in Singapore and export to other countries.

Finally, there are no programme of industrial growth can succeed unless there is political stability. Investors, domestic or foreign want to be able to predict the future with confidence before they commit their capital investment. Thus, these effective strategies, policies and capitalist approaches have contributed substantially to Singapore’s rapid economic transformation.

Outward and Forward Looking Pave the Way to the Next Economy Evolution (Triple C theory)

Singapore needs to open up and develop economic relationships with the rest of the world to be able to develop and grow. Singapore is driven by all three engines: the domestic, regional and global engines.

From the EGOIN theory explanations, it shows that the government has played a crucial role in the exceptional development of Singapore’s domestic market, which is a prerequisite for growth. Singapore has built a strong domestic engine with its effective and efficient government and a highly skilled labour force. Singapore is a small state with limited domestic market and natural resources. Hence Singapore industrialized through an export-oriented strategy to expand its market, with factories build in advance of demand and a highly skilled workforce readily available. It attracted many foreign investors to Singapore to develop the manufacturing and services sectors. Singapore’s outward-looking policy contributed significantly to its successful development and accelerated growth rates. Regional and international growth is constantly transferred between Singapore and its trading partners which enabled Singapore to grow collectively with other economies. Example is the opting of a policy to regionalization in 1993 for sustainable long-term growth. It is an extension of the growth triangle experiment for Singapore to borrow resources and extend its production frontier by encouraging its labour-intensive industries to relocate in Batam or Johor. Other regionalization programmes includes the development and management of industrial parks and townships such as the Wuxi Industrial Park and the Suzhou Industrial Township in China.

Since independence, the Singapore government has promoted a free trade system with a well-developed infrastructure and services as well as establishing several business partnerships. For instance, Singapore has been a member of the Asia-Pacific Economic Cooperation (APEC) since 1993 and World Trade Organization (WTO) since 1995 and its main business partners are the US and the economies within the European Union (EU). Singapore also benefits from bilateral trade to expand market opportunities and to boost free trade with Free Trade Agreements (FTAs).

The cumulative causation theory, which forms the basis of the Triple C theory, suggested that wealth tends to create wealth and poverty tends to create poverty. Example from table 1 has shown that during 1985 – Falling demand crisis, and 2009 – United States financial crisis, Singapore had experienced negative GDP growth rates due to its exposure to international trade. Therefore Singapore’s economy is vulnerable and needs to continue to plan ahead to diversify its industries and services, to protect its economy performance and implement measures to cushion the impact of any economic crisis.

Strengthening the ‘Only’ Natural Resources in Singapore (EGOIN’s O and I)

In the 1980s, the threat of competition from lower-cost labour countries, and the disruptive effects of the oil crisis in 1973 and 1979 prompted a review in Singapore’s economic strategy. Singapore adopted numerous policies to improve labour productivity to increase competitiveness and sought to be the preferred regional headquarters for multinational corporations (MNCs) with world-class infrastructure, industrial parks and research facilities.

Beginning of 21st century, Singapore became a maturing industrial state and faces the prospects of slower economic growth. The global slowdown in electronics demand and technology spending had affected Singapore’s annual growth rate to about 3 to 5%. However there is room to improve labour productivity by moving further up the value chain and upgrading skills. Singapore’s economic strategy shifted towards the development of the financial sector and the promotion of high value-added technology-intensive and skill-intensive exports of goods and services. The government spends heavily on its labour force by upgrading the quality of skills of the population by offering the Skills Development Fund (SDF) and promoting the Skills Programme for Upgrading and Resilience (SPUR). Both initiatives relates to high EGOIN’s ‘O’ and ‘I’. SDF aims to subsidize approved training of employees by employers. SPUR is to enhance the funding scheme developed to scale up training programmes to help companies and workers during economic downturn and to build strong capabilities for the recovery. In addition, the government also sets up the National Wage Council (NWC) to manage the wage and labour policies to maintain its export competitiveness and the harmonious relationships within the workforce.

Education is another impetus for economic advancement, because knowledge will accumulate capital through profits made when it is applied to production of goods and services for domestic and export markets. This knowledge acquisition remained to be the centerpiece of government policy, with the recent push for continuous education at all levels of the population.

However due to labour shortage, Singapore has to import a great numbers of labours and talents to raise the quantity and quality of the labour force to stay ahead of the competition and to sustain its economic progression.

Finally, Singapore government continues to invest heavily in the human capital to encourage the workforce in learning for life and advancing with skills to meet the fast changing needs of the free market economy.

Laying the Foundation for Economic Growth (EGOIN’s ‘E’ and ‘I’)

Singapore continues to thrive in its rigorous business environment. This dynamic business landscape is developed by public enterprises through Government-Linked Companies (GLCs), like the Jurong Town Corporation (JTC) and SINGTEL. Their main purpose is to invest heavily in the physical infrastructure of the country to promote basic industries, building public infrastructure, and to undertake major business operations. Other reasons are to offset market failures and to correct entrepreneurial inadequacies, the flawed capital market, the lack of market information, and the unwillingness by the private sector to bear with the risk involved. These public enterprises played a major role by creating the “linkages” transmitting growth to other sectors of the economy. Other contributions of the public enterprises were in the fields of capital formation, value-added employment, and technological development.

Another good example is the setting up of the EDB. Its objective is to promote the growth of the manufacturing industry by managing the industrial estates, providing financial incentives and assistance, and technical consultancy services as well as conducting economic research. EDB also sets up a Venture Capital Club (VCC) for local entrepreneurs to interact with potential investors and assists them towards high-technological industries and overseas investments. Another governmental agency, the Standards, Productivity and Innovation Board (SPRING) is established to encourage Singaporean entrepreneurship to supplement the MNC strategy by offering financial schemes and partnerships. The Singapore Science Park, One-North and Biopolis were established to house the MNCs and provide a focal point for industrial Research and Development.

These illustrations had shown Singapore government’s strategy to shape a high EGOIN’s ‘E’ and ‘I’ by creating a global hub for business, investments and talents.

Vital Modernization to Stay Ahead

The following are other contributions for Singapore’s high EGOIN and strong economic performance:

1. Expanded Singapore’s economic space beyond the immediate region. Singapore has upgraded its capabilities by consolidating strengths in various niche areas, innovating, providing funds for Research and Development costs. Governmental agencies have also encourage public and private partnerships in overseas projects through joint ventures, financing, focusing on expert branding and developing overseas markets, especially the Small and Medium Enterprises (SMEs). Singapore needs to develop new engines of growth (health-care and education) while continue to strengthen its current economics pillars (electronics and finance).

2. Remake Singapore to be an innovative nation. Measures such as the broadening of the school curriculum; extend education subsidies to private universities; facilitate extended stay for retrenched foreign talents were put in place. An improved personal tax schemes to attract foreign entrepreneurs were implemented. In addition, local music and arts scene were boosted to make Singapore a more attractive and vibrant city for foreign talents to stay.

CONCLUSION

Singapore’s spectacular economic development is founded on policies that focus on strategic investment in infrastructure, education, skill upgrading, openness to capital, technology and ideas from abroad, as well as a cooperative relationship between labour, management and government. The policies improve EGOIN, hence, strengthen the domestic engine and facilitated its export-orientation behavior. This strategy attracted MNCs to invest in Singapore plus the many benefits such as a pro-business environment, attractive tax incentives, liberal immigration policies, skilled and talented labour force, robust infrastructure as well as the creation of a business-friendly environment that is supported by stable macroeconomic policies, an efficient legal system and a responsive pro-active stable government. Its outward-looking policy allows Singapore to maximize freedom in trade and fully utilize its natural resources. Besides supporting the domestic engines, the governments also plays a critical role in developing and intertwine with the regional and global trade as explained in the Triple C theory. Combined with other policies adopted by the government, the economic transformation of Singapore is successful, moving from the Turtle into the Horse economy stage.

We can conclude that the governments’ political will and its role to implement measures conducive to economic growth is the critical factor in Singapore’s economic transformation. The leading role of the efficient government in securing high EGOIN ensures the success of the Triple C and S-Curve theories, and its causes of transformation are definitely multi-causal.

Finally, to succeed into the future with globalisation and rapid changes in the world’s economy, Singapore needs to establish a new growth path that will be less vulnerable to global demand cycles. Hence the government must continue to upgrade its technology infrastructure, encourage entrepreneurship, and promote arts and music to transform Singapore into a cosmopolitan city-state attractive to both business and global talent.

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