From Cub to Tiger: Government Intervention in

SingaporeAnd Implications for the Future

BY: AMBER HUBER

IntroductionSingapore as a third world country

1960: Per capita GNP <US$320, unemployment rate 14%, illiteracy, poverty, poor housing conditions Entrepot economy with few natural resources

Political strife British control following Japanese occupation Lim Yew Hock gains self-government for Singapore – 1959 People’s Action party wins general election -1959

Lee Kuan Yew - first Prime Minister

5 phases Modified version of Singapore’s investment phases set forth by Teck-Wong Soon and C. Suan Tan (1993)

Soon, Teck-Wong, and C. Suan Tan. 1993. "Singapore: Public Policy and Economic Development." World Bank.

Singapore - 1958

Labor-Intensive Import-Substitution (1959-65)

Industrialization as job creation medium

Small domestic market, expanded through political union with Malaya

Housing Development Board (HDB) Subsidized housing to citizens, addressed housing crisis

“Five Year Plan” Fixed poor education system, accelerated school building program Math, science, and technical skills for successful industrialization

Economic Development Board Industrial policies that provided capital to infant industries and land for industrial sites Howard Pack and Kamal Saggi (2006) infant industry argument, foreign competition has the upper hand

Labor-Intensive Import-Substitution (1959-65)

Results were meek Gov’t intervention and EDB efforts resulted in only 2.2% increase of manufacturing share of real GDP from

1960-65 Unemployment still over 10% However, policies enacted increased housing quality, widened semiskilled worker pool, and developed

infrastructure on industrial sites

Expulsion from Malaysia and true independence- 1965 Racial tensions, lack of interest from Malaya to be trading partner Trade barriers enacted between Malaysia PAP changed promotional efforts to labor-intensive export-orientated manufacturing

Labor-Intensive Export-Orientated Manufacturing (1966-73)

Economic Expansion Incentives Act (1967) Provided tax incentives for firms to expand and for investment Tax relief for income from capital expansion, foreign loans, royalties, etc.

Tripartism – Government, employers, and labor working together to achieve greater productivity, efficiency, and faster economic growth PAP’s efforts to strengthen relationship with National Trades Union Congress (NTUC) Employment Act of 1968 abolished discriminatory practices

Raised Central Provident Fund (CPF) contributions to 25% of worker’s wages to promote macroeconomic stability Provided non-inflationary financial source for less than market rates for gov’t to use for investment Financed spending for upgrading education and technological level Allowed gov’t to provide financial incentives to foreign investors without running fiscal deficits

Labor-Intensive Export-Orientated Manufacturing (1966-73)

Policies greatly promoted FDI, manufacturing investments totaled S$2.3 billion from 1968-73 Elkan (1995): MNCs assume risk of implementing technology, allowing Singapore to “catch-up”

Bank of America entered Singapore with interest in creating currency unit (Asian Currency Unit) Gov’t promoted this by creating tax exemption for nonresident deposits Asia Dollar Market (ADM) boomed as other banks joined Banks increase FDI by making financial resources easily accessible

Robert Maxon, manager of Mobil Oil refinery in Singapore in 1970 called Singapore an “investor’s dream” as they offered cheap labor, macroeconomic stability with low inflation, easily accessible financial resources, gov’t control over unions, and cheap factory sites.

Real GDP grew ~13% a year from 1966-73

First Attempts to Upgrade (1973-78)

Neared full employment, created labor shortage, along with a decline in FDI inflows

Gov’t sought to upgrade the economy by focusing on quality, skills, and technological content

Hon Sui Sen’s (Finance Minister at the time) ten point program (1973) to upgrade skill/tech level of the manufacturing sector: Wage increase policy under guidance of National Wages Council to increase wage competitiveness Manpower-development to promote industrial training, tax exemptions for training expenses Open-door policy for qualified foreign workers Five year tax holiday for industries with desired technology levels

Tamasek Holdings, a Government Linked Company (GLC) created in 1974 Sole shareholder was Minister of Finance Would take part ownership and provide guidance in a company if success was needed to further gov’t

objectives Controversial, fears that GLCs lead to crony capitalism and unfair advantages over domestic firms.

First Attempts to Upgrade (1973-78)

EDB joint industry training centers; means to upgrade work force skill Collaboration between MNCs and EDB, provided support for Joint Industry Training Scheme Provided MNCs with stream of well-trained workers

1973 Oil Crisis and the world slowdown that came after (1974-76) dampened their efforts World recession caused unemployment fear, economy clung to labor-intensive industries Mauzy and Milne (2002): Singapore’s attempt to increase employment by upgrading tech levels “was

premature, and the foreign demand was not enough to make it possible at a profit” Global recession affected FDI, but it never fell below S$300 million annually in the 1970s

Real GDP grew 7.4% from 1974-76

Most economic growth came from foreign investment in construction and the ADM boom

Economic Restructuring (1979-84)

Singapore’s manufacturing economy became strongly dependent on foreign firms, needed to stay competitive to continue getting FDI

“Economic Development Plan for the Eighties” goal was economic diversification Diversify economic activities into information based services, and diversify market by expanding exports

to developing countries Chose 11 industries for promotion, examples include software development and automotive parts Assured MNCs they wouldn’t construct barriers to foreign investors EDB and NWC set periodic wage increases over 1980-83 period Sustained focus on education training to provide workers for promoted fields IMF 1985 study; financial incentives alone weren’t enough to attract FDI

Explains the reason why Singapore chose several approaches

Economic Restructuring (1979-84)

Singapore infiltrated higher tech industries; by 1983 they were world’s largest export of disk drives even though they didn’t produce computer parts in 1980

Underwhelming manufacturing growth due to decreased global shipping demand, low petroleum prices, and U.S. growth decline dwindling demand for Singaporean exports High wage policies lackluster, wage increases exceeded NWC guidelines and surpassed productivity gains Adverse effects of oil crisis caused demand to go down while high wage policy increased unit labor cost

Real GDP only grew 5.1% a year, but financial sector grew by 11.3% Monetary Authority of Singapore (MAS) pushing Singapore towards becoming international finance center Financial sector accounted for 19.7% of GDP in 1980

Retrenchment and Further Diversification (1985-1990)

Foreshadowed in the previous period, global cool down caused recession in 1985

Real GDP in 1985 was -1.6%

Lee Hsien Loong (Minister of State for Trade & Industry) created the Economic Committee Sole task to get economy out of recession Two factors caused recession: increased business operating costs (caused by high wage policy and

increased CPF contribution) and changed global demand

Lowered unit labor costs by decreasing CPF funds with support of NTUC Cut down to 10% (from previous 25%), translated to 12% reduction in workers’ earnings Gov’t lowered taxes, utility charges, offered rebates for port fees/industrial site rentals Abolished high wage policy

Quick recovery, real GDP averaged 1.8% in 1986 and 10% from 1987-1990

Retrenchment and Further Diversification (1985-1990)

EDB created S$100 million Venture fund that jointly invested in overseas tech firms Saggi and Pack (2006): Technology transfers, increase domestic quality and efficiency

Many small and medium enterprises (SMEs) shut down during recession Local Industry Upgrading Program (LIUP) created in 1986 by EDB to unite MNCs and SMEs and

encourage knowledge diffusions 1989 EDB enacted SME Master Plan providing SMEs with information, training, and loan services Allowed SMEs to enter into skill-intensive production, broadened domestic base for high tech MNCs

EDB encouraged service sector investment, gave tax holidays and allowances for investments Pushing Singapore towards being a “Total Business Center” and regional headquarters for MNCs Several MNCs created operational centers there, ex: Exxon, IBM, and General Electric

Retrenchment and Further Diversification (1985-1990)

Gov’t subsidized R&D as incentives to bolster manufacturing firms Ho and Wong (2009): Short run a 1% increase in Singaporean R&D leads to 1.33% TFP increase. In long run 1% increase leads to 8.14% TFP increase.

Historical education focus beginning to bear fruit, by 1986 majority of Singaporean children received at least 10 years of schooling

To focus on uneducated adults, NWC joined forces with Skills Development Fund (SDF) “Initiatives in New Technologies” introduced in 1984 to train high tech professionals SDF provided funds for training workers Took initiative when MNCs were hesitant to invest in costly training systems Allowed Singapore to meet demand for educated workers, removed pressure from MNCs to take

additional risk, and raised foreign investment

Investment Abroad and a Globalized Singapore (1990 onwards)

Lee Kuan Yew, Senior Minister to the Cabinet, proposed “go abroad” policy in 1990 to develop external economic wing Singapore outgrowing it’s geographically small stature

EDB introduced Regionalization 2000 strategy to build external economy Goal was to increase internationalization and become regional trade hub Pursued formation of overseas industrial and technological parks

Parks allowed Singapore to keep higher value-added production goods in their own country while providing lower value-added activities at overseas parks

Investment Abroad and a Globalized Singapore (1990

onwards)

Indonesia-Malaysia-Singapore Growth Triangle (IMS-GT) created in 1990 Pooled Singaporean capital,

management, and tech levels with the cheap land and labor of Indonesia and Malaysia

Linked countries’ comparative advantages to jointly attract MNCs

Attracted quality investors, including Toshiba and Phillips

Investment Abroad and a Globalized Singapore (1990 onwards)

Focused on China with creation of China-Singapore Suzhou Industrial Park (CS-SIP) in 1994 Ultimately became global investment center

1994 - held 38 Fortune 500 companies

Success lead to creation of several other flagship parks

1997 Asian Financial Crisis Singapore’s robust reserves and financial strength helped avoid contagion Gov’t responded to growth fall with a package of cost reductions and tax rebates

Economic Review Committee (ERC) established in 2001 to revitalize, upgrade, and transform domestic economy Reviewed current policies, analyzed economic climate, and recommended changes

FTAs allowed Singapore to remove trade barriers, increase FC savings, and have greater market access Ex: bilateral agreements between New Zealand and Singapore (ANZCEP) and U.S. and Singapore (USSFTA)

CS-SIP (2006)

Investment Abroad and a Globalized Singapore (1990 onwards)

International Enterprise Singapore (IES) created in 2002 Helped domestic firms invest overseas, shorten learning curve, and find overseas

partners

Biopolis Centre, a biomedical complex, built by Jurong Township Cooperation (JTC) in 2003 Helped drive Singapore towards being a “high-tech haven” Instituted Singapore as biomedical hub, priority in nanotechnology and stem-cell

research Leading destination for healthcare services due to high medical science reputation EDB, IES, and Singapore Tourism Board jointly sought to promote healthcare sector

investmentPolicies furthered Singapore towards becoming the trade, healthcare, biomedical, and finance hub of Asia

Despite negative global impact from 2001 and 2008 U.S. recession, GDP growth averaged 5% from 2000-2013

Biopolis Centre (2008)

Policy CriticismsHigh wage policy played a role in 1985 recession

Otani and Sassanpour (1988) found that without the policy, GDP would have remained unchanged from 1984-85 instead of declining

While China-Singapore Suzhou Industrial Park (CS-SIP) was prosperous, following parks didn’t have the same achievement Nicholas Phelps (2007): Regionalization 2000 program was ineffective; “gaining from globalization” is

difficult; parks had little economic benefits outside of CS-SIP

Excessive dependence on FDI causes economy to become vulnerable to external events outside of their range of control - Sajid Anwar (2006)

CPF criticisms - Mauzy and Milne (2002): High contribution rates played role in 1985 recession due to increasing unit labor costs. CPF may not provide adequate funds for retirement In 1999, 24% of members who reached 55 in 1998 had a CPF account <$16,000

Sustainability IssuesKrugman (1994): Singapore lacks long term growth potential because growth based on non-repeatable one time changes Ex: Singapore boomed when workers became educated Unsustainable growth because factors for past growth can’t be replicated

Alwyn Young (1992): Singapore experienced slightly negative TFP growth from 1974-89 Success depends on gov’t changing policies from factor accumulation to TFPG and technological change However, using dual estimates based on price data rather than nominal account quantity data, Huff

(1999) found TFP growth averaged 1.6% a year

Huff (1999): Merit based education system stifles creativity and innovation Johannes Chang (2003) agreed and said it is the reason Singapore is short of original technological

innovation, must produce entrepreneurs for long term success

Sajid Anwar (2006): Continued liberalization of financial sector must occur to foster long term FDI Would increase competition, accountability, and transparency in disclosure standards Increase efficiency of financial sector and raise productivity

ConclusionOutlined framework vital to understanding Singapore’s growth and their reasoning for policy decisions

Gov’t attained success by using sensibly fashioned policies to: Develop infrastructure Promote tripartism Invest in human capital Promote R&D Attract foreign investment Maintain macroeconomic stability

Singapore’s flexibility will allow them to combat future problems directly They have demonstrated their capability of achieving growth by adapting to shifting global economy Only time will tell how well Singapore achieves long term growth, but historical indications imply they are likely up for the challenge

Singapore - 2011

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