1 - Gatton College of Business and Economics

Report
From Cub to Tiger: Government
Intervention in Singapore
And Implications for the Future
BY: AMBER HUBER
Introduction
Singapore 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
Singapore - 1958
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.
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:
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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)
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“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
CS-SIP (2006)
 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)
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 (2008)
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 investment
Policies 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 20002013
Policy Criticisms
High 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 Issues
Krugman (1994): Singapore lacks long term growth potential because growth based on nonrepeatable 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
Conclusion
Outlined framework vital to understanding Singapore’s growth and their reasoning for policy decisions
Gov’t attained success by using sensibly fashioned policies to:
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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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Survey 908-928.
Elkan, Rachel van. 1995. "Singapore's Development Strategy." In Singapore: A Case Study in Rapid Development, by Kenneth Bercuson, 17. International
Monetary Fund.
Han-Yin Chang, Johannes. 2003. "Culture, State, and Economic Development in Singapore." Journal of Contemporary Asia 85-106.
Huff, W. G. 1999. "Singapore's Economic Development: Four Lessons and Some Doubts." Oxford Development Studies, vol. 27, No. 1 33-59.
Krugman, Paul. 1994. "The Myth of Asia's Miracle." Foreign Affairs. November. http://www.foreignaffairs.com/articles/50550/paul-krugman/the-mythof-asias-miracle.
Mauzy, Diane K., and R.S. Milne. 2002. Singapore Politics Under the People's Action Party. London: Routledge.
Pack, Howard, and Kamal Saggi. 2006. "The case for industrial policy: a critical survey." World Bank Policy Research Working Paper 3839, February: 1-51.
Phelps, Nicholas A. 2007. "Gaining from Globalization? State Extraterritoriality and Domestic Economic Impacts - The Case of Singapore." Economic
Geography 83(4) 371-393.
Smith, Shannon L.D. 1997. "The Indonesian-Malaysia-Singapore Growth Triangle: A political and economic equation." Australian Journal of International
Affairs, Vol. 51, Issue 3. 369.
Soon, Teck-Wong, and C. Suan Tan. 1993. "Singapore: Public Policy and Economic Development." World Bank.
Stoever, William A, and Teck-Wong Soon. 1996. "Foreign Investment and Economic Development in Singapore: A Policy-Oriented Approach." The Journal
of Developing Areas, Vol. 30, No. 3 317-340.
YEOH, Caroline, Chee Sin Koh, and Charmaine Cai. 2004. "Singapore's Regionalization Blueprint: A Case of Strategic Management, State Enterprise
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Young, Alwyn. 1992. "A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore." NBER Macroeconomics Annual
1992, January: 13-64.

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