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Singapore 2008

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Harvard Business School Edited version: Microeconomics of Competitiveness Rev. 02/29/08 This document is a special version of the Harvard Business School case (# 9-793-096) prepared by Research Associate Edward Prewitt and Professor Forest L. Reinhardt) and is intended for use in the 2008 Microeconomics of Competitiveness course. 1 Singapore Economic Strategy: Independence to 1992 Fireworks, skydiving demonstrations, parades, and songs had entertained the 65,000 massed in Singapore’s National Stadium on August 9, 1992, by the time Prime Minister Goh Chok Tong arrived. Goh was greeted with cheers as he stepped in front of the television cameras and radio microphones to deliver what was only his second National Day speech as PM. “We have come this far on nothing,” he said to the crowd with pride. 1 Without doubt, the affluence of the citizens and the city surrounding him had seemed beyond imagining just three decades before. Singapore, a city-state of three million people on an island a quarter the size of Rhode Island, had attained its success against a host of obstacles: a lack of natural resources, except for a natural deep-water harbor; a frayed infrastructure; a gradual dwindling of its traditional markets; a poorly educated population; a communist insurgency; and loss of the British military presence which protected the island and supported its economy. Yet since achieving independence in 1965, Singapore had turned in some of the highest rates of growth in the world. Per-capita gross domestic product had risen from just over US$500 in 1965 to nearly US$14,500 in 1991 2 —exceeded in Asia only by Japan, and well above the GDP levels of many members of the rich-country OECD (Organization for Economic Cooperation and Development). Standing on the dais near Goh was the man largely responsible for this success, Lee Kuan Yew. As the nation’s first prime minister after independence, Lee had guided Singapore around each obstacle and through each phase of growth. In doing so, he had exercised a degree of central control rarely seen in successful economies. Lee and a few lieutenants had coordinated an industrial policy, fiscal and monetary policy, savings and investment requirements, and labor and immigration laws. The widely popular Lee had won plaudits from within and without Singapore and had been reelected eight times. In 1991, Goh set a goal of achieving United States-level prosperity by 2030, which was feasible if rates of growth approximating those achieved since independence could be sustained. That year, however, the economy began to slow: from 8.3% GDP growth in 1990 to 6.6% in 1991 and around 5% in 1992 (see Exhibit 1). Although 5% growth well exceeded that of most members of the OECD, in Singapore it provoked alarm. With the slow-down as a backdrop, Goh reminded Singaporeans of their economic vulnerability. National Day was not a time “to gloat over being Number One in this area or that area as some people might think,” he warned. “It is to learn where we have fallen behind and how others 1 Quoted in “Singapore and the problems of success,” Economist, August 22, 1992, p. 25. 2 International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.: 1992). Values are in current dollars, calculated from year-average exchange rates.
Transcript
Page 1: Singapore 2008

Harvard Business School Edited version: Microeconomics of CompetitivenessRev. 02/29/08

This document is a special version of the Harvard Business School case (# 9-793-096) prepared by Research Associate Edward Prewitt and Professor Forest L. Reinhardt) and is intended for use in the 2008 Microeconomics of Competitiveness course.

1

Singapore Economic Strategy: Independence to 1992

Fireworks, skydiving demonstrations, parades, and songs had entertained the 65,000 massed in Singapore’s National Stadium on August 9, 1992, by the time Prime Minister Goh Chok Tong arrived. Goh was greeted with cheers as he stepped in front of the television cameras and radio microphones to deliver what was only his second National Day speech as PM.

“We have come this far on nothing,” he said to the crowd with pride.1 Without doubt, the affluence of the citizens and the city surrounding him had seemed beyond imagining just three decades before. Singapore, a city-state of three million people on an island a quarter the size of Rhode Island, had attained its success against a host of obstacles: a lack of natural resources, except for a natural deep-water harbor; a frayed infrastructure; a gradual dwindling of its traditional markets; a poorly educated population; a communist insurgency; and loss of the British military presence which protected the island and supported its economy.

Yet since achieving independence in 1965, Singapore had turned in some of the highest rates of growth in the world. Per-capita gross domestic product had risen from just over US$500 in 1965 to nearly US$14,500 in 19912—exceeded in Asia only by Japan, and well above the GDP levels of many members of the rich-country OECD (Organization for Economic Cooperation and Development). Standing on the dais near Goh was the man largely responsible for this success, Lee Kuan Yew. As the nation’s first prime minister after independence, Lee had guided Singapore around each obstacle and through each phase of growth. In doing so, he had exercised a degree of central control rarely seen in successful economies. Lee and a few lieutenants had coordinated an industrial policy, fiscal and monetary policy, savings and investment requirements, and labor and immigration laws. The widely popular Lee had won plaudits from within and without Singapore and had been reelected eight times.

In 1991, Goh set a goal of achieving United States-level prosperity by 2030, which was feasible if rates of growth approximating those achieved since independence could be sustained. That year, however, the economy began to slow: from 8.3% GDP growth in 1990 to 6.6% in 1991 and around 5% in 1992 (see Exhibit 1). Although 5% growth well exceeded that of most members of the OECD, in Singapore it provoked alarm.

With the slow-down as a backdrop, Goh reminded Singaporeans of their economic vulnerability. National Day was not a time “to gloat over being Number One in this area or that area as some people might think,” he warned. “It is to learn where we have fallen behind and how others

1 Quoted in “Singapore and the problems of success,” Economist, August 22, 1992, p. 25. 2 International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.: 1992). Values are in current dollars, calculated from year-average exchange rates.

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are catching up, so that we can remedy our shortcomings. . . . Whilst the rapid growth of ASEAN3 and the east Asia region helps our growth, it means that other countries are catching up and can overtake us.”4

Indeed, as Singapore’s wealth grew, so did international economic competition. A large part of the nation’s GDP and employment came from direct investment by multinational companies in low-cost assembly work, but in the 1990s Singapore’s rising wage rates increasingly priced it out of these industries. Lee Kuan Yew repeatedly had shown an ability to guide the nation through such challenges. Not only did his hand-picked successor have no such track record, but the next transition might be the hardest yet.

Origins

Singapore was an important trading center and port as early as the seventh century A.D. By the fourteenth century Chinese immigrants had established a small community on the island, and the name Singapura, a word of Sanskrit origin meaning Lion City, was in common use. After Portugal wrested control of the region from Malaccan and Malay rulers in the sixteenth and early seventeenth centuries, Singapore fell into obscurity.5 Modern Singapore dated from the discovery of the island’s superb natural port in 1819 by Sir Stamford Raffles, an officer of the British East India Company.

The East India Company, seeking to forestall colonial advances by Holland and France, was in search of a base at the strategic southern tip of the Malay Peninsula that would complement the nearby British posts at Penang and Malacca (see Exhibit 3). Raffles instantly recognized the trading potential of the site, which he predicted would become “a place of considerable magnitude and importance”6 and “the emporium of the seven seas.”7 He settled a treaty the next day with a local sultan and established an outpost.

Singapore’s location at one end of the Straits of Malacca and its policy of duty-free trade proved remunerative. It was earning revenue within a year as a center for trade and transshipment. Population grew from about 1,000 at Raffles’s arrival to 10,700 within five years. The three British posts on the Malay Peninsula were incorporated as the Straits Settlements in 1826, under the control of British India. In 1867 the Straits Settlements became a Crown Colony, controlled directly from London, and the British colonial civil service system was implemented. Population had reached almost 81,000 in 1860, including perhaps 7,000 Europeans.

Singapore developed a classic entrepôt economy, one which funnels exports out of and imports into a surrounding area. An entrepôt typically attracted shipping, communications, banking, and insurance services and facilities to support the importing and exporting; and retailing and other service enterprises to provide for the needs of the shippers and bankers.

3 The Association of Southeast Asian Nations, consisting of Brunei, Indonesia, Malaysia, the Philippines, Thailand, and Singapore. 4 Bertha Henson, “Steer clear of subsidy mentality, warns PM,” Straits Times, August 9, 1992, p. 1. 5 Ministry of Information and the Arts, Singapore 1992, p. 26. 6 Library of Congress, Singapore: A Country Study (Washington, D.C.: U.S. Government Printing Office, 1991), p. 14. 7 R. S. Milne and Diane K. Mauzy, Singapore: The Legacy of Lee Kuan Yew (Boulder, Colo.: Westview Press, 1990), p. 1.

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The advent of the steamship and the opening of the Suez Canal in the 1860s dramatically increased traffic through the Malacca Straits. Singapore became one of the region’s major ports of call. The development of commercial rubber tree plantations in the region was particularly important. The island became that commodity’s central sorting and export center. In so doing, Singapore added processing and light manufacturing capabilities to its trade function.

Prosperity continued to grow on entrepôt trade in rubber and tin from Malaya and the Dutch East Indies. The island’s importance was accentuated by a sizable British military presence, which increased gradually after 1867 and culminated with the construction of a large complex in 1923–41. By the beginning of the second world war, Singapore had become Britain’s principal naval and air base in Asia.

As Britain was pressed to the limits in Europe during World War II, however, it was unable to commit sufficient airplanes to defend the base. The “Gibraltar of the East” fell to Japanese troops after six days of fighting. Renamed Syonan (“Light of the South”), Singapore was the capital of Japan’s wartime southern region for three and a half years.

The British returned in 1945 to find the island’s housing and infrastructure in shambles, and unrest among the populace and work force.8 Reconstruction took four years, and by 1949 trade, labor productivity, and basic social services such as electricity and sewerage had returned to their pre-war levels. Entrepôt trade in rubber and tin boomed during the Korean War (1950–53), accounting for 20% of GDP.

It was becoming clear, though, that traditional entrepôt trade was threatened. Newly independent Indonesia—half of Singapore’s trade hinterland—had embarked on its own program of industrial development, lessening the need for Singapore as a trade hub. At the same time, politics began to take precedence over trade for many residents. The Malayan Communist Party, centered in Singapore, agitated for independence from Britain and gained many adherents, despite repression of the party by colonial administrators.9

Independence

In 1946 the Colonial Office dissolved the Straits Settlements and combined the states of the Malay peninsula into a Malayan Union. Singapore was excluded, however, and remained a Crown Colony. Strikes and repeated calls for self-rule in Singapore led Britain to agree to gradually increase Singapore’s self-governance. In 1948, the first elections in Singapore’s history were held, for six of Singapore’s 25 Legistative Council seats. Throughout the next decade, a Singaporean government began to form alongside the weakening colonial administration. However, in response to communist protests in Singapore and an armed communist insurgency in Malaya, the British imposed the 1948 Internal Security Act, which allowed detention without trial for persons suspected of being ‘threats to security.’ Protests continued until full sovereignty was granted in 1958, one year after the Malayan Union had become the independent Federation of Malaya. A new constitution established a unicameral parliamentary democracy.

The results of the subsequent election in Singapore, held the following year, surprised almost everyone.10 The People’s Action Party (PAP), a fledgling pro-communist party headed by 30-year-old Lee Kuan Yew, won easily. The party soon split, though, over Lee’s ardent desire to merge

8 Library of Congress, p. 124. 9 See “Singapore (A),” Harvard Business School case no. 9-381-013 (revised June 1981), p. 4. 10 Library of Congress, p. 52.

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Singapore with the Federation of Malaya. Communists took two-thirds of the party organization with them, leaving the comparatively moderate Lee in a precarious position. After the citizenry supported merger in a referendum, Lee arrested the communist leadership.

In 1963 Lee and the leaders of Malaya, North Borneo (later Sabah), and Sarawak signed an agreement to form the Federation of Malaysia. The new nation fulfilled a condition that Lee believed was necessary for Singapore’s survival. “Nobody in his senses believes that Singapore alone, in isolation, can be independent,” stated an official government publication of the time.11

The marriage soon ended. Political strains between Chinese-dominated Singapore and the Malay majority in the rest of Malaysia erupted in riots. The economic promise of the federation never materialized; the separate territories were unable to agree on a common market. In addition, Indonesia objected strongly to the merger. Indonesian agents bombed a Singaporean hotel and seized fishing boats as part of its “Konfrontasi” with Malaysia.12 Singapore’s GDP declined by 4% in 1964. In 1965, little more than a year after the formation of the federation, Malaysia ejected Singapore.

Lee wept as he announced the separation, saying “all my life, my whole adult life, I have believed in merger and unity of the two territories.”13 His distress might have been due equally to his nation’s prospects. “With the link to the natural riches of Malaysia . . . severed, Singapore was doomed to live on the wits of its people. They were not a promising mix,” wrote the Economist.14 The newly sovereign nation’s situation was dire.

On Its Own

After the 1959 election, Lee’s PAP set about to provide jobs and decent housing, both of which were in short supply. Two statutory boards, answering to government ministries, were created: the Housing Development Board (HDB) and the Economic Development Board (EDB). They would come to play large roles in the nation’s development.

With a budget of S$10 million in 1960, the HDB set out to build 10,000 low- and middle-income housing units per year, many in “new towns” in undeveloped parts of the island. (The colonial housing authority had built 23,000 units in 32 years.) The HDB soon exceeded its goal. The EDB, faced with an unemployment rate estimated at 13.5% in 1959, sought to attract and encourage investment. One of its first projects was the giant Jurong Industrial Estate, created from filled land at the western end of the island. In the unstable political climate of the early 1960s, however, Jurong failed to attract much investment and won the epithet of “white elephant.” But the expansion of construction jobs and EDB’s other efforts resulted in a reduction of the unemployment rate, to just over 10% in 1967.

(The PAP’s strategy paid off in elections. The communist party, which despite the imprisonment of its leaders had won a third of the popular vote and a quarter of the Parliament in 1963, soon ceased to be a threat. In the 1968 election, the PAP won every legislative seat.)

During the federation period and immediately afterward, Lee’s government first pursued an import substitution strategy, the policy most often recommended for less-developed countries by the

11 Quoted in Library of Congress, p. 53. 12 Library of Congress, p. 56. 13 Library of Congress, p. 57. 14 John Andrews, “Lee’s legacy: A survey of Singapore,” Economist, November 22, 1986, p. 4.

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International Monetary Fund and other advisers during that period. But the alienation from Malaysia, with its much larger market, doomed the strategy to a short life.

The new country’s economic prospects were dealt a second blow in 1967, when Britain announced it would pull out its troops in the early 1970s. At the time, British expenditures on their several military bases accounted for 18% of Singaporean GDP and 20% of employment. Contemporary “speeches by Singaporean policymakers convey[ed] a . . . sense of desperation.”15 “Singapore is afraid that time is running out,” wrote the New York Times. “The 90,000 to 100,000 jobs that will be lost with the British pullout will be added to an already high unemployment figure. . . .”16

Lee changed the direction of the national economic strategy, replacing import substitution with a strategy of aggressive export promotion. Because he felt that Singaporeans lacked the skills and capital to develop enterprises of the necessary size and sophistication on their own, he looked outside of the island. Singapore henceforth welcomed foreign direct investment. (Many nations in the region tended to view the presence of Western-owned multinational firms as a vestige of colonialism).

To encourage foreign firms, the government undertook measures to improve the investment climate. New laws moderated labor costs by limiting some tactics of trade unions, which had been prone to strikes in the pre-independence era. Exchange rates were held close to market rates, and convertibility of the Singapore dollar was sustained (see Exhibit 4). Tariffs and duties on imports and exports were maintained at low rates.

World trade and investment flows were booming, and American and European firms were seeking sites for off-shore assembly plants. The EDB opened its first foreign offices in Hong Kong, New York, and San Francisco, pursuing multinational companies that sold to worldwide markets. Within months the campaign began attracting factories, beginning with the electronics industry. By late 1969, seven major firms, of the likes of National Semiconductor and Texas Instruments, had located plants in Jurong and newer industrial estates. The plants made components mostly for shipping back to the parent companies in America.

The government also greatly expanded investment in the economy, especially the manufacturing sector. In 1968 the Development Bank of Singapore, which was owned by the EDB, launched a huge wave of investment into local firms. By 1970 its holdings amounted to a quarter of all equity investments in the economy,17 enabling the government to channel large amounts of capital into a variety of sectors. Chief among these were the electrical machinery, petroleum products, and construction industries (see Exhibit 2). The last soon became Singapore’s largest domestically owned industry, and an important source of growth for GDP and employment.

Singaporean Identity

Assisted by explicit efforts of the government, Singapore soon developed a distinctive social culture. The population at Raffles’s arrival included a small contingent of Chinese farmers, but was composed largely of Malays. By 1860, however, immigrants seeking economic opportunity had

15 Alwyn Young, “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore” (Massachusetts Institute of Technology, Cambridge, Mass., April 25, 1992, photocopied), p. 12. 16 Fred Emery, “Singapore is Afraid That Time is Running Out,” New York Times, April 28, 1968, section 6, p. 28. 17 Young, p. 12.

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transformed Singapore’s ethnic make-up. Chinese accounted for 62% of the population, Indians 16%, Malays 14%, and Europeans and others 8%. That profile roughly endured into the 1990s; in 1991 Chinese formed 78% of the total population, Malays 14%, Indians 7%, and Europeans and others 1%. Singapore’s population (including foreign workers) reached one million around 1950, two million around 1970, and three million in 1990.

Singapore had no true native language. The five major languages and approximately 20 dialects that accompanied immigrants resulted in a confusing polyglot. Speakers of the six Chinese dialects represented on the island, for example, often were incomprehensible to one another, though many ethnic groups used a pidgin Malay to communicate with one another. The British colonial administration used English but did not promulgate it officially, often using translators. At independence, government policy directed schools to teach four official languages: English (designated the language of administration), Malay (designated the national language), Mandarin Chinese, and Tamil. A 1972 survey showed that Hokkien, a Chinese dialect, was understood by 73% of the population, followed by Malay (57%), and English (47%). English comprehension grew to 62% by 1978, and in 1979 the government embarked on a controversial policy of encouraging the use of Mandarin Chinese, arguing that it disseminated cultural values more desirable than those transmitted by English. However, in 1992 English remained widely spoken.18

In Singapore’s early years, a constant influx of workers from all parts of the world and a dearth of women gave it an air of a frontier port rather than a city with a culture of its own. That sense changed after World War II, as residents of Singapore participated in the Malayan effort for independence. Not until after 1965 was the word “Singaporean” used as a description of identity.19 Thus much of the culture of Singapore was created in the years after independence.

This newness was reflected in the island’s residences and commercial buildings. Urban renewal projects razed most of the sites that Western tourists tended to find appealing, such as the old Chinatown. “Do not think of Singapore as a tropical island of . . . palm-roofed huts, verdant jungle, exotic handicrafts and colourful street festivals. . . . Reality is a small piece of overcrowded and nondescript land . . . each horizon shows high-rise buildings of office blocks, hotels or low-cost housing,” said an account in a Western magazine. It noted, however, that the nation’s aesthetic had its adherents. “Where westerners tend to disparage the sterile modernity of Singapore, Asian visitors see a welcome oasis of ordered cleanliness.”20 Singaporeans themselves commonly used the derisive phrase “jungle island” to describe their home before the boom, in contrast with the city that rose from the forest. HDB-constructed public housing, which accounted for 76% of the island’s housing stock and housed 87% of citizens, was especially lauded; once “among the most primitive in the urban areas of the world,” Singapore had become “the public housing laboratory of the world.”21

Orderliness and cleanliness were hallmarks of modern Singaporean society, and were strictly enforced by the government. Private ownership of cars was limited through high taxes to avert traffic congestion and air pollution, for example. Taxis were fitted with outside lights and internal buzzers that were triggered if they exceeded the speed limit. Fines for littering, smoking in public places, and failing to flush public toilets were stiff and exercised with alacrity. In 1992, the government banned the import and sale of chewing gum on the grounds that it was difficult and costly to clean up. Long hair on men was prohibited among government workers and tourists. The government retained the

18 Library of Congress, Singapore: A Country Study (Washington, D.C.: U.S. Government Printing Office, 1991). 19 Milne and Mauzy, p. 7. 20 Andrews, pp. 3–4. 21 Milne and Mauzy, p. 35.

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colonial-era Internal Security Act, which allowed indefinite detention of suspected criminals without trial, and exercised this power periodically.

All Singaporean newspapers and television stations routinely supported the government. In the late 1980s the government feuded with Western publications which published unfavorable assessments, demanding a right of reply and curtailing their circulation temporarily when a right of reply was not provided. Government also limited residential ownership of satellite dishes.

The government cited the necessity of suppressing ethnic tension in multicultural Singapore as justification for these practices. Maintaining the Chinese majority was official government policy.22 In the mid-1980s, for example, the government founded a matchmaking service that aimed to find husbands for well-educated Chinese women, who were threatening the racial balance by marrying later and having fewer babies. HDB housing blocks reflected the ethnic mix of the island.

But if Lee was somewhat intolerant, he was also undeniably competent, honest, and efficient. Henry Kissinger called him the “smartest man in the Western world.”23 The Economist joked that the divorce from Malaysia meant that Lee’s “desire to govern somewhere equal in size to his ambitions could never be fulfilled. (He . . . has been known to speculate wistfully about what he could have done with a decent-sized island, like Jamaica.)”24 Many observers opined that he had remodeled Singapore in his image.

The political and business elite formed a rigorous meritocracy, granting advancement only to those with high test scores and educational achievement. According to some observers, the governing style was not totalitarianism, “but rather . . . a paternalistic, ordered, and planned approach to society, based on the government’s belief that it knows best.”25 “Big Brother in Singapore is less a tyrant than an authoritarian father worried that his family will one day disappear,” observed another critic.26 The governing elite comprised only a few hundred people, who tended to see each other frequently in different forums. “Because of the small size [of the society], each official wears many hats,” a senior EDB official said in an interview. “This eases informal communication and makes it easier to have a shared vision.”

Lee, who became senior minister without portfolio in the Goh administration after stepping down as Prime Minister in 1990, was well known for his lectures on social morality at home and abroad. Western-style liberal ideas, he often said, were not universal; in certain areas, such as public education, they did not work even for Western nations. Far better for Singapore, the Oxbridge-educated Lee believed, were “Asian values,” particularly a modern brand of Confucianism. “By switching to English in the past twenty-odd years,” Lee said in 1987, Singaporeans have

changed the curriculum, the textbooks, and, with it, the philosophy that is inculcated into the children. They are reading more and more American magazines or British textbooks which instill the belief in the rights of the individual. The supremacy of the individual human being against all else, except in times of war when his individual rights are overcome by the needs of the state. Otherwise the state and the individual are put on a par. This is not acceptable in Confucian societies.27

22 “Singapore After Lee: The under-nannies take over,” Economist, October 27, 1990, p. 20. 23 Rajendra Sisodia, “Singapore Invests in the Nation-Corporation,” Harvard Business Review, May–June 1992,p. 45. 24 “Singapore After Lee: The under-nannies take over,” p. 19. 25 Milne and Mauzy, p. 8. 26 Buruma, p. 142. 27 Quoted in Buruma, pp. 155–156.

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Although Confucianism had been used by Western sociologists in the 1940s and 1950s to explain why economic development in east Asia was improbable,28 Lee’s Confucianism accentuated hard work and obedience to authority.

Singapore’s policies had resulted in a city-state largely free of crime, pollution, homelessness, and other afflictions common to the world’s urban areas despite rapid population growth. Poverty was almost nonexistent. From a society with 50% literacy under British rule, Singapore had built a strikingly good educational system, which turned out 50,000 university graduates annually in the distribution decided upon by the government: 1,300 chemical engineers in 1992, 200 attorneys, 150 medical doctors, and so forth. Singapore also had near universal health care in a government run system.

Economic Policies

Savings The government explicitly attempted to maintain very high savings rates, in order to stimulate capital accumulation and finance investment. From a negative rate in 1960, Singapore’s domestic savings grew to 18% of GDP in 1970, 38% in 1980, and 47% in 1991 (see Exhibit 5). The last was the highest rate in the world. Partially as a result, private consumption fell from 89% of GDP in 1960 to 52% in 1980 and 43% in 1991, while government consumption fluctuated between 9% and 13% for most of the same period (see Exhibit 2). The remarkable growth in savings was a combination of voluntary and mandated programs.

The government set mandatory contributions from employers and employees to the Central Provident Fund (CPF), its social security plan. The CPF dated from the last years of the British colonial administration. After independence the Lee government adopted it, retaining the contribution rates of 10% of each employee’s salary (5% from the employee and 5% from the employer). Over the next 30 years the required rate of contribution increased almost yearly, reaching 16% in 1970, 38.5% in 1980, and peaking at 50% in 1984–85 (see Exhibit 7). In 1986, the rate was scaled back to 35%, when it was argued that the accumulated savings was depressing domestic demand and making it increasingly difficult to find productive areas for investment. The rate rose again to 40% by 1991. The CPF and other taxes on employers made employment costs very high by the standards of the region.

In 1968 the government allowed low-income citizens to use the entirety of their CPF balances to buy low-cost HDB flats. Further allowances for housing purchase using CPF funds followed. By 1992, 80% of Singaporeans owned their own homes. During the 1980s, CPF uses were gradually expanded. Withdrawals were allowed for medical and educational expenses, the purchase of blue-chip stock, and the transfer of money from children to elderly parents.

Fiscal and monetary policy The government’s long-term goal for fiscal policy was “to ensure that operating and development expenditure can be financed from operating revenue . . . thereby releasing more resources to the private sector.”29 In most of the 1980s and 1990s, government revenue exceeded not only current spending, but all spending, resulting in large budget surpluses (see Exhibit 6). Monetary policy since independence emphasized maintenance of very low inflation (see Exhibit 4). Because of its dependence on trade, Singapore was susceptible to imported inflation. The tight domestic labor market of later years added to inflationary pressures.

28 Discussed in Ezra F. Vogel, The Four Little Dragons: The Spread of Industrialization in East Asia (Cambridge, Mass.: Harvard University Press, 1991), p. 84. 29 Ministry of Trade and Industry, Economic Survey of Singapore 1991 (Singapore National Printers Ltd., February 1992), p. 25.

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The government maintained the convertibility of the Singapore dollar. The fixed rates set by the Monetary Authority of Singapore from 1965 to 1973 (S$3.06 to the U.S. dollar from 1965–71, and S$2.82 to US$1 from 1971–73) were close to the rates that would have prevailed without controls. After 1973, the currency was allowed to float.

Labor and immigration policy At independence, trade unions were an unlikely ally of the government. They were a communist stronghold and frequently struck for better wages and working conditions. Upon taking power, Lee banned antagonistic unions outright. The successor union, the National Trades Union Congress (NTUC), was cooperative with government, officially sharing the doctrines and policies of the PAP. Union membership began a long decline, from 75% of the work force in the late 1960s to 25% in 1988.

The governmental National Wages Council set economywide guidelines for wages, wage increases, and fringe benefits (see Exhibit 8). To improve the investment climate for foreign corporations, Parliament barred unions from negotiating promotion, transfers, firings, and working conditions after 1968. As the historically high unemployment rate evaporated during the 1970s and 1980s, work rules were gradually relaxed. During the same period, the functional composition of the labor force altered (see Exhibit 9).

A large contingent of foreign workers was admitted to Singapore beginning in the early 1970s, when labor shortages began to appear. They fell into two categories: skilled workers and professionals with long-term employment passes, and unskilled workers with biannual work permits, hired largely in the construction, manufacturing, and domestic service sectors. The government controlled the numbers of the unskilled group to regulate wages. (One observer suggested that the government viewed foreign workers as “a key macroeconomic policy variable.”30) In 1973, at the peak of an economic boom, “guest workers” constituted approximately 13% of the labor force, up from 3% around 1970. By 1980 their number dropped to 7%, as the government began discouraging labor-intensive operations. The fraction rose to 18% in 1991. Rules on the permitted percentages of foreign workers changed frequently. The government was willing to repatriate guest workers when it saw a need. Large numbers were sent home in 1985 and 1989, resulting in international criticism. Guest workers came at first largely from Malaysia, and then as that nation’s job market tightened, from Indonesia, Thailand, the Philippines, India, Bangladesh, and Sri Lanka.

Notwithstanding its attractiveness to unskilled workers, Singapore had more trouble attracting skilled workers from elsewhere and retaining its own. A net 4,700 families left the country in 1989. This brain drain was prevalent particularly among Singaporeans of Malay and Indian descent. In 1989, the Lee government announced it would relax the stringent resident status criteria for up to 25,000 skilled workers from Hong Kong and their dependents. But few takers had come forth by 1992.

Trade and foreign investment Government policy in the area of trade stood in relief to its involvement in other matters. In keeping with its duty-free history, Singapore after independence maintained very low tariffs on all goods and levied no capital gains tax. There were no restrictions on entrance to and exit from the Singaporean economy for foreign investors, or on repatriation of income and capital.

Singapore was one of the few nations where the sum of imports and exports (including transshipments) was greater than GDP—more than three times greater in 1991 (see Exhibit 10). This reflected the renewed importance of entrepôt trade, which revived as political relations improved with Singapore’s rapidly growing neighbors. (Trade with Indonesia was not reported, a practice

30 Economist Intelligence Unit, Singapore: Country Profile 1992–93 (London), p. 15.

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dating from the Konfrontasi.) Singapore’s reserves of foreign currency reached S$59 billion in 1991, exceeding those of most other countries on a per-capita basis. The current account in the balance of payments turned positive in the mid-1980s, despite a perpetual merchandise trade deficit. Positive net flows in services and investment income offset the negative trade balance (see Exhibit 11).

Government ownership Government was the country’s largest single employer. More than 450 public-sector firms, such as Singapore Airlines and Singapore Telecom, accounted for 20% of GDP in 1992. Government owned firms were managed differently than in most other countries, with professional boards of directors and expectations that they make a profit. The government owned equity positions in domestic and foreign firms through development banks. It held three-quarters of the country’s land, which it retained when selling HDB flats to their occupants. The results of these policies seemed positive; according to one observer, “Singapore . . . has been a major exception to the central tenet of Economics 101 that government participation is bad for the economy.”31

Economic Miracle: From Jungle Island to “Little Dragon”

From a rate of 5.8% (compounded annually) during 1960–65, Singapore’s real GDP growth accelerated to 12.9% in 1966–73—probably the highest rate in the world. This phenomenal achievement was not simply a matter of growing from a small base; GDP at independence had been high by developing country standards. Foreign investment inflows, export-oriented manufacturing, and external trade all grew rapidly. Economic success earned Singapore and several other east Asian nations the appellation of little dragon.

In addition to low-tech assembly work, capital-intensive industries also grew. Singapore promoted the development and expansion of the former British Navy refueling facilities by multinational oil companies interested in developing oil deposits in Indonesia, and soon became the largest petroleum refining center in Asia. Petrochemicals also benefited from the war in Vietnam. U.S. warships and supply ships found the facilities to their liking, and Singapore’s importance as a port increased.

“Sitting right on the main Europe-Far East shipping route, Singapore became the natural converging point of some 50 maritime nations and more than 200 shipping lines. . . . [It] became, in one of the catch-phrases of the time, the world’s fourth busiest port.”32 The government viewed the port as its lifeline, devoting as much capital to the facilities as it could afford. The result was a perpetual state of expansion and upgrading. Singapore built the region’s first container freight terminal in 1969, and introduced 24-hour berthing service. The busyness of the port meant that the British naval dockyards were not idle after 1971. They were converted into a ship-repair center, and for the next several years, that industry grew by 30% annually.

The first international oil shock in 1973 brought about the end of two-digit growth in Singapore. Economic conditions in developed countries, on which Singapore was dependent, worsened. Real GDP growth fell from 11.5% in 1973 to 6.4% the following year. Still, the economy grew at a rate of 7.3% (compounded annually) in 1973–79, far exceeding the world average. During the second international oil shock, which induced recession in many countries in 1979–80, real GDP grew by more than 9% in both years.

31 Mark Magnier, “Hong Kong’s Feisty Entrepreneurs More Adventurous Than Singapore’s,” Journal of Commerce, January 7, 1993, p. 3A. 32 T. J. S. George, Lee Kuan Yew’s Singapore (London: Andre Deutsch Ltd., 1973), p. 95.

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The high unemployment that had plagued the country through the mid-1960s had long since disappeared. In the tightening labor market, real wages began rising more rapidly relative to labor productivity (see Exhibit 8).33 Other less-developed Asian countries with cheaper labor, such as Malaysia and Thailand, had emerged as important manufacturers of labor-intensive products.

The Lee government responded by initiating a large wage increase in 1979. (Although the National Wages Council’s guidelines on wage levels were not mandatory for private firms, those not in compliance had to explain themselves before an Industrial Arbitration Court—the judgments of which were binding.) The government hoped the policy would encourage Singapore’s factories to shift to higher technology. Following this logic, employers (both foreign and local) would no longer find it as profitable to produce low-wage, low-value products, and so would switch to the manufacture of higher-wage, higher-value products. The key element of the policy was a belief that manufacturers would not relocate all operations to other countries that retained their low labor costs, but would recognize enough value in Singapore’s infrastructure, hardworking labor force, and pro-business government to stay on the island. The total impact on wages ranged between 14% and 20%.

“Our strategy is to induce entrepreneurs and managers of capital to increase efficiency of production by restructuring, automation and rationalisation,” said Goh Chok Tong, then the Minister of Trade and Industry. “We also encourage them to upgrade into higher-technology industries that can generate more value-added products.” The new policy would “allow . . . wages to rise to a level reflecting the scarcity value of labour in Singapore. This way employers will no longer find it profitable to produce more low-wage, low-skill, and low-value-added products by simply employing more men on the production line.”34 Government ministers spoke “with relish of inefficient firms going bankrupt, releasing skilled workers to successful companies that can make better use of them.”35

For several years the strategy appeared to work, or at least not to harm the economy. Real GDP grew 8.2% (compounded annually) from 1980 to 1984. Fully a quarter of GDP growth in 1983–84 came from the construction sector, which rapidly expanded to work on several large infrastructural development projects, rather than from high-technology sectors. Financial services, transportation, and communication also grew rapidly.

Recession and Reform

In 1985 a deep recession was accompanied by a sharp rise in unemployment, weak external demand, low profits, and much lower investment in manufacturing. Real GDP declined by 1.7%—the first contraction since independence. The recession was partly explained by the depressed international market for oil. But a high-level Economic Committee, composed of top public and private sector managers, blamed structural deficiencies in the economy for a larger part. It deemed the 1979 wage policy overambitious; growth of labor productivity had not kept pace with the higher wages, which had seriously eroded the nation’s competitive position in relation to rival Asian economies. The committee (which was chaired by Lee’s son, Lee Hsien Loong, a top candidate to succeed Goh as Prime Minister) pointed to the heavy payroll taxes levied for the CPF, which pushed

33 Labor productivity is defined as the economic value of an industry’s or nation’s output, divided by the amount of labor time used to produce that output. Improvements in production technology will increase labor productivity, as will the addition of more capital equipment per worker. 34 S. Awanohara, “Singapore Inc.’s Boss on the Republic’s Future,” Far Eastern Economic Review, August 10, 1979, p. 40. 35 See “Singapore (B),” Harvard Business School case no. 9-383-056 (revised August 1987), p. 11.

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up labor costs while external demand was slowing. Lastly, the committee blamed a dependence on the construction boom. When the boom ended, the economy collapsed.36

The Economic Committee recommended that the government lessen its extensive managerial and development role to allow the private sector more freedom. Specifically, it advocated flexibility in wage-setting, and reduction of the forced savings rate in order to stimulate domestic demand. The corrective measures were instituted in early 1986. By the end of that year a recovery had begun, which was sustained in 1987, when the real GDP growth rate of 9.5% exceeded the predicted figure of 6%. In 1988 high export growth and domestic demand led to 11.1% real growth, the highest rate in 15 years. “Strong world trade growth assisted this impressive performance, but it owed much to the adoption of the corrective measures recommended by the Economic Committee,” wrote one observer.37

Fast growth continued in 1989 and 1990, despite a slowdown in Singapore’s major export market, the United States. The manufacturing sector, led by electronic components (particularly disk drives), grew by 9.5% in 1990, but was eclipsed by the financial services sector. The latter had grown dramatically in importance, despite having rattled investors when the stock exchange closed at one point during the 1985 recession. With 15% growth in financial services in both 1989 and 1990—the best performance of any sector—Singapore had become Asia’s third most important financial center, behind Tokyo and Hong Kong. By the end of the decade financial services accounted for 28% of GDP and employed 11% of the labor force. (See Exhibit 12 for Singapore’s cluster portfolio measured by exports.)

In 1991 growth slowed to 6.7%, as the U.S. recession deepened. The spread of recession to other OECD countries led to forecasts of a slowdown in the Singaporean economy in 1992, to “only” 5% to 6%. Even so, “Singapore Inc.,” as many citizens referred to their nation, continued to claim an impressive set of economic superlatives. Its port, the world’s busiest for the fifth consecutive year and the most efficient, overtook Hong Kong to become the world’s biggest container port (in terms of the number of containers handled). Its oil installations were third in the world in refining capacity, and Singapore was the the world’s third largest oil-trading center. Changi Airport was voted the world’s best airport for the third straight year in a survey of business travellers. The government-owned Singapore Airlines, regularly named the best airline in the world, was also the most profitable. The CPF Board registered 137 foreign visitors who wished to study the CPF. Euromoney magazine named Singapore the second-least risky country in Asia and the second-best economic performer in the world. The World Competitiveness Report ranked it the most competitive of the world’s newly industrialized countries, and scored its telecommunications infrastructure as the best in the world. BERI, a Washington-based business information analyst, named Singapore the third-best low-risk country for investment (behind Japan and Switzerland and tied with Germany). BERI rated Singapore’s work force the best in the world for the tenth year running.38

As 1992 progressed, however, the economy worsened. The forecast for the growth rate was downgraded to between 4.5% and 5.5%—a fifth of which came from a construction boom. Singaporeans wondered nervously if the 1985 recession was about to be repeated.

36 The Economic Committee, The Singapore Economy: New Directions (Ministry of Trade and Industry, February 1986), pp. 37–46. 37 Economist Intelligence Unit, p. 11. 38 Compiled from Rajendra S. Sisodia, “Singapore’s Firsts,” Harvard Business Review, May–June 1992, p. 42; Ministry of Information and the Arts, Singapore: Facts and Pictures 1991, p. 175; and Kernial Singh Sandhu and Paul Wheatley, eds., Management of Success: The Moulding of Modern Singapore (Boulder, Colo.: Westview Press, 1990), p. vi.

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Official and unofficial commentators have not . . . attempted to pin all the blame for the country’s slowing economic growth . . . on the international situation. Instead there has been a relatively frank and public debate on whether the main problems are created nearer to home. The major argument is over whether Singapore’s virtuous cycle of saving has again become vicious. Some think over-saving, in large part through the government’s forced savings schemes[,] is serving only to depress private consumption and returns on investment.39

New Directions

In late 1991 Goh Chok Tong’s new government issued a long-range plan called the Next Lap. The plan plotted social and economic goals in general terms. Its introduction sounded the familiar Singaporean insecurity of a small island in a big and hostile world: “External events can shake us, as they have in the past. Nothing is certain. We have to keep trying to stay ahead in the race of nations. We must never forget the basics: We have to stay united, work hard, save, look after each other, be quick to seize opportunities and be vigilant. . . . No one owes us a living—we have to earn it.”40

At the same time, the plan revealed ambition. Its goal was the achievement of a U.S.-level per-capita standard of living by 2030. As part of the Next Lap, the governmental National Computer Board announced a sub-plan for the development of information technology (IT), “IT2000.” The board planned to use ISDN (integrated services digital network) technology and fiber-optics to develop Singapore—already with one of the world’s most technologically advanced infrastructures—into an “intelligent island” and “global hub” for manufacturing, services, and transportation.41 Information technology was to be the next step in the nation’s progress.

Singapore’s tensions with Indonesia and Malaysia had receded enough by the late 1980s for the three countries to announce establishment of a “growth triangle” comprising Singapore, the Malaysian state of Johore to the north (connected to Singapore by a causeway, with a second planned), and the Riau Islands of Indonesia to the south (30 minutes by ferry). Singapore would provide the management expertise, technology, telecommunications, and transportation, while Johore and Riau offered land and low-cost labor. Malaysia and Indonesia were to retain sovereignty, but Singapore had substantial freedom to administer the development as it saw fit.

Development proceeded rapidly, mostly on the Indonesian island of Batam. At the beginning of 1990 Batam was rainforest with few human inhabitants. Two years later several companies had begun manufacturing and 35 more had signed up to occupy its industrial park. In 1992 a second island, Bintan, was added to the scheme, as a planned resort.

Singaporean leaders viewed the growth triangle as a test run for future cross-national interaction in Vietnam and China. “In Asia, we have the potential for development unseen so far in human history because of the size of our populations,” said an EDB official in an interview. Singapore’s government planned to position the nation at the center of that development.

At the same time, uneasiness over the nation’s ability to sustain its economic success was prevalent, both inside and out of Singapore. Could a tiny island distant from most of the industrialized world make the transition from manufacturing to marketing—from catching up to

39 Economist Intelligence Unit, Singapore: Country Report No. 3 1992 (London), p. 4. 40 The Government of Singapore, Singapore: The Next Lap (1991), p. 15. 41 National Computer Board, A Vision of an Intelligent Island: The IT2000 Report (March 1992).

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keeping up? “Singapore will find the going tougher from now on because the economy is more mature and it is competing in the First Division of developed countries,” wrote a Singaporean newspaper.42 “Production is easy—it’s bricks and mortar,” a business executive said in an interview. “Government can help create production skills. R&D is not that difficult either. You can count it, and we as a society are very numerate. If we can count it we can relate to it. But marketing is a softer skill—it is much harder to measure success. How do you develop this skill?”

Some Western observers, in particular, took some pleasure in questioning the viability of Singapore’s approach. “Has the price of creating a country that works been a crushingly dull society? Are Singaporeans too regimented to make the shift from serving others—in shipping, tourism, banking and so on—to a society where more value is added by individuals with entrepreneurial flair?”43 Most Singaporeans were quick to defend their customs, arguing that Western-style democratic capitalism was but one route to development. “Big government versus small government is not the issue,” said an EDB official in an interview. “The issue is whether your government facilitates or restrains and regulates growth.”

42 “Four years off target: Tough-going from now on,” Straits Times, August 17, 1992, p. 20. 43 “Singapore After Lee: The under-nannies take over,” p. 21.

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Exhibit 1 Gross Domestic Product (in 1987 S$ and US$) 1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991

S$ (millions) $6,525 $11,920 $18,782 $28,351 $38,236 $38,976 $42,636 $47,391 $51,865 $56,149 $59,858 US$ (millions) 3,400 5,403 11,462 16,343 18,741 18,325 20,245 23,912 26,888 31,116 34,174 Per capita US$ 1,799 2,610 5,072 6,781 7,321 7,075 7,757 9,024 10,033 11,482 12,382

Sources: International Monetary Fund, International Financial Statistics Yearbook, 1992; Office of the President of the United States, Economic Report of the President, February 1992; and Singapore Ministry of Information and the Arts, Singapore 1992

Exhibit 2 Breakdown of Gross Domestic Product (in billions of 1987 S$) By Account Class 1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991

Private consumption $5.2% $8.0% $11.4% $14.6% $17.2% $18.3% $20.2% $22.2% $23.6% $24.8% $26.0% Investment (gross fixed

capital formation) 1.4% 3.9% 6.6% 11.5% 16.1% 14.4% 15.2% 16.4% 18.7% 20.9% 23.9%

Government consumption 0.7% 1.4% 2.0% 2.8% 5.5% 5.3% 5.3% 5.1% 5.4% 5.9% 6.3% Net exports –0.8% –2.4% –2.1% –2.5% –0.9% 0.1% 0.6% 2.4% 4.6% 3.4% 5.6% Change in stocks 0.1% 0.7% 0.5% 1.6% 0.1% 0.6% 1.5% 1.0% –0.7% 1.0% –1.5% Statistical discrepancy 0.0% 0.3% 0.4% 0.4% 0.2% 0.2% –0.2% 0.3% 0.3% 0.1% –0.4% GDP $6.5% $11.9% $18.8% $28.4% $38.2% $39.0% $42.6% $47.4% $51.9% $56.1% $59.9% Net factor income/payments abroad NA% 0.1% 0.0% –1.0% 1.4% 1.0% –0.4% –0.1% 0.4% 0.7% 1.4% Gross National Product NA% $12.0% $18.7% $27.3% $39.6% $39.9% $42.3% $47.3% $52.3% $56.8% $61.2%

As Fraction of GDP1 Private consumption 79.2% 67.5% 60.7% 51.5% 45.1% 47.1% 47.5% 46.8% 45.5% 44.2% 43.4% Investment 21.1% 32.5% 35.1% 40.7% 42.2% 37.0% 35.6% 34.7% 36.1% 37.3% 39.9% Government consumption 10.4% 11.9% 10.6% 9.8% 14.3% 13.6% 12.5% 10.7% 10.3% 10.4% 10.5% Net exports –12.0% –20.3% –11.3% –8.8% –2.4% 0.4% 1.4% 5.1% 8.9% 6.1% 9.4%

Compound Annual Growth Rates (of industry output)

By Industry, as Fraction of GDP 1965 1970 1975 1980 1985 1991 1965–75 1975–85 1985–91 Farming, forestry, and fishing 2.8% 2.2% 1.4% 1.1% 0.7% 0.3% 4.1% –0.1% –8.4% Manufacturing 15.1% 24.8% 26.1% 29.5% 23.6% 28.6% 17.4% 6.3% 11.3% Utilities 2.2% 1.9% 1.9% 2.0% 2.0% 2.1% 9.6% 8.3% 8.3% Construction 5.9% 9.5% 8.8% 7.1% 10.6% 6.1% 15.7% 9.4% –1.8% Commerce, restaurants, and hotels 27.6% 22.0% 21.0% 18.9% 17.0% 17.5% 8.2% 5.2% 8.2% Transport and communications 11.3% 7.3% 9.0% 12.0% 13.4% 14.3% 8.7% 11.7% 8.9% Financial and business services 13.7% 16.9% 20.4% 20.5% 27.3% 27.4% 15.4% 10.8% 7.8% Other 21.5% 15.3% 11.8% 8.9% 5.3% 3.7% 4.7% –0.9% 1.3% Total 11.2% 7.4% 7.8% 1 Because changes in stocks and statistical discrepancies are excluded from GDP fractions, totals do not add to 100. Sources: International Monetary Fund, International Financial Statistics Yearbook, 1992; United Nations, National Accounts Statistics, 1989; Singapore Ministry of Trade and

Industry, Economic Survey on Singapore, 1991, and “Singapore in Brief,” 1991

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Exhibit 3 Maps of Singapore and Surrounding Region

JurongIndustrial

Estate

railroadhighwaysBritish settlement, 1828developed areas

N

0 5 10 km

5 miles0

Strait of Singapore

ChangiAirport

naval baseKeppel harbor

0 100 200km

100 miles0

N

IndianOcean

Sumatra

INDONESIA

SINGAPORE

MALAYSIA

Penang

South ChinaSea

Strait of Malacca

Malay Peninsula

Kuala Lumpur

Malacca

Batam

Bintan

Riau Islands

Hong Kong

Taiwan

South ChinaSea

PacificOcean

Philippines

SouthKorea

Japan

Thailand

Vietnam

Brunei

M a l a y s i a

Singapore

I n d o n e s i a

Indian Ocean

Mayanmar

China

GuangdongIndia

Laos

Kampuchea

N0 1000 2000 km

1000 miles0

SINGAPORE

Naturepreserveandreservoirs

Johor Baharu

MALAYSIA

Johore Strait

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Exhibit 4 Monetary Indicators

1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991

Money supply change (M1, on previous year) 3.3% 15.1% 21.5% 7.5% –0.9% 11.8% 12.3% 8.4% 14.9% 11.0% 7.7% Bank prime rate 8.00% 8.00% NA 13.60% 7.20% 6.10% 6.10% 6.13% 6.25% 7.73% 7.10%

Exchange Rates (average per period) S$ per US$ 3.06 3.06 2.37 2.14 2.20 2.18 2.11 2.01 1.95 1.81 1.73 S$ per 100 yen 0.85 0.85 0.72 0.94 0.93 1.30 1.46 1.57 1.42 1.25 1.28

Inflation Consumer prices change (on previous year) 0.2% 0.2% 2.6% 8.5% 0.5% –1.4% 0.5% 1.5% 2.4% 3.5% 3.4% GDP deflator (1987 = 100) 45.3 48.7 71.2 88.5 101.8 99.2 100.0 105.5 109.6 113.4 115.4

Sources: International Monetary Fund, International Financial Statistics Yearbook, 1992; Economist Intelligence Unit, Singapore: Country Profile, various; Singapore Ministry of Information and the Arts, Singapore 1992; and Singapore Ministry of Trade and Industry, Economic Survey of Singapore, 1991

Exhibit 5 Saving and Investment (in billions of current S$)

1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991

Saving GDP $3.0 $5.8 $13.4 $25.1 $38.9 $38.7 $42.6 $50.0 $56.8 $63.7 $69.1 Consumption (private and government) 2.6 4.6 9.5 15.4 23.1 23.5 25.6 28.8 31.7 34.8 37.2 Statistical discrepancy NA –0.1 0.1 –0.3 –0.2 –0.2 0.2 –0.3 –0.3 –0.1 0.5 Gross domestic saving NA $1.1 $4.0 $9.4 $15.6 $15.0 $17.2 $21.0 $24.8 $28.8% $32.4 • As a fraction of GDP NA 18.3% 29.6% 37.5% 40.1% 38.9% 40.4% 41.9% 43.7% 45.2% 46.8%

Net factor income from abroad NA 0.1 NA –1.0 1.4 0.9 %–0.4 –0.1 0.4 0.8 1.6 Net transfers from abroad NA 0.0 NA –0.2 –0.5 –0.4 –0.5 –0.6 –0.7 –0.7 –0.8 Gross national saving $0.5 $1.1 $4.0 $8.3 $16.5 $15.6 $16.3 $20.2 $24.5 $28.9 $33.1

Investment Gross national saving $0.5 $1.1 $4.0 $8.3 $16.5 $15.6 $16.3 $20.2 $24.5 $28.9 $33.1 Net funds from abroad 0.1 1.1 1.4 3.3 0.0 –0.7 0.3 –1.8 –4.7 –3.9 –7.3 Gross capital formation 0.6 2.2 5.4 11.6 16.6 14.9 16.6 18.4 19.8 24.9 25.8 Change in stocks 0.0 0.4 0.5 1.4 0.1 0.6 1.5 1.1 –0.8 1.2 –1.7 Gross fixed capital formation $0.6 $1.9 $4.8 $10.2 $16.4 $14.3 $15.2 $17.3 $20.5 $23.7 $27.5

• Construction 0.4 0.8 2.1 4.3 10.0 7.9 7.0 6.7 7.4 8.3 10.7 • Residences 0.2 0.4 1.1 1.4 5.3 3.6 3.0 3.2 3.3 3.5 4.2

• Transport equipment 0.1 0.2 0.7 NA 1.9 1.7 2.0 2.1 3.2 3.5 4.3 • Machinery and equipment 0.2 0.9 2.0 NA 4.5 4.7 6.2 8.6 10.0 11.9 12.6

Sources: Singapore Ministry of Information and the Arts, Singapore 1992; International Monetary Fund, International Financial Statistics Yearbook, 1992; United Nations, National Accounts Statistics, various; World Bank, World Tables, various; and Singapore Ministry of Trade and Industry, Economic Survey of Singapore, 1991

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Exhibit 6 Central Government Budgets (in billions of current S$)1

1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 (est.)

Revenue $0.5 $1.3 $3.4 $6.6 $14.8 $15.0 $13.8 $14.5 $17.3 $21.6 $22.0 Current expenditure NA NA 2.0 3.9 7.3 6.8 9.7 8.1 9.0 NA NA Current surplus NA NA 1.1 2.5 3.5 3.6 3.2 5.7 6.7 NA NA Capital expenditure NA NA 0.3 1.1 3.3 4.6 5.5 3.6 4.1 NA NA Lending minus repayments2 0.1 0.2 0.9 1.1 3.4 3.0 –0.3 –0.8 –1.7 0.2 0.5 Surplus or deficit –$0.1 $0.1 $0.1 $0.5 $0.8 $0.6 –$1.2 $3.5 $5.9 $7.2 $7.6

Financing Borrowing $0.0 $0.3 $1.1 $2.6 $3.2 $1.5 $5.5 $2.6 $4.8 $8.6 $10.5 Domestic NA 0.1 1.1 2.6 3.3 1.7 5.5 2.7 4.9 8.7 NA Foreign NA 0.2 0.0 0.0 0.0 –0.2 –0.1 –0.1 0.0 –0.2 NA Increase in cash balances 0.0 0.4 1.3 3.1 4.0 2.1 4.3 6.1 10.7 15.8 10.13

As Fraction of GDP Current surplus NA NA 8.5% 9.8% 8.9% 9.3% 7.6% 11.5% 11.8% NA NA Surplus or deficit –2.7% 1.6% 0.9 2.1 2.1 1.5 –2.7 7.0 10.4 11.3% 11.0% Foreign borrowing NA 2.9 0.3 –0.2 –0.1 –0.5 –0.1 –0.2 0.0 –0.2 NA

1 Singapore does not consolidate the holdings of the Central Provident Fund into central government finance figures. 2 Data show loans to and repayments from statutory bodies in Singapore. 3 Datum does not equal the inverse of the surplus plus borrowing because it is drawn from preliminary figures. Sources: International Monetary Fund, Government Finance Statistics Yearbook, various; International Monetary Fund, International Financial Statistics Yearbook, 1992; and

International Monetary Fund, International Financial Statistics, March 1993

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Exhibit 7 Central Provident Fund (in billions of S$)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Membership (in thousands) 1,725 1,779 1,852 1,892 1,941 2,007 2,063 2,126 2,195 2,255

Contribution rate (fraction of wages)1 45% 46% 50% 50% 35% 35% 36% 38% 39.5% 40% • From employers 22 23% 25 25 10 10 12 15 16.5 17.5 • From employees 23 23 25 25 25 25 24 23 23 22.5

Contributions $3.9 $4.5 $5.4 $6.0 $4.8 $4.4 $5.0 $6.1 $7.2 $8.1

Fund balance (amount due to members) 15.7 19.5 22.7 6.8 29.3 30.6 32.5 36.1 40.6 46.0

Withdrawals NA NA NA NA NA 4.3 4.0 3.7 4.0 4.7 • For housing NA NA NA NA NA 2.6 2.8 2.4 2.3 3.0

1 Beginning in 1988, workers 55 years and older were charged lower rates. Rates shown are for workers younger than 55. Sources: Singapore Central Provident Fund Board, Annual Report, 1991; and Singapore Ministry of Information and the Arts, Singapore 1992

Exhibit 8 Wages and Labor Productivity (annual changes)

1973–781 1979–811 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est.)

All Sectors Change in average monthly earnings • Nominal 9.7% 11.9% 15.9% 10.2% 10.7% 7.9% 0.8% 3.2% 8.2% 9.8% 9.3% 9.2% • Real2 1.0 5.0% 12.0 9.1 8.1 7.4 2.2 2.7 6.7 7.4 5.8 5.8 Change in labor productivity 2.7 4.8% 1.6 5.3 6.9 3.1 6.3 4.8 4.5 4.8 3.5 1.5

Manufacturing Sector Change in average monthly earnings • Nominal NA NA 10.7 11.7 9.0 8.1 1.2 3.4 10.6 11.4 12.2 11.2 • Real2 NA NA 6.8 10.6 6.4 7.6 2.6 2.9 9.1 9.0 8.7 7.8 Change in labor productivity NA NA –0.7 9.1 7.2 –1.5 13.6 3.7 2.0 3.8 4.6 3.4

1 Data show compound annual growth rates. 2 Deflator used is the CPI. Sources: Singapore Ministry of Trade and Industry, Economic Survey of Singapore, 1991; International Monetary Fund, International Financial Statistics Yearbook, 1992; and Economist Intelligence Unit,

Singapore: Country Profile, 1992-93

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Exhibit 9 Labor Force1

Singapore United States 1970 1975 1980 1985 1987 1988 1989 1990 1991 1970 1991

Total force (millions)2 0.73 NA 1.11 1.23 1.32 1.37 1.43 1.49 1.55 84.89 126.87 Total employment (millions) 0.69 NA 1.07 1.18 1.26 1.32 1.39 1.47 1.52 80.80 118.44 Unemployment rate 6.0% NA 3.0% 4.1% 4.7% 3.3% 2.2% 1.7% 1.9% 4.8% 6.6%

Fraction of Total Employment, by Industry Farming, forestry, and fishing 3.5% 2.1% 1.6% 0.7% 0.9% 0.4% 0.5% 0.3% 0.3% 3.6% 2.9% Manufacturing 22.0 26.2 29.9 25.5 26.7 28.5 29.0 28.9 28.2 25.4 17.3 Utilities 1.2 1.1 0.8 0.7 0.6 0.6 0.5 0.6 0.5 1.2 1.3 Construction 6.6 4.7 6.7 8.9 7.7 6.7 6.6 6.2 6.5 6.1 6.0 Commerce, restaurants, and hotels 23.5 23.0 21.2 23.5 23.4 22.9 22.8 22.8 22.7 19.6 20.3 Transport and communications 12.1 11.7 11.1 10.1 10.1 9.7 9.9 10.2 10.0 5.3 5.6 Financial and business services 3.5 6.1 7.3 8.7 8.9 9.0 9.2 9.5 10.7 7.8 11.1 Other 27.6 25.1 21.5 21.9 21.7 22.1 21.6 21.5 21.2 31.1 35.5

1 Data for Singapore include “guest workers.” Data for both nations include armed forces. 2 Data for Singapore count economically active persons aged 10 and over before 1985, and aged 15 and over for 1985 and beyond. Data for the United States count economically active persons aged 16 and over. Sources: Singapore Ministry of Trade and Industry, Economic Survey of Singapore, 1991; International Labour Office, Yearbook of Labour Statistics, various; Office of the President of the United States,

Economic Report of the President, February 1992; and Singapore International Chamber of Commerce, Report, various

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Exhibit 10 Trade (in millions of current US$)1

Exports by Country of Destination, as Fractions of Total2 Imports by Country of Origin2 1965 1970 1975 1980 1985 1991 1965 1970 1975 1980 1985 1991

United States 4.2% 11.1% 13.9% 12.7% 21.2% 19.8% 5.1% 10.8% 15.7% 14.1% 15.2% 15.8% Malaysia 40.6 21.9 17.2 15.0 15.5 14.9 29.1 18.6 11.6 13.9 14.2 15.3 Japan 3.7 7.6 8.7 8.1 9.4 8.7 11.1 19.3 16.9 17.8 17.1 21.3 Hong Kong 4.4 4.1 7.3 7.7 6.4 7.2 2.9 2.5 2.2 2.1 1.9 3.0 Thailand 2.3 3.3 3.5 4.4 4.2 6.3 3.9 2.0 2.1 2.0 2.1 3.2 Saudi Arabia 0.2 0.3 1.6 2.0 1.2 0.8 0.7 1.1 8.7 12.5 3.5 5.1 Other Asia 10.4 16.6 14.0 18.5 15.0 15.7 18.4 18.8 21.4 18.9 17.1 12.7 Europe (excluding USSR) 17.0 20.9 17.6 14.7 12.0 16.8 20.0 18.6 15.3 13.6 13.6 14.6 Rest of world 17.2 14.2 16.2 16.9 15.1 9.8 8.8 8.3 6.1 5.1 15.3 9.0 Total $981 $1,554 $5,377 $19,375 $22,812 $59,025 $1,244 $2,461 $8,135 $24,003 $26,285 $66,293 Exports by Commodity, as Fractions of Total Imports by Commodity

1965 1970 1975 1980 1985 1991 1965 1970 1975 1980 1985 1991

Food 14.5% 11.6% 7.1% 4.8% 4.4% 3.0% 19.5% 12.6% 8.5% 5.7% 6.1% 4.1% Crude materials, excluding fuel 27.3 30.1 13.3 11.3 5.4 2.5 18.5 11.4 6.4 6.7 3.4 1.8 Mineral fuels 14.4 17.3 33.6 35.1 27.1 17.1 13.4 13.5 24.6 29.0 29.5 14.1 Chemicals 3.7 2.7 3.7 3.4 5.4 6.6 5.0 5.1 5.8 5.2 5.0 7.3 Basic manufactures (wood

products, textiles, etc.) 11.9 8.9 8.5 8.3 7.2 7.2 16.4 17.4 18.2 14.1 12.2 13.1

Machinery/equipment3 10.5 11.0 22.7 26.8 33.0 50.7 14.4 21.9 26.2 29.8 31.7 46.8 • General industrial 3.6 1.0 2.1 2.1 2.6 3.04 5.0 4.2 5.1 4.3 3.5 4.24 • Office and data processing NA 0.9 1.6 0.8 6.0 17.54 NA 0.4 0.7 1.0 3.2 7.24 • Telecommunications 0.4 0.8 3.1 7.1 6.3 12.14 1.1 1.4 2.0 3.5 3.9 7.54 • Electrical and electronic 1.3 3.2 8.4 9.0 11.4 11.34 3.0 5.1 7.7 8.3 10.4 13.14 • Transport 5.1 3.0 4.2 4.3 3.4 2.64 5.4 5.1 4.3 6.9 6.0 5.64

Other 17.7 18.4 11.1 10.3 17.5 12.9 12.8 12.7 10.3 9.5 12.1 12.8 Total $981 $1,554 $5,377 $19,375 $22,812 $59,025 $1,244 $2,461 $8,135 $24,003 $26,285 $66,293

1 Data include transshipments, which are goods imported into Singapore and then re-exported, often after processing or refining. 2 For political reasons, data exclude trade with Indonesia. 3 Due to changes in reporting methods, data for the five subcategories under “Machinery/equipment” are not strictly comparable between the following periods: 1965, 1970-80, 1985-91. 4 Datum is for 1990. Sources: United Nations, International Trade Statistics Yearbook, various; Singapore Ministry of Trade and Industry, Economic Survey of Singapore, 1991; and International Monetary Fund, Direction of Trade

Statistics Yearbook, 1992

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Exhibit 11 Balance of Payments (in millions of current US$)

1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991

Merchandise exports1,2 $918 $1,447 $5,110 $18,200 $21,533 $21,336 $27,464 $37,993 $43,239 $50,684 $56,819 Merchandise imports1,2 –1,166 –2,302 –7,511 –22,400 –24,362 –23,402 –29,910 –40,338 –45,687 –55,803 –60,948 Trade balance –248 –855 –2,400 –4,200 –2,829 –2,065 –2,446 –2,345 –2,447 –5,119 –4,128

Services, credit 293 489 2,787 6,085 6,383 6,220 7,447 9,372 11,742 15,703 17,086 Services, debit –96 –236 –966 –2,912 –3,976 –4,165 –5,015 –6,227 –7,294 –9,262 –10,102

Income, credit3 30 67 380 953 1,814 2,219 2,900 3,790 4,483 5,975 7,123 Income, debit3 –12 –29 –345 –1,382 –1,183 –1,707 –2,810 –3,402 –3,676 –4,723 –5,291

Private transfers, net –12 –21 –38 –104 –205 –172 –170 –209 –254 –270 –339 Official transfers, net –14 13 0 –3 –8 –11 –64 –90 –125 –134 –141

Current account balance –$59 –$572 –$584 –$1,563 –$4 $319 –$157 $889 $2,428 $2,170 $4,208

Direct investment into Singapore (credit) NA NA 503 1,117 1,047 1,710 2,836 3,655 2,770 3,861 3,584

Direct investment abroad (debit) NA NA –249 21 –238 –181 –206 –117 –453 –494 –701 Net direct investment 16 93 254 1,138 809 1,529 2,630 3,538 2,317 3,368 2,883

Portfolio investment, net 0 0 –2 13 175 –549 252 –293 324 287 232 Other long-term capital, net 224 804 3284 4324 34 187 –317 –204 6 –368 13

Overall balance –$5 $184 $407 $663 $1,337 $538 $1,095 $1,659 $2,738 $5,431 $4,193

1 Data for merchandise exports and imports differ slightly from those shown in trade data in Exhibit 10. Both are derived from customs data, to which adjustments are made according to balance of payments guidelines. 2 Data include transshipments. 3 Data include reinvested earnings. 4 Datum includes short–term capital. Sources: International Monetary Fund, Balance of Payments Statistics Yearbook, various; and International Monetary Fund, International Financial Statistics Yearbook, 1992

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Microeconomics of Competitiveness -23-

Exhibit 12 Singapore Cluster Portfolio Measured by Exports, 1992

0%

1%

2%

3%

4%

5%

6%

$0 $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000Cluster Export Value (thousands), 1992

Wor

ld E

xpor

t Sha

re, 1

992

Information Technology($17.9 Billion, 9.4% World Share)

Entertainment and Reproduction Equipment

Oil and Gas Products

Business Services

CommunicationsEquipment

Hospitality and Tourism

Tobacco

Transportation and Logistics

Power and Power Generation EquipmentMarine Equipment

Plastics

ApparelChemical Products

Production TechnologyMetal Mining and Manufacturing

Agricultural Products

Sporting, Recreational and Children’s Goods

Lighting and Electrical EquipmentAnalytical Instruments

Motor Driven Products

Singapore Overall World Export Market Share, 1992: 1.89%

Automotive

ProcessedFood

Textiles

Source: International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School

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Microeconomics of Competitiveness -24-

Exhibit 13 Comparative Social and Economic Indicators Singapore Hong Kong South Korea Taiwan Japan United States Indonesia Malaysia Philippines

Population, 1991 (millions) 2.81 5.9 43.1 20.7 124.0 252.5 193.6 18.0 65.8 Estimated annual population growth, 1990–2000 1.0% 0.5% 0.7% 0.9% 0.4% 0.7% 1.6% 2.2% 1.9% Area (thousands of square miles) 0.2 0.4 37.9 12.5 152.4 3,539.2 705.2 126.9 115.1

Life expectancy at birth, 1991 75 772 70 75 79 76 61 68 65 Adult illiteracy rate, 1990 14%3 12%3 <5% NA <5% <5% 23% 22% 10%

GNP per capita, 1990 (thousands US$)4 $11.5 $11.5 $5.4 $8.0 $25.4 $21.8 $0.6 $2.3 $0.7 GNP per capita, according to purchasing

power parity, 1990 (thousands US$)4 $14.9 $16.2 $7.2 NA $17.0 $21.4 $2.4 $5.9 $2.3

GNP per capita average annual growth rate, 1965–904

6.5% 6.2% 7.1% 9.2% 4.1% 1.7% 4.5% 4.0% 1.3%

Wages, 1990 (United States is 100)5 26 22 26 27 86 100 NA NA NA

Telephones per 100, 1987 44.2 47.0 25.5 35.96 55.53 76.0 0.5 9.1 1.53 Televisions per 1,000, 1989 372 260 207 NA 610 814 55 144 41

Military expenditures as percentage of GNP, 1989 5.1% NA 4.3% 5.4% 1.0% 5.8% 1.7% 2.9% 2.2%

Months of import coverage provided by gross international reserves, 1990

4.8 NA 2.2 13.4 2.6 2.9 3.2 3.5 1.5

Current account balance, 1990 (billion US$) $2.2 NA –$2.2 $10.8 $35.9 –$92.2 –$2.4 –$1.7 –$2.7 Average annual inflation rate,

(from GDP deflator) 1980–90 3.4% 7.2% 5.1% 4.6%7 1.5% 3.7% 8.4% 1.6% 14.9%

Saving rate (gross domestic saving as a percentage of GDP), 1990

45% 33% 37% 30% 34% 15% 37% 33% 16%

Distribution of GDP, 1990 Private consumption 44% 59% 63% 55% 57% 67% 54% 54% 75% Investment 37 28 37 22 33 16 36 34 22 Government consumption 10 8 NA8 18 9 189 9 13 9 Net exports 6 5 –1 5 1 –1 1 –1 –6 1 Singapore population figure counts citizens only, and excludes foreign workers. 2 Datum is for 1990. 3 Datum is for 1985. 4 The upper figures for GNP per capita are calculated using the average of three years of exchange rates. The lower figures are calculated using purchasing power parities (defined as the number of units of a country’s currency required to buy the same amounts of goods and services that $1 would buy in the United States). GNP average annual growth rate data are calculated from the upper row of GNP per capita figures. 5 Figures show hourly compensation costs for production workers in manufacturing industries. These costs include direct pay, employer expenditures for insurance and benefits programs, and for some nations, other labor taxes. 6 Datum is for 1988. 7 Taiwan inflation is calculated from consumer prices. 8 South Korea does not separate out government consumption; it is spread through the other accounts. 9 Where most nations count government spending on capital assets as investment, the United States aggregates it with government consumption. Sources: United States Department of Commerce, Statistical Abstract of the United States, 1992; World Bank, World Development Report, 1992; Republic of China, Taiwan Statistical Data Book, 1992;

International Monetary Fund, International Financial Statistics Yearbook, 1992; and United Nations Development Program, Human Development Report, 1991

Page 25: Singapore 2008

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