Singapore′s globalization strategy

SINGAPORE'S GLOBALIZ TION STRATEGY* Lee Lai-To

For Singapore, it is not a question of whether to globalize, but how to globalize. While Singapore may be handicapped by its small size and lack of natural resources, it seems that these drawbacks could be less of a problem as the world economy becomes more sophisticated. Physical size and natural resources will become less important for economic growth when compared with human capital, information, and knowledge in the future. To build the city-state, the Singaporean government adopted a number of bold strategies to develop its economy, making it a leader among the newly industrialized nations involved in the region. Singapore's export-oriented industrialization evolved in several stages and had to overcome obstacles along the way. Its success was dependent on en- lightened government policy in cultivating good relations with multinational corporations and cooperation between the government-run and private enterprises. A review of the economy in the last decade gave birth to the Strategic Economic Plan of 1991. Besides underlin- ing the importance of the manufacturing and service sectors, the plan also emphasized the regionalization and globalization of the economy. While the Asian economic crisis has affected Singapore's development, it has not changed Singapore's determination to globalize and liberalize its economy.

An earlier version of this article was presented at the conference on"Globaliza- tion and New Governance,"hosted by the Semin Foundation and Asia Pacific Public Affairs Forum in Suwon, Korea, 7-11 October 1999.

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Introduction

When statehood was thrust upon Singapore in 1965, the pri- mary challenge for the newly independent city-state was economic survival. Its leaders also knew very well that a sound economic foot- ing was the foundation of a viable nation. However, it was obvious that Singapore was greatly handicapped by its small population and hence small domestic market. Moreover, it does not have natural resources and a hinterland. The major asset of the new Republic was its strategic position. As the major port between the Indian and Pacific Oceans and situated next to the Straits of Malacca, Singapore had developed itself into a respectable entrepot. Apparently, the leaders of Singapore were not satisfied with the traditional role of a middleman in the regional economy. To build a nation, Singapore adopted an export-oriented industrialization strategy. The policy option chosen was to plug the nation into the global economic system. Its globalization strategy was guided basically by two features: the promotion of foreign investments in Singapore and the con- tinuation of a free trade policy that would enable liberal import and export of goods and services.

As the local businessmen were not really equipped to launch the strategy, the state, and not the private sector, was to take an active part in the promotion of Singapore as a place for export production. Notably, in the case of investment promotion, the Economic Development Board (EDB), set up in 1961 by the government, as- sumed a greatly enhanced role in helping Singapore's industrialization drive to transform the city-state from a trading nation to a modern, diversified economy. To promote Singapore as an investment target, the EDB set up offices in mostly industrialized countries to attract Multinational Corporations (MNCs) to the Republic of Singapore. The EDB offices would brief potential investors about Singapore's investment incentives. Once a corporation had made the decision to invest in Singapore, EDB would help it to set up the enterprise in the city-state. In this way, the functions performed by the EDB included not only overseas promotion, but also developing the industrial infrastructure, training manpower, providing loans, and acting as a one-stop service center for the MNCs. Some of the

38 East Asia / Summer 2000

functions were later taken over by other government agencies like the Jurong Town Corporation (JTC), the principal developer and manager of industrial estates in Singapore. Other facilities like the opening of the Development Bank of Singapore (DBS) to provide finance for industrial ventures and the Neptune Orient Lines (NOL) to ensure reasonable transport charges also helped boost Singapore as an investment destination for MNCs. More agencies, like the Singapore Trade Development Board (TDB), were also created to develop and expand the city-state's international trade.

Apparently, the immediate objective in the early years of Singapore's globalization strategy was job creation in the light of a high unemployment rate of nearly 9 percent. Naturally, labor intensive industries were encouraged and the MNCs came to Singapore in the 1960s and early 1970s because the city-state could provide a low-cost base for their labour-intensive operations. This strategy worked as demonstrated by the fact that unemployment was basically resolved by the early 1970s. In fact, some industries began to encounter labour shortages leading subsequently to the reliance on foreign labour.

In retrospect, the fear of unemployment probably had caused Singapore to rely too much on low-wage labour-intensive industries for quite some time. As a result, real productivity was low when compared with other newly industrializing economies (NIEs). It was obvious that one of the basic problems of Singapore's development was how to increase productivity so as to increase the competitiveness of Singapore products. This was especially true at the time of the rise of protectionism and faltering of the world and regional economy after the oil crises in the 1970s. Moreover, it was clear that countries with a large pool of labour, like China, India, Indonesia and Malaysia would have an edge over Singapore in the labour-intensive industries. As a result, Singapore began to encourage MNCs and local companies to use more capital-intensive modes of operation and to upgrade into higher skilled and higher value- added production after the attainment of full employment. The objective was to raise the technological sophistication and the contribution of the manufacturing sector to the Singapore economy.

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To achieve this, the city-state invested in technical and voca- tional manpower training and the infrastructure, like telecommu- nications and international transport. New financial assistance schemes and revised tax incentives were introduced. The new emphasis became what was called the "second industrial revolution" or the new economic policy from 1979 onwards. Probably the most significant move to wean Singapore from the labour intensive industries was the introduction of a high wage policy that started in the late 1970s. Quite obviously, companies relying on cheap labour would either have to transfer their production to other countries or upgrade their technology to lessen labour costs if they wanted to stay in Singapore.

The new economic policy also witnessed an increasingly active role of direct government investment. More and more state- owned enterprises were set up to take the lead in this new direction to promote high value-added production and advanced technolo- gies. 1 The government also branched into big joint ventures like the first fully integrated petrochemical complex in Singapore, or for that matter, in the whole of Southeast Asia. Last but not least, it set up the Government of Singapore Investment Corporation in 1981 to invest the country's assets and reserves internationally.

The new economic policy seemed to work for a while. Thus, the value-added per worker nearly doubled from 1979 to 1984. 2 Some companies underwent major technological upgrading and the MNCs began to bring in more sophisticated processes to the manufacturing sector. Some companies also started to undertake knowledge-intensive activities like research and development, engineering design, and computer software development. In addition, Singapore found some significant production niches like the computer disk drive industry. By the early 1980s, a more balanced base for manufacturing capabilities had been established.

1. For an analysis of the role of the state-owned enterprises, see Goh Keng Swee, "Experience and Prospect of Singapore's Economic Development: Strategy For- mulation and Execution" in Linda Low, (ed.), Wealth of East Asian Nations (Singapore: Federal Publications, 1995), pp. 43-52.

2. Singapore Department of Statistics, Yearbook of Statistics Singapore (Singapore: Department of Statistics, Ministry of Trade and Industry, Republic of Singapore, various issues).


The 1985 Recession and its Aftermath

By the mid-1980s, there were apparent structural problems in the economy. As noted by the Report of the Economic Committee headed by Lee Hsien Loong, Singapore's operating costs, especially labour costs, had outstripped its productivity g r o w t h . 3 This greatly decreased Singapore's international competitive position and prof- itability of its companies. The high operating costs such as wages and rentals had forced some MNCs to move their operations to other more cost-effective countries. The slump in the construction industry and the high rate of savings has also produced weaknesses in domestic demands. Moreover, the slowdown in international and regional trade naturally affected Singapore's growth.

There were also structural problems in several key industries, particularly the oil and marine-related sectors, which faced a world- wide recession. In some ways, the resultant recession of 1985 was self-inflicted because of the deliberate introduction of a high wage policy. On the other hand, it can also be seen that Singapore had some control over the situation and could adjust its policies to re- gain its competitiveness. Notably, the major adjustment mapped out by the government was wage restraint for two years and a cut in the employers' Central Provident Fund (CPF) contribution, thereby reducing operating costs. A flexible wage system was also established to cushion future uncertainties and lessen the rigidities of the wage structure. Tax cuts were introduced and more resources were spent on manpower training. All these measures were deter- mined efforts by the government to continue to attract foreign investments.

The 1985 recession demonstrated vividly to Singapore that if it were to continue to grow, its economy had to be internationally competitive and relevant to the needs of the businesses and investments that it wanted to attract. This consideration consequently led to a comprehensive review of the strengths and weaknesses of the Singapore economy. New directions in its developmental and globalization strategies were mapped out. As emphasized in the

3. For details of the report, see Ministry of Trade and Industry, The Singapore Economy: New Directions (Singapore: Ministry of Trade and Industry, 1986).

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Report of the Economic Committee, Singapore's position in the global economy would have to be as economically developed as the West and yet more competitive in offering higher rate of return and a more conducive environment for business when compared with OECD (Organization for Economic Co-operation Development) countries in the 1990s. 4 As such, Singapore would have to develop more sophisticated capabilities. It would encourage operations that come before production, such as production engineering and research and development as well as those that come after production, such as marketing and regional management.

While maintaining the importance of the manufacturing sector, Singapore wished to move beyond manufacturing to become an international total business centre. It wanted to attract MNCs to establish their operational headquarters in the city-state. In addition, Singapore decided to become a major exporter of services. In this connection, tradable services like financial services, computer services, tourism, hotel management, air and seaport management, and town and city planning would be systematically marketed. It is interesting to note that while recognizing the leading role of the state and the importance of the MNCs in Singapore's economic development and globalization strategy, the Economic Committee did recognize that the private sector was more developed and should be given more assistance to upgrade their operations. The hope was that some local enterprises would grow into strong and globally competitive companies. To lessen the complaints from the private sector about the state's interventionist approach and the alleged special treatment and unfair competition from state-owned enterprises, the government decided to divest itself of some of these enterprises.

Finally, it was noted by Singapore that the MNCs were increasingly adopting a global perspective in their operations. They were branching their operations into different countries to take advantage of the competitive advantages offered by each country or region. As a result, this would offer opportunities for business collaboration between Singapore and its surrounding neighbours.

4. Ibid., p. 12.


In this regard, Singapore worked hard for the formation of the Growth Triangle linking Singapore, Johore, and Batam. As Singapore considered the Asia Pacific as becoming increasingly important in the global economy, it decided to embark on a drive towards the regionalization of its economy. The idea was to build an external economy or sprout a"second wing" to enhance Singapore's competitiveness.

The new directions were all subsequently refined and incorporated by the Strategic Economic Plan of 1991. The Plan laid down the strategy for the 1990s. It underlined the importance of the manufacturing and service sectors as the twin engines of growth. Specifi- cally, Singapore aims to sustain the contr ibut ion of the manufacturing sector to the Gross Domestic Product (GDP) at more than 25 percent and employment share at more than 20 percent in the medium- and long-term projections. It would like to develop total business capabilities to increase Singapore's global competitiveness and promote the city-state as a regional gateway for the service sector. The goal is to promote the services ~ncreasing their contributions to overall GDP and employment to more than 60 percent. Singapore also emphasized continued heavy investment in infrastructure and manpower to position Singapore as a pro- vider of high value-added services in the region. Local enterprises are encouraged to diversify their operations, upgrade their skills, and develop into strong export-oriented enterprises. To achieve the vision of attaining the status of a developed country, the Plan reit- erated that Singapore would have to become internationally-oriented and be able to maintain international competitiveness. To compete in the global market, it was noted that Singapore would have to tap global resources, technology and talent.

For Singapore's globalization strategy in the 1990s, it would be apt to highlight the new emphasis on urging its local enterprises to internationalize. To facilitate the internationalization of Singapore and her companies, the state would help local companies become strategic partners of MNCs. New emphasis would also be placed on encouraging the immigration of talented people to supplement and complement its human resources. Moreover, it places special

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emphasis on enhancing its regional business linkages in the Asian region and developing an external economy through overseas investments. In this regard, it takes a"Singapore Incorporated" approach. Firms from the private sector, gove rnmen t - l i nked companies, government agencies, and statutory boards, are among those encouraged to form consortiums.

The 1998 Recession

From all indications, the development and globalization strategies mapped out by the city-state have worked well. Notably, Singapore's economy grew at an average rate of 8.9 percent. The growth was interrupted by the 1985 recession but then recovered to expand by an average of 8.3 percent per year until the Asian financial crisis in 1997. 5 As one of the most open economies in the world, Singapore thrives on exports and imports and its volume of international trade is three times that of its GDP. External demand contributes about two-thirds to the growth of its total demand of goods and services. After years of efforts to attract MNCs to the city-state, it is not surprising that Singapore's foreign-controlled companies own more than one half of the total assets of the industrial sector, although they formed slightly above 14 percent of the total number of companies by 1996. 6 The shortages of labour have also led to the reliance on foreign labour, which accounted for nearly 30 percent of the workforce. As a place with almost no protectionist restrictions on international trade, no foreign exchange controls, and a conducive environment for foreign investments, technology and talent, Singapore could rightly claim to be a global city.

Moreover, in its drive to regionalize the economy, Singapore has been helping both local companies and MNCs to co-invest in Asia. This is facilitated by its financial incentives and economic di- plomacy conducted by its leaders. Notably, various government-

5. Ministry of Trade and Industry, Committee on Singapore's Competitiveness (Singapore: Ministry of Trade and Industry, 1998) p. 1.

6. Singapore Department of Statistics, Yearbook of Statistics Singapore, 1998 (Singapore: Department of Statistics, Ministry of Trade and Industry, Republic of Singapore, 1999), pp. 73-74.


to-government agreements have been signed to open doors for its companies. In this regard, Singapore was involved in the development of industrial parks in the region--eight just before the Asian financial crisis.

In recognition of the tremendous technological progress, Singapore considers it all the more important to build up an indig- enous science and technology base to support high-tech industries, notably starting from the latter half of the 1990s. It highlights the importance of information technology (IT) and its applications in order to make Singapore's economy more competitive. It has plans to make Singapore an IT mega-hub and a global hub of knowledge-based industries.

With the onslaught of the Asian financial crisis starting from July 1997, Singapore was not spared the contagion in spite of its strong economic fundamentals. In the light of the globalization and regionalization of its economy, the city-state was extremely vulner- able to the vagaries of the international market. While links with the U.S. and EU and its own basic strengths cushioned the shock on the economy and delayed the impact of the Asian financial crisis, Singapore could not escape the effect of a fall in regional demand that in turn resulted in a decline in output and a rise in unemployment. Notably, the weak regional demand and cyclical slowdown in the global electronics industry began to take its toll on the economy. By November 1998, the Singapore economy was technically in recession as it had already had two quarters of negative quarter-to- quarter growth. In many ways, the recession in 1998 was brought about largely by factors beyond Singapore's control, unlike the pre- vious economic downturn in 1985.

It should be noted that Singapore was still not sure of the extent to which the regional crisis could affect the city-state as late as early 1998. However, developments later in the year showed that the impact of the regional crisis had spread and deepened. As a result, the earlier off-budget measures worked out in June 1998 to cut business costs and stimulate the economy fell short of saving the economy from a recession. Eventually, the government had to launch a comprehensive package of measures to reduce business

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costs in November 1998. As announced by Deputy Prime Minister Lee Hsien Loong, the government had decided on a $10.5 billion cost-cutting package.

Key features of this package included a 10 percent CPF cut beginning in 1999, rebates in various areas, and cuts in rentals and other charges. 7 However, there was not much tax reduction, as the government believed that taxes had been reduced quite substan- tially since the 1985 recession. On the wage front, the government intended to lead by example and reduce the annual variable component for government employees although the civil service would still get their full 13th month pay. As for the monthly non-pension- able variable component, it would be reduced in a graduated way for those in more senior positions. The decision to have steeper cuts in the flexible wage system for higher-level civil servants rather than junior officers was in line with the recommendations of the National Wages Council. Ministers would also take a pay cut of 10 percent in their annual wage on top of the 10 percent CPF cut. Ear- lier in the year, the government had already suspended the annual salary adjustments of ministers and top civil servants and this prac- tice would continue in 1999. Apparently, the government did not hold fiscal budget surpluses sacrosanct. Since it had been accumu- lating surpluses year after year, the government was prepared to accept a budget deficit as a result of the cost-cutting measures announced in November 1998.

While tackling the recession by reducing business costs and helping viable companies tide over the crisis and minimize unemployment, Singapore also made use of this opportunity to upgrade its capabilities, to keep ahead of competition, and to remain attrac- tive to foreign investors. It continues to look for growth markets and new markets globally and form strategic partnerships region- ally. However, with the altered economic and political landscape after the outbreak of the Asian financial crisis, some of Singapore's regional competitors will become leaner, fitter and more cost com-

. For a detailed analysis of the November 98 package, see Lee Lai To, "Singapore in 1998, The Most Serious Challenge Since Independence."Asian Survey (January/ February, 1999), pp. 72-74.


petitive after they have reformed their economies. Ostensibly, the sharp currency realignments and appreciation of the Singapore dollar against the regional currencies have eroded Singapore's cost competitiveness. Obviously, Singapore would have to accelerate its efforts to move up the city-state into a developed knowledge-based economy. As recommended by the Committee on Singapore's Com- petitiveness, to attain the vision of becoming a competitive knowledge-based economy and make Singapore the first developed economy in the tropics within the next ten years, the city-state would continue to emphasize manufacturing and services as the twin engines of its economic growth.

It would also continue the drive in building the external wing. As companies with regional exposure suffered heavy costs, the ad- vice was that the external wing should be strengthened by incorpo- rating a global dimension to allow for diversification so that growth would continue even if one region is weak. To be globally competitive, Singapore will continue to welcome foreign MNCs. However, more emphasis will be given to build up Singapore's own world- class companies starting with some government-linked companies. Small and medium enterprises would also be nurtured to be partners of MNCs and government-linked companies. It is also hoped that some of them will become Singapore's own MNCs. In this regard, some companies will have to merge in order to become more globally competitive. For example, in the case of banking, the drive to become world class and make Singapore a financial centre led to the merging of the Development Bank of Singapore and the Post Office Savings Bank. The Keppel Bank and Tat Lee Bank also merged to create Singapore's fifth largest local bank.

As expected, human and intellectual capital will become key factors in order to gain the competitive edge in the process of globalization. As such, increasing the pool of talent and entrepreneurs and upgrading the capabilities and skill of the workforce will be most important. And it was noted that leveraging on science, technology, and innovation and optimizing resource management would be most helpful. Finally, the Committee recommended that government policies should remain pro-business and allow the private sector to

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play a role in the economy. 8 Apparently, the Asian economic crisis has not shaken Singapore's confidence in globalization, or for that matter, liberalization of its economy. In fact, for the latter, the Commit- tee on Singapore's Competitiveness suggested that while the regional crisis highlighted the challenges posed by open capital markets, it believed that Singapore should not regress to restricting capital markets. Instead, Singapore should continue to liberalize its economy. 9

All and all, the strategy mapped out by Singapore was meant to distinguish it as a place that could bite the bullet and come up with tough measures to weather the economic storm. Singapore wanted to maintain its competitiveness and become even more competitive. It was and is also getting itself ready to ride on the next wave of economic growth when the regional economy bounces back. As it turns out, the Singapore economy did not do as badly as an- ticipated; it managed to have a 1.5 percent growth in 1998. With the recovery in the global electronics industry, growth in the industrialized countries, return of confidence in at least parts of the Asia Pa- cific, and the corrective measures of Singapore and the region to ease themselves out of the crisis, Singapore could expect to have about a 5 percent rate of growth for 1999. As the economy performed better than expected in 1999, the Singapore government, having mobilized the populace into accepting belt-tightening measures, was ready to restore some of the benefits to its working population. Thus, Deputy Prime Minister Lee Hsien Loong announced in Parliament in late November 1999 that workers would get back 2 percentage points in the employers' CPF contributions from April 2000 and that the full 10 percentage point cut would be restored over five years if the economy did well. Civil servants would also get a total bonus of 2 and �88 months for 1999, higher than the I and 3A months for 1998 but lower than the 3 months for 1997. All salary cuts would be restored from January 1, 2000 and the two-year freeze of ministers and senior civil servants' pay would also be unfrozen, to keep up to pace with salaries in the private sector. 1~

8. For details of these strategies, see Committee on Singapore's Competitiveness (Singapore: Ministry of Trade and Industry, 1998), pp. 6-10.

9. Ibid. 10. The Straits Times, 24 November 1999.


Concluding Observations For Singapore, it is not a question of whether to globalize, but

how to globalize. While Singapore may be handicapped by its small size and lack of natural resources, it seems that these drawbacks could be less of a problem as the world economy becomes more sophisticated. Physical size and natural resources will become less important for economic growth when compared with human capital, information, and knowledge in the future. Besides, Singapore's smallness would allow it to be quick and nimble to make the nec- essary adjustments to make itself more competitive.

Over the years, the state has taken an activist role in investment and trade promotion. It has placed special emphasis on at- tracting MNCs to energize the city-state. It has also created many government-linked companies to take part in the regionalization and globalization of its economy. And in recent years, it has encouraged the private sector to join this effort. It has to be noted that while the public sector is dominant and has better resources, Singapore has never aimed at the nationalization of its economy. The public sector co-exists with the private sector. Moreover, for the government-linked companies, they are run essentially like those in the private sector. In the final analysis, the government- linked companies are judged by their financial achievements and market forces play the dominant role in determining the fate and the running of the companies in the public sector.

Finally, it should be noted that the globalization strategy of Singapore will affect the social fabric of the city-state. While the people may become more cosmopolitan, some may be concerned that they will lose out in the competitive age. 11 Notably, older workers may find it difficult to adjust to the information age and the move to welcome foreign talent especially at a time when employment is still a problem and a cause of concern for some. In order to

11. For a detailed analysis of the impact of globalization on the social fabric of Singapore, see, for example, Ho Kong Chong,"Globalization and the Social Fab- ric of Competitiveness"in Toh Mun Heng andTan Kong'~hm (eds.), Competitive- ness of the Singapore Economy, A Strategic Perspective (Singapore: Singapore University Press and World Scientific, 1998), pp. 294-311.

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overcome this problem, government will have to mobilize more support for its globalization strategy. Moreover, with globalization and regionalization, there is concern that some of Singapore's own talent may not come back because of greener pastures elsewhere. Efforts will have to be launched to make Singapore more vibrant and comfortable to attract not only foreign talent but also Singaporeans to remain loyal to Singapore. Social engineering, like the public discussions of the Singapore 21 Committee, will also be needed to produce the "heartware" to gel the people together in trying times and mobilize them to support the government's deter- mined drive to make Singapore a world-class player in the global economy.

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Singapore′s globalization strategy

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