Economic Growth and Development in Singapore: Past and Future

Published by EH.NET (August 2003)

Gavin Peebles and Peter Wilson, Economic Growth and Development in Singapore: Past and Future. Cheltenham, UK: Edward Elgar, 2002. xiii + 328 pp. $110 (hardcover), ISBN: 1-84064-741-8

Reviewed for EH.NET by Anne Booth, School of Oriental and African Studies, University of London.

Modern Singapore is a remarkable phenomenon, which has attracted the attention of social scientists from several disciplines and a wide range of ideological viewpoints. The island city state located at the tip of the Malay peninsula is now home to some four million people, and has one of the highest per capita gross domestic products in the world. The impression the visitor receives is one of order, prosperity and modernity. Most of the population live in high-rise apartment blocks, and commute to their places of work on a public transport system which puts that of most western cities to shame. Car ownership is heavily taxed and those who do own cars tend to use them mainly for leisure activities, or for weekend trips to neighboring Malaysia; rush-hour traffic jams are unusual. The high-rise housing estates have little in common with their graffiti-daubed, run-down and violent counterparts in cities in western Europe or the United States. They are clean, well-maintained, efficiently policed and mainly crime-free, and well-served by a variety of shops and hawker stalls, which provide mouth-watering Chinese and local foods at very reasonable prices to locals and tourists alike. Even those nervous western tourists who do not venture far from the central business district, with its gleaming office towers, five-star hotels and air-conditioned shopping malls, enjoy the duty-free shopping as well as occasional forays into the “Asian culture” provided by several excellent museums and an increasing number of theatres and other modern entertainment facilities.

Who created this tropical paradise? Peebles and Wilson, like most other students of Singapore’s economic and social transformation, give full credit to the small group of mainly English-educated professionals who formed the Peoples’ Action Party in 1954 to contest 1955 Legislative Assembly Elections, when the island was still a British colony. In 1959, the party won a convincing victory in further British-run elections and took over the government of the colony. At that time the PAP regarded itself as a socialist party, but it dealt firmly, indeed ruthlessly, with those elements on the extreme left who had much support among the less educated Chinese who in turn spoke little English and worked mainly in unskilled occupations. In1963 the PAP government took Singapore into the Federation of Malaysia, a somewhat improbable entity stitched together from a patchwork of territories in South East Asia which had come under British control over the previous century, and to which the British were now only too anxious to grant independence. Singapore’s membership lasted just two years; the mainly Chinese and Indian leadership of the PAP distrusted the Malay-dominated government in Kuala Lumpur, withdrew from the federation in 1965, and formed an independent republic.

At the time, the prospects for the island republic did not look very promising. Singapore in 1965 was hardly the ‘backward fishing village’ which some modern commentators have claimed; it had been a large British naval base for decades, and an important financial, commercial and educational center for South East Asia. Commodities such as rubber and palm oil were brought to Singapore from neighboring Malaya and Sumatra, processed and re-exported to Europe and the U.S. The PAP government, assisted by a far-sighted Dutch economic adviser, realized that if an independent Singapore were to develop further, it would have to build on this colonial inheritance. Rather than establish import-substituting industries for a small domestic market, the government set out to attract foreign capital from the developed world to establish export-oriented industries, while at the same time building up a modern service sector based on banking and financial services. Realizing that the domestic entrepreneurial class was small and inexperienced, the strategy was to rely on foreign investment and expertise, while at the same time building up strong state enterprises which would monopolize the provision of infrastructure (electricity, water and gas, telecommunications, port facilities), and also provide housing, transport and other basic services for the local population which was mainly accommodated in overcrowded and unsanitary slums.

The strategy was more successful than even the most optimistic observer could have predicted in the late 1960s, and as Peebles and Wilson point out, there has been a remarkable degree of continuity in Singaporean trade policy over almost four decades. The commitment to free trade, the active export promotion strategy, the ‘open arms’ policy towards multinationals and the support of multilateral and regional trade liberalization have never wavered. Because there were never any heavily protected industries producing wholly for the domestic market, Singapore has not had to undergo painful structural adjustment policies in order to make the domestic economy more competitive. But inevitably as income per capita has grown, and wages have risen, and also as neighboring Indonesia and Malaysia have developed export-processing capacity of their own, Singapore’s export trade has moved away from the processing of primary products and labor-intensive manufactures towards medium and high-technology products such as disk drives, and other electronics components. The government has been anxious to avoid the hollowing-out of manufacturing industry which has occurred in Hong Kong, and over the past two decades has expanded tertiary education and encouraged the development of science parks around the main university campuses. These focus on such “hi-tech” sectors as information technology and bio-technology. But inevitably it has been the modern service sector that has provided most of the new jobs over the past two decades, and Singapore is now an even more important provider of financial, educational and health services to the region than was the case three decades ago.

At times the PAP government has seemed reluctant to acknowledge just how far the economy has been transformed over the past four decades. Peebles and Wilson have quite a lot to say about the rather odd aversion on the part of the government to Singapore being classified as a ‘developed economy,’ and its insistence on being labeled a ‘high income developing economy.’ Some of the reasons put forward by ministers for this appellation will make a western reader chortle; Singaporeans apparently have not yet reached that state of ‘social graciousness’ which characterizes fully developed economies. Thus they are continually exhorted by ministers not to litter, chew gum, smoke in public places, leave public lavatories without flushing them, or use Chinese dialects. They must keep fit, exercise regularly, speak grammatical English or Mandarin, and smile at foreign tourists. It is hard not to agree with the suggestion of Peebles and Wilson that the main reason the PAP hierarchy resist re-classification is that the party needs to retain the ultimate goal of economic and social development as a rallying cry to legitimize its continual monopoly of political power.

The pervasive role of government in all aspects of the island’s social and economic life is something that many foreign admirers of the Singapore system, especially western conservatives, prefer to ignore. Not Peebles and Wilson, who are often very perceptive about both the benefits and costs of a development strategy based so heavily on government involvement in, and regulation of, most sectors of the economy. There is little that happens in Singapore without direct government involvement, although in recent years some ministers have berated Singapore businesspeople for their lack of entrepreneurial spirit, and especially their reluctance to ‘go international’ and invest abroad. Singaporean investment abroad has grown rapidly over the 1990s, with investment in China showing especially large increases. But not all the foreign ventures have been successful; the joint industrial park developed by the Singapore and Chinese governments in Suchou, near Shanghai, has made large losses, and the Singapore stake has been reduced. Investments closer to home, in Malaysia and the Indonesian island of Batam, seem to have been more profitable.

The book has excellent chapters on the foundations of growth (including the famous “TFP debate” provoked by the work of Alwyn Young, and popularized by Paul Krugman), and on the financial sector, dealing with the development of both the domestic financial system and Singapore’s offshore financial market. There is also a good discussion of the evolution of fiscal policy, and the increasing trend over the 1990s towards large budgetary surpluses, which in turn have been used to finance a huge build-up of foreign reserves. Peebles and Wilson also have some perceptive comments on exchange rate policy including the consequences of the managed float of the Singapore dollar. There is also a good discussion of how Singaporean exports have managed to grow in spite of the real appreciation of the dollar since the 1980s. But perhaps the best parts of the book are those that deal, in a fair and balanced way, with some of the problems which face Singapore in an increasingly dangerous and uncertain regional and global economy.

Singapore weathered the Asian crisis of 1997/98 quite well although the growth collapses in neighboring Indonesia, Thailand and Malaysia inevitably affected its own growth in 1998. The rebound in 1999/2000 was encouraging, but Peebles and Wilson stress that the September 2001 terrorist attacks, and a slowing world economy have created new dangers and challenges. In addition, there are now serious concerns about how the growing numbers of elderly Singaporeans will cope with long years of retirement. One of the great paradoxes of contemporary Singapore is that it has the highest domestic savings rate in the world, a compulsory savings system and huge foreign reserves, but many older citizens have not been able to put aside enough to finance a reasonable pension. At the moment the government is still determined not to provide any automatic pension entitlements funded from the budget. But that might have to change if pensioner poverty becomes a more pressing social problem in coming years.

Of course the problems posed by an ageing society with inadequate pension provision are hardly unique to Singapore. But it is far from clear that the political system which has been so spectacularly successful in promoting rapid growth and full employment since the 1970s will be able to adjust to slower growth and increasing tensions over social and economic inequality. In addition as Peebles and Wilson point out, the bilateral trade negotiations with the U.S. and other countries in recent years have exposed Singapore to some unwelcome criticisms from the liberal democracies about restrictions on the media, the legal profession, and other service sectors, and the general climate of secrecy in which so many crucial government decisions are taken. Many Singaporeans themselves now realize that there will have to be changes, not just to appease the OECD countries on whom their economic future depends, but also because their own region is now so uncertain. Can Singapore survive as an island of affluence in a neighborhood characterized by slowing growth and violent religious and ethnic conflict? While Singapore’s commitment to ASEAN economic integration looks increasingly tenuous, the island state can hardly change its geographic position, and nor can it avoid its responsibilities to neighboring governments as they struggle to deal with complex economic and social problems.

Peebles and Wilson have written an excellent account of what is surely one of the twentieth century’s most remarkable economic transformations. Anyone who wants an up-to-date, balanced and authoritative guide to the economy of modern Singapore is strongly advised to start with their book. Not the least of its virtues is a comprehensive bibliography and a good guide to further reading.

Anne Booth is Professor of Economics (with reference to Asia) at the School of Oriental and African Studies, University of London. She has published extensively on economic development in the ASEAN region.