Economic Growth and Social Performance in Singapore

Economic Growth and Social Performance in Singapore

Sam Choon Yin (2003)

 

Introduction

Since gaining independence on 9 August 1965, Singapore has experienced rapid economic growth. The real Gross Domestic Product (GDP) has grown by an average of eight per cent between 1965 and 2001. According to the First Quarter of the Economic Survey of Singapore published in May 2003, the real GDP (at 1995 market price) in 2002 was recorded at S$160,853 million. With a population of about 4 million (inclusive of permanent residents and foreigners staying in Singapore for at least one year), her real GDP per capita in 2002 was around S$40,000, up from S$4,000 in 1965. With the land area of merely 640 square kilometers, Singapore is one of the most densely populated economies in the world.  The Organization for Economic Cooperation and Development (OECD) has classified Singapore as a ‘more advanced developing’ country from the ‘developing’ country status as at 1 January 1995. In the recent issues of the World Development Report, the World Bank classified Singapore as a high-income non-OECD country with the corollary that classification by income does not necessarily reflect the development status.  The classification was based purely on Gross National Product (GNP) per capita.[i]

            This essay highlights the economic and social performances of Singapore.[ii] The transformation of Singapore from a third-world city to a first-world country is a great achievement given the fact that the city-state has no natural resources with the exception of its strategic location and strong labor force. Many have attributed Singapore’s success to the strong political leadership led by the former Prime Minister Lee Kuan Yew (who is currently the senior minister in the cabinet). The government plays a crucial role in eliminating corruption, building the necessary infrastructure and institutions in support of economic development, and taking the lead in business ventures through the government-linked companies.

 

Economic growth

            Singapore has a parliamentary system based on the Westminster model. However, the parliament has limited powers to overturn the government’s legislation. Singapore is essentially a country with one-dominant part, the People’s Action Party (PAP). All the cabinet members belong to the same party. The PAP was formed in 1954 by leftist, anti-colonial and English educated individuals notably Lee Kuan Yew, Goh Keng Swee, Toh Chin Chye and S. Rajaratnam. Since elected in 1959, the PAP has won every election. Its popularity with the people was mainly due to the rapid and high economic growth that many perceived to have been brought about by the PAP. 

When the PAP took over the self-governed city-state in 1959, Singapore was suffering from high unemployment problem with her unemployment rate recorded at more than 10 per cent. The PAP was also worried about the high population growth rate at 3.3 per cent. There was a serious shortage of housing facilities during that time. Coupled with low savings and limited natural resources, the foreign press was predicting a disaster for the new nation.

            In 1963, Singapore was merged with the Federation of Malaysia. The PAP of Singapore had wanted the merger for economic and political reasons. It was felt that Singapore would not survive economically, militarily and politically. The merger was however short-lived. Clashes and tensions between the Chinese (the dominant group in Singapore) and Malays (the dominant group in Malaysia) were high. The relationship between the political leaders of the United Malays National Organization (UMNO) (led by Tunku Abdul Rahman) and the PAP (led by Lee Kuan Yew) turned sour. Differences in the nature of the political parties, criticisms of the UMNO leaders, and the insistence of the PAP for the Malaysian leaders to adopt the Malaysian Malaysia concept, all led to the expulsion of Singapore from the Federation on 9 August 1965. The year 1965 therefore marked the year of independence for the Republic of Singapore.

            For a brief period during the years when Singapore was part of Malaysia, Singapore adopted the import substitution strategy. This was a logical move given a larger domestic market of around 10 million in the ‘merged’ Malaysia. After the separation, the government realized that the strategy would do no good to the economy and hence decided to open up its economy to the outside world and adopt the export promotion strategy. Multinational companies were attracted to come to Singapore to take advantage of the low costs of production. Tax incentives were provided and infrastructures were constructed and improved to push the economy forward. Thanks to the growing trade around the world at that time, the MNCs were looking for places outside their home countries to produce their goods for ease of selling to other countries and to lower their costs of production. Locating strategically between the west (United States and Europe) and the east (Japan), Singapore was deemed as an attractive place to build their plants.

            Despite the hardship, Singapore was able to attain reasonable high economic growth in the early years of independence. In the years 1965-1970 for instance, Singapore’s GDP grew by an average of 11.9 percent. Singapore was not only able to survive the threat of communist and economic uncertainties, she was able to achieve full employment in 1973, a mere eight years after independence. This was despite the withdrawal of the British military base in 1968. The entrance of world-class multinational companies like Texas Instrument, National Semiconductor, Hewlett Packard and General Electric brought with them technological know-how and human resources. These large corporations were able to absorb the unemployed persons in Singapore which was relatively small in absolute terms.

            Internally, highly efficient public bureaucracy comprising the Singapore civil service and the statutory boards (like the Economic Development Board and the Jurong Town Corporation) were able to attract investments all over the world. Wise policies were introduced to promote Singapore as an attractive place to invest. Excellent infrastructures were constructed, generous tax incentives were offered, labor strikes were eliminated, and a pool of hardworking labor was developed. The initiatives paid off. Singapore enjoyed strong economic growth therefore earning the title ‘economic miracle’ as a description of the success story in Singapore. However, there were exceptional years which the economy did not perform well.

            For the first time since independence, Singapore registered a negative GDP growth at 1.6 percent in 1985. Chan Chin Bock, the former Chairman of the EDB, described the recession as a ‘rude shock to Singaporeans’ (Chan, 2002, p. 185). The Economic Committee led by the then Minister for Trade and Industry Lee Hsien Loong had documented the causes of the economic recession. Interestingly, the causes of the recession were not restricted to things happening in the external sector (the US was suffering from a slowdown and the fall in commodity prices affected the economic health of the regional economies negatively). It appeared that domestic factors were equally guilty of causing the recession. The chief problem was the loss of competitiveness of the labor force in Singapore. The high wage policy instituted in the late 1970s and early 1980s to force a transition from labor-force driven economy in Singapore to one that was based on capital was overdone to such an extent that the wage increased in Singapore had surpassed productivity increases. As Chan (2002) recalled:

 

‘On hindsight, we might have seen the recession coming. At the home front, companies were complaining to EDB officers about Singapore’s worsening competitiveness compared to other Newly Industrialized Countries (NICs): our wages rises, hikes in CPF contributions, a corporate tax rate of 40 percent and unabated rises in operating costs. At our overseas centers, pipeline projects began to fall off and our success rates in landing investments suffered’ (Chan, 2002, p. 186).

 

            Singapore underwent economic reforms to correct the internal problems. It recovered quickly from the recession. By 1987, the economy was backed to the pre-recession period of high growth rates, with an average annual GDP growth rate of 9 percent in the years 1987-1996. This was before the East Asian crises which hit in 1997. The crises presented Singapore with another ‘rude shock’.

            Singapore is a small country with limited resources and a small market. As a result, it makes economic sense for Singapore to open up its economy. Singapore relies heavily on trade to survive with the total trade accounting for more than three times of the GDP.[iii] The problem with being an export-led economy however is that the economy tends to be vulnerable to external changes. A slowdown in the external demand for its goods and services would have a great impact on the health of the economy. This was exemplified in the economic downturns experienced in 1998 and 2001.

            In 1998, the Singapore economy shrank 0.9 percent attributed to the East Asian crises which hit the region in mid 1997. The demand for Singapore goods from East Asian countries (including Japan) fell. These countries accounted for about 50 percent of Singapore’s total non-oil exports. Singapore was able to recover quickly thanks mainly to the solid performance of the chemicals cluster, high demand from the US economy, and the off budget measures introduced by the government to soften the impact of the crises. In 1999 and 2000, the GDP registered strong growths at 6.4 percent and 9.4 percent respectively as the crises began to subside.

            The economy fell again in 2001. The real GDP shrank 2.4 percent in 2001. The sharp reversal in the GDP growth was due primarily to the downturn in the external demand. The United States, which was the major customer of Singapore goods and services, was weaken as her companies in the IT sector were undergoing corrections. The terrorist attacks on 11 September 2001 further worsen the economic conditions of the US. Japan was also weak in 2001 with sluggish demand for her consumer and investment goods.

            In 2002, the Singapore grew marginally by 2.2 percent. The external demand again was at play. The external demand this time, led by the US, appeared to recover, albeit weakly.

            The manufacturing sector is an important sector in Singapore contributing about 25 percent to Singapore’s GDP (Table 1). The electronics industry accounts for the largest share of the total manufacturing sector. The industry accounts for about 40 percent of the total manufacturing followed by the chemicals industry (Table 2). The chemicals industry comprises the pharmaceutical industry, the specialty chemicals industry and the petrochemical industry. Specific locations in Singapore are allocated to house these chemicals industry; the pharmaceutical industry in Woodlands and the other two being housed mainly in the Jurong Island.

             It may be useful to note that the chemicals cluster (consists of the chemicals industry noted above plus the petroleum industry) is being promoted by the Singapore government to complement the electronics industry as one of the main pillars of growth in the manufacturing sector. The objectives in promoting the chemicals cluster were, first, to tap on the potential growth in these areas (they were high labor productivity industries) and second, to lessen Singapore’s dependence on the electronics industry. The initiative appeared to pay-off. The chemicals cluster grew, when the electronics industry fell, during the Asian economic and financial crises. This had helped in softening the negative impact of the crises on the Singapore economy.

 

Table 1

GDP in Singapore: By industry (in mil of SGD)

 

2000

2001

2002

Total (GDP)

161,142

157,320

160,854

Goods producing industries

54,428

49,417

51,369

Manufacturing

40,712

36,019

39,027

Construction

11,009

10,657

9,503

Utilities

2,520

2,564

2,674

Other goods industries

188

177

166

 

 

 

 

Services producing industries

99,586

101,624

103,125

Wholesale and retail trade

20,558

19,877

20,412

Hotel and restaurants

3,734

3,651

3,545

Transport and communications

20,307

20,833

21,880

Financial services

17,152

17,788

16,941

Business services

21,431

22,088

22,176

Other services industries

16,403

17,388

18,173

 

 

 

 

Owner-occupied dwellings

5,706

5,962

6,091

Add taxes

10,243

9,821

9,836

Less imputed bank service charge

8,821

9,504

9,567

Source: Economic Survey of Singapore (First Quarter 2003).

 

            The importance of the manufacturing sector in Singapore is here to stay. This is confirmed in the recent report from the Economic Review Committee, chaired by the Deputy Prime Minister Lee Hsien Loong who is also the Minister for Finance. The report was published in February 2003. Despite recognizing the possibility of the smaller share accounted by the manufacturing sector in the near future (a scenario that is witnessed in other countries with the same level of per capita income), the committee felt that ‘there is a future for manufacturing in Singapore’. The report notes, ‘Singapore has significant competitive strength to sustain manufacturing as an integral part of our economy contributing 20 percent or more to GDP over the next decade. This is important because Singapore is a city-state, unlike economies such as Hong Kong, which has the Pearl River Delta as a production base and can afford to have its manufacturing base moved offshore’ (Report of the Economic Review Committee, 2003, 138-139).

            On the last point, it may be useful to note that Singapore has tried to encourage the more land and labor intensive operations in Singapore to move their operations to the Riau islands in Indonesia and Johor, a southern state in Peninsular Malaysia, which together with Singapore, forms the Growth Triangle in Southeast Asia. This strategy is welcomed at least from the Singapore’s perspective for it enables Singapore to attract multinational headquarters in setting up their operations in Singapore to complement their production bases in Johor and Riau islands.

As a result of the land shortage in Singapore, the government is rather selective in terms of the kind of manufacturing firms that are encouraged to operate in Singapore. Industrial land productivity, measured as the ratio of value added to industrial land area, is one of the criteria used in determining the attractiveness of the companies. More specifically, Singapore is interested in those companies that are high value added, productive, and able to provide well-paying jobs to the people. In addition to the chemicals cluster and life sciences, the report of the Economic Review Committee has identified other potential manufacturing industries that are attractive to Singapore. These include industrial information technology, nanotechnology, photonics and MEM clusters.

The recent signing of the agreement of cooperation between the EDB of Singapore and the French Chamber of Commerce signaled Singapore’s position in her interest in promoting more foreign investments from the manufacturing sector to Singapore. As reported, the agreement was expected to bring in at least 10 French technology and knowledge-drive enterprises in Singapore with S$1 million in value addition and the creation of at least 50 well-paying jobs over the next two years in areas like software development, pharmaceuticals and nanotechnologies (The Straits Times, 30 May 2003).

 

Table 2

Manufacturing Sector in Singapore

Industry

2000

(S$ million)

Share

(%)

2001

(S$ million)

Share (%)

Food, Beverage and Tobacco

992.2

3%

952.6

3%

Textiles and textiles manufactures

77.0

0%

63.3

0%

Wearing apparel except footwear

247.0

1%

215.6

1%

Leather, leather products and footwear

48.9

0%

27.1

0%

Wood and wood products

70.8

0%

65.0

0%

Paper and paper products

339.4

1%

336.9

1%

Printing and Reproduction of recorded media

1,502.5

4%

1,327.3

4%

Refined petroleum products

1,747.6

4%

1,256.5

4%

Chemicals and chemical products

5,516.1

14%

5,456.5

17%

Rubber and plastic products

1,110.1

3%

872.1

3%

Non-metallic mineral products

424.9

1%

304.5

1%

Basic metals

112.5

0%

96.3

0%

Fabricated metal products except machinery and apparatus

2,083.6

5%

1,604.8

5%

Machinery and equipment

2,678.0

7%

2,032.4

6%

Electrical machinery and apparatus

814.9

2%

692.8

2%

Electronic products and components

17,228.3

44%

12,213.1

38%

Medical, precision and optical instruments

1,265.1

3%

1,281.7

4%

Transport equipment

2,339.2

6%

2,954.4

9%

Other manufacturing industries

317.4

1%

319.9

1%

Recycling of metal/non-metal

35.5

0%

32.2

0%

Total manufacturing

38,951.0

100%

32,105.0

100%

Source: Yearbook of Statistics: Singapore (2002)

 

            In a city-state, the agricultural sector is expected to be small. In Singapore, the contribution of the agricultural sector to Singapore’s GDP is negligible although small farms can be found in the outskirts areas like in Lim Chu Kang and Punggol vicinities. The services sector however is an important one in Singapore in terms of its contributions to the nation’s GDP and total employment. In 2002, the services sector contributed close to 70 percent to the nation’s GDP and more than 70 percent to the total employment. The wholesale and retail services, the financial services, and the business services are the main contributors, each contributing around 15 percent to the Singapore’s GDP.

            The services and manufacturing sectors are the twin engines of Singapore’s economic growth. This is revealed in the Economic Review Committee Report. The report made several suggestions to develop the services sector. The main recommendations include removing regulatory impediments, promoting local and global demand, developing manpower for services and allocating land at institutional rates for the development for ‘priority’ services industries. The main industries targeted by the government include education, healthcare and creative industries. The committee suggests leveraging on those industries which Singapore already has strong expertise such as in the areas of trading and logistics, ICT, financial services and tourism.

            Singapore has a head start in promoting the services sector. With a strong physical infrastructure, good location, a legal environment that is conducive in doing businesses and a well-educated English-speaking working population, Singapore is in a very good position to tap on the growing opportunities for services in Asia and around the world. The committee recognizes these competitive advantages possessed by Singapore and sees the importance of exploiting them in the fullest manner possible. It is the interest of the government to attract good service organizations in Singapore to provide well paying jobs to the people and push the economy forward.

 

Social performance

            Table 3 summarizes the main development indicators for a selected group of countries including Singapore. The table shows that Singapore has far surpassed the economic and social developments of its Asean counterparts. While Singapore has even outperformed highly advanced countries like United Kingdom, France and Canada in terms of per capita GDP, she still lags behind in some social indicators like literacy rate and human development index (HDI). This essentially implies that there are further rooms for improvements in the social indicators in Singapore.

            The life expectancy at birth in Singapore was 76 years. This figure is expected to increase. However, with the Total Fertility Rate (TFR) below the replacement level of 2.1 since 1975, improvements in the life expectancy rate are expected to impose greater demand for resources of finance old age in areas like the provision of health care.

            The literacy rate in Singapore was recorded at 91 percent. This figure was commensurate with Singapore’s level of income. While more than 50 percent of the population aged 25 years and above had attained secondary or higher qualifications, more than 20 percent of the males and 25 percent of the females had qualifications at primary school of lower. There is an urgent need to provide more training to the latter group of individuals to enhance their opportunities of getting well-paying jobs. In addition, going through the exercise provides the investing companies in Singapore with a ready pool of workers, whom will be equipped with the necessary skills, for them to tap on.

            Singapore’s infant mortality rate was one of the lowest in the world indicating its superiority in the medical care.

            Singapore’s welfare system is relatively weak. A significant burden of the social welfare is borne by the individuals’ themselves. The PAP is against the idea of spoon-feeding the people with cash or transfer payments. Financial assistance schemes are rare in Singapore. Even if they are provided, they are given on an ad-hoc basis and act as merely temporary measures. Financial assistance schemes are deemed undesirable and undermine self-reliance. Instead, the PAP has often emphasized that the best form of social security for the people is the pursuance of high economic growth so that more employment opportunities are provided. The government also designs policies to guide individuals in taking the correct paths so that they are taken care off socially (Asher and Rajan, 2002).

 

Table 3

Development Indicators for Selected Countries (1995)

Countries

GDP per capita (US$)

Real GDP per capita (PPP$)

Growth rate (%)

(1985-1995)

Life expectancy (years)

Adult literacy rate (%) 1994

Infant mortality rate (per 1,000 live births)

Human development index (rank) 1994

Australia

Canada

Denmark

France

Germany

Hong Kong

Indonesia

Italy

Japan

Korea, Rep.

Malaysia

New Zealand

Philippines

Portugal

Singapore

Spain

Switzerland

Thailand

United Kingdom

United States

18,720

19,380

29,890

24,990

27,510

22,990

980

19,020

39,640

9,700

3,890

14,340

1,050

9,740

26,730

13,580

40,630

2,740

18,700

26,980

18,940

21,130

21,230

21,030

20,070

22,950

3,800

19,870

21,110

11,450

9,020

16,360

2,850

12,670

22,770

14,520

25,860

7,540

19,260

26,980

1.4

0.4

1.5

1.5

n.a

4.8

6.0

1.8

2.9

7.7

5.7

0.8

1.5

3.6

6.2

2.6

0.2

8.4

1.4

1.3

77

78

75

78

76

79

64

78

80

72

71

76

66

75

76

77

78

69

77

77

99.0

99.0

99.0

99.0

99.0

92.3

83.2

98.1

99.0

97.9

83.0

99.0

94.5

89.6

91.0

97.1

99.0

93.5

99.0

99.0

6

6

6

6

6

5

51

7

4

10

12

7

39

7

4

7

6

35

6

8

14

1

18

2

19

22

99

21

7

32

60

9

98

31

26

11

16

59

15

4

Source: World Bank (1997), UNDP (1997). Abstracted from Khan (2001), Table 1, p. 2

 

            In the area of social protection for aged population for example, the government introduces various schemes like Elder Shield program and the Singapore Retirement Scheme (SRS) to supplement the Central Provident Fund (CPF) accounts to make sure that the individuals have sufficient savings to support them during the retirement years. In Singapore, the government also encourages the younger members of the family to take care the old age. This is part of the communitarian philosophy that the government advocates. The government has introduced several policies to encourage family support for the old age. As Mukul Asher and Revathi Rajan noted, increasingly more old age individuals are relying on the family for support. (Asher and Rajan, 2002). The authors quoted the survey carried out by the Ministry of Health, which found out that in 1995, about two-thirds of the persons 60 years and above were not part of the formal pension system, but relied on the family for support. However, the future elderly will have fewer children to rely on as indicated by the persistent low TFR in Singapore therefore potentially increasing the importance of the formal pension arrangement to provide the necessary support for the elderly in the near future. Asher and Rajan therefore recommended a shift to a more elaborate and formal social protection and health care system in Singapore.

 

Conclusion

            It is not by accident that Singapore has attained high average growth rates in the last three-and-a-half decades. Although Singapore was blessed with a strategic location and favorable external environment in her initial stages of development, the main force of growth was internally driven, attributed mainly to her strong public sector governance. Some of the commonly cited factors contributing to Singapore’s economic growth include high savings rate, strong budgetary position, hardworking and skillful workforce and excellent supporting infrastructure. All of the other factors have connections with the government.

While the government of Singapore has intervened in setting economic goals, as well as playing a strong role in directing the social system, the government is very well in support of the free market system as the main driver of economic growth. One can say that the government intervenes to make sure that market forces are being in placed. The visible hand of the government and Smith’s invisible hand work closely together in fostering economic growth in the Singapore context. The economic philosophy and objectives of the Singapore government is to let the free market system determines the way resources are allocated.

The government sector in Singapore is not only farsighted in its planning, its willingness to listen to the people and almost corrupt-free have contributed to the continuous improvement in the social and economic performance of the city-state. It strives to improve the standards of livings of Singaporeans through effective planning and intervention in areas like education, medical, housing, compulsory savings, and so on. As Milton Friedman once remarked, Singapore’s model of development shows that ‘it is possible to combine a free-private market system with a dictatorial political system’ (cited in Huff, 1994, pp. 359-360).

However, challenges remain, and they will grow as years go by. Singapore is no longer in the stage of development where it can achieve double-digit growth rates in the GDP. To do well economically, the government must make sure that the economy is farsighted in spotting niche areas with good growth potential, and continuously improve to stay relevant. Ageing population, low TFR and inadequate social protection to the old age represent some of the social challenges.

 

References

1.                  Asher, Mukul and Rajan, Revathi (2002) ‘Social Protection in Singapore’, in Erfried Adam, Michael von Hauff and Marei John (editors) Social Potection in Southeast and East Asia. Freidrich Ebert Stiftung (Singapore).

2.                  Economic Survey of Singapore: First Quarter 2003 (Ministry of Trade and Industry: Singapore).

3.                  Huff, W.G. (1994) The Economic Growth of Singapore. Cambridge University Press (Cambridge).

4.                  Khan, Habibullah (2001) Social Policy in Singapore: A Confucian Model? World Bank Institutes (Working Papers series), Washington D.C. (United States).

5.                  Krause, Lawrence B.; Koh, Ai Tee and Lee (Tsao) Yuan (1987) The Singapore Economy Reconsidered. Institute of Southeast Asian Studies (Singapore).

6.                  Lim, Chong Yah and Associates (1988) Policy Options in Singapore. McGraw Hill Book Company (Singapore).

7.                  Low, Linda and Aw, T.C. (1997) Housing a Healthy, Educated and Wealthy Nation through the CPF. The Institute of Policy Studies and Times Academic Press (Singapore).

8.                  Peebles, Gavin and Wilson, Peter (1996) The Singapore Economy. Edward Elgar (United Kingdom).

9.                  Peebles, Gavin and Wilson, Peter (2002) Economic Growth and Development in Singapore: Past and Future. Edward Elgar (United Kingdom).

 



[i] Based on GNP per capita in 1998 as the basis for classification, the World Bank classified the countries in the following groups:

 

         Low income: USD760 or less;

         Middle income: USD761 to USD9,360

         Lower middle income: USD761 to USD3,030

         Upper middle income: USD3,031 to USD9,360

         High income: USD9,361 and above

 

[ii] This essay offers only a very brief overview of the economic and social performances in Singapore. For a more comprehensive discussion on the economic performance in Singapore, see Huff (1994), Krause et al (1987), Lim and associates (1988), Peebles and Wilson (1996 and 2002). Social polices in Singapore are discussed in Low and Aw (1997), Khan (2001) and Asher and Rajan (2002).

 

[iii] Singapore is both an import and export dependent country. Since most of the consumption goods in Singapore are imported, the movements in the trade-weighted exchange rates have a significant impact on real income and consumption. The impact is relatively more severe on fixed income earners like the retirees.