The Role of Government in Singapore

The Role of Government in Singapore

Sam Choon Yin (2003)

Introduction

The debate on ‘market’ versus ‘planning’ is still going on. Some observers have labeled Singapore as authoritarian and paternalistic.  Interestingly, Singapore is also one of the freest economies in the world. This may sound surprising. Being paternalistic and free seems to appear on different sides of the spectrum. As Gavin Peebles and Peter Wilson (2002) noted, ‘The Heritage Foundation, which still ranks Singapore free economy in the world, bluntly states that: ‘The ruling People’s Action Party (PAP) maintains firm control of all political and economic power’’ (Peebles and Wilson, 2002, p. 7; The quotation from the Heritage Foundation was obtained from the 2001 Index of Economic Freedom downloadable at http://datbase.townhall.com/heritage/index/country.cfm). 

What is interesting about Singapore is that government does intervene in many aspect of people’s life but they are done in the best interest of the society. The Singapore government does its job firmly and pays her civil servants reasonably well to attract talents to work for the government. As a result, corruption is not a serious problem in Singapore. Policies are introduced to maintain and sustain economic growth, and to preserve the country’s abundant surpluses to safeguard against uncertainties in the future. The discussion on the role of government in economic development literature is not a new one with several schools of thought arguing for and against government intervention.

 

Market versus planning (this section draws heavily from Khan, 1996)

Adam Smith’s (1723-1790) laissez faire doctrine advocated the operations of market forces to solve economic problems. His invisible hand theory claims that individuals and firms know best and the society flourishes if people are allowed to pursue their self-interests. Individuals’ freedom to move capital and labor from one activity to another allocates scarce resources more optimally. This however does not mean that the government sector is not an important entity in an economy.

On the contrary, Smith saw an important role for government in at least two areas. First, government is needed to provide a system of justice. Ownership is essential to push forward one’s interest to pursue his/her dreams. Property rights laws must be carefully be introduced and enforced so that properties are assigned to the rightful owner (de Soto, 2001). Providing law and order is necessary to allow the market economic system to work. Second, government is required to build institutions and public works. Examples of include transportation works like roads, canals and bridges and educational institutions. The government needs to intervene to provide such goods and services given the heavy expenditure outlay beyond the means of many individuals in providing them. There is also a long gestation period before returns, if any, are reaped. In countries like Malaysia and Singapore, the government works closely with private corporations to provide public goods. See for example the book by Prime Minister of Malaysia, Mahathir Mohamad (1998). 

Adopting Smith’s framework, the neoclassical economists developed a more sophisticated version of market mechanism using ‘equilibrium’ and marginal analyses. Alfred Marshall made the pioneer contributions. Adopting the assumptions of wage and price flexibility, neoclassical economists advocated minimal government intervention on the basis that any distortions in the market would eventually restore back to the equilibrium. Government intervention in the forms of taxation and price controls create disequilibria in the market resulting in deadweight losses.

Smith’s doctrine dominated the thoughts of economists and policy makers for 160 years until the revolution took place in 1936 with the publication of John Maynard Keynes’s ‘The General Theory of Unemployment, Interest and Money’ published in 1936. Noting the persistent high unemployment problems in the 1930s, Keynes challenged the classical and neoclassical schools of thought. He claimed that market system was not able to generate full employment.

Consider the example of the money market. Classical and neoclassical economists thought that lower interest rates would stimulate investments if a country’s economy falls into recession. Its interest rates would fall. Investments would then increase therefore preventing further slowdown in the economy.

The model did not seem to work during the Great Depression. As Keynes argued, despite lowered interest rates to less than one per cent during the Great Depression, investments did not seem to increase. The reason given was that businessmen were not interested so much with the interest rates as the factor determining their levels of investment. Any rational investors would not want to invest in projects if they thought the business climate was not favorable. This essentially created the need for governments to intervene, according to Keynes, to stimulate the economy through government spending and cuts in taxes. An increase in government spending for instance creates a multiplier effect on the country’s equilibrium national income. Employment and investment opportunities are created in the process. Keynes therefore provided a strong argument for government intervention to stimulate economic growth and development.

     The structuralism school, led by pioneer development economists like Gunner Myrdal, Arthur Lewis, Ragnar Nurkse, Albert Hirshman, Hollis Chenery and Rosenstein Rodan further strengthened the case for government intervention in the development process. The focus was on the mechanism to transform the domestic economic structures over time from traditional agricultural based to modern industrial structure as the engine of growth. Government intervention was deemed desirable in the context of providing essential supporting infrastructures, accumulation of human capital and also facilitating the growth of cities. The basic idea of the structuralist school is that the market mechanism did not work well in the developing countries. Lack of information and poverty disallowed the price system to function properly. They hinder optimal allocation of resources. The notion of growth with equity become popular among the policy makers and academics (particularly those working in the World Bank) with increasing emphasis placed on alleviating poverty for they believed that growth need not come at the expense of equity. The popular World Bank publication ‘The East Asian Miracle’ in 1993 for instance detailed a number of high performance characteristics, namely the relatively high average growth rates of economic growth and the decline in income inequality in the periods 1960-1990.

     There is also a general consensus that government intervention is desired to correct market failures. Market failures are the results of several factors. One is in the provision of public goods. A public good is characterized as one with zero marginal cost of production. Even as one consumes the public good, it does not deprive another individual of deriving the same level of satisfaction from consumption. Public goods are non-rival and non-excludable. Examples of public goods include street lighting, lighthouse, national defense and the provision of law and order.  Due to the characteristics of the public goods, the goods are seldom provided by the private sector. Free ridership problem arises as no one is willing to disclose the price he or she is willing to pay for the public goods and services. Thinking that their contributions meant little to the eventual decision to supply the public goods, individuals prefer to enjoy the benefits of these goods (knowing that they can do so) without contributing to their creation. The absence of information on the true preference for public goods hinders the supply of these goods by private producers. Therefore, the government has to intervene to provide public goods and services essential to the overall well being of the society.

Another example of market failure is externalities. Externalities arise when the price of the commodity determined by market forces fail to reflect the actual costs and benefits of production. For example, in the case of external production externality, a plant manufacturing aluminum cans produces chemicals as a waste by-product which, if spills into the stream would kill the marine. The event jeopardizes the livelihood of fisherman. As a result, the government should intervene. It can impose taxes or introduce regulations to internalize the externalities so that the socially optimal level of output is produced.

Externalities can also be in the form of positive production externality. In the absence of the government, the actual level of production will fall short of the societal-desired level of output. A common cited example is in the production of advanced technology that facilitates production like robotics.

The government may also have to intervene to control monopolies from existing or becoming too large. This is to prevent overcharging of goods and services and to protect the consumers against exploitation from monopolies. In the case of natural monopolies, the government could take over the role of producing the commodity or supplying the services themselves like the case of the provision of telecommunication and transport services. Alternatively, the government could regulate the natural monopolies using marginal cost pricing or average cost pricing approaches.

     Economists and policy makers for more than three decades inculcated Keynes ideas. They however began to lose touch in the 1970s when inflation became too severe without a corresponding reduction in the unemployment rate. One of the major drawbacks of the Keynesian economics was the omission of the supply side of the economy with questions relating to the supply decisions and incentive effects left unexamined. The fact that individuals were able to anticipate government policies as they learn from the past could lead to the failure of the demand management strategy, as advocated by Keynes. Fiscal policies were also accused of not being effective due to the crowding out effect, where government intervention would crowd out private investment. Reduction in productivity and economic growth is resulted. See Khan (1996).

     The power of market forces resurged with the development of the monetarists and rational expectations schools of thought, led by economists like Milton Friedman, Robert Lucas and Thomas Sargent. The monetarists claimed that inflation was purely attributed to rapid increase in money supply. As governments attempted to reduce unemployment problems, a side effect of such a move was rapid inflation therefore destroying business confidence in the market as well as incentives to work. The school advocates constant money growth idea and leaves the market to operate on its own with minimal government intervention.

The rational expectation school argues that economic agents are capable of forming expectations, learn from past mistakes, and anticipate government policies, therefore rendering government interventionists policies ineffective. As the economic agents are well able to anticipate government actions, prices and wages will be adjusted accordingly, leaving no one trick. Monetary and fiscal policies become ineffective to bring about any changes in unemployment rate above the natural rate of unemployment. However, the success of the above lies in the degree of transparency and availability of information to economic agents. Without economic knowledge, information and transparency, economic agents will not be able to make rational choices. This is evident in the Asian economic crisis where the lack of transparency of government and financial sector operations creates uncertainties among economic players. Uncertainties in turn force them to behave speculatively as they have inadequate knowledge about the true state of the economic conditions prevailing during the period.

 

The Role of Government in Singapore

     The Singapore government intervenes extensively in population control, housing, education, health services, savings, wage policies, industrial relations, and others. The government intervenes in matters deemed important to maintain economic and social orders not only in the short run but in the longer term too. It is a case of the mixed economy. The government adopts the pragmatic approach. It intervenes on matters provided that they have implications (positive and negative) that would not be desirable should the government fails to intervene. In such an approach, the main ingredient to ensure successes is integrity and quality of civil servants. The civil servants are used in civil service, statutory boards, and the state and semi-state enterprises. These public institutions play an important in Singapore’s development process.

As noted in the ‘Policy Options for the Singapore Economy, authored by Lim Chong Yah and 25 other academics (1989), an important factor contributing to high growth in Singapore is the government’s commitment to economic growth.  Since gaining independence, the Singapore leaders have demonstrated good economic judgment and made sound economic policies to improve the living standards of Singaporeans. The devotion to the development of physical infrastructure, construction of industrial parks, manpower development and training, creation of legal and administrative efficiency and fiscal incentives was essential in the initial stages of the development to attract multi-national companies (MNCs) to Singapore. The ruling party, the People’s Action Part (PAP) could not rely on the local entrepreneurs, comprising mostly the Chinese-educated individuals, to spearhead the development efforts. Most of them were in the shipping and commodity trading lines (such as the Lee Rubber and Hiang Kee), and had little incentives and know-how to venture into the manufacturing sector. It was therefore imperative for the government to lead the development efforts, by engaging into business themselves, establishing the government-linked companies (GLCs), which exist until today, and by attracting MNCs into Singapore to bring in technologies, management skills and jobs to Singapore residents.

On the need to attract the MNCs, the then Prime Minister writes in his memoirs:

 

‘We did not have a group of ready-made entrepreneurs such as Hong Kong gained in the Chinese industrialists and bankers who came feeling from Shanghai, Canton and other cities when the communists took over. Had we waited for our traders to learn to be industrialists we would have starved. It is absurd for critics to suggest in the 1990s that had we grown our own entrepreneurs we would have been less at the mercy of the rootless MNCs. Even with the experienced talent Hong Kong received in Chinese refugees, its manufacturing technology level is not in the same class as that of the MNCs in Singapore’, (Lee, 2000, p. 85-86).

 

The MNCs have contributed significantly to Singapore’s rapid growth. The Department of Statistics in Singapore had estimated that the MNCs contributed 41.5 percent to Singapore’s GDP in 1998 (see Department of Statistics, 2001; quoted from Peebles and Wilson, 2002, p. 14). The GLCs are very well managed. They are essentially run on a commercial basis. Being profit oriented, they are expected to earn profits and expand through their regionalization and globalization efforts whenever possible. The GLCs are allowed to fail and go bankrupt if they lose money for the government has stated clearly in its policy that it would not engage in buying over failing firms just to save jobs (Khan, 2001).

Some of the infrastructure development tasks were handed to statutory boards so that more specialize and focus operations can be developed to better serve the public. The statutory boards are able to perform more efficiently and effectively partly because they are given greater autonomy in their operations. According to the special laws passed by the Parliament, the statutory boards are obliged to report only important matters of strong national interest (such as the pricing of the products and budgetary plans) to the supervising ministries.

Some examples of statutory boards include the Economic Development Board which administers a wide range of activities aimed to promote investments in Singapore, the Jurong Town Corporation that provides prepared industrial land and ready built factories to industrialists who set their operations in Singapore, and the Standards, Productivity and the Innovation Board (SPRING) (the then Singapore Productivity Standards Board) which aims to aid small and medium size companies in their productivity growth, therefore helping to raise productivity standards in Singapore. Other major statutory boards include Trade and Development Board, the Monetary Authority of Singapore, the Housing and Development Board, the Central Provident Fund Board, and Inland Revenue Authority of Singapore, and the Urban Redevelopment Authority. A good description on how the EDB works can be found in Chan (2002).

Statutory boards are more flexible than ministries. They have more autonomy to review and change their policies to suit the prevailing economic conditions. The flexibility of the statutory boards is reflected in the gradual shifts in the priorities announced by the EDB from advocating the import substitution strategy in the 1960s to its current strategy of promoting the life sciences industry.

Singapore’s pragmatic policies involving intensive government interventions in areas like education, health, transportation, industrial relations and wage policy are directed towards enhancing the living standards of her people. The government’s pragmatic mindset also means that the country’s economy is highly open to foreign investment and technology. This is indeed crucial in view of the smallness of the city-state. If Singapore is to adopt a close door policy and with no entrance of the multi-national companies, the economy is unlikely to reach its current stage of development given its limited natural resources and market size. With its extremely openness, Singapore has benefited from the inflows of foreign talents, entrance of the much-needed foreign technology, and the inflow of the foreign exchange.

While many observers have noted that being physically small has restricted the growth of Singapore, such claims have been exaggerated. Being ‘small’ has its advantages as far as policymaking is concerned. The public sector in the first place, is less complex where more comprehensive and systematic ideas can be presented and implemented, therefore enhancing the success probability. The government is also able to react more quickly to social, economic and political situations, and it can mobilize the people easier and faster. Values and policy changes can also be communicated faster to the people. This is clearly demonstrated during the Asian economic crisis. Policies were implemented and communicated efficiently, therefore allowing the economy to achieve a rapid turnaround time.

So far, we have noted that the public sector plays a crucial role to ensure a continuous growth of the economy, both in the economic and social arenas. Besides having competent top policy leaders, Singapore is blessed to possess a well-trained group of civil servants dating back to the colonial days. At that time, Singapore was a crucial administrative state to the British. In the present time, the civil servants are recruited among the top elites from local and overseas universities (except in a few public institution like the Ministry of Home Affairs, which recruited only Singapore citizens, majority of the public institutions accept foreigners). With its almost guaranteed lifetime employment opportunity, and the adoption of the pay for performance principle, the civil service is an attractive place for both Singaporeans and foreigners to work in. This has been aided by the government’ stand to narrow the wage gap between the private and public sectors.

Public sector in Singapore continuously strives to improve how things are currently done. An example is the implementation of the program called the Public Service for the 21st Century (PS21 for short) on 5 May 1995, which inculcates every civil servant a positive attitude towards change to meet the needs of the public with high standards of quality and courtesy. It aims to foster an environment that induces and welcomes change for greater efficiency and cost-effectiveness. The program encourages applications of modern management tools, with equal emphasis placed to building morale and welfare of civil servants. As customers become more demanding in terms of the services they get from the public sector both locally and internationally, there is a greater need to develop a higher quality public sector. Creating an efficient system in the delivery of public service creates an all-important first impression on how working or operating in Singapore would look like. A public sector that is efficient would make one’s stay in Singapore more pleasant.  The efforts appeared to pay off at least as viewed by a ‘new’ Singaporean. See (Vandenborre, 2003).

Several initiatives were introduced to promote better delivery of public services to the public. A Counter Allowance Scheme was introduced in August 1995 to encourage staff to be courteous, helpful and efficient when delivering their services. Counter staff that performs above the stated criteria will receive a monthly allowance, while those who do not perform up to the stated standards will not be rewarded. A Service Excellence Helplist was developed to specify the standards expected of the counter staff. The supervisors could make use of the helplist to assess the counter staff, therefore minimising the degree of subjectivity. The public is encouraged to provide feedback on the services provided using the Service Feedback Form.

The initiative requires constant monitoring of staff performance, therefore increasing the burden of supervisors. While the performance criteria could reduce the degree of subjectivity in the assessment, a complete removal is not possible. Some staff may be unhappy with the decisions made on who is to be rewarded and who is not.

Nevertheless, the initiative would have a positive impact on the services provided, as service providers react to monetary incentives that accompany better provision of services. It is not surprising therefore to note that the scheme has been extended to include officers who provide services over the phone. Started in June 1996, supervisors could reward the officers upon satisfying a set of ‘telephone service’ standards in a form of a checklist known as the Telephone Service Excellence Helplist. The checklist is used to appraise the officers’ performance. An officer will not be eligible for the allowance if he or she has received more than two substantiated complaints of poor services.

     In addition to the above-mentioned initiatives, the governance of the public sector in Singapore excels in motivating staff performance through its methods of promotion, and rewarding and recognizing staff contributions. Perhaps, the suitable word that links to both areas is ‘meritocracy’. Promotions of the public servants in Singapore are based on performance, potential, knowledge and experience and the existence of vacancies. It does not matter how long the person has worked in the public sector, and regardless of race or religion, the person to do the job is the one who is viewed as the best person to do the job.

     In the ministries, Recommending Panels are formed to assess and rank officers and make recommendations on their promotions. Line managers and supervisors are involved in the process so as to ensure that the most deserving officers are noted for their contributions. While the system may help to promote the rightful candidate, how successful it is lies on the relationship between the assessors and the officers. Some forms of subjectivity will be present. For instance, the chances of officers being promoted lie heavily on the willingness of their direct supervisors to ‘fight’ for them. Supervisors who are less open and less vocal are less likely to recommend promotions for their officers. The presence of a fair chairman then becomes inevitable to see that everyone is fairly assessed and not left out because of some individual differences between him/her, the supervisors and the officers themselves. However, this would require the chairman to know, at least, the performance of the officers concerned in order to assess whether the officers deserve their promotion or otherwise. It boils down then to main task; acquiring the right people to work for the government!

The performance incentive in Singapore’s public service links pay to the performance of public servants. Higher increments are given to more efficient staffs. The public sector wages are kept closely in line with the pay structure in the private sector. Paying the civil servants competitive wages, commensurate with private sector earnings, is viewed as important by the government to attract able people to join the public sector and maintain high standards of integrity, and therefore build an outstanding public service. The system therefore helps to encourage the staff to put in their best efforts in the work. In a way, the system helps to minimize the problems related to corruption among the public servants in view of the higher opportunity costs incurred should one be found guilty of accepting bribes and engaging in corruptive activities.

A new initiative has been implemented recently to improve the public services provided to the public. Known as the Zero-In Process (ZIP), the initiative aims to integrate ministries and government agencies to become one entity. It wants the public to form this perception. It is part of the ‘More Vision, Less Bureaucracy’ movement established in September 2002 to review rules and cut red tape. The ZIP program encourages ministries and other government agencies to work closer together and deliver more integrated and better services to the public. An example of a ZIP project is the Lead Agencies which would help solve problems related to maintenance of public areas. If the responsibility is shared by more than one agency, inconvenience to the public may be created. More time may be required or wasted to settle the matter, as different agencies have to sort out which one of them should correct the problem. The Lead Agencies are meant to tackle such problems. Instead of waiting for the affected agencies to sort out who bears the cost and responsibility, the Lead Agencies would first solve the problem for the public, and then work out with the affected agencies internally.

It is the desire to constantly upgrade the performance of the public service and ensure that the people are well-managed and taken care off. The public service in Singapore has indeed served the nation well and contributed significantly to the economy’s growth. 

 

Conclusion

     With a total land area of only 640 square kilometers, Singapore is considered a small country in physical terms. This allows the nation to be nimble and able to respond quickly to policy changes. However, being small also makes Singapore vulnerable to changes in the external environment as exemplified in recent events like the Asian economic and financial crises and the 911-incident.

It is a common perception that the Singapore government is not keen in making short and long-term plans since being small and vulnerable, it is the interest of the nation to be nimble and responsive rather than rigidly following the plans at times when the external environment changes either favorably or unfavorably. This is not true. Almost immediately after attaining the self-governed status from the colonial government in 1959, the first Four-Year Development Plan (1961-1964) was formulated by a visiting team from the United Nations in 1960 led by Dr. Albert Winsemius. Although the Plan was not fully implemented, it was credited for its recommendation on the setting up of the EDB, notably the most important institution in Singapore.

Other plans implemented in Singapore include the economic report submitted by the Ministry of Trade and Industry in 1980. The report suggested restructuring and transforming the main sectors of the Singapore economy from labor intensive to capital-intensive sectors. Among its recommendations were to raise labor wages and contributions to the Central Provident Funds.

In the period 1985-1986, the Economic Committee set up by the Ministry of Trade and Industry (led by Lee Hsien Loong) provided a detailed plan to re-establish Singapore’s level of competitiveness in response to the economic recession in 1985 experienced for the first time since independence. It suggested, among other things, that the Singapore economy should be private sector led, therefore leading to suggestions to divest and privatize government-linked companies and statutory boards. It also sets out the objective to build the wage flexibility system into the economy.

The Strategic Economic Plan, published in 1991, was more wide-ranging covering more aspects of the economy. It led to the creation of numerous plans like Retail 21, Manpower 21 and Industry 21.

In response to the Asian economic and financial crises, the government set up the Committee on Singapore’s Competitiveness, which released its report in November 1998. A private sector led committee, the committee's report identified eight key strategies to strengthen Singapore’s level of competitiveness, which if properly implemented, would enable Singapore to become an advanced and globally competitive knowledge economy within 10 years from the release of the report.

More recently (in October 2002), the government announced the establishment of the Economic Review Committee (ERC) to review the development strategy of Singapore. The committee was given the task to develop the blueprint to restructure (or remake) the economy. Led by the Deputy Prime Minister of Singapore and Minister for Finance, Lee Hsien Loong, with members from the public sector, private sector and labor movement, a total of seven sub-committees was set-up covering vast areas of topic touching the economic, social, cultural and political aspects. The committee published its recommendations in February 2003 (the report can be found in http://www.erc.gov.sg).

This essay provides a brief overview of Singapore’s economy and the role of its government. As we have pointed out in this essay, and generally accepted to most observers, the government of Singapore has played a significant role in the nation’s economic development, supported by the efficient leaders and callable civil servants. The government should also be credited for being proactive and taking the initiatives to continuously seek inputs from the private sector. We would therefore not hesitate to advance the conclusion that the Singapore’s success is attributed to the efficiency and effectiveness of its government.

 

References

1.      Chan, Chin Bok (2002) Heart Work. Singapore  Economic Development Board and EDB Society (Singapore).

2.      Department of Statistics (2001) ’Contribution of Government-Linked Companies to Gross Domestic Product’, Occasional Paper on Economic Statistics, March.

3.      de Soto, Hernando (2001) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Black Swan (Great Britain).

4.      Khan, Habibullah (1996) ‘Marketing vs Planning’, in Chin, Anthony and Ng, Hock Guan (editors) Economic Management and Transition Towards a Market Economy: An Asian Perspective. World Scientific (Singapore).

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

6.      Lee, Kuan Yew (2000) From Third World to First: The Singapore Story 1965-2000. Singapore Press Holdings and Times Edition (Singapore).

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

8.      Mahathir, Mohamad (1998) The Way Forward. Wendenfeld and Nicolson (London).

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

10.  Vandenborre, Alain (2003) Proudly Singaporean: My Passport to a Challenging Future. SNP Media Asia (Singapore).