ECONOMIC HISTORY OF SINGAPORE
It can be argued that no country made the leap from Third World poverty to developed world affluence as quickly and completely as Singapore did. In the 1960s, Singapore was known for its opium dens, gang-ridden streets, fetid slums and racial tensions. Now its is known for its high tech industries, comfortable lifestyle and high-speed Internet penetration.
Singapore emerged from being a tropical backwater and grew into one of Asia's wealthiest nations in little more than 30 years. Gross domestic product per capita climbed from $516 in 1965 to $22,000 in 2004 to $50,123 in 2011. The per capita income in 2011 was or 48 times the level it was in 1960, according to government statistics.
The Four Tigers of Asia—South Korea, Taiwan, Hong Kong and Singapore—raised the per-capita incomes sixfold between 1965 and 1995. Indonesia, Malaysia and Thailand tripled their income levels in the same period.
The road to development in Singapore—as it was in Japan, Hong Kong, Taiwan and South Korea—began with sweatshops that produced garments and shoes and light assembly plants that produced toys and cheap electronics. Singapore invested heavily in public health and saw GNPs soar, family size shrink and lifespan lengthen.
Seah Chiang Nee wrote in The Star, “Technically speaking, the transformation from a poor, squatter island has been impressive. During this time, without much natural resources, the city has recorded one of the world’s fastest growth rates on per capita basis, exceeded only by Japan and Germany after World War II. It has, like an invisible giant hand, lifted the bulk of a squalid population and moved it into the middle class. Few others with bigger natural assets have fared as well. [Source: Seah Chiang Nee, The Star, Malaysia, August 25, 2012]
Anthony Faiola wrote in the Washington Post, “This shimmering city-state was the house globalization built. When world trade boomed, Singapore's seaport at the crossroads of East and West became the Chicago O'Hare of freighters and supertankers. Singapore Airlines took off despite serving a country with no domestic air routes. Nearly everything manufactured here is made for export. One out of every three workers is a foreigner. [Source: Anthony Faiola, Washington Post, March 5, 2009]
Singapore as an International Trade Center
Singapore thrives on international trade, as it had since its founding in 1819, and operates as a free port with free markets. Its small population and dependence on international markets has meant that regional and world markets have been larger than domestic markets, which presented both business managers and government policymakers with distinctive economic challenges and opportunities. In 1988 the value of Singapore's international trade was more than three times its gross domestic product ( GDP). The country's year-to-year economic performance fluctuated unpredictably with the cycles of world markets, which were beyond the control or even the influence of Singapore's leaders. In periods of growing international trade, such as the 1970s, Singapore could reap great gains, but even relatively minor downturns in world trade could produce deep recession in the Singapore economy, as happened in 1985-86. The country's dependence on and vulnerability to international markets shaped the economic strategies of Singapore's leaders. [Source: Library of Congress, 1989 *]
The island's initial success resulted from its role as a conveniently located and duty-free entrepôt for the three-way trade among China, India, and various parts of the Malay Archipelago. This trade was an ancient commerce, and trading posts probably had flourished intermittently at that favored location for two millenia. In early colonial times, silks from China, manufactures from Europe, incense from India, and spices from the Moluccas all were shipped on the various seasonal trade winds to Singapore, where they were bought, sold, traded, or stored for a future customer. By the late nineteenth century, however, the British overlords of Singapore had extended their influence or control throughout the Malay Peninsula, and the port acquired a large hinterland rich in resources. Singapore became the outlet for Malaya's tin and rubber, as well as the gateway through which were funneled supplies and workers for the peninsula's mines and plantations. Tin smelting and rubber processing were added to the list of services that Singapore provided — a long list that already included wholesaling, ship repair and provisioning, warehousing, and a host of banking and financial services. *
Economic Development in Singapore
Modern Singapore, founded as a trading post of the British East India Company in 1819, achieved its initial economic success as an entrepôt because of the island's location, harbor, and free port status. Although Singapore at first served only as a center for trade and transshipment, by the early twentieth century, primary goods, mainly rubber and tin from the neighboring Malay Peninsula, were being imported for processing. Singapore also became a regional center for the distribution of European manufactured goods. After World War I, when the British established a naval base on the island, Singapore became a key element of the British Commonwealth of Nations military defense east of India, thus adding the naval support industry to the island's economy. [Source: Library of Congress, 1989 *]
In the period immediately after World War II, Singapore faced enormous problems, including labor and social unrest, a decaying, war-ravaged infrastructure, inadequate housing and community facilities, a slow economic growth rate, low wages, and high unemployment made worse by a rapidly expanding population. As late as 1959, the unemployment rate was estimated at 13.5 percent. The struggle for survival in the postwar period deeply affected the economic decision making of Singapore's first generation leaders. *
Economic Pressures as Singapore Emerges as Independent Nation
Mounting political pressure for independence from Britain culminated in 1963 in the merger of Malaya, Singapore, and the British northern Borneo territories of Sabah and Sarawak into the new nation of Malaysia. A combination of political and ethnic differences between Singapore and the national government, however, led in 1965 to Singapore's separation from Malaysia and establishment as an independent nation. The economic prospects of the new city-state at first appeared bleak. Upon separation from Malaysia, Singapore lost its economic hinterland and jeopardized its hopes for an enlarged domestic market to absorb the goods produced by a small but growing manufacturing sector. Moreover, Indonesia's policy of Confrontation (Konfrontasi) with Malaysia between 1963 and 1966 had substantially reduced Singapore's entrepôt trade. [Source: Library of Congress, 1989 *]
Britain's announcement in 1968 of its intention to withdraw military forces from Singapore by the early 1970s marked the beginning of a greatly expanded, more intrusive role for the government in the economy. From then on, the government no longer confined itself to such traditional economic pursuits as improving the infrastructure, but instead began to engage in activities that were or could have been the domain of private enterprise. Britain's departure meant the loss, directly or indirectly, of 38,000 jobs (20 percent of the work force) at a time of already rising unemployment and rapid population growth; a consequent reduction in the GDP; and an increase in Singapore's own budgetary defense allocation to compensate for the British withdrawal. Even so, the S$1,616 per capita income of Singapore in 1965 already was quite high by developing country standards, an indication that subsequent high growth rates were not merely a result of beginning at a low base. *
Singapore Grows and Industrializes in Late 1960s and Early 1970s
The period from 1965 to 1973 witnessed unprecedented economic growth for the island nation, during which the average annual growth of real GDP was 12.7 percent. Major credit for this development must be given to the effective implementation of soundly conceived government policies, which from the outset took full account of Singapore's strengths and weaknesses. Furthermore, the time was right for structural change in the economy. Enough capital had been accumulated to permit the domestic production of goods that were more capital intensive. The government's economic response to separation from Malaysia and the withdrawal of British military forces included efforts to increase industrial growth and solve the domestic problems of unemployment, population growth, and housing. Growth was achieved because workers were added to the payroll and provided with better machinery with which to work. Even more remarkable, this growth was accomplished with an outstanding record of price stability. Inflation was kept low by the government's conservative fiscal policies, which included the maintenance of strict control over the money supply. [Source: Library of Congress, 1989 *]
Industrialization promised the most economic progress. The strategic question was whether to rely principally on domestic entrepreneurs or to make a conscious effort to attract foreign direct investment. The decision to encourage the latter resulted both in a large share of Singaporean manufacturing being foreignowned and a high degree of export-led growth. Singapore's reliance on multinational corporations of the world to provide the necessary investment meant less dependence on the Southeast Asian region generally and neighboring countries particularly. *
When independence was suddenly thrust upon Singapore in 1965, its economic prospects looked bleak, if not precarious. In the aftermath of World War II, Singapore had faced staggering problems of high unemployment, slow economic growth, inadequate housing, decaying infrastructure, and labor and social unrest. Separation from Malaysia meant the loss of its economic hinterland, and Indonesia's policy of military Confrontation directed at Singapore and Malaysia had dried up the entrepôt trade from that direction. Moreover, with the announcement in 1968 of Britain's departure from the island's bases, Singapore faced the loss of 20 percent of its jobs. These problems led Singapore's leadership to take a strong role in guiding the nation's economy. The government aggressively promoted export-oriented, labor-intensive industrialization through a program of incentives designed to attract foreign investment. By 1972 one-quarter of Singapore's manufacturing firms were either foreign-owned or joint-venture companies, with the United States and Japan both major investors. The response of foreign investors to Singapore's favorable investment climate and the rapid expansion of the world economy at that time were factors in the annual double-digit growth of the country's GDP during most of the period from 1965 through 1973. *
Singapore Growth “Slows” 8.7 Percent After the Oil Shock in 1973
For the first two decades of its independence, Singapore enjoyed continuous high economic growth, largely outperforming the world economy. Its GDP growth rate never fell below 5 percent and rose as high as 15 percent. At the same time, Singapore managed to maintain an inflation rate below world averages. The worst recession was in 1964, before independence, when the economy shrank 3.8 percent. [Source: Library of Congress, 1989 *]
The 1973 oil shock with the collapse of prices and the worldwide recession it triggered brought the end of the super growth period. Even so, Singapore's growth rate averaged 8.7 percent from 1973 to 1979, which was high compared with other countries during that same period. Manufacturing continued to grow as did transportation and communications. Although the second worldwide oil crisis, beginning in 1979, set off the longest and deepest recession in the industrialized countries since the Great Depression of the 1930s, Singapore was seemingly untouched. If anything, its economy grew in 1980-81 while the world economy was contracting. The real average GDP growth rate between 1979 and 1981 was 8.5 percent. Financial and business services joined manufacturing as the major economic engines. During this period, Singapore's function as a petroleum-servicing entrepôt made it more like an oil producer than an oil consumer. *
Although Singapore lost its former hinterland when it separated from Malaysia, its northern neighbor remained the leading source of primary imports and a major destination for Singapore's manufactured exports. Malaysia was Singapore's third largest overall trading partner in 1988, and Singaporean companies were major investors in Malaysia's southern state of Johor. The entrepôt trade with Indonesia had long since revived following the end of Confrontation in 1966. By the late 1980s, Singapore was the world's third largest petroleum-refining center as well as third largest oil-trading center, serving the needs of oil-rich Indonesia and Malaysia. By 1988 Singapore had nosed out Rotterdam as the world's busiest port in terms of tonnage. Some 700 shiplines used its modern facilities each year, including Singapore's own merchant fleet, which ranked fifteenth worldwide. Four major shipyards employed about 70,000 workers, about 40 percent of whom were from neighboring Asian countries. *
Economy Under Lee Kuan Yew
Under Lee’s stewardship Singapore had both low inflation and negligible unemployment. In the 1980's wages were increased by government decree at a rate of 20 percent and strikes were virtually nonexistent. Lee was against welfare because he believed it encouraged people not to work. In his book, he wrote: “Those who can run faster should run faster. They shouldn’t be restrained by this who don’t want to run at all.”
In the 1970s through the 1990s, Singapore experienced sustained economic growth. Along with Hong Kong, South Korea, and Taiwan, it was called one of the “Four Tigers” of Asian economic prosperity. Labor-intensive industries were relocated to other ASEAN nations and were replaced by high-technology industries and services. The PAP developed a stable and corruption-free government, marked by strong central development planning and social policies. Despite paternalistic and at times authoritarian governmental practices and one-party dominance, the PAP maintained its large popular mandate. A Singaporean identity, distinct from that of the Malay and Chinese, emerged as the nation increasingly integrated itself into the global economy. [Source: Library of Congress *]
By the early 1970s, Singapore not only had nearly full employment but also faced labor shortages in some areas. As a result, immigration laws and work permit requirements were relaxed somewhat, and by 1972 immigrant workers made up 12 percent of the labor force. In order to develop a more highly skilled work force that could command higher wages, the government successfully courted high-technology industries, which provided training in the advanced skills required. Concerned that the country's economic success not be diluted by overpopulation, the government launched a family planning program in 1966. *
The country's economic success and domestic tranquility, which contrasted so starkly with the impoverished strife-torn Singapore of the late 1940s, was not purchased without cost, however. Although not a one-party state, the government was virtually under the total control of the PAP, and the Lee Kuan Yew administration did not hesitate to block the rise of an effective opposition. Holding a monopoly on power and opportunity in a small state, the party could easily co-opt the willing and suppress dissenters. The traditional bases — student and labor organizations — used by opposition groups in the past were tightly circumscribed. Control of the broadcast media was in the hands of the government, and economic pressures were applied to any newspapers that became too critical. The government leadership had adopted a paternalistic viewpoint that only those who had brought the nation through the perilous years could be trusted to make the decisions that would keep Singapore on the narrow path of stability and prosperity. The majority of Singaporeans scarcely dissented from this view and left the planning and decision making to the political leadership. Although five opposition parties contested the 1972 elections and won nearly one-third of the popular vote, the PAP again won all of the seats. *
Although admired for its success, Lee's government increasingly attracted criticism from the international press for its less than democratic style. Singapore's neighbors also resented the survival- oriented nature of the country's foreign and economic policies. The aggressive defense policy recommended by Singapore's Israeli military advisers irritated and alarmed Muslim Indonesia and Malaysia. Resentful of the profits made by Singapore in handling their commodities, Malaysia and Indonesia began setting up their own rubber-milling and petroleum-servicing industries. In the early 1970s, Malaysia and Singapore separated their joint currency, stock exchange, and airlines. *
Perhaps Lee’s biggest failure was his attempt to merge the Singaporean can-do spirit with Chinese labor. An industrial park he masterminded in Suzhou collapsed under the weight of corruption, nepotism and greed—vices he worked so hard to eliminate in Singapore.
Singapore Blossoms Into a Major Trade Center in the 1980s
Although Singapore's founder and other nineteenth-century residents would no longer recognize the island, they would at least be able to identify with certain aspects of its modern economy. The principle of free trade laid down by Raffles was still largely in effect in the late 1980s, with only a few revenue tariffs levied on such things as tobacco and liquor. Trade continued to be the island's lifeblood; in 1988 the value of Singapore's international trade was triple the total of its gross domestic product (GDP). Although some aspects of the trade have changed, others remained the same.
By the late 1980s Singapore aspired to be a "global city" serving world markets and major multinational corporations. A quarter century after independence in 1965, the city-state had become a manufacturing center with one of the highest incomes in the region and a persistent labor shortage. As one of Asia's four "little dragons" or newly industrializing economies, Singapore along with the Republic of Korea (South Korea), Taiwan, and Hong Kong was characterized by an export-oriented economy, relatively equitable income distribution, trade surpluses with the United States and other developed countries, and a common heritage of Chinese civilization and Confucian values. The small island had no resources other than its strategic location and the skills of its nearly 2.7 million people. In 1988 it claimed a set of economic superlatives, including the world's busiest port, the world's highest rate of annual economic growth (11 percent), and the world's highest savings rate (42 percent of income). *
One of the fastest growing sectors of the economy was Singapore's international banking and financial services sector, which accounted for nearly 25 percent of the country's GDP in the late 1980s. Historically, Singapore served as the financial services center for Southeast Asia, and in the late 1980s it ranked with Hong Kong as the two most important Asian financial centers after Tokyo. The government provided incentives for the continuing diversification and automation of financial services, and Singapore's political stability and top-notch infrastructure were important attractions for international bankers and investors. Trade, manufacturing, and international financial services were closely linked in Singapore, which in 1990 hosted more than 650 multinational companies and several thousand international financial institutions and trading firms. Singapore's reliance on the international economy, over which it had little control, provided incentive for the government to play a strong role in regulating domestic conditions. Soon after independence, the government brought under control the serious labor unrest of the 1950s and early 1960s in order to present a more favorable climate for foreign investment. Discipline imposed on the labor force was counterbalanced, however, by provisions for workers' welfare. While the booming economy of the late 1960s and 1970s brought new jobs to the private sector, government provision of subsidized housing, education, health services, and public transportation created jobs in the public sector. The Central Provident Fund, built up by compulsory contributions by both employer and employee, provided the necessary capital for government projects as well as for the country's comprehensive social security scheme. *
Given Singapore's dependence on the world economy, however, the consequences of declining foreign demand were inevitable. The 1985 recession was the worst in the nation's history. Singapore staggered under a year of negative growth (-1.5 percent), then recovered slightly in 1986 (+1.9 percent). The causes lay both outside and within the country. Externally, worldwide slumps in petroleum-related and marine-related sectors were reflected in reduced demand for Singapore's goods and services and raised the specter of worldwide overcapacity in shipbuilding and shiprepairing . Furthermore, the slowdown in demand for semiconductors and electronics in the United States sharply reduced demand for Singaporean components and parts. *
Internally, the construction boom — which had produced a glut of hotels, shopping centers, and apartments — began to be reversed. Domestic demand also weakened as a result of a rise in domestic savings, which was not matched by a rise in productive domestic investment. The situation was complicated by a loss of international competitiveness and a profit squeeze attributed to labor costs rising faster than productivity. The government responded promptly and firmly by lowering employer contributions to the Central Provident Fund, freezing overall wage levels for 1986 and 1987, reducing corporate income taxes from 40 to 30 percent, reducing personal income taxes in line with corporate taxes, and introducing an across-the-board investment allowance of 30 percent to encourage greater investment in equipment and machinery. These measures were highly successful; costs dropped 30 percent and productivity climbed. By 1988 Singapore's economy had rebounded. *
Singapore Prospers in the 1990s as Expands Into High-Tech Industries
By the 1990s Singapore had become a global financial, trading, and industrial center that continued to live by its wits in the world of international trade, just as it had done in the nineteenth century. Singapore's leadership and its people have always managed to adapt to the changing demands of the world economy, on which so much of their livelihood depended. In 1990 the economy of modern Singapore was still based on the same services that were performed by the colonial port, although most of these services had been greatly expanded or modified and new ones added. The major sectors of the economy were the regional entrepôt trade, export-oriented manufacturing, petroleum refining and shipping, production of goods and services for the domestic economy, and a vastly expanded services industry. *
In late 1970s government planners had adopted a policy of replacing Singapore's labor-intensive manufacturing with skill- and technology-intensive, high value-added industries. Information technology was particularly targeted for expansion, and by 1989 Singapore was the world's largest producer of disk drives and disk drive parts. In that year, earnings from manufacturing accounted for 30 percent of the country's GDP. *
GDP growth in the 1990s was linked closely with export growth and expansion of the electronics industry. Office machines and telecommunications equipment accounted for about 15 percent of exports in 1980 and 60 percent in 1995. Singapore grew at an average rate of 8 percent a year through the 1970s, 80s and 90s. Unemployment was around 2 percent in the early 1990s.
Under Goh Chok Tong, the Prime Minister of Singapore from 1990 to 2004, Singapore experienced high growth rates. Growth was 7 to 8 percent until the mid 1990s. In 1997, Singapore’s per capita income exceeded $33,000, higher than that of Germany. The reversion of Hong Kong to China in 1997 was good for Singapore. Many entrepreneurial Hong Kong Chinese moved to Singapore and brought their businesses with them.
Asian Financial Crisis of 1997-1998 in Singapore
Singapore was hit hard by the 1997-1998 Asian financial crisis but not as hard as some of its Asian neighbors. Growth fell from 8 percent in 1997 to 1.5 percent in 1998. The value of the Singapore currency fell by more than 25 percent and property values dropped by 40 percent.
Singapore should not have been hurt at all by the crisis because its economy was fundamentally sound. Singapore had a budget surplus, a strong currency, lots of hard currency reserves, low inflation. It didn’t owe much money to anybody. But it could not help being dragged down by the collapsing economies around it.
Singapore came through the 1997 Asian Financial Crisis relatively unscathed. Much of its trade was done with the United States and Europe not Asia. But Singapore didn’t rest on its laurels. In 1998, the government announced $6.5 billion in budget cuts and improved corporate transparency, allowed more foreign control of its companies and banks. Business contributions to the nation’s pension fund and airport and port fees were reduced to stimulate growth.
See article on ASIAN FINANCIAL CRISIS IN 1997-98 factsanddetails.com
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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Singapore Tourism Board, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.
Last updated June 2015