Singapore and Economic Development

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Safely enjoying a coffee in Vienna and thinking back to the early part of the trip. One of the main questions we discussed during the week was the applicability and sustainability of the model of growth used by Singapore as a strategy for other developing countries. As the following graphic shows, Singapore has experienced a very high rate of growth going back to the early 1960's and its independence. There have been some small blips along the way, yet the nation has withstood the global crisis of 2007-2009 and the Southeast Asian crisis of 1997.

The simple model of growth we discuss in the class includes a modified Hecksher-Ohlin theorem. Nations specialize in those goods which are compatible with their factor endowments. The endowments being labor, land, capital and human capital (or entrepreneurial ability). Some of these are given by nature (how much oil sits under your land) or legal agreement (the size of your country) and are difficult to change over time. Others are subject to policy, meaning that growth can come from the improvement in quality of the factor, not just its quantity.

For a small country like Singapore (pop of 5.4 million today after much growth and immigration) the investment in human capital and education has been critical to its long term success. They provide subsidized tuition to Singaporean students and students from abroad willing to commit to remaining employed in a Singapore registered company for three years after graduation. They have a loan program to make up the difference. While tuitions vary based on discipline, social sciences are about 7500 per year and business 8500, they average about how the full cost. Public education at the primary and secondary level is centralized and built on the British model. The workforce is relatively well educated and wage rates are high. Yet the economy still grows.

source World Bank

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Singapore's early years of growth were fueled by foreign direct investment and controls over labor. They took a path of control in the political and economic realms that would be alien to liberal democratic countries. They engaged in forced savings through a social security scheme that provided additional capital from its residents. The inflection point came in 1985 when the economy shifted to a positive capital account balance and the amount of national savings exceeded investment. Singapore has generated significant internal resources and now does more FDI externally than it receives from abroad (it is still an attractive place for FDI). The sovereign fund has over SGD 1.2 Trillion (not a misprint) under its control.

source World Bank

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Singapore has taken advantage of its physical location to build a major shipping sector. It sits on trade routes between east and west and has a very prosperous deep water port. The economic plan concentrates not on one industry but a range and Singapore has successful sectors in Finance and Insurance as well as technology and other manufacturing. 

They have succeeded in developing labor, capital and land with huge incentives to entrepreneurial efforts (special tax and trade policies) but is transferable? Singapore is small, compact (Indonesia has 6000 inhabited islands), ethnically homogenous (but getting more diverse) and wealthy. For a significantly larger country, could the same type of economic planning work if there are strong ethnic, religious or regional divides that complicates the division of efforts? Would the world participate through loans and FDI for a country not following liberal democratic norms (Singapore ran a persistent current account deficit and had net capital inflows from the early 1960's until mid 1980's)? Some aspects of the experience could be copied such as the concentration on education and training, but it is not likely that the wide range of policies could (for example, everyone can't run a current account trade surplus, someone has to have an offsetting deficit). But what makes Singapore fascinating is the nature of the small controlled experiment and its unique flavor and what we can learn to do and not do to build economic, political and social structures.