Singapore and the Myth of Free Market Economics

Singapore skyline (by Merlion444 [CC0], via Wikimedia Commons)

Singapore is a success story. As founding father Lee Kuan Yew said in his autobiography, Singapore moved from being a third world country in the 1960s, to being one of the richest countries on earth by the end of the 1990s.

Singapore is a city-state which in the middle of the 1990s was half the size of Hong Kong, with a population of 3.04 million (Kwong / Chau et al. 2001, p. 1). A former British colony, Singapore's political situation after WWII was tumultuous. The city was granted independence from the British Empire in 1958. Singapore's leaders, however, did not want to found a separate state, but to become part of neighbouring Malaysia.

In the 1959 elections, the People's Action Party (PAP), which still rules Singapore today, "promised clean, efficient politics and pledged to address issues in education, labor, housing, health, social security, economic growth through industrialization, and merger with the Malay Federation as a pathway to full independence from Britain," (Abshire 2011, p. 121). The PAP won and Lee Kuan Yew became the first Prime Minister of Singapore. In hindsight, the promise made in 1959 was fulfilled.

In 1957, 50% of the Malay Federation's population was made up of Malay and 37% of Chinese, while in Singapore the figures were respectively 13% and 75% (ibid., p. 124). In July 1963 the merger between the Malay Federation was finalised (p. 127), but ethnic and political tensions led to serious conflicts, and on August 6 1965 Singapore was forced to exit the Federation and declared its independence as a separate sovereign state (ibid., p. 131).

As Singaporean Professor Kishore Mahbubani explained in his best-seller Can Asians Think?:

"When Singapore gained independence in 1965, its leaders cried rather than cheered. The idea that a small island city-state of two million people with no hinterland could survive in what was then a difficult and troubled region seemed manifestly absurd. The odds were always against Singapore succeeding" (Mahbubani 2004, p. 241).

But against all odds, Singapore did succeed. Between 1960 and 1990 Singapore's GDP increased ten-fold. In 1965, when Singapore became independent, its per capita GDP was 54% as large as Japan's, and 14% as large as the United States'. Singapore's GDP was still half that of Japan and 54% that of the United States in 1990, but it reached 87% and 70% respectively in 2006. 

With an area of just 700 km2 and a population of 4 million in 2000, Singapore was the 13th largest exporter and the 24th country in the world in terms of GDP out of 179 countries. In terms of purchasing-power-parity (PPP), Singapore was ranked 17th, surpassing Japan, Germany, Italy, France, Taiwan, and the EU average (Akkemik 2009, p. 27).

In 2017, Singapore's per capita GDP was approximately $US57,000 (the United States' is $US59,000). In terms of PPP, Singapore's per capita GDP in constant 2011 international $ was approximately 85,500 (the US' was 54,000). 

How did Singapore achieve this remarkable development?

Singapore, Adam Smith, and the Free Market That Never Was

Singapore's success has often been depicted as the result of a clean and efficient government, a hard-working population, and the adoption of free market economics. This view basically mirrors neoclassical economic thinking. Kishore Mahbubani himself has propagated this neoliberal interpretation of Singapore's rise. 

In Can Asians Think? he argued that corruption "is the single most important cause for failures in development", that no products should be subsidised, that state control should be abandoned in favour of free markets, that developing countries should not rely on borrowing money, but on foreign direct investment (FDI), and that they should "scrub the ideas of Karl Marx" out of their minds and "replace them with the ideas of Adam Smith" (Mahbubani 2004, p. 247).

As we shall see, however, this version of the Singapore story is a misinterpretation of the actual strategy that led Singapore to its success. Interestingly enough, many Asian leaders have adopted the language of Western neoliberal thinking while they have in practice pursued policies that contradict many of the principles of neoliberalism. Mahbubani himself acknowledges that Singapore's socio-economic policies "fit neither the capitalist nor the socialist paradigm" (ibid., p. 242). So, what has been Singapore's way to economic success?

Ever since the 1970s neoliberal discourse has been dominating economics and public opinion. As a result, the rise of the so-called newly industrialised economies (NIE; Hong Kong, Singapore, South Korea, Taiwan) and of China has often been explained through the language and categories of neoliberalism. However, this interpretation fails to appreciate the role of governments in the development of these economies. 

If we look at the NIEs, it will soon become clear that rapid industrialisation was by no means the sole product of hard work or of liberalisation. 

After WWII Taiwan, South Korea and Singapore were poorly developed or underdeveloped. In 1961, eight years after the end of the Korean War, South Korea’s yearly income was $ 82 per person, half that of Ghana ($ 179)! (see Chang 2008, p. 3). Between 2008 and 2012, Korean GDP per capita based on purchasing power parity (PPP) stood at $30,801 (source) and was ranked as a high income country by the World Bank.

The fast and solid industrialisation of the NIEs was achieved by conscious industrial policies of the governments. Their goal was to transform the economic structure away from primary economic activities like agriculture and basic manufacturing towards a diversified and competitive industrial system. To this effect huge resources had to be mobilised and government-led mechanisms were created (see Akkemik 2009, p. 4). 

In the West, and particularly in the English-speaking world, relatively little attention has been paid to the positive role of governments in the development of Asian economies. Neoclassical economists "place the market at the center and confine the role of government to maintaining macroeconomic stability, provision of infrastructure and public goods, improving the institutions in markets to enhance development, and redistributing generated wealth. In the neoclassical view, resource allocation is performed by the market itself. The comparative advantage of a country is determined by resource endowments of the country [...] and resources are shifted to the sectors that produce the goods for which the country holds comparative advantages" (ibid., pp. 4-5).

As Cambridge economist Chang Ha-Joon has pointed out, however, there is hardly any country in the world whose economic development can be attributed to the aforementioned free market mechanisms alone. Even in Hong Kong, which is admittedly one of the most liberal places on earth, economic development is not the sole consequence of laissez-faire. As Mr Chang explains:

"'[M]iracle’ economies of East Asia have [...] succeeded through a strategic approach to integration with the global economy. Taiwan used a strategy that is very similar to that of Korea, although it used state-owned enterprises more extensively while being somewhat friendlier to foreign investors than Korea was. Singapore has had free trade and relied heavily on foreign investment, but, even so, it does not conform in other respects to the neo-liberal ideal. Though it welcomed foreign investors, it used considerable subsidies in order to attract transnational corporations in industries it considered strategic, especially in the form of government investment in infrastructure and education targeted at particular industries. Moreover, it has one of the largest state-owned enterprise sectors in the world, including the Housing Development Board, which supplies 85% of all housing (almost all land is owned by the government)" (Chang 2008, p. 29).

Singapore and the Role of Government

Though the hard work of Singaporeans and the efficient government deserve to be praised, these two factors alone don't explain why Singapore developed. There are countries like China, or Taiwan under Guomindang one-party rule, which didn't have a clean and efficient government, and nevertheless rapidly industrialised. There are also countries like Germany or Sweden where working hours aren't long, but productivity is high. 

Among the NIEs Singapore is unique in the sense that the share of foreign direct investment (FDI) is predominant. In comparison, Taiwan relies on government-financed research and small and medium-size enterprises (SME), while South Korea's industrialisation was driven by large conglomerates protected by the government (Kwong / Chau et al. 2001, p. 13), such as Samsung or Hyundai.

In fact, Singapore's economic strategy was mainly focused on attracting FDI. This policy was largely successful. In 1996, 32% of the city's GDP accrued to FDI. However, this is by far not a proof that Singapore developed through simple free market. Quite the contrary.

A decisive player in attracting FDI was the government-founded Economic Development Board (EDB), an independent organisation set up in 1961. The EDB has 12 members appointed by the government, and it is led by a chairman, a managing director, and other directors. The EDB has offices in many big cities in the world. It is made up of four divisions: International Operation Division, Operations Division, Strategic Business Units, and Services. These divisions influence various sectors of the economy and set the general targets that the country should achieve.

As Professor Sunny Kai-Sun Kwong explained: 

"EDB is a highly entrepreneurial organization. Unlike a government department, EDB has its own salary scale and is flexible in its business dealings. It also has its own investment fund, which amounts to S$1 billion, and it holds equity stakes in a number of joint ventures with foreign companies. One notable example is a wafer fabrication facility known as Tech Semiconductor, which was set up in 1994. The US$300 million plant was jointly owned by Hewlett-Packard, Texas Instruments, Canon and EDB, who held a share of 26%.

The EDB actively looks for investors, provides them with useful information, help and assistance, builds up relationships with foreign companies and makes full reports to the government. The importance of the EDB cannot be underestimated. It is a target-oriented organisation that gives to the economy its general directions. For example, one of the goals of the EDB is to maintain the share of industry in GDP at around 20-25%, it promotes Singapore as international business hub, it supports promising local enterprises etc. Such targets clearly have nothing to do with an alleged "natural" and "spontaneous" development of market forces." 

Moreover, the Singaporean government actively promotes the economy through incentives: for example, companies introducing new technologies are granted tax-free status for 5 to 10 years; through the Innovation Development Scheme the government funds up to 50% of the cost of new product or service development carried out by companies etc. (see ibid., pp. 22-28). The government also finances research and development. For instance, in 1981 a science park was set up (as of 1990, 40% of Singapore's R&D took place in the science park).

What is more, the contribution of Singapore's state-owned enterprises (SOE) sector to national output is twice as large as that of Korea. As Chang Ha-joon points out, the SOE sector in Singapore and Korea is much larger than that of poorer countries like Argentina and the Philippines, although the latter's failures have often been blamed on too much state intervention (Chang 2008, p. 109). 

One example of the importance of SEOs in Singapore's economy is Temasek, "the holding company whose sole shareholder is Singapore’s Ministry of Finance. Temasek Holdings owns controlling stakes (usually the majority share) in a host of other highly efficient and profitable enterprises, called GLCs (government-linked companies). The GLCs do not just operate in the usual public ‘utility’ industries, such as telecommunications, power and transport. They also operate in areas that are owned by the private sector in most other countries, such as semiconductors, shipbuilding, engineering, shipping and banking" (ibid. 2008, pp. 108-109).

It is therefore obvious that the myth of free market economics, and the culturalist idea that a nation succeeds because of its own intrinsic cultural advantages, do not suffice to explain Singapore's and other Asian countries' rise. It is necessary to look carefully at how the government combines state intervention and market forces in order to understand the dynamic of the 'Asian miracle'. This lesson is of paramount importance both for the developed and for the developing countries.