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01 Singapore's History of Incessant Economic Restructuring
1 January 2011
To fully grasp the dynamics driving inequality, it is essential to first understand Singapore’s history of economic development particularly since it became independent in 1965.
Over the past five decades, numerous accolades have been sung about Singapore’s economic success. Despite a bleak economic outlook at the time of its independence, the city-state underwent an astounding metamorphosis through the following phases of carefully planned transformations:
a regional trading port and low value-add labour-intensive manufacturing base in the 1960s to
an investment-driven capital intensive industrial economy in the 1970s;
an IT-driven industrial economy with business services as the second engine in the 1980s;
a high value-add, technology-intensive manufacturing economy with new high-growth hub services as well as regional presence in the 1990s;
a knowledge-driven dual-engine economy and an external wing comprising of indigenous world-class companies after the turn of the century; and
now not just a R&D intensive, innovation-driven entrepreneurial economy but also positioned to become an important hub within a networked grid of global economy as a smart city.
The success is not merely just in terms of economics. In almost all social, environmental and political aspects, Singapore has won adulations from countries not only from developing but also developed countries. The achievements, however, did not come easy for Singapore. Given the lack of natural resources and absence of a large hinterland, Singapore had to stay ahead of its competition by incessantly upgrading its economic structure and investing heavily to build up its soft- and hard- infrastructures.
1. From Labour-Intensive (1960s) to Capital-Intensive (1970s) Industrialization
Singapore underwent its ‘First Industrial Revolution’ during the 1960s when it embarked on its export-oriented industrialization efforts to drive economic growth as proposed in the 1961 Winsemius Report. Efforts to upgrade its economic structure started as early as the 1970s. As the economy expanded and approached full employment, dependence on foreign workers grew. By 1970, there were a total of 72,590 foreign workers making up about 11% of the work force. Increasingly, there were worries about the sustainability of the economic growth driven by labour-intensive industries, prompting a shift to capital- and technology-intensive industries.
As a ‘disincentive’ for companies to remain labour-intensive, wages were set to increase in stages under the guidance of the National Wages Council (NWC). This initial attempt to upgrade the economy, however, was disrupted by the first oil crisis in 1973 and the ensuing world recession in 1974-76. As FDI inflow declined sharply almost by half in 1973, economic growth fell to 6.1% in 1974 and 4.1% in 1975. The fear of recession and unemployment caused the government to cling on to labour-intensive industries. Consequently, as economic upgrading slowed down, wage increases were delayed and high growth resumed by the late 1970s.
2. From Capital-Intensive (1970s) to Technology-Intensive & Services (1980s)
By the 1980s, many national governments began to emulate the success of the four Asian Tigers by abandoning their import-substitution development model and 'liberalizing' their economies to receive FDI to drive export-led growth. As competition mounted, it became apparent that the shift towards capital- and technology-intensive industries could wait no more.
In 1980, the Singapore government launched the Economic Development Plan for the Eighties which heralded the city-state’s 'Second Industrial Revolution'. The plan outlined Singapore’s efforts to diversify its economic activities into new information-based services, such as computer, medical, consultancy and warehousing services. To spread the use of IT and automation in raising productivity, the government launched the National Computerization Plan (1980 – 85) in 1980 followed by the National IT Plan (1986 – 1991) in 1986. Education and training programmes for the labour force were also introduced to upgrade the skills of the workers. In addition, to encourage companies to climb up the value chain, the NWC initiated wage increases of about 20% from 1979 for three years in a row.
In 1980-84, high economic growth continued with real GDP growth averaging 8.5% p.a. By 1985, however, there was a slowdown in global demand and exports declined drastically. For the first time since its independence in 1965, the city state's GDP contracted by 1.4%. To make matter worse, Singapore was losing its competitiveness. The high-wage policy of 1979-84 squeezed profits at the same time as external demand was declining. The strategy to nudge enterprises up the value-ladder also did not produce the desired results. Instead of 'upgrading' their operations, many industrial MNCs chose to relocate to locations where factor costs were lower.
The recession in 1985 also exposed the peril of overdependence in a few industries such as electronics and chemicals. In 1986, a report entitled The Singapore Economy: New Directions was released by the Economic Committee set up a year earlier to look into the recession. It reaffirmed Singapore’s limitation in human and natural resources and recommended that Singapore be made into a ‘total business centre’ with not only manufacturing but also services (international services, transport and communications, logistics, and finance and banking) sectors as the backbones of the economy.
To regain cost competitiveness, the government froze wages for two years and reduced employer CPF contribution from 25% to 10%. By the second half of the 1980s, the Singapore economy again accelerated. Between 1986 and 1990, growth rates averaged 8.5 percent per annum. More importantly, there was a strong expansion in new, higher value-added computers, electronics, machinery, printing, and pharmaceuticals industries. In particular, the city-state succeeded in attracting many major electronics multinationals and emerged to be an important production platform for computers and hard disk drives.
3. Pushing for Development of Science and Technology from the Early 1990s
Building on the success of upgrading its economic structure, the government introduced, in 1991, another new national economic strategy known as the ‘Strategic Economic Plan’. The objective was to propel Singapore into the league of developed countries within the next 30 to 40 years. By then, Singapore would be a global city with economic dynamism, a high quality of life and a strong national identity.
To overcome the key constraints of shortages in people and land, the plan suggested firstly to set up a Growth Triangle linking Singapore with Indonesia’s Riau Islands and Malaysia’s Johor so that production works could be distributed according to the comparative advantages of the three locations. Moreover, to meet increasing competition from neighbouring countries, Singapore needed to re-position itself and build up new capabilities to reduce the technological gap with advanced economies in niche areas. In particular, investment in technological infrastructure would be increased to amass a pool of trained manpower in key technologies as well as to build a network of research institutes capable of doing R&D.
In 1991, the first five-year National Technology Plan was formulated to steer the development of science and technology in Singapore. Meanwhile, the push for widespread use of IT continued in the 1990s with the release of the IT2000 Report in 1992. The report painted a grand vision of an ‘Intelligent Island’ based on an advanced nation-wide National Information Infrastructure (NII) that interconnect computers in virtually every home, office, school and factory.
Economic growth peaked in 1993 at 11.9% before hovering around 8% from 1995 to 1997. Meanwhile, to enhance the capabilities of businesses and workers in leveraging on science and technology, the second five-year National Science and Technology Plan was launched in 1996. In the same year, the Singapore Productivity and Standards Board (PSB) was established to work on raising the total factor productivity (TFP) of the workforce.
[About the PSB] The Productivity and Standards Board (PSB) was formed from the merger of the National Productivity Board (NPB) and the Singapore Institute of Standards and Industrial Research (SISIR) in April 1996. It is a statutory board under the Ministry of Trade and Industry with a mission is to raise productivity so as to enhance Singapore's competitiveness and economic growth for a better quality of life for her people.
4. Developing of New High-Growth Hub Services & Indigenous World-Class Companies from the late 1990s
Just as the coast seemed clear and the economy was cruising along, the Asian Financial crisis erupted in 1997. The weakening of the regional currencies made Singapore’s exports relatively less competitive. In 1998, Singapore underwent its second recession since independence when its GDP contracted by 1.4%. However, a $2 billion cost-cutting package proposed by a Committee on Singapore’s Competitiveness (CSC) as well as the depreciation of Singdollar help the economy to regain competitiveness.
Overall, Singapore weathered the crisis relatively well and by 1999, the economy rebounded strongly with a growth of 7.2%. To address the separate issue of the loss of long-term competitiveness, the CSC also recommended another cost-cutting package amounting to $10 billion or about 7% of Singapore’s GDP. The move would in effect reduce the total wage costs by 15% from 1997 level to bring the wage competitiveness back to the level of 1994.
[About the CSC] The committee was put together by the government to review Singapore’s long term competitiveness just about the same time the crisis started. But as the crisis wore on and spread, the committee began to also deliberate on strategies that could help Singapore deal with the crisis. In the end, the committee first proposed strategies to deal with the crisis. Next, a separate package of measures was proposed to deal with the issue of the lost of long term competitiveness caused by the high wage policies in the previous years.
As for the economic structure, besides reaffirming the strategy of building both the manufacturing and services sectors as the twin engines of the economy, CSC also suggested capitalizing on the existing hub services (e.g. financial services, international trading, transport and logistics, exhibition management and tourism) where Singapore had already achieved international repute to develop new high-growth hub services (e.g. healthcare, education, media, communications and information technology (IT) services, e-commerce and direct marketing).
In addition, the negative impacts of the regional crisis demonstrated the need for Singapore to incorporate a global dimension in its effort to nurture an external wing. To achieve this, Singapore needed to have its own world-class companies (WCCs) with core competencies that could enable them to compete effectively in the global market. In that regard, many government-linked companies (GLCs) were dynamic enough by then to be even leaders within their industries not only in Singapore but also regionally and were good candidates to be developed into WCCs.
In addition, the CSC report also recommended that Singapore should also continue to develop a world class workforce by adopting a dual approach - maximising the potential of the domestic workforce while enhancing the attractiveness of Singapore to foreign talent.
In 1999, PSB introduced its first ten-year plan, Productivity Action 21, with the aim to sustain TFP growth and make Singapore one of the world's 10 most productive countries in both manufacturing and services sectors.
As for the small and medium enterprises (SMEs), the CSC stressed that they needed to be strengthened so that they could become more productive. In 1999, for example, even though SMEs employed 51.7% of the labour force, their total value-add to the overall economy was only 30.4%. Another ten-year plan, SME 21, was formulated in January 2000 with the aim to create vibrant and resilient small and medium-sized enterprises in the new economy.
5. Singapore’s Third Recession in 2001 & the Recovery
Moving into the new century, just as the regional economy was recovering from the Asian Financial crisis, a series of shocks again rattled the Singapore economy. In 2000, the NASDAQ dot-com bubble reached its peak and by 2001 was deflating at full speed. On September 11 the same year, airplanes hijacked by terrorists collapsed the Twin Towers of the World Trade Centre in New York City. In 2003, the combination of bird flu and the Severe Acute Respiratory Syndrome (SARS) near-pandemic outbreak severely affected regional economies. In March the same year, the U.S. launched its war against terrorism and also invaded Iraq.
Against the strong headwind, Singapore experienced its third recession since independence with its GDP declining by 2.4% in 2001. Given its strong fundamentals, however, the economy recovered the following year, as external environment improved, to register 4.2% growth but slowed again to 3.1% in 2003.
Global demand, though, was beginning to pick up strongly in 2003. As MNCs increased their investments in Singapore, the city state again was faced with the problem of labour shortages. Policymakers were faced with the dilemma of letting the economy grow beyond its potential by bringing in more foreign workers and dealing with the problem of over-reliance on imported labour later or turning away those investments and grow at a slower and more comfortable pace. In the end, policymakers chose what has been termed as the “growth at all costs” strategy and allowed the influx of more foreign labour.
In effect, policymakers sought to ride on the recovery of the global demand by pushing out the economy's aggregate supply curve through importing more foreign labour and talent. The strategy had the benefit of allowing the economy to diversify quickly into new industries by importing skills sets which Singapore lacked and at the same time keeping costs competitiveness and suppressing inflationary pressure. Between 2004 and 2007, the economy grew an average of 8% in real term, in comparison to the average of 5.7% chalked up by its other NIE peers.
Next: 02 Rising Inequality due to Emergence of Two-Speed Dual-Track Economy
 See Rodan (1989).
 See Soon and Tan. (1993)
 See Hon, Sui-Sen. (1973).
 See Singapore Department of Statistics. (2008).
 See Goh, Chok Tong. (1980).
 See Tselichtchev, Ivan and Debroux, Philippe. (2009).
 See Economic Committee (1986).
 See Krause, L. B. (1987). For example, in 1989, labour costs on Batam Island, Indonesia were only 25 per cent of those in Singapore on average. See Kumar and Lee. (1991).
 See Economic Committee (1986)
 See Singapore Department of Statistics (2008)
 See Ministry of Trade and Industry. (1991).
 See Tselichtchev, Ivan and Debroux, Philippe. (2009).
 See Singapore Department of Statistics. www.singstat.gov.sg
 See PSB Annual Report 1999/2000, Chairman’s Statement.