Singapore PATTERNS OF DEVELOPMENT
Singapore River in the mid-1960s
Courtesy Daniel Regan
Unavailable
Figure 6. Sources of Government Revenue, Fiscal Year (FY) 1988
Sources: Based on information from "Country Watch: Singapore,"
Asian Finance, Hong Kong, 15, No. 9, September 15, 1989,
83.
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
(see Founding and Early Years, 1819-26
, ch. 1).
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 (see Glossary)
military defense east of India,
thus
adding the naval support industry to the island's economy.
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
(see Aftermath of War, 1945-55
, ch. 1). 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.
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--see Glossary)
with Malaysia between 1963 and 1966 had substantially
reduced
Singapore's entrepôt trade
(see Road to Independence, 1955-65
, ch.
1).
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
(see
fig. 6). 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 (for value of the
Singapore dollar--see Glossary)
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.
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.
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.
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.
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.
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
(see
Forced Savings and Capital Formation;
Finance
, this ch.). These measures were highly
successful; costs dropped 30 percent and productivity
climbed. By
1988 Singapore's economy had rebounded.
Data as of December 1989
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