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Singapore - ECONOMY
A FORMER COLONIAL TRADING PORT serving the regional economies of maritime Southeast Asia, Singapore in the 1990s 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).
Singapore lived by international trade, as it had since its founding in 1819, and operated as a free port with free markets. Its small population and dependence on international markets meant that regional and world markets were 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.
The economy in the 1980s rested on five major sectors: the regional entrepôt trade; export-oriented manufacturing; petroleum refining and shipping; production of goods and services for the domestic economy; and the provision of specialized services for the international market, such as banking and finance, telecommunications, and tourism. The spectacular growth of manufacturing in the 1970s and 1980s had a major impact on the economy and the society, but tended to obscure what carried over from the economic structure of the past. Singapore's economy always depended on international trade and on the sale of services. An entrepôt was essentially a provider of services such as wholesaling, warehousing, sorting and processing, credit, currency exchange, risk management, ship repair and provisioning, business information, and the adjudication of commercial disputes. In this perspective, which focused on exchange and processing, the 1980s assembly of electronic components and manufacture of precision optical instruments were evolutionary steps from the nineteenthcentury sorting and grading of pepper and rubber. Both processes used the skills of Singaporeans to add value to commodities that were produced elsewhere and destined for consumption outside the city-state.
The dependence on external markets and suppliers pushed Singapore toward economic openness, free trade, and free markets. In the 1980s, Singapore was a free port with only a few revenue tariffs and a small set of protective tariffs scheduled for abolition in the 1990s. It had no foreign exchange controls or domestic price controls. There were no controls on private enterprise or investment, nor any limitations on profit remittance or repatriation of capital. Foreign corporations were welcome, foreign investment was solicited, and fully 70 percent of the investment in manufacturing was foreign. The government provided foreign and domestic enterprises with a high-quality infrastructure, efficient and graft-free administration, and a sympathetic concern for the problems of businesses.
The vulnerability inherent in heavy dependence on outside markets impelled Singapore's leaders to buffer their country's response to perturbations in world markets and to take advantage of their country's ability to respond to changing economic conditions. Unable to control so much that affected their nation's prosperity, they concentrated on those domestic institutions that could be controlled. The consequence was an economy characterized by a seemingly paradoxical adherence to free trade and free markets in combination with a dominant government role in macroeconomic management and government control of major factors of production such as land, labor, and capital. The extraordinarily high domestic savings rate provided reserves to weather such economic storms as trade recessions and generated a pool of domestically controlled capital that could be invested to serve the long-term interests of Singapore rather than of foreign corporations. The high savings rate, however, was the result of carefully formulated government programs, which included a compulsory contribution of up to 25 percent of all salaries to a government-controlled pension fund. The government held about 75 percent of the country's land, was the largest single employer, controlled the level of wages, and housed about 88 percent of the population in largely self-owned apartments. It also operated a set of wholly-owned government enterprises and held stock in additional domestic and foreign firms. Government leaders, deeply aware of Singapore's need to sell its services in a competitive international market, continually stressed the necessity for the citizens to master high levels of skills and to subordinate their personal wishes to the good of the community. The combination of devotion to free-market principles and the need for internal control and discipline in order to adapt to the demands of markets reminded observers of many family firms, and residents of the country commonly referred to it as Singapore Inc.
<>PATTERNS OF DEVELOPMENT
<>ECONOMIC ROLES OF THE GOVERNMENT
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.
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.
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.
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.
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. These measures were highly successful; costs dropped 30 percent and productivity climbed. By 1988 Singapore's economy had rebounded.
Although Singapore billed itself as a free-enterprise economy, the economic role of government was pervasive. As governing body for both the nation and the city, the government was responsible for planning and budgeting for everything from international finance to trash collection. The government owned, controlled, regulated, or allocated land, labor, and capital resources. It set or influenced many of the prices on which private investors based business calculations and investment decisions.
State intervention in the economy had a positive impact not only on private business profitability but also on the general welfare of the population. Beyond the jobs created in the private and public sectors, the government provided subsidized housing, education, and health and recreational services, as well as public transportation. The government also managed the bulk of savings for retirement through the Central Provident Fund and Post Office Savings Bank. It also decided annual wage increments and set minimum fringe benefits in the public and private sectors. State responsibility for workers' welfare won the government the support of the population, thus guaranteeing the political stability that encouraged private investment. In general, state intervention in the economy managed to be probusiness without being antilabor, at least regarding material welfare.
Budgeting and taxation were frequently used for attaining economic goals. In the postrecession period, budgetary changes primarily benefited business. For example, the fiscal year ( FY) 1988 budget included an overseas investment incentive program, administered by the Economic Development Board, allowing tax write-offs for losses from approved overseas investments. Other concessions such as suspension of taxes on utilities and a 50 percent rebate on property taxes were in effect between 1985 and 1988 to counteract the economic slump.
Budgeting and taxation also were often used to achieve or reinforce social goals such as population control. Until 1984 the government encouraged limiting of families to two children by levying higher medical and education costs for additional children. In 1986, however, tax rebates were introduced to encourage collegeeducated women to have third and fourth children.
<>Land Management and Development
<>Forced Savings and Capital Formation
Under the appropriate government ministries, statutory boards-- a concept carried over from colonial days--were established to manage specific parts of the economy and foster overall and sectoral development. Each worked somewhat autonomously, using a hands-on approach to the problems in the areas in which it operated.
The Economic Development Board was established in 1961 to spearhead Singapore's industrialization. Initially its function was to promote industrial investment, develop and manage industrial estates, and provide medium- and long-term industrial financing. The latter function was taken over in 1968 by the newly created Development Bank of Singapore. When the limits of import substitution became evident, given the small domestic market, policy was redirected toward promoting an export-oriented, labor-intensive industrialization program. After 1986 the board's portfolio was enlarged to include the promotion of services in partnership with other government agencies responsible for the various service sectors and the development of local small- and medium-sized enterprises. In the first two decades following independence, the board evolved industrial strategies in response to changes in the international and domestic business environments, as well as negotiating the public-private consensus necessary for implementing them. The board was not an economic tsardom but, rather, a consensus maker among agencies and corporations that commanded larger financing. In 1989 the Economic Development Board focused its attention on attracting investments in manufacturing and other high value-added services, which met the technological skills and employment needs of Singapore's future economic development.
The Small Enterprise Bureau was established in 1986, following the economic slump, when the government realized the importance of developing and upgrading local small- and medium-sized enterprises. The bureau worked closely with the Economic Development Board and managed a number of assistance programs, some of which predated the bureau. Emphasis was placed on helping local firms to improve and modernize their plants and technology, product design, management skills, and marketing capabilities. Launched in 1976, the Small Industry Finance Scheme provided low-cost financing to local smalland medium-sized enterprises in manufacturing and related support services. In 1985 this program was extended to the nonmanufacturing sector, and in 1987 some 1,125 loans amounting to S$297 million were approved by the Economic Development Board under the plan. The Small Industry Technical Assistance Scheme, introduced in 1982, provided grants to defray part of the cost of engaging short-term consultants and increasing or establishing in-service training for employees.
The National Productivity Board (NPB) was established in 1972 to improve productivity in all sectors of the economy. Increasing individual and company productivity at all levels was a government priority, given Singapore's full employment picture and relatively high wages. Greater worker productivity than the country's neighbors and competitors was viewed by the government as a necessity as well as one of Singapore's major advantages.
The National Productivity Board followed a "total productivity" approach, which emphasized productivity measurement, product quality, a flexible wage system, worker training, and assistance to small- and medium-sized enterprises. In order to promote productivity in both the public and private sectors, the board used mass media publicity, seminars, conventions, and publications to remind Singaporeans that productivity must be a permanent pillar of the economy. The board sponsored a productivity campaign each year with such slogans as the one for 1988, "Train Up--Be the Best You Can Be."
The National Productivity Board offered management guidance services to small- and medium-sized enterprises to assist them in improving their productivity and efficiency, as well as referring companies to private management consultancy services available in Singapore. Beginning in the early 1980s, the board also spearheaded campaigns to introduce productivity management techniques used extensively by Japanese business and industry, such as quality control circles.
Changes in world trade patterns and in what the government viewed as an increasingly protectionist international trade environment prompted the establishment of the Trade Development Board in 1983 as a national trade promotion agency. Based on the recommendations of specialists, the board formulated policies reflecting the needs of traders in general, as well as the specific needs of particular trade sectors. Initial areas of focus were trade facilitation of electronics, printing and publishing, textiles, and timber products. The Trade Development Board reviewed existing marketing policies, strategies, and techniques and explored new opportunities in both traditional and nontraditional markets. The board assisted both local and foreign companies interested in using Singapore as a base for such trading activities as warehousing and distribution. The Trade Development Board also helped Singapore companies market their products by assisting them in improving their product designs.
One of the government's most important roles was the oversight of land use and development. This was a particularly critical issue given the country's minute size and dense population; a total land area of 636 square kilometers and a population density of 4,166 per square kilometer made Singapore one of the most densely populated countries in the world. As pressure for economic growth increased, optimization of land use became more critical.
Central to the issue of land management was another statutory board, the Housing and Development Board, established in 1960. Between 1960 and 1985, the government-owned board completed more than 500,000 high-rise, high-density public housing apartments-- known as housing estates--along with their related facilities were completed. By comparison, the British colonial government's Singapore Improvement Trust had completed only 23,000 apartments in its thirty-two years of existence (1927-59). From 1974 to 1982, the Housing and Development Board built and marketed middle-income apartments, an activity which became a function of the board after 1982.
By 1988 the Housing Development Board was providing housing and related facilities for 88 percent of Singaporeans, or some 2.3 million people--a feat that has been called urban Singapore's equivalent of "land reform." Government encouragement of apartment ownership was both an economic and a "nation building" goal because individual ownership would ultimately pay for the program while giving citizens a "stake in Singapore." The board also provided estate management services and played an active role in promoting the advancement of construction technology. As one of the country's major domestic industries, housing construction served as an important economic pump primer.
Home owners were encouraged to use their Central Provident Fund savings to pay for the apartments. The factors determining the selling prices of apartments included location, construction cost, ability of the applicants to pay, and the practical limits to government subsidies. Resettlement policies aimed at equitable payments, minimal readjustment, and real improvement in housing conditions. In social terms, attention was paid to providing an environment conducive to community living, integrating the population, preserving the traditional Asian family structure, and encouraging upward social mobility by providing opportunities for home upgrading.
Starting with a capital expenditure of S$10 million in 1960, the Housing and Development Board's annual capital expenditures rose to about S$4 billion by 1985. The board's capital budget, with funds obtained in the form of low-interest government loans, represented 40 percent of the government's capital budget. Selling prices, rent rates, and maintenance charges were determined by the government, and the board received an annual subsidy of 1 to 2 percent of the government's main operating expenditure.
In 1974 the Housing and Development Board's Urban Renewal Department was made a statutory board and named the Urban Redevelopment Authority. Responsible for slum clearance and comprehensive development of the city's Central Area, the authority was to plan, guide, and implement urban renewal. The Urban Renewal Authority drew up long-term land-use plans, which it implemented through its own development projects as well as the Sale of Sites Programme. The latter, a key instrument in the government's comprehensive redevelopment plans, represented a partnership between the public and private sectors. The public sector provided initiative, expertise, and infrastructural services; the private sector contributed financial resources and entrepreneurship to facilitate the completion of projects. Between 1967 and 1983, some 166 parcels of land were turned into 143 projects for residential, office, shopping, hotel, entertainment, and industrial developments.
The primary responsibility for acquiring, developing, and managing industrial sites, however, belonged to the Jurong Town Corporation, established in 1968. The corporation provided manufacturers with their choice of industrial land sites on which to build their own factories or ready-built factories for the immediate start-up of manufacturing operations. In the 1950s, when the idea of establishing an industrial estate was first conceived, Jurong was an area of dense tropical forests and mangrove swamps on the southwestern quadrant of the island, and it was not until 1960 that the government decided to undertake the project. During the first few years, entrepreneurial response was disappointing, but after independence the pace of development accelerated. By 1989 Jurong had quadrupled its original size, and the corporation also managed twenty-three other industrial estates, including the Singapore Science Park, a research and development park adjacent to the National University of Singapore. Although the emphasis in the 1970s had been on the development of labor-intensive industries, in the 1980s priority was given to upgrading facilities to make them more attractive for the establishment of high value-added and high technology industries.
The industrial estates were designed to be self-contained urban centers and included such facilities as golf courses, banks, shopping centers, restaurants, child-care centers, and parks. As of 1988, they contained some 3,600 factories employing a total of 216,000 workers. The Jurong Town Corporation also provided infrastructure and support facilities, including the Jurong Industrial Port, which was the country's main bulk cargo gateway, and the Jurong Marine Base, which serviced offshore petroleum operations.
The Jurong Town Corporation shared responsibility for coastal planning and development control with the Housing and Development Board, the Urban Renewal Authority, and the Port of Singapore Authority. The coastal zone, dominated by its entrepôt facilities, was the traditional foundation on which Singapore's economy was built. Between 1965 and 1987, the coastal zone was enlarged by about fifty square kilometers through reclamation of tidal flats, shallow lagoons, and wetlands. The two largest landfill operations were the East and the West Coast Reclamation schemes adjoining the Central Business District. The former was the Housing and Development Board's largest project, in which a "sea city" almost the size of the present-day downtown area had been developed by both the private and public sector. Experts estimated that in the 1980s Singapore, including the offshore islands, had the potential of increasing its existing land resources by about 10 percent.
Singapore's much-vaunted savings rate--and much of the funding for development, particularly public housing--resulted in large measure from mandatory contributions to the Central Provident Fund, as well as voluntary deposits in the Post Office Savings Bank. The Central Provident Fund was set up in 1955 as a compulsory national social security savings plan to ensure the financial security of all workers either retired or no longer able to work. Both worker and employer contributed to the employee's account with the fund. The rate of contribution, which had gradually risen to 50 percent of the employee's gross wage (coming equally from employer and employee), was lowered to 35 percent in 1986. In 1987 new long-term contribution rates were set calling for 40 percent for employees below fifty-five years of age, 25 percent for those fifty-five to fifty-nine, 15 percent for those sixty to sixty-four, and 10 percent for those over sixty-five, with equal contributions coming from employee and employer. A series of transition rates leading to the new long-term rates were first applied in 1988. The contributions were tax-exempt and subject to maximum limits based on a salary ceiling. Beginning in 1986, the government paid a market-based interest rate on Central Provident Fund savings (3.19 percent per year in June 1988).
Every employed Singaporean or permanent resident was automatically a member of Central Provident Fund, although some self-employed people were not. Membership grew from 180,000 in 1955 to 2.08 million in 1989. At the end of 1988, the 2.06 million members of the Central Provident Fund had S$32.5 billion to their credit. That same year, a total of S$2,776 million was withdrawn to purchase residential properties; S$9.8 million was paid under the Home Protection Insurance Scheme; S$1,059 million was paid under the Approved Investments Scheme; and S$13.7 million was withdrawn for the purchase of nonresidential properties.
Each member actually held three accounts with the Central Provident Fund: Ordinary, Special, and, since the mid-1980s, Medisave Accounts. The first two were primarily for old age and contingencies such as permanent disability. The Ordinary Account, in addition, could be used at any time to buy residential properties, under various Housing and Development Board programs, and for home protection and dependents' protection insurance. Two further programs were established in 1987: a Minimum Sum Scheme, which established a base amount to be retained in the account against retirement, and a Topping-up Extension under which, as well as adding to their own, members could demonstrate "filial piety" by adding to their parents' accounts. Since the late 1980s, members could use their accounts to buy approved shares, loan stocks, unit trusts, and gold for investment. Part of the rationale for the latter was to allow Singaporeans to diversify their savings and to gain experience in financial decision making.
Although comparable to social security programs in some Western countries, the Central Provident Fund's concept and administration differed. Rather than having the younger generation pay in while the older generation withdrew, whatever was put into the Central Provident Fund by or for a member was guaranteed returnable to that person with interest.
Thus, at the individual level, Central Provident Fund savings promoted personal and familial self-reliance and financial protection, an economic attitude constantly encouraged by government leaders. Collectively, the Central Provident Fund savings assured the government of an enormous, relatively cheap "piggy bank" for funding public-sector development; the savings also served as a mechanism for curtailing private consumption, thereby limiting inflation. The result, according to some critics, was that the city-state had become overendowed with buildings, with too few productive businesses to put in them. They also noted that the bloated size of the Central Provident Fund (S$32.5 billion in 1988, equivalent to 82 percent of the GDP) was the most important factor behind the unwieldiness of public savings. Some analysts advised that the fund was beginning to outlive its usefulness and should be dismantled and replaced by private pension funds and health insurance plans. As a result, they stated, savings would be channelled to private businessmen rather than to bureaucrats.
Over time, the statutory boards not only became major actors in the economy but also formed subsidiary companies to add flexibility to their own operations. For example, in 1986 the Singapore Broadcasting Corporation formed a subsidiary to produce commercials on a fee-for-service basis. The government entered other areas of the economy that it considered appropriate, exerting leadership, assuming risk, and not hesitating to withdraw its support or close down unprofitable companies.
Numerous state and quasi-state companies were created either directly by ministries or, more often, organized under three wholly owned government holding companies (Temasek Holdings (Private) Limited, MND Holdings, and Sheng-Li Holding Company), which provided a wide range of goods and services. Joint ventures between the government and both domestic and foreign partners produced several industrial products, including steel and refined sugar. In addition, the National Trades Union Congress (NTUC), which was closely tied to the government, ran many cooperative businesses, including supermarkets, taxis, and a travel agency.
Although these companies collectively contributed significantly to the growth of the economy, neither their total amount of profits nor their rate of return on investment could be documented. In 1983 some 450 such companies, excluding subsidiaries of the statutory boards, employed 58,000 workers, or 5 percent of the labor force. In 1986 there were approximately 500 such companies still active. These different institutional forms permitted versatility.
Singaporeans themselves were universally viewed as the nation's best natural resource. In 1989, however, the work force was a shrinking resource. The high rate of economic growth combined with an increasing number of Singaporeans over the retirement age of fifty-five (nearly 12 percent) and a lower-than-replacement birth rate had resulted in a significant labor shortage. By the end of the century, the labor market was projected to be even tighter. According to the Ministry of Health, the fifteen to twenty-nine age-group would decline 25 percent, from 816,000 in 1985 to 619,000 in the year 2000.
In 1987 and 1988, slightly more than six Singaporeans out of ten were working or looking for work. Men's rate of participation, 79 percent, remained steady. Women, however, responding to job opportunities in the manufacturing and commercial sectors, were increasingly entering the labor market (48 percent in 1988, up from 47 percent in 1987, 40 percent in 1978, and 24.6 percent in 1970). Job-switching was rampant, particularly in manufacturing, where a 1988 survey showed that three out of four new workers quit within the month they were hired. Higher wage and input costs, as well as job-switching, resulted in a decline in the growth of manufacturing productivity (2.4 percent in 1988 compared with 3.7 percent in 1987 and 13.6 in 1986). The labor market, then, was at the center of challenges facing the Singaporean economy. The nature of the concern about the labor market had been almost totally reversed since independence. The early 1960s were a time of labor unrest, and unemployment was still about 10 percent by 1965. By the late 1960s, however, there was substantial industrial peace, which had continued through the 1970s and 1980s. With unemployment at a very manageable 3.3 percent in 1988, the government's attention was focused on other aspects of the labor market.
Industrial relations in Singapore reflected the symbiotic relationship between the labor movement and the dominant political party, the People's Action Party (PAP), a relationship rooted in a political history of confrontation that evolved into consensus building. Trade unions were a principal instrument in the anticolonial struggle used by both the democratic socialist PAP and the communists with whom they cooperated uneasily. In 1961 the Singapore Trade Union Congress split into the left-wing Singapore Association of Trade Unions (SATU) and the noncommunist National Trades Union Congress (NTUC). The NTUC quickly became the leading trade union organization, largely because of its effectiveness and government support. Moreover, in 1963, when SATU led a general strike against the government, the pro-communist trade organization was banned and many of its leaders were arrested.
Strong personal ties between leaders of the PAP and the NTUC formed the background of the symbiotic relationship, which was institutionalized by formal links. In 1980 NTUC Secretary General Ong Teng Cheong was made a minister-without-portfolio, and a NTUCPAP Liaison Committee comprising top leaders of both organizations was established. As the "second generation" political leaders assumed more government leadership following the 1984 election, Ong was named second deputy prime minister. Following the September 1988 general elections, the NTUC reaffirmed its close relationship with the PAP by expelling officers of NTUC-affiliated unions who had run for Parliament on opposition tickets. The NTUC and the PAP shared the same ideology, according to NTUC officials, so that active support of the opposition was inconsistent with membership in NTUC-related institutions. Workers who did not support the PAP were advised to form their own unions.
The legal-institutional framework also exerted control over labor conditions. In mid-1968, in an attempt to woo private foreign investment, Prime Minister Lee Kuan Yew successfully pushed through Parliament a new employment bill and amendments to the 1960 Industrial Relations Act. In order to make factors such as working hours, conditions of service, and fringe benefits predictable, and thus make businesses sufficiently attractive for investors, trade unions were barred from negotiating such matters as promotion, transfer, employment, dismissal, retrenchment, and reinstatement, issues that accounted for most earlier labor disputes. To spread work and help alleviate the effects of unemployment, overtime was limited and the compulsory retirement age was set at fifty-five. Lee's actions, which the militant unions opposed but could do little about, were part of the government's efforts to create in Singapore the conditions and laissez-faire atmosphere that had enabled Hong Kong to prosper. Such measures, in the government's view, were necessary to draw business to the port. Lee stressed survival, saying: "No one owes Singapore a living."
Rapid economic growth in the late 1960s and early 1970s reduced unemployment and resulted in the amendment of these laws. A National Wages Council was formed in 1972 and many of its recommendations adopted. By 1984 a twelve-hour shift was permitted. In order to enlarge the limited labor pool, in 1988 changes were introduced in Central Provident Fund policies reducing payment rates for those over fifty-five, thereby encouraging employers to raise the retirement age to sixty. The discipline imposed on, and expected of, the labor force was accompanied by provisions for workers' welfare. The Industrial Arbitration Court existed to settle disputes through conciliation and arbitration. The court, established in 1960, played a major role in settling labor-management disputes through binding decisions based on formal hearings and through mediating voluntary agreements. Adjudication of disputes between employers and nonunion workers came under the separate jurisdiction of the Labour Court. To help job seekers, the government maintained a free employment service serving both job seekers and employers. A comprehensive code governed the safety and health of workers and provided a system of workers' compensation. Under the Ministry of Labour, the Factory Inspectorate enforced these provisions in factories, where more than 35 percent of Singapore's workers were employed in 1988.
The trade unions' role and structure also had been modified. In the 1970s, the NTUC began establishing cooperatives in order to promote the welfare of its members. In the 1980s, omnibus unions were split along industry lines and further split into house unions to facilitate better labor-management relations and promote company loyalty. In the 1982 Amendment to the Trade Union Act, the role of trade unions was defined as promoting good industrial relations between workers and employers; improving working conditions; and improving productivity for the mutual benefit of workers, employers, and the country.
Union membership declined steadily beginning in the late 1970s. In 1988 there were some 83 registered unions, with about 1,000 branch locals, representing one-quarter of the organizable work force. This number was down from ninety unions in 1977. Increasing emphasis on developing white-collar, capital-intensive, and service-oriented industries was partly responsible for the union membership decline. The unions were countering the decline by offering attractive packages to bring in new members.
Following the rapid economic growth of the late 1960s and early 1970s, signs of a tight labor market emerged along with a concern that wages might escalate. In response, the government in 1972 established the National Wages Council, a tripartite forum with representation from the employers' federations, trade unions, and the government. As a government advisory body, the council recommended annual wage increases for the entire economy; ensured orderly wage development so as to promote economic and social progress; and assisted in the development of incentive schemes to improve national productivity.
The wage guidelines were not mandatory but were followed by the public sector (by far the largest employer) and widely implemented in the private sector. The influence of these recommendations generally was not applicable to private-sector professional and managerial workers, whose wages were determined more by international forces, but was more important for non-professional white-collar workers. For blue-collar workers, who constituted about 40 percent of the labor force in both the public and private sector, union influence was more crucial than the National Wages Council's recommendations, but market forces were even more important.
Between 1973 and 1979, actual wage increases followed the council recommended wage increases closely. In 1979 the "wage correction policy," in which there were three years of high-wage recommendations, was designed to force an increase of the productivity of higher value-added operations, to reduce the reliance on cheap unskilled foreign labor, and to raise labor productivity. From 1980 to 1984, however, actual wage increases exceeded the recommendations by an average of 2.4 percentage points per year, as the increasingly heavy demands for labor apparently outstripped its supply. Additionally, collective agreements for unionized workers lasted for two or three years with built-in wage increases. Although starting pay was relatively low, large gaps in wages were institutionalized through longevity of employment and annual raises.
The effect of wage increases, compounded by a further raise in the mandatory Central Provident Fund component of wages, was to price Singapore out of the market. High wages were a major contributor to Singapore's 1985 recession. Consequently, in 1986 and 1987 the government instituted a wage restraint policy: wages were frozen and the employer's contribution to the fund substantially reduced. The policy's relative success could be attributed to close government-labor ties and to the tripartite forum of the National Wages Council.
Proposals for wage reform--a "flexi-wage policy"--were announced in mid-November 1986 and became effective with the enactment of the 1988 Employment (Amendment) Act. Under this plan, the basic wage remained relatively stable with adjustments for good or bad years made by increasing or reducing the annual bonus. Negotiating the size of the bonus--frozen to the equivalent of one month's salary since 1972--was left to employers and unions, who would be able to bargain for its retention, abolition, or modification. Profit-sharing, productivity incentive, and employee share plans were encouraged to ensure that high wage payments awarded in fat years were not perpetuated in lean years and that individual as well as company productivity, growth, profitability, competitiveness, and prospects for the industry were taken into account. The government was anxious that wages not increase precipitously. This concern was shared by management, which worried about shrinking profit margins resulting from higher operating costs. Workers, on the other hand, wanted to share in the benefits of the economic boom after giving up wage increases to help cope with the 1985 recession.
Two groups comprised foreign nonresident labor in Singapore. The majority were unskilled work-permit holders who could only enter and work in the country if their prospective employers applied for work permits for them. Skilled workers and professionals on employment passes comprised the other group.
Work permits were for a short duration with no guarantee of automatic renewal. Malaysia, particularly the southernmost state of Johor, was the traditional source of such workers. Singapore's tight immigration policy was relaxed as early as 1968 to allow in these workers. At the peak of the economic boom in 1973, noncitizen work-permit holders reportedly accounted for about one-eighth of the total work force. Large numbers of these "guest workers" were repatriated during the 1974-75 world recession because of retrenchments, particularly in the labor-intensive manufacturing industries.
With the tightening of the labor market in 1978-79, it became more difficult to fill less desirable jobs with domestic labor or labor from Malaysia, which also had a tight job market. Foreign workers were then recruited from Indonesia, Thailand, Sri Lanka, India, Bangladesh, and the Philippines. By 1984 workers from South Korea, Hong Kong, Macao, and Taiwan were being allowed in, on the basis that their Confucian cultural background might enable them to adapt more readily than immigrants from other cultures.
The increase in foreign workers was remarkable; by 1980 they comprised 7 percent of the total compared with 3 percent a decade earlier. No figures on foreign labor were published after 1980. According to the 1980 census, 46 percent of the foreign workers were in manufacturing, 20 percent in construction, and 9 percent in personal and household services. The recession led to a repatriation of some 60,000 foreign workers in 1985, two-thirds of the total employment decline. The foreign worker levy was raised to S$250 per month in July 1989, and the maximum foreign worker dependency at the firm level was reduced from 50 percent to 40 percent. Both measures were designed to encourage firms to speed up automation of labor-intensive operations in order to reduce reliance on foreign workers.
The main goals of manpower training were to increase the average skill level of the labor force and, at the same time, provide sufficient numbers of workers with the specialized skills necessary to meet future industrial needs. Beginning in the late 1970s, the government placed increased stress on education in order to achieve the objective of industrial restructuring. As of 1987, however, Singapore's work force was less educated than that of some of the countries with which it competed. Five percent of the work force had university educations compared with 19 percent for the United States and Japan and 6 percent for Taiwan. Some 11 percent had received post-secondary schooling other than in universities, compared with 46 percent for Japan, 23 percent for Taiwan, and 16 percent for the United States.
In the early 1980s, government studies showed that about half of the work force had primary-level education or less, and many older workers had low levels of English language skills. To remedy this situation, the Basic Education for Skills Training (BEST) program was introduced in 1984 to provide opportunities for workers who had not completed primary education to improve their English and math. By 1989 some 116,300 workers (half the target group) had had some BEST training. Time was also solving the problem as younger people received more education and the older, less-educated workers passed out of the work force; between 1979 and 1984, entrants to the work force with only primary-level education or less declined from 43 percent to 26 percent. The government needed, however, to ensure that this better-educated work force was trained in the necessary skills to complete the transformation of Singapore from a labor-intensive economy to a high-technology city-state--a "technopolis."
A further problem in achieving this transition resulted from "government brain drain." Each year 50 to 60 percent of new university graduates were absorbed by the government, including government-owned companies and the statutory boards. A system of awarding undergraduate scholarships, which often tied the awardees to eight years of government service, assured that the public sector absorbed many of the top-ranking students. Some critics thought that this concentration of the country's valuable human resources in the public sector might be to the long-run detriment of entrepreneurial and private-sector development.
The manufacturing sector was a mainstay of Singapore's economic growth despite the absence of natural resources or an agricultural base. By the mid-1970s, the country had undergone a quarter-century of rapid industrial advance based on low-cost labor, low- to middle-level technology, and a rapid increase in exports. At that time, Singapore's planners settled on a policy emphasizing high technology, particularly information technology. In 1988 Singapore's 3,694 manufacturing establishments, employing 352,600 workers, were responsible for 29 percent of the GDP. Industrial production, valued at S$14,509.7 million, was fractionally higher than earnings from financial and business services, double those from commerce, and nearly equal to the total of commerce and transport and communications. This represented a 20-percent increase over 1987. The manufacturing sector's continuing success was largely a function of Singapore's ability to attract foreign investment through a favorable business climate and then provide investors with an educated, trained, and disciplined labor force.
Singapore entered nationhood with a mixed legacy. The industrial sector was small, its productivity low. Manufacturing in 1960 was a mere 11.4 percent of the GDP; commerce, far and away the largest sector, accounted for 32 percent. The industrial policy in 1959 sought to promote industrialization as a way of diversifying from Singapore's traditional role as an entrepôt. Reliance was placed on private enterprises whose basic decisions were determined on the expectation of a common market with the neighboring Federation of Malaya. A system of import quotas was introduced for a limited number of goods, along with controls on how many enterprises could enter a particular field. Circumstances altered strategies. After separation from Malaysia in 1965, quotas were mainly replaced by a low level (for developing countries) of protective import tariffs. A traditional import substitution strategy was implemented.
In 1968, when the British announced their intention to withdraw from their Singapore bases, import substitution was succeeded by a strategy promoting export-oriented, labor-intensive industrialization. At that time, the government began its central role in formulating and implementing the industrialization program through the Economic Development Board.
The new approach became official policy in 1967 with the government's proclamation of the Export Expansion Incentives (Relief from Income Tax) Act and was further enhanced by the 1968 Employment Act. Direct foreign investment was welcomed both to help Singapore penetrate export markets and to bring in advanced technology. As early as 1970, when full employment was attained, there was some thought given to upgrading the industrial structure in order to provide more higher paying jobs. By 1979 efforts to upgrade the overall industrial structure and to accelerate the trend toward skill- and technology-intensive, higher value-added economic activity were intensified. The government implemented the large, three-year wage increases recommended by the National Wages Council, which began the easing out of labor-intensive, low valueadded activities in Singapore.
The machinery industry was increasingly in the forefront of technological innovation as a result of the Economic Development Board's promotion of computer-controlled production, industrial robots, and flexible manufacturing systems. The industry's output increased by 17 percent in 1987 and 20 percent in 1988.
Domestic enterprises played a lesser role in industrialization. The government argued that the emphasis on large industry was a more effective stimulus to increased productivity and long-range economic development. Major promotional efforts sponsored by the government were focused on high-productivity projects, creating industries that officials claimed would not otherwise have been established in Singapore. Although institutional assistance for small-scale local industry, the majority of enterprises, was provided through a subsidiary of the Economic Development Board, the effectiveness of this aid was limited until after the mid-1980s recession, when greater emphasis was placed on encouraging and upgrading small-scale local industry.
Following a decline in the textile industry in the mid-1980s resulting from increased international competition, automation and the upgrading of product lines were encouraged. What had originally been a textile industry and then a mass-market clothing industry was encouraged to target high-fashion markets. A 10 percent growth in the fashion industry in 1987 reflected both the new trend and a strong market among Western trading partners.
After 1979 there was a single-minded emphasis among policy makers on escalating the level of technology in order to implement the succeeding phases of Singapore's industrial revolution. They relied on information technology as the strategy's principal instrument. The Telecommunications Authority of Singapore (Telecoms) was a key to the strategy because of the high caliber of its services and products and because Telecoms and the telecommunications industry had an important role in the progress of every industry in Singapore.
A second key was computers and related electronics, which in the late 1980s constituted Singapore's largest industry, measured both in numbers of jobs and in value added by manufacturing. In 1981 the 65,000 to 70,000 electronics workers comprised about 7 percent of the labor force; gross production of electronics at about S$5.9 billion was about 15 percent of total manufacturing output. By 1987 electronics accounted for 28 percent of manufacturing employment and contributed 31 percent or S$11 billion in output. By 1989, Singapore had become the world's largest producer of disk drives and disk drive parts. Other related products included integrated circuits, data processing equipment, telecommunications equipment, and radio receivers.
The electronics industry began a calculated transition away from labor-intensive products toward higher technological content and worker-skilled products in 1974. Potential investors were encouraged to look elsewhere for low-wage, unskilled labor. Aside from producing high value-added exports, the computer and electronics industries played a vital role in raising manpower productivity in other technology-intensive industries through computerization and computer communications. The National Computer Board was formed in 1981 to establish Singapore as an international center for computer services, to reduce the shortage of trained computer professionals, and to assure standards of international caliber at all levels.
Copyright and "intellectual property" issues served as an impediment to computer and other industrial development in the early 1980s, when Singapore, as well as other Asian countries, was known for producing pirated versions of everything from computers and computer software to designer handbags. Following threats by their major Western trading partners to impose trade sanctions and by international computer and software companies not to do business, Singapore passed its first copyright law in 1986. There was fairly rigorous enforcement in areas in which Western pressure was applied (computer software, films, and cassette tapes), and nearly full compliance in the book trade, which had not been as serious a problem. The Asian "copyright revolution" (Singapore's was one of several such laws enacted in the region) was significant as a realization by those countries that they had joined the international knowledge network as producers as well as consumers.
By the mid-1980s, the small but growing printing and publishing industry had entered the high-technology world with computerized typesetting, color separation, and book binding. Its high-quality printing facilities and sophisticated satellite telecommunications network made Singapore a regional publishing and distribution center in 1989.
Petroleum and petrochemicals were another base of Singapore's industrial and economic life. In the late 1980s, Singapore was the world's third largest oil-trading center and also the third largest center for petroleum refining. It was the second largest builder of drilling rigs, and its facilities for repairing and maintaining rigs and tankers were the most competitive in East Asia.
When oil prices began eroding in 1981 and collapsing toward the end of 1985, Singapore felt both negative and positive consequences. The collapse of oil prices dealt a severe blow to oil exploration. The impact was felt widely and immediately in everything from reduced orders for rig construction to lowered occupancy of luxury apartments as foreign petroleum workers returned home. With both of its immediate neighbors, Indonesia and Malaysia, heavily dependent on oil and gas exports for revenue, Singapore had a resulting loss of trade in both goods and services.
Singapore benefited, however, from the availability of cheaper energy, which in 1986 amounted to a savings of about S$2.5 billion (US$1.12 billion). Furthermore, Singaporean refineries invested in the equipment and technology necessary to enable them to refine a wide variety of crude oils and obtain a greater proportion of highvalued products from the refining process. Petroleum refining alone made up 28 percent of Singapore's manufacturing output in 1985, although by 1988 it had dropped by half as a result of a decline in petroleum production and growth in other industries. Singapore also benefited indirectly when large oil importers such as Japan and the United States obtained higher real incomes from lower oil prices, enabling them to increase their imports from Singapore and other countries.
Trade in goods and services was Singapore's life blood as truly in 1989 as it was in the early twentieth century or a century earlier when the British East India Company first began business there. Trade, along with domestic savings and foreign investment, remained key to the country's growth. Singapore traditionally had a merchandise-trade balance deficit (in part at least because food was imported), which it customarily offset with a surplus on the services account. It was one of the world's few countries where total international trade (domestic exports and reexports plus imports) was greater than total GDP. In 1988 trade (S$167.3 billion) was more than three times GDP (S$48 billion), and two-thirds of the goods and services Singapore produced were exported.
Singapore, however, was more than simply a trade and manufacturing center in the late 1980s. Trade and manufacturing were closely tied to the country's expanding business services and international financial market; each enhanced the other. In addition to the more than 650 multinational companies that had set up manufacturing plants and technical support facilities, several thousand international financial institutions, service companies, and trading firms also maintained a presence in Singapore. The increasing internationalization of the economy and the continuing centrality of external trade meant that world trade fluctuations and the state of the global economy were significant factors-- largely out of the country's direct control--in what happened to Singapore's trade and wider economy.
As a British colony in the nineteenth and early twentieth centuries, Singapore was an entrepôt for the exchange of raw materials from Southeast Asia--mainly present-day Indonesia and Malaysia--for European merchandise. Newly independent Singapore's decision in 1965 to emphasize industrial development and the growing success of that plan gradually resulted in a significant change in the nature of trade. By the mid-1970s, the proportion of reexports and domestic exports had been roughly reversed, with reexports accounting for less than 41 percent.
In the 1980s, the somewhat diminished entrepôt trade remained important, and Singapore continued to act as a regional processing and distribution center. Reexports' share of total exports averaged 35 percent from 1980 to 1987. Although primary commodities (crude rubber, nonferrous metals, and to a lesser extent palm and coconut oil) were still a factor in trading activities, machinery and transportation equipment dominated. Singapore also served as a back door to trade with Asian communist countries for third countries, such as Indonesia.
Between 1980 and 1984, total exports grew an average of 5.5 percent per year. The strongest impetus came from the newer electrical and electronics industries. The trade deficit declined steadily after 1982, reflecting lower commodity prices paid to foreign producers, greater levels of internal efficiency, and industrial upgrading. In 1985, however, total exports decreased by 2.26 percent. Higher value-added exports declined, both as a function of weaker demand and a worldwide saturation in many areas, such as computer peripherals. Petroleum exports, still a major sector, virtually stagnated.
Trade, along with the rest of the economy, reasserted itself by 1987, resulting partly from government economic decisions and partly as a reflection of rising world commodity prices. In 1988 Singapore's total trade amounted to about S$167.3 billion (US$80.8 billion), with a global trade deficit of about S$8.18 billion. Singapore's GDP grew by 10.8 percent in 1988, the best growth rate in fifteen years. Disk drives were the largest non-oil item exported, worth S$4.89 billion. Other major exports were integrated circuits, data processing equipment and parts, telecommunications equipment, radio receivers, clothing, and plastics.
By early 1989, signs of slowing down and leveling off had appeared with the first export declines in eighteen months. Analysts agreed the weak external demand for electronics and computer parts resulted, in part, from an oversupply on the world market of disk drives, semiconductors, and related items. Imports surged, however, widening the trade deficit sharply.
Although their volume was not large, food products were a significant aspect of Singapore's trade. The urban nation produced only a small proportion of its own food, requiring it to import large quantities. Some food products, such as soy sauce and juices, were processed in Singapore for export, and Singapore continued its historical role as the regional center for the spice trade.
Along with the changes in the composition of trade that had taken place since independence, there also were changes in direction. The preeminence of Britain as supplier of manufactures declined after independence, and by the early 1970s the United States and Japan had become Singapore's two leading sources of industrial products. Malaysia and Indonesia remained the principal sources of such primary imports as crude rubber, vegetable oils, and spices and an important destination for manufactured exports, including both the products of Singapore and of the entrepôt trade.
Singapore did not report trade with Indonesia. The omission dated from the period of the Indonesian Confrontation in the mid1960s and continued, according to some observers, because Singapore was afraid that if the Indonesian government knew the volume of the trade, it might try to curtail it. Estimates were difficult because a substantial part of the trade was viewed by Indonesia as smuggling and was, therefore, unlisted, although in Singapore's open export market it was legal. Nevertheless, trade with Indonesia could be presumed, based partly on Indonesian trade figures, to have assumed a gradually larger role starting in the mid-1970s.
As Singapore became more export oriented, its trading patterns became increasingly complex and interdependent. By the late 1980s, Singapore's trade links were strongest with the countries of the Organisation for Economic Co-operation and Development ( OECD), especially the United States, Japan, and the countries of the European Economic Community ( EEC) or of the Association of Southeast Asian Nations ( ASEAN). Singapore's drive to industrialization had drawn it increasingly towards the OECD countries for foreign investment, technology, and markets. To a large extent, this shift had meant decreasing reliance on its ASEAN neighbors, particularly for markets and supplies. The other Asian NIEs, Hong Kong, Korea, and Taiwan, were sometimes viewed as Singapore's competitors. On the other hand, Singapore engaged in considerable and growing trade with them, particularly with Taiwan, and all three were a source of skilled labor.
By the 1980s, the United States had become Singapore's most important trading partner and, as such, crucial to the country's welfare. Singaporean officials often stated that a 1 percent drop in the United States economy had a 1.4 percent effect on Singapore's gross national product ( GNP). Consequently, in the 1980s Singapore was critically concerned about protectionist policies and budget deficits in the United States. In 1988 Singapore's total exports to the United States amounted to S$18.8 billion, up 28 percent over the previous year, and accounted for 24 percent of the nation's total exports. Of that total, about 80 percent were Singaporean manufactures, including disk drives, integrated circuits, semiconductors, parts for data processing machines, television sets, radios and radio cassette players, and clothing. Reexports to the United States also were an important part of the trade. Singapore's exports to the United States outstripped its imports from there, although the United States was, after Japan, Singapore's second largest supplier.
Until 1989 Singapore and the three other NIEs enjoyed trade preferences with the United States under the United States Generalized System of Preferences ( GSP). This system was originally instituted to aid developing economies, but in 1989, the four Asian NIEs were removed from the program because of what some observers have seen as their major advances in economic development and improvements in trade competitiveness. The United States had been trying for some time to wrest trade and currency concessions from all four countries (but primarily South Korea), which had not been forthcoming. Although Washington presented the decision more as an economic graduation ceremony, observers noted that the move reflected United States frustration over its continuing trade deficit despite considerable devaluation in the United States dollar.
The removal of the GSP affected less than 15 percent of Singapore's exports to the United States, among them telephones, office machines, wood furniture, and medical instruments, which faced duties of 5 to 10 percent. Ironically, United States firms based in Singapore were among the hardest hit. More than 50 percent of Singapore's exports to the United States came from American firms with operations there, such as ATandT, Digital Equipment, Hewlett-Packard, Rockwell International, and Travenol Laboratories. Singaporean companies, as well as Japanese and European firms with operations in Singapore, were also affected by the removal of the GSP. In early 1988, some 4,000 NTUC members gathered outside the United States Embassy in Singapore to protest the decision, and the Singaporean government expressed regret.
Japan's place in Singapore's business picture was underscored by the fact that, in the 1980s, Japanese were the largest resident expatriate community in the city. Japan was the country's single largest supplier, accounting in 1987 for 25.3 percent of total imports, and Singapore's largest trade deficit was with Japan. Buyback arrangements for products manufactured by Japanese firms in Singapore also accounted for a significant part of the trade. Oil accounted for 40 percent of Singapore's exports to Japan in 1988. Singaporean observers noted by 1989 a significant difference in the market orientation between Japanese firms and United States-owned multinationals. Japanese firms in Singapore were producing primarily for the United States and other third-country markets, rather than for the Japanese home market. The United Statescontrolled multinationals, on the other hand, produced mainly for their own home market. Many of these same observers, both official and unofficial, also expressed the sentiment that the world export market in the 1990s, would "belong to Japan."
The Association of Southeastern Asian Nations (ASEAN) was founded in 1967 primarily as a forum for discussing issues of mutual concern among neighboring Southeast Asian countries rather than as a trading union similar to the EEC. In part, this orientation was because, other than Singapore, most of the ASEAN countries had similar products, tending to make them more competitive than cooperative. Although trade relations among the ASEAN countries remained largely bilateral, there was some informal economic cooperation, including joint representations to foreign governments on economic issues of common concern. In 1989 the possibility of a more formalized economic entity was at least being considered by the ASEAN members.
In 1988 Malaysia was Singapore's largest ASEAN trading partner and third largest overall trading partner, after the United States and Japan. The Malaysian market was the single largest ASEAN destination for Singapore's exports and its second largest export market overall. In the late 1980s, Singapore established increasingly close economic and industrial ties with Malaysia's Johor state, which had served as Singapore's hinterland in colonial times. To alleviate its land shortage as well as its labor shortage and high labor costs, Singapore, began to transfer labor-intensive industries to sites across the causeway connecting it to Malaysia's southernmost state. Johor, in turn, hoped "economic twinning" with Singapore would boost its long-term development. By early 1987, there were 217 Singaporean companies or Singapore-based multinationals in Malaysia, having total investments of slightly more than S$200 million.
Singapore's much smaller markets with the other ASEAN countries also were growing. In 1989 Singapore recorded its highest growth in bilateral ASEAN trade with Thailand, which replaced Taiwan as its fifth largest trading partner. Intra-ASEAN trade generally might have been underestimated, partly because of the volume of informal trade, including smuggling, and partly because so much of it was controlled by the Chinese community in each country. Keeping business within the family, clan, or dialect group was a central Chinese business practice that persisted across national boundaries.
Beginning in the mid-1980s, Singapore--which for two decades had sharply curtailed many forms of contact with China--began promoting itself as an alternative to Hong Kong as a "Gateway to China." In 1989 Singapore was estimated to be the fourth-largest foreign investor in the special economic zones of southern China and that country's fifth-largest trading partner; Singapore's companies were estimated to have about S$1 billion directly invested in China. Since most such investments were made in conjunction with Hong Kong-based companies, the real extent of Singapore's exposure to China may have been considerably higher.
Non-oil trade with the various EEC countries, which had been steady during the early 1980s, strengthened in 1987 and 1988. Nearly three-quarters of this increase was in exports of disk drives and integrated circuits, particularly to the Federal Republic of Germany (West Germany), Great Britain and the Netherlands. Overall, however, Singapore had a small trade deficit with Western Europe in 1988.
Tourism had been an important sector of Singapore's economy for more than a decade, averaging 16 percent of total foreign exchange earnings and 6 percent of GDP between 1980 and 1985. Tourist arrivals had dropped sharply in 1983, however, the first decline in over twenty years. The decrease resulted both from the regional and world economic downturn at that time and from travel restrictions instituted by neighboring countries to preserve their own foreign exchange. Observers noted also that Singapore was losing its "oriental mystique and charm." In its effort to build a modern city, it had torn down old buildings and curtailed traditional street activities, aspects considered by tourists to be part of Singapore's attraction. In 1984 the government established a Tourism Task Force to recommend ways to attract more visitors, and the following year the budget of the Singapore Tourist Promotion Board was increased by 60 percent. Steps were taken to preserve areas of special architectural, historical, or cultural interest. Sentosa Island, off the southern coast, was developed as a resort and recreation center, complete with museums, parks, golf courses, lagoons, beaches, trails, and gardens, all connected by monorail. Singapore also began billing itself as the "hub of Southeast Asia" and marketing sidetrips to destinations in neighboring countries. As with other economic activities, tourism was viewed as a high value-added industry. Although increasing the absolute number of visitor arrivals was the main target, a further aim was to attract the high-spending, business visitors attending conventions and trade exhibitions, which Singapore hosted in large numbers.
Tourist arrivals recovered quickly from the 1983 downturn, reaching 3 million in 1985. In 1987 tourist arrivals reached 3.7 million, a 15 percent increase over the previous year. In 1988 arrivals rose another 14 percent to nearly 4.2 million. Singapore's top tourist-generating markets in 1987 were ASEAN (29 percent), Japan (15 percent), Australia (9 percent), India (7 percent), the United States (6 percent), and Britain (5 percent). Although a building boom had caused a glut of hotel rooms in the mid-1980s, by early 1989 occupancy was running at about 80 percent.
The country's rapid development was closely linked to the government's efficient financial management. Conservative fiscal and monetary policies generated high savings, which, along with high levels of foreign investment, allowed growth without the accumulation of external debt. In 1988 Singapore had foreign reserves worth about S$33 billion, which, per capita, put it ahead of Switzerland, Saudi Arabia, and Taiwan. That same year, the domestic savings rate rose to one of the highest in the world (42 percent), as gross national savings, comprising public and private savings, totaled S$20.9 billion, 19 percent higher than in 1987. By the mid-1980s, however, domestic demand had been so stunted that it became increasingly difficult to find productive areas for investment. In the recession year of 1986, for the first time, gross national savings exceeded gross capital formation. This was in spite of a 15 percent cut in the employers' contribution to the Central Provident Fund. As a result, already depressed domestic demand was depressed even further, falling by 1 percent in 1986 after a decline of 3 percent the previous year.
Singapore's foreign reserves were, in fact, the country's domestic savings held overseas. Since the source of the domestic savings was in large measure the compulsory savings held by the Central Provident Fund, Singapore had a huge domestic liability. The fund claims, standing in 1988 at S$32 billion, almost equalled Singapore's foreign reserves. But since they were fully funded and denominated in Singapore dollars, the country was relieved of the problems of showing either a budget deficit or an external debt.
Indeed, for many years, the government had pointed out that its foreign reserves, managed by the Government of Singapore Investment Corporation, were larger than that of wealthier, more populous countries. The reserves issue became politicized after 1987 when Lee Kuan Yew proposed a change in the country's government to an executive presidency in which the president (presumably Lee himself) would have veto power over Parliament's use of the reserves. In 1986 the government-sponsored Report of the Economic Committee admitted that "over saving" was a problem. Not until 1988, however, were some tentative steps taken to invest the surpluses directly in productive resources. This process included a one-time transfer to government revenue of S$1.5 billion from the accumulated reserves of four statutory boards.
The country's public sector financial system was structurally complex and difficult to follow owing to different accounting practices. Funds essentially were derived from three sources: tax revenue (directly on income, property, and inheritance; indirectly as excise duties, motor vehicle taxes; stamp duties, and other taxes), nontax revenue (regulatory charges, sales of goods and services, and interest and dividends); and public sector borrowing. The statutory boards had separate budgets, although they played a major role in infrastructure creation. Government companies also were not included in public finance reporting.
After 1975 the government consistently had substantial current as well as overall surpluses. From 1983 to 1985, total government expenditure averaged 59.8 percent of current revenue. In fact, the overall surplus exceeded even the net contributions to the Central Provident Fund. The seven major statutory boards also had consistent current surpluses. Economic theoretician and member of Parliament Augustine Tan suggested that Singapore's public spending and public savings were much too large. According to Tan, the government tended to err on the side of financial surplus, despite frequent forecasts of deficit, because the government consistently underestimated tax revenues and overestimated expenditures. These surpluses then put upward pressure on the exchange rate and eroded manufacturers' competitiveness.
Singapore had an exceptionally open economy. Fundamentally strong, the currency reflected a sound balance of payments position, large reserves, and the authorities' conservative attitude. From 1967 until June 1973, the Singapore dollar was tied to the United States dollar, and thereafter the currency was allowed to float.
The Monetary Authority of Singapore, the country's quasicentral bank, pursued a policy of intervention both domestically and in foreign exchange markets to maintain a strong currency. This multifaceted strategy was designed to promote Singapore's development as a financial center by attracting funds, while inducing low inflation by preventing the erosion of the large Central Provident Fund balances. Furthermore, the strong currency complemented the high wage industrial strategy, forcing long-term quality rather than short-term prices to be the basis for export competition.
Given Singapore's dependency on imports, however, setting an exchange rate always generated controversy. The 1986 Report of the Economic Committee did not clarify official thinking. It recommended that the exchange rate should "continue to be set by market forces, but its impact on [Singapore's] export competitiveness and tourist costs should be taken into account. The [Singapore] dollar should, as far as possible, be allowed to find its own appropriate level, reflecting fundamental economic trends."
After 1978, when the government abolished all currency exchange controls, Singaporean residents (individuals and corporations) were free to move funds, import capital, or repatriate profits without restriction. Likewise, trade regulations were minimal. Import duties applied only to a few items (automobiles, alcohol, petroleum, and tobacco), and licenses were required only for imports originating from a few Eastern bloc countries. There were no export duties. As the government played an active part in promoting exports, there was an extensive system of supports including an export insurance plan.
The government promoted investment vigorously through a whole range of tax and investment allowances and soft loans aimed at attracting new investment or at helping existing businesses upgrade or expand. There was no capital gains tax. Special incentives existed for foreigners, including concessionary tax arrangements for some nonresidents, relief from double taxation, and permission to buy commercial and certain residential property. In 1985 extensive tax reductions were introduced to reduce business costs.
As a result of its strategic location and well-developed infrastructure, Singapore traditionally had been the trade and financial services center for the region. In the 1970s, the government identified financial services as a key source of growth and provided incentives for its development. By the 1980s, the focus was on further diversification, upgrading, and automation of financial services. Emphasis was placed on the development of investment portfolio management, securities trading, capital market activities, foreign exchange and futures trading, and promotion of more sophisticated and specialized fee-based activities.
Consequently, by the mid-1980s, Singapore was the third most important financial center in Asia after Tokyo and Hong Kong. The financial services sector, having sustained double digit growth over the previous decade, accounted for some 23 percent of GDP and employed approximately 9 percent of the labor force. In 1985, however, growth in the sector slowed to just 2.6 percent, and in December of that year the Stock Exchange of Singapore suffered a major crisis, which forced it to close for three days. In view of the troubled domestic economy, observers worried that Singapore's future as a financial center looked somewhat problematic. Furthermore, international financial market deregulation threatened to create an environment in which it would be more difficult for Singapore to thrive, especially given its high cost structure and somewhat heavy-handed regulatory environment. The government took steps to correct some of the problems, and by 1989 Singapore's financial service sector could again be described as "booming."
The financial sector included three types of commercial banks (full license, restricted, and offshore), representative offices, merchant banks, discount houses, and finance companies. In 1988 there were 13 local, 64 merchant, and 134 commercial banks. All banks in Singapore were administered by the Monetary Authority of Singapore and were required to hold a statutory minimum cash balance against their deposit and other specified liabilities with the authority.
The Development Bank of Singapore was established in 1968 to provide financial services supporting industrialization and general economic development. Owned jointly by the government (49 percent) and private sector shareholders, it had evolved from a long-term financing institution to a multiservice bank. The largest Singaporean commercial bank in terms of assets in 1989, the Development Bank was listed on the stock exchanges of both Singapore and Malaysia. Through its subsidiaries, it also provided specialized financial and insurance services, factoring, stockbroking, merchant banking, and venture capital investment management services. The Development Bank was the city-state's largest source of long-term finance, including equity and venture capital financing, medium- and long-term loans, and guarantees.
The Singapore Foreign Exchange Market had grown remarkably since the 1985 recession. As an international financial center, the country had benefited from the worldwide increase in business as well as from the related expansion in the financially liberated Japanese market. Major currencies--the United States dollar, the Japanese yen, the West German deutsche mark, and the British pound sterling--were actively traded. Volumes in such other currencies as the Australian dollar had risen as well. Average daily turnover was US$45 billion in 1988 compared with US$12.5 billion in 1985.
Singapore established the Asian dollar market as the Asian equivalent of the Eurodollar market in 1968 when the local branch of the United States-based Bank of America secured government approval to borrow deposits of nonresidents, mainly in foreign currencies, and use them to finance corporate activities in Asia. At the time, expanding economic development in Southeast Asia was rapidly increasing the demand for foreign investment funds, and the desirability of a regional center able to carry out the necessary middleman function was apparent. Singapore offered the ideal location. The Asian dollar market was essentially an international money and capital market for foreign currencies, and its assets grew from US$30 million in 1968 to US$273 billion in November 1988. To operate in the market, financial institutions were required to obtain approval from the Monetary Authority of Singapore and to set up separate bookkeeping entities called Asian currency units for transactions in the market. Funds were obtained mainly from external or nonresident sources--central banks, foreigners seeking a stable location such as Singapore to deposit cash, multinational corporations, and commercial banks outside Singapore.
In 1973, to stimulate the expansion of the Asian dollar market, the Monetary Authority of Singapore established the so-called offshore banking system, designed to concentrate on that market and its foreign exchange operations. Beginning in 1983, funds managed in Singapore on behalf of nonresidents and invested offshore or in the local stock market were exempt from tax. The fees earned for managing such offshore funds were taxed at a concessionary rate of 10 percent.
Inaugurated in 1973, the Stock Exchange of Singapore was governed by a committee comprising four elected stockbroker members and five appointed nonbroker members. In late 1988, the 327 companies listed on the main board of the exchange were classified into six groups: industrial and commercial, finance, hotel, property, plantation (farming), and mining. The market underwent a major, prolonged reorganization following the December 1985 collapse of a Singaporean company, Pan Electric, which revealed a massive web of forward share dealings based on borrowed money. The collapse resulted in a tighter regulation of the financial futures market and the securities industry. In 1986 the Securities Industry Council was established to advise the minister for finance on all matters relating to the securities industry.
In 1987 the government introduced tax incentives to encourage the trading of international securities in Singapore. The National Association of Securities Dealers (NASDAQ) in the United States and the Stock Exchange of Singapore established a link to facilitate the trading of NASDAQ stocks in Singapore by providing for the exchange of price and trading information on a selected list of NASDAQ stocks between the two exchanges. A move by the Singapore exchange to a new, spacious location in 1988 brought a transformation in trading methodology, including partial automation of the trading system, which until then had adhered to the traditional outcry auction system.
By 1987 Singapore's stock market, fuelled by bullish sentiments sent indices soaring to new highs--a recovery from the December 1985 crisis. All gains, however, were wiped out by the crash of world stock markets in October 1987, a crash from which the Singapore exchange had made substantial recovery by mid-1989.
Singapore also expanded other international financial markets in the late 1980s. Trading in gold futures originally was undertaken in the Gold Exchange of Singapore, which was established in 1978 and reorganized in 1983. The scope of its activities was widened to include financial futures trading, and it was renamed the Singapore International Monetary Exchange (SIMEX). Starting in 1984, the financial futures market featured a mutual offset arrangement between SIMEX and the Chicago Mercantile Exchange, which allowed contracts executed on one exchange to be offset on the other without additional transactional cost for market participants. The linkage was the first of its kind in the world and greatly facilitated round-the-clock trading in futures contracts. In 1988 six forms of futures contracts were traded: international gold futures; the Eurodollar time deposit interest rate; the Nikkei Average Stock Index; and three currency exchange rates--US dollar/West German deutsche mark, US dollar/Japanese yen, and US dollar/British pound sterling. Trading volume on the SIMEX had grown steadily.
The restructured Government Securities Market was launched in May 1987, auctioning at market rates taxable Singapore government securities ranging in maturity from three months to five years. Previously, long-term government stock was sold to a captive market of banks, insurance companies, and a few individuals and nonprofit organizations.
In 1966 Singapore became a member of the International Monetary Fund ( IMF), the World Bank, and the Asian Development Bank. Two years later, Singapore joined the International Finance Corporation, an affiliate of the World Bank. Singapore's loans from the World Bank and the Asian Development Bank had been used to finance development projects relating to water supply, electric power generation and distribution, sewerage, telephone services, educational services, and environmental control. A total of fourteen loans were secured from the World Bank between 1963 and 1975 and fourteen from the Asian Development Bank between 1969 and 1980. There were no further loans in the 1980s. Singapore's estimated outstanding borrowings from the World Bank and the Asian Development Bank in late 1988 totalled US$35.1 billion and US$45.4 million, respectively. Its 1988 quota of IMF special drawing rights (SDR)--related to its national income, monetary reserves, trade balance and other economic indicators--was SDR 92.4 million.
Orchard Road, now one of Singapore's most up-scale thoroughfares, got its name because it originally was lined with fruit orchards and vegetable gardens. Although contemporary Singapore still maintained a tiny agricultural base, by 1988 urbanization had reduced the land area used for farming to only about 3 percent of the total. Nonetheless, with intensive production, the farming sector met part of the domestic demand for essential fresh farm produce: poultry, eggs, pork, some vegetables, and fish. In 1988 there were 2,075 licensed farms occupying only 2,037 hectares of land, with a total output of some S$362 million worth of farm produce. A decade earlier farm holdings had covered 1,280 hectares.
The Primary Production Department, under the Ministry of National Development, ensured an adequate and regular supply of fresh produce and provided support for agro-industries, including research and development aimed at improving commercial and hightechnology farming. The department projected in 1988 that a total of 2,000 hectares of land in ten agro-technology parks would be developed and rented out for long-term farming over the next decade.
The government began phasing out pig farming in 1984 because of odor and environmental pollution. Some 200 pig farms raising about 500,000 pigs in 1987 were scheduled to be reduced to 22 farms with 300,000 pigs by 1990. Imports from Malaysia, Indonesia, and Thailand would be increased to meet domestic needs. Some 1,000 poultry farms kept a total of about 2.2 million layers, 1.6 million broilers, 245,000 breeders, and 645,000 ducks. Singapore remained free of major animal diseases.
Singapore grew 5.6 percent of its total supply of 180,000 tons of fresh vegetables in 1988 and imported the rest from Malaysia, Indonesia, China, and Australia. The main crops cultivated locally included vegetables, mushrooms, fruit, orchids, and ornamental plants. About 370 vegetable farms produced an estimated 10,000 tons of vegetables, and mushroom cultivation expanded rapidly after the mid-1980s. The Mushroom Unit of the Primary Production Development conducted research on mushroom cultivation and advised commercial mushroom growers, who produced a variety of mushrooms for the local market.
Noted for its orchids, Singapore exported flowers worth S$13.8 million in 1988, mainly to Western Europe, Japan, Australia, and the United States. Singapore's 153 orchid farms produced another S$2.2 million worth of flowers for the domestic market.
Local fishermen provided about 13 percent of the country's 110,000-ton fresh fish supply in 1988, using three major fishing methods--trawling, gill-netting, and long-lining. There were about 1,170 licensed fishermen operating nearly 400 fishing vessels, most of which were motorized. The Jurong Port and Market Complex was a major fish landing point for both domestic and foreign vessels and handled 84 percent of the total fresh fish supply in 1988. Many foreign vessels brought their catches there for processing and reexport. Fresh fish arrived also by truck from Malaysia and Thailand and by sea and air from other neighboring countries.
Fish farming was a small but growing field. In 1988 seventyfour licensed marine fish farms raised mainly high-value fish such as grouper and sea bass in a total of forty hectares of coastal waters. Many of the farms had also introduced prawn farming in floating cages. Exports of ornamental fish for aquariums amounted to S$60 million in 1988. Some 400 licensed aquarium fish farms operated in Singapore in 1988, including 36 commercial farms operating in the Tampines Aquarium Fish Farming Estate.