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Transcript of Singapore 2008

Harvard Business School

Edited version: Microeconomics of Competitiveness Rev. 02/29/08

Singapore Economic Strategy: Independence to 1992Fireworks, skydiving demonstrations, parades, and songs had entertained the 65,000 massed in Singapores National Stadium on August 9, 1992, by the time Prime Minister Goh Chok Tong arrived. Goh was greeted with cheers as he stepped in front of the television cameras and radio microphones to deliver what was only his second National Day speech as PM. We have come this far on nothing, he said to the crowd with pride.1 Without doubt, the affluence of the citizens and the city surrounding him had seemed beyond imagining just three decades before. Singapore, a city-state of three million people on an island a quarter the size of Rhode Island, had attained its success against a host of obstacles: a lack of natural resources, except for a natural deep-water harbor; a frayed infrastructure; a gradual dwindling of its traditional markets; a poorly educated population; a communist insurgency; and loss of the British military presence which protected the island and supported its economy. Yet since achieving independence in 1965, Singapore had turned in some of the highest rates of growth in the world. Per-capita gross domestic product had risen from just over US$500 in 1965 to nearly US$14,500 in 19912exceeded in Asia only by Japan, and well above the GDP levels of many members of the rich-country OECD (Organization for Economic Cooperation and Development). Standing on the dais near Goh was the man largely responsible for this success, Lee Kuan Yew. As the nations first prime minister after independence, Lee had guided Singapore around each obstacle and through each phase of growth. In doing so, he had exercised a degree of central control rarely seen in successful economies. Lee and a few lieutenants had coordinated an industrial policy, fiscal and monetary policy, savings and investment requirements, and labor and immigration laws. The widely popular Lee had won plaudits from within and without Singapore and had been reelected eight times. In 1991, Goh set a goal of achieving United States-level prosperity by 2030, which was feasible if rates of growth approximating those achieved since independence could be sustained. That year, however, the economy began to slow: from 8.3% GDP growth in 1990 to 6.6% in 1991 and around 5% in 1992 (see Exhibit 1). Although 5% growth well exceeded that of most members of the OECD, in Singapore it provoked alarm. With the slow-down as a backdrop, Goh reminded Singaporeans of their economic vulnerability. National Day was not a time to gloat over being Number One in this area or that area as some people might think, he warned. It is to learn where we have fallen behind and how others

1 Quoted in Singapore and the problems of success, Economist, August 22, 1992, p. 25. 2 International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.: 1992). Values are in

current dollars, calculated from year-average exchange rates. This document is a special version of the Harvard Business School case (# 9-793-096) prepared by Research Associate Edward Prewitt and Professor Forest L. Reinhardt) and is intended for use in the 2008 Microeconomics of Competitiveness course.

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Microeconomics of Competitiveness

Singapore

are catching up, so that we can remedy our shortcomings. . . . Whilst the rapid growth of ASEAN3 and the east Asia region helps our growth, it means that other countries are catching up and can overtake us.4 Indeed, as Singapores wealth grew, so did international economic competition. A large part of the nations GDP and employment came from direct investment by multinational companies in low-cost assembly work, but in the 1990s Singapores rising wage rates increasingly priced it out of these industries. Lee Kuan Yew repeatedly had shown an ability to guide the nation through such challenges. Not only did his hand-picked successor have no such track record, but the next transition might be the hardest yet.

OriginsSingapore was an important trading center and port as early as the seventh century A.D. By the fourteenth century Chinese immigrants had established a small community on the island, and the name Singapura, a word of Sanskrit origin meaning Lion City, was in common use. After Portugal wrested control of the region from Malaccan and Malay rulers in the sixteenth and early seventeenth centuries, Singapore fell into obscurity.5 Modern Singapore dated from the discovery of the islands superb natural port in 1819 by Sir Stamford Raffles, an officer of the British East India Company. The East India Company, seeking to forestall colonial advances by Holland and France, was in search of a base at the strategic southern tip of the Malay Peninsula that would complement the nearby British posts at Penang and Malacca (see Exhibit 3). Raffles instantly recognized the trading potential of the site, which he predicted would become a place of considerable magnitude and importance6 and the emporium of the seven seas.7 He settled a treaty the next day with a local sultan and established an outpost. Singapores location at one end of the Straits of Malacca and its policy of duty-free trade proved remunerative. It was earning revenue within a year as a center for trade and transshipment. Population grew from about 1,000 at Raffless arrival to 10,700 within five years. The three British posts on the Malay Peninsula were incorporated as the Straits Settlements in 1826, under the control of British India. In 1867 the Straits Settlements became a Crown Colony, controlled directly from London, and the British colonial civil service system was implemented. Population had reached almost 81,000 in 1860, including perhaps 7,000 Europeans. Singapore developed a classic entrept economy, one which funnels exports out of and imports into a surrounding area. An entrept typically attracted shipping, communications, banking, and insurance services and facilities to support the importing and exporting; and retailing and other service enterprises to provide for the needs of the shippers and bankers.

3 The Association of Southeast Asian Nations, consisting of Brunei, Indonesia, Malaysia, the Philippines, Thailand, and Singapore. 4 Bertha Henson, Steer clear of subsidy mentality, warns PM, Straits Times, August 9, 1992, p. 1. 5 Ministry of Information and the Arts, Singapore 1992, p. 26. 6 Library of Congress, Singapore: A Country Study (Washington, D.C.: U.S. Government Printing Office, 1991), p. 14. 7 R. S. Milne and Diane K. Mauzy, Singapore: The Legacy of Lee Kuan Yew (Boulder, Colo.: Westview Press, 1990), p. 1.

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Microeconomics of Competitiveness

The advent of the steamship and the opening of the Suez Canal in the 1860s dramatically increased traffic through the Malacca Straits. Singapore became one of the regions major ports of call. The development of commercial rubber tree plantations in the region was particularly important. The island became that commoditys central sorting and export center. In so doing, Singapore added processing and light manufacturing capabilities to its trade function. Prosperity continued to grow on entrept trade in rubber and tin from Malaya and the Dutch East Indies. The islands importance was accentuated by a sizable British military presence, which increased gradually after 1867 and culminated with the construction of a large complex in 192341. By the beginning of the second world war, Singapore had become Britains principal naval and air base in Asia. As Britain was pressed to the limits in Europe during World War II, however, it was unable to commit sufficient airplanes to defend the base. The Gibraltar of the East fell to Japanese troops after six days of fighting. Renamed Syonan (Light of the South), Singapore was the capital of Japans wartime southern region for three and a half years. The British returned in 1945 to find the islands housing and infrastructure in shambles, and unrest among the populace and work force.8 Reconstruction took four years, and by 1949 trade, labor productivity, and basic social services such as electricity and sewerage had returned to their pre-war levels. Entrept trade in rubber and tin boomed during the Korean War (195053), accounting for 20% of GDP. It was becoming clear, though, that traditional entrept trade was threatened. Newly independent Indonesiahalf of Singapores trade hinterlandhad embarked on its own program of industrial development, lessening the need for Singapore as a trade hub. At the same time, politics began to take precedence over trade for many residents. The Malayan Communist Party, centered in Singapore, agitated for independence from Britain and gained many adherents, despite repression of the party by colonial administrators.9

IndependenceIn 1946 the Colonial Office dissolved the Straits Settlements and combined the states of the Malay peninsula into a Malayan Union. Singapore was excluded, however, and remained a Crown Colony. Strikes and repeated calls for self-rule in Singapore led Britain to agree to gradually increase Singapores self-governance. In 1948, the first elections in Singapores history were held, for six of Singapores 25 Legistative Council seats. Throughout the next decade, a Singaporean government began to form alongside the weakening colonial administration. However, in response to communist protests in Singapore and an armed communist insurgency in Malaya, the British imposed the 1948 Internal Security Act, which allowed detention without trial for persons suspected of being threats to security. Protests continued until full sovereignty was granted in 1958, one year after the Malayan Union had become the independent Federation of Malaya. A new constitution established a unicameral parliamentary democracy. The results of