In a single generation, Singapore has leapt from dire poverty to become one of the richest countries on earth. This month Singapore has a new prime minister – only the third in its history. Can the miracle continue?
1 / Very Low / 0 – 10 percent
2 / Low / 10 – 25 percent
3 / Moderate / 25 – 35 percent
4 / High / 35 – 45 percent
5 / Very High / 45 percent or more
– The Heritage Foundation’s scale for rating the severity of government intervention in the economy, based on the percentage of national output produced by state-owned firms.
The idea of state ownership triggers an almost physical revulsion in some economists. Each year the conservative Heritage Foundation releases their Index of Economic Freedom, invariably accompanied by research showing that countries with highly interventionist governments suffer dire economic consequences.
Of course, they can do this only by fiddling the data for Singapore. This was most pronounced in 2001. By the Heritage Foundation’s own scale, the country should have rated a five – “very high” intervention. As much as 60 percent of Singapore’s national output, Heritage noted, came from partially state-owned companies. Instead, Heritage scored Singapore at three – “moderate intervention.” Which was at least more realistic than the year before, when they rated the country, bizarrely, at two – “low intervention.”
But forgive the Heritage analysts a bit of ideologically-induced blindness. Singapore is a spectacular outlier. In 1959 it was a swamp plagued by tuberculosis and race riots and dotted by slums. Today it is richer than much of Europe. Not only is Singapore’s economy improbably state-dominated; its politics remain improbably undemocratic, despite the first-world levels of wealth and education enjoyed by Singaporeans.
It is always fashionable to predict that Singapore’s unlikely model is about to break down. Authoritarian politics and state-dominated economics are unloved by commentators on both the left and the right. And yet, even as power passes to Lee Hsien Loong, son of the country’s first prime minister, Singapore has good odds of continued success.
The reason is that the model is still sound. To turn a swamp into a super-state in the space of forty years requires something unusual. Good policies, to be sure – while most countries pay lip service to the basics, such as education and infrastructure, Singapore’s first prime minister, Lee Kwan Yew, poured money into them. During the first nine years of his administration, an incredible one-third of the budget went to education.
But what made Singapore truly exceptional was the civil service. Lee created a bureaucracy of ruthless competence. In many developing countries, public sector jobs are a patronage mechanism – they may not pay well, but offer ample opportunities to collect bribes, and hence can be created and distributed to political supporters in great numbers at little cost to the budget.
Lee’s service was different. The jobs would be extremely well paid – salaries of Singapore’s top civil-servants are explicitly pegged to those of private-sector CEOs. So the best and the brightest would come. And only the best would be hired, through a rigorous examination system. “An extreme example of meritocracy,” in the words of one scholar. Corruption would be ruthlessly punished. So much so that according to Transparency International, Singapore now ranks among the least corrupt countries on earth – trailing only Finland, Denmark, New Zealand and Iceland. And well ahead of the United States.
And then this civil service would be placed at the center of everything. To this day, 75 percent of Singaporeans live in government-built housing, and government-linked firms account, by some measures, for the majority of economic activity.
Fans of free markets may object that such a command and control economy could never rival the great capitalist centers as an innovation machine. But that was never the idea. The civil service would be employed to create the ideal business environment – the absence of corruption, the superb infrastructure. The government-linked companies were established in support industries such as shipbuilding and repair (Keppel and Jurong), transport (Orient Lines and Singapore Airlines), and infrastructure (Singapore Telecom). They provided joint venture partners for foreign firms – for instance, Singapore Refining partnered with British Petroleum and Singapore Petrochemical with Shell, in the early years.
The idea was to attract the great innovators from abroad. And this worked. The foreign investors came in droves. The ratio of the value of foreign direct investment in Singapore to national output is over 140 percent, the third highest in the world if offshore tax havens are discounted. Even countries such as China – whose growth is often described as fueled by foreign investment – do not exceed 50 percent. For the US, the ratio of foreign investment to output is under 15 percent.
So those who criticize Singapore for its state-dominated economy, stifling innovation, and its risk-averse people misunderstand the model. The state is employed, not as an economic dynamo, but as the skilled technician that keeps the dynamo running. In the past decade Singapore has proved the model still works by attracting a venture capital industry and building biotechnology research.
There will, to be sure, be challenges. Singapore’s bureaucrats have been eager consumers of Richard Florida’s Rise of the Creative Class, which argues that creativity drives rich-world economies. One of Florida’s contentions is that highly creative places have large gay populations. In 2003 Singapore’s pragmatic bureaucrats duly announced that homosexuals would be welcome in the civil service. But this is a small step, in a highly conservative country that still has laws forbidding homosexual sex on the books.
Still, it would be wrong to think that Singapore’s model is in danger. The country’s program of recruiting “creative class” scientists has been successful in recent years. The Economist magazine recently reported several top biomedical researchers lured to Singapore to establish labs. And Pfizer and Schering-Plough expanding their capacity in the country. It may not be popular, but Singapore unusual state-led miracle is likely to be maintained.
This article was originally published on Countryrisk.com, before I sold the website to Roubini Global Economics.