Presentation on theme: "From Cub to Tiger: Government Intervention in Singapore And Implications for the Future By: Amber Huber."— Presentation transcript:
1From Cub to Tiger: Government Intervention in Singapore And Implications for the Future By: Amber Huber
2Introduction Singapore as a third world country Political strife 1960: Per capita GNP <US$320, unemployment rate 14%, illiteracy, poverty, poor housing conditionsEntrepot economy with few natural resourcesPolitical strifeBritish control following Japanese occupationLim Yew Hock gains self-government for Singapore – 1959People’s Action party wins general election -1959Lee Kuan Yew - first Prime Minister5 phasesModified version of Singapore’s investment phases set forth by Teck-Wong Soon and C. Suan Tan (1993)Soon, Teck-Wong, and C. Suan Tan "Singapore: Public Policy and Economic Development." World Bank.Singapore
3Labor-Intensive Import-Substitution (1959-65) Industrialization as job creation mediumSmall domestic market, expanded through political union with MalayaHousing Development Board (HDB)Subsidized housing to citizens, addressed housing crisis“Five Year Plan”Fixed poor education system, accelerated school building programMath, science, and technical skills for successful industrializationEconomic Development BoardIndustrial policies that provided capital to infant industries and land for industrial sitesHoward Pack and Kamal Saggi (2006) infant industry argument, foreign competition has the upper hand
4Labor-Intensive Import-Substitution (1959-65) Results were meekGov’t intervention and EDB efforts resulted in only 2.2% increase of manufacturing share of real GDP fromUnemployment still over 10%However, policies enacted increased housing quality, widened semiskilled worker pool, and developed infrastructure on industrial sitesExpulsion from Malaysia and true independence- 1965Racial tensions, lack of interest from Malaya to be trading partnerTrade barriers enacted between MalaysiaPAP changed promotional efforts to labor-intensive export-orientated manufacturing
5Labor-Intensive Export-Orientated Manufacturing (1966-73) Economic Expansion Incentives Act (1967)Provided tax incentives for firms to expand and for investmentTax relief for income from capital expansion, foreign loans, royalties, etc.Tripartism – Government, employers, and labor working together to achieve greater productivity, efficiency, and faster economic growthPAP’s efforts to strengthen relationship with National Trades Union Congress (NTUC)Employment Act of 1968 abolished discriminatory practicesRaised Central Provident Fund (CPF) contributions to 25% of worker’s wages to promote macroeconomic stabilityProvided non-inflationary financial source for less than market rates for gov’t to use for investmentFinanced spending for upgrading education and technological levelAllowed gov’t to provide financial incentives to foreign investors without running fiscal deficits
6Labor-Intensive Export-Orientated Manufacturing (1966-73) Policies greatly promoted FDI, manufacturing investments totaled S$2.3 billion fromElkan (1995): MNCs assume risk of implementing technology, allowing Singapore to “catch-up”Bank of America entered Singapore with interest in creating currency unit (Asian Currency Unit)Gov’t promoted this by creating tax exemption for nonresident depositsAsia Dollar Market (ADM) boomed as other banks joinedBanks increase FDI by making financial resources easily accessibleRobert Maxon, manager of Mobil Oil refinery in Singapore in 1970 called Singapore an “investor’s dream” as they offered cheap labor, macroeconomic stability with low inflation, easily accessible financial resources, gov’t control over unions, and cheap factory sites.Real GDP grew ~13% a year from
7First Attempts to Upgrade (1973-78) Neared full employment, created labor shortage, along with a decline in FDI inflowsGov’t sought to upgrade the economy by focusing on quality, skills, and technological contentHon Sui Sen’s (Finance Minister at the time) ten point program (1973) to upgrade skill/tech level of the manufacturing sector:Wage increase policy under guidance of National Wages Council to increase wage competitivenessManpower-development to promote industrial training, tax exemptions for training expensesOpen-door policy for qualified foreign workersFive year tax holiday for industries with desired technology levelsTamasek Holdings, a Government Linked Company (GLC) created in 1974Sole shareholder was Minister of FinanceWould take part ownership and provide guidance in a company if success was needed to further gov’t objectivesControversial, fears that GLCs lead to crony capitalism and unfair advantages over domestic firms.To address these fears, Goh Chok Tong, a member of PAP at the time, stated that the GLCs would have to operate competitively in a similar manner that private firms do. In addition, he argued that larger GLCs had to compete with the global market as well as the domestic market, which diminished part of their perceived advantage .
8First Attempts to Upgrade (1973-78) EDB joint industry training centers; means to upgrade work force skillCollaboration between MNCs and EDB, provided support for Joint Industry Training SchemeProvided MNCs with stream of well-trained workers1973 Oil Crisis and the world slowdown that came after ( ) dampened their effortsWorld recession caused unemployment fear, economy clung to labor-intensive industriesMauzy and Milne (2002): Singapore’s attempt to increase employment by upgrading tech levels “was premature, and the foreign demand was not enough to make it possible at a profit”Global recession affected FDI, but it never fell below S$300 million annually in the 1970sReal GDP grew 7.4% fromMost economic growth came from foreign investment in construction and the ADM boom
9Economic Restructuring (1979-84) Singapore’s manufacturing economy became strongly dependent on foreign firms, needed to stay competitive to continue getting FDI“Economic Development Plan for the Eighties” goal was economic diversificationDiversify economic activities into information based services, and diversify market by expanding exports to developing countriesChose 11 industries for promotion, examples include software development and automotive partsAssured MNCs they wouldn’t construct barriers to foreign investorsEDB and NWC set periodic wage increases over periodSustained focus on education training to provide workers for promoted fieldsIMF 1985 study; financial incentives alone weren’t enough to attract FDIExplains the reason why Singapore chose several approaches
10Economic Restructuring (1979-84) Singapore infiltrated higher tech industries; by 1983 they were world’s largest export of disk drives even though they didn’t produce computer parts in 1980Underwhelming manufacturing growth due to decreased global shipping demand, low petroleum prices, and U.S. growth decline dwindling demand for Singaporean exportsHigh wage policies lackluster, wage increases exceeded NWC guidelines and surpassed productivity gainsAdverse effects of oil crisis caused demand to go down while high wage policy increased unit labor costReal GDP only grew 5.1% a year, but financial sector grew by 11.3%Monetary Authority of Singapore (MAS) pushing Singapore towards becoming international finance centerFinancial sector accounted for 19.7% of GDP in 1980
11Retrenchment and Further Diversification (1985-1990) Foreshadowed in the previous period, global cool down caused recession in 1985Real GDP in 1985 was -1.6%Lee Hsien Loong (Minister of State for Trade & Industry) created the Economic CommitteeSole task to get economy out of recessionTwo factors caused recession: increased business operating costs (caused by high wage policy and increased CPF contribution) and changed global demandLowered unit labor costs by decreasing CPF funds with support of NTUCCut down to 10% (from previous 25%), translated to 12% reduction in workers’ earningsGov’t lowered taxes, utility charges, offered rebates for port fees/industrial site rentalsAbolished high wage policyQuick recovery, real GDP averaged 1.8% in 1986 and 10% from
12Retrenchment and Further Diversification (1985-1990) EDB created S$100 million Venture fund that jointly invested in overseas tech firmsSaggi and Pack (2006): Technology transfers, increase domestic quality and efficiencyMany small and medium enterprises (SMEs) shut down during recessionLocal Industry Upgrading Program (LIUP) created in 1986 by EDB to unite MNCs and SMEs and encourage knowledge diffusions1989 EDB enacted SME Master Plan providing SMEs with information, training, and loan servicesAllowed SMEs to enter into skill-intensive production, broadened domestic base for high tech MNCsEDB encouraged service sector investment, gave tax holidays and allowances for investmentsPushing Singapore towards being a “Total Business Center” and regional headquarters for MNCsSeveral MNCs created operational centers there, ex: Exxon, IBM, and General Electric
13Retrenchment and Further Diversification (1985-1990) Gov’t subsidized R&D as incentives to bolster manufacturing firmsHo and Wong (2009): Short run a 1% increase in Singaporean R&D leads to 1.33% TFP increase.In long run 1% increase leads to 8.14% TFP increase.Historical education focus beginning to bear fruit, by 1986 majority of Singaporean children received at least 10 years of schoolingTo focus on uneducated adults, NWC joined forces with Skills Development Fund (SDF)“Initiatives in New Technologies” introduced in 1984 to train high tech professionalsSDF provided funds for training workersTook initiative when MNCs were hesitant to invest in costly training systemsAllowed Singapore to meet demand for educated workers, removed pressure from MNCs to take additional risk, and raised foreign investment
14Investment Abroad and a Globalized Singapore (1990 onwards) Lee Kuan Yew, Senior Minister to the Cabinet, proposed “go abroad” policy in 1990 to develop external economic wingSingapore outgrowing it’s geographically small statureEDB introduced Regionalization 2000 strategy to build external economyGoal was to increase internationalization and become regional trade hubPursued formation of overseas industrial and technological parksParks allowed Singapore to keep higher value-added production goods in their own country while providing lower value-added activities at overseas parksNot to delve too deep into specifics, this lead to the creation of several other flagship parks. Among those were; the Wuxi Singapore Industrial Park (WSIP), Vietnam-Singapore Industrial Park (VSIP), and the India International Technology Park Limited (ITPL).
15Investment Abroad and a Globalized Singapore (1990 onwards) Indonesia-Malaysia-Singapore Growth Triangle (IMS-GT) created inPooled Singaporean capital, management, and tech levels with the cheap land and labor of Indonesia and MalaysiaLinked countries’ comparative advantages to jointly attract MNCsAttracted quality investors, including Toshiba and Phillips
16Investment Abroad and a Globalized Singapore (1990 onwards) Focused on China with creation of China-Singapore Suzhou Industrial Park (CS-SIP) in 1994Ultimately became global investment centerheld 38 Fortune 500 companiesSuccess lead to creation of several other flagship parks1997 Asian Financial CrisisSingapore’s robust reserves and financial strength helped avoid contagionGov’t responded to growth fall with a package of cost reductions and tax rebatesEconomic Review Committee (ERC) established in 2001 to revitalize, upgrade, and transform domestic economyReviewed current policies, analyzed economic climate, and recommended changesFTAs allowed Singapore to remove trade barriers, increase FC savings, and have greater market accessEx: bilateral agreements between New Zealand and Singapore (ANZCEP) and U.S. and Singapore (USSFTA)CS-SIP (2006)
17Investment Abroad and a Globalized Singapore (1990 onwards) International Enterprise Singapore (IES) created in 2002Helped domestic firms invest overseas, shorten learning curve, and find overseas partnersBiopolis Centre, a biomedical complex, built by Jurong Township Cooperation (JTC) in 2003Helped drive Singapore towards being a “high-tech haven”Instituted Singapore as biomedical hub, priority in nanotechnology and stem-cell researchLeading destination for healthcare services due to high medical science reputationEDB, IES, and Singapore Tourism Board jointly sought to promote healthcare sector investmentBiopolis Centre (2008) The 2009 budget’s “Resilience Package”, aiming at helping businesses to retain workers, amounted to S$ 20.5 billion. S$5.1 billion of this was spent on helping to preserve jobs, and S$5.8 billion extended to stimulate bank lending through a Special Risk-Sharing Initiative (SRI).Policies furthered Singapore towards becoming the trade, healthcare, biomedical, and finance hub of AsiaDespite negative global impact from 2001 and 2008 U.S. recession, GDP growth averaged 5% from
18Policy Criticisms High wage policy played a role in 1985 recession Otani and Sassanpour (1988) found that without the policy, GDP would have remained unchanged from instead of decliningWhile China-Singapore Suzhou Industrial Park (CS-SIP) was prosperous, following parks didn’t have the same achievementNicholas Phelps (2007): Regionalization 2000 program was ineffective; “gaining from globalization” is difficult; parks had little economic benefits outside of CS-SIPExcessive dependence on FDI causes economy to become vulnerable to external events outside of their range of control - Sajid Anwar (2006)CPF criticisms - Mauzy and Milne (2002):High contribution rates played role in 1985 recession due to increasing unit labor costs.CPF may not provide adequate funds for retirementIn 1999, 24% of members who reached 55 in 1998 had a CPF account <$16,000
19Sustainability Issues Krugman (1994): Singapore lacks long term growth potential because growth based on non- repeatable one time changesEx: Singapore boomed when workers became educatedUnsustainable growth because factors for past growth can’t be replicatedAlwyn Young (1992): Singapore experienced slightly negative TFP growth fromSuccess depends on gov’t changing policies from factor accumulation to TFPG and technological changeHowever, using dual estimates based on price data rather than nominal account quantity data, Huff (1999) found TFP growth averaged 1.6% a yearHuff (1999): Merit based education system stifles creativity and innovationJohannes Chang (2003) agreed and said it is the reason Singapore is short of original technological innovation, must produce entrepreneurs for long term successSajid Anwar (2006): Continued liberalization of financial sector must occur to foster long term FDIWould increase competition, accountability, and transparency in disclosure standardsIncrease efficiency of financial sector and raise productivityThe first exercise of growth accounting was presented by Solow (1957) and was basedon subtracting of weighted growth rates of capital and labor from the growth rate ofoutput. The remaining (residual) part was ascribed to growth of technology. This isprimal approach to growth accounting. The main problem of primal approach is that itrelies on measuring inputs such as capital or labor which can be sometimes unreliable.On the other hand, dual approach is based on factor prices rather than quantities, whichare usually better to measure. Next advantage of price-based estimates is that the pricesare formed at the markets and agents have incentive to get the right price. A firm thatpays to factor more than its marginal product is throwing money away. On the contrary,national accounts are provided by government (statistical) agencies and the figures maybe subject to large errors.
20Conclusion Singapore - 2011 Outlined framework vital to understanding Singapore’s growth and their reasoning for policy decisionsGov’t attained success by using sensibly fashioned policies to:Develop infrastructurePromote tripartismInvest in human capitalPromote R&DAttract foreign investmentMaintain macroeconomic stabilitySingapore’s flexibility will allow them to combat future problems directlyThey have demonstrated their capability of achieving growth by adapting to shifting global economyOnly time will tell how well Singapore achieves long term growth, but historical indications imply they are likely up for the challengeSingapore
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