Will small still be beautiful in 2065?

Will small still be beautiful in 2065?

THE 50 years since Singapore's modern journey began has been a good time for small countries.

Although this was not at all obvious in 1965 - there were serious challenges that had to be overcome by a city state with no natural resources and an uncertain regional context - the strategic international environment over the next several decades turned out to be strongly positive for small countries. Globalisation provided new economic opportunities, and a relatively stable international political environment protected against security risks.

Small has been beautiful.

Small advanced economies have outcompeted larger countries over the past few decades.

Singapore has been in the vanguard of this, making the most of favourable conditions.

But history shows that past performance is no guarantee of future success. A look at maps of Asia or Europe over the past few centuries shows clearly that countries come and go.

This is particularly true for city states, which need economic openness and political stability.

Continuing success requires countries to adapt to a changing world. For Singapore, its domestic and international contexts are substantially different from 50 years ago. Singapore is now one of the richest countries in the world. And the return of geopolitics is weakening the rules-based system that supported small-country performance.

The outlook for Singapore to 2065 depends on how it responds to these domestic and international challenges.

Domestic challenges

AFTER 50 years of strong catch-up growth, Singapore now needs to generate growth at the income frontier, manage issues around an ageing population and income inequality, and respond to demands for increased provision of public goods and services.

As is recognised, this will require Singapore to transition to a productivity-driven growth model. Reduced labour-force growth and higher cost structures mean that an input-driven growth model is not sufficient. In turn, this will need to be grounded in innovative capacity that is broadly based, with less reliance on importing productivity through multinational corporations.

This transformation will need to be delivered at the same time as small countries are facing a series of challenges, such as exposures to increasing global economic volatility as well as to fast-paced changes in technologies and business models that can cause shocks to important sectors.

For Singapore, some of its traditional strengths - being a regional hub, its position on major trade routes and its strengths in services - may weaken as other countries in the region become more competitive and as economic geography shifts.

As in the past, ongoing adaptation and the development of new strengths will be required.

Being a small country makes it easier to develop a coherent, rapid policy response to these changes.

Indeed, many small countries are successfully responding to a rapidly changing global economy - investing in research and development, upgrading their economies, restoring fiscal balance and so on. But this is demanding, with little margin for error. Small countries will need to work hard to sustain their historical performance.

Singapore is increasingly facing policy issues that are similar to those faced by "normal" small, advanced economies.

Its policies will likely become more like those of other small, advanced economies over time.

This will require Singapore to make some hard policy choices.

But the good news from the international experience is that small countries can sustain strong performance at the frontier, even with high cost structures and higher government spending. And Singapore has a solid foundation to build on, with high-quality institutions, a strong competitive position and substantial reserves.

The return of geopolitics

AFTER 50 years in which the international environment supported small-country performance, new challenges are emerging that will confront Singapore over the coming decades.

In particular, geopolitics is back. Issues of nationalism and security are increasingly prominent, and international economics and politics are intersecting to a much greater degree.

These developments are global in nature, but are pronounced in Asia because of the emergence of new regional powers as a result of rapid economic development - from Japan, South Korea and China to countries like India and Indonesia.

There is increased jostling in the region such as in the South China Sea and uncertainty about the future role of the United States in the region.

There are also unclear prospects for ASEAN and signs of domestic political instability in some of Singapore's neighbours.

Singapore, as with other small countries, has prospered in a liberal, rules-based international system and with a relatively stable security environment in Asia.

But to the extent that the rules-based system weakens, and considerations of hard power become more prominent, a small city state like Singapore may be squeezed.

In turn, this may compromise the ability of Singapore to pursue an outwardly-oriented economic strategy with supply chains that are deeply embedded in its neighbours.

Even in the relatively benign environment of the past several decades, Singapore has had an understandable sense of vulnerability.

Singapore has responded by developing a strong military capability, supporting regional integration (notably ASEAN) and a stabilising US presence, and by making itself a valued source of ideas.

As the intensity of the challenges in the region grows, increasingly deliberate action will be needed.

For many small countries, notably in Europe, the response to the vulnerabilities of limited economic and political scale has been integration into the European Union (EU) and security alliances like the North Atlantic Treaty Organisation.

This is less straightforward for Singapore. Regional economic integration is under way, but Singapore will also need to create strategic space by balancing multiple relationships and by being valuable to as many countries as possible.

Although small countries have some intrinsic abilities to adapt and respond, the world is likely to become more uncomfortable for small countries.

In response, Singapore needs to continue to maintain its leading economic and financial position, to anticipate change, and to engage in creative diplomacy that makes Singapore relevant. Even so, Singapore may face increasing constraints over the coming decades. Small countries tend to have to accommodate themselves to the preferences of larger powers on issues ranging from market access to security alliances.

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