How Singapore has grown, from a policy perspective

LAST year, 17 economists, mostly Singaporean academics, got together to prepare 13 papers for an SG50 Special Issue of the Singapore Economic Review, that I guest edited. This has since been republished as a book, Singapore's Economic Development: Retrospection and Reflections.

We look at Singapore's economic development of the past 50 years from different policy perspectives: governance, lessons for other developing countries, role of the state, monetary policy, public financial management, labour and productivity, trade and foreign direct investment, demographics and population, housing, the Central Provident Fund (CPF), poverty and social welfare and energy and the environment. And we reflect on what lies ahead for the economy.

There are several common themes among our papers. The dominant theme is the primacy of economic growth in driving social as well as economic policies. This was maintained throughout our 50-year history, even after per capita gross domestic product (GDP) had risen well beyond the level at which growth tends to slow down in developed countries.

Examples of social policy being harnessed for economic growth include: ensuring affordable housing to keep factory wages low during the years of labour-intensive manufacturing; reducing employers' CPF contributions and government industrial estate rentals to lower business costs during growth slowdowns; the liberal foreign worker and talent policy underlying the extensive growth model based on factor accumulation; public finances oriented toward providing incentives and subsidies for investors; social welfare policies focused on human capital development; and energy and environmental policies focused on developing the oil and gas sector and lowering costs through energy efficiency.

A second theme is the interconnection between different policy arenas, which increased the effectiveness of individual policies. The best known of these is the mobilisation of individuals' CPF savings to finance their publicly-constructed housing, thus avoiding budget deficits, creating a home-ownership society and motivating national service.

Racial quotas in public housing estates helped to foster national unity and prevent the formation of ethnic ghettoes and voting blocs. Housing Development Board (HDB), CPF and labour policy also served industrial policy conducted by the Economic Development Board (EDB).

Housing, education and health policy were used to lower birth rates during the 1960s and 1970s, while budget measures such as tax relief and child payments were later employed to encourage births.

Third, there were sharp changes in policy direction, but within the same development model and institutional infrastructure.

The HDB's goals moved from dealing with a chronic housing shortage and providing affordable basic housing in the 1960s through the 1980s, to upgrading, market deregulation and asset enhancement after 1990, with some return to a focus on affordability very recently.

CPF moved quickly from retirement savings to mortgage financing, later adding non-housing investments, healthcare and education financing to its allowable expenditures.

Investment incentives and industrial policy moved up the technological ladder from labour- to capital- and skill-intensive, while foreign labour policy swung back and forth between heavy dependence and tightening.

Population policy, which was emphatically anti-natalist in the 1960s and 1970s, was reversed in the 1980s to encourage higher fertility.

There was a switch from public provision to partial privatisation of public and social services, reflecting an ideological shift from state to individual responsibility for social welfare, which has recently begun to shift back.

Fourth, the dominant role of the state in the economy was maintained, and even expanded. Rather than retreating with the development of markets and institutions, state and state-linked entities have reached into ever more areas of public and private life and the provision of commercial goods and services which in other developed-market economies would be undertaken by private enterprise.

Strong central executive control, an undivided legislature and what Associate Professor Tilak Abeysinghe of the National University of Singapore (NUS) calls "politicians with high opportunity cost", facilitated swift decision-making and policy implementation by the civil service, statutory boards, the government-linked companies (GLCs), NTUC and other state-linked units and their private-sector subcontractors.

This pervasive state apparatus enabled the rapid mass mobilisation of resources for economic growth during different developmental phases.

These policies were very successful in achieving both the primary goal of rapid GDP growth (with low unemployment and inflation), and each policy's multifaceted social and economic goals.

They were greatly enabled and enhanced by a favourable world market environment, which also benefited other Asian newly-industrialising economies.

But focusing on maximising growth through factor accumulation proved to be unsustainable. The depression of both capital and labour costs preserved international competitiveness and attractiveness to foreign investors. But there were diminishing returns, especially given the extreme scarcity of land and the early appearance and continuation of low, and even negative, productivity growth.

Both public and private housing prices rose due to heightened scarcity values intensified by foreign demand (the result of open capital and labour markets). In response, Singaporeans saved more of their income to spend on housing, with a corresponding fall in the share of income spent on consumption of other goods and services to a very low level (40 per cent of GDP) by local historical and comparative international standards.

Becoming "asset-rich and cash-poor" in a rapidly-ageing society, where most retirement savings lodged at the CPF have been devoted to housing, poses serious problems for retirement-income adequacy.

The integration of CPF savings with HDB housing policy, so perfect for a much younger, lower-income, higher-fertility society in a much lower-cost, faster-growth era, now presents difficult policy challenges in a much older, higher-income, lower-fertility society in a much higher-cost, lower-growth era.

Higher land and property costs have also directly and indirectly reduced international competitiveness and hence, the capacity for growth through foreign investment.

While individual policies interacted to enhance their collective effectiveness, successful policy in one domain also had negative impacts on other policy domains.

For example, during the labour-intensive era of development, low-skilled manufacturing jobs were plentiful for lowly-educated residents. Their employment and wages rose rapidly, reducing poverty and inequality and increasing their ability to pay for affordable public housing out of CPF.

But as Singapore's comparative advantage shifted, returns to internationally mobile capital and skills increased, while those to low-skilled domestic labour decreased, as in other developed countries also subject to intensified global competition and skill-biased technological change.

This resulted in increased income inequality, intensified in Singapore by the massive import of low-skilled labour which depressed wages at the lower end of the scale, and reduced productivity growth by removing the incentive for firms to automate and innovate.

At the same time, the policy to attract global talent, especially into financial services, pushed salaries up dramatically at the high end of the labour force.

Not surprisingly, earned-income inequality in Singapore is now greater than in most other developed countries, and overall inequality is even greater if wealth inequality is also taken into account. Combined with the rising cost of living, this has introduced challenges of poverty and retirement adequacy for significant proportions of the population.

Industrial upgrading through statist policies has also increased economic volatility, given concentration in a few volatile and capital-intensive industries.

Volatility not only reduces growth and productivity, it also makes macroeconomic stabilisation more challenging, reducing the degrees of freedom which monetary and fiscal policy previously had to pursue other goals. Increased volatility has also arguably reduced welfare for workers by forcing them to shoulder higher risks, in the absence of an effective social safety net.

Industrial upgrading also increased the skill-wage premium, worsening income inequality, while prioritising heavily capital-intensive industries such as petroleum refining and chemicals also conflicts with environmental goals of reducing energy use and pollution.

Growth based on large imports of foreign labour and talent has resulted in increased physical congestion, and increased risk of social divisions between indigenous citizens and the "new residents".

We collectively conclude that economic policy was both innovative and effective in the first two to three decades of independence, particularly in simultaneously delivering on both rapid economic growth and improved social welfare.

In more recent decades, economic growth and social welfare for a significant minority of Singaporeans have begun to diverge. At the same time, external demand and domestic supply-side constraints have sharply lowered growth potential, even as the income, housing and healthcare needs of the ageing population rise.

Furthermore, prolonged dependence on foreign enterprises has left the economy lacking what economists Tan Kim Song and Manu Bhaskaran call the "inherent production capacity" and "core of strong vibrant local enterprise" - necessary to propel development into the future. "An investment approach - putting bets on many new industries with the expectation that some would pay off handsomely even if others fail - limited the likelihood of developing sufficient depth and globally competitive scale in any of these industries, since all would be competing for already extremely scarce resources."

Looking ahead, there is consensus that slower GDP growth, higher productivity, a more vibrant and innovative local private entrepreneurial class, and a relative shift from manufacturing to services, and from a global to a regional market orientation, are necessary for continued economic development. The big question here is whether and what the government can and should do in this transformation away from the development model it created.

There is also consensus that public policy must continue to pay greater attention to directly meeting the growing social needs of the population, especially the poor, low-income and elderly. Fortunately, we have the financial and institutional resources to effect the necessary transfers, which will be reduced if we also allow labour and capital markets to function more freely and efficiently.

• The writer is guest editor of "A Fifty-Year Retrospective on the Singapore Economy" published in a special issue of the Singapore Economic Review Vol 60, No 3 (2015), and republished as "Singapore's Economic Development: Retrospection and Reflections" in World Scientific Publishing Co's SG50 Series. She is also professor of strategy at the Ross School of Business, University of Michigan

This article was first published on March 8, 2016.
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