Since its inception, the Republic of Singapore has
combined the fastest growth with the lowest inflation of
any industrial economy. This feat was accomplished with a
strict set of economic goals including a conservative
monetary and fiscal policy, free trade, and a commitment to
stable prices (Wood, 25). This evaluation of Singapore's
economy will look at the history and forces behind their
success. Background Sir Stamford Raffles established
Singapore as a British trading post in 1819. At the time
the island was scarcely inhabited, had no valuable
resources, was mostly marsh and jungle land and wasn't
located on the major commercial trade routes. The only
thing the island had going for it was its location for
secondary trade and its deep water port.
It wasn't until the 1860's, when the Suez Canal opened,
that the port's true potential was realized. With the canal
thoroughfare, the island suddenly became attractive as a
resting point. Initially, it was used as a coaling station
for the steam boats traversing the new routes between the
East and West. From here, Singapore was rapidly integrated
in the commercial channels as a source for rubber and tin,
and as a distributor for goods collected from Europe and
America (Woronoff, 121-2). This newfound prosperity came to
a halt in World War II when Singapore's occupation was
juggled between Japan, Britain, and Malaysia. After all the
commotion was over, Singapore secured its independence on
August 1965 and was declared a republic in December 1965.
At this point, the Republic of Singapore had to start
anew (Buchanan, 31). In effect, it had to develop it's own
system of government and economic policies to retain its
success. After all the smoke cleared Singapore was able to
accomplish this feat and much more. Setting Singapore has
approximately the area and population of the city of
Chicago. The total land area is about 239 square miles
including 58 surrounding islets. It is separated from the
mainland of Malaysia by the Johore Strait to the north.
Across the Strait of Malacca and the Singapore Strait to
the west and south of the island lies Indonesia. It is
situated just 85 miles north of the equator so its climate
is tropical (Deyo, 104). The population is entirely urban
with "a strong manufacturing base, and active service
sector, and virtually no agriculture" (Gregory, 261). There
are also virtually no natural resources (Woronoff, 122).
Throughout its development, Singapore's population has
increased at a blinding rate due to immigration and high
birth rates. It went from a few thousand when Raffles
arrived to about a million after the war to about 2.8
million today (Buchanan, 162). Economy Singapore has one of
the World's most open economies, rivaled only by Hong Kong.
There are few protective tariffs and the government has
provided an attractive climate for foreign investment. It
has one of the world's largest and busiest ports and oil
refinery centers. Also, it is a major financial center,
trailing only London, New York, and Hong Kong in the number
of commercial banks (135) and is the center of the Asian
Dollar Market with 190 financial institutions that cater to
foreign depositors. Compared to the size of its economy,
Singapore leads the world in foreign trade (Wood, 30).
Goals are something Singapore holds dear. Among them are
"the diversification and upgrading of industry while
developing the island into a center of regional services
and international finance." Skill-intensive and high-tech
industries are encouraged (Buchanan, 164). Among the main
industries that have made Singapore successful are as
follows. Manufacturing is responsible for about 25% of the
GDP. From 1965 to 1980, manufacturing grew at an annual
rate of 13.3%. Other major activities are petroleum
refining, and machinery and appliances (including the large
electronics industry). Interestingly, agriculture is
responsible for the employment of only about 1% of the
labor force (Wood, 139-40). This is a drastic difference to
many of its neighbors and the reason will be introduced
shortly. Though Singapore is a capitalist society, their
monetary policy hardly takes a laissez faire approach. In
their commitment to monetary stability, the government sets
economic goals and "unhesitatingly interferes with market
forces to achieve those goals" (Wood, 30). Examples of how
the government accomplishes its goals are discussed briefly
below. Because land space is so limited, the government
steps in to make sure it is used in the most efficient way.
Road construction is kept to a minimum by a 225% tax on new
automobile purchases, cremation is encouraged, outlying
villages are destroyed and its inhabitants transferred to
urban high-rise housing, and agriculture has been nearly
eliminated. The logic behind reducing agriculture is that
it is very land intensive and cheap food is available from
the nearby agricultural communities. This effectively
leaves room for the less land intensive activities like
trade, manufacturing, and services. Between 1965 and 1989
the share of agriculture and fishing in GDP fell from 3.1%
to 0.3% (Wood, 31). Beyond having high automobile taxes,
the government offers other incentives to alternative
transportation. They have a network of high quality public
transportation which consists of buses, taxis, and a
mass-rapid-transit (MRT) system. The MRT routes link the
major housing estates with the central business district.
Also showing Singapore's commitment to high quality
transportation is the national carrier, Singapore Airlines,
which has a world-wide reputation of excellence (Deyo, 47).
On fiscal policy, the government of Singapore enforces
private savings and manages a surplus in its own budget.
Savings exceed 40% of income and most is handled through
the Central Provident Fund under which employers and
employees contribute 18% and 22% to respectively.
Withdrawals from this account are only allowed for home
purchase (the main use), retirement income, home repair,
and hospital expenses. (Buchanan, 107). Singapore is
classified as an upper-middle-income country by the World
Bank. Performance-wise, Singapore's economy has done very
well compared to the rest of the world. In 1989 the
unemployment rate was at 2.2%, down from 6% in 1970 (Wood,
32). The GNP per capita in 1985 was $7420, the second
highest in Southeast-Asia behind Brunei. Wages, which are
controlled, rose 8.7 percent per annum (compared with a
growth rate of 4.6%) between 1979 and 1984 (Woronoff, 140).
Between 1965 and 1990, the average annual growth rate of
Singapore's per capita real GDP was 7.2% compared to 6.7%
for South Korea and 6.4% for Taiwan (Singapore's closest
competitors). Singapore's average rate of consumer price
inflation was 3.6%, compared with 4.2% for West Germany
which had the second lowest inflation, and 5.6% for the
U.S. (Wood, 25). Conclusion Singapore's dedication to a
strong economy and stable prices have made it one of the
most successful economies in the world in a relatively
short amount of time. It's openness to the outside world
lends itself as an example as to what other newly
developing economies and governments can accomplish if they
are committed to their goals. Granted, Singapore's
governmental and economic institutions have only been
around for 30 years so we will have to see how they stand
the test of time. There's no denying, though, that they are
off to a great start.
Buchanan, Iain. Singapore in Southeast Asia. London: G Bell
and Sons, LTD, 1972.
Deyo, Frederic C. The Political Economy of the New Asian
Industrialism. London: Cornell
University Press, 1987.
Gregory, Paul R. Comparative Economic Systems. Boston:
Houghton Mifflin Co, 1995.
Wood, John H. "Monetary Policy in a Small Open Economy: The
Case of Singapore." Economic
Review Second Quarter 1992: 25-36.
Woronoff, Jon. Asia's "Miracle" Economies. New York: M.E.
Sharpe, INC, 1986.