Macroeconomics

Final Project

Trim II, MBA 2020-21

Eye of the Tiger:

Singapore Roars

Submitted to:
Dr. Chandrima Sikdar

Group 8
I009 - Nikhil Mantry
I027 - Aarushi Alagh
I031 - Shubham Rajawat
I060 - Anant Jakhar
I063 - Jitendra Tolani
I064 - Dhruv Patel
 Introduction: Singapore’s Economic Presence Through the Ages

To the uninitiated, Singapore, with its relatively small island and population, belies the
underlying significance it holds in the world economy. Since the middle ages, Singapore has
played a pivotal part in the trade and commerce of Asian and European nations. Historically,
it owes this importance to its location, a centre point in the Maritime Silk Route. Lying just
beyond the Strait of Malacca, travellers from Europe and South India often found themselves
treading Singaporean waters while on their way to China. Back in the 14th century, Singapore
acted as an important port city for the thalassocratic Majapahit Empire of Java and Ayutthaya
kingdom of Siam. Interestingly enough, it also used to be an active pirate hub. The empires
deteriorated over time due to an influx of European conquerors and got replaced with Dutch
and British supremacy. Singapore, the stronghold of Asian economy as it’s known now, has its
roots in this time, in 1819, when the British established a new port in the city and incorporated
it in their trade route.
For most part of the 19th and 20th century, while Singapore grew as a key city in Asian
economics, it was merely a vessel for British interests. Its location proved to be of strategic
interests to British, who used it as a nucleus to increase their sphere of rule and influence in
South East Asia and to keep Chinese and Japanese empires at bay. During the second World
War, the city suffered heavy damages in terms of both man and infrastructure, as Japan ravaged
the city. Post Japan’s surrender in 1945, the city went through a tumultuous period of transition.
With British secession from the region in the following years, Singapore became a partially
self-governed state in 1955.
Till then Singapore was a part of the Malaya Federation, which comprised of 11 states including
Singapore and Malaysia. With the Britons having left with most of their capital, Singapore was
thrown into an economic downturn, with rampant unemployment. It was also rife with racial
tensions as Singapore had a sizeable portion of ethnic Chinese making up their population,
something which the other Malayans did not appreciate. Due to a myriad of political and
economic reasons, the Malaya Federation redrew the national boundaries and formed new
states, among which was the Federation of Malaysia, of which Singapore was a part. In the
years which followed, the Singaporean government continued to have issues with its Malaysian
counterpart, eventually culminating into great communal riots. This led to the Malaysian
government expelling the state of Singapore from the Federation in 1965. The city-state of
Singapore was born.
At its inception, Singapore had a negative real GDP growth rate at -3.03%, a GNI per capita
(by Atlas method, current US $) of $540, $50 lower than the world average then and the
unemployment rate was at 9%, extremely high for a country where manpower was the only
substantial resource. Singapore had no natural resource to fall back on and it depended on
neighbouring states for its energy needs. Even water was imported. Mr Lee Kuan Yew,
Singapore’s first Prime Minister had mentioned, in 1957, that an independent Singapore was a
“political, economic and geographical absurdity”. 8 years later, it was not hard to see that his
words held some substance of truth.
Half a century from that point onward, Singapore stands as the beacon of free market economy,
ranked as the most pro-business and open economy in the world. Its per-capita GDP in terms
of PPP stands third-highest in the world. It is a journey of excellent proportions in socio-
cultural norms, economics and politics. It makes for an interesting case study in economics, as
is the purpose of this report.

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 Objective of the analysis: A Case Study on a Near Ideal Economy

The primary objective of this report is to analyse the economy of Singapore via the lens of
macroeconomic policies – fiscal, monetary and trade – which have made it the economic
powerhouse it is in the global stage. As a corollary, we will also be observing how socio-
cultural and political factors shape these policies. Through the analysis, we will try to draw
insights as to whether Singapore’s economy is an ideal free-market economy.
Singapore, one of the Four Asian Tigers economies, others being South Korea, Taiwan and
Hong Kong, is widely studied for its rapid and constant growth since its inception. There are
various reasons as to why it makes for an interesting study. Although Singapore abounds in
natural beauty, it has virtually no natural resources, apart from deep water reserves of
petroleum. Given the state’s small size, there is virtually no hinterland, a key aspect of most
major port cities across the world. At the time of its inception, almost all of its population was
rural. Of all the factors of production, Singapore only had labour. Basing arguments purely on
economics, Singapore had odds stacked against it.
Singapore went through two distinct phases of growth – one from its inception to the late
1980s, led by export heavy industrialization, and the other from the 1990s to the previous
decade, which was marked by market liberalisation and rise of multinational modern services.
The first stage was marked by development around industrialization. The government created
new laws which promoted foreign direct investments as vehicles to embolden growth, the
first Asian colony to do this. At the same time, they established industrial lands and facilities,
restructured their labour laws in the favour of industries and designed education in a way
such that it put emphasis on technical, industry-relevant skills. This reaped amazing benefits
to Singapore, who gained a sort of ‘first-movers advantage’ in the South East Asian industry
space when it came to lucrativeness to foreign investors.
The second stage of growth was preceded by a recession in Singapore, in 1985, the only
instance in Singapore’s history when domestic economy contracted while global economy
was chugging along just fine. Herein, some structural strains began to show in the economic
setup of the state. Singapore was just not populous enough to keep growing solely on
industries. Diminishing returns on investments and resource constraints abounded. This led
to the government reviewing their outlook on the economic setup of the state.
In the second stage, Singapore began shifting its focus from industries to service sector. With
favourable tax and property laws for businesses already in place, Singapore soon became a
hot investment opportunity for technology and financial institutions. Entrepreneurship was
heavily encouraged. Wage flexibility was increased as more and diverse opportunities started
emerging for Singaporeans. Various government-controlled service sectors like
telecommunications, utilities and finance were liberalised. This phase catapulted Singapore
from being a third-world nation to first-world nation.
In the past decade, Singapore has come to terms that even this modern socio-economic space
cannot compensate for the fact that they have limited land and an almost fully utilized
populace with very low population growth rates, as is wont with developed states. So, they
have begun to transition their economy into a productivity-based economy. This productivity-
based growth model has proven challenging for labour intensive sectors like retail and

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hospitality, but it is the most optimal way forward for their economy. These growth phases
speak volumes about the general mindset of Singapore’s policymakers and general populace.
Wary of their resource infirmities, there seems to be no place for complacency in their minds.
Constant domestic responses to global changes.
Through the analysis in this report, we aim to dissect how Singapore has kept rolling forward
by measures of strong and visionary policies with a populace that has adopted their
traditional work culture in to their modern work ethic and forged this unstoppable, apex
entity in this ever-changing economic jungle.

Macroeconomic Scenario of Singapore (2010-19) &

Analysis of Policies

GDP Growth Rate % (YoY)

16
14
12
10
8
6
4
2
0
2008

2011
1999
2000
2001
2002
2003
2004
2005
2006
2007

2009
2010

2012
2013
2014
2015
2016
2017
2018
2019
-2

GDP Growth Rate % (YoY)

Source: World Bank and OECD National Accounts Data

GDP for this Asian Tiger has grown tremendously at an average of 7.7% YoY since its
independence (1965). For the first 25 years, the average growth rate was 9.2%, definitely on
the higher spectrum on the global level. However, if we look at the recent decade, 2010-19,
which immediately follows the financial crisis of 2008-09, we see a recovery of Singaporean
economy in Y’10 when its GDP grew at a staggering 14.53%. That point onwards, Singapore
embarked on a journey of steady growth with an average of 4.88% (2010-19).
As GDP is a culmination of various components viz, Consumption, Investment & Government
Expenditure and Net Exports, we have tried to analyse the individual components and their
impact on GDP.

1. Private Consumption expenditure has been fairly

steady growing at an average annual rate of 3.78%
owing to a constant autonomous expenditure and a
stationary increase in GNI per capita. As in any other
case, consumption expenditure is the major
contributor of Singapore’s GDP with an average of
36.25% during the past decade.

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Analysis of Consumption Expenditure
GNI per capita, annually, for Singaporean residents
has been observed to increase from USD 44,930 to
USD 59,590 at an CAGR of 2.9%. GNI in this method
is calculated at current prices, thus it is safe to say that
it is explained by the nationwide increasing wage rates
which are present below.

As can be seen above, there has been a steady increase in monthly wage rates on a
macroeconomic level. It has grown from ~ S$3800 per month back in 2010 to ~ S$5000 per
month in 2019.
It is observed that apart from a linear upward trend, monthly
wages rose and fell with a stationary variance throughout the
past decade. The reason for the same is economy operating at
more than its potential. This means that the resources,
specifically labour (a factor of production), are being over-
utilized, resulting in increased wage rates in the short-run,
which increases cost of production. High costs reduce seller
margins because of which the Short-run Aggregate Supply
(SAS) curve shift to the left, curtailing the inflationary gap
which in turn result in economy returning back to its potential
level, and thus wage rates again fall momentarily. Inflationary Gap adjusted in short-
run
There is no government intervention here, as the forces of demand and supply auto-adjust
the market equilibrium of aggregate expenditure/demand and aggregate supply in short-run.
(Note: Productivity levels for the past decade are present on the chart above on left. The same
upward linear trend and stationary falls and rises in the productivity explains the fluctuating
wage rates.)

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2. Government Expenditure, as observed for
private household consumption, has also been
fairly steady contributing on an average 14% to
the nation’s GDP. Singapore Government’s major
expenditure is incurred on Defence, Education,
Health, Nation Development (Infrastructure),
Environmental Resources (Green Motif and
Water Sanitation), Transportation and lastly,
Trade and Industry. Government has expended
avg. 3% of Total GDP on education and 2% on
Health in the past decade. Avg. 1% of total GDP
has been spent on Trade and Industry, which directly facilitates the country’s net exports.

Analysis of Government Expenditure

As mentioned before, human resources are utilized more than the country’s potential, which
is possible only if the labour force is nimble, flexible and competitive in the first place. GoS
expends 5% of country’s GDP for Education and Health which directly results in increased
competitiveness and productivity of workers in the country. As per the World Bank Human
Capital Index, Singapore ranks the best country in the world. One of the contributing factors
of human development can be GoS’s ‘Skillsfuture’ initiative. Programmes like SGUnited
extend skills training and job support to 100s of thousands in Singaporean workforce. This
keeps the unemployment rate low at 2.73% (past 10 years average)
Government spending of 1% GDP on Trade and Industry can be better explained by looking
at the next component of GDP, Net Exports.

3. Net Exports: Double digit annual GDP

growth achieved in Year 2010 (14.53%) can
be owed to a whopping 28.79% YoY growth
in net exports for the country in that year.
Since 1977, Singapore has been a net
exporter of goods and services i.e., it exports
more than it imports. Chart on the right
presents a yearly growth trend of net
exports and it can be observed that apart
from a steep recovery period of 2010-11, net
exports grew from year ’12 to ’15 and then
from ’17 to ’18.

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Analysis of Net Exports:
As seen in the chart on right, under
Government’s Fiscal Policy to promote
domestic production, corporate tax rates
were reduced from 26% back in 2000 to
17% in year 2010. These lucrative tax rates
induced foreign investment and foreign
companies to establish their presence and
operate from Singapore. This coupled with
domestic currency of Singapore Dollars
depreciating against USD, ensured higher
exports for the economy.
In 2015, net exports grew by 14.71% which has been analysed below –
While the manufacturing sector was on a decline, wholesale trade and transportation sectors
were boosted by an up-turn in oil related activities globally. However, due to the pressure to
cut back oil exploration by the cartel, OPEC, there has been a slow growth post 2015.

4. Inflation Rate: Annual inflation rates YoY

Inflation Rate
basis are aligned with what is expected (YoY)
looking at the annual GDP and Net Exports
growth rates. With economy recording
double digit GDP and Net Exports growth
rates in year 2010 and ’11, high inflation
rates at 5.25% and 4.58% respectively have
been observed. However, average for the
past decade is a mere 1.38%.

Analysis of Inflation:
Monetary Authority of Singapore, central
bank of the country, doesn’t interfere much
with money supply in the country. When it
does, it interferes only to keep the Foreign
Exchange Rate of SGD and USD in check by
altering its FOREX Reserves.
During 2010 and 11, it didn’t change the
bank lending rate and kept it constant at

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5.375%. Reducing it any further would decrease the price of money, increase the money
supply in the market, increase temporary demand which would further increase the inflation.
The risk of this hyperinflation is of paramount consideration for a nation’s monetary policy.
Post 2014, when the inflation rate fell drastically to avg. 0.26% (negative inflation adjusted),
MAS reduced its lending rate to increase money supply and achieve a healthy inflation in the
economy.

Bank Lending Rate in relation to Exports: In 2014, when the net exports were growing and
inflation was under control at meagre 1.03%, to facilitate exports even further, MAS reduced
lending rate by 2.5 basis points. Again, in 2017, when net exports didn’t grow for 2 years (’15-
’17), MAS stimulated money supply in the economy by reducing lending rate 60 basis points
to bring it to 5.275%. This ensured a 13.34% increase in net exports in the year 2018.

Connecting Policies to Performance of the Economy

Having examined some key economic policies and scenario prevalent in Singapore in the past
few decades, the next step is to observe the effects of these policies on the economy.
Historically, Singapore’s government has always been proactive in their approach to the state’s
economic development. With overarching plans on how the policies should be going forward
being enumerated in 1960s (First Plan), 1980 (Second Plan), 1985(Economic Committee
Report), 1991(Strategic Economic Plan) and so on.
In its first phase of growth (1960s-70s), Singapore relied heavily on foreign investments to fill
the capital gap it suffered from. To facilitate this, it passed the Economic Expansion Act (1968)
while also establishing government linked firms to build low production cost sites for
international investors. To make sure that the workforce in these industrial units is well
prepared and looked after, it geared its education policy towards industrial skill development
and created the Housing Development Board (HDB) to provide for public housing at subsidized
rates. The Economic Development Board (EDB) was also set up to command the industrial
growth. Furthermore, to make sure that the foreign investors found a cordial workforce, the
government abolished several aggressive trade unions and established a singular entity called
the National Trade Union Congress (NTUC), which worked as much for the government as it
did for the employees. In the following decades, a number of other centralized institutions, like
the Trade Development Board (TDB) and the Urban Redevelopment Authority (URA), were
established to streamline Singapore’s effort in creating one of the best FDI locations in the
world.
Post the 1985 recession, in the second phase of growth, which is the primary area of focus of
the report, Singapore shifted its focus to export and service sector. An overbearing issue was
the increasing shortage of labour. So, in the 1980s, Singapore adopted pro-immigration
policies. An interesting thing to note here is that while Singapore had also implemented several

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pro-natalist policies, with Children Development Accounts being set up by the government
which sort of acted as a savings account where the government matched the parents’ deposits
up to a certain limit, Singapore’s population growth rate never really took off. A big reason for
this was that Singapore was gradually transitioning from being a developing nation to a
developed one. And this paradoxical phenomenon of an almost inverse relationship between
family size and family income is observed with most developed nations, since the cost and time
investment in raising a kid, where both the mother and the father are employed, makes having
too many kids infeasible. This made Singapore even more reliant on foreign workers. As a
result, even though Singapore’s native population grew only by 2% in the 1990s, its
employment rate grew by 6%.
On a similar vein, Singapore adopted a policy of individualising social safety nets in the 1980s,
wherein the government established Central Provident Funds (CPF) which forced the
employees to save a portion of their wages. This led to a culture of self-reliant workforce with
minimal need for welfare. Singapore still has one of the world’s highest savings rate. On the
government’s front, there was strict adherence to the principal of not running a deficit in the
current account of the government. It also channelled funds from the profits generated by
government linked firms in to public spending. This policy, which Singapore still follows to
some extent, made sure that the government was able to undertake massive public sector
investments without incurring any unsavoury debts or inflationary pressure.
These policies made sure that Singapore was able to invest heavily in infrastructure and public
services and utilities. In addition to having a robust road, rail and port network, Singapore
established the Changi Airport on a swathe of land reclaimed from swamplands. It is one of
the busiest airports in the world by footfall. This airport Interestingly, Singapore undertook
several ambitious projects to reclaim land in a bid to increase its usable are. In 1991, 10% of
Singapore’s total land area was reclaimed land. It has since kept on with this practice and plans
to expand the city’s area by an additional 7-8% in the next decade. In an effort to keep its land
usage as efficient as possible, government owns about 85% of the total land and allocates it
private entities or citizens via URA, which designs master plans on future land usage.
Singapore also has a very active and, unlike most countries, profitable public conveyance
network. The reason behind it is a very clever policy solution to the increasing traffic on roads
it was facing in the 1990s. In Singapore owning a car is extremely expensive. There are no
extravagant import duties or tariffs on them. The registration system involved in getting a car
on the roads of Singapore involves limited issue licenses and government checks which more
than double the price of buying the car. Through this system, the government not only keeps
the environment greener and traffic in check but also the public conveyance system prospering
since a lot of the income generated by this is put back in developing public services.
On the monetary policy front, Singapore adopted a customized floating exchange rate since it
is highly dependant on foreign trade. The Monetary Authority of Singapore (MAS) manages
the variation in float of the Singapore dollar based on a trade-weighted basket of the major
currencies which are actively exchanged in trade with Singapore. This flexibility allows them
to keep inflation in check while reducing the volatility in their currency, making it more
favourable to trade with.

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Singapore’s tax policy and other fiscal measures have always been pro-business. Faced with
growing competitiveness from other Asian Tiger economies, Singapore brough down the
corporate tax rate from 40% in 1986 to 20% in 2005, and it stands at 17% as of now. Similarly,
the personal income tax rates were also reduced, with the highest bracket once being 55% for
income exceeding S$600,00 in 1980 to 20% for income exceeding S$320,000 in 2007. The
average Singaporean worker pays very little in taxes compared to other OECD members.

Conclusion: Afterthoughts and The Road Ahead

With the observations and analysis presented in the preceding sections, it becomes evident
that even though Singapore was dealt a rough hand, it has made excellent use of its limited
resources and then some. Ambitious vision of government, combined with the skill and
enterprise of the populace, has transformed this small city-state from an entrepôt to the
business hub of Asia, with flourishing service sector industries in finance, technology and
banking. And as we have come to observe, Singapore, being the excellent economy it is, has
already started drawing plans for the future.
In 2015, the Managing Director of MAS shed some light on how the future looks for
Singapore’s economy in a keynote address. As the annual growth in the working age bracket
of their population declined to 3% in 2011, with no recovery expected, Singapore plans to
shift into a productivity driven growth model. Their current economic setup might work well
on a long term for a small country, but there is only so many people and buildings you can fit
in what is basically a city-nation. So, the logical step forward, while keeping both local
population and international firms happy, is to increase productivity. This would entail heavy
investments in technology and scaling up of more traditionally focused industries, like
education and healthcare. More and more high skilled labour would be created and managed.
It is expected that some labour-intensive industries like retail and hospitality might suffer,
along with the overall economic, or real GDP, growth. But it might be a worthy trade-off
with shifting gears in to the next economic paradigm.
With all their ambitious plans and foresight, Singapore has constantly delivered economic
results. It has weathered a number of economic disasters in the past few decades, like the
Asian Financial Crisis of 1998 or the Global Financial Crisis of 2008, and always come out
stronger. So, can a case be made for Singapore being an ideal free market economy? The
answer to that is more complex that a simple yes or no.
What Singapore lost on the front of land and resources, it gained in effective governance.
Singaporean governments have had a long road of success with their ambitious economic
policies because there are very limited resources to govern. Another factor, which crosses the
boundaries of macroeconomics, is a deep-rooted culture of Confucianism among the general
populace of Singapore. This culture historically valued discipline, hard work and stability
over anything else. Although this school of though has had its critics, it is evident that all the
Asian Tiger economies have skilled local workforce which matches the foreign workforce.
This culture of hard work is deep rooted in the culture and Singapore has optimized that to

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their benefit. Combine this with the single-minded focus of an economically driven
government, and you get a well-oiled economic machine.
But while this unique combination of socialist nationalism and capitalistic authoritarianism
seems perfect on the surface – technologically advanced, seamless infrastructure, virtually
crime-free with absolutely every comfort which the world can offer, there are tensions
beneath. As the world economies become more and more capitalistic in nature, economic
malaise and social restlessness rises with it. It’s sort of a ‘winner takes all’ scenario.
Although, it is a global phenomenon, Singapore is a salient example in it. Many of the older
household land prices have peaked which concerns the older population. There has been a
rise in nativism as more and more foreign individuals have begun settling in Singapore. Its
biggest strength might slowly become a problem.
So, while it might not be an ideal model to take after, Singapore does present strong
arguments for an economically driven nation. With a constantly evolving policy driven by
global macroeconomic indicators and designed around the socio-cultural landscape of the
people, it might just be the next best thing to an ideal economy.

References
1. K.Siddiqui. (2010). The Political Economy of Development in Singapore. University
of Huddersfield, UK
2. R.Menon. (2015). An economic history of Singapore – 1965–2065. Keynote address,
Managing Director of the Monetary Authority of Singapore
3. A.Chowdhury. (2008). Growth Oriented Macroeconomic Policies for Small Islands
Economies: Lessons from Singapore
4. T.Abeysinghe. 2007. Singpore: Economy.
5. Monetary Authority of Singapore. 2020. Singapore's Economy. Located at
https://www.mas.gov.sg/
6. Trading Economics. Located at https://tradingeconomics.com . Source for figures and
analysis data
7. Government of Singapore. Located at https://data.gov.sg/. Source for figures and
analysis data
8. Department of Statistics, Singapore. Located at https://singstat.gov.sg/. Source for
figures and analysis data

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