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116
Chao-Wei Lan
March 2001
Working Paper No. 116
ISSN 1474-3280
Chao-Wei Lan
March 2001
Chao-Wei Lan
No. 235, Ming-The Road
Peitou
Taipei, Taiwan
cwlan@yahoo.com
SINGAPORE’S EXPORT PROMOTION
STRATEGY AND ECONOMIC GROWTH (1965-84)
CONTENTS
1 INTRODUCTION 1
2 THEORETICAL FRAMEWORK 2
2.1 Hecksher-Ohlin Trade Theory 3
2.2 Theory of Developmental State 3
2.3 Theories of Economic Growth 4
6 GROWTH ACCOUNTING 9
7 EXTERNAL CONDITIONS 11
8 DEPENDENT DEVELOPMENT 12
9. CONCLUSION 13
REFERENCES 15
ENDNOTES 18
TABLES
1.1 Export Performance of Singapore, 1965-1988 1
3.1 Differences Between Effective Subsidy for Export Sale and for
Domestic Market Sale (%) 5
5.1 Singapore GDP by Industrial Sector, (1960-1985) (%) 8
6.1 Contributions to Growth, 1966-90 9
6.2 Foreign Direct Investment as a Share of Gross Domestic Capital Formation
in Singapore, 1967-1990 (1985 market prices, annual averages) 10
6.3 Singapore Investment Commitments in Manufacturing, 1990 ($m) 10
6.4 Singapore Gross Fixed Capital Formation by Public and Private Sectors,
1960-1990 (1985 market prices, annual averages) 11
7.1 Singapore’s Trade Balance with Japan and the US in
1980, 1985, 1990 and 1994 (Billions of US dollars) 12
SINGAPORE’S EXPORT PROMOTION STRATEGY
AND ECONOMIC GROWTH (1965-84)
1
(M. Todaro, 1997: 691). The reason exporters’ in order to capture externalities.
neoclassical economists define EP different Technological superiority and human
from others is that they disregard government skills, acquired through positive export
intervention, a point which we will return. promotion, explain much of the trading
On the other hand, within neoclassical success of some East Asian economies.
school, the definition of ‘export promotion’ and B. Ingham (1995: 346)
‘outward orientation’ is close, to ‘free trade’3.
The consensus among economists has …state interventions promoted
become the recipe of the international lending remarkable economic growth in East
agencies, notably the IMF and the World Bank. Asia’s newly industrialising economies
The World Bank Report of August 1993 (East (NIEs) – Hong Kong, Korea, Singapore
Asian Miracle) attributes the success of the and Taiwan…By such activities as
East Asian economies to four factors: coaxing foreign investors, ensuring ample
macroeconomic stability; human capital quantities of scientific and engineering
formation; openness to international trade; and labour power, and offering a generous tax
an environment friendly to private investment policy, the state in Singapore has played
and competition (World Bank 1993). The East a key role in the country’s ‘free market’
Asian economic success, argues the World economy. J. H. Mittelman (1995: 280)
Bank, has little to do with interventionist
policies. The promotion of specific industries The main aim of this paper is to contribute to
and export-push trade policies were the revisionist studies through examining the
considered by the Bank to be “largely case of Singapore, namely to present empirical
ineffective” in promoting growth and enhancing evidence to show that export promotion (EP) in
productivity. Singapore entailed substantial government
A contrary study by Amsden (1989) on intervention, and that government intervention
Korea, argues that the architect behind the has promoted remarkable growth in Singapore.
emergence of this new ‘Asian tiger’ is a strong, The other aim is to examine other factors that
interventionist state, which has wilfully and are necessary to economic growth (e.g. foreign
abundantly provided tariff protection and capital and external conditions) which have
subsidies, changed interest and exchange often been undermined by both neoclassical
rates, managed investment, and controlled proponents and revisionists.
industry using both lucrative carrots and This paper is organised as follows.
threatening sticks (Amsden 1989). The Chapter 2 provides the theoretical supports for
encouragement of manufactured exports Singapore’s export promotion (EP) strategy
became an active policy in the early 1960s. which can be found in Hechsher-Ohlin factor
The incentives made available to exporters endowment trade theory and the theory of
took the form of direct tax reductions, developmental state. The aim is to provide a
privileged access to import licenses and theoretical framework for analysis. Part 1
preferential interests rates. Thus export examines Singapore’s EP strategy and its
promotion entailed substantial government impact on economic growth and structural
involvement. change. It is chronologically divided into three
Compare to the vast amount of chapters: labour intensive export-oriented
neoclassical writings, there is much less manufacturing (1965-73, Chapter 3);
Amsden-like revisionist literature on the upgrading and diversifying (1972-79, Chapter
interventionist states in East Asia. Moreover 4); and economic restructuring (1979-84,
revisionist studies tended to focus their cases Chapter 5). Part 2 examines the causes of
on Japan, South Korea and Taiwan rather than Singapore’s economic growth. The objective is
Singapore.4 Thus, there is a lack of empirical to examine the importance of the EP strategy
studies on Singapore. Consequently, writers and foreign capital to economic growth. The
began to generalise their cases for Singapore. process involves examining the components of
Referring to the two quotes shown below, growth in Singapore using growth accounting
while Barbara Ingham maintains that the data (Chapter 6). Then we will examine the
Singapore government has not promoted external conditions that facilitated Singapore’s
export activities, Mittelman suggests that state economic growth
intervention in Singapore has promoted (Chapter 7). We will also examine the negative
remarkable growth: consequences of relying on foreign capital and
technology (Chapter 8). Finally we present a
Some East Asian governments, though summary of findings.
probably not Singapore, have tended to
positively promote export activities. East
Asian governments have tended to 2. THEORETICAL FRAMEWORK
promote export activities. They do not rely
on the operation of comparative It is important to state our definition of ‘export
advantage. Protection is granted to ‘infant promotion’ (EP) strategy in order understand
2
the theoretical framework. We define it as It is suggested that “the phenomenon of
governmental efforts to expand the volume of successful ‘late development’ – whether
a country’s exports through industrial policies ‘capitalist’ (Japan, South Korea) or ‘socialist’
(e.g. export incentives), foreign investment (the Soviet Union, China) should be
policies and other interventionist policies, in understood in terms of Listian ‘political
order to achieve sustained economic growth. economy’ - concretely as a process in which
The theoretical support for our EP strategy can states have played a strategic role in taming
be found in Hechsher-Ohlin factor endowment domestic and international market forces and
trade theory (2.1) and the theory of harnessing them to a national economic
developmental state (2.2). interest” (White and Wade, 1988: 1). That “the
modern notion of ‘development’ rests on a
2.1 Hechsher-Ohlin Trade Theory concept of the state as the primum mobile of
socio-economic progress. It draws on the
The H-O factor endowment trade theory is an historical argument (Gerschenkron, 1966) that
extension of the classical comparative successful ‘late development’ takes a form
advantage theory of free trade. The classical very different from that of the early
free trade theory is a static model based industrialisers, notably United Kingdom: it is
strictly on a one-variable-factor (labour cost), less ‘spontaneous’, more the subject of
to demonstrating the gains from trade. This teleological determination, which the state
theory was modified by Eli Hecksher and Bertil playing the role of historical animateur. The
Ohlin, to take differences in factor supplies ideology of ‘developmentalism’ and the idea of
(mainly land, labour, and capital) on the interventionist state are thus inseparable”
international specialisation. Unlike the classic (White and Wade, 1988: 1, 2).
labour model, however, where trade arises ‘Guided market economies’ are market
because of fixed but differing labour economies5 in which the state tries to achieve
productivities for different commodities in its objective by influencing the market - by
different countries, the H-O factor endowment shifting the composition of what is profitable
model assumes away inherent difference in (White and Wade, 1988: 5). The state
relative labour productivity by postulating that constrains market rationality by the priorities of
all countries have access to the same industrialisation. Industrialisation per se has
technology. If domestic factor prices were the been the priority, not considerations of
same, all countries would use identical maximising profitability based on current
methods of production and would therefore comparatively advantage. To achieve
have the same relative domestic product price industrialisation, the government may
ratios and factor productivities. The basis for intervene aggressively in the markets to bring
trade arises not because of inherent about specific allocative effects – in addition to
technological differences in labour productivity measures designed to safeguarding the self-
but because countries are endowed with regulating parts of the market. Therefore, the
different factor supplies. Given different factor government does not limit itself to the provision
supplies, relative factor prices will differ (e.g. of infrastructure . Nor has it intervened in
labour will be relatively cheap in labour- industries when they are in trouble, as has
abundant countries), and so too will domestic been the tendency of the West.6
commodity price ratios and factor The approach has been based on the
combinations. argument that some industries are more
Provided demand patterns do not differ important for the future growth of the economy
much between countries, the Hechscher-Ohlin than others. Some industries have accordingly
theorem of trade states that: “countries will been highly subsidised, promoted, and
export those goods whose production is directed by the government; others have
relatively intensive in the factor with which they experienced policy intervention to a lesser
are well endowed” (Winters, 1991: 31). The H- scale; the rest have been left to take care of
O trade theory provides the rational to justify themselves within a framework of regulation. It
our export promotion strategy because it is is not that the government has prevented
logical that industrial countries, which had investment in non-strategic industries; it has
plenty of capital, should specialise in capital- simply not given such industries much help. It
intensive sectors of the economy while less has also retained enough instruments of
developed countries (LDCs), with their cheap control to make sure that whatever happens in
labour, should invest in labour-intensive the rest of the economy, enough promotion
industries (Biel, 2000: 81). and investment is forthcoming for the strategic
industries. In this way the market is guided by
2.2 Theory Of Developmental State the conception of a long term national
rationality of investment formulated by
In this paper, the only other rational for our EP government officials; the content of
strategy is the theory of developmental state industrialisation is not totally left to the market
which justifies state interventions in East Asia. (White and Wade,1988: 1).
3
The developmental state is governed by organs of government to implement economic
an authoritarian-corporatist type of political reforms (Haggard and Cheng, 1987: 104).
system - the rules for selecting the rulers give When PAP administration took office in 1959, it
little scope for the expression of popular launched a development plan that recognised
preferences, and especially, do not allow the importance of state action in promoting
competition between political parties. This type industrialisation. Goh Keng Swee, PAP’s most
of political system enables the political leaders influential economist, argued that pure laissez-
to exercise much influence over public faire offered only a developmental dead-end,
investment decisions and policy choices. the entrepot (Haggard and Cheng, 1987: 104).
To attain the priority of industrialisation,
2.3 Theories of Economic Growth the government established state-owned
enterprises (SOEs) to allow its participation in
The theory of economic growth allows us to the economy. It also established the Economic
decompose the sources of growth. This is Development Board (EDB) in 1961 to
important because it allows us to (i) measure centralise its efforts to promote economic
the contributions of EP to the sources of development in a single agency. In addition,
growth; and (ii) examine the hypothetical other the government has designed the country’s
causes of growth (e.g. foreign capital). The first economic development strategy. The First
model of economic growth was put forward by Development Plan was instituted for 1960-64
Harrod and Domar (Ray 1998). The model which aimed at import-substitution-
states that there is a strict link between industrialisation for the anticipated Malaysian
physical capital formation and economic Common Market. With separation from
growth. If demand conditions are made right, Malaysia in 1965, the Government’s
said the model, the only bottleneck to growth is development strategy shifted to export
a lack of physical capital. Moreover, the model promotion.
suggests growth depends on ICOR7 – the In many aspects the State of Singapore
efficiency of investment. The Solow model fits well with the developmental state theory.
modified the Harrod-Domar model by saying The state guides the market. The economy is
that the long run per capita growth is guided by an authoritarian-corporatist kind of
determined by the growth rate of technological political system which does not allow
progress (Promfret, 1997: 51). It suggests that competition between political parties. This type
increases in investment have only transitory of political system enables the political leaders
effects on the growth rate due to diminishing to exercise much influence over public
returns to capital accumulation. The Solow investment decisions and policy choices. The
model shows how growth could be top priority of state action is industrialisation
decomposed into contributions from the growth rather than maximising profitability based on
of ‘Total Factor Inputs’ (TFI) and growth of current comparative advantage. The state
‘Total Factor Productivity’ (TFP).8 TFI guides the market, with development
measures the contribution of increases in the strategies formulated by an elite economic
amount capital9 and labour10, and TFP is a bureaucracy, led by a pilot agency – the EDB.
residual which among all other factors includes We can divide Singapore’s export promotion
increases in output resulting from greater strategy into two phases: labour intensive
efficiency and better technological knowledge. export-oriented manufacturing (1965-73)
In chapter 6, Solow growth accounting is used (Chapter 3); diversifying and restructuring
to measure the sources of Singapore’s growth (1973-84)(Chapter 4).
and examine the hypothetical other causes of
growth e.g. foreign capital.
3 LABOUR-INTENSIVE EXPORT-
ORIENTED MANUFACTURING (1965-73)
PART I SINGAPORE’S EXPORT
PROMOTION STRATEGY Before 1961 Singapore’s factor endowment i.e.
labour abundance and geographic location
In Singapore, throughout the 1950s, the enabled it to become specialised in entrepot
Communists were serious contenders for trade and the services supporting this trade
political leadership. After electoral victory in the (such as banking, regional shipping,
self-rule elections in 1959, the liberal PAP warehousing and transportation). However, in
(People’s Action Party) leadership purged the 1961 the entrepot trade was assessed by the
left wing. To minimise organisational state as having “very limited possibilities for
weaknesses at the grass roots, PAP leaders expansion” (Soon and Tan, 1993: 8). Since
embarked on a one-party dominant system. then the state had plans to diversify
Since then, the state of Singapore has been Singapore’s economic activities. The
controlled strongly by a party that had an government first thought was to encourage
asymmetrically strong political power in the import-substitution industrialisation (ISI) in
society.11 This allows the reorientation of manufacturing. But these hopes were dashed
4
with the separation from Malaysia in 1965. However, the Singapore government did
Singapore’s domestic market was too small to not leave it up to free trade and market forces
support ISI and the government thought to turn to bring the island’s production structures in
towards export manufacturing instead. line with comparative advantage. The aim of
To extend Singapore’s economic activities the trade liberalisation was to attract export-
into export manufacturing was a difficult task oriented industries and encourage foreign
for the state. At the time, there was little investments. Moreover, industrialisation behind
incentive for industrial investment. Local tariff walls was clearly not a feasible option for
a small city-state with no raw materials.
investment was heavily concentrated in
services, real estate, and domestic trade –
3.2 Incentives to Attract Foreign
conservative in outlook and with little Investment
experience in manufacturing, local firms
seemed unlikely to spearhead growth To attract foreign investment into labour-
(Haggard and Cheng, 1987: 105). Moreover, intensive industries the government,
uncertainty of demand and risks due to lack of established ‘free zones14’ and particularly
information made investment unattractive. Export Processing Zones (EPZ). The EPZs
Under these conditions, the state sought an have two important characteristics. First, they
export promotion strategy based on an alliance are industrial sites with excellent physical
with foreign firms.12 More specifically, the state infrastructure at highly subsidised rates.
decided on an aggressive export-based Second, the EPZs allow the duty-free entry of
industrial growth financed by foreign capital. goods destined for re-export. The zones thus
To attract foreign investment the government seek to attract 100 percent of foreign-owned
adopted a free trade regime (3.1); it provided subsidiaries that are vertically integrated into
incentives to attract foreign capital (3.2); and the investing firm’s marketing and production
exercised extensive controls over labour and structure. As a corollary, the zones often have
forced savings (3.3). Moreover, to control over few economic linkages with the domestic
the economy the state was engaged in direct economy other than the wage bill. To attract
production (3.4). investors into the free zones and EPZs, the
government increased tax incentives steadily
3.1 Free Trade Regime since 1967. First, new industries qualified15 for
‘pioneer’ status are exempted from the 40%
Neoclassical proponents support free trade profits tax for a period of 5, 10, or more
because by eliminating trade barriers, adopting years.16 Then, under the Industrial Expansion
realistic exchange rates, and above all, to Ordinance No.2, income taxes were reduced
allow the free play of market forces, such for firms that expanded in order to produce
policy would bring a country’s production approved products (Deyo, 1981: 53-54).
structures in line with comparative advantage. Thirdly, to induce investment and expansion of
It is clear that the government of Singapore did export-oriented industries, export incentives,
adopt a free trade regime. According to Soon introduced in 1967, provide a 90% tax
and Tan (1993) since 1969 trade has been exemption for 5-15 years for export profits
continuously liberalised and by 1973, all derived from sufficient large investments. By
quotas and almost all import tariffs were 1983 twenty-one EPZs were in operation,
eliminated (Soon and Tan, 1993: 31). In fact, covering 2,895 foreign and indigenous
table 3.1 shows that Singapore is based on companies, and having nearly 212,000
free trade in the sense that the average employees (Mirza 1986: 84). It should be
incentives to sell on the domestic market are noted that the whole effort was coordinated by
about equal to the average incentives to sell the Economic Development Board (EDB) – the
on the export market.13 Moreover the state’s pilot agency. The EDB determines
exchange rate was freed to become an priorities in manufacturing and related sectors,
instrument targeted specifically on inflation decides on the scale and format of taxes and
(Monetary Authority of Singapore, 1984: 4). other incentives.
Table 3.1 Differences between effective subsidy for export sale and for domestic
market sale (%)
Korea Singap Israel Argentina
ore
All manufacturing industries 7 -5 44 -145
By trade orientation
Export 31 0 -130 -91
Import-competing -61 -3 -88 -190
Export & Import-competing -46 -7 -65 -164
Non-import-competing 16 3 -5 -153
Source: B. Balassa 1982, table 2.5
5
3.3 Controls Over Labour and Forced entrepreneurs and companies must be
Saving encouraged to become too complex take
over (Lee 1991)
At the beginning of the 1960s, Singapore
remained a high cost producer by Asian By the early 1980s, the government
standards (U.N. 1961: 310), but during the (through the Jurong Town Corporation) ran 21
decade wages only rose moderately. The great industrial estates and export processing zones.
reliance on labour-intensive industrialisation as Moreover, the government owned Singapore
the basis for national economic development Airlines, INTRACO (a trading company), in
and the reduction of unemployment, led the manufacturing, held a 100% or majority equity
government to impose authoritarian corporatist stake in firms in food, textiles, wood, printing,
controls over labour in order to stabilise labour chemicals and petrochemicals, iron and steel,
costs, enhance productivity and industrial engineering, and shipbuilding and repair
stability, and low-cost availability to foreign (Young, 1992: 21). It is estimated that state-
investors (Deyo, 1981: 110). In 1961 the owned enterprises (SOEs) and statutory
government split labour movement by forming boards (e.g. the EDB) generated a return of
its own unions. Moreover, in 1968 it reduced $5-7 billion in 1983, or roughly a third of GDP
the range of issues over which a union could or a half of indigenous GDP (Mirza, 1986:
confront an employer and expanded the state’s 110).
power of arbitration, while also drastically These interventionist policies, together
reducing overtime pay, retirement benefits, with cheap labour and a good investment
and maternity and sick leave (Haggard and climate17, were extremely successful in
Cheng, 1987) . Unionism, firmly under party attracting foreign capital, generated growth
and state control, was henceforth to be an and employment. Direct foreign investment
instrument for mobilising labour around the (DFI) in manufacturing which averaged less
government’s political and developmental aims than S$151 million per annum in 1968 had
leave (Haggard and Cheng, 1987). The reached S$708 million by 1972 (Young, 1992:
important political precondition is Singapore’s 21). Most of this investment went into
single party system which enabled the political petroleum refineries, electronics , textile &
leaders to exercise much influence over policy garment industries (Soon and Stoever, 1987 :
choices. This permitted them to control labour, 323). Petroleum refining and electronics
and subdue political opposition. By 1970, exploded in the late 1960s, with the share of
Singapore’s unit labour costs were among the manufacturing value added accounted for by
lowest in Asia, and for an assembly worker in capital intensive petroleum rising from 13.6
the seminconductor industry the wage was percent in 1965 to 19.2 percent in 1970, while
about one-tenth of those in the US (Huff, 1987: the share of manufacturing employment
311). accounted for by consumer electronics and
Apart from controls over labour, the electrical machinery leap from 3.3 percent in
government also forced the private sector to 1968 t o 11.3 percent in 1970 (Young, 1992:
save through a social security scheme taken 27). Textiles & garment industries generated
from the colonial government – the Central more than half of the growth in manufacturing
Provident Fund (CPF). These savings are employment (147,500 jobs) in the period of
used by the government to finance planned 1968-72 (Soon and Stoever, 1987 : 323).
investment, for example, EPZs and in state GDP grew at an impressive compound rate of
owned enterprises (SOEs). 13.0 percent annually (Soon and Tan, 1993:
12), with manufacturing share rising sharply
3.4 Direct State Production from 16.3 percent to 22.5 percent (Huff, 1987:
table 2).
The government has pursued a strategy of
state entrepreneurship. State entrepreneurship 3.5 Summary
helped Singapore solve common handicaps of
‘late industrialisation’ as a dearth of H-O trade theory states that countries will
entrepreneurial, technological and even capital export those goods whose production is
resources by concentrating the economy’s relatively intensive in the factor with which they
efforts (R. Wade, 1992: 286). As the former are well endowed. In the case of Singapore, as
Prime Minister, Lee Kuan Yew, recently said: we have seen, this is correct. Singapore’s
factor endowment was relatively labour-
[i]n the early stages, when you try to bring abundant and capital-scarce, thus it
up a very low level of economy to catch specialised in labour-intensive industries such
up with others, the government must be as textiles. However , the initial conditions
an activist, and catalyst to growth. But were not suitable for industrial development
once the businesses get going, they and there were few incentives for industrial
would and specialised for any government investment. Under these circumstances the
to be involved. Hence private state guided the market - by systematically
6
distorting incentives in order to industrialise – government also established the Monetary
that is, to facilitate the establishment and Authority of Singapore, with the mission of
growth of industrial sectors that would not have turning Singapore into an international financial
thrived under the working of comparative centre (A. Mirza, 1986: 37). It should be noted
advantage. This was done by an alliance with that these activist policies ‘stole the march on
foreign capital: by attracting MNCs into the Hong Kong’, where the government lacked a
targeted industry and area through the similar development commitment (Huff 1994:
construction of EPZs, the various investment 342). The Asian dollar market (ADM) attracted
incentives to go with them, state-direct a large number of foreign banks resulting in
production, and controls over labour and the phenomenal growth of more 20 percent
forced saving. As Amsden (1989) rightly per annum in the period 1980-90. The
asserts “economic expansion depends on subsequent expansion of financial services
state intervention to create price distortions also facilitated the inflow of DFI by making
that direct economic activity towards greater financial services available.
investment. State intervention is necessary Despite the first oil crisis in 1973, and the
even in the most plausible cases of world recession that followed in 1974-76
comparative advantage, because the chief Singapore’s real GDP grew by 7.4 percent a
asset of backwardness – low wages –is year in the period of 1974-79. During the world
counterbalanced by heavy liabilities” (Amsden, recession growth came from infrastructural
1989: 84). These interventionist policies investment and financial services (reflecting
successfully attracted foreign capital, the expansion of the ADM). Meanwhile the
generated economic growth and structural ISIC sector 38 (fabricated metal products,
change. machinery, equipment, and electronics)
continued to grow. Employment in the ISIC
sector 38 rose from 35.8 percent of total
4 UPGRADING AND DIVERSIFYING manufacturing employment to 57.3 percent by
(1972-79) 1980 (Young, 1992: 27).
7
provided fiscal incentives to encourage components or peripherals. By 1983 ingapore
automation, mechanisation, computerisation, was the largest exporter of disk drives in the
and R&D. The government also used large world (Young, 1992: 27). The island’s
state owned industries to promote restructuring success in building up a skilled work force and
and undertake targeted activities. The in drawing in higher value-added activities is
Development Bank of Singapore and Keppels reflected in value added per worker. Between
Shipyards, for example, promoted Singapore’s 1973 and 1982 value added per worker in
diversification into higher technology, higher Singapore manufacturing increased from about
value added products and services, creating one-quarter to almost two-fifths of that in US
the image of ‘Singapore Inc.’ (Mirza, 1986: manufacturing (Huff, 1987: 315). However, this
110-111). also shows the distance Singapore would still
To stimulate investment in desired high- have to traverse for its manufacturing to be on
value activities, the government again modified the same level in terms of value added with a
fiscal incentives (it also introduced new ones). developed country. Nevertheless, during this
First, the tax rate for export was cut from the period, financial and businesses developed
usual rate of 40 percent to 4 percent only (Lim rapidly in response to the expansion of the
and Fong, 1986: 19). Second, there was an ADM and the inducements of the Monetary
investment scheme for an approved Authority of Singapore. As table 4.1 shows the
manufacturing project. The project can claim, share of financial and business services
up to 50%, a tax credit for fixed investment in accounted for 13.9 percent of GDP in 1965
plant and machinery. Third, the government reached 17.8 percent in 1980, and an
has a variety of other incentives to encourage incredible 25 percent by 1985. Note that as
plant expansion, automation, computerisation early as 1985, the island had a mature
and R&D spending: there was a “Warehousing structure with the financial and business
Incentive18, an Investment Allowance service sector accounting for a larger share of
Incentive, an International Consultancy GDP (25 percent) than manufacturing (19
Services Incentive, an Approved Foreign Loan percent). The development of Singapore as
Scheme, and an Approved Royalties provision” the region’s financial centre utilises
with which “in general, all capital equipment Singapore’s relative factor endowment (i.e.
can be completely written off in 5-10 years, geographic location) to the best advantage.
and R&D spending can be double deducted, For example, Singapore advantageously
as can all expenses for export promotion” bridges the time zone gap between the New
(Young, 1992: 23). In short, compared with York/London and Hong Kong markets for
last two phases, the investment incentives are foreign exchange. As early as 1986 average
now more selectively awarded. This is daily turnover on the Singapore foreign
because the government has favoured projects exchange market had reached to roughly half
that are technologically sophisticated and also that in New York (Huff, 1994: 341).
capital- and skill-intensive. The investments It should be noted that, the success of the
are awarded according to government’s list of economic restructuring was highly dependent
industries for priority development.19 on maintaining the large inflow of foreign
8
Singapore, 7,065 (33.1 percent) had some Part II is divided into two chapters. In
foreign participation and of these, 2,965 firms Chapter 6 we present empirical evidence to
(42 percent) were wholly foreign owned (Soon show the contributions by the EP and foreign
and Stoever 1996: 325). capital to Singapore’s growth experience,
using growth accounting data. Then in Chapter
5.1 Summary 7 we examine the reasons why foreign
countries mainly from US and Japan invested
Neoclassical proponents asserts that “as heavily abroad during this period (i.e. the
export and income growth leads to higher external conditions of Singapore’s economic
savings, and as education spreads and growth). Finally in Chapter 8 we examine the
workers become more skilled, industrialising negative effects of Singapore’s ‘dependent
countries shift to new exports, such as development’.
steel...and electronics, that use more capital
and more skilled workers.” Moreover, “Well- 6 GROWTH ACCOUNTING
functioning labour and capital markets ought to
generate such transformation automatically” Slow growth accounting shows how growth
(Gillis, 1992: 468) . In this and last section, could be decomposed into contributions from
however, we saw that the state played a the growth of ‘Total Factor Inputs’ (TFI) and
crucial role in transforming Singapore’s growth of ‘Total Factor Productivity’ (TFP).
economic structure. In the 1970s we saw the TFP measures the contribution of increases in
state aggressively build on Singapore’s the amount capital (human and physical
comparative advantage in financial and capital) and labour (population increases), and
business services. In the 1980s we saw the TFP measures increases in output resulting
state lead Singapore into high value activities. from greater efficiency and better technological
This was done using distorting incentives to knowledge.
guided MNCs into targeted industries and to In order to show that Singapore’s growth
pull up skill and technology levels, using state- experience was dependent on foreign
owned industries to undertake targeted investment, it is necessary to find the sources
activities, and using high wages to discourage of growth. Alwyn Young (1992) has estimated
labour-intensive industries. These the sources of growth for Singapore during the
interventionist policies successfully attracted period, shown in table 6.1. During the period
direct foreign investment into the desired of 1970-90, economic growth in Singapore
industries and generated growth and structural came mainly from increases in population ( 25
change. percent) and investment in human and
9
In contrast to other Asian Tigers, accumulation. To attract foreign capital and
Singapore has grown not through technical maintain its constant inflow, the state had to
progress. This is because the Singaporean continuously invest in physical infrastructure
government has pursued an active policy of and in education and training22 (to upgrade
industrial targeting which has pushed labour skills). Moreover, the state also had to
production from one sector to another (textiles give attractive incentives to foreign capital (e.g.
to electronics and refining then to clothing and EPZs and fiscal incentives). To solve the
electronics and banking services) too rapidly common ‘late industrialisation’ handicap of a
for there to be enough time for higher dearth of entrepreneurial and technological
productivity rates to be achieved (Young skills, the state itself engaged in direct
1992). It should be noted that it does not really production via state-owned enterprises23.
matter if TFP growth is low or zero. For Table 6.4 shows throughout the period of
example, Switzerland is the richest country in 1967-1990 that the average investment by the
the world yet its TFP growth is zero (Reebles public sector was about 30 percent.
and Wilson, 1996: 204). In short, growth during To summarise, Singapore has grown
this period came mainly from investment in entirely through high capital accumulation from
human and physical capital, and the role of the domestic savings and foreign capital. The EP
EP in this had been crucial to mobilise strategy played a major role in the
domestic capital and attract foreign capital. accumulation of physical capital via forced
Singapore’s growth experience was national saving and the policies to attract
dependent on high capital accumulation from foreign capital. Much of the government’s
Table 6.2 Foreign direct investment as a share of gross domestic capital formation
in Singapore,
1967-1990 (1985 market prices, annual averages)
Gross fixed capital Foreign direct
formation (GFCF) Investment in Singapore
$m $m % of GFCF
1967/69 2382.2 219.0 9.2
1970/79 6648.6 1471.3 22.1
1980/90 16297.1 4012.5 24.6
1970/90 22945.7 5483.8 23.9
Sources: Adapted from Huff, 1993, table 11.22.
foreign capital and domestic savings. Let us physical capital accumulation was conducted
first measure the contribution of growth made to attract foreign capital, that is, to maintain the
by foreign capital. Table 6.2 shows that in the constant inflow of foreign investment by
period of 1970-90 DFI contributed about 24 continuously investing in physical infrastructure
percent to the accumulation of physical capital. and upgrading labour skills and by giving
Moreover, table 6.3 shows that in 1990 nearly attractive fiscal incentives to foreign firms
90 percent of the investment in manufacturing (including EPZs). On the other hand, most
was committed by foreign capital, dominated foreign capital (mainly from US and Japan)
by the US (42.4%) and Japan (28.4%). Foreign was invested in manufacturing and
direct investment (DFI) in Singapore is also increasingly in services. This suggests that
concentrated in services; on average it economic growth during the period of 1965-84
accounted for a third of FDI during the period was highly dependent on foreign capital. In the
of 1967-82 (Chowdhury and Islam, 1993: table next chapter we will examine the reasons why
7.2). foreign countries invested abroad during this
Apart from DFI, the other main source of period (i.e. the external conditions that
growth was investment by the state in the facilitated Singapore’s development). We will
economy. This is explained by the fact that also examine the negative effects of
from the beginning of Singapore’s Singapore’s ‘dependent development’ (i.e.
development process, the state has been economic growth that is dependent on the
acting as a central agent of capital investment by other countries).
10
Table 6.4 Singapore gross fixed capital formation by public and private
sectors,
1960-1990 (1985 market prices, annual averages)
Gross fixed Public sector Private sector
Capital
formation
$m $m % $m %
1967/69 2,382.2 716.4 30.2 1,652.2 69.8
11
and tools necessary for production were 1988; Chowdhury and Islam 1993: 115). Thus,
imported from Japan, suggests that Japanese the aggregate benefits of foreign direct
firms were clearly looking for a base from investment (DFI) are not spread throughout the
which they could export. economy. It can be argued that the presence
Table 7.1 Singapore’s Trade Balance with Japan and the US in 1980, 1985, 1990
and 1994 (Billions of US dollars).
Japan USA
1980 1985 1990 1994 1980 1985 1990 1994
12
Singapore, exports as a percentage of GNP export. To make the island a source of cheap
was 138 percent in 1982 (Naya, 1988: table labour, the government enacted strict labour
3.2). The heavy dependence on external legislation and took control of trade unions.
market and technology exposes the industry to Furthermore, the state forced the private
large fluctuations in production and sector to save through a social security
employment. For example, in the electronic scheme – the Central Provident Fund, so that
industry in Singapore, market and the state could finance planned investment
technological development have subjected the such as EPZs and the state-owned enterprises
industry to wide cyclical fluctuations every (SOEs). Finally the state itself undertook
three years or so. From the second half of production via the SOEs. These interventionist
1974 to end of 1975, the down turn in the policies, together with cheap labour and
electronic industry coincided with the general favourable external conditions successfully
world recession to hit the industry with the attracted foreign capital, generated growth and
most severe recession so far. “Singapore was employment. Most of the investment went into
perhaps the worst affected offshore location” in petroleum refineries, electronics, textile &
the electronic industry, some two thirds of the garment industries. In this phase, the case of
20,000 workers retrenched during this period Singapore fits the H-O theory in that Singapore
(Frobel et al. 1980: 368). The fact that the was labour-abundant and capital-scarce so
majority of the workers were retrenched also she specialised in labour intensive
indicates that Singapore has little influence manufacturing.
over the decision of foreign firms. The second phase of Singapore’s EP
strategy (1972-79), involved upgrading and
diversifying Singapore’s export activities. But
9 CONCLUSION the attempt to upgrade the manufacturing
sector was abandoned due to the oil price
Between 1965 and 1990 real GDP grew on shocks. Nonetheless the state diversified
average 6.5 percent per annum. Parallel to this Singapore’s export activities by building on
miraculous growth was an even more Singapore’s comparative advantage in
spectacular increase in exports. Between 1965 financial and business services. The Monetary
and 1988, exports grew on average 7.6 Authority of Singapore was established to
percent per annum, with manufactured exports promote Singapore into an international
accounting for 75 percent of export earnings. financial centre. During this period, the
Manufactured exports included not only textiles government successfully promoted the
but also electronic goods. Yet in 1960 development of the Asian dollar market.
manufacturing accounted for only 7.2 percent Compare to the previous phase, Singapore
of GDP, with more than one-third of now specialised in the production of such new
employment engaged in traditional production. products as machinery equipment and
If this is a miracle, it is not beyond explanation. electronics, that used more capital and more
According to the generally accepted view, the skilled workers. Moreover, we began to see
success of Singapore is due to a high degree the government promoting services-based
of commitment by the Singapore government development which uses Singapore’s relative
to laissez-faire market economics which factor endowment to the best advantage:
stressed ‘free trade’ as an explanation for location, rather than cheap labour, was the
success. On the contrary, in this paper we island’s most abundant factor.
have argued that the architect behind the The third phase of Singapore’s EP
emergence of this new “Asian Tiger” is a strategy (1979-84) involved an economic
strong, developmental state, which has restructuring programme which aimed to lead
willingly and abundantly provided incentives to Singapore into high-value activities. The
attract foreign capital, controlled labour and government identified five pillars of growth:
forced savings, raised wage rates and manufacturing, trade, tourism, transport and
upgraded labour skills. The encouragement of communication, and “brain” services (including
an export-oriented industrial growth finance by financial, medical and architectural services).
foreign capital has been an active policy since To restructure the economy, the government
1965, following an unsuccessful attempts at intensified its intervention. The government
import substitution. used distorting incentives to guide MNCs into
The first phase (1965-73) of the export desired high-value activities. It also introduced
promotion (EP) strategy involved the a high-wage policy to discourage labour-
establishment of virtual free-trade regime by intensive activities, while at the same time
the government. The incentives made to taking measures to upgrade the quality of
foreigners took the form of tax holidays and labour. In addition, the government used state
export incentives. Moreover, the government owned industries to promote restructuring and
established free zones and EPZs. EPZs are undertake targeted activities. These
highly subsidised industrial sites which allow interventionist policies successfully attracted
the duty-free entry of goods destined for re- foreign capital into the desired industries. In
13
1980 Singapore did not produce any computer development. First, MNCs tended not to
components, by 1983 Singapore was the integrate with local suppliers. Thus, multiplier
largest exporter of disk drives in the world. In effects on the rest of the economy have been
the area of financial and business services, by limited. Second, foreign firms tended to crowd
the late 1980s Singapore was already the out indigenous enterprises. Third, the high
region’s financial centre, having utilised her degree domination by MNCs leaves Singapore
relative factor endowment i.e. geographic with a minimum of ‘bargaining advantage’. The
location. For example, Singapore problem was that these manufactured exports
advantageously bridges the time zone gap were subjected to the decisions of foreign firms
between the New York/London and Hong over which Singapore (the host country) could
Kong markets for foreign exchange. have little influence, e.g. decisions over
This paper presents empirical evidence to product development, choice of techniques,
show the contributions of the EP strategy and and market locations.
foreign capital to Singapore’s economic Singapore’s ‘dependent development’
growth, using growth accounting data. We suggests that in order to sustain economic
found that Singapore has grown entirely growth, she has to continue to attract MNCs.
through high capital accumulation from This requires the government to constantly
domestic savings and foreign capital. The EP upgrade the levels of skills and infrastructure,
strategy played a major role in the so that MNCs are attracted, this time into
accumulation of physical capital via forced higher value-added activities which do not
national saving and the policies to attract depend purely on cheap labour. As we have
foreign capital. Much of government’s physical seen, Singapore has been successful in doing
capital accumulation was conducted to attract this, for example, in export-oriented services -
foreign capital, while most of foreign capital such as financial and business services -
concentrated in the manufacturing sector and where the main factors shaping the
increasingly in services. The main reason that comparative advantage are the availability of
facilitated the US to invest abroad in search of physical and human capital and geographic
low-cost production was the long term location.
declining competitiveness of the US, especially It should be noted that although
with the entry of Japanese manufactures into Singapore’s growth is dependent on foreign
the US market. Also, the huge government capital, technology, and trade, it has
borrowing during the Reagan period kept the increasingly invested capital in and traded with
dollar at unrealistically high levels, prompting countries in South East Asia and China. This is
US firms to invest increasingly abroad in why export-oriented industrialisation in
pursuit of low-cost production bases. Declining developing countries has brought about
competitiveness eventually led the US and changes in the international division of labour.
Europe to gang up to force Japan to raise the The prospects offered by the opening of
value of yen. Faced with rising Japanese costs South-South trade are tremendous. In fact,
due to the revaluation, Japanese firms also “South-South trade could be the most dynamic
invested heavily abroad to look for low cost component of world trade” (Milner, 1990: 55).
export bases. Consequently, both US and South-South integration suggests that
Japan investment abroad surged. developing countries could co-operate and
Singapore’s case strongly confirms the benefit from the comparative advantage of
process of dependent development because each country. For example, within an
capital accumulation was characterised by electronic product, India specialises in
continued dependence on foreign capital, programming, Singapore produces machinery
technology, and trade. There are a number of for production, China manufactures the parts,
negative effects associated with dependent and Malaysia assembles the product.
14
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ENDNOTES
1
This research was carried out by the International Institute for Management Development (IMD).
See Economic Development Board, 1999.
2
For example, referring to the East Asian five, Chen asserts that “State intervention is largely
absent. What the state has provided is simply a suitable environment for the entrepreneurs to
perform their functions” Chen, E. V.K. 1979:183-4.
3
Trade in which goods can be imported and export without any barriers in the form of tariffs, quotas,
or other restrictions.
4
See for example, Lau, 1990, Alam, 1989, Governments and markets in economic development
strategies: lessons from Korea, Taiwan and Japan.
5
In market economies enterprises are mostly privately owned, and profits are mostly privately
appropriated.
6
For example, the British government tried to prevent the collapse of the British steel industry in the
1930s-1940s and the cotton industry in the 1940s.
7 ICOR stands for Incremental Capital Output Radio.
8
This procedure is known as growth accounting.
9
Capital includes both human and physical capital.
10
Population increases.
11
In the case of Taiwan the government was controlled strongly by military groups.
12
The triple alliance in Korea is different from Singapore in that the state brokered Korea into the
international capitalist system via the local bourgeoisie rather than via multinational. See Lim 1985.
13
Note that by comparison with other developing countries in the same table, Singapore has had
much freer trade.
14
Defined as ‘geographical areas offering tariff, tax and/or regulatory relief to business located within
their boundaries” Sabre Foundation, 1983: 3.
15
Firms selected on the basis of capital expenditure and type of technology.
16
This is under Pioneer Industries Ordinance No. 1.See Young,1992: 23.
17
A good investment climate was prompted by political stability, low inflation, and good physical
infrastructure (concentrating on telecommunications, port, and air services).
18
5 year 50% tax exemption on profits in excess of a fixed base for firms investing in warehousing.
19
The list includes industries making such product as computers, telecommunication equipment,
advanced electronic components, solar cells and optical fibres, precision machine tools, robotics,
aircrafts and automotive components, and pharmaceuticals and engineering plastics.
20
In 1986, about 97 percent of the value of net investment commitments came from the US, Japan,
and Europe, with Japan accounting for the largest share (411.3 percent), followed by the US
(S$443.5 million, or 37.4 percent). See Soon and Stoever 1996: 339.
21
The negative effects of the dependence on foreign firms is discussed in part 2.
22
A 1993 study of 47 countries by Business Environment Risk Intelligence shows that on the basis of
a weighted composite index, which measures the number of skilled and technically trained people
against market requirements, the Singaporean labour force ranks best in the world in productivity –
ahead of its counterparts in runners-up Switzerland, Japan and Belgium. See Mitterman 1995:
278.
23
State owned corporations and statutory boards earned profit equal to S$10 to S$15 billion, which
roughly one-third of GDP. See Young 1992: 21.
24
The simultaneity of the success of other three tigers (Taiwan, South Korea, and Hong Kong)
adopting similar strategies confirms a possible common cause.
25
Kojima Kiyoshi’s term cited in Numazaki 1998 80.
18