Chapter 1. Introduction
1.5 Background information
1.5.1 Development stages of the Republic of Singapore
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is dealt with. On a rosier note, wealth and asset management are identified as the strongest elements, and risk management is seen as a potential future key player in Singapore’s financial district.
Ong Chong Tee in “Singapore’s policy of non-internationalization of the Singapore dollar and the Asian dollar market” (2003) stresses the importance of the establishment of the Asian Currency Unit and the Asian Dollar Market as a tool to internationalize the activities of the local banks in the early development of the financial cluster until today. He also points out the poor performance of managers in the finance and banking sector that is lower than in the Philippines according to studies. Hence the heavy reliance of the city-state on foreign workers, and the limitations of this model on the long-run. Contrarily, Zahidi, Bloom, Milligan, Guzzo,
& Harding (2013) in the “The Human Capital Report” underlined that the country has the workforce that is the best prepared in terms of human capital to face coming challenges, as competition on the international stage increases.
To conclude we can say that most of the current literature outlines Singapore’s status as an overachiever. Yet, none studies Singapore’s financial cluster combining local and regional perspectives altogether.
1.5 Background information
In order to better understand the uniqueness of Singapore as a city-state, this part will briefly introduce the different development stages that it has been through.
1.5.1 Development stages of the Republic of Singapore
1.5.1.1 The path to self-governance and independence
The modern history of the city of Singapore truly started when Stamford Raffles colonized what was then known as Singapura or Temasek in 1819. Shortly after the settlement of Singapore, the island was able to take advantage of its natural deep-water harbor, its key location alongside the Malacca Straits, and the intense trade that took place between Europe and its colonies. As a result, “entrepot trade”
became the key to the early rise of the city. The takeover of the colonized island by the East India Company in 1858 further reinforced the sole reliance of the local economy on trade.
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Following the “Straits Settlement”, the Indian Office of the British Governor took over and ruled altogether Singapore, Penang and Malacca. It somewhat pushed Singapore to diversify in the manufacturing sector, and the service industry. However, as World War II happened, the Japanese troops took over Singapore, and from 1942 to 1945 the economy drastically suffered. After Japan surrendered, the British went back, and it’s not until 1959 that Singapore was allowed some degree of self-governance. The first election saw the People’s Action Party (PAP) takeover the government with Lee Kuan Yew at its head, and it marked the start of the PAP’s single-handed rule that has been going on since then (Turnbull, 1989).
Lee Kuan Yew’s party did not rest on its laurels and in order to prevent the island from falling into the communists’ hands adopted a set of policies to resolve the various problems that plagued Singapore. The establishment of the first statutory board -a state-governed body-, the Housing Development Board (HDB), helped tackle rampant poverty and unemployment, thanks to the “Five-Year Building Programme”
that built thousands of subsidized flats. This high-profile policy was enforced alongside the “Five Year Education Plan”, which reduced illiteracy and laid the foundations necessary for the rise of the “Singapore’s miracle”. The Singapore Polytechnic, and other vocational schools hereby established, set the path to the forthcoming industrialization. The famous stance of the island against corruption is not new either; it also dates back to the early days of the PAP when it enforced an
“Anti Corruption Law”, which gave the judiciary power wide investigation and enforcement powers.
The first “State Development Plan” was launched in 1961, and was promoted by the newly established Economic Development Board (EDB), another statutory board. It was planned to last over a three-year span, and it identified the areas in which Singapore benefited from a clear competitive advantage (ship building, small appliances manufacturing, steel and chemical industry, etc.). It advocated an import-substitution strategy aimed at tapping in the large Malaysian market. In order to promote labor-intensive sectors, the EDB also drafted policies that would attract Foreign Direct Investments (FDI).
In 1963 following a referendum Singapore gained independence from the British colonial empire, and seventeen days later Singapore merged with its neighbor to form the Federation of Malaya. However the PAP did not get along with the United Malays National Organization (UMNO) that wanted to establish pro-Malay policies.
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Following the ethnic riots of 1964, the Federation of Malaysia expelled Singapore in 1965, because of fears of a pro-Chinese coup against the UMNO (Lee, 2008).
1.5.1.2 The Republic of Singapore’s first industrial revolution and the following turmoil
Singapore’s forced independence from Malaysia did not affect Singapore’s economy that had, at the time, a Gross Domestic Product (GDP) per capita more than double of Malaysia’s, and manufacturing already accounted for a bit more than 19%
of its total GDP (United Nations Statistics Division, n.d.; World Bank, 2014c).
Furthermore, the city-state was ready to face future challenges thanks to earlier PAP’s industrial policies and its two statutory boards, the HDB and EDB.
The separation from Malaysia meant that the government had to move away from its first State Development Plan, and adopt an export-oriented growth model, as it could no longer rely on Malaysia’s domestic market. This period was called the
“First Industrial Revolution”. This new path did not go without some major issues. In 1971 the UK, that still had a military base in the island, announced its intention to close it. Since British military was one of the principal employers of the island, the news stirred grave concerns. As a consequence, the PAP decided to attract foreign heavy-industry companies, and Japan proved to be a major ally. The former colonial power established many trading companies, and also helped strengthen the local shipbuilding companies, which led Mitsubishi Heavy Industries and Mitsui to start operating in Singapore (Lee, 2000).
The First Industrial Revolution, with the support of the EDB, saw an improvement in the industrial skills of the local workforce through the “Manpower and Training Unit” and the “Overseas Training Program”, both established in 1971.
The EDB was also highly efficient in attracting investments from overseas by working as a “one-stop shop” for willing investors, especially since it had been alleviated from its considerable work-load thanks to the creation of the Development Bank of Singapore (DBS), and to the Jurong Town Corporation (JTC), a new statutory board (Teo & Ang, 2001). The creation of Asian Currency Units allowed the financial service sector to rise as well, by attracting foreign financial institutions, in permitting the trade in US Dollars or other major foreign currencies (Lee, 2000).
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All those measures reflected in the changing economic structure of Singapore, manufacturing grew tremendously, helped by the relocation of many factories from Hong Kong to Singapore, due to the political turmoil in China at that time. As a result, in 1973 manufacturing reached 22,3% of the GDP, and the Per capita GDP at current prices (US dollars) had attained $1,929, nearly triple that of Malaysia’s.
Finally, GDP growth averaged 12,7% annually from 1965 to 1973 (United Nations Statistics Division). As the local business class did not seem to be willing to shift from their traditional focus on shipping and logistics, there was a concomitant increase in state intervention by means of a “big push” strategy,
As the country reached a state of full employment, concerns emerged about the spiraling wages and the unsustainability of the labor-intensive orientation of the economy, consequently the country attempted to adopt a more capital-intensive growth model (Cahyadi, Kursten, Weiss, & Yang, 2004). While globalization started, it became less and less competitive to attract FDI in the low-skilled sector as fierce competition emerged from other Asian countries that took part in the global production network. The EDB moved to attract more technology-intensive businesses, such as in engineering, high-end electronics, and petroleum processing. The borders were also opened to attract foreign talents, and offset the shortage of labor. Yet this strategy coincided with the First Oil crisis of 1973, the effects of which lasted until 1976. As a result the industrial upgrade strategy had to be delayed, growth slowed down from 11,1% in 1973 to an annual average of 6,2 % from 1974 to 1976 (United Nations Statistics Division).
1.5.1.3 The second industrial revolution: A hazardous journey
As the world’s economy recovered the flow of FDI went back to normal after 1976, the turn towards more capital-intensive industries was resumed and in 1979 the Vocational and Industrial Training Board was set up to level up the skills of the workforce. Simultaneously, the Joint Industrial Training Scheme was enforced with the help of multinational corporations in order to provide them with highly sought-after skilled employees. While in appearance this strategy appeared as a success as the growth rate went up, this was mostly due to the rise of Singapore in the financial service sector, and the construction sector.
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Thus, in 1980 the “Economic Development Plan for the Eighties” was published and it kick-started what is now known as the Second Industrial Revolution.
All the statutory boards were put to the task to diversify the industrial structure of the country: Information and Communication Technology (ICT), pharmaceuticals, medical instruments, etc. The EDB was particularly successful in attracting MNCs in those sectors, and the city-state became a crucial link in the region in high-end industrial production. In order to ensure that productivity would follow and that wages went up, the government decided to enforce a high-wage policy from 1979 until 1984. Simultaneously, the Trade Development Board (TDB) was founded in 1983, with the aim of strengthening indigenous companies by helping them to expand their business abroad. This board had other beneficial effects on the economy, and further setting Singapore as an international trading hub (Ramcharan, 2002).
Education-wise lots of efforts were made to continually make sure that the workforce had the appropriate technical skills. Some universities were transformed into Technological Institutes, the brightest students were sent abroad, many faculty members were recruited from the West, and joint projects such as the French-Singapore Training Institute were set up.
While at first it seemed that the Second Oil crisis did not have much impact on the economic performance of the island, oil-refining and ship-building were severely hit. What’s more the high-wage policy (1979-1984) led to an unsustainable situation as wages increased faster than productivity. Many companies instead of upgrading their business had simply relocated to the Malaysia hinterland, or Indonesia. As a consequence, in 1985 the country was hit with its first recession, the GDP contracted by 0,6% and the following year GDP only grew by 1,3% (World Bank, 2014a).
In reaction, in 1986 “The Singapore Economy: New Directions” was published and advised the PAP to make services a clear part of its growth strategy, pushing for tax incentives in order to ensure MNCs would settle their regional headquarters there. The “SME [Small and Medium Enterprises] Master Plan” was also launched in 1988 to make sure that indigenous companies would restructure.
High wages, which had pushed the country into the 1985 recession, were frozen for two years, the corporate tax was lowered, and the flexi-wage system was enforced, automatically regulating people’s income based on various performance indexes.
Luckily the economy went back on track, and from 1986 to 1990 the country thanks
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to its new found luck in the tertiary sector enjoyed an average GDP growth of 8.7%
(Toh & Tan, 1998).
1.5.1.4 The 1991 Strategic Economic Plan: a turning point
The Strategic Economic Plan published in 1991 can be seen as a turning point for Singapore. Thus, it mentioned for the first time many key ideas that have long lastingly shaped the city-state. It was a long-term plan that aimed at making Singapore a high-income nation within the following 30 years. It also listed the ways to make the Republic a global city. Thereby, “The Riau Islands, Johor, Singapore Growth Triangle” was mentioned for the first time as a possible hinterland for Singaporean businesses. Singapore positioned itself as a key regional force, and identified possible clusters (Toh & Tan, 1998).
In the early 1990’s the country was concerned about the low productivity of its service sector (including the financial sector), while it encompassed 39% of workers, the economic output only represented 9% of the GDP. As a response the Singapore Productivity and Standards Board was created in 1996 to increase the economic output of service workers (Ministry of Trade and Industry, 2006).
While the local workforce was already well educated the government launched the “National Technology Plan” in 1991 to deepen locals’ scientific and technological knowledge, followed by the 1996 “National Science and Technology Plan”. The government came to the realization that the population being limited the country would have to resort to hiring foreign talents, thus starting the constant growth of foreign workers in the island (Ministry of Trade and Industry, 2006).
Regionalization was also set as a priority. Singapore had long overlooked its neighbors and mostly targeted Western markets. Thus a series of policies were enforced to better help Singapore to become a regional hub, such as the
“regionalization of Singaporean enterprises programme” (Pereira, 2001).
All these efforts paid off, and in 1993 the GDP growth reached 11.5%.
However, the 1997 Asian financial crisis disrupted the growth model set by the 1991 Strategic Economic Plan. Whereas in 1997 the GDP growth was still of 8.5%, in 1998 the country’s GDP contracted by 2.3%, luckily the economy bounced right back in 1999 and grew by 6.9% (World Bank, 2014a). Most of Asia’s currencies and stock markets were severely hit, yet Singapore remained largely unaffected by the crisis,
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that situation led the Singapore Dollar (SGD) to strengthen in comparison to other regional currencies. Consequently the island’s regional competitiveness worsened, so the government decided to reduce labor costs. The newly established Committee on Singapore’s Competitiveness advised the country to keep developing its well-established financial service sector and diversify in venture capital and fund management, and to also turn to new high-growth hub services that include healthcare, media, education, etc. The “Productivity Action 21” plan was simultaneously launched in order to ensure that the local workforce would finally reach the list of the top 10 most productive nations in the service and manufacturing sector (Tan, 2002). This plan confirmed the island’s turn towards attracting more foreign talents in order to help achieve its goal. The 1990’s also saw the nation develop into a more knowledge intense model, with higher education at its core, leading to plans to make Singaporean universities among the most attractive and competitive in the world.
Those measures were highly successful as service exports grew by an annual average of 9.9% between 1985 and 2001. In 1993 more than a hundred foreign banks had set branches in the city-state. By 1998 the local financial market started to open up, and foreign banks were allowed to enter the lucrative retail-banking sector (Economic Review Committee, 2002).
The years 2001, 2002, and 2003 witnessed several external shocks, the technology bubble collapsed, the USA were hit by the 09/11 attacks, and the SARS epidemic broke out. As a consequence in 2001 the GDP contracted by 1.2%, in 2002 the economy bounced back to a meager 4.2% GDP growth, and in 2003 the GDP grew by 4.6% (World Bank, 2014a).
As a result, as early as 2001 the government set a new Economic Review Committee, and in 2003 it released a series of recommendation in order to truly build the city as a global hub. Six fields were picked out and much emphasis was put to make them flourish: international links, the local business environment, knowledge-driven sectors, the service and manufacturing sector, human capital, and job displacement (Ministry of Trade and Industry, 2003). Accordingly in 2006 the real growth of financial services was of 9,2%, Singapore became the sixth largest private banking center worldwide (Singh, 2012). At the same time the manufacturing sector still represented 27% of the annual GDP, an impressive performance for such a small island (World Bank, 2014c).
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This period of rapid expansion was again halted in 2008, as the subprime mortgage crisis hit the USA and impacted other international markets. That year the GDP grew by only 1.7%, and in 2009 it contracted by 0.8% (World Bank, 2014a).
While on the financial front Singapore was enforcing many proactive measures such as guaranteeing all deposits, a stimulus package representing 8.2% of the GDP was launched (ADB Asia Capital Market Monitor, 2009). The government also took advantage of the lower level of economic activity to implement the “Skills Programme for Upgrading and Resilience”. This plan aimed at improving the knowledge of the local workforce, and seizing new opportunities when the economy bounced back (Ministry of Manpower Singapore, n.d.). The city-state did not have to wait for too long as in 2010 the GDP increased by a spectacular 14.8% (World Bank, 2014a).
In 2010 the Economic Strategies Committee released its latest report. In the past most reports had solely targeted how to improve the business environment and the economic output of the local workforce. Yet the 2010 recommendations moved away from their traditional focus and called for a more inclusive growth, in order to decrease the ever-growing income inequalities (Ministry of Trade and Industry, 2010).