SCOTLAND can learn much from how Singapore wrote its own rule book in transforming itself from a third world country into a global economic force, writes Daniel Gay
The building at 250 North Bridge road in Singapore looks like any of the island-state’s many gleaming monuments to modernity. Outside, spanking new Mercedes hover over pristine tarmac. Hermes handbags come and go. But this is no ordinary office block: it houses the headquarters of the Economic Development Board (EDB), nerve centre of an astonishing success story.
At independence in 1965, the average Singaporean earned less than a Jamaican. Today, after a tenfold explosion in real incomes, Singapore is the third richest country per person, behind only Luxemburg and Qatar. Development was so fast that Lee Kuan Yew, the prime minister for the first 25 years, titled his memoirs From Third World to First.
Such tropical opulence may seem a world away from Scotland – not least because most ships trading with booming East Asia must pass the city-state. But Singapore’s story carries economic lessons for most small, open countries seeking separation.
What’s most striking is the desire of Singaporeans to do things themselves. “The Singaporean context is one of self-reliance,” writes Alan Choe, former head of the Urban Redevelopment Authority. “You cannot turn to anybody, any experts outside, because the problems are uniquely our own. The government came in and Singapore-anised the whole lot.”
That didn’t mean sticking two fingers up at the world – far from it. The EDB was desperate to secure international confidence by making the country an attractive place to do business. From 1980 to 1984 no other Asian country won as much direct foreign investment. Singapore captured more than a tenth of the total to all developing countries and exports surged.
At the same time that the EDB courted international capital and promoted trade, it was furiously carving out controls over policy. Targeted tax incentives and high public spending lured exactly the kinds of foreign investment desired – first in basic electronics, then in higher-end manufacturing. In the early days after independence, tariffs protected exporters for a limited period.
Singaporean ministers consciously focused on reducing any excuse for international markets to punish them, building a spare cashpile during the boom times and spending in downturns. They funded a lot of investment domestically – everyone has a retirement account with the government – and quickly paid off international loans.
Government-linked corporations pump out a sum up to half of annual economic output, while each year the state spends a sum worth up to a third of GDP.
Don’t let anyone tell you it is money wasted: the effects of huge early investment in housing, alongside a public education onslaught can be seen today. Four-fifths of locals live in government flats and Singaporean children regularly top the global maths rankings.
The stand-out feature of policy is not only the involvement of the state in the economy, which is falling as the international environment becomes more competitive. It’s that the government intentionally kept international markets happy while developing the levers of economic control: taxes, investment, education and health.
Policies were tailored to local circumstances rather than brought in wholesale from elsewhere. “The book of rules tells you very little and precedents borrowed from advanced countries have a nasty habit of coming apart in your hands,” says the first minister of finance, Goh Keng Swee, in his book Socialism That Works: The Singapore Way.
The strategy aimed to steer the economy in the direction politicians wanted, creating a virtuous circle in which the more the economy grew, the more the government could invest in upcoming technologies, and the faster the economy expanded.
At a time of pessimism for the global economy, Singapore offers a glimmer of light for small trading nations potentially threatened by the global markets.
If Scotland is going to dump England or plump for devo-max, whatever it turns out to be, it too needs to grow its room for manoeuvre and foster home-grown solutions. Holyrood should shun blueprints from abroad and seize the reins of economic power.
First: a muscular but nimble export promotion agency can help steer the economy in a sensible direction. Scottish Development International follows roughly this model, but it’s less powerful than its Singaporean counterpart.
World Bank research shows that the executive boards of successful export promotion agencies are stuffed with private business people and that most of their budget comes from government. EDBs are more effective when focusing on non-traditional exports or a sector, such as tourism. Every pound spent hyping exports has a five-fold impact. The benefits start to decline if the budget gets too big – usually about a dollar per capita.
Second: take an active decision to define the trading future rather than passively accepting the existing export make-up. In 1973, South Korea had never built a ship. Seven years later it was a world leader; today, it’s number one.
No-one is suggesting that Scotland can resurrect Clydeside’s glory days. The future lies with industries such as biotech and green power. New industries need to be actively cultivated.
Third, nurture the national narrative. Singapore’s symbol is a tacky half-lion, half-mermaid. Surprisingly, people rally round when things look bleak. Scotland is lucky to have less kitsch icons. Anything that separates Scotland from the crowd helps reinforce a sense that the nation is moving in unison and lets politicians get on with the task of shaping the economic future.
Fourth: establish stable sources of revenue to avoid a kicking from the bond markets. Income tax is a more steady source of earnings than VAT. As Ireland found in 2008, the minute a recession kicks in people spend less, compounding the government’s shortfall. The scant earnings from its 12.5 per cent corporate tax rate weren’t enough to stabilise state coffers.
Singapore has low company taxes, but it compensates with a forced savings scheme and fixed levies such as an expensive ten-year car licence.
Encouraging Scots to hoard more cash and keep it in the country would help build funds for investment and ward off the speculators. East Asians save up to half their pay, often with government. Local banks have ample money to invest and politicians don’t have to hawk so many government bonds to financiers in London or New York.
Finally, to the perennial question of the black stuff. Salmond’s trust fund wouldn’t turn Scotland into Norway – there isn’t enough oil left for that. But, crucially, most countries with a well-run resource fund are less likely to default on their debts, shoring up international confidence. Nobel prize-winner Joseph Stiglitz was correct to say that Britain should have invested its oil revenues instead of squandering them to prop up the shaky 1980s economy.
Despite early talk of socialism that works, Singaporeans clung to no ideology.
Their national narrative was the desire to build wealth in a turbulent region. The mantra is openness and pragmatism, not paternalism or equality. Their politicians shun dry bickering about the size of the state or the freedom of markets: they do what works.
Similarly, the example of Singapore may have less bearing on the independence debate than it might at first seem. Formal political separation may look like it would give Holyrood new tools, but policy space can often best be defended by staying out of the firing line. Scotland may have more independence on tax and spending now than it would have in the event of political separation.
The biggest economic lesson from Singapore is that Scotland should actively tailor policy to its own needs so that it manipulates its destiny. Scotland’s march to its own gleaming future may be limited only by the distance of its horizons.
• Dr Daniel Gay is an independent political economist advising on trade policy in small countries. www.emergenteconomics.