Economic miracle of Singapore

MINISTRY OF SCIENCE, EDUCATION, YOUTH AND SPORTS OF UKRAINE

KHARKIV NATIONAL UNIVERSITY OF ECONOMICS

 

 

 

Department of foreign languages

 

 

Economic miracle of Singapore

 

 

 

 

 

 

 

 

 

                                                                                                                        Paper  by

                                                                                                                                              Shvartz Natasha

Student of Management and Marketing Faculty

                                                                                                                       ( 2-7)

                                                                                                                              Supervisior:

                                                                                                                                  Chebotar  E.F.

 

Kharkiv -2011

The topic of this research  is Economic miracle of Singapore.

Aim: To analyse reason of the rapid  growth of the Singapore economy.

Objectives: - to analyse literature about the given issue;

• to  learn the principles of economics and business of Singapore;
• to work out the possible ways of stabilize the economy of Ukraine;

                  

Novelty: Theoretical novelty of the paper lies in finding . Practical novelty

lies in application Singapore`s methods of developing economic situation in Ukraine.

Topicality: This topic is relevant because economic situation in Singapore is an example of rapid development without any natural resources.

Practical value: This research offers some possible ways of improving economic situation in Ukraine.

Structure of work: The paper consist of 8 parts,   pages.

 

 

 

 

 

 

 

 

 

Contents

Part I. General  principles of economic expansion…...........................................1

1. Transformation   ………………………………………………………………..1
2. «Clean hands»…………………………………………………………………..2
3. Science to become rich………………………………………………………….3

Part II. Recent growth record………………...………...…………….………….4

Part III. Development strategy…………..………...…………………....………..6

3.1 Development experience……………………………………………………..

3.2 Branching off…………………………………………………………………

Part IV. International competitiveness…………………………………………

Part V. Monetary system ..................................................................................

Part VI. Fiscal policy…………………………………………………………….

6.1 Tax policy……………………………………………………………………

6.2 Expenditure policy…………………………………………………………..

Part VII. Medium term prospects……………………………………………..

Part VIII. Corruption......................................................................................

8.1 Punishment for corruption…………………………………………………..

Conclusion………………………………………………………………………..

References………………………………………………………………………….

 

 

 

 

 

 

Part I. General  principles of economic expansion

Singapore officially becomes the most comfortable country for business, showing to the whole world the model of economic expansion without natural resources. In Singapore there is no oil, gas or ore. Moreover this country does not even have the  sand for building  and drinking-water. All these things have to be imported.

In spite of scarcity of resources, and minerals, this country at the end of a 20 age accomplished a swift economic  breach, flying  up from a world bottom in the first five of countries on the level of GDP.

The main and unique tool of Singapore in the fight for own prosperity became particular conditions for making business. During the short interval of  time a country destroyed all of obstacles on the way of technologies and capital.

A bright demonstration of success of their work on a way to prosperity became the results of  Index of economic freedom research, published by the American fund of Hearltage  Foundation. Singapore once more took the second place in this global rating. In other words,  this Asian country in the earliest for making business.

Ukraine  in this prestige rating continued the free falling and stopped on a 164th place out of 179 possible.

International investors appreciate liberalism of Singapore. Banks and corporations from around the world aim to set the offices or even to open their headquarters in this country.

Today the experience of little Asian country becomes an example for poor and corrupted countries. Authorities of Singapore asset that their secret of prosperity is based on four pillars, the English language , low taxes, simple condition of making business and skilled officials. 

 

 

 1.1 Transformation

Only 45 years ago Singapore, one of the poorest states in the world, first in the history got its sovereignty. One and half centuries of British colonization remained behind.

The main source of profit is marine port. However and it is mainly utilized for the re-export of tin ore, rice, rubber from Malaysia, Indonesia and Thailand. But even freights could go away from an obsolete Singaporean economy at any moment.

Only for one generation Singapore changed greatly.  Its population increased in five times, attaining 5 mln. people. An average  salary is $ 4 thousands  a month. What was a deserted island   recently is compared to the business district of  New-York – Manhattan .

Lea Kuan Yu changed the former British colony of  Singapore into paradise for investors and hell for the violators of laws.

The question is how poor Singapore attracted a foreign capital in this remote edge? The first thing  that this state did was simplification of system and reduction of fiscal rates. Except low taxes it attracts multi-billion investments with favourable  conditions for making business. Setting a business in Singapore occupies only 4 days. For comparison, in Ukraine it can be handled for 27 days. All procedures are maximally simplified and aimed at the effective use of time.

1.2 «Clean hands»

For creating a proper civil service broke corruption in a country. Bribery control was very cruel, making  position of state official into the most high-paying  and desirable career . In 1994 the middle pay-envelope of the Singaporean ministers is set at  the level of the two thirds from a middle pay-envelope to forty eight most highly-paid employees of corporate  sector  of Singapore. Annual pay-envelope of member of government and judge is - $1 million. Salary of premiere – minister is - $2 million. It is five times higher than the salary of president  of the USA.

The selection of personnel for sivic service is done by an agency that fights against a corruption. It punishes officials caught on bribery severely, sends them to  prison without taking into account  their merits  for the country.

In 2010 Singapore took the third  place corruption rating which is published by international  organization Transparency International. Ukraine still frightens the business world with its 134th place. For Singaporeans a corruption is so unacceptable, that  they can refuse to conduct business in a country, where it is possible to come across.

1.3 Science to become rich

Singapore owes its prosperity to a maximal integration into an international context. During the first years of his independence, in 1965, a government proclaimed English as an official language, that helped to save integrity of Singapore.

In the end freedom of enterprise, elimination of corruption and integration in the international process of education took away the young Asian country on the top of young capitalism.   

 Part II. Recent growth record

After the successful take off by mid 1970s and except for falling into a deep air pocket in 1985/86 the Singapore economy recorded an impressive growth passage till the onset of the Asian Financial Crisis in mid 1997. Following the crisis came the electronics dip in 2001 followed by the SARS set back in 2003. Despite the rather gloomy atmosphere then the economy gathered steam quickly and started to accelerate by recording 8.8% growth rate in 2004 followed by a 6.6% in 2005 and 7.9% in 2006.

In terms sectoral performance, the manufacturing sector, as in the past, was the main driver of the accelerated growth; the sector grew by 11.5% in 2006 and contributed about 3 percentage points to the overall growth rate. The manufacturing sector has retained its dominance in the economy by contributing 27% to GDP in 2006. After a long period of stagnation, the construction sector started to pick up and grew by 2.7% in 2006 and contributed about 3% to GDP. The service sectors jointly accounted for about 63% of GDP in 2006 or 4.4 percentage points in the GDP growth rate. Overall, therefore, the growth was broad-based.

On the demand side, private consumption expenditure grew modestly by 2.5% in 2006. A puzzling scenario that has been unfolding in Singapore is that the private consumption expenditure share in GDP has been falling over the years. This share has fallen from 61% in 1970 to 40% in 2006. In general, private consumption expenditure is the most stable aggregate demand component and accounts for about two thirds of GDP in developed economics. As this built-in stabilizer gets eroded away, the economy’s growth path becomes more volatile because of the volatility of the other demand components, private investment expenditure and exports. Studies show that Singapore’s falling consumption share has resulted primarily from rising property and car prices; when these prices fall the consumption share tends to rise.

The total domestic demand recorded a healthy 6.6% growth in 2006 mainly because of a healthy growth of private investment expenditures propelled a healthy inflow of FDI.

More than 80% of net investment commitments in manufacturing are from foreign investors. In 2006, the manufacturing sector attracted S$8.8 billion worth net investment commitments, most of which were from EU, US, and Japanese investors.

The propeller of the Singapore economy has been the external demand; export of goods and services. In 2006 external demand grew by 10.4% and contributed 8.1 percentage points to the year’s GDP growth. In comparison, the total domestic demand contributed only 1.5 percentage points to the growth rate. The role of exports is well reflected in the exports to GDP ratio. In 2006 the merchandize exports to GDP ratio stood above 200% and the domestic merchandize exports (excluding re-exports) to GDP ratio stood above 100%. The major value adding export item is non-oil domestic (merchandize) exports (NODX), which accounted for 40% of total exports in 2005/06. A healthy trade balance outweighed negative service and capital/financial balances to yield a S$26 billion surplus which amounted to 12% of GDP in 2006. Singapore has enjoyed persistent balance of payments surpluses over many decades.

With the impressive recovery of the economy the labour market made substantial gains.

In 2006, a record number of 173,300 new jobs were created and as a result the unemployment rate fell further to 2.7% from a height of 4.0% in 2003. Service producing industries took the lion’s share by creating 110,700 new jobs followed by the manufacturing and construction sectors creating 62,600 and 40,900 new jobs respectively.

Despite the overall high growth the nominal wages grew only by 3.2% and real wages by mere 2.2%. The highest growth in nominal wages occurred in the real estate and leasing services (11.7% growth) followed by financial services 5.7%. The slow growth in nominal wages kept cost pressures down; in 2006 the economy wide unit labour cost index fell by 0.5% and the unit business cost index in manufacturing edged up slightly by 0.6%.

The first half of 2007 recorded a boom and frenzy. Propelled by the high growth performance, the property market awakened from a decade long slumber and re-entered a frenzy fuelling a bubble similar to that burst in 1996. Burgeoning tourism sector with 9.7 million visitors in 2006 and with another 5 million in the first half of 2007 has squeezed the hotel sector with visitors spilling over to many non-standard visiting lodges. Outbound travel faced a crunch as a result of demand outstripping the supply and created long waiting lists for flight bookings. The upbeat, however, rekindled the fears of a roller coaster ride for the Singapore economy.

Part III. Development strategy

3.1 Development Experience

Since self-government in 1959 and independence in 1965, Singapore has passed through a number of phases in its development process. The Government put in place strategic plans in 1960 (First Plan), 1980 (Second Plan), 1985 (Economic Committee Report), 1991 (Strategic Economic Plan), 1998 (Competitiveness Report), 1999 (Industry 21; Manpower 21), and 2002 (Economic Review Committee). Through a forward looking strategy the government of Singapore has responded to new economic challenges quickly and capitalized very well on the “first-mover” advantages.

Despite the current standing as a developed economy, the initial challenges that Singapore had to face were many. Although independent Singapore inherited an efficient entrepot trade system from its colonial masters, it also inherited a large pool of unemployed workers (with more than 10% of the labor force was unemployed in 1960), a low skilled workforce, and wretched housing conditions. The institutional structure that the Government put in place to address these issues, though evolved over time, continues to this day. The Government took initiatives to tackle these problems simultaneously. The education policy was geared towards training in skills that were needed for the emerging industries. The Housing Development Board (HDB) was set up in 1960 to provide adequate public housing at subsidized rates. The Economic Development Board (EDB) was set up in 1960 to spearhead the industrialization drive.

A major challenge for the Government was to transform Singapore from a re-export economy under the colonial regime to an export economy. This appeared to be an insurmountable task for three reasons. First, unlike Hong Kong and Taiwan, which benefited from an exodus of entrepreneurs from communist China to their shores, Singapore faced a severe dearth of industrial entrepreneurs (as opposed to commercial entrepreneurs) at the early stages of its industrialization. Second, the lack of domestic savings aggravated the situation further. Third, the regional markets for Singapore’s exports were not that viable because they were likely to impose trade barriers to help their own industries. This meant that Singapore had to look beyond the regional market.

The solution to these problems was to aggressively look for foreign direct investment (FDI) from the industrial world to build up the manufacturing base of Singapore. The foreign companies not only brought in investment and entrepreneurship they also brought with them the markets for their products. The Government made sure to make Singapore as attractive as possible for foreign investors by providing them not only with financial incentives such as tax breaks and accelerated depreciation allowances but also with a cordial labor force. This latter objective was achieved by diluting the power of militant labor unions and establishing the National Trade Union Congress (NTUC) that worked cooperatively with the Government and employers. The Government also mobilized domestic savings through the compulsory savings scheme under the Central Provident Fund (CPF), which the colonial administration started in 1955 initially for civil servants.

The basic structure thus laid down has continued to this day.

3.2 Branching Off

One important element of Singapore’s development strategy has been historical continuity and branching off. A serious mistake a number of newly independent countries made was to either cut off or weaken the colonial economic pipeline, and as a result fall into economic degradation. In the industrialization process Singapore did not break away from the trade system that it inherited from its colonial masters. In fact, entrepot trade still plays a very important role in Singapore. The value of re-exports has ballooned from S$3.3 billion in 1960 to S$204.2 billion in 2006. What has changed is the relative importance of entrepot trade in the economy. As a share of total exports, re-exports accounted for only 47% in 2006 as opposed to 94% in 1960. The country evolved rapidly from a re-export economy to a manufactured export economy.

Even within manufacturing, further branching off from electronics to other areas like chemicals and biomedical manufacturing (especially pharmaceuticals) has been taking place over the decade after the Asian Financial Crisis. In 2006 electronics accounted for 29% of manufacturing value added as opposed to more than 50% in 1995. With the emergence of chemicals and biomedical manufacturing also as key players with 14% and 25% of value added shares respectively in 2006, the manufacturing sector has become more broad based. Unlike the electronics production, chemicals and biomedical production are highly capital and skill intensive. In terms of employment in manufacturing in 2006 electronics absorbed 26% of the manufacturing workers whereas chemicals and biomedical sectors absorbed only 9%. For these sectors the Government has made heavy infrastructure investments in Biopolis and the Tuas Biomedical Park. These heavy investments are a calculated gamble that the Government decided to bid on.

With rising competition for manufacturing from low cost competitors, the Singapore Government embarked on a further branching off to new economic drivers; one among them was to develop an “external wing” and another was to develop Singapore as a regional service-hub. While both these were emerging as natural outcomes of Singapore’s development process, the former received special government attention in the early 1990s and the latter since about 2000.

Under the regionalization drive, the Government designed an incentive package for Singapore companies to invest in the region and beyond. Direct investment is an effective way to penetrate protected markets. The emerging transition economies such as China, Viet Nam, and Cambodia provided more opportunities for such investment. Outside Asia, countries like Mexico and Central and East European countries were also emphasized because of their proximity to the USA and the EU. Private companies as well as Government Link Companies (GLCs), with the support of such institutions as the EDB, were encouraged to take advantages of these opportunities. The EDB also arranges training schemes for managers under its Initiatives in New Technology (Rationalization) Programme. At the end of 2005 Singapore’s direct equity investment abroad amounted to about S$154 billion, a substantial jump over the 1990 level of S$13.6 billion. Over this period equity investment has grown by more than 20% per year with the exception of 1998 when there was a contraction as a result of the Asian Financial Crisis. The total direct investment that includes net lending to overseas affiliates amounted to S$181 billion in 2005 of which S$25 billion went to China and another 15 billion to Malaysia.

In terms of returns the factor income of Singapore’s from the rest of the world was about 11% of GDP in 2003 and 2004. Obviously, these returns were miniscule in relation to what accrues to foreign residents and institutions in Singapore. As a result Singapore’s GDP remains higher than the GNP.

Under the service-hub drive, Singapore is aiming at moving into non-traditional service areas as quickly as possible because the traditional areas such as aviation, logistics, finance and tourism are also facing intense competition form its regional competitors. For example, Singapore’s attraction to tourists primarily lies in its aviation hub status, a stopover for many tourists who are on the way to more popular tourist destinations in the region. There is a strong correlation between tourism in the region and in Singapore.

Moreover, the average length of stay for tourists in Singapore is only about three days as opposed to about two weeks in Thailand. As these competitors improve their aviation services and coupled with their relatively cheep retail shopping Singapore may loose a large proportion of its “stop-over” tourists. As for financial services, Shanghai is trying to capture a large chunk of the pie. The major obstacle to Shanghai in this regard is its serious pollution problem. As for port services, Malaysia’s Tanjong Pelapas port made Singapore rethink its approach to managing the port.

As with the manufacturing sector, the intense competition in the traditional service sector has prompted Singapore to move into non-traditional services quickly before the competitors catch up. Capitalizing on Singapore’s English speaking environment, the Government has focused on developing two key areas; on making Singapore a “global schoolhouse” and on developing Singapore as a medical hub for various treatments. As a learning center in the region the Government is planning to attract at least 150,000 international students by 2015 (The Straits Times, March 24, 2007). The country is in fact well on the way to achieving or even surpassing this target. In 2006 Singapore hosted nearly 80, 000 international students. This was a 46% increase over the 2003 figure. Students came from more than 120 countries but the majority was from China, which now has overtaken the traditional sources, Malaysia and Indonesia. This sector’s contribution to the economy was about 3.8% of GDP or about S$8 billion in 2006. The Government’s aim is to increase this to 5% of GDP by 2015. The Government launched the roadmap for this endeavor in 2002 as recommended by the Economic Review Committee to tap on Singapore’s English speaking advantage, high education standards, cosmopolitan character, global connectivity, safe environment, and multi-lingual society.