Economic miracle of Singapore

About 20 reputed foreign academic institutions have been operating in Singapore in early 2007 and the Singapore Tourism Board (STB) has been holding road-shows in many cities to promote Singapore both for tourism and other services.

Part IV. International competitiveness.

Maintaining international competitiveness has always been a priority concern of policy makers because Singapore’s sustained growth depends critically on international factor inflows and external trade. The Government has been addressing this at two levels; one is by containing cost pressures during downturns and the other is through long run productivity improvements.

The Government’s approach to addressing the short-run cost competitiveness has been both direct and indirect. As will be discussed in the next section, the exchange rate policy is geared towards containing imported inflation. A key policy tool that the Government has used in direct interventions is the adjustments to the CPF contribution rates. To combat the 1985/86 recession the Government slashed the employer’s CPF contribution rate from 25% to 10% and retained the employee’s contribution rate at 25%. As the economy gained its growth momentum the employer’s rate was adjusted steadily upward and the employee’s rate was adjusted downward to reach 20% each by 1994. In response to the Asian Financial Crisis the Government again cut the employer’s rate to 10% in 1999. This was later restored to 16% but cut again to 13% after the SARS episode. In July 2007 this rate went up to 14.5% again. The cost cutting packages included many other measures such as cutting the utility rates and tax rebates to companies.

The Government intervenes indirectly to reduce wage pressures by controlling the inflow of foreign workers. Apart from this, a unique institutional feature that Singapore has put in place to make wages flexible downward is to attach a variable component to the wage package. The variable component can go up and down depending on the performance of the company and the economy. On taking the cue from the public sector many private companies have adopted this adjustable wage system.

Gaining long run competitiveness through productivity improvements is a challenge that the Government has been trying to address since early 1980s. Education and skill developments and restructuring the economy towards high value added industries have taken priority in recent years. The R&D thrust discussed earlier is a concerted effort in productivity improvements. When labour productivity is measured as value added per worker Singapore’s productivity growth rate has been impressive with the exception of the turbulent period between 1997 and 2004. Overall the growth rate of GDP per worker has been about 4% per year since 1980. However, the value added per worker overstates the productivity gains since Singapore (and East Asian) workers tend to work longer hours compared to the OECD counterparts. In the absence of quality data on hours worked it is difficult to assess these productivity trends. Nevertheless, recent data published by the Department of Statistics show that value added per manhour has grown by about 3% per year between 2000 and 2006.

Part V. Monetary system

In June 1967, nearly two years after independence, Singapore broke away from the currency union with Malaysia and Brunei and established its own currency board (Board of Commissioners of Currency, Singapore – BCCS) and issued its own currency, the Singapore dollar. Until 1973 the Malaysian ringgit, Brunei dollar and Singapore dollar were interchangeable at par. In June 1973, when Singapore dollar was floated, it was delinked from the Malaysian ringgit but remained exchangeable at par against the Brunei dollar. Until the BCCS was merged with the Monetary Authority of Singapore (MAS) in October 2002 the BCCS was the issuer of the Singapore dollar. The MAS, which was established in 1971, is Singapore’s de facto central bank and the regulator of the banking and financial institutions. In 1981 the Government of Singapore Investment Corporation (GIC) was established to manage and invest long-term government reserve assets, a function that MAS handled earlier.

Singapore is among the top ten most sophisticated financial markets in the world. Over the years, MAS liberalized its rules and regulations on the financial market enabling it to capture an increasing proportion of world’s financial transactions. Except for prudent regulation of the banking and financial system and money market operations for maintaining liquidity in the financial system the MAS does not engage in controlling the interest rates or the money supply. The main monetary policy instrument that the MAS uses is the exchange rate to control imported inflation.

Interest rates in Singapore closely follow the US rates and the money supply fluctuates in response to demand. With the tightening of the US monetary policy in 2006 the 3-month US$ SIBOR rose steadily to reach 5.36% by the end of the year. The domestic 3-month interbank rate followed this trend closely and settled to 3.44% by the end of the year. The longer term interest rates also followed a similar trend; the benchmark 10-year Singapore Government Securities (SGS) rate settled to 3.04 by the end of 2006. The retail interest rates, on the other hand, remained very stable with the average prime lending rate at 5.33% and the deposit rates below 1%. With 1% price inflation, the real interest rates on deposits were negative.

Part VI. Fiscal policy

The pivotal role the public sector has played in Singapore’s transformation is well acknowledged. Despite such heavy involvements, based on the philosophy of fiscal prudence, the Singapore Government has kept both government revenue and expenditure at relatively low levels (around 15% of GDP) and yet generated healthy and persistent budget surpluses. On the revenue side, however, the Government has adopted an unconventional accounting method by excluding two items, receipts from the sale of land and capital goods and the net investment income generated by investing government reserves. Only up to 50% of the latter is included in the budget. If these items are taken into account, the actual budget surplus would be much larger than the reported one. For example, in 2005 the reported budget surplus was S$0.43 billion whereas the actual surplus would have been as high as S$10 billion. Although the reported surplus has varied from -2 to 8 percent of GDP over 1990-2005 the adjusted surplus remained positive and varied from 3 to 19 percent of GDP. These surpluses have yielded a robust fiscal position for Singapore with total public assets standing at $437 billion by the end of March 2005.

 

6.1 Tax Policy

In general, the fiscal measures have been pro-business. The corporate tax rate has come down steadily from 40% prior to 1986 to 20% in 2005. Faced with competitive pressures from economies like Hong Kong where the corporate tax rate as of 2007 was 17.5% and other emerging economies with even lower rates, the Singapore Government announced a further reduction of its corporate tax rate to 18% to be effective from the fiscal year 2008. Business firms also receive many other incentives such as investment tax credits, accelerated depreciation allowances and firm specific benefits that would reduce their tax burden substantially.

The Government also reduced the personal marginal income tax rate steadily over the years to enhance work effort. The highest marginal income tax rate in 1980 was 55% for assessed income exceeding S$600,000. In 2007 this was 20% for assessed income exceeding S$320,000. The income-share weighted average marginal income tax rate has come down from about 10% in 1980 to about 6% by 2007. Effectively, an average Singapore worker pays very little income tax compared to the OECD counterparts. Obviously this blurs the picture since there are many other tax and non-tax charges including the goods and services tax (GST) that would add up to a much higher effective tax rate. Moreover, Singapore does not have a social welfare network similar to that of many OECD countries and only recently has the Government come to address this issue openly.

Corporate income tax constituted the largest revenue item in 2006 accounting for 27.5% of the total revenue followed by personal income tax with 15.6% and GST with 13.0%.

The remaining 43.8% was generated from other tax and non-tax charges. On the personal income tax side, there are rebates and deductions, the largest deduction being the CPF contributions. Moreover, only about a third of the labor force pays income taxes. Therefore, to offset the reduction in income tax revenue resulting from reduced corporate and personal income tax rates the Government has been raising the GST from time to time. The GST was introduced in April 1994 and the initial rate was 3%. Then it went up to 4% and 5%. In July 2007 the GST rate went up from 5% to 7%. Eventually the GST may come to prominence as a major source of government revenue.

Among other revenue items, two are somewhat unique to Singapore. One is the foreign worker levy (introduced in 1980) that the Government uses to regulate the inflow of lows killed foreign workers and thereby the market wage rate. The employer has to pay the levy to the Government when they employ low-skilled workers . The other revenue item is motor vehicle taxes that the Government uses to regulate the vehicle population in Singapore. This involves taxes and charges on both ownership and usage. The charges on the ownership side include a market determined price of Certificate of Entitlement (COE – introduced in May 1990), import duties (Singapore is largely duty-free), registration fees, GST and annual road taxes. On the usage side are fuel taxes, parking fees, and road charges based on an electronic road pricing system. Cars in Singapore are the most expensive in the world and as a result owning a car has become a status signal. On the other hand, the peak-our traffic congestion in Singapore is the lowest among the rich cities in the world.

6.2 Expenditure Policy

On the expenditure side government consumption expenditure constitute about 10% of GDP and investment expenditure about 4%, most of which goes to infrastructure developments. Given the high savings and import leakages the multiplier effect of government expenditure in Singapore is extremely low. Nevertheless the Government uses infrastructure spending and off-budget packages as counter-cyclical measures.

Obviously infrastructure spending entails more long-run beneficial effects that are not easily measured. Among the key expenditure items in Singapore lies defense expenditure. In 2006 defense expenditure accounted for 33% of the total expenditure (the single largest expenditure item) and about 5% of GDP. Although some quarters in Singapore consider such high spending on defense as a waste the Government’s position is that it is a premium that needs to be paid to sustain Singapore’s progress; security cannot be taken for granted. What was conspicuously absent in Singapore budget accounts was (welfare) transfers.

The Singapore Government has been averse to a welfare state from the beginning. The Government considers that welfare payments not only drain fiscal resources but also erode work ethics and create an entitlement mentality. The basic philosophy of the Government has been to provide equal opportunity for every individual to enhance his/her human capital and become self-reliant. Individual welfare is left to himself/herself and to the family and the community. Government subsidies are designed essentially along this line. Public education is almost free upto the university level. Public housing is provided at highly subsidized rates. Healthcare is basically a co-pay system but it is also subsidized for low income groups; subsidies in public hospitals range from 80% in class C wards to 20% in class B1 wards. Beyond this there has hardly been any social welfare until recently.

With changing demographics, in particular with aging population, and increasing income disparities the Government has begun to seriously reconsider its stand on social welfare. Since the mid 1990s the Government has put in place some special transfers on a piecemeal basis. Since most of these transfers were on one-off basis the amount of transfers have jumped up and down in different years. For example, between 1998 and 2007 the lowest was S$52 million in 1998 and the highest was S$ 5,264 million in 2001. A transfer that the Government has made mostly on a regular basis was CPF top-ups for Singapore citizens.

For higher income groups the Government introduced a Medishield Plus scheme on an opt-in basis. For the elderly who may need long-term care the Government introduced an Eldershiled scheme. By and large healthcare in Singapore is a private responsibility. The Government claims that it incorporates the best features of the American insurance model and the UK taxation model.

The CPF now consists of three accounts, ordinary, special, and medisave. The special account is meant for retirement and as mentioned above the medisave account is for medical expenses. Over the years the Government liberalized the usage of the CPF funds in the ordinary account for other purposes such as for house mortgages and some approved investments. The adequacy, rather the non-adequacy, of CPF for retirement and healthcare is a hotly debated topic in Singapore. Some have argued that the CPF is a mortgage finance scheme and not a pension scheme. The money locked-up in an illiquid house is not available for retirement and the discretionary savings among low income groups are virtually zero.

To help the low income Singaporeans who are mostly older workers the Government in introduced, instead of “welfare”, a “workfare” bonus scheme. Instead of an unemployment allowance an individual receives the workfare allowance only if he/she makes an earning. In the 2007 Budget the Government expanded the workfare scheme under the Workfare Income Supplement (WIS) program and introduced it more as a permanent feature. These transfers (somewhat similar to the US earned income tax credit scheme) depend on age, income level and whether or not the recipient had an employment at least for three months within the six month period prior to the claim. Again to save more for retirement most of the workfare transfers are made to the individual’s CPF account; the Government in 2007 set the cash to CPF ratio at 1:2.5.

Although the WIS was a welcome move, setting aside too much in the CPF was seen as “not much help” for the poor who are struggling with their daily subsistence. The Government’s stand on this is to set aside more funds to help these people upgrade their skills and improve their earning capacity. At present, there are some proposals that are being discussed to address old-age social security and healthcare in Singapore.

Part VII. Medium term prospects

The steady high growth era of Singapore ended with the Asian Financial Crisis. Since then the economy has become more vulnerable to shocks and growth rates have become more volatile. There are two possible ways to stabilize the growth rate. One is to build up the consumption expenditure share of GDP from its current 40% to about 60%. Given that property and car prices are many folds higher than the affordable income levels, further rise in these prices strain the households and they cut back on consumption to pay up loans and to build up some savings. Instead of bubbles in the property market, if property prices move on at the rate of per capita income growth it is likely that the consumption share in GDP will pick up as it was observed after 1996. Given the limited land space in Singapore there is nothing much can be done to reduce the car population and to keep the prices down.

The other counteracting effect is likely to emerge from the new services drive discussed earlier. Most of the service industries in Singapore had a close link with manufacturing activities. As a result, business cycles in manufacturing created similar cycles in services.

With branching off into new service areas that are not heavily linked to manufacturing the synchrony in the business cycles in manufacturing and services may be reduced and even reversed. This may help in reducing the volatility in growth to some extent.

Despite the possibility of volatile growth pattern, medium term growth prospects for Singapore remains bright. Singapore has been entering the emerging markets like China and India quickly. Under some highly plausible assumptions like Singapore’s trading partners grow by at least 4% per year, and barring unforeseen debilitating shocks, simulation studies show that Singapore could grow on average by about 6-7% per year over next 10 to 15 years.

 

Considering  the present economic situation in  our country, it is possible to follow the example of  Singapore. The experience of this country, which used to be a post-colonial country for a few decades and became a modern highly developed state, can be very instructive and helpful for our state. After all the patterns of economic success are quite simple and clear: the desire to work efficiently, to offer the world new and popular products and services, elimination of corruption is severe and most importantly – professional and patriotic government that is willing and able to work honestly and efficiently for the benefit of their  country and citizens.

But unfortunately many of us believe that economic situation in Ukraine is so bad, that we can`t even dream about  economic miracle of Singapore. With this pessimistic belief which prevails in our society now, it is hard to argue. On the other hand, the experience of Singapore proves that the determination  to change the life of the country and people`s faith in the success of their homeland, the ability to forget about national, linguistic differences for the sake of prosperous modern state allowed in Singapore within a single generation make a breakthrough from the third world to first. This illustrative examples convincingly that making a decent future for Ukraine – is an ambitious task, which may be solved the modern generation. The investigation of Singapore`s economic model clearly shows that Ukraine has a great potential to overtake   Singapore`s rapid success.    

 

 

 

 

 

 

 

 

 

Сonclusion

The theme of the work was “Economic miracle of Singapore”. The aim was to analyse reason of its rapid  growth. To my mind, the aim was achieved. It was reviewed the general spheres of Singapore`s economy. It was also identified the application of what Singapore`s methods of managing the economy can be used in Ukraine. This  work is very topical and it is in field of  investigation by many economists.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

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