09 Jul 2016

Singapore’s economic model over the last fifty years has, undoubtedly, been a great success. The state recognised early on the limitations of a small domestic market and embarked on an aggressive drive to attract foreign capital from the developed West. This, combined a hardworking workforce, generous tax incentives for multinational corporations (MNCs), and a competent and honest bureaucracy, enabled Singapore to become the most attractive place for foreign businesses looking to grow in Asia.

But after fifty years of almost unparalleled success, what next for Singapore’s growth model?

The global discussion about the rise of emerging markets, especially those in Asia, has become a lot less bullish in recent years. Much of the earlier excitement of rapid catch-up growth in Asia has evaporated. Poorer countries still have a lot of room to grow, but high income and upper middle-income countries have (mostly) exhausted their catch-up growth potential.

Part of this pessimism is due to weak recovery in the developed West after the global financial crisis. More recently, China’s slowdown and its transition to a consumption-led growth model have dimmed prospects in emerging economies that were highly dependent on commodity exports to China. Other economies in Asia also became too reliant on fickle capital inflows that left them vulnerable to external shocks and prone to financial crises.

Secondly, manufacturing across the world is growing more slowly and automating much faster. This increases the risk of “premature de-industrialisation” in a number of emerging markets in Asia.

Third, while the United States and China are flushed with liquidity as a result of their monetary policy responses to their respective financial crises, emerging markets in Asia are mostly short of capital. But instead of attracting the long-term capital that would finance industry, infrastructure and innovation – the things that sustain economic development – economies in the region have become more reliant on “hot money”. This increases macroeconomic volatility and leads to speculative booms and busts.

Last but not least, policies and institutions in many East Asian countries were largely successful in delivering catch-up growth by mobilising capital and labour, and imitating Western technology and other practices. South Asia is belatedly following, especially with India’s opening from the early 1990s. But they have all been much less successful in shifting to innovation-based growth – even in some of the advanced economies such as Singapore and South Korea.

Singapore’s growth model 2.0

What do all these trends in the region mean for Singapore as it tries to adapt its economic model for the next few decades?

The basic premise of version 1.0 still holds: Singapore remains the best conduit of capital and enterprise in the region. What has changed is the source of the impetus: Growth is now closer to home. A model that funnels funds from “East to East” could replace our traditional focus on “West to East”.

In particular, two ideas for Singapore’s growth model 2.0 are worth considering: Singapore as Asia’s infrastructure financing hub and as Asia’s start-up nation.

Financing Asian Infrastructure

First, there may be a silver lining for Singapore as the United States begins to normalise monetary policy over the next few months. As monetary conditions in the US tighten, emerging markets would find it harder to attract long term capital.

While this should give countries in the region impetus to attract long-term capital, most will find it hard to do so given their relatively undeveloped financial systems and the risks inherent in taking long-term positions in frontier markets. This creates opportunities for Singapore because of its more developed and better regulated financial industry.

At the same time that the US is unwinding quantitative easing, China is looking for ways to reduce its reliance on American debt and diversify its investments abroad. This is at least a partial, if not the primary, motivation behind recent policy announcements such as the Asian Infrastructure Investment Bank and President Xi Jinping’s “One Belt, One Road” initiative.

Many of Singapore’s neighbouring countries need large investments in infrastructure if they are to boost domestic consumption and develop their cities. China is keen to invest in the region’s infrastructure, but domestic concerns about Chinese hegemony may crimp its investment potential.

Singapore is ideally placed to play a key role in intermediating financial flows for long-term investments in Asian infrastructure. Not only is Singapore already a trusted financial centre that possesses the expertise to structure complex, risky long-term infrastructure projects, but she also possesses thought leadership in a number of areas in urban and infrastructure development.

Singapore’s own record in mobilising and channelling savings to develop its urban infrastructure in a comprehensive, highly integrated way also provides a living example of how patient capital can support long-term economic development.

Start-Up Nation for Asia

Second, Singapore should strive to lead innovation in Asia. It should be Asia’s start-up nation. But getting there is a huge challenge as Singapore continues to be dependent on low-end and high-end imitation. Little genuine innovation, in terms of new and creative activities, happens in Singapore – or, indeed, in much of Asia.

While much of our future innovation will have to come from foreign entrepreneurs in Singapore (this is inescapable for a global city), Singapore also needs much more innovation from Singaporeans and domestic enterprises.

It is easy to be sceptical about Singapore’s state-led efforts to foster the growth of globally competitive home-grown enterprises. Previous efforts have mostly floundered; the few successful Singaporean companies are still government-linked ones in the “old” distributive parts of the economy (such as real estate and banks) rather than the “new” creative parts.

Heavy state investment in research and development has also had mixed results – although in a few niche areas such as water technologies, Singapore has a few globally competitive firms.

The government’s approach has been to shower small-and-medium enterprises with tax and other incentives. But this leaves the economy’s structural problems unaddressed.

The domestic private sector is squeezed between MNCs and government-linked corporations, accounting partly for its low productivity. In particular, it is crowded out in local markets for land, talent and capital. The result is a safe, bureaucratic capitalism in Singapore that lacks competition – unlike the much more vibrant, freewheeling capitalism in New York and many other American cities that foster innovation.

The world is also at the cusp of significant technological, industrial and business model disruptions that would upend many traditional businesses. Infocomm technologies are disrupting an entire swathe of service industries that were relatively insulated from foreign competition, and threatening the survival of less efficient domestic firms (think Uber, Airbnb, 3D manufacturing, machine intelligence and robots).

These disruptions raise questions about manufacturing in Singapore, which is still about a fifth of the economy, and about the relatively low productivity levels of Singapore’s services sector.

Not only must Singapore embrace these new technologies and asset-light business models, but more importantly for future growth, she must also become a producer of such innovations. This is especially so in areas where Singapore has advantages – such as education and health, where infocomm technologies could turn what were previously non-tradable services into highly scalable and exportable ones.

Singapore should therefore strive to be Asia’s premier destination for MNCs that do real innovation here, not just have regional headquarters to coordinate production, sales and distribution, with their core innovation still done in their home markets.

Similarly, Singapore can be Asia’s most attractive destination for global entrepreneurial talent. Business and technological innovations by start-ups based in Singapore but serving the region and the world, and financed by a deep and knowledgeable venture capital industry here, should be an integral part of efforts to reinvent the Singaporean economy.

Achieving these goals demands a hard look at Singapore’s existing policies and institutions. History also shows that innovation cannot be engineered top-down. It needs a genuine competition culture in an open society.


Cloudy horizons ahead. Image: Lip Jin Lee

Madhur Maini is an emerging market specialist and an adjunct professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. Donald Low and Razeen Sally are associate professors at the School. A shorter version of this post appeared in The Straits Times on 21 December, 2015.