25 May 2017

The evolution of Singapore’s petrochemical industry offers some sage lessons to other nations looking to replicate its success.

When Britain departed Singapore in 1959, it left behind a clutch of colonial buildings, a port and little else in a country with no natural resources. From these modest beginnings, Singapore's early leaders drafted an ambitious and detailed agenda to best take advantage of the country's attributes and develop it into the world-class economy it is today. A large portion of this success can be attributed to its petrochemical industry.

Almost 60 years on, the petrochemical cluster is now an important driver of Singapore's modernisation and economic growth. Here, Singapore has succeeded where other Asian nations such as China have lagged.

A recent paper, Embracing globalization to promote industrialization: Insights from the development of Singapore's petrochemicals industry, published by Dr Vu Minh Khuong of the Lee Kuan Yew School of Public Policy at the National University of Singapore, examines the Singapore experience and sheds light on recent industrial policy debates surrounding the optimal level of government intervention. The paper also identifies lessons for developing countries who are looking to replicate Singapore's success.

Singapore is well located to serve the world

Chemicals was first identified as a potential industry in 1960 in Singapore's original economic plan, drawn up a year after its colonial

British rulers bowed out and left the country to self-govern. Singapore's strategic location near the Malacca Strait and with easy access to the sea made it well-placed to become a bunkering facility for oil storage and later a trading post for petroleum products.

The early stages of Singapore's modern industrialisation saw a focus on chemicals at the lower end of the value chain, and by the late 1970s the country had become one of the largest refining centres in the world. The 1980s saw advances up the value chain through investment in the production of downstream products. In 1995, the government began work on an ambitious land reclamation project to createJurongIsland, which, after opening in 2000, quickly became the state's petrochemical hub.

The 3 fundamental principles and CORE framework

Today petrochemicals is a key pillar of Singapore's manufacturing sector, whichcontributes up to 25 per cent of GDP.As such, it is vital to the state's continued economic success. The industry is also a major source of the country's export growth, particularly over the past decade. Petrochemical exports grew at an annual average of almost 15 per cent between 2000 and 2013, increasing from US$21 billion to US$124 billion. It has also meant that related industries, such as ship repair and building, have grown to be globally competitive.

It has taken significant detailed government planning to get Singapore to where it is now. In promoting the petrochemical industry, economic planners were guided by Singapore's overall development strategy, which is based on three fundamental principles.

  1. The interdependence between government and market.
  2. A focus on establishing links with industrialised countries and attracting investment frommultinational companies(MNCs).
  3. Effective strategic positioning to best leverage competitive advantage.

This foresight has reaped rewards. For example, the fundamental principle of strategic positioning meant that Singapore's attributes were quickly identified and capitalised upon. In this case, its strategic location as a bridge between the supply of crude oil from the Middle East and demand from growing Asian markets led to several MNCs building petroleum refineries here,spurred by government incentives.

Planners also formulated a strategic action framework consisting of four pillars:capacitybuilding,opportunityseizing,resourcesupgrading andenduringsuccess. Combined, they are referred to as the CORE framework.

Capacity building, in particular, has always been a key priority for Singapore. To this end, the Economic Development Board (EDB) was established in 1961 as a one-stop agency to lend support to investors. Over the decades, theEDBhas played an important role in helping to drive Singapore's ambitions.

Takeaways for other countries

The Singapore example reveals that a developing country can indeed overcome government failures such as information constraints and rent-seeking to vitalise industries and accelerate industrialisation. If leaders of other countries adopt an effective development strategy, maintain a deep commitment to building capacity and gather the best talent, they too could help their nations to enjoy similar successes and all the benefits that flow down from that.

It is also important to note the quality of government interventions, which are classified as hard' and soft'. In Singapore's case, the former approach included measures such as tax credits while the latter involved creating a favourable business environment, an excellent education system and entering intoFTAswith major trading partners to enlarge markets.

In particular, other countries would be well advised to take note of the three fundamental principles and the CORE framework, which would be of invaluable assistance in preparing the ground for a petrochemical boom.

Singapore's success did not happen by chance. Rather, it was the result of long-term planning and thoughtful government intervention. The story behind the sector's development offers transferable lessons to other nations in knowledge and processes. At the same time,insight into how the Singapore government successfully balanced market forces and intervention provide food for thought in the light of recent industrial policy debates.

*To read more, see the full paper, Embracing globalization to promote industrialization: Insights from the development of Singapore's petrochemicals industry.