Lessons in Economic Development from Singapore
Web Posted on : Sun, 29 Jun 2014
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Singapore is a remarkable growth story. Back in the 1960s, it was one of the poorest countries in Asia. Since then, it has transformed itself into one of the most of the advanced economies, with the third highest per capita GDP in the world after Qatar and Luxembourg. Singapore went through several stages in this astonishing development. It had initially started with basic industrialization, then moved to more sophisticated industries before developing as a regional hub for trade and financial services. Its latest phase of development is establishing a knowledge-based economy. Singapore’s remarkable development provides useful lessons for GCC countries, which seek to diversify their economies away from oil into a more sustainable model of growth and development.
In 1960, Singapore was a British colony whose economy mainly served as a regional trading post. British military bases accounted for nearly a fifth of nominal GDP and at least 75% population had no primary education. Since then, the economy had developed at a remarkable speed. Between 1966 and 2013, real GDP per capita grew fifteen fold, three times as fast as its growth in the US.
The dramatic transformation took place in different phases, almost following an economic textbook. An economy grows either because of increase in inputs (labor, capital or natural resources) or because those inputs become more productive. In the case of Singapore, most of the initial growth came from a rapid increase in labor and capital. More recently, however, most of the Singapore growth story has come from more productivity gains as the economy has become more knowledge-based.
GDP per Capita in the US and Singapore
The first phase of Singapore’s development involved a large mobilization of inputs to turn the economy into an export-led manufacturing base. This was driven by a deliberate government industrial policy financed by national savings and inflows of foreign investment. As a result, investment as a share of output rose from less than 10% in 1960 to over 40% in the mid-1980s, leading to large accumulation of capital and skilled labor. In addition, Singapore expanded its labor pool through immigration and a higher participation of its population in the labor force.
In doing so, Singapore climbed up the value-added chain, moving from basic industries such as textiles, clothing and plastics to sophisticated ones such as electronics, chemicals, precision engineering and biomedical sciences. In addition, this development went hand-in-hand with a large increase in services, especially banking. However, a development model based merely on the expansion of inputs eventually hits a wall as the marginal returns to those inputs decline and the population becomes fully employed.
Given therefore the limits of the previous development model, Singapore needed to move to a new stage of development that relies on productivity gains from existing inputs rather than their further expansion. To do so, Singapore is adopting two strategies. The first relies on importing the latest global technological advances to increase capital and labor productivity by encouraging foreign direct investments and hiring foreign talents as a means of knowledge transfer. The second rests on providing the right legal, governance and intellectual environment to grow and nurture the acquired talent in order to innovate and create new technological advances. In this respect, Singapore ranks first in the economic incentive regime for a knowledge-based economy and fourth in the world in terms of innovation in the World Bank’s Knowledge Economy Index. The World Bank also ranks Singapore first in the world in its Doing Business Report.
Qatar could draw useful lessons from the experience of Singapore in the implementation of the Qatar National Vision 2030. Both are small countries with an open economy to the rest of the world. Although Qatar is blessed with far more natural resources than Singapore, production in its hydrocarbon sector has plateaued and the economy is undergoing a diversification phase.
The diversification phase is marked by rapid expansion in investment spending into infrastructure and industries leading to a large build-up in physical capital such as roads, machines and buildings. This is accompanied by rapid increases in skilled labor through immigration. This is similar in nature to the first phase of Singapore’s rapid growth. However, like other countries, the process of expanding the inputs of production will eventually run its course, requiring a new model of development in line with Qatar’s National Vision 2030. A key factor in changing that growth model will be Qatar’s ability to attract, develop and retain human capital in the same way as Singapore is doing it today.
In the long term, growth is primarily due to increases in knowledge and improvements in productivity. The experience of Singapore suggests that offering excellent education, attracting high-quality workers and creating the right environment and infrastructure to innovate and advance are necessary conditions to create sustainably high levels of economic growth. Qatar’s National Vision 2030 sets out the roadmap for this new development phase.