20 Aug 2004
Get Adam Smith into the Lion City
By Alan Oxley Published 08/16/2004
Asians evidently like political dynasties. India, the Philippines, Indonesia and North Korea have had Leaders who were children of Leaders. Singapore has anointed a new Leader and joined the club. The line from the Lion City, Singapore's self-adopted tag, is that this is a signal that stability will continue and there will be no dramatic shift in policies. But for Singapore's own good, and for the rest of Asia, it is time there was a dramatic change. It is time Singapore released Adam Smith's animal spirits.
On 12 August, Lee Hsien Loong, Singapore's Deputy Prime Minister replaced Goh Chok Tong who lead Singapore for 12 years. He in turn replaced Lee Kwan Yew who ruled Singapore since independence from Britain in 1963. Lee Hsien Loong is Lee Kwan Yew's son.
Singapore has been an unabashed economic success story. Britain gave the city state of 3 million independence in 1963 and, thereafter, it traded on its natural place as a commercial hub in one of the fastest growing regions of the world, and prospered mightily. For several years, its per capita GDP has ranked with OECD economies. It is also economically and politically closer to the US than any other country in Southeast Asia.
Lee Kwan Yew built modern Singapore with an interesting blend of Western economic models and Asian political absolutism. He set Singapore determinedly on a capitalist path, but under firm government direction. He created a "nanny state" European socialists could only dream of. But he based it on a very Chinese value (most people in Singapore are émigrés from China) - savings.
In Singapore's development strategy, savings came first. A compulsory national savings scheme was introduced. Employers and workers paid for national welfare. Profit was second, but was important. Unprofitable state-owned businesses were shut down. The national union movement was integrated into the State system and given monopolies to run, such as supermarket chains and taxi companies, but only if they were profitable.
Singapore's annual economic growth has consistently averaged seven percent over the last thirty years, one of the highest in the world. When it falls to five percent or below, the Government goes into panic mode. Singapore has been a leader in the "flying geese" economic formation which Japan so proudly touted as the Asian development model until it went into it its own prolonged economic slump in 1990. (In this formation, Japan's booming economy leads the wing and Asia's tiger economies follow, emulating Japan's growth strategy.)
When the Asian currency crisis unveiled fundamental weaknesses in economic governance in Asia in 1997, it was Singapore which implored analysts not "to throw the baby out with the bath water". The message was that Singapore had got the Asian economic model right.
But there are worrying features about Singapore's economy. Sixty percent of productive activity is accounted for by businesses owned by the State and the public sector. Singapore Airlines, Chartered Semiconductor, SingTel, PSA Corp, Singapore Technologies , Changi Airport, DBS Bank, Keppel Corporation, Singapore Press Holdings, and Raffles Corporation, for example, are all state-owned and owned by either Temasek Holdings (owned by the Singapore Government) or by the Government of Singapore Investment Corporation (GIC).
These businesses displace private business. In Singapore, private and small and medium sized enterprises generate 20 percent of economic activity. In Taiwan and Hong Kong they generate 75 percent. Nevertheless, private business would claim to do well in Singapore. In times of recession, the Government invariably acts to reduce costs controlled by government to ensure profits remain buoyant.
The state-owned businesses in Singapore, while profitable, are generally not producing returns comparable to privately-owned businesses in other markets. And the value of their publicly-traded shares is marked down by the inevitable weighting markets attach for the risk inherent in government control of a company.
Singapore has problems. Unemployment is now around 5 percent. The "nanny state" is under challenge. People have been told the State will not now provide for them "from cradle to grave". The change is on.
The Singapore Government has begun a steady process of selling shares in its companies on the open market and exposing these companies, like SingTel, the national telecommunications provider, to competition. In its recent Free Trade Agreement with the US, Singapore committed to create competition policy law which guaranteed state-owned companies could not secure privileged positions in the Singapore economy.
But the approach to change is oxymoronic. The Singapore government wants to control the rate at which Adam Smith's animal spirits are released. Its leaders know that growth and enterprise in free market economies comes from entrepreneurship. But they seem not to understand that animal spirits generate that, not special business schools or courses on how to be an entrepreneur which it has fruitlessly fostered over the years.
Singapore has a fabulously wealthy base, but too much of it is in the wrong hands - the Government. It is in danger of going the way of the leader of the flying geese unless it transfers a large slab of that wealth quickly to the private sector and sets the animal spirits to work.
Until Singapore takes that step, its prosperity today might be a plateau rather than a base from which to move to the higher level of quality necessary to prosper in the world economy. When Singapore takes that step, the economic model that emerges may well make it the leader of the flying geese.
Alan Oxley is host of the Asia Pacific page and Chairman of the Australian APEC Study Centre.
Copyright © 2004 Tech Central Station - www.techcentralstation.com