Singapore economy today is a well developed capitalist economy. The country’s economic structure is characterized as a mixed economy and the government intervention is minimum. The country is synonymous with open business environment, corruption free and transparent government policies and has one of the highest GDP. Since its Independence in 1960, the country has witnessed several crises and had to overcome several roadblocks to reach the current stage of economic prosperity. The growth of Singapore's economy can be illustrated in the following phases:
At the time of its Independence in 1960, Singapore was a small country with a population of 1.6 million. The country lacked in natural resources and was to a large extent dependant on entrepot trade and in providing services to the British army stationed in Singapore for economic growth. Domestic capital was insufficient, manufacturing base was underdeveloped and technical knowhow was outdated.
The Government initiated a policy of import substitution for industrialization to overcome unemployment and reduce the countries dependence on entrepot trade. The Economic Development Board (EDB) was formed in 1961; similarly Singapore Tourism Promotion Board (STPB) was started in 1964.The Jurong Industrial Estate was also established in 1961.
Between 1960 and 1964 the GDP grew at 5.1 per cent, the contribution by manufacturing sector to GDP went up to 14 per cent in 1964 from 11 per cent in 1960.
The country witnessed major upheavals during this period. The country had to move away from import substitution strategy after its separation from Malaysia. Conflict with Indonesia also hampered its position as a key trading post in the region. The British phased out the military base over a period of 5 years. Unemployment rate was high at 10 per cent.
The Government initiated a process of industrialization by the way of export oriented strategy. The Government encouraged Foreign Direct Investment in the manufacturing and financial sector in Singapore. The Government passed the Employment Act to set standards for employment and to settle industrial conflicts.
The Government set up the National Trades Union Congress (NTUC) and National Wage Council (NWC) to advocate improvement in labor management relations. The Government made massive investments in infrastructure and established the Jurong Town Corporation. Sectors were the private sector had insufficient capital and lacked expertise, were nationalized. Some of the e.g. are Singapore Airlines, Neptune Orient Lines, Development Bank Of Singapore and Sembawang Shipyard.
The country achieved an average growth rate of 10 per cent for the period and by 1978 unemployment had decreased to 3.6 per cent. The manufacturing sectors contribution to GDP increased from 14 per cent in 1965 to 24 per cent in 1978.
During this period, Singapore faced stiff competition from other cost effective developing countries in the area for foreign investment. Salaries and wages increased considerably and the economy needed to be restructured to provide higher value added services.
The Government invested in education and training to improve the efficiency of human resource. The government gave impetus to industry to automate, mechanise and computerize the manufacturing units. The investment promotion policy of the government focused on value added services and skill development programme.
By this stage the Singapore economy witnessed greater competition from developed and developing countries. Technological development was outdated in comparison to International standard.
The Government took major steps to bring about technological development. Under the National Technology Plan the government made an allocation of $2 billion from 1991 to 1995 and another allocation of $4 billion under the National Science and Technology Plan from 1996 to 2000.
Industrial strategy was reformatted to take advantage of the collaboration at the firm and industry levels. Interdependent industries were grouped and developed. For e.g. electronics, petrochemical and engineering. This enabled the formation of group development plan with stress on core capabilities common to the industries within the group.
To have a wider base for the economy and to reduce risk, services along with manufacturing were developed as twin pillars of the economy. The government encouraged manufacturing by the way of incentives like pioneer status, investment allowances. Subsequently these incentives were extended to the service sector also.
The Government firmly believed in a policy of maximizing the opportunities from the Asian markets to negate the local resource/market constraints and further strengthen relationship with OECD nations. For the period on an average, the GDP growth was 8.6 per cent. The contribution by financial and business services in total GDP increased from 21 per cent in 1986 to 26 per cent in 1997. The total number of research scientists and engineers went up to 11,302 in 1997 from 3,361 in 1987. Total direct investments overseas increased from $16.9 billion in 1990 to $75.8 billion in 1997.
The economies of the region were affected by crisis, which started with the devaluation of the Thai Baht in July 1997.Although the fundamentals of the Singapore economy internally were strong, the adverse condition of other regional economies had an effect on the economy of Singapore due to their close proximity.
The Singapore economy witnessed a negative growth of 1.4 per cent in 1998 after witnessing 8.3 per cent growth in 1997.After witnessing modest growth in 1999-2000, the economy witnessed another downturn in 2001.The terrorist attack in the US on September 11 2001, further aggravated the situation. The country aims to be a globalised, entrepreneurial and diversified economy with an annual growth rate of 4.6 per cent in the medium term.
The strategies adopted by the government are:
Increasing External Ties: Accepting globalization mooted by the WTO through multilateral trading framework, enhanced regional cooperation and bilateral Free Trade Agreements.
Developing Human Capital: Increase expenditure on education, formulate workers training programme and bring in Intenational talent to support the indigenous talent pool.
Maintaining Competitiveness and Flexibility: Reducing the burden of taxes and the Central Provident Fund on the economy, reviewing labor market and wage system and ensuring factors of production are priced competitively.
Promoting Entrepreneurship and Domestic Companies: Encourage innovation and support firms to come up with new ideas and businesses, diversify the export markets and widen the economic base.
Growing Manufacturing and Services: Ensure the sectors are cost effective, enhancing the skill set of human capital and encouraging research and development.