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Singapore: Serviced by Industry and Finance

Singapore: Serviced by Industry and Finance

The city-state is run with the level of efficieny usually seen in global corporations

 

SINGAPORE AND THE WORLD

 

Nominal GDP ($)

297 billion

GDP Rank

36/191

Per Capita GNI- Nominal ($)

$54,040

Per Capita GNI Rank

16/213

Population Rank

117/227

Geographical Area Rank

192/252

Global Competitiveness Rank

2/144

Economic Freedom Index Rank

2/179

Human Development Index Rank

9/187

Major Industries

Electronics, Chemicals,
Financial Services,
Petroleum Refining & Tourism

An alleyway. A group of Chinese stand outside a store on an impeccably paved street, selling fresh dim sums. On the opposite side, an Indian hotel sports a shiny sign, its name displayed proudly in English and Tamil. Two women dressed in typical Malaysian headscarves walk down the small street and emerge onto the main road, which offers a view of the splendid skyline of modern Singapore. Situated on the southern tip of the Malaysian peninsula, this multi-cultural city with lights, pubs and money also charms tourists with its corners of ancient temples, slivers of history and imposing colonialism. Known for its clinical neatness and stringent rules, the Republic of Singapore is a haven for tourists and business people alike.

Confluence of cultures

The island of Singapore was a part of the Javanese Sri Vijaya Empire and originally had the name Temasek or Sea Town. First mentioned in the 14th century Javanese chronicle Nagarakretagama, Temasek was a bustling trading port which decayed soon into oblivion. Legend has it that a Malay prince encountered an animal resembling a lion and named the island Singapura or Lion City, considering it to be a good omen. Singapore prospered, but soon was invaded by the Javanese Majapahit Empire and the Thai kingdom of Ayutthaya.

The close-up of a glazed ceramic mural at the Chinese Chamber of Commerce in Singapore. Established just over one hundred years ago, the organization has a membership of 4,000 local ethnic Chinese enterprises.

These forces drove out King Paramesvara who eventually found the kingdom of Malacca. This realm not only became one of the busiest seaports of the 15th century, but also a platform for the propagation of Islam. The 16th century saw Singapore changing hands of ownership and becoming part of the Sultanate of Johor in the Malay Peninsula.

Trading outpost to the british

Historical growth: It was only in the 19th century with the coming of the British that Singapore regained its prominence as a trading post. The British had a robust trade going with China and they needed a landing base for goods. In 1819, Sir Stamford Raffles signed a treaty with the temenggong1 Abdu’r Rahman on behalf of the British East India Company to secure Singapore as a British trading post.

Singapore thrived under Raffles. Shipyards, markets, churches and other infrastructure quickly sprung up changing the sleepy seaport into a commercial town. Immigrants began pouring in from all around, attracted by the now tariff-free port, and a flourishing colony with a military and naval base was established. Chinese were the highest number of immigrants, and by 1860 they accounted for 61.9% of the population.

Singapore becomes an important port: Singapore’s prosperity pressed ahead with the opening of the Suez Canal in 1869 and the advent of steamships. The arrival of the automobile industry created a demand for rubber and tin from Singapore and other South East Asian countries, which was a big boost to its economy. It also became a successful port due to entrepot trade, which allowed the entry of commodities with no taxation and minimum restrictions.

Singapore became the export center for rubber by the end of 19th century.

This allowed goods to be imported duty-free solely for export. Numerous ships brought in medicines, gold, silk, spices, tea, porcelain and other commodities including opium from India.

War, peace and independence

Singapore continued to rise until the Japanese invasion during World War II in 1942. Between 1942 and 1945, the period of the Japanese occupation, its economy suffered a huge setback. Food and other basic commodities were in short supply, while inflation ballooned to enormous proportions. In 1945, Japan surrendered to the British who came back to Singapore to find their colony in shambles. But Singapore was blessed by the sea, and it soon began to recover with worldwide demand for tin and rubber. By 1949, its economy had stabilized and immigrants flooded in from India, which was undergoing its own struggle for independence.

Separation from Malaysia: Singapore awoke not just economically, but also politically. Increasing sentiments of nationalism were voiced, giving rise to numerous parties. In 1959, the People’s Action Party (PAP) was elected with Cambridge-educated Lee Kuan Yew as the Prime Minister who ruled for the next 30 years. In 1965, Singapore and Malaysia formed a Malaysia Solidarity Convention, but it dissolved in a few months. With differences growing between the two sides, Malaysian Prime Minister Tunku Abdul Rahman decided to separate Malaysia from Singapore, leading to its independence on August 9, 1965. The same year, Singapore joined the UN and the Commonwealth of Nations, and became a republic with Yusuf bin Ishak as its first President.

During the early 1980s, Singapore improved relations with Malaysia and Indonesia, and cooperation agreements were signed. Economic ties were renewed with Malaysia, and Singapore became a major investor in the Malaysian economy. By the 1990s, Singapore was known for its tough, even extreme, measures to maintain civil order. Since 1991, the Singapore government has executed over 400 murderers and drug peddlers, gaining the recognition of having the highest execution rate per population in the world.

 

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A cultural olio

Diverse culture: Heterogeneity and diversity define the society of Singapore. A Chinese wedding taking place a few blocks away from a Malay funeral near a Hindu temple would come as no surprise for the average Singaporean. The island is uniquely multicultural with a mélange of Chinese, Indians, Malay and European immigrants. Its neighborhoods stand in testimony to its cultural diversity – Chinatown, Little India and Kampong Glam were formed as early as the 19th century according to the Raffles Plan.

Typical of Singapore’s culture-crossed neighborhoods, the 181-year-old Sri Mariamman Hindu temple, Singapore’s oldest, is located in downtown Chinese district.

Globalization has encroached upon this cultural olio, expressed through Westernization and a yuppie outlook. But Singapore has still managed to retain wisps of its past through the smoke of the incense sticks in temples, the pungent spices in the markets and strains of Chinese opera. Its architecture and fine arts speak of a bygone era colored by colonialism and religion. Structures reminiscent of a British past are manifested in the Parliament House, City Hall and Raffles Hotel, while Hindu, Islamic and Chinese heritage is represented in edifices like the Sri Mariamman Temple, Sultan Mosque and the Shuang Lin temple.

 

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The making of Singapore Inc.

The popular narrative about Singapore’s economy is that it emerged on the global economic map as soon as it separated from the Malaysian Federation on August 9, 1965, an event which is celebrated as its National Day. More than a century of serving the commercial interests of its colonizer, the British Empire, had already turned the little island into a bustling port and a key trading entrepot in South East Asia.  Singapore’s founding fathers nevertheless deserve credit for driving the rapid modernization and industrialization which has given rise to this island-nation’s highly successful free-market economy which boasts the highest per-capita GDP in South East Asia and the world’s No: 2 ranking in global competitiveness.

At the outset, Singapore’s leaders were quick to realize the factors which weighed down its progress: no natural resources, small land area, and a small population. The primary step, they realized, was to open up the small, domestic market. The result of their efforts was the creation of a mixed economy which stood for free-market policies, yet one in which the government exerted control. Soon after, Singapore could become a byword for a stable, efficient, clean, corruption-free environment. The model thus created has come to be known as the Singapore model which many a small nation has tried to emulate, albeit without success.

A close look at how the economy has developed during the 50 years of its history shows that the government has run the country more or less like a corporation – which also earned it the sobriquet, Singapore Inc. Luring some of the world’s best minds to join its workforce and tapping their expertise to get the local people trained, and a ruthless efficiency which left absolutely no room for worker dissent were among the salient features of this economic transformation program. Huge tax breaks, low costs of operation, superior quality of life, and an English-speaking population were the big draws for foreign corporations. Moreover, the multinationals brought along their own market and distribution networks, giving Singapore a lesson in the how the rest of the world functioned. This knowledge would come in handy when Singapore started exporting its own wares to countries located far and wide.

For a rich and prosperous country, one would expect Singapore to be generous with public welfare. Wrong. The government will step in only if it is convinced that a person is truly in need of help, like a student who can’t fund his education or a struggling, elderly person. To be fair, the government provides primary education for all Singaporean citizens. Likewise, workers who are fired are not entitled to benefits. The bottom line is simple: the onus is on citizens to save up for their future. American essayist Emerson’s idea of “self-reliance” seems to be the underlying motif which drives various government schemes with their focus on making people “job-ready”, not making them lazy with hand outs. Despite rising inequality, poverty is hard to find in the country. Politically too, the city-state appears to take prudent steps. It has no enemies, only trade partners. Geopolitical squabbles do not concern the nation, which is firmly rooted in Asia yet Western in its outlook. The economy and the people seem to work in tandem.

Services and industry drive growth

For a country which originally made its name as a trade entrepot, exports are crucial to its growth. Thanks to the investor-friendly and export-oriented policies adopted by the government after Singapore’s independence, growth averaged 8% per annum between 1960 and 1999. The country’s geographic location also helped Singapore emerge as the one of the busiest ports in the world, giving the likes of Rotterdam and Hong Kong a run for their money. The complete lack of natural resources such as energy and food prompted Singapore to focus on its export-import sector. The significant feature of the country’s exports is its re-exports wherein the firms and industries operating in the country import raw materials and processes them before re-exporting. Interestingly, as Economy Watch pointed out, 47% of Singapore’s exports consist of re-exports. Singapore’s buzzing petrochemicals industry is a case in point. Without producing a single drop of oil, Singapore imports the commodity from other nations, refines it, and exports it to economies which require those products. Hong Kong, Malaysia, Indonesia, U.S., China, and Japan are Singapore’s major trading partners.

From its humble origins as a small seaport trading tin and rubber, Singapore has been ranked the world’s busiest port by shipping tonnage since 1986.

By the early 70s, Singapore’s manufacturing sector had undergone a sea change, thanks to foreign investments, mainly from the U.S. and Japan. Companies were either foreign-owned or tie-ups with local firms. Along with foreign money came technical knowhow which Singapore made use of fully to improve productivity in sectors such as electronics and petrochemicals. The economy, which started off with exports of textiles and basic electronic goods in the 70s, graduated to biotech, consumer electronics, pharmaceuticals, and semiconductor exports in the 90s. Small wonder that manufacturing and industry came to contribute about 30% of Singapore’s gross domestic product.

As the economy expanded, the demand for more value-added services also grew. Singapore has emerged as the fourth-largest offshore financial center in the world, thanks to the open, welcoming investment culture, low taxes, and the ease of setting up a business which attracted multinational banks and financial institutions in droves. The city-state is one of the most sought-after locations in Asia for setting up asset management firms, inspired by the fact that the number of millionaire households in Singapore is higher than that in any other place in the world. Singapore, the hot-spot financial center, is also known as a tax haven, a dubious distinction which the government is trying hard to shake off by taking steps to curb tax evasion. Tourism brings millions of foreign visitors annually to Singapore, drawn by the city-state’s tourist attractions as well as its casino resorts. The services sector now accounts for about 70% of the economy’s GDP.

The construction industry has also been performing well, especially buoyed by the government’s efforts to improve infrastructure and by construction activities in the private sector. Moving on from its traditional mantra of enticing multinationals with tax incetives, Singapore is trying to give its economy a new spin by focusing on research and development as well as improving its standards of education. Special efforts are under way to attract deep-pocketed multinationals to develop niche sectors such as biotechnology and pharmaceuticals — efforts which seem to be paying off.

Not a dream run

Notwithstanding the remarkable progress made by Singapore in the decades following its independence, the economy has had its share of ups and downs. The Asian financial crisis, the dot-com bust in early 2000s, the SARS outbreak in 2003, and the global financial crisis hit the open, export-oriented economy hard. Real GDP growth, which clocked an average of 8.6% between 2004 and 2007, shrunk 0.8% in 2009 due to the global financial crisis, only to bounce back to register a 14.8% growth in 2010 on the back of renewed exports. With GDP growth slowing to 1.3% in 2012, the government of Singapore is trying to chart a new course with the focus largely on raising productivity by giving incentives to small and medium-sized businesses.

The country’s trademark symbol, the Merlion, welcomes visitors to Singapore, which has been ranked the most globalized nation out of 20 developed countries.

Singapore, with a population of just above 5 million, has a low birth rate. With “baby boomers” retiring, the city-state just doesn’t have enough people to replace its outgoing workforce. The low fertility rate also points out to another alarming issue which has attracted the government’s attention — the need to rely on foreigners who currently comprise about 30% of the population. A new law has been passed which slaps a levy on firms which employ foreign workers. However, local businesses cannot help but pass on such extra employee costs to their consumers, fanning inflation. Such restrictive rules have created a tight labor market which would naturally push the wages up. Rising wages would, in turn, make Singapore’s exports less competitive vis-à-vis low-wage economies like Vietnam. Meanwhile,  the large pay packages of expat executives have been partly blamed for the rising costs of housing and education.

Rising household debt is another trap the Singaporeans have walked into. Low interest rates have been driving the island-nation’s citizens to take on debt to buy their dream car, villa, or an apartment built by the government. Though the situation is not yet dire, it does not seem prudent to ignore the flashing red lights for long, especially if interest rates continue to rise. Singapore’s status as the major trading post in the region may also be in for challenge as new ports built by the likes of Malaysia draw some of its top customers with heavily discounted berthing rates.

Yet, Singapore’s finances are in an enviable shape, with its swelling current-account coffers and healthy foreign-exchange reserves comprising 20% of GDP. Moreover, the economic fundamentals which propelled its meteoric rise — a highly educated, disciplined workforce, the rule of law, and the ease of doing business — have all remained intact.

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© Thomas White International, Ltd. 2014