MPH: Cornerstones of S'pore's success

AGAINST the backdrop of a highly challenging external environment, Singapore is itself going through a significant restructuring process as it tries to transition to a productivity-driven growth model, the outcome of which remains uncertain.

While the recent forecasts of 1-2 per cent growth for the city-state in the near term has added to the mood of pessimism, one should not forget how far Singapore has come in such a relatively short period of time. Indeed, policymakers in many countries remain fascinated by the rapid, sustained and non-inflationary growth experienced by Singapore since Independence in 1965, and are eager to learn appropriate and transportable policy ideas and lessons in development.

So what did the policymakers do right that scripted Singapore's rapid growth and transformation? In a series of speeches a couple of years back, Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy (LKYSPP), opined that good governance and strong political leadership were the cornerstones of Singapore's fast-paced growth and rapid industrial transformation. Professor Mahbubani introduced the acronym "MPH" to characterise Singapore's approach to governance: M for Meritocracy, P for Pragmatism, and H for Honesty.

However, MPH can just as effectively be used to describe a set of specific economic policies and characteristics that were integral to Singapore's economic success story.

2Ms

MNCs: Singapore was one of the first countries in the world in the 1960s to recognise the potential role of multinational corporations in the development process and, through the Singapore Economic Development Board (EDB), explicitly targeted world-class MNCs and lured them to establish a presence in the newly independent country and use Singapore as an export platform. Within a decade of this policy, Singapore became a major hub for a labour-intensive electronics cluster such as semiconductor assembly. Since then, every decade has seen constant evolution and industrial upgrading to focus on higher- value-added activities. Despite its small size, Singapore has consistently been among the top 10 host economies for foreign direct investment (FDI) globally.

Going forward, while MNCs remain crucial to the future success of the economy, the focus has shifted from adding value (that is, production platform) to encouraging them to start creating more value by being a hub of R&D and innovation, and using Singapore as a platform for commercialising new products and processes.

Monetary policy: A vital element of Singapore's economic transformation was the rather unique but highly regarded exchange rate-centred monetary policy framework commonly referred to as the BBC (Basket-Band-Crawl) which has been adopted since 1981. This policy, which recognises that the exchange rate has been the most important transmission channel for inflation and the real economy in general (far more so than money supply or interest rate), has helped Singapore moderate business cycles and ensured it has had a highly enviable macroeconomic record in the world at least until 2010.

This said, as Singapore's business cycle appears to have become somewhat more volatile in recent times and the industrial structure has evolved, it would be reasonable to ask whether this monetary policy framework needs to be re-examined and tweaked in any way to ensure it remains as impactful as it has been.

2Ps

Prudence: Singapore's exchange rate-centred monetary policy has been supported ably by a highly prudent approach to fiscal policy. Singapore has been a bastion of fiscal conservatism. This has been achieved via a combination of streamlined expenditures and a resilient and broad tax base with focus on taxes on consumption and user charges as opposed to direct income taxes. This in turn has ensured that the government has been able to finance large-scale infrastructural projects without compromising fiscal discipline.

With a slowing economy, more volatile external environment, an ageing society and greater pressures by the populace for the government to expand the social safety net, balancing the budget will become relatively more challenging. Fiscal policy will also likely be needed to offset the deflationary impact of the restructuring being undertaken. However, Singapore is better placed than most other countries to meet these challenges without compromising fiscal sustainability because of the considerable fiscal space it has created for itself owing to its past policies.

A related form of prudence is in the manner in which surpluses generated by the country (fiscal surpluses, household savings via the Central Provident Fund and foreign exchange reserves) have been astutely managed by the country's sovereign wealth fund (SWF), Government of Singapore Investment Corporation (GIC). GIC may have a few detractors who yearn for somewhat greater transparency from the institution. While this trend towards greater transparency should be embraced, it is pertinent to note that many other countries in the region and beyond have created their own SWF using GIC as a role model.

Ports: Singapore has been blessed by its strategic location and has historically always been an important entrepot centre. The government has consciously built on this strength by positioning itself as a world-class transport and logistical hub. The focus on ports (including airports and seaports) as well as harnessing information technology (IT) to become a leading logistics hub has been an integral part of Singapore's success. The Republic houses many of the world's largest third-party logistics companies, consequently making it well placed to support companies in their supply chain activities in Asia and beyond.

2Hs

Holdings company: One cannot possibly discuss the successes of Singapore's transformation without mentioning the important role played by the national holdings company, Temasek. Temasek was an integral part of Singapore's initial dualistic development strategy. In particular, while MNCs focused on the tradables sector such as electronics, the government - through Temasek - managed (and, in some instances, established) key companies engaged in developing strategic sectors such as logistics and transportation, defence and engineering, finance, and telecommunications.

Temasek is today viewed by many as being more of an SWF, having become a commercial investment company a decade and a half ago, with greater focus on investments overseas, especially in Asia. However, it is likely to play a more visible developmental role in Singapore in the future, as evidenced by its proposed buyout of SMRT as well as co-investment with EDBI (EDB's corporate investment arm) in strategic firms with exposure to certain promising sectors such as life sciences.

Housing policy: Absent domestic social stability, the best plans in the world would have made no difference. To ensure social cohesiveness and a harmonious society, the government has aggressively pushed for universal home ownership through public housing. This policy was a means by which the government was able to link long-term economic growth to asset accumulation by households. It is striking how public housing policies were also carefully calibrated to avoid the development of ethnic enclaves over the last five decades, although there is some evidence that the policy may have generated some microeconomic distortions.

DOING IT RIGHT

Has Singapore done everything right? Do policymakers here believe that they can be a role model for all other countries? Has Singapore pioneered these policies or processes? In all cases, the answer is a firm "no", and the Republic's political leaders have never said otherwise.

However, it is their ability to absorb best practices from all over the world, adapt it to the Singapore context, and (very importantly) fine-tune and even rethink original paradigms if things are not working as expected or unintended consequences have been created, that has led to Singapore's success. This likely is the most important takeaway from the Singapore developmental experience for other countries.