Singapore's economic success

June 03, 2020 •

4 min reading

Singapore: The Reasons Behind Its Economic Success

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In May 2019, IMD issued the last World’s most competitive economies and Singapore ranked first. Now, what are the factors that allowed an island city-state, in Southeast Asia, to go from a developing country to a developed country and from it to the most competitive economy in roughly one generation period of time?

There are many factors that justify the sky rocketing development of Singapore. The Economist identifies three main factors:

  1. The strategic location of the island, just suspended in the Malacca Strait that guarantees the control on 40% of trading passes.
  2. The friendly policies adopted by the government towards foreign investments.
  3. An efficient and “honest” government.

From these three reasons, only one is actually a real competitive advantage. In fact, many other economies are located in strategic locations (also in the same Malaysia), but they fail to fully take advantage of such a favorable position. The fact that Singapore is able to control 40% of maritime trade is not a cause of its success, but rather a consequence. It’s because Singapore “is good for business” that ships sail there!

Also, being friendly with foreign investors is the policy of other economies that, despite their efforts, fail to have as many friends as Singapore. We are left with one choice: the true key of Singapore’s success lies in its efficient and honest government.

The economics literature points out that the form of government might not have an impact on economic growth. That is to say that there is no reason to believe that authoritarian governments are less effective in promoting growth than liberal government. What actually matters is not the form of the government, but rather the stability that this government is able to provide (Alesina et al., 1996).

Close link between economic growth and political stability

The history of Singapore is a clear example of the close link between economic growth and political stability. In fact, after the independence of Singapore in 1965, the first Prime Minister Lee Kuan Yew was able to give to the new born Republic of Singapore the stability needed in 1969. The island's stability comes from the fact that its legal system is “clear, secure and efficient”. In legal terms, this implies that the consequences attached to the laws are predictable for everyone (clear), the law does not constantly change but it is rather reliable (secure) and it is enforced all the time (efficient). These three key elements generate the required stability that attract investors. Indeed, investors are by their own nature risk-averse. They do not like when the rules of the game are unclear, mutable and enforced depending of the discretion of someone. Therefore, they very much like Singapore.

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A strong education system supporting economic growth

However, there might be an additional reason that has been neglected so far. If what stands above is true (and we claim it is), it is still not the complete picture for Singapore's success. Other countries have a well enforced law system but, despite doing well, they do not rank first in the IMD world competitiveness ranking.

To understand the success of Singapore, we can refer to a metaphor taken from horse racing. In horse racing, the expression win by a nose means that in case of two or more close competitors that are very likely, win the one that is able to put is nose first. Then, what is the nose of Singapore?

Well, to understand it, we should refer to another ranking: the PISA Worldwide Ranking that assess the education system of different countries. And who is the first in that Ranking? That’s right: Singapore! The “nose” of Singapore is the education system and its contribution to economic growth. Education contribution is double folded: on one hand, education provides skilled workers with a higher marginal productivity of labor (with obvious consequences on the GDP). On the other hand, as Lucas (1988) pointed out, education provides positives externalities. A positive externality is a benefit that a party has without paying for it. In plain English, when we invest in education, we consider only our individual benefits out if. However, once we are finally educated, this education generates also a benefit for the whole society.

For instance, given our knowledge, we will be more likely to set up a profitable business that would, in return, give a job to other people. Giving a job to another person was not our initial intention. Our initial intention was to invest in education to have a successful career. It turns out that by doing so, other people benefits of our education. Now, Singapore has invested greatly in education. According to the BBC, Singapore put an effort to increase the prestige of teaching, recruited teachers “from the top 5% graduates in a system that is highly centralized” and trained teachers in order to secure quality control on education.

Obviously, this could not have been done without a well-established government. A government that can guarantee security, avoid corruption and enforce the law. However, a well-established, law enforcing government alone cannot guarantees the success, not up to the one “earned” by Singapore. The government should also be benevolent in recognizing what stands at the heart of the success for an island without row material that can count only on its-own. And that is education. And that, it is, the true spell of magic that relies behind Singapore success. 

Written by

Associate Professor in Economics at EHL

Associate Professor of Economics at EHL Hospitality Business School

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