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Singapore and the myth of services-based development

The recent rise of PMIs may be overstating the extent of the global economic recovery, and instead could hint to a worrying development.

Although no one would question the success Singapore has had in raising the living standards of its population, and establishing itself as a regional centre for trade and financial services, the origin of the country’s economic success appears to be up for debate as some are suggesting Singapore developed on the basis of those services it is now known for. This was not the case, however, as this article will show. A historic analysis of Singapore’s government policies and economic data clearly  shows that the country, like many others(dare I say all other countries), developed on the basis of one strategy, and one strategy alone: export-oriented manufacturing.

Singapore’s phase of rapid economic development occurred from the early 1960s till the late 80s. Between 1961 and 1990, real GDP growth averaged an impressive 8.7 percent as it far exceeded the developing country average of 5 percent. This high economic growth was accomplished primarily due to the government’s industrialisation strategy, which was initiated in 1959, when Singapore gained self-governance and started to break away from Malaysia. Under the guidance of its first and most famous prime minister Lee Kuan Yew, the government started setting up structures and introducing policies to spur investment in the manufacturing sector from both domestic and foreign sources, while incentivising producers to export to foreign markets to allow for rapid expansion.

First phase of industrialisation

The first few years of Singapore’s industrialisation involved an import-substituting strategy that was ultimately deemed a failure due to its disappointing results. Yet, the period was not a complete loss as it also brought about the foundations that were critical to the next phase and overall development of industrialisation. In 1961, the government established the Economic Development Board (EDB) to centralise all activities regarding the promotion of industrialisation. The EDB’s main responsibilities were to provide finance to key industries within the manufacturing sector and manage incentive structures introduced by the government.

One of these incentives was the Pioneer Industries Ordinance, an award granted to certain pioneer manufacturing companies that included tax incentives such as exemption from income tax (40 percent at the time) for a duration of five years, accelerated depreciations charges, and exemption from import duties on raw materials and equipment. The initiative’s impact was substantial, reflected in the fact that pioneer firms accounted for 20 percent of employment and 28 percent of value added in the manufacturing sector by 1966, up from 6 and 12 percent respectively in 1963.

Shift to export-oriented manufacturing

The second phase of Singapore’s industrialisation started in 1966, when the government decided to abandon import substitution in favour of a labour-intensive export-oriented manufacturing strategy, as it attempted to accelerate the industrialisation process and reduce the persistently high unemployment rate of 10 percent.

Part of the change in strategy involved attracting foreign investors, for which several industrial zones were established and given to the EDB to manage and develop. The 17,000-acre Jurong Industrial State was by far the largest of the industrial zones and helped attract over $700 million in foreign investment in manufacturing between 1967 and 1973. The bulk of investments were made in the industries of petroleum refining, textile and garments, and electronics, of which the latter two saw the number of workers rise from a collective 4,070 in 1966 to 79,495 in 1973― half the increase in manufacturing jobs. The EDB also engaged in several joint ventures with foreign companies, of which the most notable was the Jurong Shipyard that it established together with a Japanese firm. Shipbuilding and repair was one of the four key areas the EDB had identified as key industries to promote and develop, along with metal engineering, chemicals, and electrical equipment and appliances.

To further stimulate growth in the manufacturing sector, as well as ensure foreign exchange earnings, the government created structures to promote exports by setting up the Export Promotion Centre and introducing the Economic Expansion Incentives Bill in 1967. The latter mainly introduced tax incentives for exporters such as a 20-year tax exemption to export industries, and lower taxes on profits made through exports. Another incentive was that companies that incurred expenses while exploring new export markets were allowed to deduct these twice from their taxable income.

Between 1968 and 1974 the number of export-oriented industries ―those with direct exports accounting for more than 50 percent of total sales ― grew from 3 to 11. This development went hand-in-hand with the manufacturing sector diversifying into electronics, precision instruments, shipbuilding and repairing, oil-rig construction, and petroleum refining, all of which owed a lot to the influx of foreign capital into these industries. Indeed, the manufacturing sector as a whole was considerably dependent on foreign companies during that period as they contributed 63 percent to the total growth in output and 45 percent to the total increase in employment.

The effectiveness of the government’s industrialisation policies introduced in the two decades following its attainment of self-governance in 1959 can be seen from the economic data. Manufacturing as a share of GDP rose from 10.6 percent in 1960 to 17.6 and 26.5 percent in 1980. From 1967 onward, manufactured exports started to take off and drive manufacturing activity, which in turn drove the high rates of GDP growth recorded between 1961 and 1990. 

Moving up the value-chain

After the establishment of an industrial base, Singapore’s government decided in the early 1970s that it was time for the next phase of industrialisation, and subsequently shifted its strategic focus from labour-intensive manufacturing to higher value-added production, to be attained through the upgrading of workers’ skills as well as technological advancement. One of the key structures introduced to help realise the shift in strategy was the EDB’s Joint Industrial Training Scheme. It entailed the establishment of several training centres by the EDB in collaboration with multinational corporations such as Tata and Philips, with a view to train workers in specialised technical knowhow needed for new industries.

A ten-point program was released in 1973 by the then Finance Minister, Hon Sue Sen, outlining the desired upgrading of the manufacturing sector. Notable points were tax incentives for medium- and high-technology companies that incurred training expenses, tax concessions to industries with the desired level of technology, and an open-door policy to foreign engineers, technicians, and other high-skilled workers needed for the implementation of new industrial projects.

Towards the end of the 1970s the government ramped up its efforts to shift to higher value-added manufacturing, as the EDB started targeting specific sectors to invest in and promote investment for, including automotive components, medical and surgical apparatus and instruments, and precision engineering products. The government restricted the pioneer status to companies operating in industries identified by the government as high-technology, such as aircrafts components and accessories, diesel and petrol engines, and cameras. It also withdrew the pioneer status from any company producing exclusively for the domestic market, to further promote exports. It was during this phase that Singapore rapidly moved up the value chain in manufacturing, and could then start developing its services sectors, including financial services.

The previous analysis shows clearly that, contrary to popular opinion, it was manufacturing, not services, that developed Singapore economically and moved it into the realm of higher-income countries. The most important strategic interventions were targeted government support of certain industries and a gradual movement up the economic ladder, or value chain. If Sri Lanka wishes to follow the Singaporean path and eventually become a financial centre in Asia, it needs to start with an industrialisation strategy.

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