Figure 1: Real GDP per capita, 1996 US$ [Source: Penn World
Estimates of Real GDP per Capita]
Lee Kuan Yew, Singapore’s first Prime Minister, died on 23
March 2015; and on 29 March 2015, the Straits Times published an article titled
“The Singapore That Lee Kuan Yew Built” which stated
that he “...foretold the transformation
of the country from a tiny slum-ridden trading post ...” back in 1959.
On 1 April
2015, another article in the Straits Times, titled “Interactive Map: How Twittersphere Reacted to News of Mr. Lee Kuan Yew’s Death”, stated that over 1.2 million related
tweets were sent in the week preceding his death. Unwittingly, I may have
contributed to this statistic.
A
Trinidadian Information Technology professional had posted one of my articles
“Singapore: Example to the Caribbean in Doing Business” with the comment “Caribbean leaders think they can cut and
paste Singapore success story here, they need (sic) address productivity and
innovation first”.
I don’t
know if he actually read the article, but we tweeted at length on the matter and
I advised that transformation was a slow process and “Lee Kuan Kew (sic) was in power for over 30
years to oversee Singapore’s development”. Shortly thereafter, I received a
tweet that Lee Kuan Yew was dead.
His leadership of Singapore has been
chronicled in his book From Third World to First – The Singapore Story: 1965
- 2000. In this, he describes a meeting in 1980 between Jiang Zemin, then mayor of Shanghai,
China, and Ng Pock Too, then director of Singapore’s Economic Development Board
(EDB).
Jiang, who would
later become China’s President, was studying how Singapore’s EDB developed
special economic zones and attracted foreign direct investment (FDI). Jiang had
commented that China could provide all the amenities cheaper than Singapore, but
then enquired: “What is the secret formula?”.
In
response, Ng explained “...the key
importance of political confidence and economic productivity”. Lee further explained
in the text that “There was no danger of
confiscation. Our workers were industrious and productive, and there were
minimal strikes”.
So, the
productivity of Singapore’s workforce did play a part in its development, but
there was much more. The article tweeted actually examined the World Bank and
International Financial Corporation’s “Doing Business 2013” Report, which ranked
nations with regard to 10 performance indicators.
Singapore was
ranked first overall; and Trinidad and Tobago, the highest ranked Caribbean-Community
nation at the time, ranked 69th. In the 1960s, both had similar economic
structures, history, and institutions. But since 2007, Singapore has been one
of the 5 most competitive nations in the world.
Again in
the 1960s, both planned economic development by import substitution
industrialization (ISI). To overcome the limitation of its small market, Singapore
also pursued a common market with the much larger Malaysia. By the mid 1960s, its
growth was erratic, alternating between 4 – 14 percent.
ISI was
typically advocated and promoted by colonial administrations. It involved
import substitution supported by tariffs and import quotas. In theory, this protection
was to be reduced as the domestic manufacturing sector became internationally
competitive. But in practice, this was rarely done.
Initially, Singapore’s per capita income was as
low as US$ 2,161 and its infrastructure was very poor. The economy was poorly diversified
and poorly integrated globally. Capital was scarce, and there was hardly any FDI.
But, a single party ruled the nation for decades, just as Trinidad and Tobago.
Singapore’s
traditional entrepôt-trade, related supporting
services and processing industries, were declining because direct routes had
opened up between markets of the developed world and the other Southeast Asian
nations.
In
contrast, Trinidad and Tobago had the highest per capita income in the
English-speaking Caribbean at US$ 4,370. Early that century, it had started
producing oil and natural gas commercially, and this attracted multinational
corporations, significant FDI, technology and skills.
Singapore
also lacked high-quality institutions with strong governance structures. So, EDB
was founded in 1961 as a statutory agency responsible for marketing Singapore
and overseeing the establishment of industrial companies.
EDB
functions as “a one-stop agency so that
an investor need not deal with a large number of departments and ministries”.
But, the government planned “broad
economic objectives and the target periods within which to achieve them”
which were regularly reviewed and adjusted as required.
After the
election of the Peoples’ National Movement (PNM) in 1956, Trinidad and Tobago established
such an institution called the Industrial Development Corporation (IDC). Economic
development plans were also prepared. But, the fundamental goals to be achieved
were not clearly defined until 1963.
Trinidad and
Tobago used diverse industrial policies since 1956. But from 1958 to 1973, it used
three 5-year development programmes based on ISI. By the end of the first,
coordination between the government, labour and the private sector was handled
by another statutory body.
This body
was the National Economic Advisory Council. By the end of that century, IDC was
relegated to being an investment-screening agency and remaining functions were
distributed to other institutions, such as the Export Development Corporation
(EDC).
By 1965,
Trinidad became a founding member of the Caribbean Free Trade Association
(CARIFTA): an agreement between Anglo-Caribbean states to eliminate trade
barriers. However, Singapore was expelled from the Malaya region, loosing its coveted common market which rendered ISI
unviable.
According
to Lee, “I gradually crystallized my
thoughts and settled on a two-pronged strategy to overcome our disadvantages.
The first was to leapfrog the region...”. “The second part of my strategy was to create
a First World oasis in a Third World region”.
Singapore then
began its second phase of development. Its path diverged from ISI to export-promotion
industrialization (EPI). It pursued
export-oriented growth when few developing countries were doing so. A host of
supporting policies were passed, tariffs were abolished, and import quotas
minimized.
One of the
policies passed was the 1967 Economic Expansion Incentives Act which
significantly reduced corporate tax rates to exporting manufacturers. Policies
were adjusted as the need arose and sustained growth was realised in this
phase. (See figure 1)
In 1968, Lee
took a short sabbatical to Harvard Business School, and consulted Professor
Raymond Vernon. In 1966, Vernon had published a paper in the Quarterly Journal
of Economics which postulated shifting production of goods in their mature
phase of development from the First to Third World.
According
to Lee, “Vernon dispelled my previous
belief that industries changed gradually and seldom moved from an advanced
country to a less-developed one”. Acting on Vernon’s advice, Lee
accelerated EDB’s marketing effort to US multinational corporations.
In Lee’s
words, “This campaign has been the most
important element of a carefully orchestrated development strategy that has led
to Singapore experiencing what is probably the most dramatic single-generation
improvement in comparable living standards in the history of mankind”.
So,
innovation also played a part in Singapore’s development: which supports the
previous suggestion that Caribbean leaders need to address innovation. Terrence
Farrell – former chairman of the macro-economic sub-committee of Trinidad’s Vision
2020 project also confirms Trinidad’s need of innovation.
In his book
The Underachieving Society: Development Strategy and Policy in Trinidad and
Tobago 1958-2008, he states that “There
was little technology transfer, innovation or research and development
occurring in any industry in Trinidad and Tobago”.
However,
this should not be construed to mean the Caribbean lacked innovation. Farrell
acknowledged that Trinidad’s underperformance can be attributed in part to the
deficiencies and mistakes in policy: one of which was the limitation of ISI
compared to EPI.
The St.
Lucian Nobel-laureate Sir W. Arthur Lewis was one of the advisors to Trinidad
and Tobago on its first 5-year plan, and his name is usually associated with the
ISI strategy, but he actually postulated EPI as early as 1954 in his definitive
work “Economic Development with Unlimited Supplies of Labour”.
He had actually
proven that colonial economies with export-oriented plantations could achieve
industrialization, and this was later branded the ‘Puerto Rico Model’. Teodoro Moscoso of the Puerto
Rico Economic Development Administration (Forento)
was also an advisor on that plan.
According
to Farrell, “The presence of these two
men in particular was a clear indication of the direction in which the newly
elected PNM administration intended to take the economy...”. However, these men were not involved in formulating the
subsequent 5-year plans.
Nevertheless,
the PNM did approve an economic development plan similar to the ‘Puerto Rico
Model’ back in 1956. But by 1958, this was deemed unsuccessful and abandoned
because Trinidad and Tobago could not match the incentives Puerto Rico was offering
US investors.
The
institutional structure for ISI (i.e. taxes, legislation, etc.) was in place at
that time; and Farrell states that: “The PNM’s economic programme differed from
those of its predecessors only in the extent and vigour of its intended
industrialization programme”.
In the
first 2 years of the first 5-year plan, the increase in real per capita income reduced
in comparison to the plan it replaced. “But,
there was no explicit embrace of the idea that import substitution had to lead
to export-promoting industrialization”.
Farrell
suggests that “the reason for this was
perhaps that imperative for generating foreign exchange through manufactured
exports was muted by the strong performance of the dominant petroleum industry
that had expanded refining capacity significantly”.
An incomes
policy was also a necessary element for the success of EPI, so Singapore established
a tripartite wage negotiation system to facilitate stability in wage bargaining
and deter labour militancy. In 1971, Singapore also established the Manpower
and Training Unit to provide industrial training.
This did not occur in Trinidad and Tobago. According
to Farrell, the Industrial Stabilization Act of 1965 “had become a dead letter, until replaced in 1972 by the Industrial
Relations Act”. Nevertheless, a tripartite committee was appointed in 1968 to
deliberate on the feasibility of an incomes policy.
But, its “recommendations were never implemented and
the subject of wage restraint was dropped...” until 1974. In addition, the
government also facilitated “…low-level,
low productivity employment in the civil service, the local government bodies,
and statutory corporations and later on in state enterprises”.
This led to
increased expenditure on wages and salaries and “less of government expenditure was available to be directed to capital
expenditure on social overhead capital and infrastructure that could promote
external economies and increase productivity”.
From figure
1, it should be noted that Singapore eventually overtook Trinidad and Tobago by
the end of the final 5-year programme from 1968 to 1973. According to Farrell,
the plan “was an impressive document” but
“was never implemented as intended for it was interrupted by profound social
conflict”.
These
included “the trade union unrest in 1969,
the wider social unrest and army mutiny of 1970, culminating in the declaration
of a state of emergency, an acceleration in inflation from 1972, without
precedent in the nation’s history…”.
Recognising
that their development programmes had failed to meaningfully improve employment
and seeking to counteract the social disruptions of the time, the government
abandoned fiscal restraint which resulted in a near 6-fold increase in
inflation: from 2.5 percent in 1970 to 14.8 percent in 1973.
Beside
deficiencies and mistakes in policy, Farrell also identifies 3 other factors
that could have contributed to that nation’s underperformance. These are: “the problem of implementation; the impact of
ethnicity; and the ‘culture’ factor”.
With regard
to the latter, he states: “that people of
a country may actually not aspire to the standard of living of the richer and
more developed countries. They may choose to work less hard, be less innovative
and productive, and consume more because they value leisure, conviviality and
pleasure more…”.
In
hindsight, Singapore’s real per capita income, though initially lower, increased
faster during Trinidad and Tobago’s first 5-year plan, even though both nations
pursued the same ISI strategy. It fell in 1965, on loosing the common market
with Malaysia, but recovered during the second 5-year plan.
Singapore’s
real per capita income exceeded that of Trinidad and Tobago just when oil
prices started to increase, following the Arab/Israeli war in 1973. But, it was
the inability of Trinidad and Tobago to implement the third and final 5-year
plan that was its undoing.
It is
paradoxical that foreign exchange gained from Trinidad and Tobago’s mineral resources
may have prevented its switch to EPI; and poor management of its human
resources (practically Singapore’s only resource) was responsible for Singapore
eventually achieving the higher real per capita income.
Trinidad
and Tobago’s per capita income increased relatively steadily under the former
plans. Had it maintained this, it would have at least postponed being overtaken
by Singapore. To attain the ‘Singapore Experience’, Trinidad and Tobago needed
to address the 4 factors identified by Farrell.
Farrell
also stated that, a “...strong growth
spurt in the latter half of the 1970s pushed Trinidad and Tobago ahead on
Singapore for a few years between 1978 and 1983”. But, “by 2008, Trinidad and Tobago’s GDP per
capita was only...49 per cent of Singapore’s”.
Poor
implementation is responsible for Trinidad and Tobago starting well but failing
to stay the course and to maintain its support systems. For example, IDC predated
Singapore’s EDB. But by 2005, the functions of both the IDC and EDC were
transferred to its Ministry of Trade, Industry and Investment.
Whereas
Singapore’s EDB continues to exercise its mandate of marketing Singapore and
overseeing the establishment of industrial companies, Trinidad and Tobago no
longer has their statutory body so mandated to attract non-oil FDI.
Whereas
Singapore recognised from the onset that its economy was too small, Trinidad
and Tobago did not appreciate that it needed to promote export: even though EPI
was postulated by an internationally-acclaimed Caribbean economist; and, there
was also no regional economic grouping prior to CARIFTA.
Whereas
Singapore changed strategy in response to deteriorating economic environments,
Trinidad and Tobago seemingly arbitrarily switched to ISI which offered no
improvement over its lifespan when compared to the former plan, which was not even
allowed to complete its duration.
Trinidad
and Tobago never built upon its first 5-year plan as would have been reasonably
expected from the calibre of expertise available to it. But, Singapore
maintained EPI from 1965 and was able to increase its per capita income at a
faster rate.
Singapore
gained the first-mover advantage in EPI and it would be reasonable to assume
that its rapid rate of development will never be replicated, especially with
the large number of competing Third-World nations presently seeking to attract
FDI.
Nevertheless,
Lee Kuan Yew had charted the course from Third World
to First by strong and decisive leadership, macroeconomic stability, and high
quality institutions and infrastructure. But, those that seek to navigate this
path cannot do so blindly.
First, they
need to survey their own domestic conditions en route to become intimately aware
of its currents and hazards. Then, they need to implement only those principles
needed to stay the course. Adjustments will no doubt be required, but their
sights need to be firmly fixed on the next port of call.
Paul Hay is a Jamaican national, founder of PAUL HAY Capital Projects: a consultancy, based in Kingston Jamaica, with a vision of providing strategic planning and implementation services to organizations for non-residential facilities in the Caribbean.
