Friday, August 12, 2016

Singapore’s economic miracle uncovered

Ferdinando Giugliano

Mar 24 2015

The death of Lee Kuan Yew, the founding father of modern Singapore, has focused attention on the economic miracle he helped to create.

In the three decades since Lee first became prime minister in 1959 until he stepped aside in 1990, per capita income in the city-state rose by a factor of 29, jumping from around $435 to more than $12,700. Nearby Malaysia only managed a ten-fold increase, from $230 to around $2400.
Yet economists remain divided over the causes behind this remarkable take-off.

For some it was the result of inspiration – the ability to import the best technologies from around the world thanks to an enlightened economic model. For others, it was the consequence of perspiration – the sheer accumulation of factors of production such as labour and capital, accompanied by little technological growth.

The answer to this question matters for developing countries across the world. Under Lee, Singapore has mixed political authoritarianism with an extensive involvement of the state in the running of the economy. As Western, market-based economies struggle with lackluster rates of productivity growth, the Singaporean model of development appears increasingly a luring alternative.

The pessimist take on Singapore’s was championed by Paul Krugman, the Nobel-prize winning economist, who in 1994 compared the city-state to the Soviet Union under Stalin.
“Singapore grew through a mobilisation of resources that would have done Stalin proud,” Prof. Krugman wrote in the Foreign Affairs journal. “There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union”.

Prof Krugman’s remarks were largely based on controversial research by Alwyn Young, a professor of economics at the London School of Economics, who sought to understand what exactly drove economic growth in Singapore between the 1960s and the 1990s.

He found that, much like in Communist Russia, economic growth was the result of more workers joining the labour force, a larger proportion of the population entering formal education, as well as higher levels of investment. There was no evidence that Singapore became any better at turning these inputs into productive output.

“Rising participation rates, inter-sectoral transfers of labour, improving levels of education, and expanding investment rates, serve to chip away at the productivity performance of East Asian [countries], drawing them from the top of Mount Olympus down to the plains of Thessaly,” Prof Young wrote.

These results implied that the Singaporean model was not sustainable. Unlike technological growth, which in theory can drive economic growth for ever, governments cannot rely on doubling the number of workers entering the labour force. No surprise Lee was outraged at Prof Krugman’s findings.

The prime minister was not alone in his disbelief. Chang-Tai Hsieh, an academic now at Chicago Booth University, was skeptical of the accuracy of the Singaporean national accounts, which he believed significantly overstated the amoung of investment spending which went on in the city-state in the decades to 1990.

Using different statistical techniques, which relied on economic variables such as wages and price-earning ratios, Prof. Hsieh reached opposite results to the pessimist field. Total factor productivity growth – a comprehensive measure which looks at the efficiency of producing output from a range of labour and capital inputs – grew by almost 2 per cent a year between 1970 and 1990, and could explain a sizeable chunk of Singapore’s growth miracle.

The criticisms by Prof Krugman and others, however, stuck. In 1996, the government of the city-state created the Singapore Productivity and Standards Board, whose aim was to “raise productivity as to enhance Singapore’s competitiveness and economic growth”.

But for all the government’s efforts at boosting efficiency – and spectacular growth rates which eventually brought per capita income to hit $55,000 in 2013 – productivity growth in Singapore has remained poor.

Singapore has made up for it by continuing to attract migrant workers and working longer hours – some of the longest in the world according to a database compiled by the University of Groningen.
“We’ve grown in the last five years by just importing labour,” Lee admitted in 2010, a claim which summarises the limits of the model he presided over.

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