22 March 2014

Lessons from Singapore

Is Singapore a unique case of authoritarian capitalism? Or could it have lessons for us all? Mitchell Wigdor's book, "No Miracle", provides some answers to these questions.

Singapore is very often regarded as a unique, special case. A city-state, an example of authoritarian capitalism, with perhaps few lessons for other countries.

But as Mitchell Wigdor argues convincingly in his book, "No Miracle", Singapore does indeed have many lessons for us all.

"It's all about institutions", says Wigdor, reflecting the new mantra of development economists.

Many economists like Gerschenkron, North, Rodrik, Acemoglu and Robinson before him have emphasized the importance of institutions. But unfortunately, they offer too little concrete advice about which institutions are important or how they might be built. Exploring these issues in detail through the case of Singapore is the great contribution of Wigdor's work.

First of all, where do the institutions come from?

As in Singapore's case, institutions must be created by leaders who are competent and who believe in inclusive growth. That is, growth that involves the mobilization and participation of all members of society. In fact, including all society in the growth process is win-win for both society's elites and the general public. When everyone contributes, the economy itself is bigger for everyone.

Burma may be the perfect example of a country that did not practice inclusive growth. For decades, the military dictatorship practiced "extractive" policies. In other words, it was a rip-off state (a kleptocracy), that sought to monopolize the economy's resources for the military and political elites. And it did so by destroying institutions, rather than building them.

The upshot was that Burma's extractive elite found itself increasingly threatened by social discontent, conflict with ethnic minorities, and an uncomfortable relationship of dependency that it had fostered with China. Hence, the dramatic turnaround, these past couple of years.

Which institutions are necessary for a country's development success?

As the process of economic development is like climbing a ladder, the institutional needs of a country evolve and change over time. In the early stages, it is necessary to establish basic physical infrastructure like roads, ports, public transport, electricity etc. Other requirements are the education system, and basic financial markets.

As an economy climbs the development ladder further, its institutional requirements are also more exacting. For example, a sophisticated financial sector requires equally sophisticated prudential controls and supervision. An innovation-driven economy needs strong investments in basic research and policies for protection of intellectual property rights. And as an economy engages in international trade, investment and finance, government institutions to participate in international discussions and negotiations also become necessary.

But connecting all these factors are information and communications technologies (ICTs), according to Wigdor. Today, ICTs are everything. They facilitate international trade and finance, they provide access to information and knowledge, they are our connections with the world.

In many ways, the gap between rich and poor countries boils down to a gap in ICT usage, known as the "digital divide". Superficially, the digital divide measures differences in ICT penetration rates between countries. More profoundly, it shows the extent to which
countries have integrated into an increasingly global economy.

In the same way that electrification became an engine of growth a century ago, the same is now true for ICTs. The prospects for sustained economic development are bleak for countries that do not foster ICT usage.

So if ICTs are so important for economic development, how can a poor country hoping to develop quickly get them?

The first thing it needs is telecommunications infrastructure. And an
independent telecommunications regulator is key to building such infrastructure. The next thing that we need is human capital through a quality public school system and worker training. Human capital is essential to maximizing the potential benefits of ICTs.

And above all, it needs strong investment in ICT goods and services, and this means attracting multinational corporations which own these technologies. Unlike past technologies that were more readily licensed or otherwise transferred, ICTs tend not to be in the public domain. They are privately held and jealously guarded by their owners. Thus, foreign direct investment (FDI) may represent the most efficient option to acquire ICTs.

One of Wigdor's key messages is that many aspects of the developmental state model of Japan, Korea and Taiwan don't work anymore. These countries sought to create a core of strong domestically owned industries by buying, licensing and copying technology. Their governments played a strong coordinating role between the public and private sectors. But multinational companies will no longer part with their valuable technologies like they did in the past. To get their technologies you have to get the enterprises in.

Singapore has been very successful in attracting FDI which is rich in ICTs. In this context, Singapore’s Economic Development Board stands out as the critical institution in building Singapore's success.

What can we learn from its success?

Consultation. Governments must consult with all relevant stakeholders, who should also be represented on institutional boards of directors and advisory boards. This consultation should be a formal, consistent process, which is ongoing in order to ensure that the institution is properly addressing its goals. It should not be one-off or ad hoc.

Professionalism and independence. Institutions should hire the best people, not cronies, and they should be well paid. There should be legislative guarantees of institutional independence from political interference.

Mandates, finance and transparency. Institutional mandates should be clearly defined in enabling legislation and there should be clear boundaries between their functions and those of other institutions and government ministries.

Funding and transparency. Sufficient funding must be provided to accomplish the institutional tasks. And institutions should operate, make decisions and report transparently.

As Wigdor explains, Singapore's economic transformation was the result of strategic planning, focus, hard work, and perseverance. It sounds like motherhood, I know, but there are all too few governments who operate in such a disciplined manner.

For example, leading nations like the US, Canada and Australia have much to learn from Singapore in the ICT area. All three have seen themselves overtaken by Singapore, even though it is a late developer. Singapore is now ranked 12th in the world in the ICT Development Index of the International Telecommunication Union, while the US is at 15th, Australia 21st and Canada 22nd. A similar story emerges in the OECD's Programme for International Student Assessment (PISA), where Singapore is also ahead of all three countries, with a very significant edge for mathematics and science competencies.

Japan is another case in point. This country spearheaded Asia's post-war economic development. But in more recent times, it has seen its electronics and other sectors overtaken by US, Korean and other firms. In this context, Japan, which has among the world's very lowest levels of inward foreign direct investment and migration, would do well to open its markets.

And lastly Singapore itself has much to reflect on in terms of its future governance. A system which combines a strong authoritarian streak with consultation, meritocracy, efficiency and low levels of corruption may have served it well in the past.

But each passing election has seen declining support for the ruling party, despite strong discouragement of any credible opposition. Many citizens are not happy with the yawning income gap that has emerged between the rich and the poor. And recent protests about government plans for continued increases in immigration show that the population is becoming less compliant, as they feel that immigrants might be taking their jobs, and adding pressures to the country's already strained infrastructure.

Having succeeded famously thus far, the next step in Singapore's developmental journey may have to be democracy. A well-educated and prosperous society should demand no less. Indeed, the exodus of Singapore's young elite to countries like Australia and the US suggests that they are looking for more than just efficiency in their lives.


John West
Executive Director
Asian Century Institute
Tags: asean, singapore, digital divide, Asian miracle, ICTs, FDI, developmental state

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