Alternative Approaches to Development Policy
Economists (Sachs, 2005; Stiglitz, 2001) point out that there is no one development approach
that fits all countries and circumstances. Each country must craft it own policies and strategies based on sound macroeconomic principles; its history, culture, and geography; its unique competitive advantages; and its development goals. But what are the factors that are going to most influence growth and development? Singapore, Finland, and Egypt illustrate alternative approaches that governments can take to answering this question.
Economic Growth and the Case of Singapore
The case study of Singapore illustrates one approach to state-supported economic growth (this case report is based on analyses by Anwar & Zheng, 2004; Blomström, Kokko, & Sjöholm, 2002; Castells & Himanen, 2002; Economic Review Committee, 2003; Hernandez, 2004; Rajan, 2003; Wilson, 2000). Singapore is an island city-state of 4.2 million people with an ethnic mix of approximately 77% Chinese, 14% Malay, and 8% Indian.1 It had an annual
population growth rate from 1975-2003 of 2.2%. It is a parliamentary republic which the People’s Action Party has controlled since the separation of Singapore from Malaysia in 1965. Historically, political stability has been maintained at the expense of public participation and dissent. There is limited freedom of the press, with Singapore scoring 147th out of 167 countries on the Worldwide Press Freedom Index of the group Reporters Without Borders (2005).
Yet Singapore has come to have a highly developed and successful free market economy that has experienced significant growth over the past several decades. Despite its very small population and landmass, Singapore ranks as the world’s 41st largest economy, according to the Economist (2003), with a gross domestic product in 2003 of US$91.3 billion (UNDP, 2005). Signapore has a high standard of living with an adjusted per capita GDP of US$24,481. However, Singapore has a high income disparity, with the ratio of the income of
the top 10% to that of the bottom 10% being 17.7. It was ranked as the world’s seventh most
competitive economy by the World Economic Forum in 2004 and second most competitive
by the Institute for Management Development in 2004. These indices attempt to measure a country’s macroeconomic environment and the quality of public institutions and infrastructure. On the UNDP (2001) Technology Achievement Index that measures access, technology creation, and education, Singapore was ranked 10th internationally, with a score of .585. The World Bank (2005) reports that that Singapore had 622 PCs per 1000 people in 2003 and the UNDP (2005) reports that there were 509 Internet users per 1000 people in that year.
Since starting out as a developing country with its separation from Malaysia in 1965,
Singapore’s economic growth has been closely linked to the emergence and evolution of state
policies. The government’s initial strategy was to focus on the development of physical and
labor capital. They instituted policies to develop a labor-intensive, export-driven industrial economy by building a private savings-financed infrastructure and attracting foreign direct investment (FDI) from transnational corporations. Singapore had few competitive advantages. It has essentially no agriculture or natural resources and a small domestic market. But it has a deep-water port and a strategic location in the shipping corridors of Southeast Asia. Through the 1960s and 1970s, Singapore was considered to be a reservoir of cheap labor as a result of the government’s wage controls and restrictions on labor unions. The particular combination of constraints and competitive advantages supported the strategy of promoting a labor intensive, low value-added, entrepot economy. Low tariffs allowed inexpensive imported parts to enter the country for assembly by low-wage laborers and the export of finished goods. The government created a forced retirement savings program to which both employees and employers contributed at a very high level, up to 40%, and used this to finance the development of a re-export-friendly infrastructure (such as port facilities, airport, roads, and telecommunications infrastructure), without recourse to high taxes, deficit financing, foreign commercial debt, or foreign aid that would otherwise put a drag on the economy. Human capital development was an important part of this strategy and Singapore built up a strong education system to supply a literate labor force with a reasonable knowledge in basic numeracy. The government coordinated these investments around the development of strategically selected industrial clusters—the geographical concentration of firms and ancillary units engaged in the same sector. The government courted transnational corporations in industries such as consumer electronics and computer peripherals by providing them with incentives for locating production facilities in their country and thus tapping into global value chains of these industries.
Foreign businesses benefited from low import tariffs and implicit subsidization from
ready-made factory sites, technical education and training, and education delivered in the English language. Because government investments were strongly complementary to the private sector, there was a large degree of “crowding in” of private investment and Singapore
became a leading destination for FDI. Singapore in turn benefited from the importation of technology that came along with these investments. The government used the stability of its
extended tenure to refine its strategy and develop it over time, leveraging initial gains in the
economy to pursue a growth trajectory that moved from low value-added export to high value-added manufacturing and services. As a result of this strategy, Singapore’s GDP grew
at an impressive average annual rate of about 4.9%, during the period 1975-2003 and 3.5%
from 1990-2003 (UNDP, 2005). This compares to at rate of 2.0% and 2.1%, respectively, in
the US during these periods.
However, in the mid-1990s, economists noted that much of Singapore’s economic growth was due only to the accumulation of its input factors—growth of its labor force and foreign capital—rather than growth in total factor productivity (Krugman, 1994; Young, 1995). Total factor productivity is the amount of growth in the economy beyond that attributed to growth in labor or physical capital. While growth in labor or capital has diminishing returns, growth in total factor productivity—which is often attributed to technological innovation—is associated with compounded economic growth and sustainable development. In effect, Singapore was able to grow its work force, its physical capital, and its economy by tapping into the global market, bringing in transnational corporations, and with them imported technology developed elsewhere. However, Singapore did not develop its indigenous technological innovativeness; investment in local research and development was substantially lower than other newly industrialized countries in Asia. Furthermore, locally owned companies did not participate in economic growth, so economic development was not
widespread. Consequently, analysts felt that Singapore’s initial growth was subject to diminishing returns and would run its course and flatten out. According to analysts, in order
to continue its growth, Singapore would have to increase its research and development (R&D) and technological innovativeness, enhance the creativity of its labor force, and foster local entrepreneurship and widespread participation in the economy.
In the late 1990s, the government acknowledged this problem and has subsequently shifted its policies to address it. In 2003, the cross-ministerial Economic Review Committee
(2003) issued a report that recommended a number of measures to promote more sustainable
economic growth. In addition to recommending upgrades in the existing industrial clusters of
electronics, chemicals, biomedical sciences, and engineering, it promoted the development of
new clusters, such as micro-electromechanical systems and nanotechnology, and new exportable services in areas like health care, education, and creative industries. Significantly,
the government also recognized a third factor needed to sustain its economic growth— knowledge creation and technological innovativeness.