From Rags to Riches: The Case of Singapore

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When Singapore became independent in 1959, it was poor with low per capita income, low levels of education and high unemployment. One could even argue there was social conflict as labor strikes were common, and there was a housing crisis; Singapore had one of the largest slump settlements in the world. The government became decisive in dealing with labor strikes given growth was labor intensive. They provided affordable public housing and increased employee rights which put an end to strikes.

The government has been a major contributor to Singapore’s economic miracle founded in meritocracy, honesty, interventionism, an extensive state-owned enterprise sector with competitive wages and effective public services which were put in motion by Lee Kuan Yew. He took a pragmatic approach similar to Deng of China who said it does not matter if the cat is black or white what matters is whether or not it catches the mouse. The governmnent is efficient and corrupt free ensuring prudent spending as there is no malpractice in administration and business.

Singapore is a developmental state wherein the state acts as an entrepreneur undertaking market risks when it establishes a company and in the rare case where a state-owned company makes loses it is not saved but closed. Due to the efficiency of state capitalism in Singapore, the city state has low unemployment and crime rates, little social unrest world-class infrastructure and high social protection. The profits of the state capitalist sector are reinvested to maximize economic growth. As such growth rates from the 1960s to the 1990s averaged 8% and have remained robust. The government also encourages saving at the individual level with a mandatory savings scheme of 20% of one’s wage which can be used for housing, medical bills and education.

Economic Performance of Singapore for the Period 1960 to 2012

Source: IMF eLibrary

Human resource in Singapore is fundamental to yielding high dividends and as such the country embarked on educational reforms starting with a focus on primary education in the 1960s and early 1970s then secondary and technical education in the late 1970s which was followed by tertiary and specialist education in the 1980s leading to the technology intensive growth of the 1990s. Due to meritocracy, those who exhibit extraordinary abilities get extra support from the state. The good education system has led to Singapore being a high-tech economy which is highly developed. Education is important for the creation of ideas which lead to dynamic economic change as there is a positive correlation between education and GDP.

Given Singapore had a small open economy, a small domestic market and no natural resources, they had to depend on foreign markets, capital, technology and professionals for economic growth. To attract foreign investment Singapore introduced tax incentives, removed barriers to trade, engages in free trade with no tariffs and also has a free port. Singapore is strategically placed sitting in the middle of an important trade route connecting Asia to Europe making the Singapore harbor a major shipping port. Approximately 40% of world maritime exports pass through the natural harbor creating opportunities for exports which are important for growth and expansion as this is a focal point for the world’s ocean trade routes. Singapore also has underwater species that are an attraction for tourism which is major contributor to the GDP.

Singapore under Lee Kuan Yew was not bound by ideology, welcoming foreign trade and investment leading to a capital-intensive boom in growth in the 1980s as depicted in the graph. The institutions put in place by the state attracted multinational companies to set up regional headquarters in Singapore thereby attracting bigger players and decreasing unemployment. As of 2019 Singapore has maintained its status as one of the easiest places to do business in the world, sitting on number two. There is no diversion in the form of excessive taxation, red tape and corruption, and the economic environment is stable with good social infrastructure thereby attracting more investments. In 1985 Singapore faced its first post-independence recession which led to the privatization of certain industries such as telecommunications making them more competitive. The services industries e.g. finance and insurance were further liberalized growing services to 70% of GDP compared to 24% in 1985.

Singapore is a city state and one of the most densely populated states in the world, bringing firms and entrepreneurs as well as employers and employees in close proximity which provides the freedom to share ideas which are then multiplied through urban interaction. Though the state does not have much land space, infrastructure is optimized through ingenious ideas to make use of limited space. Singapore has dealt with the congestion demon of density by providing modern affordable housing and by providing a mass rapid transport system and also charging taxes on cars. Crime is also a demon of density but not in Singapore where the police force is effective, and citizens generally subscribe to the state before individual philosophy which has proven useful in maintaining stability given the multicultural nature of the state.

However, the system is not without its flaws. Singapore presents a case of state capitalism which tends to create competition between state and business. While per Acemoğlu and Robinson, strong states can generate rapid growth, suppressing dissent can result in increasing costs and might not be sustainable in the long run. Some economists have even argued that the high degree of centralisation has resulted in narrow performance indicators governing policymaking which tend to not review the economy holistically, factoring how it has changed over the years, and thus underperform in addressing issues. One such policy is how the focus in education is on bright students yet per the graph above, economic growth in Singapore is now dependent on innovation thus the government should also incorporate late bloomers into the innovation process and make full use of the entire population in order to stay on a growth trajectory as they are already faced with an aging population problem. Though recovery has been steady, the state was hit hard by the pandemic with an estimated 13.2%contraction in the second quarter of 2020 further necessitating a transformation of policy to increase innovation.

Should developing countries explore state capitalism?

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Yours in Thoughtful Learning

Panashe Maningi

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