3-9 April 2015 #752

It’s governance, stupid

Lee Kuan Yew’s main legacy is to prove that leadership is an important ingredient for prosperity
Pradumna B Rana And Chia-yi Lee

Developing countries have much to learn from Singapore’s first prime minister Lee Kuan Yew who transformed the republic from a third world economy to one of the most advanced countries in one generation.

The lessons for countries aspiring to learn from the Singapore development model are clear: strengthen institutions and improve governance. But this is much easier said than done. Aspiring countries need to improve the rule of law and reduce corruption. The civil service, bureaucracy, and public administration need to be reformed, and private sector allowed to flourish through regulatory reforms and clearly-defined property rights.

The dilemma is that such reforms generate benefits only in the long term, making them hard for policymakers and politicians with a shorter time horizon to set as priorities. Yet, without them, other policy measures to support sustained economic growth will become less effective and ultimately unravel.

Development theorists used to think that economic development could be explained solely by factors like the availability of natural resources, high levels of saving and investment, and openness to foreign trade and investment. More recently, the Commission on Growth and Development headed by Nobel laureate Michael Spence has used the Singapore model to cite an additional factor: good governance.

As Singapore’s Emeritus Senior Minister Goh Chok Tong puts it, to make a delicious dish “besides having the right ingredients and the right recipe, you must have a master chef”.

Economic development does not just happen. It must be consciously chosen as an overarching goal by rulers -- a government that delivers political and economic stability, implements the correct macroeconomic policies, articulates a vision for the country and implements it. This requires a capable, committed, and credible government that people can trust, and leaders with integrity. An abundance of natural resources is neither necessary nor sufficient for a country’s economic development. 

After the separation from Malaysia in 1965, Singapore was similar to a typical Third World country of today with GNP per capita of $300, high unemployment rates, and rife racial disharmony. As the Prime Minister of a small country, Lee was always thinking big and making bold decisions in the interest of the country. Lee adopted a development model based on export of labour-intensive manufactured goods to world markets. He invited multinational companies to invest, telling them: “Produce in Singapore and sell to the world.”

To attract investors, Singapore built infrastructure, cut tariffs and quotas, offered tax incentives, and implemented appropriate macroeconomic policies. The Economic Development Board was established in 1961 to provide a business friendly environment. The National Wage Council was also set up in 1970 to make sure that the benefits of foreign investment were shared and also to accelerate Singapore’s move up the development ladder.

Lee met foreign investors regularly and listened to them and their grievances.

Although pragmatic, his choice of an export-oriented development model driven mainly by foreign investment was a risky strategy at the time. Dependency theorists had argued that foreign investors typically exploit cheap labour and extract natural resources of the developing countries. It is only after the success of the Singapore development model that export-oriented development strategies driven by foreign investment has been popularly adopted all over the world.

By the 1990s, Singapore had moved from labour-intensive manufacturing towards high-tech and knowledge-based industries. Lee noted that since jobs had been created his priority was to improve the quality of the new investments and with it the education and skill levels of Singaporean workers.

Lee’s attempt to make Singapore the Asian financial centre and global business hub is also bold. Unable to compete with Hong Kong, Lee convinced foreign banks to come to Singapore by establishing integrity, efficiency, the rule of law, reliability, and stability. “The history of our financial centre is the story of how we built up credibility as a place of integrity, and developed the officers with the knowledge and skills to regulate and supervise the banks, security houses and other financial institutions,” Lee said.

However, other developing countries, primarily in South Asia, will face difficulties in adopting this strategy. They began economic reforms in the 1990s by focusing on macroeconomic areas which had contributed to rapid economic growth. But the reforms ran out of steam because of red tape, endemic corruption, and lack of rule of law.

They could learn from the Singapore model, because as Lee Kuan Yew liked to say: “It’s not how you begin the journey, it’s how you end it.”

Pradumna B Rana is associate professor and Chia-yi Lee assistant professor at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University in Singapore.

www.rsis.edu.sg

Read also:

“Nature of political regime doesn’t determine growth, governance does”

President Xi’s Singapore lessons, Michael Spence

Be careful what you wish for, Chong Zi Liang

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