LESSONS FROM SINGAPORE

This week’s issue of The Economist contains an important special report by one of the paper’s most talented journalists, John Micklethwaite, on the role and size of the state.

He concludes that the prospects for reforming the state have improved with the fiscal crises buffeting Western nations:

… the incremental benefits of ever bigger government, even assuming it was somehow affordable, become ever smaller.  Decent-sized government can reduce inequality and poverty, but most of the evidence is that gargantuan government merely gets in the way of social progress.  A state that takes up more than half the economy begins to deliver an ever worse deal to ever more people in the middle: the extra benefits become harder to detect, the extra costs harder to hide.

The report argues that with good management the share of government spending in Britain could be reduced to 40% of GDP – a very modest goal and an outcome that would still be far too high for fast growth.

It rightly notes that the British welfare state, with high levels of social transfers and middle class churning, would remain twice the size of Singapore’s.  Unusually, for what is still a Eurocentric paper, the report devotes this section (scroll down) to observations about Asia and Singapore in particular.

Singapore is certainly a standout country.  Only two generations ago Orchard Road looked like a third world thoroughfare.  In the 1970s I was involved with the administration of New Zealand aid to Singapore.

Today, Singapore’s per capita income (PPP basis) according to World Bank figures is US$47,940, roughly on a par with Hong Kong ($43,960), well ahead of Australia ($34,040) and nearly twice that of New Zealand ($25,090).

Some New Zealanders think of Singapore as a country that reflects the state paternalism of Lee Kuan Yew who ran the island from 1959 to 1990.  It is true that there are dirigiste elements in the Singapore model, such as mandatory contributions to the Central Provident Fund which finances  much of Singaporeans’ housing, pensions and health care.  Also some outsiders dislike Singapore’s limited political democracy, proselytising of ‘Asian values’ and attitudes that they find somewhat stifling, including of entrepreneurial vigour.

But to regard Singapore as an essentially statist country is to miss the wood for the trees.  It consistently rates behind Hong Kong as having the freest economy in the world.  As Micklethwaite notes, Singapore’s success owes far more to laissez-faire than to industrial policy:

Rather than seeing foreign investment as a way to steal technology or to build up strategic industries, as China often does, Singapore has followed an open-door policy, building an environment where businesses want to be. The central message has remained much the same for decades: come to us and you will get excellent infrastructure, a well-educated workforce, open trade routes, the rule of law and low taxes.

Government spending is around 19% of GDP, the top income tax rate is 20%, the top corporate rate is 17%, Singapore has been at free trade for years, and its labour market is highly flexible with no burdensome rules on dismissals and work hours.

Many other interesting features are noted by Micklethwaite:

• Singapore’s competitive advantage has been good, cheap government
• It provides better schools and hospitals and safer streets than most Western countries
• It is near to the top of educational league tables, yet education consumes only 3.3% of GDP (less than half New Zealand’s level of education spending)
• Teachers need to have finished in the top third of their class; headmasters are often appointed in their 30s and rewarded with merit pay if they do well but moved on quickly if their schools underperform
• The quality of Singapore’s civil service is exceptional, with those at the top being paid US$2 million or more
• There is a welfare safety net to cover the very poor and sick, but much greater reliance on personal and family resources.  Lee Kuan Yew once said that the only thing that would hold Singapore back would be the development of a Western welfare state.

Micklethwaite concludes:

… arguably the place that should be learning most from Singapore is the West. For all the talk about Asian values, Singapore is a pretty Western place. Its model, such as it is, combines elements of Victorian self-reliance and American management theory. The West could take in a lot of both without sacrificing any liberty. Why not sack poor teachers or pay good civil servants more? And do Western welfare states have to be quite so buffet-like?

By the same token, Singapore’s government could surely relax its grip somewhat without sacrificing efficiency. That might help it find a little more of the entrepreneurial vim it craves.

Neither Hong Kong nor Singapore have significant natural resources.  Their geographical position has not altered: Hong Kong grew rich while China was still poor.  They do not have great natural environments but there’s not much they can do about that.  Their prosperity underlines the lesson that the institutions and policies a country adopts basically determine its success in the modern world.  Singapore has an admirable focus on its own interests; one hears little about ‘leading the world’ on climate change, for example.

Many New Zealanders are sceptical about the idea that New Zealand could catch up with Australian living standards.  I have put the question the other way round: would any competent economist not think that New Zealand could overtake Australia if it moved towards the kind of economic framework of Hong Kong and Singapore?  So far none has come forward to take this position.