Singapore's income per head is the highest in Asia after Japan's and now an increasing number of government incentives are appealing to its entrepreneurial streak.
Singapore is a classic case of successful human response to national disadvantage. The Lion City, to translate its original Indian name, is small. It is short on natural resources, and has a population of barely three million. Imagine the people of Greater Manchester compressed into the Isle of Wight and you get the picture. For good measure, most Singaporeans are of Chinese immigrant stock, very different from their neighbours in Southeast Asia - and not entirely trusted by them.
Despite these anomalies, Singapore now boasts the highest income per head in Asia, with the single exception of Japan. It has no unemployment, low inflation, no foreign debt, an average annual growth of 8% during the past 20 years, 70% home-ownership and 800,000 credit cards. Gross domestic product per head, at £7,550, is higher than that of the UK's four southern-most partners in the European Community. Singapore's Strategic Economic Plan aims to raise this to the American level by the year 2030. It is no idle hope. Currently, the island state is experiencing a bit of a hiccup. With a high dependence on foreign trade, particularly on the American and Japanese markets, Singapore has inevitably suffered the effects of the international recession.
The level of manufacturing activity fell slightly in the first quarter of 1992, with slack American demand for Singapore's computer components and high inventories of consumer electrics in both Japan and Western Europe. The vital financial and commercial sectors did slightly better, with growth of between 2% and 3% in the same quarter. But the construction industry came to the rescue, with a 23% surge in the first quarter of 1992, following 40% growth during the full year 1991: this is one area of the economy that the government can control. Overall, real GDP growth appears to have bottomed in the first half of this year.
The official expectation is that the American economy should bump along the bottom during the later months of 1992, towing Singapore in its wake, but estimates for growth in the year as a whole have been shaved to between 4% and 6%.
The Chinese always look for the redeeming feature in any setback, and Finance Minister Richard Hu claims that, "We are comfortable with a pause. We have been growing too fast over the past three or four years". Bureaucrats may profess to be glad to see the growth rate halved, but those whose stake in the economy involves daily sales, such as manufacturers, are addicted to fast growth, and will be only too pleased to have it back. The growth of the China trade and the pharmaceutical industry are expected to offset present difficulties in other sectors.
The current vision of the future is that Singapore will be a regional service hub, focusing on clusters of export-oriented industry that match its facilities and its region's needs. Education will be cossetted in the hope of squeezing more innovations from a compliant population, while labour-intensive industry will continue to be farmed out to Indonesia, Malaysia and other low-cost countries. Singapore Incorporated is to become Singapore International. Or, as a local banker puts it, "Singapore has moved from managing survival to managing the economy, to a period now of managing expectations."
Critics ask whether a society so sheltered by its government, and enjoying full employment, can produce entrepreneurs - who, in the western book, thrive on adversity. But then the south-coast Chinese have an intrinsic entrepreneurial streak. And the incentives are being stepped up.
Corporation and income tax, for example, will be cut next year by 1% to 3%. Furthermore, a process of privatisation is now underway, with Singapore Telecommunications the next rich candidate for the local punters.
It's scarcely 30 years since Singapore pioneered its first industrial estate in the mangrove swamps of Jurong. Yet today services account for 70% of GNP. Services are being energetically promoted, moreover, while manufacturing is becoming much more selective. The financial sector is the most vigorous, against the background of efficient and incorrupt public finances. There has never, incidentally, been a bank failure in independent Singapore, and the monetary authority is proud of having consistently refused to grant a licence to the Bank of Credit and Commerce International.
The government is determined neither to devalue nor to internationalise the Singapore dollar. The currency cannot be borrowed for projects or acquisitions overseas, which makes Singapore the only financial centre whose money cannot be traded freely. But the market in foreign exchange now exceeds £40 billion a day and many foreign banks thrive on the offshore Asian dollar market.
Singapore has steadily tightened the standards required in financial services: affecting insurance solvency margins, for example, and the Stock Exchange. Last year arrests were made for alleged multiple applications for issues, and stiffer stock market guidelines were announced. Ever since the collapse of the exchange in 1985, following the Pan-Electric debacle, the regulations have been tightened in order to ensure equal treatment of all shareholders. Singapore is a family-oriented society, and many companies are family companies. Nevertheless new requirements about disclosing the qualifications of directors are making it more difficult to put relatives on the board.
The trouble is that protecting minority shareholders reduces the market's attractions for other investors. Singapore brokers have also lost their hinterland, with the delisting of Malaysian stocks. At the same time, foreign brokers have won new opportunities in the stock market for larger trades. Baring Securities, Smith New Court and others are taking their advantage. Turnover fell last year to £10 billion, but everyone is looking forward to the Singapore Telecommunications listing, the first of several privatisations to come.
The banks are doing nicely, led by the government-controlled Development Bank of Singapore (DBS). (Characteristically, the government holds its 43% of DBS through two private companies which are technically owned by the Minister of Finance himself, something which would send shivers down the spines of bureaucrats in less disciplined countries.) "Our mission for the 1990s," says DBS Chairman Ngiam Tong Dow, "is to build on our pre-eminent position in Singapore to be a leading bank in the Asia-Pacific region".
All of the big four local banks are expanding fast - their profits were up around 10% or more last year. Now they are spreading into merchant banking, and into new markets including stockbroking abroad. China and Vietnam are the latest to be tapped. The DBS itself hopes to draw off some of the financial profits available in south China through its 10% holding in the Wing Lung Bank in Hongkong. It also has a small part of the equity of Thai Danu Bank in Thailand. Standard Chartered and the Hongkong and Shanghai Banking Corporation keep the British flag flying on the lucrative retail side in Singapore.
The tax on offshore business is only 10%, and some of the rather onerous domestic regulations do not apply here. About 200 offshore banks now congregate around the Asian dollar market which has assets of well over £100 billion. There is also an active futures market, and some fund management business is carried out. The latter is not treated as favourably in tax terms as in Hong Kong where there are, in any case, more facilities available. The two island states are complementary rather than competitive in the finance field. Hong Kong's reversion to China in 1997 may bring about a transfer of some of this business.
After finance, tourism is a mainstay of Singapore's service economy. Singapore Airlines has just lifted its profits by 2.5%, partly as a result of relentless investment. There are still some 14 new aircraft on firm order and another 25 on option. When one challenger in Indonesia sought to curb Singapore Airlines' access, hub rights were offered to other airlines, including British Airways, as a quid pro quo for access rights. The jet fleet is to be doubled over 15 years, with Boeings and Airbus 340-100s. Singapore Airlines is also thinking of buying one-third of Qantas, largely to secure its southward routes. The new Changi airport, named Airtropolis, is already a wonder of the world, handling 2,000 weekly flights by 55 airlines and capable of fielding 20 million passengers a year. There are currently worries about a fall-off in Japanese tourists, but Singapore's attractions remain strong - indeed anyone going to Southeast Asia can hardly avoid it.
High Tech Progress
Some of the old industrial stalwarts are still going, even expanding. The shipyards are venturing overseas. Keppel Shipyard, which converted the former British naval dockyard so successfully to commercial use, is hoping to do the same in Vietnam's Cam Ranh Bay and in the Philippine's Subic Bay. The company's market capitalisation of £1 billion gives it an inestimable advantage. Sembawang Shipyard has raised new capital for expansion, with S G Warburg Securities assisting. On the other hand, NatSteel has had to diversify radically - with the Raffles Marina and Laguna golf course; plus equity holdings in Singapore Petroleum, National Oxygen and a US electronics company, as well as joint ventures in Malaysia and Thailand.
Textiles and clothing are still active, and doing well in export markets. So are pharmaceuticals: Glaxo makes the ingredients for about 70% of its global sales of the ulcer drug Zantac in Singapore, and is expanding its plant there. But the manufacturing sector overall is now declining as a proportion of GDP, and rising industrial costs are forcing Singapore manufacturers to relocate their production abroad. When not being moved along by costs, they are chased by the government along the path of higher technology and higher value-added.
Foreign investment in manufacturing increased by 18% last year, mostly from the US and Japan but also from the EC countries, whose investment jumped by 57%. The UK invested £60 million in Singapore last year. Cumulatively Britain ranks third among investors from overseas. Foreigners are estimated to control about three-quarters of Singapore's business assets, while nine of the 10 most profitable companies are foreign-owned. This is a tiger which other countries might shoot, but which Singapore is confident it can ride.
The other side of the coin is Singaporean investment abroad. Jack Chia's purchase of Universal Homes of New Zealand, followed by his bid for the London-quoted Boustead, is one example. Asia Pacific Breweries' half-share with Brierley in a New Zealand liquor company is another. The government, through Government of Singapore Investment Corporation (GSIC) and Temasek Holdings, took its courage in both hands to invest in Brierley, owner of the UK Mount Charlotte hotel chain.
GSIC also joined the private company Yeo Hiap Seng to buy Chun King, the American canned food producer, from Nabisco. An earlier purchase of Pacific Fruit Concentrates in Canada has been sold off, and few of these government sorties into the overseas acquisition seem to be profitable. It makes sense for a local bank to back Singapore Press Holdings (the Straits Times group) in taking one-seventh of Hong Kong's South China Morning Post, but the GSIC raids are viewed with some disquiet.
The overall industrial strategy of going for hi-tech industries is obviously sound. Singapore plans to double spending on R and D by 1995, raising its percentage of GDP to the level of Taiwan and South Korea. That means an annual expenditure of £650 million. The government has tried to accelerate this development by using its funds to buy American businesses, taking up fledgling computer companies, and obliging them to manufacture partly in Singapore. But it has then found, in some cases, that the hardware became out of date. Singapore now makes more than half of the world's computer disc drives - and currently suffers from global overstocking. It also has several unprofitable companies on its hands. The seasoned trouble-shooter J Y Pillay has been put into the chair at the government-linked Singapore Technologies Holdings (in effect a private arm of the Ministry of Defence), some of whose subsidiaries are said to have made losses of £125 million or more. The government may do better by linking up with established world leaders. The Economic Development Board (EDB) is now linked with Texas Instruments, Hewlett-Packard and Canon to form Tech-Semiconductors Singapore, which will make DRAM chips from next year. EDB calls itself a "business architect". There is concern as to whether this particular joint venture has come too late.
But there are many success stories in the private sector. Motorola is working a seven-day week producing semi-conductors, and may make Singapore its regional HQ - with concomitant tax advantages. It already gets a subsidy to train its R and D engineers. Aiwa is making 70% of its pocket-sized stereo-cassette players in Singapore, with a local content of 82%, and local managers and R and D engineers. Now Thomson of France is moving in to make video cassette players in a joint venture with Toshiba. Electronics is certainly the leader in Singapore industry.
The thrust for high-technology is also leading Singapore further into aerospace and biotechnology. Dowty Group, Aerospatiale, Lucas and Pratt and Whitney are among the more than 30 foreign companies now producing £400 million worth of aerospace products every year. Singapore Aerospace has linked with the French Aerospatiale (60%) and China National Aero-Technology Import and Export Company (24%) in the joint development of the P120L helicopter. The whole field is one with excellent potential for British participation.
The same is true of biotechnology. Singapore's National Biotechnology Programme has seen government spending of over £18 million on infrastructure, incentives and experts. There is a new Institute for Molecular and Cellular Biology, employing 160 researchers from all over the world, working mainly on cancer, virology, immunology and plant genetics. The government also started Plantek, which is now owned by Sumitomo, Salim of Indonesia, Tata of India and Native Plants of the US. The potential in Southeast Asia is measureless.
To match these high industrial ambitions, Singapore's government has decreed that the city-state must become an intelligent island within the next 15 years, through an advanced "national information infrastructure" with fibre optic cables linking every house and including teleview. Foreign companies worry about business secrecy, but the dangers can be safeguarded against with highly sophisticated systems. This is the universal trend and Singapore is determined to be at the head of it.
A £5.4 million TradeNet already links 20 government departments with 2,500 importers and shippers, allowing the time required for document approval to be cut to some 15 minutes. Another system handles ship and cargo movements, and a flexible road-pricing system. The National Computer Board's civil service operations have reduced the number of bureaucrats by 5,000 through the pooling of information and increased efficiency. The commercial opportunities for providers of equipment and software are obvious. Finally, hi-tech is being applied to agriculture. Unfortunately the hi-tech prawn farm which the EDB launched with a local food company and the government's agriculture department is plagued by algae, apparently capable of resisting human technology.
The Trade Hub
Singapore has the highest ratio in the world of trade to GDP. At £60 billion a year, foreign trade is worth three times GDP. The old standbys are still useful. About 60% of the world's traded physical rubber goes through Singapore. Now its plantations have a new money-spinner in orchids, the export of which to Japan, Australia and other markets is expected to hit £20 million in another three years. But the big success has been in building up value-added industrial exports, especially automatic data processing machinery, telecommunications equipment and refined fuels. Singapore was the world's fifth largest trader in office and telecommunications equipment in 1990, after Japan, the US, Germany and the UK. That includes the substantial entrepot trade.
The US is the best single market, taking one-fifth of Singapore's exports. Singaporeans have been careful to cultivate capital goods exports to this market more than consumer goods. They also make the trade reciprocal by being the 12th best customer for US exports of goods and services. At the end of last year a Framework Agreement on Trade and Industry was signed with Washington which is expected to lead to investment and intellectual property rights treaties in the future; even, if things go well, to a free-trade agreement. Singapore is already committed to a free-trade area with Indonesia, Malaysia, Thailand, the Philippines and Brunei in 15 years' time, although in practice it might take longer.
Japan is still the biggest supplier to Singapore, responsible for one-fifth of its imports. Much of Singapore's economic-cum-diplomatic efforts are directed to ensuring that Japan's presence does not become too dominant.
Singapore is doubly vulnerable in that it is dependent not only on international trade but also on multinational corporations, which are responsible for two-thirds of its domestic exports. Typical of the imaginative efforts being made to attract new trade is a scheme for granting Approved Trader status to "mega-traders" - inevitably multinationals - with the carrot of tax concessions or exemptions. But fear of dependence may explain why the government and its various arms take substantial stakes in 114e new enterprises, with a view to retaining some control.
The fact that Singapore is a free port, and one of the most open and accessible markets in the world, does not save it from western protectionism. It was only to be expected, given the high income per head of Singaporeans, that they would lose their Generalised Special Preferences (GSP) in some industrialised markets, notably New Zealand and the US. Singapore umbrellas, colour TV sets and machine tools are exported under voluntary restraints to France, the UK and US respectively. But other products like photo albums and TV tubes are facing anti-dumping or countervailing duty actions or investigations and there are 40 similar cases in the pipeline. The labour-intensive products which inspire protectionism in the West are being phased out to a large extent. Singapore has much to fear, nevertheless, from a failure of the Uruguay round of GATT trade negotiations.
UK trade with Singapore has been rising steadily in the last few years. Britain is the eighth biggest exporter - especially of electrical, industrial, power-generating and office machinery - but also road vehicles, tobacco, telecommunications equipment and a variety of consumer goods and manufactures.
The DTI identifies computer software engineering, biotechnology, robotics, pharmaceuticals and industrial design as potentially profitable areas for British companies in the immediate future.
Indeed Singapore is one of Britain's top 20 export markets, taking just over £1 billion-worth of products in 1991. There was a 7% increase in the first two months of this year. Over the 12 months to August 1992 there were four UK trade missions and eight exhibitions by British manufacturers in Singapore, covering audio, engineering industries, sporting goods, woodworking machinery, aerospace, defence and business equipment.
Seasoned travellers regard Singapore as the best equipped city in Asia as far as business visits are concerned. From the moment a visitor steps off the plane to go through Changi airport, they will be aware how the arrangements have been skilfully designed to save time and energy.
There are about 75 hotels, almost all of them within easy reach of the business areas. The beautifully refurbished Raffles Hotel, the Shangri-La or the modern Westin Plaza and Westin Stamford, are perhaps most suitable for company chairmen, with room rates to match. Of the quality hotels at standard international rates (say between £50 and £70 a night), the Carlton, Pan Pacific, Goodwood Park, Oriental, Marina Mandarin, Singapore Mandarin, Meridien, Hyatt Regency and Hilton can all be recommended.
Most hotels have a business centre, and English is understood throughout the island. The hotel will deal with all problems, needs and queries. British Airways and Singapore Airlines provide frequent non-stop flights.
Labour and Land
Singapore has faced its physical problems boldly in an effort to maintain its high standard of living. It is desperately short of land and labour. A programme of reclamation can just about provide the minimum needs for space but the labour shortage has to be met by immigration. The relocation of manufacturing industry is another solution.
The former policy of trying to limit family size has been overturned in favour of larger families. The importation of foreign workers has been made easier, especially for the construction and marine businesses, although the two big yards, Keppel and Sembawang, have already moved many of their operations to the Philippines, India or Indonesia where wages are lower. As for professional and skilled labour, up to 15,000 are to be allowed in, with preference being given to Asians coming back to Asia from the West.
The labour shortage is such that £325 million of taxation is said to remain uncollected because there are not enough tax officials. But all employers are feeling the pinch. The MD of Glaxo in Singapore admits that, "We are now having to look around the region for skilled people, or recruit them from Europe". The National Wages Council was intended to bring about wage stability. But without the threat of unemployment, real wages have run ahead of productivity gains for the past three years.
This is where the Hong Kong reversion could prove such a boon to Singapore. The official hope is that 30,000 Hong Kong Chinese will have moved to Singapore by 1997, but only about 2,500 have arrived so far.
Singapore's final ploy is to own more of the productive enterprise carried on in neighbouring countries. The agreement of the three governments, within the ASEAN framework, to designate Singapore, together with the neighbouring Malaysian state of Johore and the Indonesian Riau islands, as a "growth triangle" has given a boost to the city-state's plans. A tropical resort complex, to be built by private investors, is planned by the two governments involved, on the Indonesian island of Bintan.
Further along, on Batam island, the Singapore Technologies Industrial Corporation, together with Jurong Environmental Engineering and the Salim Group of Indonesia, are jointly developing an industrial park. The growth triangle enables Singapore manufacturing and service industries to overflow - in controlled conditions and by agreement with neighbouring governments - to places where there is abundant land and cheap labour. The snag is that Indonesian investors, whose partnership is necessary, have equally attractive opportunities open to them in other parts of Indonesia.
Singapore has indeed become a regional service hub, staying ahead of its neighbours' needs. The coming travails of Hong Kong may well benefit it. Only prolonged world recession or a serious upsurge in anti-Chinese feeling in Southeast Asia could threaten it.
For reprints of this article, contact Anne Oakley (071) 413 4336.