Singapore’s Shanmugaratnam: Asia’s statesman sketches the face of global finance

Sid Verma
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Singapore matters. The city-state continues to blaze a trail for the region by shifting its growth model in favour of productivity, securing its presence at the top level of international financial diplomacy. Tharman Shanmugaratnam, Singapore’s finance minister – and Euromoney’s Finance Minister of the Year 2013 – outlines his reform agenda and issues a sharp warning on reform inertia in the region, China’s growth model and destabilizing capital flows.

Finance Minister of the Year 2013: Singapore’s dynamo presses reform

For decades, Singapore has seduced overseas talent thanks to its status as the Shangri-la of city-states, endowed with clean streets, diverse cuisine, water parks, a stunning skyline, botanical gardens and luxurious malls. Why are some nations doomed to a perpetual cycle of boom and bust, while others, notably Singapore, steadily graduate to high-income status? The success of the small city-state with big ambitions sheds light on this contested battleground of economic ideas while it continues to carry the torch for Asia’s transformation.

As investors lament the unsustainable credit boom and reform inertia that has blighted China India and Indonesia, in particular, in recent years – raising the spectre this summer of a repeat of the 1997 Asia crisis – Singapore has consolidated its status as the region’s competitive dynamo, thanks to a flurry of supply-side reforms, backed by judicious fiscal and monetary policies.

Michael Zink, head of Asean and chief executive for Singapore at Citi, sums up the zeal of expatriate workers evangelizing over the Singaporean story. "It provides a great example of economic success that is endlessly nurtured," he says. "There is a never-ending benchmarking about who is the best today, or what is the next step in outperformance, or what is missing from our growth model. It is a very proactive policy orientation. The government has done so well because it has not stopped running."

And yet the city-state, ejected from the federation of Malaysia in 1965, is saddled with perceived obstacles: limited land and a small population, depriving the private sector of the economies of scale. What’s more, at independence, it lacked thriving neighbouring markets, foreign aid and an easily replicable growth model from other nations, while state administrators only a decade before were engaged in a bruising battle to root out drug trafficking and opium dens.

Fast-forward to 2013: five decades of explosive growth have propelled the city-state from low income to high income in two generations. Along with that of South Korea, that has been the fastest pace of economic development in modern history. The economy is the most competitive in the world, according to the World Bank, with the highest income per capita in southeast Asia, outpacing the US in recent years.

Unusually for economists, there is rare near-universal consensus about why Singapore has succeeded. The roots of Singapore’s transformation lie in the vision of Lee Kuan Yew, the first leader of the independent city-state, who assumed power at a time when per-capita income levels were equivalent to those of Angola or Kosovo today, according to the Cato Institute, a Washington free-market think-tank. His model: light taxation, a stable monetary system, free enterprise, a zero-tolerance policy towards corruption, complemented by a highly trained and well-paid workforce – with top officials typically earning million-dollar-plus salaries – and an open-door policy to migrant labour.

However, as Singapore Inc edges towards its 50th birthday, the economy is at an inflection point. Its model of attracting multinational firms through tax breaks, a strong business climate and relentless expansion of the overseas workforce is reaching a breaking point, given a shortage of space and rising tensions between domestic and foreign workers. The city-state needs a more sophisticated growth model, focused on expanding productivity of domestic businesses and building an innovative homegrown corporate sector. In some ways, the challenge is more vexing than crises in the past 15 years: the 1997/98 Asia crisis, the Sars outbreak in 2003 and the global recession in 2008. China’s growth model is now under siege, threatening one of Singapore’s top export markets; the city-state’s potential growth rate has almost halved to around 2.5%, according to economists, citing, in part, new curbs on foreign workers; and a strong Singaporean dollar, an ageing workforce and structurally high inflation will continue to erode competitiveness. What’s more, social cohesion is being threatened by rising income inequality – exacerbated by the growth of high-net-worth individuals in recent years that means Singapore now rivals Switzerland for private banking, while rival regional trade and investment centres are snapping at its heels in becoming innovative hubs.

Given Singapore’s reputation for blazing a trail for the rest of the region – from supply-side reforms, trade and investment strategies as well as financial-market growth – Asian policymakers are taking note of how the city-state navigates these challenges, with its energetic reformist finance minister, Tharman Shanmugaratnam – Euromoney’s Finance Minister of the Year 2013 – lionized as the region’s statesman on the international stage.

The economic plan centres on increasing productivity by imposing restrictions on cheap foreign labour to coerce companies to embark on reforms to maintain margins – and to correct the policy misstep of opening the floodgates to foreign labour over a short period – while introducing fiscal and educational measures to reward industry innovation. In addition, the government is beefing up the social safety net to address discontent over strained infrastructure and rising living costs, driven by a surge of migrant workers, equivalent to a near 10% increase in the workforce in recent years.