Direction for Economic Reform in Singapore - Case Study Example

Direction for economic reform in Singapore Identifying the areas for reform in Singapore is a tough job. Firstly, it is one of the top economies of the world. Being so, it is probably one of the best economies of the world. Secondly, it enjoys the highest ranks in the economies of the world as seen from the perspective of World Bank and the Heritage Foundation. The World Bank is the top multilateral or intergovernmental agency for development while the Heritage Foundation is one of the top think groups of the world. Both are authorities in the field of development and it is unlikely that they will miss the most important points in formulating the appropriate economic development recommendations for Singapore. Nevertheless, this work will venture into the unthinkable: formulating a set of recommendations for economic reform in Singapore. Table 1. Singpore’s score in economic freedom indicators versus world average Index of economic freedom Singapore Rating United States Rating World average Business freedom 98.2 91.3 64.6 Trade freedom 90.0 86.9 74.2 Fiscal freedom 90.7 67.5 75.4 Government spending freedom 95.3 58.0 65.0 Monetary freedom 80.9 78.1 70.6 Investment freedom 75.0 75.0 49.0 Financial freedom 50.0 70.0 48.5 Freedom in property rights 90.0 85.0 43.8 Freedom from corruption 92.0 73.0 40.5 Freedom for labor 98.9 94.8 62.1 Source: Heritage Foundation 15, 375-376, and 431-432 Let us begin with the assessment of the Heritage Foundation. Table 1 of the preceding page earned for Singapore the title of the 2nd top ranking economy of the world based on the economic freedom index developed by the Heritage Foundation. The number 1 rank was earned by Hong Kong for 2010. As of September 2009, the Heritage Foundation estimated Singpore’s population at 4.8 million, GDP at US $238.5 billion, compound annual growth for the last 5 years at 6.1%, per capita income at US 49,284 dollars, inflation at 6.5%, and FDI inflowst at US$ 22.7 billion (375). The Heritage Foundation (2010), however, has pointed out that Singapore’s economic growth has significantly slow down to only about 1 percent in 2008 compared to the usual of around 6% annually over the last five years. The Heritage Foundation was founded in 1973 and portrays itself as a research and educational institute founded on the “principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense” (Heritage Foundation, 2010). That Singapore defeated the United States of in terms of economic freedom, a value strongly traditionally held by Americans, is significant. The United States ranked only number 8 in terms of the economic freedom index in the 2010 report. The overall rating of Singapore in the economic freedom index as of 2010 is 86.1 while the US rating is only 78.0. Hong Kong has a rating of 89.7 in the 2010 report. The Heritage Foundation identified flexibility and openness as among the basic strengths of Singapore’s economy (375). In addition, according to the Heritage Foundation, Singapore has an efficient regulatory environment, transparent in commercial operations, and enjoys a reputation for the non-existence of corruption (375). Singapore’s tax system is described as competitive and the labor market highly flexible (Heritage Foundation 376). The vulnerability of Singapore to global financial and turmoil is indicated, however, in the Heritage Foundation Report (375). According to the foundation, Singapore’s economic growth slowed down to only 1% in 2008 vis-à-vis the annual average of 6.1% compound annual growth over the last five years (375). Nevertheless, the Heritage Foundation expressed confidence that Singapore has strong fundamentals and “is likely to rebound quickly” (375). The Heritage Foundation describes Singapore as “a nominally democratic state that has been ruled by the People’s Action Party (PAP) since 1965” (375). The foundation said that in Singapore “freedom of assembly and freedom of speech remain restricted, but the PAP has also embraced economic liberalization and international trade” (375). Inspite of a high score of 95.3 for freedom in government spending, the Heritage Foundation revealed that the Singapore state has remained involved in the economy through many government-linked companies (376). There are even plans to set up state-owned energy and telecommunication enterprises but proposals on these have been shot down (376). Singapore’s monetary freedom is rated at 80.9 but the Heritage Foundation noted that the government tries to affect prices “through regulations and state-supported enterprise” and the government imposes controls as it deems necessary (376). The Heritage Foundation noted that some policies of the Singapore government even distort prices (376). Although Singapore got a high score of 90 for trade freedom, some of the problems identified by the Heritage Foundation included import and export restrictions inspite of an average tariff rate of zero, services market barriers, sanitary and phytosanitary rules described as “burdensome”, problem areas in intellectual property rights, and export incentive programs. Meanwhile, the World Bank Group gave Singapore the overall rank of number 1 in the Doing Business 2010 Report out of 183 countries worldwide. Singapore was also number 1 in the 2009 report of Doing Business. Table 2. Starting a business (Singapore’s overall world rank in the 2010 report: 4) Indicator Singapore East Asia & Pacific OECD Average Procedures (number) 3 8.1 5.7 Time (days) 3 41.0 13.0 Cost (% of income per capita) 0.7 25.8 4.7 Min. capital (% of income per capita) 0.0 21.3 15.5 Source: Heritage Foundation, Singapore Table 3 shows that construction permits are easier to get in Singapore compared to the rest of East Asia and OECD. It takes only 25 days to get a construction permit in Singapore while the same is many times longer to do in East Asia and the Pacific and OECD or Organization of Economic Cooperation that is an organization of rich countries. Table 3. Getting construction permits (Singapore’s overall world rank in 2010 report: 2) Indicator Singapore East Asia & Pacific OECD Average Procedures (number) 11 18.6 15.1 Time (days) 25 168.6 157.0 Cost (% of income per capita) 19.9 139.6 56.1 Source: Heritage Foundation, Singapore With regard to property registration, Singapore has a rank of 16 worldwide. It takes only 5 days to register a property in Singapore compared to around 20 times that long in East Asia or 5 times that long among OECD countries. Table 4. Registration of property (Singapore’s overall world rank in the 2010 report: 16) Indicator Singapore East Asia & Pacific OECD Average Procedures (number) 3 5.0 4.7 Time (days) 5 97.5 25.0 Cost (% of property value) 2.8 3.9 4.6 Source: Heritage Foundation, Singapore In Table 5, higher values of the index indicate greater rigidities in regulations pertaining to employment. It appears however that Singapore is an employer’s paradise with zero difficulty, zero rigidity of working hours, zero difficulty in redundancy, and zero rigidity of employment. The figures gave Singapore a rank of 1 in overall international rank. Table 5. Employing workers (Singapore’s overall world rank in the 2010 report: 1) Indicator Singapore East Asia & Pacific OECD Average Difficulty of hiring index (0-100) 0 19.2 26.5 Rigidity of hours index (0-100) 0 8.6 30.1 Difficulty of redundancy index (0-100) 0 19.6 22.6 Rigidity of employment index (0-100) 0 15.8 26.4 Redundancy costs (weeks of salary) 4 42.4 26.6 Source: Heritage Foundation, Singapore In Table 6, Singapore appears to be one of the top investor’s paradise as investors enjoy abundant protection through the extent of disclosure, director’s liabilities under Singaporean laws, ease of suits, and strength of investors’ protection. Table 6. Protecting investor (Singapore’s overall world rank in the 2010 report: 2) Indicator Singapore East Asia & Pacific OECD Average Extent of disclosure index (0-10) 10 5.1 5.9 Extent of director liability index (0-10) 9 4.6 5.0 Ease of shareholder suits index (0-10) 9 6.3 6.6 Strength of investor protection index (0-10) 9.3 5.3 5.8 Source: Heritage Foundation, Singapore Singapore is number 1 worldwide in practicing trade liberalization. Table 7 indicates that there are only few documents to produce for international trade in Singapore, the time for to export is as short as 5 days, and the costs of international trading are far below the level currently spent by both developed and underdeveloped countries. Table 7. Trading across borders (Singapore’s overall world rank in the 2010 report: 1) Indicator Singapore East Asia & Pacific OECD Average Documents to export (number) 4 6.7 4.3 Time to export (days) 5 23.1 10.5 Cost to export (US$ per container) 456 909.3 1,089.7 Documents to import (number) 4 7.1 4.9 Time to import (days) 3 24.3 11.0 Cost to import (US$ per container) 439 952.8 1,145.9 Source: Heritage Foundation, Singapore Table 8 indicates that enforcing contracts in Singapore are one of the best but Singapore does not belong to the top 10 countries in this regard. Thus, this may be one of the stress for reforming Singapore market economy. Table 8. Enforcing contracts (Singapore’s overall world rank in the 2010 report: 13) Indicator Singapore East Asia & Pacific OECD Average Procedures (number) 21 37.2 30.6 Time (days) 150 538.1 462.4 Cost (% of claim) 25.8 48.5 19.2 Source: Heritage Foundation, Singapore Based on the preceding discussion, the aims for economic reform in Singapore can be as follows: 1. Improve or maintain Singapore’s standing in the 2010 Heritage Foundation’s index of economic freedom and World’s Bank’s index of ease of doing business. 2. Sustain and advance Singapore’s resilience to crises. The program of government required to achieve the two aims are not very difficult to identify although it may be difficult to implement. Using primarily the critique on Singapore’s economy forwarded by the Heritage Foundation, there must be three points of emphasis in Singapores economic reforms as it tries to maintain or improve its current standing in the Heritage Foundation’s economic freedom index: The first emphasis should be on continuing the effort to avoid a temptation for Singapore government to establish state-owned energy and telecommunication enterprises. Government direction or acquisition of energy and telecommunication enterprises will not guarantee that two sectors will be more efficiently handled by government rather than by the private sector. Worse, the actions will impress unfavorable signals to market players, especially among foreign market players. It can lead to a situation where there can be a deep downgrade in Singapore’s standing in the international community. The second emphasis should be on continuing the effort to avoid the temptation for government to impose too many regulations that will have the effect of promoting price distortions. Other than creating price distortions, actions that create an impression that the Singapore government will be taking over the market will be strongly confronted by the international community and will cause a deep downgrade in the international standing of Singapore. Finally, the third emphasis must be on maintaining resilience to international crises. This is done by adhering to the fundamentals: keep government spending low, conservative growth and rules on conservative growth in money supply, keeping inflation low, avoiding regulations that distort prices and market signals, and keeping the economy open to international trade and international inflow and outflow of capital. Given our recommendations, it is important to note that the KOF Swiss Economic Institute gave Singapore a rank of 17 in the overall globalization index, a rank of 1 in the economic globalization index, a rank of 21 in the socialization index and a rank of only 77 in the political mobilization index out of 156 countries. Unfortunately, the ranking will probably not have much bearing for Singapore nor from the international community of governments. Political globalization, for example, an area in which Singapore’s ranking is low, is measured by the KOF Swiss Economic Institute in terms of Singapore’s membership in international organization. Unfortunately, this may matter not much for a country with a small population and area. In sum, the greatest asset of Singapore is that it enjoys a superior standing in the international community. The most important order of business is to maintain it although improving its international standing will also be fine. For the meantime, it may not be necessary to put concerns with regard to equity in the forefront as Singapore has a good reputation with regard to its standard of living. Work Cited Heritage Foundation. 2010 Index of Economic Freedom. Washington: The Heritage Foundation/Wall Street Journal, 2010. Heritage Foundation. Singapore. Available 21 March 2010 http://doingbusiness.org/ExploreEconomies/?economyid=167. KOF Swiss Economic Institute. KOF Index of Globalization, 2010. Available 21 March 2010 . World Bank. Doing Business 2010. Washington, The World Bank, 2009. World Bank. Doing Business 2010 Singapore. Washington, The World Bank, 2009. Read More