Successful Free-Market Economy - Essay Example

Introduction Singapore is a South East Asian country that has been experiencing rapid economic growth overthe years. It gained independence from Malaysia in 9 August 1965 and since then, it has been engaging in strategies to improve its economic situation. To reach where it is today, Singapore has had to overcome a myriad of challenges. According to the Singapore Economic Development Board (EDB, 2014) “from its days as a small and underdeveloped nation, Singapore has emerged from the tumultuous financial, social and political changes over the years to transform into the first-world metropolis that it is today.” Economic development is the sustained, concerted actions of policy makers that promote the standard of living and economic health of a specific area. It is often used interchangeably with economic growth but economic growth is an aspect of economic development. The World Bank is the primary international organization that measures economic development. The indicators of economic development include such factors as Gross Domestic Product (GDP) per capita, Gross National Product (GNP), literacy and education, healthcare, income distribution and poverty levels, infrastructure, and external debts among others. According to scale of development as measured by these indicators, countries are often classified according to Rostow’s five stages of growth development model. According to this model, countries are categorized into developed and developing, first world and third world, core and periphery (Binns, 2008). The Western countries are often classified as developed while African and most Asian countries are developing. However, most countries like Singapore have defied this criterion and are now classified as emerging economies due to its level of economic development. Singapore is considered one of the fastest growing economies in the world with GDP growth of 2.8% in 2014.This essay will discuss the economy of Singapore with a focus on its history, experience with development, and the challenges and opportunities for development. History Singapore became British colony in 1819 up to the Second World War when it gained independence and merged with Malaysia to form a federation in 1963. However, things were not that rosy for the federation as the two countries fought for supremacy leading to expulsion of Singapore from the federation by Malaysian assembly. It formally gained independence in August 9, 1965 (EDB, 2014). By the time of acquiring independence, Singapore was in a bad economic situation. It was a third-world nation with poor infrastructure, limited capital, and a GNP per capita of less than US$320 (EDB, 2014). It had high levels of unemployment (14%) and poverty with more than two-third of the population living in slums and half were illiterate. Singapore also lacked natural resources and adequate water supply and being situated between two unfriendly nations, Malaysia and Indonesia did not help the situation for the infant nation. Its economy was centered on entrepot trade which was not promising especially for employment creation. According to EDB (2014) low-end commerce was the mainstay of the economy and the handful of industries that existed produced only for domestic consumption, leaving no room for direct foreign investment. Something had to be done to revive the economy as the international community or donors were not willing to help. The solution was industrialization based on labor-intensive industries and a conducive environment for industrial development. Economic development for Rostow occurs in five stages: traditional society, preparing to take- off, take-off, drive to maturity and finally, mass consumption (Binns, 2008). Most western countries like U.S and European countries are deemed to be at the mass consumption stage. Singapore is one country that followed this path of development by Rostow. From traditional society based on agriculture it looked forward to take-off by development of manufacturing and adopting a more international outlook. The first step to attracting international investment was the foundation of the Economic Development Board (EDB). The EDB is mandated with the role of ensuring a safe environment for doing business. This entails being corruption-free, low taxation, and unimpeded by unions. To limit the power of unions, it amalgamated the unions into one umbrella union called National Trades Union Congress (NTUC) which worked hand in ahnd with government. As a result, strikes are rare in Singapore and by 2001, it had attained full employment. Creating a stable political and economic environment is key for economic growth of any nation as it gives investors both local and foreign assurance of security of their investments and they can also be able to predict future returns. Singapore in this case, adopted business-friendly laws and low tax regime to attract foreigners. Having a stable environment for doing business, Singapore was ready to begin its industrialization program. It began with labor-intensive factories producing garments, textiles, toys, wood products and hair wigs. It also had capital and technology-intensive projects from companies such as Shell Eastern Petroleum and the National Iron and Steel Mills (EDB, 2014). However, Singapore was faced with the challenge of lack of natural resources or raw materials for its manufacturing industries and had to rely on other countries. The EDB adopted export-oriented industries to curb this problem. The advantage of Singapore was that it had a well developed port both for imports and exports making it a hub for Asian countries. By 1972, it had manufacturing firms which were either foreign-owned or joint-ventures most of which were from U.S and Japan (Geography, 2015). The country also focused on development of Human resources and infrastructure to boost its industries. It thus employed international corporation’s technical schools to train its employees on information technology, petrochemicals and electronics. Electronics are the major export earners for Singapore even today. Singapore is also a member of various trade organizations which makes it possible to open its market to international community as well as export and import labor. These include: World Trade Organization (WTO), Association of SouthEast Asian Nations (ASEAN) andAsia-Pacific Economic Cooperation (APEC). Such organizations offer favorable tariffs to trading partners thus eliminating barriers to trade. Experience with Development Singapore is a highly developed and successful free- market economy. It depends on exports especially consumer electronics, information technology products, pharmaceuticals and financial services (CIA, 2014). It also depends on re-exports for its foreign exchange earnings since it does not have natural resources and water is scarce. The EDB has ensured that Singapore is the most open economy in the world attracting foreign direct investments from all over the world and encouraging its citizens to invest abroad (EDB, 2015). Due to its location and pro-business policies thanks to EDB, Singapore is the number one choice for the world’s top global companies in the industrial goods and services sector. The EDB strategy for economic development in Singapore is “Home for Business” aimed at ensuring that companies are deep rooted in Singapore hence home away from home (EDB, 2014). Those investors who wish to set-up and operate business in Singapore enter the Global Investor Programme and are issued with an entrepass to facilitate entry and stay. The entrepass has a validity of two years. It also allows one to live in Singapore with family and one can also leave and re-enter with ease. This saves the investors the hassle of having to leave their families behind when they invest abroad. This is a good attraction for foreign direct investments (FDI). In addition to easy entry, Singapore also has one of the lowest corporate tax rates in the world making it easier to start business. For corporate tax, remittance of foreign-sourced dividends, foreign-sourced branch profits and foreign-sourced service income into Singapore are exempt from tax if prescribed conditions are met. For individual tax, remittances of all foreign-source income are exempt from tax (EDB, 2014). The corporate tax is 17%, capital gains tax rate is exempt, and individual tax rate ranges from 0 to 20%. A 7% Goods are services tax (GST) is also levied on imports but export of goods are zero-rated. Singapore has been able to attract more than 3,000 multinational companies with more than two-thirds of its manufacturing output and direct export sales coming from MNCs. In addition to being open, Singapore is rated as 7th least-corrupt (Transparency International, 2014). Corruption is one of the vices that hinders development and is prevalent in developing countries. The leadership of such countries diverts money for investments either from foreign aid or natural resources earnings to their pockets instead for the well-being of all. That is why some countries remain as failed states despite having potential for growth. However, Singapore does not have any foreign debt as it does not rely on aid for development but on foreign investments, exports and re-exports. It also does not offer welfare services like developed nations such as U.S and U.K hence government spending is for investment purposes only. Instead it offers individual safety nets to encourage savings. It operates two government-linked corporations for offering certain services. Its total expenditure as percentage of GDP is thus among the lowest internationally and it has budget surpluses (World Bank, 2015). It had a surplus of 7.6 in 2010; 9.3 in 2011; 8.7 in 2012 but the surplus declined in 2013. GDP represents total value of goods and services produced in a country in a year. Singapore has a per capita GDP higher than most developed countries (CIA, 2014). Most of the goods produced in Singapore are for export and include food and beverage, chemicals, textile garments, petroleum, electronics, and transport equipments. These are foreign exchange earners and the currency used is Singapore dollars (SGD/S $). The major imports include crude oil, chemicals, iron and steel, textile fabrics, electronic components, motor vehicles and aircraft parts (EDB, 2014). It buys some of these raw materials from other countries to produce goods for re-export. For example it imports crude oil and refines it to produce petroleum products for export. Its exports according to the CIA World Fact book amounted to US $410.3 billion in 2013 while imports amounted to US$ 373 billion (CIA, 2014). Its main export partners are Hong Kong, China, Malaysia, Indonesia and Japan while main import partners are Malaysia, U.S, China, and Japan. Singapore has high inflows and outflows of capital. Its FDI stock was $746.7 billion in 2012 (CIA, 2014). Major investments are on pharmaceuticals and medical technology production with investors such as Glaxo SmithKline. Unlike some economies which have a pegged exchange rate, Singapore has a floating exchange rate regime which enables it to deal with volatile capital flows thus safeguarding domestic economy. As regards its current account balance or balance of payment in current US $, it has not been stable but sometimes declining and others rising depending on economic situation, for example an economic crisis. It had a current account balance of 54, 554, 942, and 859 in 2013. Current Status in Development Process Singapore’s GDP at purchaser’s prices (PPP) has been increasing over the years according to World Bank reports. GDP at PPP is “sum of gross value added by all resident producers in the economy plus product taxes minus subsidies not included in value of products” (World Bank, 2015). The following table shows data for Singapore from 2013 to 2013: 2010 2011 2012 2013 2014 GDP ( USD billions) 236.4 274.0 286.9 297.9 445.1 GDP growth (annual %) 15.2 6.1 2.5 3.9 2.8 Inflation (CPI, annual %) 2.8 5.3 4.5 2.4 1.5 GDP per capita (Current US $) 46569.7 52870.5 54007.3 55182.5 56112 GNI per capita (current US$) 44790 48630 51090 54041 Inflation measured by consumer price index reflects annual percentage change in cost to the average consumer of acquiring a basket of goods and services. It is a situation where prices rise resulting in too much money chasing too few goods in the economy. It can lead to recession hence the monetary authorities concern themselves more with inflation targeting as a monetary policy measure rather than controlling exchange rates. However, Singapore operates a managed float whereby it controls its exchange rate to achieve the desired inflation target of 2-3%. As shown in the table above, inflation has been declining since 2011 and this is a good sign for the economy. The GNI per capita is GDP plus net receipts of primary income such as employee compensation and property income from abroad converted at official exchange rate (World Bank, 2015). The GNI per capita has been increasing over the years showing improved standards of living for Singaporeans. However, an increase in GNI per capita does not mean everyone is benefiting from economic growth as it all depends on how income is distributed. This distribution of income or income inequality is measured using GINI index (coefficient) and equality is shown by a low Gini index while inequality is shown by high Gini index. Singapore has a high income inequality gap as indicated by a Gini index of 46.3 in 2013 (CIA, 2014). This means only a few people get to enjoy the wealth created. Challenges and Opportunities for Development Singapore has many challenges to overcome for it to become a developed country. The first challenge is scarcity of water meaning its citizens well-being or health is compromised. It thus could end up spending a lot in healthcare. Its health expenses amounted to 4.6% of GDP in 2011. Another problem is lack of arable land for farming or irrigation. According to World Bank data (2015), Singapore has a population growth rate of 1.92% in 2014 but has an arable land of 0.89% and permanent crops of o.4%. This means its population relies on imported food which cannot be self-sufficient. Due to land shortage, it also has a waste disposal problem and also experiences pollution from seasonal smoke from Indonesian forest fires. These compromise the climate hence lowering living standards for citizens and hindering economic development. On the other hand, Singapore has many opportunities for development bearing in mind that it is a regional hub and most developed countries have been looking to Asia for investments. Besides, its port is the world’s busiest in terms of tonnage (World Bank, 2015). It also has a well established manufacturing sector and financial services sector which could be an opportunity for more investments. Conclusion Singapore is a highly developed and successful free-market economy whose per capita GDP surpasses that of most of developed countries of Western Europe. It is also the world’s most business-friendly as pertains to regulation environment, the most open in the world, and is among the least-corrupt nations thus making it rank among the most competitive economies in the world. It relies much on exports and also the manufacturing and financial services sector with main products being pharmaceuticals, electronic products, and IT products. It has a favorable balance of payment and a surplus budget with an annual GDP growth rate of 2.8% as of 2014 and GDP of US$ 445.172 billion. However, it faces the challenges of water and land scarcity thus hindering development. It also has a high income inequality gap ( 46.3 in 2013) hence its progress in growth does not result in the welfare of all its citizens but a few. Overall, Singapore is on the right path to economic development. References Binns, T (2008). Geography of Development: An Introduction to Development Studies, 3rd ed. Harlow: Pearson Education. Central Intelligence Agency (2014). East and South East Asia: Singapore. The CIA World Factbook. Retrieved 3 March 2015, from http://www.cia.org/ Economic Development Board (2015). Singapore. Retrieved 2 March 2015, from http://www.edb.gov.sg/content/edb/en.htm Transparency International (2014). Corruption Perceptions Index 2014. Retrieved 3 March 2015 from, http://www.transparency.org/cpi2014 World Bank Group (2015) Indicators. Retrieved 3 March, 2015, from http://data.worldbank.org/en/country/singapore Read More