The Miracle Economy of Singapore

From the period of 1965 to 2023, the Singaporean economy grew by 16,390% in GDP per capita in US dollar terms; that is roughly 1.3X the rate at which China’s economy grew in GDP per capita in US dollar terms, an 8X increase as compared to India, and 5X the growth of Japan in GDP per capita in US dollar terms during the same periods. Truth be told, GDP per capita is not the only factor we should be looking at, but at the same time, it is a better and fairer estimate compared to GDP.

Singapore, a small island nation, 0.0002% the size of India, has a population of just 6 million people and a GDP per capita of more than $80,000 in the world. This tiny nation, deprived of an endowment of any natural resources, EXPLODED in just a small amount of time to become the second richest country in the world by GDP per capita after Luxembourg. But how? How did the Singaporean economy grow this exponentially and in such a small time period? To analyze this miraculous economic growth path of Singapore, we are going to look at certain factors that affect the economic growth of a nation like its history, geography, endowment of natural resources, population, savings, taxes, and most importantly, human capital.

History: The aftermath of World War II left every economy devastated. Singapore was also in a critical condition—its people were dying, opium addiction was widespread, and crimes were frequent. The nation then also surrendered to the Japanese savagery, which further destroyed its economy. Our story begins when Singapore gained independence in 1965 with Lee Kuan Yew as the Secretary General of the ruling party, the People’s Action Party (PAP), and what all happened afterwards, in a period of less than 60 years from its independence.

Geography: Singapore is located just at the southern tip of Malaysia. It is bordered by the Straits of Johor to the north, the Singapore Strait to the south, the South China Sea to the east, and the Strait of Malacca to the west. Being an island, since the very beginning, Singapore has been used as a port, mainly for refueling of ships loaded with containers. Countries that are surrounded with water on all sides, i.e., islands or even peninsulas, enjoy a great deal of economic boost from developing ports, which also leads to the development of other industries alongside. As Asia became a hub for low-cost manufacturing and the ports began developing in Singapore, the economy grew in size and in terms of new industries.

The most important geographic advantage Singapore has is the passing of the Strait of Malacca, the single busiest shipping lane in the world, a strait with about 30% of the global maritime traffic and Singapore handling around 50% of it. The Straits of Malacca and Singapore are a vital shipping lane for global trade, carrying almost half of the world's seaborne trade and about one third of the world's crude oil. Alongside, Singapore also enjoys its proximity with nations like Malaysia, Indonesia, Thailand, the Philippines, and other ASEAN countries through free trade agreements.

The endowment of natural resources: Singapore has almost no natural resources of its own, so naturally foreign investment was its only option to grow and to save its people from poverty. To facilitate this, the Singaporean government gave foreign oil companies the freedom to operate in the country, revenue sharing, consistent policies, and the common British law system, which was widely practiced and understood. Alongside, it also gave advantages like low tariffs, an easy process, and an open-door policy to MNCs.

Population: The population of Singapore in the 1970s was around 2 million, with a growth rate of 1.7% as compared to countries like India and China, with populations of 555 million and 822 million in the 1970s, respectively. It is generally assumed that a lower population size has certain benefits, like faster growth in the economy since the government can be more efficient, law and order can be maintained, and it is easier to curtail inequalities. It also suggests a high employment rate as the industries grow and increased welfare. However, the population of Singapore was also more diverse—different religions and nationalities, which could very well be considered a disadvantage compared to one-predominant-religion nation that experience lesser religious clashes, protests, and religious communism.

Savings and taxes: For capital accumulation and growth, savings is one of the most important factors to look at; the higher the savings in the economy, the faster the capital accumulates and the more the economy grows. In other words, there exists a connection between economic growth, incomes, and savings rates. It also tells you in a way how well above the necessities the people of the country are making given their consumption-saving patterns. Singapore has a gross domestic saving rate of roughly 60.1%, relatively higher than most countries in the world, with the US being around 17.1% and China around 47%. Along with a higher savings rate, it has lower tax rates comparatively, which facilitates higher savings. Singapore invested its money into huge infrastructure projects and development activities.

Human Capital: The most important factor that contributed to growth in Singapore is really the human capital. Human capital can be said to be a function of education, level of skills/technology acquired, and labor participation. Singapore’s literacy rate is 97.65%, with world-class infrastructure, institutions, and facilities to facilitate quality education. In the 1970s, Singapore began to shift from a labor-intensive economy to a skill-intensive economy. Then further from skill to capital-intensive to technology-intensive economy nearing the early 2000s. Technology, as seen widely, is a catalyst in the process of growth, and the level of skilled manpower in a country roughly determines its capacity to grow industrially and economically. An infamous concept known as the Solow Model, given by Robert Solow, is widely used to describe the economic growth and differences between countries. The augmented Solow model with human capital explains how human capital can account for about 80% of the cross-country variation in income. Singapore focused on education, or human capital, as one of its pillars for economic growth, along with infrastructure, industry, and foreign investments.

Singapore’s miraculous growth model is still replicated by nations all over the globe to mimic a similar growth pattern, but thanks to being at the right place at the right time and doing the right thing, with its incredible leadership, Singapore has achieved in 60 years what many nations fail to achieve in double the time period! It truly is miraculous.

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