Sources of Singapore's Economic Growth, 1965-2008: Trends, Patterns and Policy Implications

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I. Introduction

The outstanding economic performance of Singapore and the other Asian "tiger economies" (Hong Kong, Korea, and Taiwan) during the past five decades has attracted a great deal of attention from researchers and policy-makers around the world. One way to gain insights into the performance of these economies is to decompose their growth into the contribution of productive factors (capital and labour) and the increase in total factor productivity (TFP). This makes it possible to capture the growth in combined productivity of production inputs and the contribution of unobservable factors.

Early studies of the sources of economic growth in "tiger economies" revealed shocking information about the East Asian growth model: TFP growth was found to be unusually low in comparison with output growth which was remarkably high. This paradox is particularly striking in the case of Singapore, where TFP growth was marginal even though output growth was well above 8 per cent in the periods under study (Table 1).

Young (1995) concludes that whereas "the growth of output [...] in the newly industrialized countries is virtually unprecedented, the growth of TFP in these economies is not". Kim and Lau (1994) argued that "the hypothesis that there has been no technical progress during the postwar period cannot be rejected for the four East Asian newly industrialized countries". Based on these results, Krugman (1994) adopts a bluntly pessimistic view of the East Asian growth model. He compares the growth patterns in these economies with those of the Soviet Union, which also achieved outstanding growth through rapid input accumulation for an extended period prior to a period of economic stagnation and its eventual collapse in 1991, and projected: "from the perspective of the year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years." (Krugman 1994, p. 78).

Interestingly, in 2010, Singapore's GDP growth peaked at 14.8 per cent, having achieved among its best single-year performance figures from the past four decades. Although Krugman's projection has turned out incorrect, it calls for a better understanding of the pattern of Singapore's growth in the past and the challenges that Singapore in facing to maintain its high performance in the future. This study aims to perform these tasks, and towards that end, this paper will proceed and follows: Section II highlights the salient features of Singapore's economic growth since 1965 and the challenges the country is facing in sustaining its high performance. Section HI introduces the framework used to decompose Singapore's sources of GDP and average labour productivity (ALP) growth. Section IV presents the results achieved along with relevant insights. Section V discusses policy issues and recommendations.

II. Singapore's Economic Growth, 1965-2010: Salient Features and Challenges Ahead

II.I Salient Features

Singapore's economic growth from 1965 to 2010 can be broadly understood by dividing that timespan into four shorter periods: 1965-1980, 1980-90, 1990-2000, and 2000-10 (Figure 1). The first two periods, 1965-80 and 1980-90, were characterized by government efforts to use exportled industrialization and rapid capital accumulation to promote quantitative growth. In the first period (1965-80), the government's main policy objectives were to promote growth by attracting foreign direct investment (FDI), create jobs and expand productive capacity (Peebles and Wilson 1996). During this period, Singapore achieved rapid growth. However, its economy was also affected by the worldwide recession of 197475, which had been caused by the 1973 oil crisis. Singapore's growth in the second period (198090) was shaped by government policies launched in the late 1970s and early 1980s to restructure the industry by focusing on high-tech manufacturing and high value-added services. …