Summary

Whilst Singapore and Malaysia may be geographical neighbours, their paths to development have not always been the same. Singapore has a highly-developed and successful free-market economy and has made the most of its limited natural and human resources. It has enjoyed a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries. Its economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector.

Since achieving Independence from Britain in 1957, the Malaysian economy has been structurally reformed through the move from a heavy reliance on raw materials such as rubber and tin to an industrial based situation. Most of these changes and especially the development of heavy industries have been aided by government funded agencies such as the Heavy Industries Corporation of Malaysia Berhad (HICOM). This placed a heavy economic burden on the State and in 1983, in line with the global spread of neo-liberal policies, major privatisation reduced government involvement in the economy.

Fifty years ago, Singapore was an undeveloped country with a GDP per capita of less than $320. Today, it is one of the world's fastest growing economies. Its GDP per capita has risen to $60,000, making it the sixth highest in the world. For a country that lacks territory and natural resources, Singapore's economic ascension is nothing short of remarkable.

Malaysia successful growth in recent years can be explained in several ways. Firstly, it is one of the most open economies in the world. There are very few trade barriers and it is open to foreign investment. Secondly, Malaysia has followed excellent macroeconomic management. It consistently has very low inflation and has never had a balance-of-payments crisis. Thirdly, it has excellent physical infrastructure with good roads, harbours, and telecommunications networks. Fourthly, most of its institutions have been fairly high quality and reasonably independent. It inherited a British-style civil service, which has been maintained. The question of political interference arises from time to time, but its legal system is clearly pretty high quality.

Background information

Whilst Singapore and Malaysia may be geographical neighbours, their paths to development have not always been the same. Singapore has a highly-developed and successful free-market economy and has made the most of its limited natural and human resources. It has enjoyed a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries. Its economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing financial services sector.

Malaysia is a middle-income country that has transformed itself since the 1970s from a producer of raw materials such as rubber and tin into a multi-sector economy. Exports, particularly of electronics, oil and gas, palm oil and rubber, remain a significant driver of the economy. As an oil and gas exporter, Malaysia has profited from higher world energy prices; although the rising cost of domestic gasoline and diesel fuel, combined with strained government finances, has forced Kuala Lumpur to begin reduce government subsidies.

Whilst Singapore adhered to the basic principles of a free market economy, the government never shied away from state planning or state ownership where deemed important. State enterprises played a large role in the economy until the 1980s when privatisation and neo-liberal ideas took centre stage. The revised model was one in which the State remained active encouraging international investment and respecting private property. The labour force, however, was strictly disciplined and political dissent was punished. Business regulations were relaxed whilst the population was controlled through a wide range of laws.

Singapore thus illustrates how it is possible to create a prosperous society for all citizens but only at a price. There has been little room for political dissent and the power and role of civil society has been much reduced. This trade off of democratic rights for economic riches has led to the creation of a model of development that weds dictatorship with a market economy. It has provided a blueprint that is now being followed by countries such as Rwanda and Tanzania and perhaps even China.

Since achieving Independence from Britain in 1957, the Malaysian economy has been structurally reformed through the move from a heavy reliance on raw materials such as rubber and tin to an industrial based situation. Most of these changes and especially the development of heavy industries have been aided by government funded agencies such as the Heavy Industries Corporation of Malaysia Berhad (HICOM). This placed a heavy economic burden on the State and in 1983, in line with the global spread of neo-liberal policies, major privatisation reduced government involvement in the economy.

In terms of creating a mixed economy with the State stepping back and encouraging privatisation, Malaysia has much in common with Singapore. Both countries moved from strong government-controlled approaches to neo-liberal approaches in the 1980s. Both countries have encouraged inward direct financial investment and both have developed strong and vibrant financial markets. A major difference, however, lies in the efficiency of public delivery systems which have held back Malaysia’s economic development. There are also major differences in levels of corruption with this hampering recent development in Malaysia.

The Republic of Singapore is a city-state with a governing structure based on the British system of parliamentary government. Since 1989 Parliament consists of eighty-one members elected for a five-year term. There is universal adult suffrage and voting is compulsory for all citizens above the age of twenty-one.

Fifty years ago, Singapore was an undeveloped country with a GDP per capita of less than $320. Today, it is one of the world's fastest growing economies. Its GDP per capita has risen to $60,000, making it the sixth highest in the world. For a country that lacks territory and natural resources, Singapore's economic ascension is nothing short of remarkable.

The country has achieved this remarkable growth through embracing globalization, free market capitalism, emphasising the importance of education, and following strict pragmatic government policies. In order to attract investors, Singapore has had to create an environment that was safe, corruption- free, low in taxation, and unimpeded by unions. The path chosen by the government to enable this was to curtail personal freedoms and replace them with autocratic governance. The death penalty was introduced for crimes involving narcotics or corruption. Independent trade unions were repressed and replaced by a single umbrella group called the National Trade Union Congress (NTUC). Anyone threatening national unity was jailed without recourse to the courts.

These draconian but business-friendly laws appealed to international investors who flocked to the city state. The result was annual double digit economic growth.

Today Singapore is a highly industrialised economy with entrepôt trade playing a central role. The port of Singapore is now the world’s busiest transhipment port surpassing Hong Kong and Rotterdam. In terms of tonnage handled, Singapore has become the world’s second busiest port after Shanghai. Singapore's economic model of sacrificing a whole range of personal freedoms in the name of economic growth is highly controversial and heavily debated. But regardless of philosophy, its effectiveness is certainly undeniable.

Malaysia is a parliamentary democracy with a federal constitutional monarchy. The Paramount Ruler, commonly referred to as the Yang di-Pertuan Agong, is the head of state as well as the leader of the Islamic faith in Malaysia. This monarch is selected for a five-year term from among their own number by the nine hereditary rulers (sultans) of Peninsular Malaysia.

Federal legislative power is vested in the government and the two chambers of the federal parliament. This parliament consists of two houses, the senate (Dewan Negara) and the Hall of the People (Dewan Rakyat). Bills must be passed by both houses and assented by the Yang di-Pertuan Agong.

Malaysia successful growth in recent years can be explained in several ways. Firstly, it is one of the most open economies in the world. There are very few trade barriers and it is open to foreign investment. Secondly, Malaysia has followed excellent macroeconomic management. It consistently has very low inflation and has never had a balance-of-payments crisis. Thirdly, it has excellent physical infrastructure with good roads, harbours, and telecommunications networks. Fourthly, most of its institutions have been fairly high quality and reasonably independent. It inherited a British-style civil service, which has been maintained. The question of political interference arises from time to time, but its legal system is clearly pretty high quality.

Malaysia has always been a resource-rich economy and this helps to explain its economic success. Its GDP has risen from below $2000/person at Independence to around $11,000 in 2017.  It has managed its diversified natural resource base well and has not suffered from the resource curse (Dutch disease) as some countries that rely on a single major resource have. It used to be the world's largest rubber producer and is today a major palm oil producer. It has large reserves of oil and natural gas and has been very successful in export-oriented manufacturing, especially electronics. Diversified economies tend to do better over time because they are able to manage the shocks that occur as a result of what is known as the resource. Whilst one sector might decline, others are able to prosper.

It is quite clear, then, that both Singapore and Malaysia have displayed spectacular economic development over the past 30 years. Both are great trading nations taking advantage of their geographical locations at an international trading crossroads, but simultaneously developing their own capacities to manufacture, educate, innovate and finance commercial activity. This hasn’t been happenstance. Both governments have development plans and economic levers to pull that we in the UK long ago abandoned.

With few resources other than human resources, Singapore has exploited ‘entrepot’ status like no other. It has a highly developed trade-oriented market economy ranked as the most open in the world. It is the 7th least corrupt country, is one of the most pro-business with low tax rates (14.2% of Gross Domestic Product, GDP) and has the third highest per-capita GDP in the world in terms of Purchasing Power Parity (PPP). However, it has had to contend with exceptional challenges. Upon independence from Malaysia in 1965, Singapore had a small domestic market, high levels of unemployment and poverty and 70% of Singapore's households lived in badly overcrowded conditions.  Unemployment averaged 14 percent, GDP per capita was US$516, and half of the population was illiterate.

In response, the Economic Development Board was established to make Singapore attractive for foreign direct investment. By 2001 foreign companies accounted for 75% of manufactured output and 85% of manufactured exports. However, in recent years, both inward and outward investment has ballooned in the financial and insurance services sector to approximately three times that of manufacturing. Singapore's savings and investment rates are among the highest levels in the world, while household consumption and wage shares of GDP are among the lowest.

This successful economic development has been achieved partly through the efficient use of sovereign wealth funds (SWFs). These are investment funds owned by the state that invest globally and locally in real and financial assets such as stocks, bonds, real estate, precious metals.  

Currently (2018) the largest SWF is that held by the government of Norway. The country’s pension fund is currently valued at over a trillion dollars and is based on wise investment of oil revenues. The UK does not have a SWF although there have been discussions on establishing one to provide funding for infrastructural developments.

Government-linked companies play a substantial role in Singapore's economy operating through two major sovereign wealth funds (SWFs): Temasek Holdings and The Government of Singapore Investment Corporation (GIC).  Their overall objective is to provide Singapore with a secure financial future through investment at home and abroad. Between them, they accounted for 60% of all cross-border deals in 2014.

Government-linked corporations (GLC) play a substantial role in Singapore's domestic economy. As of November 2011, the top six Singapore-listed GLCs accounted for about 17 % of total capitalization of the Singapore Exchange (SGX).

These fully and partially state-owned enterprises operate on a commercial basis and are granted no competitive advantage over privately owned enterprises. State ownership is prominent in strategic sectors of the economy, including telecommunications, media, public transportation, defence, port, airport operations as well as banking, shipping, airline, infrastructure and real estate.

Temasek Holdings

Temasek is a wholly state owned Private Equity company established in 1974 with total assets of US$178billion. As of 2014, Temasek held US$51 billion of assets in Singapore companies, accounting for 7% of the total capitalization of Singapore-listed companies. Its portfolio is broad-based, including financial services, industrial and engineering, energy and resources, life sciences, consumer and lifestyle, technology, transportation and logistics, and real estate.  Returns of around 6% p.a. have been the norm for over a decade.

GIC Pte Ltd

This firm, established in 1981, manages the government’s foreign exchange reserves, amounting to around US$260 billion. It invests in the unlisted public and private companies with a focus on health care, financial and business services as well as natural resources, real estate, fixed income, and alternative markets including foreign exchange, commodity, and money markets across the globe. It manages substantial investments in the technology sector in China. Both Sovereign Wealth Funds help fulfil the government’s intention to advance Singapore into a mature, diverse economy with a sustainable future.