Adapting development models to geoeconomic disruptions: Reflections on Singapore’s development

Singapore has been a major beneficiary of a relatively free and open trading regime and hence an ardent advocate of globalization. As a transhipment centre and logistics hub, Singapore sees trade accounting for more than 300 per cent of GDP.

Singapore’s development model has been based on creating conditions attractive to international foreign investments, through political and policy stability and predictability, and trading openly across the globe. Its political leaders have been known to preach that trade has no ideology, and that it will trade with anyone willing to trade with us. As a small city-state with a small domestic market and no natural resources, Singapore has to adopt an industrial policy that is not based on protecting its market but rather is cost-competitive, export-oriented and integrated into the global economy.

The benign global environment and regional stability in which Singapore prospered is now under threat. Strategic rivalry between the United States and China and the war in Ukraine have increased tensions and raised uncertainties. Rising geopolitical competition and geo-economic disruptions are threatening to fragment the world; the era of hyper-globalization has come to an end. Technological disruptions brought about by robotics, digitalization, and generative artificial intelligence will put further pressure on Singapore to rethink its development model as it moves into the third decade of the 21^st Century.

From geopolitical stability to geoeconomic disruptions 

The geostrategic competition amongst major powers is increasingly manifested in the areas of economics and technology. Increased protectionism and politicization of market access, subsidies wars and tech wars, and a trend towards on-shoring and friend-shoring, all threaten to upend the liberal economic order that has allowed Singapore to prosper.

Singapore’s early economic development has to some extent relied on what was called the “Flying Geese” development model: relying on cheap labour to power an export-led growth and catch-up industrialization moving up the value chain through tech transfer and investments in human capital. Being a small city-state with a small domestic market has meant that the Singapore did not have the luxury to experiment with import-substitution or other models of development. Yet at the same time, while professing a market-oriented approach the Singapore government has never fully subscribed to the idea of the “invisible hand”. The economic success of Singapore was in large part due to the strong hand of the government in planning and investing in human capital, and more importantly in building a predictable rules-based regime friendly to businesses. 

The government was also able to ride the geopolitical wave of the times to prosper from its strategic location to become a logistics hub and plug itself into the global economy. Singapore’s economy really took off riding on the back of the intense globalizing forces of the post-Cold War liberal economic order and geopolitical stability.

We are now entering a new era of geoeconomic fragmentation driven by geopolitical rivalry. Being heavily exposed to both China and the US, the Singapore government is doing all it can – diplomatically – to call for a managed competition between the two rather than an outright war. At the same time, economically, it has to start thinking ahead about how potentially to mitigate the fallout from the worst-case scenario of the fragmentation of the economy into two separate and distinct blocs.

Navigating the new geopolitical and geo-economic realities

Compared to many of its neighbours in South-East Asia, Singapore is fortunate to have already achieved advanced economic status and no longer purely reliant on cheap labour and catch-up industrialization to power its growth. However, with its small domestic market, its dependence on export-led growth is a given.  As a trading nation, Singapore is already seeing impacts from increasing restrictions on trade, and it is in constant search for new markets to diversify and build resilience. 

As geopolitics drove many of the advanced economies of the West and China to re-shore and friend-shore, the potential bifurcation of the global economy would have serious implications for Singapore. Singapore is heavily invested in both China and the West. China, US and the European Union are Singapore’s top trading and investment partners. If trade is split between two global blocs, it is estimated that Singapore’s GDP would decline by around 10 per cent.

Currently, economic diversification and de-risking rather than decoupling has given Singapore some breathing space to continue to attract investments from US, Europe and increasingly from China. The latter in trying to circumvent the trade restrictions imposed by the US and the EU has begun to invest more in South-East Asia.  Similarly, the China+1 strategy adopted by European companies to de-risk and diversify their supply chains have also benefitted some countries in South-East Asia. Yet this should not obscure the broader trends of rising protectionism and weaponized trade and investments decisions.

Singapore will need to review its current development model and think hard about what policies can mitigate the worst that may happen, as geopolitical rivalry and strategic competition lead to more economic disruptions.

From globalization to regionalization

Singapore is increasingly turning its attention to the immediate region as a source of growth. The shift from a globalized to a more regionalized strategy began more than a decade ago as the Association of Southeast Asian Nations (ASEAN), of which Singapore is a founding member, sought to deepen its economic cooperation to build an ASEAN Economic Community.  Singapore has also used the regionalization strategy to tap into the lower costs of land, labour and raw materials to sustain its own competitiveness.

The current geopolitical tensions are also threatening the cohesion of ASEAN, with some member states moving closer to China and others to the US. Hence, Singapore has redoubled its efforts in the past few years to push for a much more economically integrated South-East Asia, in a hope to counter the appeal and reduce the divisive impact of the external influence.

On matters of trade, Singapore has continued to champion a rules-based order and proactively work with like-minded partners and participate actively in rule-making. It seeks to make common cause with as many countries as possible and promotes close cooperation between government and businesses. Singapore’s strategy is to support businesses to seek growth, efficiency gains and supply chain resilience.

Embracing technological disruptions and digitalization to remain a “key node’ in the global supply chain

Singapore’s economic success in the past has been associated with the outsized role that the state plays. For decades, astute and often bold policy moves helped the economy re-invent itself. However, this strong government intervention has also been criticised by some as stifling the capacity for businesses to make more spontaneous, bottom-up adjustments in response to the changing environment. Local industries’ capacity to innovate and adapt to technological disruptions suffered as much more effort was placed on attracting multinational companies to set up shop in the city-state.

The challenging geopolitical and geoeconomic environment and the Covid-19 pandemic have focused the minds of the Singapore government on a more wholistic approach of supporting especially local industries through a strong emphasis on innovation and technology adoption. A start-up ecosystem has also been developed in Singapore to support the next stage of economic growth.

Concluding remarks

Singapore’s economic success has in large part followed the “Flying Geese” development model. However, due to its unique feature as a small city-state, with a highly competent and technocratic interventionist government, Singapore’s economic model is not easy to replicate anywhere else. The government’s close collaboration with the business community and a generally docile working population has enabled Singapore to respond swiftly to several economic cyclical crises and maintain a positive growth trajectory.

Whether the government’s highly interventionist approach can help its economy withstand the current geopolitical headwinds and geo-economic disruptions, or whether a more fundamental transformation of its economic model is needed, is unclear. What is certain is that the government has a high interest in and therefore investing a great deal in the social cohesion needed to face the uncertainties ahead.

The views in this article are not necessarily those of FES.