How Singapore married dictatorship with a market economy

It has been half a century since Singapore achieved full independence. In that time, a strong model of economic development has transformed the fortunes of the republic and its people

46-year-old Lee Kuan Yew, the recently deceased leader of Singapore. Yew is credited with transforming what was a flagging country into one of the world's biggest economic powerhouses
46-year-old Lee Kuan Yew, the recently deceased leader of Singapore. Yew is credited with transforming what was a flagging country into one of the world's biggest economic powerhouses 

In an emotional televised press conference in August 1965, Lee Kuan Yew explained to the Singapore public that its voluntary union with Malaysia had come to an end. The leader of the new, tiny city-state had assembled journalists and television crews in order to inform the citizens of the new Singaporean republic that they would be on their own, no longer part of a political union with their much larger neighbour to the north. “For me it is a moment of anguish because all my life… You see, the whole of my adult life… I have believed in [the] merger and the unity of these two territories,” said Lee, trying to hold back his tears. “You know that we, as a people, are connected by geography, economics, by ties of kinship.”

Lee was devastated by the end of the short-lived union. During his time studying in both London and Cambridge, and living in Singapore under Japanese occupation during the Second World War, he became convinced of the need for self-governance in South-East Asia. After the war came to an end, he hoped to also end British rule, creating a political union between Malaysia and his native Singapore.

The fledging British Empire finally gave way and granted Singapore self-governance in 1959. The People’s Action Party (PAP) was voted to power and Lee, the party’s leader, became prime minister of the island. After a referendum in 1962, Lee’s vision of unification came true: in 1963, it was agreed that Singapore would be admitted to a recently independent Malaysian Federation ruled by Tunku Abdul Rahman.

And yet, only two short years later, Lee’s lifework was in tatters. After race riots broke out in 1964 between the island’s two minority groups, Malays and ethnic Chinese, relations with Malaysia soured. Malaysia’s government felt that the crisis was not worth the effort, and accused Singapore’s government of disloyalty, declaring that all ties would be cut between the two nations. Singapore was expelled from the union, and the impoverished city-state, racked by racial strife, was henceforth alone, no longer under the tutelage of an empire.

Singapore was able to create a prosperous society for its citizens. But this road to economic development came
at a price

Despite the divorce being received with such devastation by Lee and other like-minded Singaporeans, the separation was a blessing in disguise. Although no one could have imagined it at the time, the small poverty-stricken nation would go on to be one of the most prosperous in the world – or from swamps to skyscrapers, as it is sometimes said. In 1960, an economist investigating the island’s economic viability referred to it as a poor little market in a dark corner of Asia. At the time of independence, Singapore’s GDP per capita stood at just $512. Now it has the eighth-largest GDP per capita in the world (see Fig 1), and is consistently ranked among the top echelon of countries, with the highest density of millionaires relative to population (see Fig 2).

Fig 1

Lee, the man who presided over this transformation, would also quietly go on to be one of the most influential leaders of the 20th century, with many seeing his legacy reaching far into the 21st. During his tenure, he had forged a nation that combined both an authoritarian state and free market. “To whom will monuments be built a century from now?” wrote Slovenian philosopher Slavoj Zizek in the Financial Times. “Among them, perhaps, will be Lee Kuan Yew. He will be remembered not only as the first prime minister of Singapore, but also as the creator of authoritarian capitalism, an ideology set to shape the next century much as democracy shaped the last.”

Capitalism and democracy
After the Second World War, many American thinkers argued that economic development engendered democratic and liberal political values known as ‘modernisation theory’. Sociologist Seymour Martin Lipset, in his influential 1959 paper Some Social Requisites of Democracy: Economic Development and Political Legitimacy, argued that as countries pursued economic development, becoming richer, they tended towards democracy: “All the various aspects of economic development – industrialisation, urbanisation, wealth and education – are so closely interrelated as to form one major factor which has the political correlate of democracy.”

These optimistic theories were anchored to a general hope that as countries emerging from colonialism advanced in the economic sphere, they would mirror the democratic states of the western world in the political sphere as well.

The 1970s saw the global spread of communism and numerous military coups across the world. Yet the decade also saw the beginning of what Samuel P Huntington termed ‘the third wave of democratisation’. Among other reasons, Huntington argued in The Third Wave: Democratisation in the Late Twentieth Century that the fruits of economic modernisation – education, urbanisation, the growth of a middle class – saw a wave of democracy spread across the world.

Portugal’s Carnation Revolution ended decades of dictatorship in 1974, which was soon followed by the fall of the fascist dictatorship in Spain after Francisco Franco’s death, and then the end of the regime of the colonels in Greece. The 1980s saw Latin America’s infamous military dictatorships eventually cede power to popular rule.

Towards the end of the 1980s, Taiwan, South Korea and the Philippines, in the face of popular protests, also dumped theirs. Furthermore, democracy slowly began to reappear across across Africa throughout the 1990s; a continent once dominated by military regimes and communist dictatorships. Likewise, Eastern Europe rid itself of its corrupt communist regimes in 1989, adopting both capitalism and democracy as if the two were one and the same.

For many, this was evidence of not only the superiority and desirability of both democracy and capitalism, but its inevitability. Within this spread of democracy and capitalism, Francis Fukuyama saw the end of history. In his book The End of History and the Last Man, he argued that history – if understood as a constant struggle by humans to find the best system under which to live – was over, as any way of economic and political life other than democratic capitalism was no longer conceivable. Democracy and capitalism had proven to be the most suited way for humans to live together in peace and prosperity. As Fukuyama wrote in the early 1990s: “There is now no ideology with pretensions to universality that is in a position to challenge liberal democracy, no universal principle of legitimacy other than the sovereignty of the people.”

Yet quietly in the background, the small island state of Singapore failed to budge. Under the rule of Lee, it refused to cede any ground to democracy while its fellow Asian Tiger economies were democratising. Singapore had modernised, developed economically, yet its authoritarian rule went unchallenged. As Milton Friedman observed in the 1990s, as much of the world succumbed to democratic rule, Singapore demonstrated that “it is possible to combine a free private market economic system with a dictatorial political system”. Singapore stood in opposition to the wave of democratisation.

Working against the odds
Faced with few natural resources, internal ethnic strife, widespread poverty, a small domestic market (after the break with Malaysia), no meaningful armed forces and an irredentist Indonesia to its south, the chances of the newly independent Singapore surviving in 1965 seemed slim. Survival depended upon economic development. “We had to create a new kind of economy, try new methods and schemes never tried before anywhere else in the world, because there was no other country like Singapore,” wrote Lee in his book From Third World to First.

In the 1960s, many countries were emerging from colonial rule. Under the influence of ‘dependence theory’ economics, many leaders in these countries saw economic investment from the West as a form of neo-colonialism that would result in a perpetual state of underdevelopment. The new leaders of Singapore saw things differently: they believed that economic development would require collaboration with their former colonisers and the western world in general. The island realised that its best route to economic development was to attract investment from Japanese, American and European manufacturers.

Fig 2

This attempt to turn Singapore’s economy into an export-orientated manufacturing base for international capital came at the right time. Professor Garry Rodan of Murdoch University told World Finance that this strategy came “at a time when new international divisions of labour were being developed by multinational corporations to take advantage of different labour and production costs in manufacturing”.

In 1968, Singapore’s Economic Development Board announced that it had successfully secured investment from Texas Instruments to open a manufacturing base in the country. Soon a whole host of other western firms were flocking to the area, including National Semiconductor, Hewlett-Packard, General Electric and Philips. By the 1980s, Singapore had established itself as a major exporter of electronic goods.

Huge investment
According to Rodan, Singapore’s success in attracting investment relied upon several factors: “Huge investments in specialised physical infrastructure, generous tax incentives to attract capital, politically docile labour, and efficient bureaucratic and administrative regimes combined to make this strategy hugely successful in generating economic growth and employment.”

Investment from multinationals and an accommodating geography to maintain the city-state as a trading post required investment in infrastructure. The government accessed the funds for this infrastructure, not through international borrowing or printing money, but through using government-imposed savings. The state set up the Central Provident Fund (CPF), and citizens were expected to pay money into the CPF as a form of social security. However, contrary to schemes such as National Insurance in the UK or Social Security in the US, the payouts dispersed by the CPF upon residents’ retirement were proportional to what was paid in.

This incentivised Singaporeans to save. According to W G Huff in his essay What is the Singapore Model of Economic Development?, in 1960 Singapore had a savings ratio of 10 percent. This rose to 29 percent in 1970, and to a further 40 percent in the 1980s. This gave the state a large reserve of savings to draw upon, allowing it to fund public infrastructure projects conducive to attracting international investment. This method of raising funds allowed Singapore to avoid the ‘crowding out’ phenomena through borrowing, according to Huff. These funds were also used in raising the skill of its workers and teaching them English, further attracting foreign investment, and to create Singapore’s world-renowned education system, which still receives strong government investment (see Fig 3). The savings ratio also remains at a high level today (see Fig 4).

While the basic principles of a free market economy were adhered to, the state never shied away from state planning or ownership where it deemed it important. State enterprises played a large role in the economy until privatisations in the 1980s. Economic planning was pursued, although often in line with and taking into account world economic trends rather than being rigid production plans such as in the soviet and soviet-inspired economies.

Fig 3

This new model was one in which the state was active, yet the philosophy of the welfare state was spurned. International investment was encouraged and private property respected, while the labour force was disciplined and political dissent punished. Red tape and business regulation were relaxed, while the population was regimented through micromanaging laws.

An iron fist in a velvet glove
The economic ends of these policies were achieved through much less appealing political means: the smooth running of Singapore’s economic policies relied upon a high degree of state and economic cooperation, achieved through the curtailment of Singaporean democratic life and civil society.

While the PAP had ascended to power democratically, it used its newfound powers to reduce any political opposition. Beginning in 1963, political rivals of the Socialist Front – a left-wing split from the PAP – began to be arrested through the use of the Internal Security Act. Likewise, the Societies Act, a law left by the former British authorities, was strengthened and amended in 1967 to ban any organisation that was not registered as a political group from engaging in political activities.

“This was in response to a spate of student activism and represented a killer blow for what was left of civil society,” Rodan told World Finance. “It enforced a very narrow avenue for political expression – electoral politics – where an array of administrative and legislative obstacles curtailed open competition with the PAP anyway.”

Through political repression, Lee was able to create a climate of political stability. Independent trade unions were emasculated, preventing strikes and work stoppages. By the 1970s, strikes were almost unheard of. Wages were also kept low through the use of state-sponsored trade unions and the National Wages Council. This helped to foster a friendly climate for business.

With no opposition, the PAP was able to integrate itself with the state apparatus. According to Rodan, through a “virtual merger between the PAP and the state through strategic appointments in public bureaucracies”, the PAP was able to perpetuate its rule: it blocked the use of any independent electoral commission, allowing it to engage in electoral gerrymandering as well as using the state’s administration to discriminate against any PAP critics. With party and state integrated, Singapore was able to seamlessly put its economic development plans into action.

Model for growth
Emerging from years of self and internationally imposed isolation, China’s new leader Deng Xiaoping made a regional tour in 1978, visiting Thailand, Malaysia and Singapore. According to Lee, what Deng witnessed changed China’s economic future. Talking to Spiegel in 2005, Lee recalled: “I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism – the politics of the iron rice bowl – did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it.” The model crafted by Singapore is now widely seen as offering inspiration for China’s Market-Leninism – a mixture of a market economy with state intervention alongside a political dictatorship.

With the fall of the Soviet Union, the ideals of state planning and socialism were discredited, even among Western Europe’s democratic socialist parties. Now, with the world – for the most part – accepting capitalism, some see the major global political rivalry of the 21st century being over how best to manage capitalism, with the contenders on one side following Singapore’s authoritarian political model pitted against liberal democracies.

Fig 4

In an interview with the New Statesman, Zizek said: “Something genuinely new is emerging today in the guise of what are ridiculously called ‘Asian values’: authoritarian capitalism. A capitalism which, we can see now, is doing better in the crisis than the West. A capitalism that is more dynamic and efficient than our Western, liberal capitalism, but precisely as such functions perfectly with an authoritarian state. My pessimism is that this is the future.” Similarly, Professor Azar Gat of Tel Aviv University talks of countries around the world following the authoritarian market models of China and Russia, in an essay entitled The Return of the Authoritarian Powers.

Singapore was able to create a prosperous society for its citizens, but this road to economic development came at a price. Singapore’s ruling party allowed little room for political dissent, challenging the optimistic assumption that prosperity and democracy are self-reinforcing. Lee defended this trade-off of democratic rights for riches until the end of his life, insisting that the former would have precluded the latter. This is the international legacy of Singapore: the creation of a viable model that weds dictatorship with a market economy.