Lawrence Solomon
National Post
May 8, 2001

FROM THIRD WORLD TO FIRST – THE SINGAPORE STORY: 1965-2000

By Lee Kuan Yew, HarperCollins, 729 pages, $52.95

Hong Kong and Singapore, Third World backwaters four decades ago, are today much wealthier than Canada, the United Kingdom, and most other Western nations.

Hong Kong – the 13th wealthiest country in the World Bank’s ranking by per capita GDP – achieved its great success through freewheeling, entrepreneurial capitalism. Singapore – whose citizens enjoy the world’s fifth highest incomes – rose even higher and faster, not through free markets but through a heavily interventionist socialist government.

The two city states both faced external threats in their early years. Hong Kong lived under continual fear of an invasion from mainland China, and Singapore, born as its protector, the British military, was planning to exit east Asia, faced aggression from both Malaysia to its north, and Indonesia to its south.

Yet Singapore’s challenge in developing into an economic powerhouse was in many ways greater than Hong Kong’s, which would thrive as an intermediary between China and the West. In From Third World to First – The Singapore Story: 1965-2000, Lee Kuan Yew, Singapore’s only prime minister for the island nation’s first three decades, describes his country’s seemingly insurmountable difficulties. Not only did it lose 20% of its GDP with the closing of the British base, but Malaysia, which resented Singapore’s role as an entrepôt that handled 40% of Malaysian trade, decided to bypass Singapore after the two jurisdictions bitterly separated in 1965. Seeing the island largely cut off from trade with the mainland – Mr. Lee calls it "the hinterland" – he saw Singapore’s prospects as bleak.

To make matters worse, Singapore lacked talent. Unlike Hong Kong, which was blessed with the entrepreneurial genius and business acumen of the 1.5-million refugees fleeing Communist China, Singapore thwarted immigrants from Malaysia upon separation, thinking they would only take jobs from Singapore residents. What little talent Singapore had it concentrated in the apparatus of government. Nevertheless, under Mr. Lee’s discipline, the government single-mindedly and sure-footedly created a socialist paradise.

Mr. Lee’s socialist roots run deep. A Cambridge-educated lawyer and labour union negotiator, he built his People’s Action Party on union support. He proudly describes his membership in the Socialist Internationale and his relationship with British Prime Minister Harold Wilson, who repeatedly convinced his Labour Party colleagues to delay Britain’s pullout from Singapore on the basis of Mr. Lee’s socialism. "Lee Kuan Yew [is] as good a left-wing and democratic socialist as any in this room," he quotes Mr. Wilson telling a Parliamentary Labour Party meeting in 1966. "His social record, in his housing program, for example, defies challenge in anything that has been done in the most advanced social democratic communities."

Those words about the housing program – which Mr. Lee financed through a mandatory savings scheme called the Central Provident Fund – were prescient. With necessity the mother of invention, Mr. Lee subsequently created what is undoubtedly the world’s most inventive public administration. Through its Central Provident Fund, Singapore provides high quality public health care, an innovation that Western countries have only lately begun to consider under the name of medical savings accounts. To promote public transit and tame the auto, Singapore charges astronomic fees on car permits and electronically tolls its roads via smart cards.

Singapore has been less inventive in managing its economy, where many of its policies resemble those of big governments everywhere, only more so. In its spectacular rise in affluence, Singapore protected its industries from foreign competition to appease workers, established state corporations throughout the economy, and offered tax holidays and other subsidies to attract foreign investment. It set up its Economic Development Board – a one-stop government agency designed to service investors – with the help of the United Nations Development Program and the International Labour Office. It lured industries – including those from a then more advanced Hong Kong – with the promise of a cheap, well-disciplined workforce. It tried to pick economic winners and it often succeeded.

Mr. Lee believes that he had his priorities right. He is proud to have set up a nanny state for Singapore’s citizens, noting that he did so at low cost – his government spends just 20% of GDP, compared to 33% in the G7 economies. He is also proud to have set up a nanny state for foreign investors through lavish spending on infrastructure and other corporate amenities, noting "our development expenditure has consistently been much higher than that of the G7 countries."

But is this spending efficient? A study by MIT economist Paul Krugman over the period of Mr. Lee’s rule attributes Singapore’s entire success to brute force, not brains – "a mobilization of resources that would have done Stalin proud," states Mr. Krugman. "Above all, the country had made an awesome investment in physical capital: Investment as a share of output rose from 11% to more than 40%." Singapore’s success involved one-time improvements that cannot be duplicated. "There is no sign at all of increased efficiency."

Apart from its quirky authoritarianism – the country banned chewing gum after someone stuck gum on to the sensor of a train door, disrupting service – Singapore has two defining features, both of which go a long way to explain its success. One of these – its absence of corruption – is well understood by Mr. Lee. Corruption drives investors away and also robs a country of its productive assets – in kleptocracies like neighbouring Indonesia, as much as 25% of GDP was siphoned off in corrupt dealings, enough to doom any economy.

But Mr. Lee doesn’t understand Singapore’s other great advantage over the nations of the world – its absence of a hinterland. When Singapore broke off from Malaysia in 1965, Singapore didn’t lose a market, it lost a millstone. Following the separation, the two countries jointly operated Malaysia-Singapore Airlines for several years. The joint ownership fell apart because Mr. Lee refused to fly money-losing routes to the Malaysian hinterlands. Had Singapore remained inside Malaysia, the national airline would have served its hinterlands at a loss, as occurs in almost all the nations of the world, bleeding productive enterprises and sapping the overall economy. Imagine a Vancouver that didn’t need to support its farmers, fishermen and foresters, or a Montreal freed from subsidizing its money-losing resource industries, and you’re got a city that would grow at the speed of a Singapore or Hong Kong, even when carrying its own military or meeting the social needs of its own residents.

"We inherited the island without its hinterland, a heart without a body," Mr. Lee thinks. In fact, Mr. Lee and his fellow citizens were blessed to inherit one of the world’s only two true city states. With a blessing like that, even when starting with nothing, it would have been difficult to fail in a world of nation-states, whether under a free market or socialist governance.