Friday, May 7, 2010


The reason why people love to invest in growth stories is quite simple. They often have attractive, 'hot' and 'new' business lines (be it at the corporate or country level depending on whether we analyze a firm or country) and when picking the right story at the right time, returns can be very attractive. But similar to the 'winner's curse' that we described a few days ago when discussing Overreaction, there is something fishy about 'growth' as an investment style. At the stock level we know that 'growth' tends to underperform a more boring 'value' style over longer periods of time. And similarly: not too many high-growth countries have succeeded in maintaining that growth track record without either difficulties in other areas that hindered investment returns (e.g. at the governance or legal level) and/or the growth stories were too volatile, with excess risk as a result. Actually: it wasn't until the beginning of this century that most people in the Western world were quite skeptical about larger allocations to Emerging countries due to the fact that up until then periods of high growth were always followed by periods of problems, be they due to local factors or sensitivities to what is going on in the rest of the world. It is only recently that most people seem to believe that 'continued periods of above-average growth' are sustainable in the Emerging Markets as a group.

But a longer-term track record of growth, and increased wealth for the population, has been achieved in a select group of nations. The most important success story is not China, although the country has done a tremendous job since the beginning of the 1980s. No, the most amazing story is that of Singapore.

 Singapore: Economic High Flyer 
and its prestigious Airliner 'A great way to fly'

In 1965, the first year of its independence, it had a GDP per capita of USD 511. Although that is of course a very low number, it was the third highest GDP per capita in Asia (after Japan and Hong Kong), illustrating what an impressive progress the Asian continent as a whole has made. But the Asian economic development story in general is nothing in comparison to what happened in Singapore, especially when taking into account that the city-state has no natural resources and is hindered by climatic conditions (tropical rain forest climate).

In this contribution we analyze the longer-term development of Singapore and try to learn from it, not as an exercise in economic history but with the idea that we might be able to get some signals that might help select the new winners of the future.


Although he himself was always quick to point out that the main commodity of Singapore was its human capital, the truth is that Lee Kuan Yew was nothing more or less than the architect behind the country's success. LKY was born in 1924 in a reasonably well-off Chinese family.

Success Ingredient 1: Education

One thing that the Lee family understood was that 'education' is key, something that LKY translated into macro policy for the country ever since he became the dominant strategist of the People's Action Party (PAP), be it officially or  - since 1990 when he retired as the longest-reigning prime minister in the world (from 1959 to 1990 after 7 consecutive electoral wins) - unofficially as 'Senior Minister' or 'Minister Mentor' in the background. Lee was sent by his family to the UK to study at the London School of Economics (unfinished) and Cambridge. He graduated in law at Cambridge (highest honors) and unlike so many of his fellow foreign students from Emerging countries, LKY did not become part of the famous brain drain. He returned to Singapore and became a lawyer in the chambers of John Laycock, who was also a pioneer in multi-racialism. No doubt that the strong focus on Multi-racialism - to be discussed as Success Ingredient 2, below - was formed during his period at this law chambers.

LKY understood that in a country with poor resource base the quality and skill set of its population would be key to economic development. I.e. it would not suffice to have a few prestigious educational institutions for the kids of the happy few. What was needed was an upgrade of education in general, and in a pragmatic way. Actually, 'Pragmatism' is Success Ingedient 3, as we will see below. With respect to the incorporation of pragmatism in its educational programs, Lee himself was once again a good example. When he was still in his late teens, during the Second World War at the time of the Japanese occupation of Singapore, Lee decided to learn Japanese. He knew English but the Brits were gone and the Japanese were now the rulers. So, not a bad idea to learn the language. You never know who will win in the end, and secondly, this way you can get work as a translator and making money wasn't that easy at the time of the Japanese occupation. LKY did indeed become translator for the Japanese. Before you conclude that LKY was a collaborator, please keep in mind that from the perspective of the local Singaporeans the Brits were occupying the country as well. So he was indeed, once again being pragmatic. No doubt that this kind of educational pragmatism played a large role ever since LKY became the chief architect of Singapore's sucess story.

First, we see it back in the policy that English should be the main language of education for ALL students. English was of course just one of the four official languages in the country, the others being Malay, Tamil and Chinese. The Chinese represented the bulk of the population but at that time it was clear that English had the largest added-value economically. Therefore the following policy: all Singaporean students are taught in English, while at the same time having to pick ONE of the other three official languages as a major. And contrary to how the introduction of English was done in many other nations, where it was about elitist introduction of Shakespearean prose, official British English including the accent, LKY introduced the so-called Singaporean English or Singlish. Good English that could help generations of Singaporeans understand each other and do business internationally. In other words: English the way they speak it together, with just the worst major flaws that would lead to international misunderstandings corrected from above.

And that this choice for English was part of an 'engineered' approach based on relative strength and the window of opportunities became clear at other moments in history. In 2001 the country suffered a 2.2 percent drop in its GDP. A disaster by Singaporean standards. Reason: like so many other countries in the late 1990s Singapore had also put its hope on technology, with large investments in the ICT sector. Often at too high a price. When the ICT bubble burst, the GDP suffered. The Economic Review Committee that the government established worked closely together with the Ministry of Education so as to avoid future calamities in this direction. There was always a direct linkage between economic growth in various industries and the development of the curriculum in schools.

As it became clear in recent years that China was now truly a catalyst of global growth, the Singaporean government started to stimulate its population to learn Mandarin. That may sound like not really something special with a population consisting of a Chinese majority. However, the bulk of these Chinese people were from families whose ancestors (who arrived at Singapore from China) were from the poor farm areas of China's South. In that part of China people do not speak Mandarin. So once again, stimulation packages and new policies were linked to what was going on in the World. In other words: it is not just the government that decides on education, but the government seems to follow a perpetual education program itself as well. In a 2005 interview with China's CCTV Lee stated:

''In a different world we need to find a nice for ourselves, little corners where in spite of our small size we can perform a role which will be useful to the world. To do that,  you will need people at the top, decision makers who have got foresight, good minds, who are open to ideas, who can seize opportunities like we did...My job really was to find my successors. I found them, they are there, their job is to find their successors. So there must be this continuous renewal of talented, dedicated honest, able people who will do things not for themselves but for their people and for their country. If they can do that, they will carry on for another one generation and it so goes on. The moment that breaks, it is gone.''

In this quotation, we see also signals that refer to Success Ingredient 4 below: Anti-corruption Policies so as to make sure that leadership is indeed in the hands of a group of bureaucrats that want the best for the country and its people. How did Singapore achieve this? More about it below under 4.

Success Ingredient 2: Multi-Racialism

As stated above, Lee was formed as a thinker when at the Laycock law chambers. In a time when racial separation was still standard in the world, John Laycock was the initiator of one of Asia's first multiracial clubs. LKY understood that in the densely populated city-state (with now almost 5 million people on approximately 700 square kilometers of land!) any actions or activities developing along the lines of racial or religious extremism would be disastrous. The economic development program did also stimulate industries (e.g. the financial services sector and the health care sector) that attracted foreign personnel and staff. Result: Singapore has the sixth highest percentage of foreigners in the world (42 percent).


How did the country achieve a situation of relatively peaceful coexistence of different groups in one tiny state? Answer: by following an agenda that acted fiercely against any sign of thinking along racial or ethnical or religious lines. They were forbidden. Freedom of the press is nothing like what Westerners are used to. The country's 7 TV stations and 14 radio stations are all government-owned. And Singapore Press Holdings, a large stock-market listed giant, is strongly linked to the government through the latter's investment vehicles.


Success Ingredient 3 Pragmatism
In everything LKY as a person and Singapore as a nation did, it is striking to see the sense of realism. Avoid the mistakes of the underperforming and learn from the best.

A few examples:

From the pre-independence period (1959-1965), when the country had to maneouvre between British and Malaysian interests on the one hand, and the tense relationship with communist factions within and outside the PAP on the other, until far into its independence period (1965 onward) Singapore seemed to follow a policy of technocratic neutrality similar to that of the Swiss. Join large international networks like the UN or even help create them (like the ASEAN) while at the same time making sure you don't take ideological sides when you don't have to. Indeed, similar to how an internationally operating commercial corporation would act (see also Success Ingredient 6 Business Approach).

Western democracy - especially Anglo-Saxon interpretations and infrastructure - and British Common Law provided good starting points for the country's legal system, but without the liberalist tendencies and with a penal system that was much tougher (see also Success Ingredient 5). In other words: use what is good and import it from abroad, but modify it when you know how to improve it.

Singapore is a very small city state in a region that is maybe not the most violent in the world, but the relationship with large powers like Indonesia has for prolonged periods of time been quite tense. And besides, the country was occupied twice in recent history (England and Japan) and is always aware of potential tensions with Malaysia. As far as the latter is concerned: the Federation with Malaysia did only last for 2 years before Singapore became independent. Singapore did therefore believe that it needed a strong army. What should a small country do if it wants a strong army. Answer: learn from the best. Basically, the Singaporean Armed Forces seem to be streamlined in a way that resembled the Israeli IDF to quite some extent. The army is relatively small in terms of head count (less than 80,000 man at the moment), but the reservist army is large (about 350,000 people) with annual trainings / tests for all grown-up males after they leave the army (2 year mandatory military service). 

But head count alone is not enough, one should - as smaller army - also invest in the best technology. The SAF is one of the most advanced in the world in terms of weaponry, and it uses sophisticated training facilities in many other countries ranging from Brunei in the region to the US. And when one can learn from British experience about the excellent skills of Nepalese Gurkha's, then let's set up a Gurkha platoon. The way in which Singapore dealt with the hijack of Singapore Airline flight 117 in 1991 was illustrative. The 4 hijackers were killed and non of the passengers and personnel were injured.

Social issues can rapidly develop in a small city-state with an ethnically and religiously diverse population. At the time when population growth seemed to be a real threat, the country initiated a 'no more than 2' policy in which parents were advised not to have more than 2 kids. If they went for more kids, they should be prepared for less favorable school opportunities and  smaller tax refunds. The moment the country found out that population tension was diminishing (it now has the third lowest birth rate in the whole world) it did first relax the rules for women with graduate educational background and later for the whole community. Changing policy is not a sign of mistake, but a sign of changing times. Exactly like LKY indicated in the quotation above.

Success Ingredient 4 Anti-corruption Policy / Governance

One of the most important problems that emerging countries have to face is corruption. Corruption is everywhere, but whenever a country gets on the international radar screen (due to its strategic location, available resources, economic growth potential etc) it should be prepared for 'donations' by international parties (either governments or corporates) to local government officials at all levels.

LKY understood this and set up a Corrupt Practices Investigation Bureau (CPIB) that was legally bestowed with far-reaching powers to act against persons or entities whenever it felt that corruption might be an issue. Corrupt officials were punished much more heavily than in other countries, and in a country where corporal punishment was not just still present but actually even expanded, heavy punishment was more than just fines and/or imprisonment (see also Success Ingredient 5 below). But LKY understood that negative incentives alone would not suffice to maintain a strong cadre of government officials. In 1994 the country accepted new laws that linked the salaries of the highest ranks in government directly to wage levels in the private sector. When government has to be run like the biggest firm in the country, with some of the best firms actually being government-owned or at least -linked (e.g. Singapore Airlines, Development Bank of Singapore, Singapore Press Holdings) and with two internationally respected wealth funds (Temasek and the Government Investment Corporation, GIC), why then run the risk of the brightest people avoiding a job for the country as government official?

Another subtle element that helps avoid corruption is the centralized structure of government. There are far less bureaucratic layers involved with decisive powers than in other countries. This makes it easier for the CPIB to 'find' the potentially corrupt elements in the government hierarchy. Singapore is one country, but it is also one municipality, i.e. the ultimate form of centralization. No way that construction firms hoping to be awarded tenders can bribe officials at lower levels so as to make sure their chances of winning the contracts are optimized. The lower levels simply won't have the power to do anything without the higher ranked officials agreeing as well. 

The system worked: Singapore is now regularly in the top-10 of least corrupt countries in the world (see Transparency International)

Success Ingredient 5 More Wealth and Welfare is not Less Discpline

In his memoirs LKY describes that he is really surprised why Western leaders and educationalists are so much against corporal punishment, be it in schools as part of the judicial punishment system. He describes how he was caned by his lecturer, McLeod, for being too late. 

Afterwards he avoided being too late and the event hadn't hurt his development later in life, according to Lee. The number of offenses for which caning was applied in the legal system went up from about 40 at the time of Independence to more than 6000 in 2007. The country does also apply the death penalty for first-degree murder and drugs-related crimes. With respect to the latter: foreigners can hardly miss the signs at Changi Airport when leaving their plane.

Singapore doesn't believe in a soft approach. Not when it comes to crime, but also not when it comes to the democratic process and freedom of speech. The country is very sensitive to extremist ideas, similar to what we have talked about yesterday in our contribution about the work of Francisco Ayala. Soft approaches will be misused by extremists. They won't respect it and use the space they will get automatically in a way that might destabilize the country. Lots of countries would object saying that this tough stand itself would trigger extremism, but Singapore shows that a clear technocrat focus on development of people's wealth, welfare and personal skills can work once you are applying that tough stand to ALL extremists. Not one single category of society is excluded from it.

As a result, Singapore is not considered a true democratic state when looking at The Economist's Democracy Index. With a score of 3 out of 4, the country is classified as a hybrid system. It is actually one of the richest non-democratic states, albeit with voting rights for the population.

Success Ingredient 6 A Business Approach

All in all we can say that the Singapore way is characterized by an almost business style approach in all layers of society. It is not really surprising that in a troubled industry like Airlines only Singapore Airlines seem to ride the waves not because of the availability of cheap personnel (wages in Singapore aren't low anymore by international standards!) or cheap fuel (the country has no natural resources!), but simply because of the population's high labor ethics and productivity on the one hand and great management on the other. Great management is a scarce resource in the Airlines world that is dominated (still) by firms that are part of the government sector (fully or partially) with at best mediocre leadership.

The business approach is also visible in the country's focus on long-term policies. Unlike many Western democracies where the agenda of political leaders seems to be more related to their personal agenda - which is often not looking further than 4-5 years into the future, i.e. the period until the next elections -, Singapore concentrates on the long term. This implies that it is much less inclined to postpone large investment projects in infrastructure, energy, logistics, education etc until after the next elections.

But it also was able to avoid another trap so often seen in countries that focus on the long-term: rigidity. The world is rapidly changing and it is great to have a good, long-term structural policy. However, one should also be aware of the fact that when times are changing, some of those longer-term policies need to be changed as well. In our analysis above it became clear that Singapore did change when change was necessary.

Last but not least, the country uses a business approach to economic growth and targets that is based on what the Germans would call 'Realpolitik': pragmatic thinking again (see Success Ingredient 3 above). Meaning: focus on those areas where you have a chance to make a difference. In Singapore's case this implied:

* Trade - Due to its large port, with the port now being one of the largest in the world;
* International Finance - The combination of good education and the targeted focus on attracting bright foreigners into the country resulted in the creation of an international finance hub that is now the world's nr 4 when it comes to FOREX for instance (currency trading);
* Tourism - Not just with a focus on regular tourism, but - again using the recipe of good education and attraction of bright foreigners - also medical tourism. If the Western countries are not capable of solving their medical problems (waiting lists, too high prices for mediocre service), why then not set up a plan for the development of medical tourism? More than 7,8 million people visit Singapore annually as regular tourist now and almost 200,000 as medical tourist. The government is planning to expand services for medical tourists to such an extent that the number of patients visiting from abroad will reach 1 million by 2012. If the plan succeeds (and so far most plans do succeed in Singapore) it will bring the country an additional USD 3 billion revenues per year. Remarkable: one of the first acts of the new PM, Lee junior (oldest son of LKY) was to allow 2 casinos in Singapore in an effort to attract more regular tourists as well.


The amazing Singapore Success Story seems perfect and there don't seem to be elements in it that couldn't be copied by others, except maybe the fact that the charismatic leader LKY made it possible whereas an average leadership with less charisma would probably not survive short-term disappointments in what is otherwise a good longer-term growth story.

But let us assume that other countries do have good leaders and apply the Singapore recipe. The 'negatives' are of course first and foremost politically. If you consider ideological and political freedom as a huge asset it is almost impossible to do it. Especially so in a small country where by definition people from different ethnic and religious background are living in the same city.

The less contact people of different background would have, or the more educated and wealthy they are, the more one could loosen up a bit when it comes to political freedom. But it is indicative that Singapore - now one of the richest countries in the world - did not feel it had reached this point yet.

And just to give you an idea how tough Singapore's stand on this issue is: in 2008 the court convicted the well-respected, serious Far Eastern Economic Review (owned by Dow Jones, which itself is part of Rupert Murdoch's News Corp) of being too critical and of defamation of LKY as a person and Singapore as a country. The subtle good element in this conviction is that it shows that Singapore - unlike a lot of Western states acts just as much against 'Western' extremism in favor of democracy and/or liberalism as it does against Muslim fundamentalism, to name just another example. In many Western states it seems as if only the second type of extremism is seen as a threat.

The real problem to solve - and LKY's quote above indicates that he understands this - is how to avoid self-righteousness when you do at the same time not allow full Freedom of Speech? LKY was even involved in a court case with the late president Devan Nair (living in Canada at that time) who accused him of self-righteousness and an HR policy of surrounding himself with dummies. With this case being before a Canadian court it was clear that LKY couldn't win the way he would deifnitely have won at home. But again, pragmatic: who really cares?

Another - and that is a tougher one - issue is the avoidance of creating a political inner circle consisting of - maybe not dummies - but people that were closer to the fire. LKY's oldest son is the current PM and his brother was until 2009 CEO of Singapore Telecom, the largest firm at the stock market and majority owned by Temasek, one of the two wealth funds of the government. PM Lee, the son is also the deputy chairman of the Government Investment Corporation of Singapore, with LKY himself still serving as Chairman. In an earlier stage of their lives both Lee jrs were Brigadier-General in the army. Their sister runs the Neuroscience Institute.

LMG Emerge is not convinced that the juniors are of the same quality as dad. And this is in general our problem with structures like the one at hand. Whenever a technocrat structure 'delivers' a new generation leaders that is closely related to the previous one through family ties things get fishy. LKY was great and did it. But he is old now. Still a great mentor and he no doubt did and does a heart for the country, wanting the best. Like he always did. But what if he is not around anymore? Will the population still support the PAP the way they did? Will the next generation leadership have sufficient backbone? That remains to be seen. And although we didn't see signs that they are bad, we cannot imagine that they are of the same level.

The next Singapore is therefore probably not going to be Singapore itself. Thorough analysis of countries around the world will have to show what the next success story will be. Does that imply that we believe Singapore will fall back to below-average growth on a global scale? Not at all, the country will fall back from currently still far-above average growth rates for a rich nation to slightly above or average growth levels, using its competitive advantage for trade with China. That competitive advantage is not very sensitive to the leadership structure in the shorter run since it is directly linked to education, the harbor and the Chinese background of the majority of the population.


In our next contribution we will analyze Emerging Markets countries on the basis of the derived Singaporean success factors and see what the potential group of new success stories would look like.

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