I have co-written the article below with Leong Sze Hian which was published in the TRUSTING, The Independent Financial Advisor magazine. The article can be read at the magazine here.
The Sustainable Development Goals: What Can Be Learned from the Singapore Development Model?
The Singapore development model has been widely-acclaimed for its ability to springboard a nation from the Third World to the First World – but arguably what exactly are the pivotal points to its success may not be well understood.
The Singapore model can be explained by two key principles – first, the uniqueness of the treatment of cash flows in its fiscal policy and second, the conceptualisation of its economic and social development policies.
But first a warning – that the adoption of the Singapore model needs to fulfil several criteria in order for it to be replicated for long-term success. Otherwise it may lead to certain undesirable outcomes. This will be discussed in the later part of this essay.
An Alternative “Fiscal” Model?
The fundamental difference between Singapore and other countries, and what arguably allowed Singapore to leapfrog its contemporaries – is a migration from a traditional tax-based system towards a self-sufficient “savings-investment” model.
Right after its independence in 1965, Singapore was aware of the need to create a huge pool of capital in order to fund the development of key infrastructure in the country.
Taxation as a tool was inflexible as a high tax rate is seemingly unattractive to foreign investment and immigrants. So, a Singapore eager to attract investments reduced tax rates gradually to one of the lowest in the world. But this, in theory, would mean that the funds necessary for infrastructure development may also be reduced due to lower tax revenues.
The Government would therefore have to look for alternative funds domestically, or to look externally to borrow from other countries or international organisations.
The Government did both, but with the aim of reducing the reliance on external debt eventually.
Within less than 10 years, by the mid-1970s, the Government was able to do so.
Today, it has hardly any external debt as almost the entire public debt is domestic.
For a country with no natural resources which could be exported and had difficulties attracting foreign capital investment at that time, where did the alternative funds come from domestically?
By 1968, the Government recognised that the social security pension funds of Singaporeans, the Central Provident Fund (CPF) had accumulated a huge pool of funds.
The CPF was a self-generating pool of money, unlike taxes which would normally be used up year after year and in a time where Singapore was still an under-developed nation, there was hardly any surplus left over annually for development goals.
The decision was made to allow the Government to borrow and use the CPF funds. The Government began pumping the CPF into infrastructure development, in public housing, airports, ports, etc. Arguably, Changi Airport (formerly the world number one airport) and the Port of Singapore (formerly the world number one port) were all financed to some extent in the early years by the CPF.
By the mid-1970s, Singapore had managed to build up its key infrastructure, and was also able to wean off international funding and started to accumulate annual Budget surpluses.
From the late 1990s, the Government also began to keep part of the annual returns from the investment of the CPF funds to build up the country’s reserves. The reserves, at an estimated $900 billion, are estimated to be the largest in the world today on a per capita basis.
The above are arguably, one of the key reasons that made the Singapore model tick.
The use of a stable pool of pension funds thus enabled infrastructural development and economic growth.
In this scenario, a viable replication of the Singapore model would be for a government to liaise with its citizens to keep a small portion of the annual returns of the pension funds, say 1 per cent – to fund development, so that the route towards achieving development goals may be smoother.
The pension contribution rates can be gradually adjusted upwards if desired, to allow for more funds to be set aside in the pension fund, and this is arguably easier to do than increasing taxes.
An Alternative “Taxation” Model?
The key to differentiating the Singapore model with that of the traditional “high” tax-based system in other countries is that instead of a singular pool of tax revenue which is spent in a year with little left, a second constant pool of funding is available for longer term objectives.
Where a singular pool of tax revenue can result in the perpetual problem of fiscal deficits, a secondary pool of funding which is not constantly sapped away may help to mitigate this issue.
In Singapore’s case, this came from the people’s labour and mandatory contribution of their income into the CPF. In another country, it could be the discovery of oil, for example.
The Singapore “Public Housing” Model: Pricing is the Key to Its Success?
Notably, one key use of the CPF in Singapore is to also fund the development of public housing, via the borrowing of it by the Government to fund the construction, and the borrowing of it from the citizens’ own CPF accounts to fund the purchase.
By the early 1980s, more than 80 per cent of the population were living in public housing.
However, after the 1985 economic recession, several economists warned against further excessive usage of the CPF for the development of public housing, as Singaporeans could then only use the CPF for the purchase of public housing, other than for retirement, as this could distort demand, and lead to inflationary pressures and a housing bubble.
Eventually, the use of the CPF for public housing did lead to escalating home prices. The CPF thus became a double-edge sword because of its dual use for public housing and retirement. The money funnelled towards paying for the increasing prices of the homes meant lesser funds for retirement.
But the Singapore public housing model may still be adapted if public housing is pegged on a “cost” basis instead of Singapore’s “market pricing” basis.
A different approach to attaining the Sustainable Development Goals?
In conclusion, the Singapore model stands out in its identification of a secondary pool of domestically-available funds which could act as the jumpstart for infrastructural development, and also continuing Budget surpluses and accumulated reserves for longer term use.
However, it bears repeating that for this model to be effective, transparency and accountability should act as strong foundations, especially in the light of the issues related to using the citizens’ pension funds.
Finally, a balance has to be maintained particularly for such a model, for as long as wages, the contribution rates to the pension fund, interest returns on the pension fund to the citizens and retirement adequacy are well-coordinated, it may make the path to sustainable development a smoother one.
Roy Ngerng and Leong Sze Hian
Linda Low, “Central Provident Fund in Singapore,” HKCER Letters, Vol.41, November 1996, http://www.hkcer.hku.hk/Letters/v41/rllow.htm
Edward Ng, “Central Provident Fund in Singapore: A Capital Market Boost or a Drag?,” A Study of Financial Markets, http://aric.adb.org/pdf/aem/external/financial_market/Sound_Practices/sing_cpf.pdf
Sock-Yong Phang, “The Singapore Model of Housing and the Welfare State,” Research Collection School Of Economics, 2007, http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1595&context=soe_research