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Singapore and Hong Kong — Asia Rising

How did two Asian shantytowns make it to the economic top in just one generation?

August 11, 2001

How did two Asian shantytowns make it to the economic top in just one generation?

Singapore is now one of the ten wealthiest countries in the world, on a par with Canada. Hong Kong comes close, at the same level as Italy.

But during the early postwar years, Hong Kong fared better than Singapore.

Shortly after the Chinese Revolution of 1949, hundreds of thousands of refugees flowed into the city — among them a large number of former entrepreneurs from Shanghai.

These immigrants brought with them a great deal of industrial know-how. They promptly reconstructed an industrial base that put Hong Kong on a solid growth trajectory.

At first, the industrialization of Hong Kong was based on textiles.

Then, as industrialized countries reinforced their protectionism, the city moved into more elaborate production, expanding into the clothing industry, in which it is more difficult for protectionism to set efficient norms.

Throughout the 1970s, Hong Kong gradually extended its range of activities, soon becoming the world’s leading manufacturer of toys and one of the leading exporters of electronic products and quartz watches in particular.

In the early 1980s, at the peak of Hong Kong’s industrialization, China embarked on a course of economic liberalization. In a twist of fate, people returned to Shanghai from Hong Kong to recreate capitalism as they had once known it in pre-Mao China.

Hong Kong slowly began to revert to its former role as a warehouse for trade between China and the rest of the world.

Singapore’s postwar experience was far more difficult. The educational attainment of the population was one of the lowest in the world, and the political climate was very unstable. The city was shaken by a communist insurrection in Malaysia in the 1950s, then by a war between Indonesia and Malaysia in the 1960s.

In 1967, when Great Britain decided to withdraw its military personnel from the city, industrialization had not yet taken off.

The year 1967 was a turning point for Singapore: the iron-fisted Lee Kuan Yew took charge of the city.

The Singaporean government promulgated a series of quasi-dictatorial reforms.

Labor legislation was “simplified” in such a way that all labor disputes were submitted to the judgment of an industrial court of arbitration whose mission was to watch over the “interests of the community as a whole.”

The government also launched a radical reform regarding public funds. In the early 1970s, the government was able to avail itself of a surplus of public funds in excess of 10% of the gross domestic product.

The mandatory pension funds plan that was later established financed, by itself, half of the investment in the city throughout the 1970s and the 1980s.

Finally, the government offered foreign investors tax exemptions of up to 90% on profits generated. As a result, Singapore became the leading recipient of international investments in the world.

Singapore’s government increased industrial subsidies, taking advantage of its considerable internal and external resources.

After first focusing on textiles, it turned to chemicals and oil, then to toys, then to electronics and computers — and finally (in the early 1990s) to financial services.

In the early 1980s, Singapore had absolutely no computer experience. By the late 1980s, it had become the leading exporter of hard disks in the world.

Equally impressive is Singapore’s development from a place with very little financial activity into one of the most active financial centers in Asia.

The rate at which Singapore’s government pushes its industries forward is spectacular and — according to many observers — absurd.

None of the industries has enough time to consolidate its advantages before the government, in a mad race, is already moving on to the next stage of specialization.

And yet, this strategy can be said to have worked. The fast pace of decisions regarding specialization, while unrealistic at every stage, has enabled Singapore to become one of the wealthiest cities in the world. A number of countries, in Asia and elsewhere, are using Singapore and Hong Kong as points of reference.

Adapted from “The Wealth of the World and the Poverty of Nations” by Daniel Cohen. Copyright © 1998 by Massachusetts Institute of Technology. Used by permission of MIT Press.

Daniel Cohen is professor of economics at the University of Paris (Panthéon-Sorbonne).