From Rags to Riches: How Singapore Developed Its Economy

Singapore’s rise from rags to riches has been nothing short of a miracle. Today, it’s one of the world’s wealthiest economies and a highly sought-after destination to live and work.

It ranks among the top 10 countries with the highest GDP per capita and largest foreign reserves and is the fifth most competitive economy on the planet. It’s also among the nine elite countries to have a AAA rating from the three major global credit rating agencies.

This is impressive progress for a city-state with a 729 km² landmass and a 5.7 million population. We’re talking about a country the size of New York City. In fact, NYC is bigger, with an area of 783 km² and 8.2 million residents.

But it’s not just the country’s minuscule size and population that may have worked against its success. Unlike many other countries, it has no meaningful natural resources like oil. This also includes water, part of which it imports from Malaysia even today. Moreover, Singapore became a sovereign state only in 1965, much later than most other countries in the world. And political freedom endowed it with a country engulfed in extreme poverty and social instability.

Yet by 1994, Singapore’s economy had overtaken the UK, Canada, and Australia in GDP per capita. So, how did it secure a position among the most developed economies on the planet in under three decades? In other words, how did Singapore become so rich so fast? The answer may surprise you.

A rough path to freedom

Until 1819, Singapore’s land was under various neighboring rulers, serving as a trading port and occupied by a small trading settlement. It remained in obscurity for the most part, with little significance other than its proximity to the region’s maritime activities.

But on January 28, 1819, things took a sudden turn when the then British governor Stamford Raffles discovered Singapore. He quickly understood the city-state’s importance in trade and regional security for the British Empire.

At the time, it was ruled by Malaysia’s Sultan of Johor, whose power was waning due to divisional fractions. So, Raffles helped establish Sultan Hussein: the then Sultan of Johor’s exiled elder brother.

In return, the new Sultan allowed the British governor to establish a trading post in Singapore. Five years later, in 1824, the Sultan handed over Singapore’s entire land to British India. This is when the socio-economic landscape of the quiet city-state quickly started to change.

The tiny nation’s population quickly expanded from 1000 people to 80,000 within just 40 years. The indigenous Malay-dominated ethnic composition also changed during this time. As the plantation sector boomed, Chinese workers came to work in large numbers. And by 1860, they represented more than half of Singapore’s population.

Achieving independence

In 1867, British India handed over Singapore to Britain for direct control. In the years that followed, Singapore’s economy took a new life. But the thriving economic activities came to a sudden halt a few decades later as World War II commenced.

After World War I, the British Empire built a massive naval base in Singapore as part of a defensive security strategy. This proved detrimental to the city-state when World War II erupted. The country’s significance in the British military defense strategy attracted a Japanese invasion in 1942, throwing it into turmoil and instability.

After the Japanese occupation, Singapore again became a British colony and then a part of the Federation of Malaysia in 1963. Two years later, Malaysia expelled it from the Federation, and Singapore finally became an independent country. This was when Lee Kuan Yew became its first prime minister: And so began its journey of epic economic growth.

Singapore’s rise as a global economic powerhouse

Singapore’s golden era started with Prime Minister Lee Kuan Yew, who set the stage for the country to prosper. And it prospered fast: In just a few decades, Singapore joined the ranks of developed nations and even outranked them in several key measurements.

So, how did Singapore become so developed despite its bleak past and with very little working in its favor? Some may point to its geographic location. The country’s proximity to key trading routes makes it perfect to set up a trading hub for sea and air traffic. The government understood this very well and quickly set up the infrastructure to harness the location-based advantages.

Today, the Port of Singapore is the world’s second-largest port and busiest transshipment port. It also ships one-fifth of the world’s containers and almost 50% of the world’s crude oil. And Changi Airport ranks third on Skytrax’s list of best airports on the planet, a chart it had topped for eight consecutive years before 2021.

But there are many other countries with similar geographic advantages, who have not thrived at the pace this tiny island city-state has. So, how did Singapore develop its economy? What are the unique Singapore success factors? The answer may provide clues to critical national strategies that could help turn around the most disadvantaged nations.

How did Singapore’s economy develop so fast?

The secrets to the epic rise of Singapore’s economy lie in not one, but several essential factors. Interestingly, none of them are historic endowments, naturally inherited, or the results of random events. Instead, they all seem carefully crafted and strategically articulated by the city-state’s government under Lee Kuan Yew’s leadership.

Strong government policies to encourage business

From the beginning, the Singapore government framed its policies to encourage foreign investments. Similar to Dubai, it set up attractive incentives like low tax rates and tax breaks to entice businesses and investors. Today, the country is a tax haven for millionaires. And when the world’s ultra-rich flock in, so does their money.

And regardless of the country’s free-market activities, government intervention is also common, mainly to set direction and the right policies to support growth.

“The state in Singapore acts as an entrepreneur,” writes Miklós Szanyi in Seeking the Best Master: State Ownership in the Varieties of Capitalism.

Government-linked corporations or GLCs act with the primary purpose of driving economic development. They enjoy no special advantages over the private sector and must deliver profits to remain in business. And some of them, like Singapore Telecommunications and Keppel Corporation, are even publicly listed and represent some of the biggest corporations in the country.

Singapore’s tripartite approach to labor unions that helps maintain harmonious labor relations is another ingredient in its success. It encourages collaboration between unions, employers, and the government so that cooperation-based union action replaces confrontational ones.

The country has also set up advanced infrastructure to lure investors and businesses to its shores. It has invested in real estate parks, high-tech communication infrastructure, financial services, an extensive road network, a state-of-the-art port, a major international airport, and much more.

Moreover, instead of following the restrictive and nationalistic policies of other developing nations, Singapore banked on networking heavily with the rest of the world. We’re not just talking about inviting over international businesses and high-net-worth individuals. For the country to boost economic activities, Singapore needed a larger workforce. So, the government welcomed foreign workers to bridge labor supply shortages. Today, Singapore’s 1.23 million foreign workers represent more than 34% of the total workforce.

Strict enforcement of the law

A business-friendly regulatory environment is a crucial element of the Singapore model of economic development. The country has fair and transparent judicial processes and a zero-tolerance approach to corruption. And this has helped bring stability to its socio-economic environment.

Singapore is among the top 10 most peaceful nations in the world and ranks third in Transparency International’s least corrupt nations list. It also ranks high for the overall rule of law and intellectual property protection.

Strict regulatory enforcement, good governance, and focus on meritocracy have been critical for the country to attract foreign direct investments. For overseas businesses, all these represent lower risks, greater predictability, and better security for their investments. So, it comes hardly a surprise that Singapore houses headquarters of 37,000 international companies, including 7,000 MNCs. It also claims the fourth largest foreign direct investment inflow in the world, attracting $91 billion in 2020—that’s nine times the FDI inflow of Japan and much more than what went into Germany, Sweden, and the UK combined. 

Economic diversification with strategic industries

Singapore’s economy doesn’t depend on one or two industries. Instead, it has taken a diversified approach and promoted the right industries for its country’s circumstances and aspirations. Here are some of the main industries driving the economy of this resource-deficient nation.

High-tech manufacturing

Unlike most other neighboring countries, Singapore moved away from cheap labor-dependent manufacturing to one that counted on skilled labor and technology. For example, today, the country hosts over 60 semiconductor companies that claim 11% of the global market share.

Financial services

Singapore is one of the top four financial hubs in the world alongside New York, London, and Hong Kong, and is also among the top 3 foreign exchange centers. The skilled workforce, infrastructure, and strong regulatory systems have certainly played a role in this.

Oil refining and trading

The country is one of the top three oil refining and trading hubs in the world. Of course, the tiny island state doesn’t have oil of its own to trade at this scale. The government made use of its location-based advantages and invested heavily in superior port facilities and state-of-the-art infrastructure for oil refining, storage, and transportation. As a result, it now houses the regional headquarters of the top global oil giants on its shores.

Port services

The Port of Singapore is a major global maritime hub and an important revenue source for the country. And its infrastructure and services are among the best. It handles around 1000 ships simultaneously and offers one of the most high-tech and efficient ship repair facilities. The port is also the busiest transshipment hub in the world and is currently building the world’s largest fully automated container terminal.

Medical tourism

Singapore claims one of the best healthcare systems in the world with top-rated facilities and services. It’s also much cheaper than most other developed nations. So, promoting healthcare services to the rest of the world comes as a natural choice. According to the Medical Tourism Index, Singapore is the second-best medical tourism destination in the world today.

Building a skilled workforce 

From the early days, the government invested in skilling up its citizens, so they’re geared to cater to the influx of international businesses. As a result, Singapore now has one of the best education systems in the world, focused on maths, science, innovation, and vocational training.

According to OECD’s Program for International Student Assessment, Singaporean students consistently outperform their peers from other countries when it comes to maths and areas like collaborative problem-solving. The average Singaporean student is also around two years ahead of other countries in terms of literacy.

But it’s not just the school system: Singapore’s universities are also known for high-quality education. The National University of Singapore (NUS) and Nanyang Technological University (NTU), for example, regularly rank among the top 20 universities in the world. This level of focus on education and skill development has certainly allowed the country to keep international employers happy.

Promoting diversity and social stability

Social stability is a critical element for the economic prosperity of any country. And Singapore has recognized this from the outset. Its focus on meritocracy, equity, and transparency has been pivotal to maintaining harmony in a highly diverse society.

The government has also invested heavily to eradicate poverty, a driver of social unrest in many countries. Its initiatives include public housing development, subsidized healthcare, and various financial assistance programs to uplift the living standards of its citizens.

In addition, Singapore acknowledges Mandarin, Malay, and Tamil as official languages to represent and recognize the country’s three main ethnic groups. But English remains the language of choice in government, business, law, and other key social and economic activities. This policy has helped prevent undue prominence to one ethnic group.

But all these have another advantage: The country’s impressive diversity and ethnic harmony have created a welcoming environment for international companies, wealthy investors, and foreign workers to make Singapore their home.

Singapore’s recipe for economic success

The Singapore success story is an excellent case study on government strategy. The reasons for success of Singapore’s economy primarily lie in a strong vision and bold actions based on meritocracy and equity. And that required courage and a country-first approach by its leaders—to eradicate corruption, injustice, and unfair advantages and create a fair and just environment to build trust, first among its citizens and then among the global business community.

The story of how Singapore developed its economy provides many examples of bold and decisive government action that often goes against the grain. When other economies chose protective measures, Singapore opened its shores fully to the world. When experts denounced government intervention, it adopted a somewhat authoritative approach to enforce direction, policies, and law. And when ethnic diversity created instability in other countries, Singapore made it a strength to drive economic prosperity.

But Singapore’s fate in 1965, when it gained independence, was no ordinary plight to be in either. It had no meaningful natural resources or land to count on. Its population was minuscule and highly unskilled. The country grappled with extreme poverty and social instability. In other words, it had nothing going its way.

Perhaps desperation provided the courage and determination for its leaders to do what’s deemed impossible by many other nations. But, no doubt, an inspiring vision and strong personal values have also played a pivotal role in this journey.