I failed to impress Lee Kuan Yew when we met for the first time a decade ago. It was in December 2004 in Bangkok and he was giving a speech arguing that rumors of America's decline were premature. "America," he declared, was "the most dynamic economy in the world" and would be for many years to come. Afterward, when I asked the founder of Singapore if he was too bullish on the U.S. given the rise of China, he rolled his eyes.
"Why are you such a bad American?" he joked with signature bluntness, before lecturing me on the mechanics of competing in a fast-changing world. Today, as Lee leaves the scene, I'm struck by the irony of that exchange. It's now Singapore's turn to confront questions about whether it can still compete, as Asia’s emergence challenges the impressive economy Lee built.
With the gap between haves and have-nots widening and citizens turning against the open immigration policies Singapore long embraced, the Southeast Asian city-state is facing stark questions about its identity. Lee’s early successes were based on a unique confluence of factors. Whereas Asian "tigers" Hong Kong, South Korea and Taiwan relied on productivity gains to drive growth, Singapore appropriated domestic savings, marshaled the population into moderate-paying jobs and led the charge with government-linked companies. While the results were dramatic, a model Paul Krugman once compared to Stalin's Soviet Union has clearly run its course.
The question now is what the new model should be. "For Singapore to maintain its position as a country with Asia's highest per capita GDP, it will need to sustain strong productivity growth to support steadily rising wages, while keeping unit labor costs constrained," says economist Rajiv Biswas at IHS Global Insight. "Singapore's future success will therefore depend on continued transformation of the economy towards higher value-added industries."
Efforts by Lee's son, Prime Minister Lee Hsien Loong, to raise Singapore's competitiveness have had mixed results. Five years ago, the government launched a 10-year, $2.6 billion effort to boost productivity. Instead of rising toward the targeted 2 percent to 3 percent range, growth in worker efficiency has averaged around 0.5 percent in recent quarters.
What's been lacking? Scale, focus and audacity. A true transformation will require a more targeted approach, not to mention spending more than 1/115th the size of the city’s $298 billion economy. Offering cash rebates to companies that pass out flashy new laptops and iPads to workers will achieve nothing. Even the metrics -- gross domestic product divided by the workforce -- are wrong. Singapore needs more telling indicators, like sales per square foot of retail space or square-foot-per-man-per-day progress in the construction sector.
But the real problem is boldness. In 2010, the government unveiled plans to increase Singapore’s expenditure on research and development from less than 3 percent of gross domestic product to 3.5 percent -- hardly enough to catalyze a startup boom. Singapore needs to get more creative with grants for cutting-edge R&D across industries -- software, biotechnology, energy, logistics and health care among them. Given the backlash against immigration, Singapore must get more out of the 5.5 million-person population it has now -- not rely on new recruits.
One way to do that is to curtail the outsized role of government-linked companies. A necessary evil in the 1960s and 1970s, these champions are impeding opportunities for small-to-midsize companies, which tend to be more innovative. To level the playing field, says economist Irvin Seah of DBS, Singapore should help these companies tap growth in faster-growing economies like Indonesia, Malaysia, Myanmar, the Philippines and Vietnam.
The 10-member Association of Southeast Asian Nations is actively lowering trade barriers. Why not give smaller companies preferential treatment to strike partnerships in neighboring economies? Also, SMEs in struggling Europe are desperate for joint ventures in overseas markets. Singapore could leverage Europe's technology, experience and reach to internationalize even further.
Clearly, the only way Singapore can maintain the remarkable gains made under its legendary founder is to innovate. As the government well knows, the city’s future lies in inventing new ideas, industries and processes, as well as niche, high-value-added services. That will require more strenuous efforts to revamp an education system still based too much on rote learning. Startups could use new tax incentives and a stronger safety net to encourage entrepreneurs to risk failure.
Historians will long debate the merits of Lee Kuan Yew's soft authoritarianism. Yet as I walk the streets of Asian nations stifled by more unsteady leadership than Singapore has enjoyed, I wonder how much stronger these economies would have been under his guiding hand. The irony is that the model Lee pioneered is no longer sufficient for Singapore itself. The government must think bigger and bolder if it’s to sustain his remarkable legacy.
* William Pesek is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. The opinion expressed is his.