July 11, 2017 9:00 am JST
William Pesek

Why Singapore is struggling to reinvent itself

Roots of today`s problems were visible in the city-state over 20 years ago

Singapore's dazzling skyline testifies to its boom times, but the city-state's old recipe for growth is losing its effectiveness. © Getty Images

There is a hot new industry in Singapore: Kremlinology.

Paul Krugman once compared the city-state to the Soviet Union under Stalin, and the Nobel laureate had a point. He was not referring to communism or to mass killings, of course -- but the art of observing, deducing and obsessing over a secretive organization is again consuming the nation of 5.5 million people. The subject of the latest intrigue is a bizarre spat within the family at the core of Singapore's astounding success and the row is fueling an unprecedented scandal that Prime Minister Lee Hsien Loong says could dent the nation's squeaky-clean image.

As far as Singapore's budding Kremlinologists can tell, the tiff concerns the estate of Lee Kuan Yew, who died in 2015. Some of Lee's children accuse their brother, the current prime minister, of preserving a family home that Singapore's founding father wanted demolished. They took to social media to air the dirty laundry of a family that long maintained a facade of having none. Many are asking what is really going on and what the first family brawling means for the trajectory of Singapore's top-down political and economic system.

The echoes of Krugman's 1994 critique are impossible to miss. His over-the-top comparison was this: Lee Kuan Yew's model of appropriating domestic savings, championing state-linked companies and steering the workforce into moderate-paying jobs "would have done Stalin proud," but would ultimately prove unsustainable. The fallout from that unsustainability is now the biggest challenge facing the younger Lee. Efforts to recalibrate the engines of growth away from demographics to greater productivity and innovation are not doing Singaporeans proud.

Singapore long ago realized that mobilizing domestic talent and importing more was the secret of rising living standards. Whereas Hong Kong and other "tigers" championed productivity, Singapore harnessed migration. There are limits, of course. Tiny Singapore cannot reclaim land, build housing and expand subways fast enough to accommodate the roughly 7 million people the government expects by 2030. In 2010, Lee Kuan Yew said "we have grown in the last five years by just importing labor," an admission that says everything about the limits of the Singapore model.

Singaporeans are being squeezed at both ends: the high-net-worth set -- from bankers to tech entrepreneurs -- pushed property prices into the stratosphere, while lower-skilled labor from neighboring countries restrained middle-class incomes.

The nation Lee built needs new ways to boost incomes, competitiveness and innovation as upstarts around Asia raise their economic games. Lee's son has yet to come up with a compelling vision. Certainly tourism is filling government coffers, as are the casinos that altered the feel of the downtown Marina Bay district. But Singapore must transform the economy by moving towards higher value-added industries, encouraging entrepreneurship and investing far more in research and development on biotechnology, energy, health care, logistics and software innovation. It must also reduce the dominance of government-linked companies to give startups more oxygen.

This moment should be Singapore's for the taking as capitalist Hong Kong clashes with Beijing. The buzz surrounding the 20th anniversary of Hong Hong's handover on July 1 is how its free-market spirit is being broken by communists -- not Stalin's, but Xi Jinping's. As China goes further to remake Hong Kong in its image -- greater opacity, less press freedom, dousing hopes for democracy -- Singapore should be an obvious winner. Unfortunately, Singapore is fumbling efforts to reinvent itself.

The Lee family drama might get less attention if it were not for the fundamental questions hovering over Singapore. The sense of rudderlessness that Lee Kuan Yew's death wrought is best addressed by bold and visionary leadership, not more of the same in a fast-changing global economy. A political system stacked in favor of the Lee-dominated People's Action Party -- and against conventional opposition party challenges -- is proving no match for the forces of globalization.

It is troubling, for example, how reliant wealthy Singapore is on exports 20 years after the 1997 Asian crisis. Even if gross domestic product expands 2% this year, as hoped, consumer spending contracted in the last two quarters amid tepid wage growth (slowest since 2009), rising household debt (now 75% of GDP) and increasing unemployment (highest in eight years).

The way forward is harnessing new ideas, industries, processes and fostering greater risk-taking among the ranks of the twentysomethings and thirtysomethings. In top-down Singapore, that means a new tack by the government. Why not try additional tax inducements to catalyze a fresh startup boom and support small enterprises? Stronger safety nets might encourage a risk-averse society to risk failure.

Even now, 17 years after he stepped down, it is hard not to marvel at what Lee Kuan Yew accomplished. Through sheer force of will, he marshaled a place so devoid of natural resources that it long had to buy drinking water from Malaysia into a financial power. The merits -- or drawbacks, as Krugman would argue -- of his soft authoritarianism are still a matter of lively debate. But as Lee's children brawl and Singaporeans become concerned, the blueprint Lee used to build Southeast Asia's richest economy is no longer enough.

The rivalry with Hong Kong, the race to lure multinational companies to headquarter in Singapore and to draw in talent to staff them, increases the urgency for Lee Inc. to get its house in order. The fact that it is fighting over a house, literally, augurs poorly for the retooling process needed to move beyond today's malaise. That will not stop Singapore's fledgling Kremlinologists from poring over the mysteries surrounding the first family. It is no secret, though, that Singapore needs to regain its ability to think big.

William Pesek is a Tokyo-based journalist and author of "Japanization: what the world can learn from Japan`s lost decades". He is a former columnist for Bloomberg.

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