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How Singapore Became an Economic Success, and What Lies Ahead

Gross Domestic Product (GDP) per capita is a metric that is used to measure the average income of a country’s citizens. It is calculated by dividing the country’s GDP by its population. GDP per capita is important because it provides a snapshot of the standard of living in a country. It can also be used to compare the economic performance of different countries.

Singapore has one of the highest GDP per capita in the world. In 2022, its GDP per capita after adjusting for Purchasing Power Parity (PPP) was $127,564.60, which is higher than the East Asia and Pacific region’s average of $22,397.1. As a note, we use PPP to compare cross-country macroeconomic numbers as a more accurate reflection of costs and standards of living. 

So, why is Singapore’s GDP such an odd phenomenon? Let’s start from the beginning. 

History of Singapore’s economy

Singapore’s GDP per capita has grown rapidly over the past few decades, with the average between 4% to 6% since 1965. In 1965, when Singapore achieved independence, its GDP per capita was just US$516.5. By 2000, it had grown to US$23,852.8. And in 2022, it reached US$82,807.6. 

This growth has been driven by a number of factors, including:

Manufacturing

While we may not naturally associate manufacturing with something Singapore is known for, it is actually how we automate manufacturing aggressively that bolsters our GDP without needing to drain precious human resources. The manufacturing sector accounts for about 20% of Singapore’s GDP, but it employs only about 12.4% of the workforce. 

A strong focus on export-oriented manufacturing, particularly in oil and petroleum refining further makes use of Singapore’s strategic geographic location and infrastructural capabilities to support the economy. In fact, we are home to two of the world’s largest oil rig builders: SembCorp Marine and Keppel Corporation. 

A highly skilled workforce

In the 2019 World Bank Human Capital Index, Singapore ranks as the best country in the world in human capital development. A child born today in Singapore will be 88% as productive when she grows up, as if she enjoyed complete education and full health.

Singapore’s workforce is also multilingual, with many people speaking English, Mandarin, Malay, and Tamil. This makes it easy for businesses to operate in Singapore, as they can communicate with their employees and customers in their preferred language.

The government also provides a number of incentives to attract and retain skilled workers, such as tax breaks and subsidies for training. Singapore ranked second globally for best talent according to the Global Talent Competitiveness Index 2022. 

A pro-business environment

Singapore has a pro-business environment, with relatively low income and corporate taxes, few regulations, and a strong rule of law. This makes it an attractive destination for businesses looking to set up or expand their operations.

The government also provides a number of support services to businesses, such as a free trade zone and a network of business incubators.

Singapore is also a member of the World Trade Organization (WTO), which gives businesses access to a large market of potential customers.

A stable political system

Singapore has a stable political system, with a strong government that is committed to economic growth. On the Corruption Perception Index (2023), Singapore ranks joint 5th out of 180 countries. This gives businesses confidence in the future of the country, and makes them more likely to invest in Singapore.

The government also has a long-term plan for the development of the economy, which gives businesses a clear roadmap for the future. 

Last but not least, Singapore is also a relatively peaceful country, with a low crime rate. This makes it a safe place to do business, and attracts investors from all over the world.

Future outlook for Singapore’s GDP per capita

Singapore’s gross domestic product (GDP) is estimated to expand by 1.4% in 2023, according to the Monetary Authority of Singapore’s (MAS) June survey of professional forecasters. This is lower than the growth rate of 3.6% in 2022. 

According to insights from The Cove, value-added manufacturing, specifically in the electronics and precision engineering fields, continue to play a significant role in driving Singapore’s growth. 

The services sector, particularly the information and communications industries, has also experienced a year-on-year growth of 6.0%. 

Additionally, the finance and insurance industries have seen a growth of 5.9% year-on-year, contributing to the overall economic expansion of Singapore.

For 2023, Singapore’s exports are projected to increase by 4.5%, primarily due to robust demand from the United States and China. Similarly, imports are expected to grow by 4.0% during the same period.

Other macroeconomic factors point to a robust economic situation in the post-Covid recovery period. Singapore has one of the lowest unemployment rates in the world, at just 1.80% in Apr 2023.

Challenges and opportunities for the Singaporean economy

Rising income inequality

Rising income inequality is a major challenge facing the Singaporean economy. The gap between the rich and the poor has been widening in recent years, and this is putting a strain on social cohesion. In 2020, the richest 10% of households in Singapore held 43% of the country’s wealth, while the poorest 10% of households held only 2% of the country’s wealth.

The government has taken some steps to address this issue, such as introducing a progressive tax system and providing subsidies for low-income households. However, more needs to be done to ensure that everyone has a fair chance to benefit from economic growth and not fall behind in the midst of upcoming economic uncertainties. 

An ageing population

The number of people aged 65 and over in Singapore is expected to more than double by 2030, from 400,000 to over 900,000, and this will put pressure on the healthcare system, the labour force, and the economy as a whole. 

The government is taking steps to address this challenge, such as raising the retirement age and encouraging more foreign workers to come to Singapore. 

War in Ukraine

The war in Ukraine, although geographically far from us, has posed key risks to the Singaporean economy. For instance, as we import nearly all the energy we use, the plummeting supply of oil and gas from Russia has meant that energy prices have skyrocketed.

Food prices have also gone up, adding to the list of concerns. Ukraine, known for being one of the world’s major exporters of cereal crops like wheat, maize, and barley, as well as vegetable oils, is facing challenges meeting food demands amid a war. 

Unfortunately, these issues have had a ripple effect on global food supplies, causing prices to skyrocket. That’s why even in places like Singapore, food prices have gone up as a result.

Inflation and business expectations

It’s difficult to relate to GDP per capita without looking at other features of the economy such as inflation. Inflation has several effects on GDP per capita:

  1. Inflation erodes the purchasing power of individuals, as the same amount of money can buy fewer goods and services. This reduction in purchasing power affects the standard of living and, in turn, the GDP per capita. 
  2. High inflation rates can discourage savings and long-term investments since the future value of money becomes uncertain. In Singapore, this is not a huge concern as saving rates are generally stable at around 50%, partly due to the mandatory Central Provident Fund (CPF) savings system. 
  3. Inflation can affect income distribution within a country, worsening the first problem we mentioned. 

Inflation remains quite high, and is expected to range between 4.5% to 5.5% in 2023.

The government has taken some steps to address this issue, such as raising interest rates, which curbs consumer demand and raising the costs of doing business. 

However, as businesses are becoming more pessimistic about the future, this leads to investment and hiring decisions being put on hold – notably in the technology sector in recent quarters. The government is working to boost business confidence, but this is a challenge that will take time to overcome.

Read more: 3 Effective Ways To Hedge Against Inflation

Technological advancements: Artificial Intelligence 

The rise of artificial intelligence (AI) and other new technologies is changing the way businesses operate, and this is creating uncertainty for some businesses. 

However, we can be optimistic about Singapore’s capability to take advantage of the AI revolution – Singapore emerged as the top-ranked city in the Oliver Wyman Forum’s inaugural Global Cities AI Disruption Index, which measures AI readiness. 

Our deputy Prime Minister Lawrence Wong has also indicated some level of confidence in the country’s ability to manage the disruptions that will come with AI.

Read more: 5 Ways AI Could Affect Your Job and How To Make It Work for You

Conclusion

As Singapore continues to navigate these challenges and capitalise on opportunities, its sustained high GDP per capita will play a crucial role in shaping its global significance. 

Singapore’s economic journey serves as an inspiration, showcasing the importance of stability, strategic planning, and investment in human capital for sustainable development. 

With a proactive approach to addressing challenges and a commitment to harnessing technological advancements, Singapore is poised for a bright economic future that will contribute to its global prominence.

Read more: All You Need to Know About Singapore’s Reserves

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