Paths to Economic Success in Singapore and Indonesia

July 10, 2013

By Justine Doody

Singapore and Indonesia are close neighbors with very different paths of development. Set up by the British as a trading post in 1819, the city-state of Singapore became after independence in 1965 one of the 20th century’s great economic successes. Indonesia gained its independence from the Dutch in 1949. Today, Indonesia is emerging as one of the strongest economies in Southeast Asia: as one of the MIST countries of Mexico, Indonesia, South Korea, and Turkey, it is viewed as a potential economic successor to the powerhouse emerging economies of the BRICS (Brazil, Russia, India, China, and South Africa).

Singapore, with a population of just 5 million, has been held up as an example for emerging markets around the world. Photo/Flickr user dmytrok

A new report on Asia from the Sustainable Governance Indicators project of the Bertelsmann Foundation sheds light on the successes of Singapore’s government in creating policies and structures that support its economy. Singapore scores the highest possible mark on economic policy, providing coherent institutional regimes that contribute to a stable economic environment. This success is also reflected in the country’s rank in the World Bank’s Global Competitiveness Index: Singapore is ranked second in the world in the report for 2012-13.

The Singapore model

Beginning in the 1960s, Singapore began to focus on driving growth by building export-oriented industries. The government worked to attract foreign investment through creating a climate conducive to doing business. One of the key elements in this was curbing corruption. In the SGI Asia report, Singapore scores nine out of a possible 10 on corruption prevention. Singapore is ranked fifth on Transparency International’s Corruption Index for 2012, making it one of the least corrupt countries in the world.

However, there are disadvantages to the Singapore model. The country was helped in its growth by a relatively authoritarian government that could implement whatever policies it liked without facing domestic opposition. The same tendency that encouraged economic growth hinders democratic participation. The SGI Asia report notes that infringements of civil rights are frequent and that institutional barriers exist to fair competition between the ruling party and the opposition.

All traditional media in the country is owned by two government-linked corporations and regulations, enable the government to revoke press licenses and repress criticism of the government. Assembly rights are constrained: police permits are needed for outdoor gatherings of five or more people and for indoor assemblies where all speakers are not citizens of Singapore. These and other restrictions have had a chilling effect on the exercise of free speech and civic participation.

Singapore focuses on exports, Indonesia on its domestic market

Singapore has a population of just 5 million, but its next-door neighbor, Indonesia, is the fourth most populous nation in the world, with 242 million people. Indonesia ranks 50th in the World Economic Forum’s Global Competitiveness Index, but its economy is already the 16th largest in the world. Some economists argue that it could pass Germany and the United Kingdom to become the 7th largest economy by 2030.

Part of the reason for Indonesia’s economic growth is its wealth in natural resources. The commodity boom caused by China and India’s growth has favored Indonesia, which has considerable mineral resources, as well as important palm oil and rubber exports. But unlike some other emerging markets, which depend heavily on resources to the exclusion of other categories, Indonesia is succeeding in building its service sector.

Where Singapore focused on exports to drive growth, Indonesia is buoyed by its enormous domestic market. A growing middle class has driven domestic demand higher, to the point where 65 percent of GDP came from the domestic market in 2012. The resource sector has fallen as a share of the economy since 2000: by 2012, mining and oil and gas represented only 11 percent of Indonesia’s GDP.

Corruption is a major obstacle to growth in Indonesia

However, Indonesia has some work to do if its political system is to create a strong foundation for growth. The SGI report gives Indonesia a score of six out of a possible 10 in economic policy, reflecting the fact that challenges remain in institutional cooperation and in implementing policies.

Corruption is a major obstacle to growth: the report scores Indonesia scores three out of 10 on corruption prevention. Even though the government has based successive electoral campaigns on anti-corruption initiatives, these projects have borne little fruit. Oversight mechanisms are not properly implemented and a culture of graft pervades the economic sphere in the country.

The corruption problem extends throughout the political structures of the country, from central to local government, holding back government efforts to put policies into action at all levels. Even though Indonesia has managed to establish a functioning democracy, shortcomings in campaign finance laws means that political parties fund themselves through bribes from donors who can then influence policy-making. Transparency International ranks Indonesia 118 out of 174 countries in its Corruption Index.

Both Singapore and Indonesia face challenges in ensuring that their economic success benefits everyone in their societies. Singapore has one of the most unequal distributions of wealth in Asia. Real wages for the lowest-earning workers have stagnated, and without a minimum wage law, many citizens have to work more than one job to stay afloat. Better protections need to be instated to ensure that the social safety net can adequately support the elderly and those on low incomes.

There are signs that Singaporean politics are indeed changing, according to the SGI experts. In the last parliamentary election the ruling party suffered serious losses, while the opposition gained the highest number of seats since the country’s independence in 1965. Anti-government activism is also growing through the use of the internet and social media which undercuts the largely government-controlled mainstream media. This puts pressure on the government to become more transparent too. For example, it for the first time released information on the number of people receiving the death penalty.

In Indonesia, massive differences exist between regions. Decentralization gives local administrations a lot of power, and while some have used this autonomy to build economic strength, others have fallen far behind. To tackle this problem, the government needs to attack the corruption that siphons off funds for development, as well as improve the quality of infrastructure and education in Indonesia’s poorer regions.

Guest contributor Justine Doody is the English-language editor of China Analysis, published by the European Council on Foreign Relations in cooperation with the Asia Centre in Paris, and an editor for EUCAM and a writer for SGI News. The views and opinions expressed here are those of the author and not those of The Asia Foundation.

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