Little Red Dot, Great Influence: Singapore in Southeast Asia

The city-state of Singapore is barely visible on a map of Southeast Asia. So small it is that Indonesian president B.J. Habibie once disparagingly called it the "little red dot" [1]. However, Singapore's small size belies its status as a major player in Southeast Asia, due to its economic strength. Indeed, despite having only 0.9% of the region's population, Singapore accounts for 13% of its GDP and 35% of its total trade in goods and services.. Moreover, Singapore's wealth and inherent vulnerability have given it both the means and incentive to create a powerful military, with a robust military-industrial complex, and large reserve force due to conscription. As such, Singapore accounts for 26% of Southeast Asia's total military expenditure.

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When Singapore gained full independence in 1965, it was poverty stricken with high unemployment. Today, it is among the top-5 countries in GDP per capita, dominating Southeast Asia in this category (Fig. 2). While most of the region has grown rapidly in the past half-century, Singapore remains exceptional in its single-generation leap from third world to first. To achieve this, the city-state benefitted from a combination of shrewd policy-making, favourable geography, and historical conditions.

1. Strategies of Growth

Former UK prime minister Tony Blair once identified three key decisions, taken by Singapore's first-generation leadership, that primed the fledgling country for success [2]. In the region, these decisions are unique - or at least unique in extent - to Singapore. The first is adoption of English - the main international language - as Singapore's official working language. Today, this is reflected in workplaces and schools, where English instruction is emphasised. The second is the recruitment of intellectual and management capital from all over the world to support Singapore's enterprises and train its people. The third is zero tolerance of corruption.

All three decisions played crucial roles in Singapore's strategies of development. From the beginning of self-governance in 1959, Singapore has cycled through at least four distinct policy phases [3]. From 1959-65, the government focused on industrialisation through import substitution, a common approach in the post-war developing world. As part of this strategy, Singapore imposed tariffs and quotas in the early 60s and entered the new Malaysian Federation in 1963, a move that doubled the size of the domestic market.

This strategy met with some success. However, Singapore's manufacturing sector could never achieve the economies of scale required, and unemployment remained at high levels. Furthermore, the lack of exports led to issues in the balance of payments. To make matters worse, the domestic market was then reduced by expulsion from Malaysia in 1965 and the withdrawal of UK military forces from Singapore, announced in 1967.

To overcome these problems, Singapore shifted to a policy of export promotion from 1966-73. This was novel in Southeast Asia, but it echoed the current strategy of rapidly growing economies in East Asia: Japan, Hong Kong, Taiwan and South Korea. To this end, the Singapore government offered incentives to manufacturers that produced for export - the most prominent being corporate tax breaks - that served to boost both domestic as well as inward foreign investment. The resulting expansion of industries from textiles to electronics absorbed the unemployed labour force and resolved the balance of payments issue.

By the early 1970s, with employment high, the only room for growth lay in upgrading Singapore's industries to skill- and technology-intensive sectors such as computers and pharmaceuticals. Hence, from 1973-84, Singapore embarked on a period of industrial restructuring toward these sectors, vigorously courting foreign multinationals to invest and bring advanced technologies to Singapore. This invitation of foreign capital had at least three positive impacts on Singapore's industrial restructuring. First, it meant that foreign firms shouldered much of the start-up risk in implementing new technologies. Second, it enabled technological development at a rate faster than if local firms had to ascend the learning curve on their own. And third, domestic companies enjoyed the knowledge spillover effects of working with foreign firms, such that Singapore's own intellectual capital was upgraded.

Indeed, this period was characterised by increasing knowledge transfer from foreign to local workers, supported by initiatives such as training centres run by foreign multinationals. This is just one example of the way in which Singapore benefitted form adopting English as the working language. So vital was this that founding prime minister Lee Kuan Yew once remarked that "the deliberate stifling of language (English) which gives access to superior technology can be damaging beyond repair ... It is tantamount to blinding the next generation to the knowledge of the advanced countries" [4].

These benefits continued to be felt as Singapore transitioned to a fourth stage of development: diversification away from manufacturing to sectors such as financial services. Hence, Singapore has long benefitted from its courtship of foreign investment and expertise, aided by the use of English, and a stable political and macroeconomic environment (e.g., low inflation), as well as liberal policies toward trade and foreign investment.

Throughout the whole development trajectory, Singapore has also greatly benefitted from a lack of corruption, especially relative to regional neighbours such as Indonesia, Malaysia and the Philippines. The negative effects of corruption on development are many-fold. It generally leads to weaker governance, increases economic inequality, and deters foreign investment [5]. Furthermore, it would have undermined an activist industrial policy such as that adopted by Singapore. By prioritising sectors and firms assessed to have the highest growth potential, this policy exposes itself to personal interests and unfair treatment should corruption exist in the decision-making process [3].

In summary, Singapore's exceptional development path has benefitted enormously from a series of policy decisions, concerning language, investment priorities, and political stability through long-term dominance of the ruling party. This is a very incomplete picture, but it goes some way to explaining why Singapore has so widely exceeded its regional peers in economic development.

2. An Open Economy

Singapore's highly liberal trade policies have also facilitated its development as a regional trade hub, accounting for more than a third of Southeast Asia's total international trade (Fig. 3). Indeed, Singapore is one of the most open economies globally, with total trade standing at 311% of its GDP (Fig. 4). This external orientation has opened many business opportunities, particularly in the shipping trade and financial services; however, it also renders Singapore vulnerable to global shocks, as was revealed during the 2008 financial crisis [7].

Singapore sits at a major shipping route between the Pacific and Indian Oceans. Therefore, it has long played a key role in maritime trade between East Asia, South Asia, Africa and Europe. However, its status as an trading hub was greatly enhanced during British colonial rule in the 19th century. Apart from its favourable geographic location, Singapore enjoyed political, commercial and technological advantages during this period. Politically, it served as a node within an expanding and vigorous British empire, facilitating trade for British possessions in the Far East. Commercially, it enjoyed liberal "free port" policies, implemented by the British, that gave it an advantage over neighbours that enacted protectionist policies such as tariffs. And technologically, it benefitted from the Industrial Revolution in Britain, which led to increased volumes of goods to be traded, as well as steam navigation, the construction of railways on the Malay peninsula, and improved communications capabilities [8].

Independent Singapore retained the twin advantages of geography and an open trade policy. It also benefitted enormously from the overall growth of the region, and of East Asia more broadly. Furthermore, it was one of the first Asian ports to embrace containerisation, which dramatically increased the efficiency of transshipment. Aside from this, Singapore maintained its trade relevance by investing heavily in port capacity and expanding its petroleum refining facilities. In services, Singapore also encouraged the growth of its banking sector with liberal financial policies. For example, Singapore banks engaged in US dollar deposits and loans outside the grip of US financial regulation, which allowed Asian economies to borrow US dollars from Singapore to finance trade and investment.

The result of Singapore's open trade policy is that it is now the world's second busiest container port - behind only Shanghai [9] - and its fourth most competitive financial centre, behind New York City, London and Hong Kong [10].

As an interesting side note, Singapore's external orientation and proximity to emerging economies in Southeast Asia have made it an incredibly attractive destination for foreign direct investment (FDI). In 2024, Singapore was the second largest recipient of FDI globally, behind only the United States [6]. It was also the world's seventh largest source of FDI, accounting for 4.9% of China's total inward investment - comparable to the United States and Japan. Singapore's investment footprint in its own region can be seen in the fact that it accounted for a full 29% of inward FDI in Indonesia and Myanmar, as well as 22% in Malaysia and 18% in the Philippines and Thailand [11, 12]. Hence, Singapore is in a unique position to shape and benefit from the growth of emerging economies in Southeast Asia.

3. The Poisonous Shrimp

Singapore's small size and proximity to larger neighbours have also spurred its government to invest heavily in the city-state's military capabilities. Its high per-capita GDP, imposition of national service for men, and acquisition of advanced platforms such as the F-35 fighter jet [13], have all contributed to Singapore having the largest military expenditure in Southeast Asia, despite its small size and population (Fig. 5).

Independence in 1965 left Singapore vulnerable amid acrimonious relations with its larger neighbours. It had just been expelled from Malaysia due to racial and political tensions, and was engaged in low-level conflict with Indonesia, whose government did not accept the legitimacy of Malaysia's formation under British auspices (and by extension, of Singapore). Hence, in 1967, Singapore instituted national service for all males at age 18, both to build a credible reserve force, and to foster a sense of unity between the country's Chinese, Malay and Indian communities. With no strategic depth, the goal of the armed forces was therefore to deter attack by imposing the highest possible cost to any attacker through "Stalingrad" style urban combat. Singapore was to be a "poisonous shrimp" - easy to swallow but impossible to digest [14].

To be sure, national service is not unique to Singapore within Southeast Asia. Vietnam also imposes military service for all young men, and Thailand does so under a lottery scheme. As such, the size of Singapore's active and reserve forces is actually quite modest, comprising the fourth largest military in the region (Fig. 6). However, if one multiplies the military personnel count by GDP per capita, Singapore comes out on top, suggesting that its high defence budget can be explained in part by the living expenses of military personnel.

Another dimension is arms acquisition. Singapore is home to a robust indigenous defence industry; while it is dwarfed by counterparts in America, China and Europe, it still stands as the most highly developed in Southeast Asia. For example, Singapore's top defence contractor, ST Engineering, is the 58th largest company in the world by arms revenue, while no regional competitor made it to the top 100.

In addition, Singapore is also the largest regional importer of military equipment, including advanced platforms (Fig. 7). For example, all of Singapore's fighter aircraft (F-15, F-16 & F-35) are American-made, and all of its transport aircraft are either American or European, including the Lockheed C-130 Hercules and the Airbus A330 [16]. Furthermore, its only main battle tank is the Leopard 2, manufactured in Germany [17]. While Singapore's wealth enables it to purchase top-end equipment from America and Europe, there are also supply-side factors in its favour. For example, the US desire to protect its most advanced technology means that it restricts export of the F-35 to only its most trusted partners. Hence, it rejected requests from Thailand and Indonesia, while it approved Singapore's request [18]. Thus despite the modest size of its active military, Singapore has been able to maintain a significant cache of high-tech armaments, including the largest force of fixed-wing combat aircraft in Southeast Asia (Fig. 8).

Hence, the scale of Singapore's military expenditure can be readily explained by the size and technological sophistication of its armed forces, reinforced by conscription and large arms purchases from abroad. However, it is also true that no nation would be able to sustain this level of defence spending without Singapore's degree of wealth, achieved by decades of economic growth. Furthermore, the Singapore state enjoys a significant net asset position that would enable it to rapidly boost spending should a crisis arise, all without incurring a net public debt position [20]. Seen this way, the country's economic and military fortunes are interlinked. Indeed, its domestic defence industry has certainly benefitted from the country's ascent up the technology scale and its activist industrial policy, which has enabled it to channel investment to areas of strong military relevance, such as robotics and artificial intelligence.

4. Conclusion

It is clear that in relation to its size and population, Singapore punches far above its weight. Through a combination of far-sighted policymaking and advantageous geography, it has become a major trade hub, financial centre, and regional military power; seen in these terms, this "little red dot" no longer seems so little. It has achieved all this largely by harnessing foreign investment and attracting capital - including intellectual capital - to the city state such that it could leapfrog its neighbours in governance and technology. As such, Singapore exerts outsize economic and military power in the region, with its influence enhanced by significant FDI positions in neighbouring countries. The task for Singapore going forward is now to maintain its global relevance and social cohesion amid new challenges such as in the cost-of-living, and in an increasingly fraught geopolitical climate.

References

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