A New Nation In Poverty

In 1959, Singapore was granted full self governance from the British.

Heading up this newly formed government was Lee Kwon Yew. He served as Prime Minister of Singapore from 1959-1990. Conditions in the country when he first came to power were some of the harshest any leader has faced. Unemployment was in the double digits and close to 70% of the population lived in poverty and slums. Basic sanitation was lacking, labor strikes and social unrest were common. They had problems created by multi-culturalism with Chinese, Malays, and Indians forming ethnic blocks, each looking to advance their group's interests at the expense of others. On top of this, communism was rampant. The communists sought to sow chaos and subvert the newly formed government at every turn in order to gain control.

If these problems weren't enough, Singapore was on an island, both literally and figuratively. They had no natural resources to build an economy with. The only resource available was its native population of 1.6 million people.

Despite all these challenges, Yew was able to pull this newly created nation out of poverty and transform it into some of the highest standards of living in the world.

So what policies did he implement to complete one of the greatest economic turnarounds in history and how can we use the same policies to improve America?

Building Singapore Into An Economic Powerhouse From Scratch

Lee Kwon Yew knew he was up against the clock.

He needed to get wins on the board for his people and fast. Failing to deliver tangible benefits that improve his people's quality of life would allow the communists to capitalize on the failure to take the country over.

The challenge was figuring out the best path that would enable his people to make a good living. The problem was the country and its citizens had no capital to draw upon and no skills whatsoever.

To take Singapore out of poverty and transform it into a first world nation, Yew focused on 4 key pillars:

• Industrializing
• Developing Human Capital
• Government Leadership - Ease of Business and Building Infrastructure
• Make Ownership Possible

Pillar 1 - Industrializing

When Yew first assumed power, Singapore's economy was limited to importing goods and immediately exporting them to other countries.

There was no manufacturing base to further process the imported goods and increase their value prior to exporting them. Yew knew they had to industrialize in order to bring Singapore out of poverty.

But manufacturing requires capital to build up industry. Singapore had none to draw upon. They would also have to import everything as they had no natural resources to draw upon. Given these constraints, he focused on two areas:

• Low capital, high labor intensive industries
• Foreign investment to build factories

Singapore had no shortages of people to draw upon as a workforce. To begin their economic development, they spun up a tourism industry. This was highly labor intensive while requiring little capital. It provided a variety of supporting businesses that was also labor intensive, including cooks, maids, waiters, laundrymen, drycleaners, tour guides, drivers, and producers of souvenir products.

This was a stepping stone to building up capital. But they needed more if they wanted to build factories. Foreign investment came in from Hong Kong and Taiwan to set up manufacturing facilities for toys, textiles, garments, vegetable oils, cosmetics, and more. Yew as able to set up joint venture partnerships for a shipping industry to build and repair ships.

Unemployment steadily decreased as more economic development occurred from the tourism and foreign investments. But to further increase the standards of living, they needed to move up the ladder to begin producing more complex manufacturing products. These complex manufacturing industries required a skilled labor force, which Singapore did not have.

Pillar 2 - Developing Human Capital

While the low capital, high labor intensive industries and initial foreign capital investments were a good starting point, Yew knew he needed to upskill the Singaporean workforce to move on to more complex industries to further grow the economy and increase living standards.

Any industry that Singapore pursued but didn't possess sufficient industry specific knowledge failed more often than not. They key to success was ensuring the managers and workers within those industries had sufficient training. Education levels and skills needed to be increased.

The first step to remedy this was seeking more foreign investment from multi-national corporations. Singapore was yet another country that benefited immensely from America's prosperity being exported over seas thanks to the promoters of "free trade". Many American businesses gave Singapore the much needed technology, capital, and industry knowledge required to build factories and make their workforce productive.

Yew took this a step further by creating schools, trade unions, community centers, and social organizations to help train his people and established best in class standards. Some of these were financed directly by Singapore while others were established by foreign corporations that employed their own instructors to train the technicians required for the newly built production facilities. These centers trained workers in complex manufacturing areas such as precision mechanics, precision optics, toolmaking, and electromechanics. Singapore now had a highly capable precision engineering workforce that could be deployed to a variety of high value added manufacturing businesses.

Part of the success of these training facilities was training the workforce in a factory-like environment. This enabled them to become familiar with the systems and cultures of different nations. Within 4-6 months of training, the graduates from these programs were productive and highly sought after. This spits in the face of recent proponents of American politicians and corporations who say they have to import people from foreign countries because Americans don't have the skills required. 4-6 months is an extremely short period of time to be able to take a person with zero skills and turn them into a highly productive employee.

Increasing the productivity of Singapore's human capital led to increasing wages while reducing costs per unit produced. This ensured they maintained their price competitiveness around the world. They consistently upgraded their technology and trained their workforce to utilize the new tools to further increase productivity.

A highly productive population enabled unemployment to plummet and attracted even more investment into the Singaporean economy, creating a virtuous feedback loop as more jobs were available, which increased wages as company's bid for a highly skilled workforce.

Pillar 3 - Government Leadership - Ease of Business and Building Infrastructure

Foreign investment didn't flow in just because Singapore increased the human capital productivity of their 1.6 million people.

They had to make themselves an attractive place to invest in.

The goal was to build Singapore into a base camp for entrepreneurs, engineers, managers, and other professionals who had business to do within the region.

First world standards in security, healthcare, education, telecommunications, transportation, and other supporting services helped increase the country's attractiveness to foreign investors. Accomplishing this required the government playing a key role.

Businesses needed infrastructure in place to be successful. Industrial estates were planned out to balance the needs of various investors with the native population. Financial incentives were provided to attract large foreign companies. Establishing good labor relations by rooting out the communist subversives hiding in trade unions brought the stability investors needed to feel comfortable investing in Singapore. All of these provided the foundation for making the country an attractive place to invest. Many of the largest investors were American companies offshoring production in Singapore. Such companies included Texas Instruments, HP, GE, and more.

Singapore's government had to plan for the infrastructure, training, and education needs of various employers years in advance. This is something severely lacking in America today, as seen in an aging workforce in trades and manufacturing. The importance of a singular vision ensured people are trained for areas employers highly value, which increased workers wages, as well as the growth of the country.

Removing friction was key to success. Singapore sought to make doing business with them as easy as possible. An economic development board was established to act as a one-stop shop agency for investors. It eliminated the time consuming process of coordination with many departments and ministries. The agency sorted all investor requirements ranging from land, power, water, environmental, and even worker safety.

It is easy to attract investment when you make it simple to do business with your country.

Pillar 4 - Making Ownership Possible

Singapore was able to industrialize thanks to foreign capital.

But that foreign capital meant foreign ownership. If this wasn't addressed quickly, the country can be hollowed out as all profits generated by these foreign owned companies would leave the country as their owners were overseas.

The citizens of Singapore needed the ability to gain ownership in key industries.

One solution implemented was establishing government owned businesses in a variety of new and critical industrials.

Most people have alarm bells ringing in their heads whenever they hear of government ownership of businesses. They automatically think it's communism. Putting aside the fact that many public corporations have indirect government ownership via government pension investments, Singapore sought to form these government owned businesses with the intent to make them private once established. These industries would have no hope of being created without government funding or foreign ownership.

Here were some of the largest examples of government owned businesses:

• Steel mills such as National Iron and Steel Mills
• Service industries such as the shipping line Neptune Orient Lines (NOL) and an airline Singapore Airlines (SIA)
• Banking and insurance industries such as the Development Bank of Singapore, the Insurance Corporation of Singapore, and the Singapore Petroleum Company
• Chartered Industries of Singapore
• Singapore Technologies
• Water fabrication plant JV with top MNCs

Sufficient private capital from native Singaporeans was insufficient to get these industries off the ground. The government played a key role in establishing these desirable and essential industries that otherwise would have had no chance of being created with private capital without foreign ownership.

To avoid creating an inefficient, bureaucratic "company", national industries had to be profitable or they would be shut down. The successful ones, such as the Public Utilities Board, the Port of Singapore Authority, and Singapore Telecom, started out as state monopolies, which helped them build up their capabilities by having a guaranteed market. To ensure they were ran efficiently, profitably, and competitively, they were spun out into separate entities outside of the government's direct control to be ran as private companies.

Many of these companies were listed on the local stock exchange. This allowed Singaporeans to purchase ownership in successful national companies. Citizens were able to participate in the company's growth and gained a share of the profits through dividends.

To further increase ownership, the Development Bank of Singapore (a nationally created company), sought to finance entrepreneurs who needed capital to get their business off the ground. Established banks had no experience outside of trade financing and were far too conservative and resistant to lend to manufacturing entrepreneurs. The Development Bank of Singapore made it possible for more Singaporeans to create their own businesses, increase ownership, and further increase the economy.

First World Results

Under Yew's leadership, Singapore transformed from nearly 70% of its population living in poverty in 1959 to having some of the highest standards of living in the world today.

Singapore's purchasing power parity, which measures how much a basket of common goods and services compares between two or more countries shows Singaporeans enjoy a 47.9% higher per capita purchasing power parity of America ($132,570 in Singapore versus $89,600 in the United States).

Yew credits the success of Singapore to the quality of people in charge. Confidence in Singapore's leadership made foreign investors comfortable enough to deploy large investments into the country to build its manufacturing base. This was so effective, that Singapore was the world's third largest oil-refining center after Houston and Rotterdam. It was the third largest trading center after New York City and London, and the largest fuel oil bunker market in terms of volume and became a major petrochemical producer.

In 1997, they had nearly 200 American manufacturing companies invest over $19 billion into Singapore.

This is the bittersweet part. Singapore was a great success story. But it can at the expense of the United States.

America lost not only these investments to Singapore, but also the countless manufacturing jobs thanks to "free trade". The same investment and jobs that could have remained in the US could have dramatically increased our standards of living. Free trade agreements were a disaster for America, but a boon to Singapore.

Implementing Singapore Pillars In America

What lessons can we take from Singapore's success to rebuild America's productive powers, in both manufacturing and trades, to increase profits while also increasing the pay of employees?

Developing human capital is something your business can directly influence. Other policies require governments to implement. I have previously wrote on developing human capital as a component of creating a cost advantage. By increasing the skills and quality of your workforce, your production costs per unit will decrease. This enables you to have higher levels of profit and compete more effectively on price.

Refer to the cost advantage for more details, but as a summary, here's how to increase human capital:

• Hiring Process - Hire the right employees from the start
• Training - Get new hires productive as soon as possible, cross train them in multiple areas, and increase the skillset of all employees to become more productive
• Compensation & Upward Mobility - Give employees a reason to stay with your company
• Employee Retention - The higher your average employee tenure is with your company, the more productive and effective they will be

Another area your business can influence without waiting for political action is making ownership possible for your employees.

There are a variety of potential options to achieve this, which will likely be part of a separate expanded article in the future. But at a high level, these can include:

• Retirement
• Home buying assistance and Mortgage repayment assistance
• Employee stock ownership plans
• Phantom stock and stock appreciation right plans
• Deferred profit sharing plans

Helping to fund employee retirements can be great way to increase the level of assets your employees own.

The 401k retirement plan is likely the easiest existing vehicle to help achieve this. It also has tax benefits in place that make it attractive to use. The company can provide a given amount of contributions to their 401k to help them achieve financial security for their retirement.

I have my own feelings about increasing investments in publicly traded companies. It can create a lot of issues, such as removing capital out of the local community where your business and employees exist. This capital flow, in my opinion, can be better put to productive use by focusing on other ownership areas.

One of the biggest problems your employees likely face now days is buying a home.

Helping your employees accomplish this requires creativity as there aren't tax advantaged options, unlike the 401k. Nevertheless, young people are struggling to afford a home and it creates an unstable environment. The longer it takes for them to purchase a home, the longer they are likely to delay starting a family and it can lead to not being tied to a physical place, which may increase the likelihood of employee turnover as they haven't been able to establish real long term roots in the community.

Some potential solutions include providing benefits such as the company helping employees build a sufficient down payment to get the home purchased in the first place. This could a matching savings account held separately for purposes of funding the down payment, similar to matching 401k contributions. Again, this requires a lot of work but it can be enormous value add for your employees. Even when this is achieved, many will struggle with repaying their newly acquired mortgage ahead of schedule to avoid crippling usury rates.

For example, the interest for a 30 year mortgage at 6% annual interest for a $400,000 home with 20% down is $370,682. The interest alone is greater than the $320,000 mortgage. The monthly payment for this loan is $1,918. But if you help them by giving an additional approximately $385 they can put to repaying their mortgage each month (after taxes), they can repay the loan in 20 years and save over $140,000 in interest.

The other options for ownership include tying your employees to the long term performance of the business.

This helps ensure short term performance isn't prioritized at the expense of the long term. Options here include employee stock ownership plans, phantom stock plans, stock appreciation rights plans, and deferred profit sharing plans. Each has their own pros and cons but all act in a similar manner by promoting long term performance and allowing employees to take part in the growth of the business. These will be expanded on in a separate article.

It has been a rough 50+ years for average American workers.

But it doesn't have to continue this way. By taking some of the lessons as seen in Singapore, we can transform America to regain its former high standards of living. Despite all the problems created from bad policies over the last several decades, we are still thousands of miles ahead of the bleak conditions Singapore faced when Lee Kwon Yew took over in 1959. They were able to transform themselves from poverty and slums to first world standards in less than 30 years. America can do the same, in a much shorter amount of time. All it takes is applying these lessons in your business to get the ball rolling.

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