Why did Singapore and Hong Kong Escape Protection?

Singapore and Hong Kong have been the most open economies in the world during the past fifty years.  How do we explain this success of the two economies during a period when all other developing countries found themselves resorting to protection?

Economic Times, June 20 2001

Singapore and Hong Kong have been the most open economies in the world during the past fifty years. While the former went through a brief import-substitution period during 1960s, the latter has been entirely free of trade barriers throughout this period. How do we explain this success of the two economies during a period when all other developing countries found themselves resorting to protection?

The commonest answer to this question is that the domestic market in Singapore and Hong Kong was too small. Reliance on exports was a natural response to this small size of the internal market.

Though plausible sounding, the late economist Bela Balassa correctly argued that it fails to stand closer scrutiny. Balassa reminded that with a population of 2 million in 1950 and relatively high per capita income derived from trading activities, Hong Kong, China had a larger domestic market for manufactured goods than the majority of the developing countries. Yet, many of these latter countries embarked on industrialisation behind high protective barriers. For example, Tunisia had a home market smaller than that of Hong Kong, China but it went on to establish small local plants to serve the domestic market behind a protective wall that remained in existence for decades.

An alternative explanation of the victory of free-trade policies in Hong Kong and Singapore has been offered in terms of their geography. They are both island economies that stood to benefit from large volumes of trade that free-trade policies may generate. For example, Singapore was a natural port to serve as a way station for storage and final processing of goods destined to and originating from the neighbouring countries in south east Asia.

While this feature of geography may have played some role, by itself it is insufficient to explain why pro-export interests won over import-competing interests in these economies but not elsewhere. Sri Lanka, Mauritius and Madagascar were all island economies but fell prey to protectionist policies for achieving industrialisation.

The failure of protectionist interests to assert themselves in Hong Kong, China and Singapore during the last half-century must be explained in terms of two other mutually reinforcing factors. The first of these factors relates to history. By 1950, both Singapore and Hong Kong, China had accumulated a long history of free trade. Singapore had become a British Colony under the Straits Settlement in 1867. The British gave it free-trade status. Likewise, after colonising it, the British adopted free trade policies in Hong Kong as early as 1840s. Free-trade status of these economies resulted in a large expansion of re-export trade. During 1960-67, the share of re-exports in total exports in Singapore had reached 85.6 per cent. This large share of re-exports made trade barriers costly and, thus, strengthened the hands of pro-export interests.

The second reason why free-trade policies could be sustained in these two economies during the past half-century is the absence significant agricultural activity there. For example, in 1970, only 3.78 per cent of Singapore’s labour force was engaged in agriculture, fishing and quarrying. As much as 23.44 per cent of the labour force was engaged in trade and 21.98 per cent in manufacturing. The remaining 50.8 per cent of the population was engaged in construction, utilities, transport, communications, financial, business and other services. Thus, the pressure for transformation from a principally rural, agrarian economy to an industrial or service economy that other developing countries faced during the early part of the last half-century was essentially absent in Singapore and Hong Kong. With industry and exports already having a significant presence, the pressure for achieving industrialisation behind a high protective wall was contained.

In the case of Singapore, considerable credit for the success of pro-free trade policies also goes to its far-sighted leaders. The import-substitution ethos among policy makers during the early part of the last half-century was too powerful for any developing country government to escape. Consequently, the Singapore government also introduced import quotas on a small number of selected products during 1965-69.

But the Singapore government was careful to credibly inform the industry that such protection was temporary. The need for the quota for each product was reviewed once every six months. If the particular industry was found not making any serious effort to succeed in its ventures, import quota protection was withdrawn. Quotas were also removed when industries were able to function without further protection from government. As a result, by early 1970s, Singapore had returned to the policy of near free trade that prevails till today. Few developing countries have succeeded in rolling back protection with this textbook efficiency.

India’s experience on trade policies is in sharp contrast to that of Singapore and Hong Kong, China. A key factor behind increased protection in the early phase of development was undoubtedly the initial structure of the economy. In 1950, India began with a very high proportion of its workforce in agriculture. This fact, combined with the prevailing import-substitution ethos, ensured the choice of protection as a key instrument of industrialisation. But subsequently, the interest group politics became dominant. As Jairam Ramesh has emphasised in his recent writings, a key problem India continues to face even after fifty years of development is one of continuing high share of labour force in agriculture. Despite the sharp reduction in its share in the GDP from 50 to 25 percent, agriculture accounts for two thirds of India’s labour force. In part, this has been due to the failure of labour intensive industry to expand. In turn, this requires continued export expansion and hence reduced protection at home and more open markets abroad.

In this context, the forthcoming WTO ministerial conference in Qatar offers a major opportunity to launch a new round of trade negotiations that could help bring the level of protection down around the world.