There are three main elements of the Singaporean system that allow it to operate, and they demonstrate that the country is far from a free-market paradise.
To learn from, or indeed reject, the Singaporean model, we must first understand it.
T he small Southeast Asian city-state of Singapore is often held up as a shining example of how free-market capitalism brings prosperity to all nations that embrace it. “If you compare the conditions of people in a place like Singapore with the conditions of people in a place like red China or for that matter Indonesia,” said Milton Friedman in his 1980s TV series Free to Choose, “you will see that the economic freedom is a very important component of total freedom.” Similarly, in its 2022 Economic Freedom Index, the Heritage Foundation observes that “Singapore’s highly developed free-market economy owes its success in large measure to its remarkably open and corruption-free business environment, prudent monetary and fiscal policies, and a transparent legal framework.”
For free-market advocates, Singapore may therefore appear to be worthy of emulation. But Singapore actually provides a vision — attractive or not — of what a pragmatic form of social democracy looks like in a globalized and interconnected world. There are three main elements of the Singaporean system that allow it to operate, and they demonstrate that the country is far from a free-market paradise.
Element 1: “Eliminate the communists”
When Singapore gained independence in 1965, there were many who doubted whether the country would survive economically. It lacked natural resources and a capitalist class capable of producing globally competitive goods and services. The country’s working class was organized by a radical labor-union movement that sought a socialist and anti-colonialist revolution. Singapore’s ruling party, the People’s Action Party (PAP), led by Lee Kuan Yew, had come to power by teaming up with the radicals, as there was no other way of gaining the trust and support of the working class. Once in power, however, the party faced the daunting task of convincing the working class to embrace capitalist development based on foreign direct investment.
In 1961, the United Nations sent an economic committee to Singapore, tasked with investigating the possibilities for industrialization on the island. The committee was led by a Dutch economist, Albert Winsemius, who clearly saw the economic challenges facing Singapore. In private conversation with Lee, he bluntly explained that, in his view, for Singapore to achieve economic development, it would be necessary to “eliminate the communists,” meaning the radical labor unionists. “As an economist,” Winsemius said, “I am not interested in what you do with them.”
Said and done: Two years after Winsemius made his recommendations, Operation Coldstore was carried out, a mass arrest during which 113 individuals from the political opposition were imprisoned — without trial and indefinitely — under the “Internal Security Act.” This move kneecapped the political opposition in Singapore, and as a result, the PAP was able to establish the absolute parliamentary monopoly that it held until 1981.
The PAP also took control of the labor-union movement by deregistering the radical unions and forcing workers to join one of the more moderate unions. As part of this, a National Wages Council was also founded — a tripartite organization consisting of labor representatives, employer representatives, and representatives from the government, tasked with formulating central wage guidelines for the Singaporean labor market.
Thus, the first element of Singapore’s social democracy was in place: a corporatist system of centralized wage bargaining, controlled by the one-party state, set up to neutralize the radical elements of the labor movement.
Element 2: Class compromise over class struggle
Despite the PAP’s early consolidation of power, it was not until 1968 that Singapore’s industrialization really got going. The British announced in that year that they would withdraw their military from Singapore by 1971, and with that a large number of jobs, as the British military was at the time the largest employer in Singapore. To attract new investment, two new bills were therefore introduced: the 1968 Industrial Relations (Amendment) Act, and the 1968 Employment Act.
The first bill restored rights to managers that, according to the government, had been eroded in the preceding years by labor unions. It replaced the principle “first in, last out,” which had previously governed retrenchment decisions, with the principle “least efficient, first out.” The second bill sought to make employment conditions stricter and more uniform, to cut costs and increase labor productivity.
When introducing the two bills to parliament, labor minister S. Rajaratnam explained the philosophy behind them:
In many newly independent countries, politicians out to be popular with the people, and particularly with the workers because they happen to be in the majority, have invariably persecuted and impoverished the capitalists in the belief that as the rich become poorer, the poor would become richer. We have studied these examples with great interest and in every case the result has been contrary to what was expected: the capitalists certainly have grown poorer but the poor have grown poorer still.
Based on this analysis, Rajaratnam declared the PAP to be the sole defender of what he called the “national interest.” “Naturally for the trade unionists,” he said, “they are only interested in the trade unions and the workers,” just as the employer “is concerned only with his own sectional interest.” However, “As a Government, our interests are national. We are interested in the welfare of Singapore as a whole — workers, employers and professional men. . . . And the overriding test to which we submit any legislation is, will it help to bring about these objectives — economic expansion, new investments, increased productivity?”
Thus, the second element of Singapore’s social democracy was in place: a corporatist class compromise according to which zero-sum class struggle was exchanged for positive-sum cooperation, with the one-party state taking it upon itself to subordinate the interests of capital and labor to the unified “national interest.”
Element 3: ‘A stake in the country and its future’
The last and arguably most important element of Singapore’s form of social democracy came with a third bill — the 1968 Central Provident Fund (Amendment) Act — which was introduced as a companion to the two other bills. It made two important updates to Singapore’s pension system, the Central Provident Fund (CPF).
First, it gave the government the power to increase the monthly savings rate — which it did, bit by bit, until the savings rate stood at 50 percent in 1985 (split evenly between employer and employee). The government invested this money mostly into the industrializing economy, specifically into its so-called government-linked corporations, all of which operate on a for-profit basis.
Second, the bill gave the citizens the ability to use their savings to buy housing from the Housing and Development Board (HDB), a state-owned real-estate developer (it, too, operating on a for-profit basis). At the time, most Singaporeans were living in “kampungs,” which were urban villages on the fringes of the city center.
Today, more than 80 percent of the Singaporean population own their homes through the HDB. Since its introduction, the CPF system has expanded, with citizens using their savings to gain access to not just housing, but also health care, education, and other welfare services.
In this, we get to the heart of Singaporean social democracy. Rather than being based on taxation, Singaporean social democracy is based on getting the citizens invested as shareholders in the state as a profitable corporation, with each citizen gaining access to the welfare services provided by the state based on their individually accumulated savings. The idea behind the system is simple: If individual citizens use their own savings to gain access to the services provided by the state, they will be much more frugal in how they use the system, leading to less waste of resources. Similarly, while non-profit, tax-financed bureaucracies are often wasteful and inefficient — as they are punished with budget cuts whenever they manage to increase efficiency — the profit motive provides an incentive to Singapore’s state-owned corporations to be efficient, as well as an index of success and failure.
Thus, rather than taking citizens out of the market — by promising that everyone will receive the same welfare services regardless of their economic performance — Singapore’s social contract plugs citizens into the market, by qualifying access to the welfare sector based on individuals’ market participation.
Why Social Democracy?
Why, however, should such a society be understood as a social democracy?
First, like other social democracies, Singapore is organized around a corporatist system of centralized wage bargaining. The state assumes the role of ensuring that industrial relations are characterized by labor peace, cooperation, and avoidance of strikes, and that capital and labor exchange class struggle for harmonious industrial relations, to bring about increases in prosperity over time.
Second, and more fundamentally, the Singaporean system was set up to solve the same basic problem as other social democracies. I call this “the prisoner’s dilemma of capitalism”: Although capitalism brings about increases in prosperity that over time allow both capital and labor to increase their earnings without taking it out of the pockets of the other (in a positive-sum manner) the only way that either party can increase its earnings at any given moment is by decreasing the earnings of the other (in a zero-sum manner). Hence, although both capital and labor stand to gain more from collaboration and compromise over time, both are incentivized at every given moment to pursue class struggle.
Seen from this perspective, the difference between Singaporean social democracy and European social democracy is not so much the basic logic of class compromise, but rather the situation in which this class compromise was struck. Specifically, in contrast to European social democracies, Singapore had to achieve its class compromise in a situation where the country had to attract global capital to its shores. Hence, Singapore’s class compromise had to be initially struck much more on capital’s than labor’s terms.
Singapore represents an important innovation in statecraft — what the PAP early on referred to as “Singapore’s concept of socialism” — a concept that may be disturbing to Western classical liberals and social democrats alike, but that has nevertheless been very successful on its own terms. To learn from it, or indeed reject it, we must first understand it.