SINGAPORE: SOME ECONOMIC IMPLICATIONS OF THE UK MILITARY WITHDRA

Created: 10/1/1968

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DIRECTORATE OF INTELLIGENCE

Intelligence Memorandum

Singapore: Some Economic Implications ofthe UK Military Withdrawal

ER18

N2 20

OCT

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence3

INTELLIGENCE MEMORANDUM

Singapore: gome Economicof cne UK-

Suninarv

ingapore will have to plan and implement measures to compensate for the loss of the British military establishment whose bases occupyercent of the island's total land area, generateercent of gross dcciestic productnd provide direct employment0 ofillion people. Singapore isetermined effort to minimize this considerable blow to its economy. During the four-year transition period, government spending is planned to increase2 million0 million in loans and grants from thehe large naval base and probably the airbases will be converted to civilian use, and private investment will be encouraged in tourism and manufacturing- These factors and the basic strength of Singapore's economy should enable the island to make the transitionserious economic consequences-

The withdrawal comesime when the economy of Singapore is expanding rapidly/ as the result of an aggressive goveriiment program to industrialize as wellubstantial inflow of foreign capital- economy has been shaken twice previously ins: 3 because of Indonesia's policy ofwith Malaysia and againS whenopted out of the Federation with Malaysia. Despite these setbacks, Singapore's GDP has grownateear Even with this

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rate of expansion, however, the economy in the past has failed*to provide enough jobs for the growing labor force, leading to an increase in unemployment which has become the island's major economic problem.

With aboutercent of the island's labor force unemployed, the withdrawal would be disruptive to Singapore's economy if there were not offsetting factors. Roughly one-fourth of the base workers are Malays and Indians and, by agreement between London and Singapore, they will be discharged first and encouraged to leave the country. Expanding tourism will absorb some of the slack in the servicewhich now cater co 3ntish servicemen. 0 of the base employees ar* supervisors or skilled industrial personnel who should have little problem finding jobs as the basas are converted to non-military uses and the industrial sector continues to expand. The conversion of the Royal Naval Base to aship repairing concern is already under way, and prospects look bright for turning the airbases into regional aircraft maintenance and repair facilities (see The government's plan to increase local spending substantially over the next four years will help to offset the recessionary influence of the withdrawal.

1. Singapore, dr. island country smaller than Kong Kong, has been independent for just over three years. In9 the United Kingdom granted the island internal self-government under Prime Minister Lee Kuan Yew, leader of the Peoples' Action Party (PA?). ingapore joined with Malaya and the Borneo States of Sab ah and Sarawak co form the Federation of Malaysia. But the racial antagonism between the Malays and the largely Chinese population of Singapore and the increasing friction between Lee and Federation leaders in Kuala Lumpur was too deep, leading Singapore to withdraw 5ran "the Federation in

2. Traditionally the island has been the leading entrepot port ir. Southeast Asia, but this role was changing even before the breakup of Malaysia. The

of goods between the less developed countries of the region and the developed countries of the world via Singapore is declining in importance,for only aboutercent of the country's GDP7 (seend Figure Singapore is gradually becoming ananufactuxer bymany of the raw materials which pass through its ports, although the local Chinese businessmen are traditionally traders, and many of them are reluctant to move into manufacturing. But the recent problems with Ccrcmunist agitators in Hong Kong have encouraged some investors there to examine opportunities inand this may help to accelerate investment in manufacturing.

SINGAPORE; GROSS DOMESTIC6

3. Singapore has benefited over the yearsubstantial British military presence. The island's officials have long known that the British eventually would leave, and London's announcement7 that British forces east of Suez would be withdrawn by thes came as no surprise. efense planning after the break with Malavsia assumed that the presence of British forces could' not be counted on The shock came with the UK announcement in8 that withdrawal had been moved forward After an initial period of threats of reprisal, Singapore began to work out programs to take up the expected slack in the economy.

The UK Military Presence

4. The UK military establishment in Singapore was and is impressive in terms of the number of peode and the size of the installations involved. In April IUn^Ced Kingdom0 uniformedivilians,urkhas stationed "in The bases9 acres, orercent of the island's total land area. 0 local personnel were employed inncluding persons employed directly by the bases,ercent of whom were Malays not holding Singaporeomestics, and oersons employed by contractors working on the bases. as many more were indirectly dependent on the British for jobs.

5. The direct expenditures attributable toand to UK personnel in Singaoore6 year for which complete figures7 million. Theseroughlyercent of national incomea valuable source of foreign exchange Singaporehronic deficit onof trade, which is made upurplusconsisting largely of the British

Population and Employment Problems

6. Unemployment is Singapore's major economic prooiem and the greatest potential threat to There are no government statistics on the size of the labor force or the number ofurvey made by the University of Singapore in

nd data from the Labor Exchange suggest that0 people are now unemployed and that this represents roughlyercent of the labor force. Probably at least an equal number are underemployed.

After World War II, Singapore's birth rate soared and became one of the world's highest. While population growth remained high throughout most of0 's, it has declinedercent9ercent The government's goal is to reduce the rate of population growthercent by the end ofoal which may be reached1 The reduction in the birth rate should soon begin to ease the burden on Singapore'ssystem, butumber of years at least it will not ease the island's major problemarge number of young people entering the labor force annually (see Table

Singapore has an unbalanced agemore than half of theillion people are underears of age. Each year, more0 people reach working age, and the number is expected to swell0 The labor force participation rate inge group isercent for males andercent for females (comparable rates for Hong Kong1ndercent). 00 young people will be entering the labor force annually between now Just to hold unemployment to the present rate,0 new jobs will have to be created by Although the economy has grown at an averageearhe unemployment rate has almost doubled during that time.

Singapore and Malaysia

domestic market is toothe developmentiable industrialFederation with Malaysia was seen as ato this problem. Even at the time ofbreak, both sides promised full economicand manyommon market mightformed. But economic cooperation has notprospectsommon market are dim. is still Singapore's most importantaccounting for one-fourth of thehas declined since separation. In the first

five monthsingapore's exports to Westwere downercent and importsercent from*the same period Trade is expected to continue to decline in relative, if not absolute, terms as Malaysia raises tariff barriers to protect its own processing industries and ports. Singapore traditionallyarge hinterland in West Malaysia with imports from third countries coming via Singapore. Malaysia has been successful insome of this traffic to West Malaysian ports but has not succeeded in finding other outlets for Malaysian rubber, which continues to be processed in Singapore (see Tables,

10. Asideecline in transit trade,probably has not suffered from its break with the Federation of Malaysia. Economic integration with Malaysia would have had advantages in terms of market size, but the Chinese business community in Singapore would have been restricted in this larger market by the Malay-dominated federal government. Programs to promote economic integration within Malaysia were being implemented very slowly, if at all, because of continuing communal and political rivalries between the member states. Disputesthe federal government and the government of Singapore were intense on questions of economic policy, with each side claiming that the other lacked the proper common market spirit. Disputes centered on such matters as the size of Singapore's financial contribution to th* federal government, allocation of Malaysia's quota for textile exports to the United Kingdom, and the establishmentommon external

11. The dispute over allocation of the textile quotaood exampleumber of federal policies which discriminated against Chinese-dominated Singapore. Under the quota negotiated by the federal government with Londonalaysia could export annually to the Unitedillion square yards of woven textilesillion square yards of made-up goods. The federal government reserved for Malaya the entire quota for woven goods. It alsoillion square yards of the made-up goods for Malaya in spite of the fact that no garmentin Malaya could produce this volume of goods for export. Meanwhile, textile manufacturers in Singapore were being forced to cut back operations and lay off workers.

'0*

Government Policies

12. The failure toommon market with Malaysia has resulted in increased efforts by the Singapore government to attract foreign firms with established international markets. The mainincentives that Singapore offers are an ideal location from which to tap the Southeast Asianell-developed infrastructure in transportation, ccrununications, and banking; experiencetable political andound, freely convertiblelentiful, relatively well-educated labor supply;avorable tax structure. Singapore mustfor foreign capital with Hong Kong, Taiwan, and to some extent South Korea, all of which offer most of these incentivesabor supply which is cheaper and less protected by unions and legislation. Singapore has recently enacted legislation aimed at reducing labor costs and restricting unionby limiting fringe benefits, reducing overtime, making wage increases and bonuses dependent onand givingree hand toworkers "for cause" and to promote workers wlthout regard to seniori ty. The change in tone on the part of the government is designed to reassure investors that in Singapore profits are not frowned upon and to remind the unions that the time has come for belt tightening. Thisarked change both for Prime Minister Lee, who started his career in the labor movement, andovernment which came to power through the support of labor.

13. Singaporeumber of tax breaks designed to encourage investment. Most new firmsax holiday of two to five years. Toestablished firms to expand, profits derived frcnn expansion are tax exempteriod of three to five years. The tax structure was modified7 to favor firms manufacturing for export. derived fron the export of locally produced goods are taxed atercent instead of the normal rate ofercent. To encourage the flow ofinto Singapore (especially from Hong Kong) the tax rate on interest earned on deposits in Singapore banks by nonresidents was reduced from An additional attractive feature of Singapore to overseas Chinese investors from Hong Kong and Indonesia is that investors are eligible for citizenship.

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Implications of the uk Withdr awa 1

14. The withdrawal of British forces which began last year is scheduled to be completed by the end Between7 andivilian employees and 9S0 enlisted personnel lost their jobs. About one-fourth of all base employees are Indians and Malays who are not citizens of By agreement between the UK and Singapore, these persons will be released first and encouraged to leave the island. The United Kingdom has agreed toayment to each worker who loses his job because of withdrawal, and this money will gound set up by the government of Singapore. will eventually be able to draw the full amount, but noncitizens will be able to draw only two-thirds unless they leave the island permanently. 0 of the local base civilians are supervisors and skilled industrial personnel who will have little problem finding employment as the bases are converted and the industrial sector in Singapore continues to expand. Some of the slack in the "large services sector, which caters to the British servicemen, will be taken up by the expanding tourist trade. Theof visitors arriving in Singapore waso. The expansionith the number of arrivals in the

first four months uoercent above the same period

15. The United Kingdom will0 million to help offset the money Singapore loses when the British withdraw. Beginning this year,ercent of the aid distributed over the next five years will be in the form of an interest-free loan, repayable overearseven-year grace period- The balance will be an outright grant. London andhave already agreed on the initial allocationillion for the period8 topecific projects include: conversion of the Royal Naval Dockyard,9 million; vocational3 million; purchase of British machineryillion; harborther8 million; and projectsselected- for8 million.

16. Singapore will take over some valuableas the British leave, and the government is determined to convert the facilities left behind into

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profitable commercial enterprises. Tho conversion of the Royal Naval Dockyard is already under way, and offers have gene outfkilled and semi-skilled workers to remain on the job when the yard becomes commercial at the end of this year. The ship repairing business has been booming in Singapore, and prospects axe bright for the converted base touccessful enterprise. There are also prospects for converting the Royal Air Force bases. Both US and Australian investors have expressed an interest in converting tha bases to regional aircraft maintenance and repair facilities.

Singapore's Plans for Adjustment

17. From now until the endhen the British complete the withdrawal, there will be areduction in the UK's military expenditures in Singapore. For its part, Singapore will adjust its fiscal and monetary policy to smooth the In March the Minister of Finance announced plans to increase government spending2 million during the transition period to offset theinfluence of declining British expenditures. Singapore expects to raise2 million forgovernment spending by official overseas aid and loans3loating loans on overseas money markets9ncreased localandnd drawing down its foreign reserves6 million). The official overseas aid portion is already oversubscribed (the United Kingdom alone has0 million). illion figure for private foreign loans is well within Singapore's capacity to raise, considering the island's high international credit standing (see The level of official foreign reserves stood at more0 million at the end7 and will only have to be reduced by aboutercent in order to raiseillion from that source (see Table

IB. The2 million increase inspending will be divided between defense and development. Defense spending in connection with the expansion of the araed forces is to be increased with an0 raillion spent locally* mainly on pay of members of the Armed Forces and purchases of local services and supplies. The2 million will go for increased development Several development projects originally planned

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for the middle and0ill be advanced several years, including expressecond large industrial complex, land reclamation, and an increase in housing construction from0 units per year previously planned0 units per year. In addition, Singapore hopes to increaseillion over the four-year period by accelerating the construction of tourist hotels and by loan guarantees and equity participation.illion of the increased governmenthas been allotted for this purpose. Toincreased private construction, interest rates on approved private buildings started during theill be subsidized sufficiently to reduce the effective interest rate to betweenercent throughout the life of the mortgage.

Prossects

19. The British pullout will not cause major disruptions in Singapore's economy, because theof the bases, the government's expansionary monetary and fiscal policy, and the infusion of UK aid will cushion the impact- Aided by foreignSingapore's economy is grow ing rapidly, and the British withdrawal may slow but probably will not stop Singapore's economic development. On balance, the economy will probably expandate of 8or more for the next few years. Unemployment, the island's major economic problem, will, of course, be aggravated by the withdrawal. But conversion of bases, the expected rise in tourism, and Singapore's plans to enlarge its militaryoung people are to be inducted each year) should keep unemployment close to present levels.

20. Investors seem to be confident about's future after the British leave, and theintends to maintain that confidence. Aninflow of investors specializing in labor-intensive industry wouldong way towardSingapore's unemployment problem. There is mount* ing evidence that such an inflow may take place in responseore attractive labor situation and Singapore's willingness to grant citizenship toa fact that makes Singapore especially attractive to overseas Chinese in Hong Kong and Indonesia

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Table 2

Estimated Contribution of UK Bases to Singapore's Cross Domestic Product

187

9

221

Million US S

Expend!tures

Wages and salaries to local civilians Expenditures of UK military personnel Local base expenditures Other

Import content of local purchases

Direct contributions Indirect contribution

Totalqual toercent of COP,

Table 3

Unemployment in Singapore6

Age

j loved

Emploved

of Total

to 19

to 29

to 39

.6

and over

739

3ased onurutj. of sample households.

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Table 4

Singapore: Foreign Trade, by Hajor Commodities a/

7

of

of

s

s

rubber

piece goods

timber

oil

rubber

fabrics

piece goods

oil

v*fleet the dominance of Singapore**} role as an entrepotinasmuch as mail portion of the major commodities involved in Singapore 'e foreign trade are produced or consumed locally. For data on domes tic exports and re tained imports,, see Table S.

Table 6

Foreign Trade of Singapore, by Major Countries

Exports

Million US of Total

Malaysia

which: West

8

Vietnam

2

States

6

Kingdom

79

US S

which; West

8

China

Kingdom

States

Table 7

Singapore: External Medium-Term and Long-Term a/ Public Debt Outstanding as of7

Thousand us 5

"otal external public<65

Debt repayable in foreign

IBRD

UK government

Debt repayable in local

Deoz 'Jith an original or ezter.dsd maturity ofor J

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Table 8

foreign Exchange Reserves of Singapore

Million US $

I960 1 2 3 4 5 6 7

estimated share of Malay-Borneo Currency Board's exchange assets

Singapore government

Government agencies and other public authorities

Official reeervee

Commercial bank's foreign exchange assets

Croat reserve*

. 1

. 1

. 2

. 2

. 3

. 8

2

JS.4

. 1

. 5

commercial bank's foreign exchange

V,1: & erven

9

. 7

Data7 ia notcomparable with other yeara,because Singapore'a share of the Currency Board's assets was underestimated up to that tine. Thu*, of the apparent in-oreaaeillion, perhapeillion tatistical adjustment. It ohould aloo be noted that the sharp increase in Singapore government foreign assets largelythe end resultindfall inflow of oapital from Hong Kong7 as wellhift out of Malaysia into Singapore treasury bills. 3 million foreign assets of tha Singapore Currency Board.

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