[Viewpoint] Singapore lesson Korea missed

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[Viewpoint] Singapore lesson Korea missed

In the era of globalization, Singapore’s economic system is often cited as an exemplary model for other nations to follow.

Singapore got out ahead early in the game long ago by inviting multinational corporations and creating a friendly environment for expatriates.

As a result of its early moves toward globalization - a concept that promotes the idea of money, investment and workers moving freely across borders - Singapore continued its upward climb during the Asian financial crisis in 1997-98 while Korea fell.

In the years following the financial crisis, many pundits here concluded that the Korean economic model had serious structural problems in a globalized world.

Korea has therefore pushed to change numerous regulations and its overall economic structure in an effort to attract outside investors and create a business-friendly environment for foreigners.

And where did the country look when determining how to do that most effectively?

You guessed it, Singapore.

Over the past decade, countless politicians, officials, scholars and journalists from Korea have studied the Singapore model.

Korea’s economic model during the financial crises, some said, had a close-minded attitude, relying too much on foreign debt while pursuing growth driven by domestic, not international, businesses.

In contrast, Singapore opened its arms to foreign investors and earned a solid reputation as a good place to do business internationally.

Now that we are going through another global financial crisis, however, it’s time to compare the two countries again and see what conclusions, if any, we can draw.

In terms of economic trends, Korea fared better than Singapore in the first quarter, though both countries struggled. Korea’s economy shrank 4.3 percent, while Singapore’s contracted by 11.5 percent.

The numbers reflect Singapore’s higher dependency on exports and foreign investments. With a population of only 4.5 million, the country thrives when the global economy is brisk, but is more vulnerable to global shock waves.

Singapore is better off in terms of financial stability, though. The value of the Korean won has plummeted to its level during the late-1990s financial crisis. The currency decline is not a result of too much foreign debt or a high corporate debt ratio. Foreign funds left Singapore as well, but Singapore did not suffer as much as Korea did in this regard.

To me, the difference in financial stability between the two countries is rooted in the exchange rate system. When Korea freed up its capital markets, its currency was allowed to float freely against other currencies. The won’s exchange rate, therefore, changed every minute.

More importantly, the exchange rate fluctuates drastically when capital is suddenly taken out of the market. When capital is taken out over an extended period, it leads to a foreign currency crisis.

Singapore addresses these by controlling its currency in three ways:

Speculation against the Singaporean dollar is prohibited. Singapore has long had a free capital market and is known as a currency speculators’ paradise, but exceptions apply to the Singaporean dollar.

The Singaporean government classifies available foreign currency reserves as a national secret and does not make the number public. Aside from the official foreign currency reserve amount, you never know how much additional cash the country can raise through the government-owned investment company Temasek or sovereign wealth fund GIC.

Singapore has adopted a currency basket, a system in which the government monitors trading partners and competitors and regulates the exchange rate. The government modifies the weights of the trade partners whenever necessary. They keep a tight lid on exactly how they determine the exchange rate.

Globalization opens up the possibility of accelerated economic growth through free movement of capital and manpower, but it also amplifies financial uncertainty. If Korea is to succeed in the age of globalization, it needs to implement a system to defend the national economy from financial uncertainty.

So far, Korea seems to have paid attention to only one side of the lesson of Singapore. The emphasis on a free market economy has overshadowed the other side.

While Singapore’s system is rather opaque and seems to go against the market, it reminds us that having a currency system to control exchange rates is an effective way to respond to financial instability in the globalized era. It is the less-celebrated side of Singapore’s lesson.


The writer is a professor of economics at the National University of Singapore. Translation by the JoongAng Daily staff.

by Shin Jang-sup

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