Asian bellwether looks southeast

The small city-state of Singapore, which turns 40 this week, is having something of a mid-life crisis.

Since independence, this tiny island with a population of 4 million people and few natural resources has transformed itself into a foreign investment hub, building a $120 billion economy.

Singapore blazed a trail that other Asian tiger economies are trying to follow. The country first offered itself to overseas firms as a low-cost manufacturing base, then reinvented itself in the late 1980s as a gateway for global firms into the East Asia market.

Now, as China and India grab more and more foreign direct investment, Singapore finds its economic growth diminishing, partly due to its own successes. Looking to reinvent itself again, this bellwether of Asian economic development is setting its sights on becoming a clearinghouse for trade with Southeast Asia.

Singapore is "facing a lot more competition as a hub because other countries are opening up and they can trade directly," says Denis Hew, an economist at the Institute of Southeast Asian Studies in Singapore. "It's a tough sell to convince India or China to be their middleman. You can try, but you're placed better to be the hub for this [Southeast Asian] region."

Over the last few years, Singapore's growth rate has plummeted to an average of 4 percent. Some analysts suggest the drop in the growth rate is mostly because Singapore's economy is too mature to grow at the high rate of yesteryear. "For 30 years, Singapore's GDP growth was 8 percent. That's fantastic, but you can't sustain that type of growth. Singapore is like a [developed] country now," says Mr. Hew.

Having achieved the standards of a developed country is in a way Singapore's drawback because high costs mean it can compete neither with China in manufacturing nor with India in the knowledge-based service industry.

With their newfound open-door policies and cheap labor, the two Asian giants - China especially - are snapping up foreign direct investment that might have otherwise fallen on Singapore's plate.

"In the early 1990s, 60 to 70 percent of the direct foreign investment East Asia received was in Southeast Asia. Today, 60 to 70 percent goes to China," says Daljit Singh, a senior research fellow at the Institute of Southeast Asian Studies.

Right from the mid-'60s, Singapore has depended on foreign direct investment to fuel its economy. Singapore was the first to court multinationals in the region and they capitalized on Western industries looking to outsource to cheaper countries.

With an English-speaking workforce supported by excellent infrastructure development, good governance, and pro-business economic policies, Singapore became a success model for its neighbors, including China, to emulate.

Then in the mid-'80s came another instance where Singapore had to reinvent itself because by now China and its own Southeast Asian neighbors had begun to open up and it lost out against their cheaper labor and production costs. At this juncture, Singapore went into high-end manufacturing and focused on financial services.

As Singapore looks to become a hub for Southeast Asia, it faces other regional competitors vying for the spot. Thailand hopes to grow into one of the top 20 economies over the next two decades. It has already embarked on an Eastern Seaboard Development Project, an integrated infrastructure system to develop capital-intensive industries like petrochemicals, oil refineries, steel, and automotive plants.

Singapore's closest neighbor Malaysia, has a multimedia supercorridor, which it hopes to turn into the Silicon Valley of the East, and airport infrastructure that surpasses Singapore's Changi International Airport. It also aspires to expand one of its ports to compete with Singapore.

Indonesia has projects to develop a large deep-sea port and an international airport at Batam, close to Singapore.

The strong efforts by its neighbors to catch up may mean the middleman role will not pay Singapore the high dividends it once did, says Ramkishen Rajan of the Lew Kuan Yew School of Public Policy in Singapore. Instead, he says, "they have to look at value-added industries."

But Hew enumerates the advantages Singapore has over its neighbors as an ASEAN hub. Singapore's first language is English, unlike other countries in the region. The island has a fully developed international banking and financial sector. Singapore is also committed to secularism unlike its neighbors Malaysia and Indonesia. And it is by far the most stable state in the region with a "clean and efficient government," according to Hew.

"Singapore has always been good at maximizing whatever advantages it has had," says Hew.