Remaking Singapore Inc.

Amid Asia's financial crisis, the island nation is charging into new industries. The effort just might make it a model for the region

Lee Hsien Loong, Singapore's often-abrasive Deputy Prime Minister, economic policy czar, and chief of the central bank, can speak readily on the most technical details of managing the island's economy. He is precise in his descriptions, as you would expect of a former brigadier general. But the emotion creeps into his voice when he talks of the dark days of Singapore's birth, more than 30 years ago. That is when Lee's father, Lee Kuan Yew, founded the city-state, declaring independence from Malaysia in a dire time of economic disruption, racial strife, and political chaos in Southeast Asia. Today's Asian crisis, says Lee, poses similar challenges. But make no mistake, he adds. "We can make it, whatever the upheavals, riots, and disturbances in the region."

So far, the island state has survived Asia's financial meltdown in remarkably good shape. Although growth of 1.5% last year pales compared with 1997's 8%, it far outpaced most of recession-racked Asia. But Lee, Prime Minister Goh Chok Tong, and the other leaders of Singapore are intensely worried about what comes next. Singapore's neighbors, Malaysia and Indonesia, have long been the island's main trading partners, sources of much of its wealth. But Indonesia is falling into chaos, and Malaysia has far to go before it recovers.

More important, in the midst of the crisis, the global economy is changing, too. The premium is no longer on big, state-directed efforts in areas such as ship repair and chemicals, industries in which Singapore has long excelled. Instead, future growth is expected to come from services and "smart" industries like software and the most sophisticated manufacturing. Unless Singapore can overcome the regional effects of the crisis and position itself as an Asian leader in the hot industries, the days of 8% growth may be gone.

These fears explain Lee's deep concern about Singapore and why he is using the crisis as a catalyst to force economic change. For many of Singapore's neighbors the Asian miracle is over, but the younger Lee is determined that no crisis shall block Singapore's progress. If he must reinvent Singapore Inc. to save it, so be it.

The crusade is already well under way. Soon, Lee will step up the pressure with plans to open the financial sector to more foreign competition. Already, Singapore has made big efforts to attract more high-tech manufacturing and make it a regional hub for multinationals from chipmakers to media companies. Of course, transforming Singapore's economy into one based on high added-value manufacturing and services will be tough. Among the island's 4 million people are few native-born managers and entrepreneurs up to the task of reinventing Singapore. But for Lee and other ministers, there's no turning back.

If Lee succeeds, he will create a new model for Asia to rebuild its economies. But while political systems in much of the region are opening up, Lee insists that Singapore must keep measures such as the Internal Security Act, which permits indefinite detention without trial. Still, he needs to nurture a more flexible, entrepreneurial economy, and he intends to loosen restrictions on some areas of public debate. Lee points to Singapore's Roundtable, an unofficial group of 12 businesspeople and academics founded in 1994. The group discusses issues from the environment to the ruling People's Action Party's election tactics. "We are right on the periphery of the boundary, and we're prepared to push the line a bit," says Zulkifli Baharuddin, vice-president of Circle International Group Inc., a logistics company, and of the Roundtable.

Yet while he talks about opening up political debate in Singapore, Lee is using all the powers of the state to ram change through. He is encouraging bank mergers in a trend that will ultimately leave Singapore with just two powerhouse banks. Lee is also reforming the government-linked corporations whose publicly traded shares make up a third of the stock market's capitalization. And to trim the costs of doing business in Singapore, he has sanctioned a 5% island-wide wage cut and halved employers' contributions to the Central Provident Fund social security system, to 10% of wages.

In the meantime, he is trying to attract the highly skilled foreign workers he needs to transform the economy. To lure them and their families, the government is pressing the Singapore American School to double its capacity, to 5,300 students, in five years. Foreign executives who come often get commanding positions. Chartered Semiconductor Manufacturing, for instance, has a British CEO and an American marketing honcho who were hired to steer Chartered out of the chip price slump.

John T. Olds is one of those foreigners playing a key role in the reforms. Looking out over the busy Singapore Strait from his 46th-floor office, Olds looks relieved. The former J.P. Morgan & Co. managing director has just wrapped up his first six months in one of Singapore's toughest jobs: chief executive of the powerful, state-owned Development Bank of Singapore (DBS), with a mandate to shake up the country's financial system. First, he revealed unprecedented details about $4.1 billion of bad loans in the bank's portfolio, a major change in Singaporean financial practice. Then, in a management shakeup that shocked the country's complacent elite, he demoted powerful civil servants from executive posts in January. "They're smart people, but not experienced bankers," says Olds. Instead, he brought in four outsiders to raise DBS's operations to global standards.

Not all the elite imported executives are Western. Consider Chester Lin, CEO of government-linked NatSteel Electronics Ltd. Lin learned from the rough-and-tumble business environment of his native Taiwan how to take risks and build agile companies. So when NatSteel was losing money in 1994, Lin saw an opportunity and emptied his savings account to lead a management buyout. And he bet against the conventional wisdom of the time that Apple Computer Inc. would fail by buying its factories in Ireland and Singapore. Now, NatSteel earns 40% of its revenues from making motherboards for the fast-selling Apple iMac desktops, which helped profits soar 90% last year. "You've got to go global," says Lin. "We paid a lot of tuition to learn that."

A complementary strategy is to lure foreign high-tech outfits to set up shop. IBM, which pledged to invest $30 million over the next five years, has just set up a chip-design center in Singapore. Hewlett-Packard is more than doubling R&D spending in the next five years. Meantime, Sun Microsystems is helping the government implement plans to become a regional hub for E-commerce, media, and communications.

Next on the agenda: shaking up the hundreds of government-linked companies. The focus now is on writing off losses incurred in an ill-fated regional investment rush. SembCorp Industries, a behemoth created by the merger of the Sembawang conglomerate and the technology subsidiaries of Singapore Technologies, and the equally diverse Keppel Corp. have just written off a total of $320 million in bad assets. Long term, the aim is to turn the likes of SembCorp into truly global players. "They'll have to survive in a more open and competitive market," says S. Dhanabalan, chairman of Temasek Holdings Ltd., which owns the conglomerates and more than 1,000 other companies on behalf of the Finance Ministry.

That's not all. The government wants to improve the management skills of its own population rather than just rely on expatriates. So it has signed agreements recently with France's INSEAD and with the Wharton School and the University of Chicago in the U.S. to set up Singapore campuses. Meanwhile, the government's National Computer Board is feverishly installing computers in high schools to meet a 2002 target of one PC for every two students.

The question is whether Singapore's rote-trained workers can follow the government's command to emulate dealmakers like NatSteel's Lin. "You can't teach creativity," says Simon Tay, a Parliament member who teaches law at the National University of Singapore. "Either you fail, or it spills over into students asking more questions."

FEAR FACTOR. Lee's reform effort also requires him to walk a tightrope between openness and control. It's a balancing act that's likely to become increasingly difficult. Singapore's leaders laud Silicon Valley and Taiwan for their ability to ride the crest of technological and economic change. But California and Taiwan are freewheeling, anything-goes sorts of places whose ways wouldn't be tolerated in tightly controlled Singapore. All the same, Singapore is trying to have its cake and eat it, too. "We need to draw the line between innovation and destruction," says Michael Yap, chief executive of the National Computer Board. "We have to be more cautious specifically because we are a city-state with no hinterland."

Impressive as Singapore's plans look on paper, many foreign analysts harbor doubts about its ability to become a more open economy if it insists on keeping political debate on a tight leash. Opposition politician Chee Soon Juan, for example, was sentenced to jail twice this year on charges of making a public speech without a permit. His Singapore Democratic Party is campaigning for more freedoms.

It's not that voters want to to topple the PAP after decades in power. Rather, uncertainty about what is permitted breeds its own kind of fear. One foreign stockbroker moved many of his valuables out of his apartment before publishing a tepid article on the causes of the Asian crisis in case the authorities expelled him from the country--even though the essay didn't name Singapore.

His fears proved unjustified. But as long as people worry about speaking their mind, Singapore's climb up the economic ladder could be much slower than the government wants. An example: Fears about freedom, founded or not, are holding back Singapore's efforts to become a world-class financial center. While Singapore is having a good deal of success in wooing fund managers, it trails Hong Kong in equities trading. Politics has "everything" to do with that, says a senior Western banker. He argues that Singapore will be hobbled as a regional financial center unless it has a strong equities focus, as opposed to fund management or bond operations. The trouble is that equity analysts tend to be more acerbic in their comments than their fixed-income counterparts. "We can't get our good people to go to Singapore," says the banker. "That gets to freedom of the press."

CLOSEMOUTHED. What's more, despite Lee's reforms, the government-linked companies are unlikely to become models of open corporate governance soon. Temasek, for example, reports only to the Finance Minister and a small Parliament budget committee, so details about its performance remain obscure. "As long as we're not asking outsiders to put money in, there's no reason to tell them our financials," says Chairman Dhanabalan, a former Foreign Minister.

In all its strivings, Singapore keeps a close watch on its archrival, Hong Kong. The Hong Kong economy fell 5.1% last year, and the outlook is for a further drop this year. But Singapore still lags in several areas. It has only three Internet service providers, while freewheeling Hong Kong has more than 100. Because foreigners can't own a majority stake in Singapore's ISPs, giant MCI WorldCom Inc. went to Hong Kong instead to set up regional operations.

All the same, there's every reason to applaud Singapore's reform push. Given the government's track record in hitting its goals, the efforts will certainly bear some fruit. And Lee has demonstrated leadership capabilities that few observers anticipated. Bringing in outsiders such as John Olds and giving him a free hand to shake up even a huge institution such as DBS is a powerful signal that the senior leadership is dead-set on change. But the challenge of imposing openness and flexibility in a society that prizes neither still lies ahead.