Country Profile Singapore

Eduard Romanenko, Li Guoxu, Denion Galimuna Country Profile: Singapore With the population of only 5.18 million people and the total area of 710 sq km (189th among other countries), as of 2010 according to the World Bank database, Singapore is the 14th largest exporter and the 15th largest importer in the world. The total trade volume of the country in 2010 comprised USD 662, 658 bln contributing to trade to GDP ratio of 317.42%, the highest in the world. As Figure 1 demonstrates, since 1981 the ratio has been within the range of slightly less than 250 – 370%, which signifies the importance of trade to Singapore’s economy and indicates a high degree of its openness. Figure 1. Export, Import and Trade to GDP Ratios for Singapore, %, 1981-2010. Source: World Bank database

From Figure 1 we can also distinguish three relatively recent drops in export, import and trade to GDP ratios: 1997-1999 downturn associated with Asian financial crisis, 2001 drop as a result of global recession and a slump in the technology sector and 2009 slowdown due to global financial crisis and recession. The major factors contributing to the openness of Singapore’s economy are:  geographical location and colonial past – due its status as the main British naval base in the region before independence, Singapore was often referred to as the “Gibraltar of the East”;  highly developed market-based and exports-driven economy which is known as one of the freest, most innovative, most competitive, most business friendly and least corrupt in the world; along with Hong Kong, South Korea and Taiwan, Singapore is one of the original Four Asian Tigers;  advanced infrastructure – among other things, the Port of Singapore is one of the five largest and busiest ports in the world;  trade policy factor – Singapore’s extensive network covers 18 regional and bilateral Free Trade Agreements (FTAs) with 24 trading partners. Singapore’s trade is diversified across partners: in 2010, 15 major partners accounted for almost 80% of total trade volume. Among major partners, 56.96% of trade is recorded with Asian countries, which is justified by distance factor as well as regional integration (ASEAN and APEC), size of economies of partner countries and cultural affinity.

Figure 2 captures two snapshots of principal partners’ shares in Singapore’s trade for 1995 and 2010. Figure 2. Trade of Singapore with Major Partners, % of total trade, 1995 and 2010. Source: UN Comtrade database

Basing on Figure 2:  On the top of the list is Malaysia which is Singapore’s main import source, as well as its largest export market, absorbing 18% of Singapore’s exports. Explanation: as Singapore was formerly part of Malaysia till 1965, there remains a high degree of economic and social inter-dependence between the two countries;  The rise of China from the 6th place in 1995 to the 2nd place in 2010 which is explained by the growth of Chinese economy and trade in the region during that period;  US shifted to the third place having been outweighed by China;  Japan shifts from the 3rd to the 6th place due to continuous stagnation of Japanese economy throughout that period;  European partners are represented by Germany, France and UK. Together they account for less than 8% of Singapore’s trade. Their shares slightly diminished throughout the period which reflects the strengthening of Singapore’s orientation to Asian economies;  Special note on Indonesia: there is no entry for Indonesia in statistics provided by UN Comtrade for 1995 (political tensions between two countries occasionally led to breaks in reporting on bilateral trade). Figure 3. The fit of Gravity Model for Singapore Major Trade Partners, 2010. Source: UN Comtrade database

To identify any “surprises” in trade with major partners, we estimated a Gravity Model controlling for distance and the size of a partner measured as GDP value. We used 118 observations and obtained the OLS regression results indicating both statistically and practically significant effects of distance and GDP on total trade. Figure 3 exhibits a scatter plot of 15 principal trading partners clustered around a 45-degree line. The horizontal axis measures the fitted values of log (Trade) between Singapore and a trade partner, while the vertical axis represents the actual value of trade. Basing on Figure 3, the gravity model predicts perfectly a trade volume with Indonesia and almost perfectly a trade volume with Malaysia. The rest of 13 partners are all located above the red line indicating that the gravity model underpredicts the trade volume with them. This implies the influence of other important factors not accounted by the estimated model:  China, Japan, Thailand, India, Hong Kong, Australia, Republic of Korea, Philippines – all these counties together with Singapore belong to Asia-Pacific region that has been undergoing extensive economic integration processes throughout 1990s and 2000s.

ASEAN and APEC are both manifestations of those processes and contributors to increased trade in the region;  Cultural affinity factor with Asian countries;  USA – US presence has been quite active in the dynamic region; FTA with Singapore; APEC membership;  Germany, France, UK – particularly for the UK, colonial past is an important factor; among more contemporaneous factors – Agreement between European Free Trade Association and Singapore effective since 2003;  Saudi Arabia – FTA with Singapore definitely facilitates the trade; however, in this case the structure of trade matters as well: key exports from Singapore to Saudi Arabia include ships and boats and civil engineering parts, while the main import items are crude petroleum and petroleum-refined products which are then used by Singapore for producing the major items of total exports. Figure 4. The Major Export Commodities, 2010, % of total exports. Source: Department of Statistics Singapore

As Figure 4 exhibits, Singapore’s exports are quite diversified with about half of them coming from machinery and transport equipment, one fifth from petrolium products and the rest from food/beverages, chemicals, textile/garments, electronic components, and telecommunication apparatus. The graph, again, reinforces the idea that despite its small size, Singapore has a diversified economy, a strategy that the government considers vital for growth and stability.