Journal of Asian Economics 13 (2002) 52±71

Ef®ciency of investments in Asian economies: has

Singapore over-invested$
Mun Heng Toha,*, Wai Choong Ngb
a
Department of Business Policy, National University of Singapore, 10 Kent Ridge Crescent,
Singapore 119260, Singapore
b
Ministry of Trade and Industry, Singapore, Singapore
Received 1 February 2001; received in revised form 1 July 2001; accepted 1 September 2001

Abstract

This paper compares the investment ef®ciency in Singapore with the rest of Asia to determine
whether Singapore's capital utilisation has been effective vis-aÁ-vis other Asian economies. In
particular, it analyses the key investment differences between Singapore, Hong Kong and Taiwan, the
three NIEs with comparable data breakdown. While the government facilitates investment through
infrastructure development, market-oriented domestic enterprises and foreign companies make much
of the investment in Singapore. Singapore's returns to capital investment are not inferior to other
Asian economies. In terms of total factor productivity (TFP), the ®ndings vary according to the
computation method used. But even if the traditional approach adopted by Alwyn Young is used,
more recent data suggest that while Singapore's TFP growth had been negligible compared to Hong
Kong between 1971 and 1986, it has improved signi®cantly since then. Singapore's earlier phase of
rapid capital deepening with associated low TFP growth is giving way to more sustainable and
perceptible simultaneous growth in capital intensity and TFP. Singapore's experience accords with
that of the U.S. and Japan, which also recorded low TFP growth in the early stages of their economic
development. # 2002 Elsevier Science Inc. All rights reserved.

JEL classification: O47; O53

Keywords: Asian economies; NIEs; TFP

$
An earlier version of the paper is presented at the 7th Convention of The East Asian Economic Association
(EAEA), November 17±18, 2000, Singapore.
*
Corresponding author. Fax: ‡65-779-5059.
E-mail address: fbatohmh@nus.edu.sg (M.H. Toh).

1049-0078/02/$ ± see front matter # 2002 Elsevier Science Inc. All rights reserved.
PII: S 1 0 4 9 - 0 0 7 8 ( 0 1 ) 0 0 1 1 2 - 9
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 53

1. Introduction

For about three decades since 1970, four Asian economiesÐKorea, Taiwan, Hong Kong
and SingaporeÐhave registered remarkable economic growth of 6%±8% per annum. Some
scholars have called these hyper-growth economies, while others referred them as Asian
tiger economies. There are many studies done to unravel the factors contributing to the
miraculous growth of these economies. A notable example is one by the World Bank in 1993
which identi®ed the factors responsible for rapid growth as (1) high saving and investment
rate, (2) high and growing human capital formation, (3) rapid growth of exports, (4) prudent
macroeconomic policies and management, and (5) appropriate institutions which foster
government±private sector co-operation and the creation of a business-friendly environment.
Of course, the above factors are not the only ones and neither can any single one of them
claim the entire credit of growth creation.
In this paper, we revisit the issue of capital accumulation and its associated productivity
in three of the tiger economies, namely Hong Kong, Taiwan and Singapore. In particular,
we are interested in whether Singapore has over-invested in infrastructure and physical
capital goods. Growth powered by merely input growth is deemed to be less superior than
that achieved by increasing productivity and innovation. We begin by discussing the
importance and inter-relatedness of saving and investment. Section 3 traces the investment
trends in Asia and examines whether Singapore has over-invested vis-aÁ-vis other Asian
economies. In particular, it analyses the key investment differences between Singapore,
Hong Kong and Taiwan, the three NIEs with comparable data breakdown. Section 4
compares the investment ef®ciency in Singapore with the rest of Asia to determine whether
Singapore's capital utilisation has been effective. It also reviews some of the recent
empirical work relating total factor productivity (TFP) growth measurement for the Asian
economies. We note that TFP growth and the productivity of capital (output-capital ratio)
cannot be treated as independent entitiesÐthey are linked in an accounting framework.
In particular, we postulate that the growth of TFP does have a non-linear relationship with
the capital intensity (capital-labour ratio) of the economy. A ®nal section concludes
the paper.

2. The importance of saving and investment

For an economy to grow it must invest. Investment adds to the capital stock of the
economy and hence enhances its productive power. Commonly when we speak of
investment, we refer to the construction of plants, buildings, machines and inventories. This
is because not only are these the most visible and concrete forms of productive assets, the
costs and returns from them are more easily measurable. However, properly speaking,
investment refers to all economic activity that involves the use of resources to produce goods
and services. In this respect, education as well as technical and managerial training are also
investments that increase productivity. Similarly, the creation of an integrated and supervised
credit and capital market is a crucial social investment. It enables existing savings to move
into the most productive uses, and stimulates the desire to save and invest among more
54 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

people. Likewise, the resources spent on the development or improvement of agencies for
the making, maintenance, or enforcement of law, and the development of markets, goods,
and ideas are productive investments.
If any one scarce factor associated with underdevelopment should be singled out, it
would be capital. It would be an over simpli®cation, of course, to regard economic
development as a matter of capital accumulation alone. Other things are needed in
addition, such as entrepreneurship and training of workers and public administrators.
Yet these are seldom possible without some increase in the stock of capital. Therefore,
capital accumulation is regarded as the core process by which all other aspects of growth
is made possible.
To invest an economy must save. However, it is noted that hard work and high savings do
not ensure economic growth. Peasants in many societies are very hardworking indeed. And
many societies save a fair proportion of their output. The crucial difference between
economically growing and stagnant society lies more in the use than in the volume of
savings. Unless savings are put into productive investment, hard work and thrift will produce
hoards of treasure, pyramids, cathedrals, temples, mausoleums, armies, weapons and other
symbols of glory, power, beauty or status but not economic growth.
The more prevalent productive investment is in an economy, the more readily the supply
of savings tends to increase. It is helpful, but not necessary, for the entire or even a major
section of the population to become investment-minded. It is necessary, though, that some
groups within the community be willing to invest and assume the necessary risks involved in
investment, and that they are granted the freedom to manoeuvre resources into places and
combinations where these are most productive. These groups may be private entrepreneurs,
political elite or public servants. The process of economic growth is helped by, and in turn
helps, the enhancement of social status and political power of such groups which are
pioneering or engineering economic change.
Inef®ciency, ineptitude, corruption, miscalculation, carelessness or thoughtlessness in the
use of investable resources can lead to serious misallocation and wastage. Thus, the will to
undertake risks is only one of the conditions for successful investment, albeit an important
one. The will to economiseÐthe will to seize opportunities when and where they exist and to
depart from traditional ways of doing things when new ways promise gainÐare important
ingredients for productive and dynamic investment.

3. Investments in Singapore

Singapore has a high national savings rate. At 54% in 1998, it is in fact the highest in the
world. One contributory reason is the mandatory savings in the Central Provident Fund,
which is an individualised social security account with contributions made by employees
(20% of wages) and employers (currently 16% of wages).
Some have postulated that the high availability of savings has led to excessive amounts
being channelled (especially by the government) to domestic investments, with diminishing
returns (Lovell & Tang, 1999). In particular, Young (1992) noted that besides attracting
foreign investments, ``the Singapore government has, since the early 1960s, pursued the
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 55

accumulation of physical capital via forced national saving''. His basic proposition was that
despite Singapore's higher investments compared to Hong Kong, Singapore showed minimal
technical progressÐ``while total factor productivity has contributed substantially to
economic growth in Hong Kong, its contribution to growth in Singapore is next to nil''.
He reasoned that ``Singapore is a victim of its own (industrial) targeting policies, which are
increasingly driving the economy ahead of its learning maturity into the production of goods
in which it has lower and lower productivity''. Krugman (1994) echoed and supported
Young's assertion and added that Singapore's miraculous growth ``turn out to have been
based on perspiration rather than inspiration. Singapore grew through a mobilisation of
resources that would have done Stalin proud. . . Above all, the country has made an awesome
investment in physical capital. . .'' Heritage Foundation resurrected Young's claims when it
published its 2000 Index of Economic Freedom. Heritage noted that because Singapore's
economic growth had not been systematically higher than Hong Kong's despite Singapore's
higher investment, ``it was fair to say that the (Singapore) government effectively dissipated
all the forced savings (of its citizens)''.
How true are these assertions? This section examines whether there is a correlation
between saving and investment in Singapore, and whether Singapore has over-invested
compared to the other Asian economies, in particular Hong Kong and Taiwan.

3.1. Is there a correlation between saving and investment rate in Singapore

Due to the open nature of Singapore's economy, studies have shown that there is no
correlation between our saving and investment. Singapore is heavily dependent on foreign
direct investment, which accounts for 78% of its total ®xed asset investment in the
manufacturing sector. Hence, domestic investment tends to be ®nanced by external sources
and not necessarily from domestic savings. Similarly, as there are no restrictions on capital
mobility, any excess domestic saving over-investment also tends to be channelled out of
Singapore.1 The high national saving rate in Singapore per se, thus, does not lead to high
domestic investment.

3.2. Has Singapore over-invested

From the 1970s to mid-1980s, Singapore's investment rate, measured by the gross ®xed
capital formation to GDP ratio, was indeed high compared to the other Asian economies
(Fig. 1). This was especially so during 1981±1985, when Singapore's investment rate
averaged 46%. However, since then, Singapore's investment rate has trended down, while
those of the other Asian economies have picked up. Over 1990±1998, Singapore's
investment rate of 35% per annum was only higher than Japan (29%), Hong Kong (29%) and
Taiwan (24%). In Malaysia, Thailand and Korea, investment rates during this period were
close to Singapore's pre-1990 levels of about 40% per annum
The high investments in Singapore in 1970±1985 coincided with the ramp-up phase of its
economic development, where the emphasis was on industrial and infrastructural capacity
building. Part of Singapore's development strategy was to build economic infrastructure
ahead of demand, and put in place the foundations to support long-term growth.
56 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

Fig. 1. GFCF as a % of GDP in selected Asian countries. Source: Singapore Department of Statistics and CEIC.

The investment peak in 1981±1985 was primarily due to construction and work (C&W)
(see Table 1), which accounted for more than half of the investment during the period.
Fuelled by a boom in the residential property market,2 an average of 1.1 million m2 of
private residential ¯oor area was completed per annum in 1981±1985, up 77% from the
average of 610,000 m2 per annum in 1976±1980. The public housing construction
programme was also speeded-up to meet a surge in demand for public housing.3 In the
non-residential segment, heavy investments were put into the preparation of industrial land
and the construction of factory buildings to support the industrialisation drive. Meanwhile,
new hotel rooms were constructed to meet rising demand in tourist arrivals.
The construction frenzy in the early 1980s contributed to a property glut and the recession
in 1985. As real estate development slowed to a more sustainable rate and as Singapore's
infrastructure became more developed, the need for, and pace of, investments subsequently
slowed. The emphasis shifted towards upgrading and improvements, with greater attention
paid to ef®ciency and timeliness of investments.

3.2.1. Comparisons with Hong Kong and Taiwan

3.2.1.1. Sectoral comparison. Table 1 compares the investments of Singapore with Hong
Kong and Taiwan by sectors. Although Singapore's investments had been much higher than
Hong Kong's during the mid-1980s, the gap has narrowed in recent years. By 1998, Hong
Kong's investment rate has reached 30%, only slightly lower than Singapore's 37%.
The main difference in investment rates between Singapore and Hong Kong was due to
investments in transport equipment (TE) and machinery and equipment (M&E). From
Table 1, these two categories explained almost all of the 10% points difference in investment
rates between Singapore and Hong Kong over 1966±1998. The gap in M&E and TE
investment rates between Singapore and Hong Kong can be attributed to their differing
economic structures. Unlike Hong Kong, Singapore has a large manufacturing base.
As shown in Fig. 2, there is a close correlation of transport and machinery investment with
Table 1
Total GFCF as a % of GDP, by sectors
1966±1970 1971±1975 1976±1980 1981±1985 1986±1990 1991±1998 Average Average difference
(1966±1998) (1966±1998)
GFCF, all sectors Singapore 24.3 36.7 36.6 45.7 33.1 35.9 35.4 ±

M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

Hong Kong 19.6 22.7 26.8 26.4 24.7 29.7 25.4 10.0
Taiwan 21.1 26.3 27.6 23.3 20.5 23.7 23.7 11.7
Construction and works Singapore 11.6 15.5 15.3 26.3 14.9 18.6 17.2 ±
(a ‡ b ‡ c) Hong Kong 11.9 14.0 17.8 16.8 14.1 17.3 15.5 1.7
Taiwan 9.3 10.1 13.2 10.8 10.0 12.2 11.1 6.1
Residential buildings (a) Singapore 6.3 7.8 6.5 12.5 6.6 9.0 8.2 ±
Hong Kong 5.8 7.1 7.7 6.6 6.8 7.4 6.9 1.3
Taiwan 2.3 2.8 3.8 3.3 2.8 2.9 3.0 5.2
Non-residential buildings (b) Singapore 2.8 5.1 5.9 10.7 4.8 7.4 6.2 ±
Hong Kong 4.3 4.3 6.4 6.8 5.2 6.7 5.7 0.5
Taiwan 4.0 3.3 4.1 3.9 3.6 3.9 3.8 2.4
Others (c) Singapore 2.5 2.6 3.0 3.1 3.2 2.2 2.7 ±
Hong Kong 1.8 2.6 3.8 3.4 2.1 3.1 2.8 0.1
Taiwan 3.0 4.0 5.4 3.6 3.6 5.5 4.3 1.6
Transport equipment Singapore 2.8 6.2 8.4 6.6 4.8 5.5 5.7 ±
Hong Kong 1.7 1.5 1.8 1.7 1.6 1.9 1.7 4.0
Taiwan 2.9 3.2 2.7 2.5 1.9 1.9 2.5 3.2
Machinery and Singapore 9.9 15.1 12.8 12.9 13.5 11.7 12.6 ±
equipment
Hong Kong 5.9 7.2 7.2 7.9 9.1 10.4 8.2 4.4
Taiwan 8.9 13.0 11.6 10.0 8.7 9.6 10.2 2.4
Source: Yearbook of statistics published by respective statistical agencies.

57
58 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

Fig. 2. Singapore manufacturing share of GDP and investment in machinery and transport equipment. Source:
Singapore Department of Statistics.

the growing size of the manufacturing sector in Singapore. Other countries like Korea and
Thailand, which also have sizeable manufacturing sectors, share this high correlation. This
re¯ected the capital-intensive nature of Singapore's industrial investments over the years
(e.g., petrochemicals, disk drives, wafer fabrication) which was partly the result of the
government's efforts to promote higher value-added economic activities.
Hong Kong, on the other hand, had become a predominantly service economy by the late
1980s. Much of its manufacturing was hollowed out to the southern part of China, especially
Shenzhen in Guangzhou province. As a result, Hong Kong's manufacturing's share of GDP
has fallen from 31% in 1970 to 5.3% today.
Singapore's capital-intensive manufacturing investments also contributed to the
investment difference (of about 12% points) between Taiwan and Singapore over 1966±
1998. Although Taiwan's manufacturing share of GDP is similar to Singapore's,4 its
industrial structure comprises a larger proportion of SMEs and labour intensive industries.5
For example, about 50% of Taiwan's manufacturing output still consists of relatively less
capital-intensive products such as textiles and food and beverages, as compared to
Singapore's 25%. Singapore also has a larger proportion of chemical industries, which are
highly capital-intensive6 (Table 2). However, it is probably also true that Taiwan's SMEs,
which are known for their dynamism and competitiveness, are more ef®cient in utilising
capital compared to Singapore's SMEs, in part due to Taiwan's better education pro®le.7
However, what accounted for the bulk of the difference in the investment rates between
Taiwan and Singapore is C&W, which contributed about 6% points out of the total 12%
points (see Table 1).8 In particular, residential C&W investments in Taiwan were
substantially lower than in Singapore. This could be because as a city state, Singapore is
more built-up compared to Taiwan, and has a higher proportion of high rise buildings (which
cost more to build) due to land scarcity.

3.2.1.2. Public and private investments. In Singapore, the public sector accounted for about
26% of total investments over 1966±1998 (Table 3). This is higher than the public investment
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 59

Table 2
Composition of manufacturing sector
Industry Singapore Taiwan
1981 1998 1981 1998
Electronic products and components 17.4 42.3 8.0 21.0
Chemicals and chemical products 4.3 13.1 7.0 8.4
Transport equipment 13.1 6.9 6.9 7.2
Machinery and equipment 12.9 6.2 3.0 5.4
Fabricated metal products 4.9 5.9 3.7 7.7
Re®ned petroleum products 18.2 5.1 6.8 8.1
Rubber and plastic products 2.2 2.6 6.8 6.6
Basic metals 1.5 0.4 5.3 6.4
Food, beverages and tobacco 5.2 2.9 12.8 6.0
Textiles 1.3 0.2 9.4 5.3
Others 19.0 14.4 30.3 17.9
Source: Economic Development Board, Singapore and Directorate-General of Budget, Accounting and
Statistics, Executive Yuan, Republic of China.

ratio of 15% in Hong Kong but lower than the 45% in Taiwan. Hence, for all three economies
(especially Hong Kong and Singapore), it is the private sector rather than the public sector
which undertakes the bulk of investments.
In fact, since 1990, the public sector in Singapore has begun to reduce its role in
investment (Figs. 3 and 4). Public investment rate in Singapore has dropped substantially
from a peak of about 16% of GDP in 1983±1984 to 8.2% in 1998, amongst the lowest in
Asia. As a percentage of total investment, the public sector's share has also fallen from 43%
in 1986 to 22% in 1998. On the other hand, most other countries, even Hong Kong, have
slowly increased their public sector investments until the onset of the Asian crisis.
Overall for the period 1966±1998, the public investment rate in Singapore was 5.4%
points higher than Hong Kong, of which 4.2% points were attributable to investments in
C&W (see Table 4). This re¯ects the larger role the Singapore government plays in the
provision of housing and industrial facilities. While Singapore's public investment in C&W
was higher than Hong Kong's, the overall C&W investment was similar for both economies
because Hong Kong had a higher private C&W investment (Table 5).

Table 3
Difference in average investment rate (%)
Average overall investment Average public investment Average private investment
rate (1966±1998) rate (1966±1998) rate (1966±1998)
Singapore 35.4 (100%) 9.1 (25.6%) 26.3 (74.4%)
Hong Kong 25.4 (100%) 3.7 (14.4%) 21.7 (85.6%)
Taiwan 23.7 (100%) 10.6 (44.2%) 13.1 (55.8%)
Source: Singapore Department of Statistics, Census and Statistics Department, Hong Kong SAR, People's
Republic of China and Directorate-General of Budget, Accounting and Statistics, Executive Yuan, Republic of
China. Figures in brackets denote the share out of overall investment rate in the individual countries.
60 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

Fig. 3. Public GFCF as a % of GDP. Source: Singapore Department of Statistics and CEIC.

Fig. 4. Private GFCF as a percentage of GDP. Source: Singapore Department of Statistics and CEIC.

Table 4
Difference in average public investment rate, by sectors (%)
Average public Average public Average public Average public
investment rate investment rate in investment rate in investment rate in
(1966±1998) C&W (1966±1998) TE (1966±1998) M&E (1966±1998)
Singapore 9.1 7.6 0.1 1.4
Hong Kong 3.7 (‡5.4) 3.4 (‡4.2) 0.1 (0) 0.2 (‡1.2)
Taiwan 10.6 ( 1.5) 5.0 (‡2.6) 0.7 ( 0.6) 4.9 ( 3.5)
Source: Singapore Department of Statistics, Census and Statistics Department, Hong Kong SAR, People's
Republic of China and Directorate-General of Budget, Accounting and Statistics, Executive Yuan, Republic of
China. Figures in brackets denote the difference between Singapore and country under comparison.
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 61

Table 5
Difference in average private investment rate, by sectors (%)
Average private Average private Average private Average private in-
investment rate investment rate in investment rate in vestment rate in
(1966±1998) C&W (1966±1998) TE (1966±1998) M&E (1966±1998)
Singapore 26.3 9.6 5.6 11.1
Hong Kong 21.7 (‡4.6) 12.1 ( 2.5) 1.6 (‡4.0) 8.0 (‡3.1)
Taiwan 13.1 (‡13.2) 6.0 (‡3.6) 1.8 (‡3.8) 5.3 (‡5.8)
Source: Singapore Department of Statistics, Census and Statistics Department, Hong Kong SAR, People's
Republic of China and Directorate-General of Budget, Accounting and Statistics, Executive Yuan, Republic of
China. Figures in brackets denote the difference between Singapore and country under comparison.

Singapore's public investment rate is close to Taiwan's. Taiwan has a substantially lower
private investment rate due to its comparatively less capital-intensive manufacturing sector,
and the lower investments in buildings.

4. Has Singapore used capital inef®ciently

One of the key conclusions of Young (1992) and Heritage Foundation was that
Singapore's over-investment has led to declining rates of returns, which would limit our
accumulation-driven growth in the future. This section compares Singapore's investment
ef®ciency vis-aÁ-vis other Asian economies using three key benchmarksÐreturns on
investment (ICOR), and TFP growth.

4.1. Rates of return on investment

Investments ¯ow where returns are highest. According to the U.S. Department of
Commerce, U.S. direct investments in Singapore have been consistently delivering high
rates of return (Table 6). Singapore's average rate of return on U.S. direct investments in the
non-oil manufacturing sector was the highest in Asia at close to 30% per annum for the
period 1990±1998. This was followed by Philippines (24% per annum), Hong Kong (19%
per annum) and Malaysia (17% per annum). For U.S. investments in the services sector,
Singapore's average rate of return of 19% per annum for the same period was largely similar
to that of Taiwan, Hong Kong and Malaysia.

Table 6
Average rate of return on U.S. direct investment abroad, 1990±1998 (%)
Singapore Philippines Hong Kong Malaysia Thailand Taiwan Korea
Manufacturing (non-oil) 28.2 23.6 19.3 17.0 14.9 12.1 8.0
Services 19.5 16.1 19.4 18.8 24.3 19.8 10.8
Overall (including oil) 22.5 18.8 19.2 28.1 19.1 15.0 9.8
Source: U.S. Department of Commerce.
62 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

4.2. Incremental capital output ratio (ICOR)

Some may argue that the Singapore government could have subsidised the high rates of
return on investment in Singapore. However, the ICOR9 showed that the use of capital in the
Singapore economy as a whole has been ef®cient as well. The reciprocal of the ICOR is the
marginal productivity of capital. Hence the smaller the ICOR, the higher is the return to
capital. Between the 1970s and the mid-1980s, Singapore's ICOR has been no better, or worse
in some cases, than many Asian countries. However, Singapore's ICOR has performed better
since the mid-1980s. Over 1987±1997, Singapore's average ICOR was about 4. This was far
lower than the average ICOR seen in other Asian countries for the same period, including
Japan, with an average ICOR of close to 11, and Hong Kong, with an average ICOR of 6.
Singapore's average ICOR, however, was higher than Taiwan's average of three (Fig. 5).10

4.3. Total factor productivity

TFP growth refers to the amount of output growth not accounted by the growth in capital
and labour quantity. Hence, it can only be considered as a measure of capital ef®ciency in so
far as it captures the improvement in the quality of inputs, especially capital.
Symbolically, the growth in output (Y) can be decomposed as follows:
g…Y† ˆ g…TFP† ‡ ag…K† ‡ bg…L†
where g(X) is the growth in variable X, and L represents labour input and K represents
capital. The parameters a and b are, respectively, the capital and labour shares of the output.
The sum of a and b is unity.
Several researchers have conducted such exercise of decomposition for Asian economies.
Young's (1992) article is a notable example that recorded negligible TFP growth of Asian
NIEs. Corroborating the ®nding is the work of Kim and Lau (1996) using the meta-
production function. However, other studies do not concur completely with Young's or Kim
and Lau's ®ndings. Efforts by Stanley Fischer in the World Bank (1993) report, Toh and Low
(1996), Rao and Lee (1995), Gapinski (1997), and Hsieh do indicate that there are more
explanations to the apparent absence of TFP growth. It ranges from data de®ciency, incorrect
estimate of factor share to conceptual implication of latent variables not explicitly identi®ed.
A summary of the estimates of the TFP growth is given in Table 7.
Notably, Gapinski (1997) extended the basic framework by using a production function
that takes into consideration various vintages of capital combining with labour to generate
output. In his formulation, he can attribute the growth in TFP to the change in the quality of
labour and capital as well as allocative ef®ciency arising from international trade.11
Gapinski's formulation for TFP growth can be written as
g…TFP† ˆ af ‡ bl ‡ yF
where f and l are, respectively, the rates of change in quality of capital and labour, and F is
a measure of international trade. The parameters a and b are, respectively, the capital and
labour shares of the output. Table 8 presents, the results for the estimated share of TFP in
output growth using the information of 120 countries for the period 1960±1990.
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71
Fig. 5. Regional comparison of ICOR (5-year moving average). Source: Singapore Department of Statistics and CEIC.

63
64 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

Table 7
Annual average TFP growth rates in the Asian tiger economies
Study Hong Kong Singapore South Korea Taiwan
Chen (1977) 4.3 3.6 5.0 4.3
Kim and Lau (1996) 2.4 1.9 1.2 1.2
World Bank (1993) 3.7 1.2 3.1 3.8
Young (1994) 2.5 0.1 1.4 1.5
Young (1995) 2.3 0.2 1.7 2.6
Collins and Bosworth (1996) 1.5 1.5 2.0
0.9 (1960±1973)
1.0 (1973±1984)
3.1 (1984±1994)
Tsao (1986) 0.6 (1966±1972)
0.9 (1972±1980)
Rao and Lee (1995) 0.6 (1976±1984)
2.6 (1987±1994)
Toh and Low (1996) 1.5 (1971±1980)
1.8 (1981±1992)
1.7 (1971±1992)

One prominent aspect of Table 8 is the magnitude of TFPs contribution to output

growthÐits share never falls below 29%, and is more than 50% in three cases: Singapore,
Hong Kong, and Papua New Guinea (PNG). In particular, TFP explains 57% of output
growth in Singapore, the highest in the sample economies. Singapore has 87% of its TFP
growth rooted in trade, followed by PNG (82% and Hong Kong (82%). Even the U.S., which
is not a relatively open economy, owes about 30% of its TFP growth to trade. The
Table 8
Total factor productivity accounting by country (1960±1990)
Country Output growth
Share (%) due to inputs Share (%) due to TFP
Total Labour Capital Total Trade Quality
Hong Kong 44.4 22.8 21.6 55.6 45.5 10.1
Singapore 43.3 17.9 25.4 56.7 49.5 7.2
Taiwan 63.7 26.8 36.9 36.3 22.4 13.9
Korea 68.8 26.2 42.6 31.2 15.8 15.4
Indonesia 70.4 39.1 31.3 29.6 16.9 12.7
Malaysia 60.6 29.5 31.1 39.4 26.0 13.4
Thailand 70.6 48.4 22.2 29.4 21.1 8.3
Papua New Guinea 49.5 39.1 10.4 50.5 41.3 9.2
Philippines 68.6 51.1 17.5 31.4 22.6 8.8
Australia 64.4 40.6 23.8 35.6 16.9 18.7
Japan 70.5 19.1 51.4 29.5 11.0 18.5
New Zealand 51.0 33.3 17.7 49.0 29.0 20.0
U.S. 64.3 40.5 23.8 35.7 10.4 25.3
Source: adapted from Gapinski (1999) economic growth in the Asia Paci®c Region.
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 65

Fig. 6. Total factor productivity. Source: Singapore Department of Statistics and MTI estimates.

importance of TFP in the process of output growth for the Asian tigers economies seems to
run counter to the popular pronouncements of Krugman.
In fact, in the exercise in which the term associated to international trade (F) is omitted,
the results indicate that the shares of output growth previously attributed to growth in factor
inputs have increased while that attributed to TFP has shrunk.
When trade is removed as an explicit determinant of economic growth, Gapinski's
computation shows that TFP growth will account for less than 20% of the output growth in
the Asian tiger economies. This is similar to the ®ndings of Young (1995), Kim and Lau
(1996). Incorporating international trade into growth analysis on the basis of allocative
ef®ciency puts a powerful force into TFP and produces a high percentage contribution to
growth.
Even if the traditional TFP computation approach adopted by Young is used, more recent
data suggest that there is a signi®cant shift in the trend of Singapore's TFP growth (see
Fig. 6). Computation based on latest available national income statistics shows that between
1971 and 1986, Singapore's TFP growth had indeed been negligible compared to Hong
Kong (and Taiwan too), as pointed out by Young (see Fig. 6). However, since then,
Singapore's TFP growth has improved quite substantially, averaging 2.6% per annum in
1987±1997 until the Asia economic crisis struck. This is higher than Hong Kong's 0.7%,
although still lower than Taiwan's 3.7%.

4.4. Relationship between TFP and capital productivity

What could have accounted for the improvement in Singapore's TFP in the 1990s? The
relationship between TFP and capital productivity is as follows:
g…Y† ˆ …1 b†g…K† ‡ bg…L† ‡ g…TFP†
66 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

g…Y† g…K† ˆ g…TFP† b‰g…K† g…L†Š

   
Y K
g…TFP† ˆ g ‡ bg
K L
For a constant capital intensity (that is ratio K/L is constant), the growth in TFP is equal to
the growth in average capital productivity, Y/K. However, the growth of TFP is related to the
rate of change in capital intensity.12 In particular, it is observed that growth of TFP will
increase with the low values of g(K/L), but will ultimate decline with higher (K/L) growth.
Thus, an inverted U-shape relationship between g(TFP) and g(K/L) is postulated (see Fig. 7).
Over the development cycle, in the early phase of development, where capital deepening
predominates, when K/L is accelerating from a low base, TFP growth will be low. However,
when much of the basic social overhead capital is established, growth in (K/L) slows and
there will be a concomitant increase in TFP. Using the information for the three Asian
economies, the quadratic function:
    2
K K
g…TFP† ˆ a0 ‡ a1 g ‡ a2 g
L L
was estimated and the results shown in Table 9.
The value of g(K/L) in which g(TFP) is maximum is X  ˆ a2 /…2 a1 †, and the
associated value of the g(TFP) is given by Y.
The important implication of the above postulate is that when capital deepening
decelerates as a result of completion of basic infrastructure investments, the TFP and
productivity of capital will increase in tandem with rising TFP growth. From Fig. 7, when
growth of (K/L) is below H, (Y/K) will have positive growth and TFP growth will be near its
maximum.
This corresponds with Singapore's development experience. From the 1970s to the end of
the 1980s, Singapore was in a ramping-up stage with substantial capital deepening and low
TFP. Subsequently when the pace of investment eases in the 1990s, TFP picked up. The
computation in Table 9 suggests that Singapore's maximum potential TFP growth can be as
high as 2.7%.

Fig. 7. Inverted U-shape relationship between g(TFP) and g(K/L).

 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 67

Table 9
Fitting of quadratic relationshipa
a0 a1 a2
Singapore Value of coef®cient(s) 0.0227 1.4934 0.2087
Standard error of coef®cients 1.0584 0.6097 0.0794
T statistics 0.0214 2.4495 2.6280
X 3.5778
Y 2.6942
Hong Kong Value of coef®cient(s) 3.1029 0.7012 0.0501
Standard error of coef®cients 9.0923 2.2692 0.1317
T statistics 0.3413 0.3090 0.3805
X 6.9946
Y 0.65
Taiwan Value of coef®cient(s) 0.9426 0.2609 0.0239
Standard error of coef®cients 1.2882 0.2584 0.0118
T statistics 0.7317 1.0096 2.0266
X 5.4461
Y 1.65
a


2
g…TFP† ˆ a0 ‡ a1 g KL ‡ a2 g KL .

The TFP improvements in the 1990s may be a re¯ection of other factors as well, including
rising educational and skill levels, higher in¯ow of skilled foreign workers, greater
technological absorptive capacity, and stronger IT hardware and software investment. In the
earlier years, Singapore's heavy capital investments could not be adequately exploited
because of its relatively unskilled workforce. However, as Singapore's workforce becomes
increasingly educated over the years, the combination of capital and labour has become
more ef®cient, raising TFP as a result.
There are two noteworthy points about the study of TFP. First, given the lumpiness and
long payback period of capital and infrastructure investments, the conclusion may be skewed
by the choice of the study periodÐespecially if it is not suf®ciently long. Alwyn Young's
study period of the 1960s±1980s corresponded to the period when Singapore was ramping-
up its economic infrastructure investments, and thus gave the picture of low TFP growth
compared to Hong Kong.13 However, if the time horizon were lengthened to the end of
1990s, a different picture emerges, as Singapore was starting to reap the fruits of its earlier
investments and enjoying a higher TFP growth. Hong Kong on the other hand, was
increasing its investment rate, in part due to infrastructure upgrading like the building of
Chek Lap Kok airport, and thus saw its TFP growth worsened. Second, Singapore's
experience of low TFP in its early days of economic development is by no means surprising
or unique. Abramovitz and David (1973) have found that economic growth in the 19th
century U.S. can be largely attributed to the growth of inputs rather than to technical
progress. In particular, Tostlebee (1956) reported that the TFP growth for the U.S.
agriculture in the 19th century was negative. Similarly, Hayami and Ogasawara (1996) have
found that the growth of the Japanese economy between Meiji Restoration and World War I
can be largely explained by the growth of inputs, principally tangible capital accumulation.
68 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

This has led Lau (1997) to conclude that input-driven growth is not unique to the East Asian
NIEs, but accords with the experience of the U.S. and Japan in their early stage of economic
development.

5. Conclusion

Young and Heritage Foundation had raised the point that Singapore's investment rate was
high compared to other Asian economies from the 1970s to mid-1980s (and especially
1981±1985). This was due to the substantial industrial and infrastructural capacity building
during the ramp-up phase of its economic development, and re¯ected its development
strategy to build economic infrastructure ahead of demand. The bubble in the property
market and over-building between 1980 and 1984 also accentuated the investment rate.
However, with the major infrastructure in place and correction in the property market,
Singapore's investment rate has declined in recent years, while the other Asian economies
have increased their investment rates.
Investments in Singapore have been undertaken primarily by the private sector. The
private sector accounted for 75% of total investments, and its share has been rising in recent
years. Given that the bulk of investments are undertaken by the private sector, Heritage
Foundation's claim that the Singapore government has ``squandered the people's savings'' is
unfounded.14
Recent literature has distinguished between three principal forms of capital: (i) physical
capital, produced by investment in equipment and structures; (ii) human capital, generated
by education and training and learning by doing; and (iii) disembodied knowledge, or
blueprints, generated by research and development and/or learning by doing. Capital
quantity, like trade, proves to be a major factor in economic growth. This ®nding reaf®rms
the assertions by De Long and Summers (1991) and Wolff (1991), who likewise stressed the
role of capital in growth. Accumulation, by de®nition, augments capital quantity. But,
because of embodiment, they simultaneously enhance capital quality, and hence they must
be understood as accessing two sources of growth. Gapinski (1999) provides two main
reasons in support of accumulation. Firstly, empirical evidence implies that developing
countries in the Asia Paci®c Region tend to be de®cient in capital, as the marginal product of
ef®cient capital exceeds the real interest rate. For those nations accumulation is needed on
optimisation grounds. Secondly, to the extent that accumulation is accomplished through
international trade and foreign direct investment it represents a transfer of technology
enabling the developing states, consonant with Gerschenkron's principle, to improve their
production capability. Acquisition (accumulation) therefore matters in four respects: capital
quantity, capital quality, stock de®ciency, and technology transfer. Given the multiple
dimensions of acquisition, domestic strategies geared to raise thrift or to lower capital costs
should not be treated lightly. Nor should they be perceived as being unrelated to
international strategies.
Singapore has invested ef®ciently vis-aÁ-vis other Asian economies based on measures
such as return on investment and ICOR. In terms of TFP, computations by different
researchers have yielded varying results. By taking into account the effects of trade,
 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71 69

Gapinski's (1999) study has shown that TFP in fact accounts for 57% of Singapore's output
growth. Even if the traditional TFP computation approach adopted by Alwyn Young is used,
more recent data show that while Singapore's TFP growth had been negligible compared to
Hong Kong between 1971 and 1990, it has improved quite substantially in 1990s. This is due
to the slowing of capital deepening as its economic infrastructure becomes more developed.
Singapore's experience of low TFP growth in its early stages of economic development is not
unique. The U.S. and Japan had similar experience. Singapore is starting to reap the returns
from its earlier high investments, due partly to improvements in the quality of its work force.
This bodes well for Singapore's ability to sustain healthy economic growth in the future.

Notes

1. A detailed discussion can be found in Toh (1997) and MAS (2000).

2. Private property prices rose by 34% per annum between 1979 and 1983, partly due to
the relaxation of rules in 1981 to allow Central Provident Fund savings to purchase
private properties. Property prices were also fuelled by a surge in foreign capital
in¯ows (which rose by 32% per annum between 1980 and 1984), some of which went
into property investments.
3. The surge in demand for public housing was due to the Housing Development Board's
revision in the income ceiling and relaxation of eligibility conditions (citizenship
requirement and resale policy), as well as the accelerated resettlement programme. The
long application queue created political pressures for the public housing construction
programme to be speeded up.
4. In 1999, manufacturing accounted for 25% of GDP in Taiwan and 24% in Singapore.
5. SMEs account for 89% of manufacturing establishment in Taiwan and 78% in
Singapore. SMEs tend to be less capital-intensive compared to MNCs.
6. The chemicals industry accounted for an average of 14% of Singapore's total capital
expenditure in the manufacturing sector in 1996±1998, although its value-added share
was 11%.
7. In 1999, 62% of Taiwan's workforce has post-secondary and above education. This
compares with 35% in Singapore.
8. Some analysts have attributed Taiwan's low investment rate to its longer-term political
uncertainty.
9. Real ICOR is de®ned as the ratio of gross ®xed capital formation to the change in GDP,
i.e., the additional unit of capital required to produce each additional unit of output, a
common measure for evaluating the ef®ciency of capital usage. The lower ICOR is, the
more ef®cient is capital usage.
10. The ``spikes'' in the ICOR lines re¯ect the economic downturn in the various
economies. For Singapore, Malaysia, Thailand and Hong Kong, this occurred in the
mid-1980s when they fell into a recession, following rapid increases in investment in
the previous years. For Korea and Japan, it was during the early 1980s and 1990s
(after the burst of the asset ``bubble''), respectively. The latest ``spike'' was caused by
the Asian economic crisis.
70 M.H. Toh, W.C. Ng / Journal of Asian Economics 13 (2002) 52±71

11. A detailed derivation of his accounting formula is provided in Chap. 3 and pages 126±
131 of Gapinski (1999). Other studies that reported outward-oriented economies
achieved signi®cantly higher growth in GDP and productivity include Chenery et al.
(1986) and IMF (1992).
12. A similar idea is expressed by Ohkawa (1984). He suggested that the growth in TFP is
related to the growth in the conventional inputs of capital and labour. Furthermore,
the relationship is parabolic and will shift as the economy moves into different stages
of development.
13. Hsieh (1999) asserts that the under valuation of the contribution of public housing to
GDP is one important factor for low TFP growth measured in Singapore. He indicates
that adjustment made for this under-valuation will increase the TFP growth by 0.3%±
0.4% per annum. However, the conclusion that Singapore's TFP growth is still the
lowest among the Asian NIEs during the 1970s and 1980s remains valid.
14. Heritage Foundation's claim that Singapore's economic growth had not been
systematically higher than Hong Kong despite its higher investment is not true.
Singapore's real GDP per capita, at 1990 market prices, has surpassed Hong Kong's
since 1994 and the gap has widened in recent years. In 1999, Singapore's real GDP
per capita was $18,000 compared to Hong Kong's $15,200.

Acknowledgments

The authors will like to thank Professor Tan Kong Yam, George Tan, Soo Cheng Ghee
and Choy Choon Ho for their excellent research assistance and data preparation. The authors
are also grateful for the valuable comments and suggestions provided by the participants of
the EAEA Convention and the anonymous referees, for revising the paper. The usual
disclaimer applies.

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