The scandal has highlighted some distortions in the country’s economic development model at a politically sensitive time
In early August, a major money laundering operation worth 1.8 billion Singapore dollars (around 1.2 billion euros) was discovered in Singapore and the investigation led to the arrest of 10 people accused of laundering money from illegal activities Mainly in Singapore, China took place, from secret betting to usury. Some funds were also found at the country’s largest banks. This case is being discussed not only because of the scale of the operation – which, however, raises some concerns about the presence of loopholes in financial regulation – but also because it highlights some flaws in the development model on which the country’s growth has been based in recent years. decades.
Singapore has long thrived largely due to its reputation as the “Switzerland of the East”. It has proven to be a safe and neutral place for Western companies and is also open to international trade and capital. Today, not only is this model at risk of abuse and illegal activity, but it is also at risk of becoming unsustainable in a world increasingly focused on hindering foreign competition in the national market and on the other hand no longer brings the same benefits as it once did for the local population, where inequalities have become much worse.
These investigations, with all the considerations they have given rise to, come at a very sensitive time for the country: the renewal of key government offices is underway, while the country is currently struggling with some exceptional cases of corruption among politicians.
The success of Singapore’s economy has a relatively recent history. Under the leadership of Lee Kuan Yew – the founder of modern Singapore, who died in 2015 – the city-state transformed itself from a Southeast Asian hinterland into one of the world’s most successful economies after independence from Malaysia in 1965. Today the gross domestic product per capita is $91,000 per year: more than that of the United States, Australia, France, the United Kingdom and not far behind Switzerland.
After independence, Singapore benefited from a period of rapid industrialization and the worldwide expansion of the globalization phenomenon. Additionally, its strategic location makes it an ideal trading hub and first stop for those looking to invest in Asia.
However, the real difference has been made by public policies, particularly in attracting foreign investment. Lee was aware that encouraging foreign investment, immigration of skilled workers and the introduction of new technologies would enable the country’s rapid development. At a time when many Eastern states were wary of multinational corporations, Lee welcomed them with low taxes and nonexistent bureaucracy.
But Singapore became much more than just a tax haven because it managed to combine capitalism with a welfare state that protected citizens and provided housing, medical care and education. The economic development went hand in hand with the social development of the country, which, thanks to the integration policy between foreigners and the local population, managed to create a Singaporean identity: Today Singapore has 5.4 million inhabitants, of which just over 40 percent are foreigners.
A local celebration in central Singapore (AP Photo/Yeen Ling Chong)
However, an extremely far-sighted and open economic policy corresponded with a very authoritarian state leadership. Showing little tolerance for political dissent, Lee enacted tough anti-corruption laws and some of the strictest gun and drug control laws in the world, and instituted the mandatory death penalty for those found guilty. Anyone who bought or sold even small amounts of drugs or fired a gun while committing another crime, such as robbery, was automatically sentenced to prison, regardless of whether someone was shot or not.
– Also read: Lee Kuan Yew, the man who built Singapore
Singapore’s economic success continued with Lee’s successors, first Goh Chok Tong and then his son Lee Hsien Loong, who came to power in 2004 and still serves as prime minister. The open and trade-oriented economy has also proven resilient to the trends of recent years, such as increasing global protectionism, the economic crisis due to the pandemic, the fragmentation of goods supply chains, the economic consequences of the war in Ukraine, the energy sector crisis and inflation.
Among these, protectionism is the biggest problem for an open economy like Singapore’s, which risks gradually losing its attractiveness compared to large countries that massively invest and attract capital thanks to subsidies and incentives.
The country has held for now. In fact, political and economic uncertainty in the Western world has strengthened Singapore’s role as a safe haven for businesses. Its reputation, coupled with favorable taxation, has helped the country compete with the massive industrial subsidies of major economies, such as the United States’ Inflation Reduction Act or the European Union’s Next Generation EU.
Overall, foreign direct investment inflows rose to $195 billion last year, the highest level on record, up just 10 percent from the previous year. Singapore attracted $22.5 billion in real estate investment in 2022, even as the sector slowed significantly globally due to rising interest rates.
(AP Photo/Wong Maye-E)
The country is also very attractive for Chinese companies. Many people are talking about “Singapore washing,” a phenomenon in which Chinese companies move their headquarters to Singapore to protect themselves from the geopolitical risk of remaining in China, which has increasingly problematic economic and trade relations with the Western world. HongShan, formerly known as Sequoia China, a giant fund that specializes in investing in Chinese technology startups, has also opened an office in Singapore.
The country has also become extremely attractive to Chinese millionaires looking for stability: low taxes, good schools, excellent management of large assets and strong cultural ties to China (many speak Mandarin) are all features that have attracted Chinese millionaire families in recent years .
However, the €1.2 billion money laundering scandal has drawn attention to the fact that Singapore can sometimes serve as a haven for capital from illicit activities, a risk that has also increased in recent years.
Since the pandemic, Singapore’s non-traditional financial sector, that is, the sector that does not involve banks and more traditional financial players, has grown significantly. For example, family offices, i.e. companies that manage the assets of private individuals, and closed-end funds, such as trusts, have increased. These activities do not automatically imply that illicit interests exist, but they are actually more difficult to regulate and monitor because, unlike banks, they are not subject to traditional financial regulation.
“I think the money laundering investigations barely scratch the surface of the illegal activities that have been going on here for years,” the head of the Singapore branch of a major international investment bank told the Financial Times, pointing to large flows of capital from foreign investors through illegal activities, particularly in South East Asia.
This is a well-known issue in financial circles and is unlikely to have a major impact on Singapore’s reputation as a safe and peaceful place to place large, including illegal, investments. What could be damaged, however, could be the reputation of a country that wants to be not only a tax haven but also a place of growth and development. “The government needs to deal with this better, also to avoid the risk of a rise in populism and xenophobia that has swept many other countries,” the banker told the Financial Times.
For the country, the risk is more political and social, with many questioning whether an economic model so heavily reliant on foreign capital still benefits citizens as it has in the past. In short, the danger is that the local population’s intolerance towards foreign companies investing in the country will increase.
For example, the large influx of millionaires and wealthy financial workers has created some distortions in the cost of living. Property prices have risen dramatically, both for sale and for rent. In 2022, the average house price reached $1.2 million, the highest price among Asia Pacific cities. At the end of last year, private apartment rents even exceeded those in New York.
(Clive Rose/Getty Images)
The welfare state has compensated for this to some extent. Many Singaporeans are protected by a government housing program: almost 80 percent live in government apartments with long-term rental contracts. But in any case, over the years the cost of renting this type of accommodation has also increased, along with the general cost of living. As a result, inequalities have increased significantly.
All this is happening at a time of upheaval in the country’s politics. The People’s Action Party (PAP) has been in government continuously since 1965, and the “transition to the fourth generation” has been taking place since 2018, which includes the renewal of politicians in the most important government positions. It is a renewal within the party that does not actively involve the population. However, Singapore remains an authoritarian state where it is very difficult to express dissent, there is almost no opposition and electoral democracy is not transparent.
Singapore’s next general election will take place in 2025, although it is not yet clear whether current Prime Minister Lee Hsien Loong will resign or run again. The party has recently been at the center of a number of corruption incidents, which are very rare in Singapore due to strict anti-corruption rules and which have received widespread public opinion.
For Singaporeans, the opacity of the succession plan and episodes of corruption contribute to a general disorientation about the country’s identity. Sudhir Vadaketh, editor of Jom, a Singapore weekly, told the Financial Times that the money laundering case “confirms the feeling that the ‘Switzerland of the East’ is actually designed for global plutocrats rather than ordinary Singaporeans.”
– Also read: The extraordinary scandals in Singapore politics
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