To reduce investment red tape between the two countries, the United States and Singapore signed a free trade act that went into effect in 2004. The free trade agreement eliminated trade duties for most goods between the two countries, including information technology products and medical devices, sectors in which U.S.-based firms are world leaders. Import restrictions on beef, dairy and sugar will be phased out over the next 10 years. The agreement also makes it easier for U.S. firms to compete for contracts with government agencies in Singapore and eases restrictions on the export of professional services, financial products, commercial and investment banking services, energy and telecommunications services.

The U.S. and Singaporean governments do not duplicate taxation of income earned by companies operating in both countries.

The U.S. and Singaporean governments do not duplicate taxation of income earned by companies operating in both countries. Singapore-based joint ventures and subsidiaries of U.S. businesses pay income taxes to that country’s equivalent of the IRS, the Inland Revenue Authority, on the profits they earn locally. (The current corporate tax level is 20 percent.) These companies then face a reduced tax burden from the IRS on the profits they remit to their parent company in the United States. For example, after paying the Singaporean tax authorities, a company would pay the IRS only 16 percent, which is the current difference between the two countries’ corporate tax rates.

Solid Foundations
In addition to investment-friendly agreements with the U.S. government, foreign investors are also drawn to Singapore’s solid economic indicators. Standard & Poor’s recently reaffirmed its AAA rating on the country’s government bonds; Singapore is the only Asian country to enjoy the agency’s highest government debt rating. The prime lending rate has trended downward from a 10-year peak of 7.49 percent in 1998 to 5.3 percent, making it cheaper to borrow short-term money locally. Bond yields, however, have trended upward this year.

Last March, the country’s central bank, the Monetary Authority of Singapore, surveyed 21 local economists and found that 42 percent expect GDP growth of 4 to 4.9 percent in 2005. Most are forecasting expansion in the same range for 2006, as well. Expectations are highest for non-oil exports with economists looking for 9 percent growth in 2005, on average. They also expect growth of 4.5 percent in financial services, 6 percent in wholesale and retail trade and 7.5 percent in manufacturing.

The economists do not believe this growth will spur inflation. They anticipate the consumer price index to hover around 1.5 percent in 2005, on par with 2004’s CPI. This is considerably lower than the 2.3 percent CPI averaged from 1981 to 1997, indicating the success of Singapore’s inflation-fighting measures. “It gives investors the comfort that prices of assets and resources are not likely to change abruptly,” notes Bernard Yeung, a professor at  New York University’s Stern School of Business. Companies can project their producing costs into the future with a high degree of accuracy.
 
The macroeconomic policy of the country centers on active management of the value of the local currency. The Monetary Authority of Singapore continually adjusts the value of the Singaporean dollar against a basket of international currencies. The bank manages this exchange rate—rather than interest rates—to control prices and economic growth. Local economists credit the low inflation and long-term stability of the Singaporean dollar to this policy. The average exchange rate in March 2005 was 1.63 Singaporean dollars per U.S. dollar, which is at the high end of a steady trend of appreciation.

Commercial Comity
The low level of corruption and relatively rare bureaucratic hurdles are additional boons for entrepreneurs and foreign investors. The 2004 Index of Economic Freedom, compiled by the Washington, D.C.-based think tank Heritage Foundation, ranked Singapore’s business environment one of the least corrupt in the world, second only to Hong Kong’s. The researchers found that Singapore’s courts are strong advocates of private property rights and contractual agreements, and are relatively free of political interference.

Entrepreneurs in Singapore generally need only eight days to register and open a business, compared to an average of more than 50 days for Singapore’s neighbors and 34 for other developed countries. The cost of starting a business in Singapore is only 1.2 percent of gross national income per capita, versus 8 percent for developed countries and 48.3 percent for other economies in the region.

Singapore is also trying to protect equity investors with strict transparency requirements for publicly traded companies. The World Bank pegged Singapore at 5.0 out of 7.0 for the stringency of its requirements for auditing, financial reporting and the independence of corporate boards. This is just below the average of 5.6 for other developed countries, but far higher than the 2.6 average for Singapore’s regional peers.
 
One snag in the otherwise favorable conditions cited by investors and academics is the government’s intervention in the economy, which can border on meddlesome. The government has traditionally been actively involved in all aspects of the economy through state-owned enterprises, so-called government-linked companies or GLCs. Newbridge Capital, a company based in Fort Worth, Texas, has offices throughout Asia, manages $1.7 billion in that region and recently invested $200 million in the Singaporean company Parkway Healthcare. Tim Dattels managing director of the investment firm, explains that the government policy has helped Singapore develop first-rate industrial infrastructure and human capital. Yet he adds, “The government can’t be the catalyst for growth forever.”

The government has also shown a penchant for promoting quirky policies that border experiments in social engineering. “Government intervention in the economy has ranged from encouraging high-tech investment all the way to arranging marriages for university graduates,” NYU’s Yeung says. One of Singapore’s high-profile programs was dubbed the “Love Boat,” a cruise designed for educated singles to meet. Yeung likened the junket to a state-sponsored attempt to “keep up the gene pool” amid declining fertility rates.