By Louis Kraar
March 23, 2015

This Fortune article first ran in the magazine in July 1974. We are running it again to mark the passing of Lee Kuan Yew, Singapore’s first and longest-serving prime minister, and the architect of the nation’s remarkable transformation.

Singapore, the smallest nation in Asia, occupies a 225-square-mile expanse of swampy, tropical islands—an area about the size of Trenton, New Jersey. The former British colony has almost no natural resources, except a superb harbor situated along the main shipping route from Europe to the Far East. And it has fewer people—2.2 million—than metropolitan St. Louis.

Yet the tiny city-state has swiftly seized a large place in the world economy. It is a thriving manufacturing center turning out ships, precision machinery, and electronic components. And it is fast becoming the Zurich of the East, an international haven for money and bankers. In nine years of full independence, the gross national product has nearly tripled—raising the average per capita income to a level exceeded in Asia only by that of Japan.

Singapore has achieved this dazzling growth by stretching its meager means and using some extraordinary techniques of statecraft. The country is run very much like a corporation. Striving above all for efficiency, the government coldly weighs every move, from school curriculums to foreign relations, against cost-effectiveness. The key criterion, as one top-rank official puts it, is always : “What good can we get out of it?”

Prime Minister Lee Kuan Yew, a fifty-year-old lawyer educated at Cambridge, calls himself a “democratic socialist.” But he shows more concern with rates of return (for both investors and the state) than with political dogma. In fact, Lee rules as though he were the autocratic chief executive of Singapore Inc.

Under his tight managerial control, nothing is long tolerated if it interferes with economic performance. Young men are prohibited from wearing modishly long hair, which the chairman regards as a symbol of the Western counterculture and a menace to the work ethic that he prizes. Lee keeps the country’s labor force cheap and disciplined by setting strict guidelines for both wage increases and working conditions. Since he has the political power to enforce his rules, factory wages, which are about one-fifth of those in the U.S., help to keep Singapore products internationally competitive.

Lee’s economic philosophy is stern and simple. “We do not expect something for nothing,” he says. In a characteristic jab at his less energetic Asian neighbors, he explains: “We haven’t got oil and minerals on which other people have to pay royalties. So we develop a different approach to life.” He calls it “the rugged society,” but it is really his own special blend of pragmatic socialism, freewheeling capitalism, and plain opportunism.

The Prime Minister has hitched the island to the global economy through multinational corporations, which supply needed capital, expertise, and export markets. Singapore ardently woos foreign business, a rare policy among countries that have only recently emerged from colonialism. Besides providing such familiar tax incentives as a five-year income-tax exemption for coveted corporations, the government often shares the cost of training workers and even puts up part of the capital for plants and equipment.

During the past five years, international manufacturers have responded by pouring in $1.2 billion of their own to start more than a hundred factories. About half the money has come from U.S. corporations. All together, 425 American companies now operate in Singapore. General Electric alone has seven plants assembling home appliances and components.

An avowedly nonaligned foreign policy makes Singapore useful—for a price—to nearly every trading nation. Soviet merchant ships as well as vessels of the U.S. Seventh Fleet patronize its efficient port and repair yards. Peking maintains a busy Bank of China branch, while within walking distance Taiwan runs an active trade office. Arab oil producers, which provide most of the crude for the refineries, are now being urged to invest in Singapore industries. And Lee’s government has entered into a joint venture with an Israeli concern that produces communication equipment, and has hired Israeli military advisers to shape Singapore’s fledgling armed forces. His country’s real protection against undue influence by any foreign power, says Lee, is to maintain a balance of investment by the U.S., Japan, and Western Europe.

Profits even from the postal service
The Prime Minister not only demands that government services operate smoothly and honestly, an uncommon achievement in the Orient, but also wants them to produce profits, if possible. Part of the police force is hired out through a state-owned company as guards for banks and factories. The government printing office accepts commercial work. The postal service proudly reported $7.5 million in earnings last year, partly because it charges the equivalent of 40 cents for airmail letters to America. (U.S. air postage to Singapore is just 26 cents.)

Sometimes this approach leads to what surely would be considered excess profits in other countries. A 3 percent sales tax on hotel and restaurant bills provides funds to promote tourism, but for the past several years a substantial portion of the take has been hoarded in bank accounts gathering interest for the state. Eventually, the tax proceeds are to be invested in an offshore resort island and a handicraft center, not merely to help tourism but also to make money.

Lee has also moved his government directly into business in a variety of ways. Its ever growing array of profitable enterprises includes shipyards, banks, hotels, an oil refinery, and even a small steel mill. All together, the government wholly owns about twenty sizable companies, and it holds substantial shares of about 100 others in every sector of the economy. Again, the main motive isn’t to implant socialism, but to make profits. As one cabinet minister explains: “We see opportunities, and we can make some money out of them. If a company doesn’t pay, we just let it go bankrupt.” An unprofitable charter airline, Sabre Air, was abruptly folded in 1972.

Management by mandarin
To run his fiefdom and its business holdings, Lee relies heavily on an elite cadre of about fifty senior civil servants. These modern mandarins, like the functionaries of ancient China, are selected on a merit basis and are ultimately accountable only to the ruler. But many are active in politics as members of Lee’s party, which holds all the seats in Parliament. At least one mandarin is usually assigned to the board of each corporation in which the government holds equity. Some sit on the boards of as many as a dozen companies.

The mandarins belittle their pervasive influence. “We’re bureaucrats, not managers,” insists J.Y.M. Pillay, a permanent secretary in the finance ministry, who is also chairman of Singapore Airlines and a board member of half a dozen other corporations. “We know how to read a balance sheet and mostly just keep a check on management.” Still, the mandarins are under considerable pressure from Lee to perform. Any head of a money-losing state company is bound to be replaced.

The government keeps secret the amounts the mandarins collect as directors’ fees from their private enterprises. But some Singapore academicians calculate that top performers get paid about $50,000 a year, including their perquisites and official salaries. The extra income, Lee claims, induces competent men to stay with the government.

The state’s moves into business increasingly intermingle private and public enterprises in joint ventures. Government-controlled companies not only have interlocking boards of directors, but also do more and more business with one another. A Singapore economist who has studied this trend detects the emergence of “something like a single national corporation.”

The managers of Singapore Inc. tend to treat local citizens somewhat like the employees of an old-fashioned company town. Grade schools seek to instill what are officially termed “correct attitudes” toward manual work by assigning students to sweep classrooms and clean toilets. Colleges have downgraded liberal arts to stress accounting and engineering, in line with business needs.

Public housing in high-rise apartments is provided for nearly half the population. Thanks to government subsidies, low-income workers pay only 13 percent of their salaries for rent, and many are encouraged to buy the apartments with part of the otherwise untouchable savings that they are forced to put into a national retirement fund. “It’s an all-embracing system,” explains a senior public-housing officer. “When people own homes, they aren’t likely to start revolutions, and they’ll see that nothing happens to disrupt their jobs.”

Lee and his associates are constantly lecturing on the virtues of hard work, thrift, and clean living. Appearing at routine meetings of civic and professional groups, they deliver uplifting sermons, which are invariably broadcast on radio and television. The Prime Minister repeatedly warns Singaporeans not to drop out, take drugs, or indulge in sexual promiscuity. Job-hopping is denounced as another deadly sin, along with such “vulgar displays” of affluence as marble floors, elaborate door chimes, and sports cars. Such homilies may sound quaintly Victorian to Westerners, but most Singapore citizens seem to take them seriously.

A legacy of struggle
The paternalistic society that Lee has shaped is largely a response to the difficulties of transforming the former British colonial outpost into a self-supporting nation. For nearly a century and a half, Singapore made its living largely from the foreign trade of neighboring Malaysia and Indonesia. Perched between them in the Malacca Strait, the city processed and shipped their rubber, copra, and other products; it also handled most of their imports. But nowadays the producers of raw materials increasingly do their own processing and trading, depriving Singapore of its traditional role.

Seeking a broader economic base, Lee merged his country with Malaysia in 1963. He hoped to make Singapore the commercial capital of a larger, mainly rural country. But Lee proved too independent to suit Malay leaders, and the federation split after two stormy years. Shortly after the breakup, Singapore met another serious setback. In 1966 the huge British military establishment—which had provided much of the island’s livelihood—began withdrawing, and now has all but vanished.

Thrust on his own, Lee had to devise new arrangements for Singapore’s survival. “It was the best thing that ever happened to us,” the Prime Minister says. “We didn’t get much chance to collect fat, and we’ve had to struggle.”

A fourth-generation Singaporean, son of a retired oil-company employee who now clerks in a jewelry store, Lee has thrived on struggle all his life. While achieving the highest honors at Cambridge, he acquired strong anti-colonial views, which brought warnings from the British the moment he returned home. In 1952, as a brash, ambitious attorney, he backed postal workers in an unprecedented strike against British authorities. He established himself as a public figure by successfully defending the editors of a student journal, which had supported the strike, against sedition charges.

His People’s Action party opportunistically teamed up with local Communists, who helped Lee get elected Prime Minister when the British granted local autonomy in 1959. Later on, he broke with his former comrades and jailed more than 100 of them to forestall a leftist take-over. “If they had won, I’d be dead,” he now says.

During fifteen years of uninterrupted rule, Lee has gradually changed from a street-brawling left-wing politician to an astute manager and unchallenged boss. He has gained the respect of Singaporeans by giving them clean, rigorous government that delivers solid results. One of the few Asian leaders untouched by personal scandal or corruption, Lee draws an annual salary of only $38,400. He and his wife, Kwa Geok Choo, who now runs his prospering law firm, live in modest style in their own wood-frame home.

A powerful combination of intellect and arrogance underpins the Prime Minister’s authority. Lee, who grew up speaking English, has patiently learned Malay, Tamil, and Mandarin Chinese so that he can deliver a speech with equal force in all the common languages of Singapore. Though personally cold and aloof, he takes pains to appear in public clad as a man of the people—that is, without a jacket or tie. But his ruthless techniques and frequent rudeness deprive him of popular affection. At a meeting with university students, Lee grew so impatient with a testy, long-winded question that he physically shoved aside the student who was presiding and took over himself.

In his zeal for achievement, Lee insistently shuns small talk. Any foreign visitor who begins by discussing the weather is likely to be dismissed at once. He regards concerts, movies, and novels as “time-wasting.” His only hobby is golf, which he considers healthy exercise. Lee abhors smoking so much that no one is allowed to smoke either in his presence or in a room he plans to enter. (One chain-smoking minister ducks outside cabinet meetings for a quick cigarette.) An old British hand who admires his accomplishments aptly describes Lee as “the most brilliant man around, albeit just a bit of a thug.”

Brain-picking at Harvard
Abroad, Lee’s thoughtful, forceful speeches on international affairs have won him a reputation as a regional statesman. Actually, he is unpopular with many other Asian leaders, who dislike his smug, undiplomatic manner, though they envy his accomplishments. The Prime Minister takes time every year or two to visit the U.S., where he quietly spends a couple of weeks at such universities as Harvard and Yale, picking the best available brains for ideas useful to Singapore. Among other notions, he has picked up some obsessive impressions of America. Though an admirer of U.S. technology, he deplores the new permissiveness, the weakening of family ties, and the lax discipline in the labor force. He seriously contends that the U.S. has lost five or six years of progress from “riotous, drug-induced madness.” If children of American businessmen in Singapore are caught smoking marijuana, Lee usually expels the whole family.

Despite his country’s striking success, Lee often talks and acts as if his island realm were threatened by unnamed enemies and economic disaster. To guard against potential threats to his power, he maintains a large force of secret police who watch his political opponents, tap many telephones, and even investigate all students applying for admission to a university.

There sometimes seems to be a slightly paranoid strain to Lee’s personality. He often erupts in rash actions. A few years ago, he wildly claimed that hostile foreigners were trying to subvert Singapore through local newspapers. So he abruptly closed down two papers and jailed four top executives of a third. He also threatened to eject the Chase Manhattan Bank for lending money to one of the papers. But Lee produced not a shred of hard evidence supporting his charges. “He runs scared and always creates a kind of purposeful tension,” observes a banker who knows Lee well. This is partly his way of keeping Singaporeans disciplined and hardworking.

In the Prime Minister’s closely guarded office, he actually sounds like a board chairman—and he nodded approvingly at the characterization. He is proud that his system “deliberately exposes civil servants to decision making based on corporate rewards and profitability.” His bureaucrats, Lee boasts, Have picked up business attitudes and “the sense of the percentage.”

Getting Rollei into the picture
These talents have been plainly evident in Singapore’s effort to attract international business. Hewlett-Packard is assembling sophisticated calculators “primarily because of the ease of doing business here,” says Tom Lauhon, the local managing director. “This government wanted us and was geared to help. Elsewhere in Asia we ran into a lot of red tape.”

On barren hills and swamps at the outskirts of the city, Lee’s government over the past twelve years has built the satellite town of Jurong, which in addition to housing and retail stores is crammed with 510 factories; another hundred will be completed this year. To attract foreign manufacturers, the authorities provide plant buildings at nineteen industrial parks scattered around Singapore.

Four years ago Lee decided that Rollei-Werke, Franke & Heidecke—the West German camera company famous for the Rolleiflex—would be a prime recruit. Rollei was seriously threatened by stiff Japanese competition and a labor shortage at home that made production costly. The Prime Minister flew to Braunschweig and personally made the sales pitch. Among other things, he promised that if Rollei moved its production to Singapore, no Japanese camera makers would be permitted to set up shop there. Naturally, said Lee, he would expect the company to allow some local participation in the venture.

Rollei succumbed to the pitch and invested $52 million of its own in five plants, which now employ 5,300 Singaporeans. Substantially lower labor costs have enabled the company to produce cheaper cameras and counter the Japanese in most foreign markets. Once operations went into the black, Lee’s regime added shares in Rollei to its bulging portfolio.

Ready to seize chances
Singapore goes to considerable lengths to snare key industries. Two small offshore islands were cleared not only of jungle, but also of resident fishermen and their family graves to make way for an Esso refinery and Mobil oil-storage tanks. Thanks to its obliging attitude and central location, the city-state has become the site of the principal refinery complex in the region. Shell, British Petroleum, and Amoco also process oil there, primarily for Japan and other Asian markets. By the end of this year, total refining capacity will exceed a million barrels a day—making Singapore the world’s third-largest oil-processing center, after Houston and Rotterdam.

The oil-exploration rush in nearby Indonesia has been beneficial for Singapore, which now supplies much of the equipment used in offshore drilling. The government itself has three logistical bases to service wildcatters with pipe, drilling mud, and other gear. And the island serves as headquarters for dozens of contractors participating in the search. “We’ve had a fair amount of luck in the events around us,” admits Deputy Prime Minister Goh Keng Swee. “They gave us chances, and we were ready to seize them.”

The Vietnam war and its aftermath gave the corporate state another opportunity to provide products and services. Initially, the conflict brought windfall sales of patrol boats, oil, and construction materials to the U.S. military in Saigon. More recently, Lockheed has established a service base in Singapore to repair American planes for South Vietnam.

In a broader sense, American military activities have also helped stimulate plant investment. The war effort not only brought inflation to the U.S. but focused attention on Southeast Asia, where American businessmen saw opportunities outside the battle zones. As Japanese rivals grabbed business away from them, U.S. electronics companies moved production to countries with lower labor costs. Among those that flocked to Singapore were National Semiconductor, Fairchild, and Teledyne. In the last few years, fast-climbing wages in Japan have prompted such major Japanese shipbuilders as IHI, Hitachi, and Mitsubishi to make the switch, too.

Money is a major export
To realize his grand design of making Singapore an international financial center, Lee shrewdly turned to the world’s most prestigious banks. His government has admitted virtually every big international bank, from New York’s First National City to Moscow’s Narodny, and has left them free of the numerous restraints that they face elsewhere in the Far East. So a towering new financial district is taking shape along the waterfront.

“We decided to open up the banking system to provide services that other countries don’t offer,” explains Michael Wong Pakshong, managing director of the government’s Monetary Authority. As a start, he broke up a cartel of established British and local banks that fixed rates on all transactions. “They’d sit on their bottoms waiting for captive customers,” complains Wong. “The newcomers actually went out to buy business with loan rates that were competitive. That made the others get busy fast.”

Singapore’s main growth in financial stature came after the government, at the urging of the Bank of America, decided in 1968 to allow banks to accept deposits in foreign currency. These funds, called Asian Dollars, are the Far Eastern equivalent of Eurodollars. The foreign-currency deposits now amount to $6.3 billion and are still rising rapidly. The money comes from corporations, other banks, and affluent individuals, including overseas Chinese seeking a haven beyond the reach of prying revenue officers. Singapore banks attract funds with rates comparable to those paid for Eurodollar deposits, plus two advantages that Hong Kong and Tokyo don’t offer: tax exemption for depositors and strict secrecy. (The Monetary Authority keeps track of the amounts on deposit but not the identities of depositors.)

Today money is a major Singapore export. The country’s hundred or so banks finance business and industry throughout Asia. Their aggressive push for loan customers has quickened the development of the whole region.

The state has pushed into banking, too, partly by flexing official muscle. At first, it invested public funds directly in shipyards and factories because local businessmen and bankers, accustomed to quick returns from trading, shied away from such ventures. In 1968 the government established the Development Bank of Singapore to back priority industries. Lee’s mandarins twisted private bankers’ arms to ante up about half of the $40-million paid-up capital. The government’s share was a portfolio of loans it had already made to local industries.

Once in business, D.B.S. gathered $260 million of working capital from the World Bank, the Asian Development Bank, and—at concessional rates—the Singapore government. Today D.B.S. has grown into a commercial bank with profitable side ventures in computer services, real estate, ship and machinery leasing, and merchant banking. The government, of course, appoints the majority of board members, mainly mandarins who are top administrators of government agencies.

The D.B.S. building, a $25-million showpiece of the new financial district, covers one side of a city block, Naturally, the structure was also designed as a revenue earner and most of the space is rented to commercial banks. “D.B.S. is in competition with us,” complains one foreign banker, “but also insists on our support because it’s a government institution.”

D.B.S. is particularly effective as the banking arm of Singapore Inc. Having noted the success of oil refineries, the government-controlled bank invested in one. It has a one-third interest in a $50-million refinery established by Amoco and U.S.-based Oceanic Petroleum Co., which is owned by a group of Chinese-Americans. The bank supports Lee’s programs in many other ways. As a boost to urban renewal, a D.B.S. subsidiary is constructing an $18-million shopping center and office building. The government housing board is a big buyer of elevators, so the bank owns a minority interest in a new Japanese venture to fabricate them locally.

The bank’s official status greatly enhances its commercial operations. D.B.S. has little trouble finding depositors, for many other state enterprises with large cash flows keep accounts there. Foreign banks find it politic to include D.B.S. in large consortium loans, such as the $25 million that the Bank of Montreal organized recently for International Nickel to use in Indonesian mining. D.B.S. has also formed three separate joint-venture merchant banks with such prominent foreign partners as Sumitomo Bank and Morgan Guaranty. “It’s like marrying three wives,” says a D.B.S. officer. “Each provides something different.”

Penguins for the tourists
Thanks to the relentless pursuit of economic growth, Singapore today throbs with the clump of pile drivers and is clouded with dust blown from construction sites. Entire city blocks of ramshackle open-front shops are being replaced by high-rise apartments, office buildings, and shopping centers. The corporate state has also invested in four hotels and provided tax incentives for about seventy others. “Some of the hotel people weren’t too happy when we suddenly had 13,000 guest rooms and couldn’t fill them,” acknowledges a government official. “But we knew that those with money invested in hotels would work very hard to attract tourists.” For several years, surplus rooms plagued hotelmen, but recently occupancy rates have reached a profitable average of 70 percent.

Though Singapore has no notable scenic or historic sites, it draws a million foreign visitors a year, largely on the strength of man-made “tourist attractions.” The most notable include a bird park equipped with imported penguins and piped-in music, stores that offer duty-free Japanese radios and cameras, and those abundant hotels.

The campaign to attract more and more businesses has succeeded so well that Singapore now faces a labor shortage. Consequently, the government has brought in 100,000 Malaysian workers, who make up about a fifth of the labor force. In 1966, Lee was seeking whatever investment he could get because 72,000 Singaporeans were jobless. Today his policy is to discourage any expansion of garment making and simple assembly operations in favor of industries that require more skillful labor and use more capital per worker. For example, Lee’s government intends to invest in a $420-million petrochemical project that Sumitomo Chemical Co. has agreed to organize. And Lee hopes to form a joint venture with other multinational companies to construct a $400-million integrated steel mill.

As soon as Singapore moves on to such activities, says Lee, “we can slowly slough off our labor-intensive factories and get them to move into the countries around us—Malaysia and Indonesia.” Accordingly, he insists that “immigrant workers are just here for the time being.” Several government planners, however, doubt that Singapore can do without imported labor anytime soon. Lee’s own expansion plans are creating too many jobs, and his government leans heavily on Singaporeans to limit the size of their families through an array of financial disincentives such as progressively higher hospital fees for each successive baby.

No place for poets
Lee’s managerial approach to statecraft produces great economic progress at considerable social cost. He has built an industrious, clean, well-ordered but bland society. Government leaders see little need for poets, philosophers, or public dialogue. “We are more concerned with filling our rice bowls,” declares Toh Chin Chye, minister of science and technology. “Western political liberalism and economic discipline are hard to have at the same time.”

Not all Singaporeans share in their country’s economic progress, of course. No one goes hungry, but about a quarter of the population lives at a subsistence level. Even those who prosper most under the corporate state tend to resent its frequent intrusion in their lives. “They treat us like children,” complains a wealthy businessman. But openly challenging fundamental policies can land citizens in prison, indefinitely and without trial, under internal-security laws. Criminals who use or threaten violence are punished with both jail terms and flogging. Though he concedes that Singapore-style discipline is harsh by Western standards, Lee insists he can afford no slack.

For all its prosperity, the city-state is disquietingly sterile and seems to lack a soul or culture other than pursuit of profit. Even the poorest Asian countries produce a profusion of art, music, and folk literature, none of which has much place in Singapore life. One minister derisively describes the national creed as “money-theism.”

Lee provides an exceptional educational system and seeks to make his domain a “brain center” providing managerial and technical services throughout the Far East. In this he may be overreaching himself, for he discourages independent, creative thinking. His approach systematically stifles intellectual curiosity. As one American professor learned to his dismay, most Singapore law students don’t even read newspapers.

Many popular movies, songs, and publications are deemed dangerously corrupting influences. Whereas the very name Singapore once conveyed the promise of exotic pleasures, the present reality is so antiseptic that one current novel about the city, Paul Theroux’s Saint Jack, recounts the misfortunes of a pimp who can’t make a living there. Fleshly pleasures are surely no measure of national well-being, but Lee’s Singapore lacks humor and laughter too. As pressures mount, an increasing number of citizens commit suicide by jumping off the towering public apartments. Social workers are equally alarmed by a high rate of attempted suicides.

A yearning for culture
Despite all the money the government spends on subsidizing housing, the resulting environment leaves a great deal to be desired. Even at their nocturnal best, the housing projects are -ablaze with harsh fluorescent lights, and they are perpetually noisy and far too impersonal for many Asians. In the context of Lee’s tight little state, the apartments often seem to be, as one Western businessman says, “a glimpse of 1984 in concrete and steel.”

Lee, of course, has been forced by circumstance to stress discipline so Singapore could survive economically. The country’s volatile racial mix—ethnic Chinese, Malays, and Indians—makes firm direction essential to promote cooperative effort. Singapore is the only country in which overseas Chinese form a majority; they compose three-quarters of the population. The Chinese originally came more than a century ago seeking better opportunities, and the experience gave them and their descendants great drive. To his credit, Lee has carefully cultivated a multiracial society, not another China. He has encouraged the Malays and Indians, who tend to be more languid and leisurely because of their rural value system, to work hard, too.

Now that Singapore has achieved such enormous material success, Lee says that he is appalled by the lack of books, culture, and social graces among citizens. He talks of nurturing “a gracious society” without sacrificing the economic drive of his “rugged society.” But Lee faces a dilemma, for there is room to doubt whether his well-run state can add culture to its line of products and services. Perhaps Singaporeans will do it themselves if Lee fully realizes that he leads a country as well as a corporation—and relaxes his authoritarian ways. As Deputy Prime Minister Goh points out: “We can’t order people to like music or drama, even though our ministry of culture tries. It’s up to people to decide for themselves.”

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