A HARD LANDING AWAITS SINGAPORE The economy shrank in 1985 after two decades of 9% annual growth. Other Asian highfliers stalled too, but Singapore's troubles are more than cyclical. Its high-wage policy backfired, and Prime Minister Lee Kuan Yew's paternalism has stifled entrepreneurship.

(FORTUNE Magazine) – LIKE ANY GOOD FATHER, the government of Singapore knows when it's time to back off and let the children run the business -- to struggle, stumble, and with luck succeed. And like any good father, the government of Singapore finds that it's easy to talk about letting go and tough to do it. Clearly the family business is in trouble. A financial panic temporarily closed the Singapore Stock Exchange in December. After two decades of roaring growth that averaged almost 9% a year, the economy has suddenly gone cold. The gross domestic product shrank an estimated 2% in 1985. Asia's other little dragons -- Hong Kong, South Korea, and Taiwan -- have temporarily lost their economic fire as well. Exports of TV sets, computer peripherals, and other electronic gear from all four places have suffered as the U.S. economy has slowed down. Singapore has depended heavily on oil refining and shipbuilding and repair, businesses in serious decline. Getting out of the hole will be made harder by the paternalistic rule of Prime Minister Lee Kuan Yew, 62. To Lee's great credit, his regime has given the 2.6 million Singaporeans the third-highest per capita income in Asia. (Brunei, which has lots of oil and few people, is No. 1, followed by Japan.) The government has no debt, and the inflation and unemployment rates both run about 4%. At the same time, Lee's paternalism can be suffocating. At a recent Scrabble contest sponsored by a local hotel, players kept censorship guidelines in mind as they chose words. (The government forbids racial epithets, for example, lest they stir up animosity between Singapore's Chinese, who make up three-quarters of the population, and its Malay and Indian minorities.) Singaporeans have always been smug about the tidiness of their society, especially in comparison with the boisterous, anything-goes capitalism of Hong Kong. Now some are beginning to think they are paying too high a price for domestic tranquillity. ''Hong Kong is more vibrant,'' says Lee Hsien Loong, 33, son of the prime minister and his likely eventual successor (see box). For now he is a junior minister heading a committee charged with devising a new economic strategy for Singapore. ''People in Hong Kong are quick to see opportunities and quick to cut their losses,'' he says. ''We don't have quite the same crop of entrepreneurs here.'' So now the government is trying to release the creative energies of the citizens so they can come up with new products and services to get the economy moving again. In March, Tony Tan Keng Yam, 45, then minister of finance, now of trade and industry, proclaimed that the private sector rather than the government should be the ''engine of economic development.'' Government, which owns part or all of some 500 companies, should not get into new businesses, he said, unless private enterprise can't or won't. And except where its presence is essential, the government should get out of the businesses it's already in. BY SELLING OFF COMPANIES the government might slap life into the sleepy Singapore stock market. The weakness of the nation's capital markets limits entrepreneurship. Singapore Chinese traditionally raise cash for new ventures by putting the touch on aunts and uncles, but that kind of money is rarely enough to launch, say, a bioengineering company. The government sold 100 million shares of Singapore Airlines at $2.38 a share in November. Including some stock earlier sold to airline employees, 37% of the superbly managed carrier now is in the hands of local and foreign investors. The airline earned $69 million in fiscal 1985 on revenues of $1.4 billion. With such powerhouse companies trading on the exchange, more investors will be drawn in. That in turn should eventually produce more capital for start-up companies. Still, despite Tony Tan's ringing rhetoric, not much else has gone on the block. Nor does the government seem ready to relinquish majority ownership of Singapore Airlines or sell some of its other leading companies. More sales apparently have been blocked for now by an argument within government. The prime minister has yet to say where he stands, though he must be at least open-minded on privatization or the idea would not have been floated. Pushing for it is a group of young ministers including Tony Tan and Lee Hsien Loong. Arguing against them are traditionalists who continue to think that government can run the economy best. ''Young politicians think that government is too big and that if a business makes money, government should get out of it,'' observes the amiable P. Y. Hwang, 50, chairman of the Economic Development Board. ''But we've done things quite well. We hardly ever run businesses as charities. We run them as businesses.''

Paradoxically that's part of the problem. Because government businesses are well managed, they not only compete effectively with private enterprise, they sometimes crowd it out. Singapore's brightest students get government scholarships, then work five years or so for government agencies or companies. Says an executive for a large multinational corporation in Singapore: ''Bright young people, and that includes bright young bureaucrats, always want to make businesses grow.'' So state businesses proliferate. Established to make loans to importers, the government development bank, for example, now does all kinds of lending. The 40,000-man army has no worlds to conquer and only 224 square miles to defend, about the size of El Paso, Texas. So the army runs a cab company, a travel agency, and a department store. The post office is hankering to get into the insurance business. The trouble is that government managers haven't been particularly innovative or responsive to shifts in markets. And the growth-at-any-cost virus has infected private business. Singapore got a scare in December when the stock exchange closed for several days because of panic set off when a major private company, Pan Electric, defaulted on $30 million in debt. A onetime maker of refrigerators, Pan Electric had bought shares in dozens of companies in Singapore and Malaysia. The company had expanded rapidly into such fields as marine salvage, hotels, and real estate. The government is trying to organize a bailout. The state so dominates the economy that its policies are rarely questioned. Two major miscalculations of recent years went unchallenged until their disastrous results were obvious. In the late Seventies the government's tourist promotion board predicted that the number of travelers to Singapore would continue to grow 10% to 12% a year. ''It was a straight-line projection,'' recalls Pakir Singh, executive director of the Singapore Hotel Association. With that sunny forecast in mind, the government helped underwrite the construction of Raffles City, a mammoth complex of offices and hotel rooms across the street from the grand and ornate old Raffles Hotel, where Somerset Maugham and Noel Coward used to tipple. Encouraged by the government's optimism, private developers built with abandon. But the number of visitors is increasing by only 3% or 4% a year. Indonesia, the Philippines, and Thailand are discouraging shopping trips to Singapore by levying exit taxes on their citizens. One innkeeper considers prospects so dismal that he has decided not to open and staff his new hotel even though he's already filled the swimming pool. By late 1986, when Raffles City and another project of equal size are open, Singapore will have 25,000 hotel rooms, but only enough guests on average to fill half of them. Singapore also has a lot of empty offices and shop floors. The government's high-wage strategy -- designed in 1979 to discourage labor- intensive industries -- has run into trouble too. Because of Singapore's relatively small population, the government worried that industries relying on unskilled workers would draw immigrants from neighboring Malaysia and Indonesia. With them would come the social problems that usually accompany low-paid toilers living in an alien land. So for three years in a row the National Wage Council recommended pay increases of 20% a year. Private companies didn't have to follow the recommendations, but if they didn't, they could expect a backlash from the labor force. The government hoped that the high-wage policy would automatically attract businesses that make generous use of capital and technology. It hasn't, at least not in great numbers. Meanwhile, low-tech business has been scared away. GE makes appliance controls and circuit breakers, among other things, in Singapore, but in the past year or so it has cut employment from 10,000 to 6,200 and soon the number will drop to about 5,200. Part of that cut reflects GE's decision to get out of the television set manufacturing business altogether. But GE is also saving money by moving some consumer electronics manufacturing a few miles across the water to Malaysia, where wages for production workers are 50% lower. And Indonesia has passed the word that if foreigners want to sell to 168 million Indonesians, they would be wise to make products there rather than in Singapore. Saddled with heavy investments at home, local companies can't pick up and follow cheap labor. ''The high-wage policy put another nail in the shipbuilding industry's coffin,'' says C. N. Watson, 54, chief executive of the Sembawang Group, which owns one of Singapore's largest shipyards. Sembawang can't compete for ship repair work with the yards of South Korea and Taiwan. Singapore, its defenders point out, has been down before and bounced back. When the British pulled their fleet out of the Pacific in 1968, they towed away more than 10% of Singapore's economy. Singapore rebounded. It boasts political and social stability, a good harbor, and a strategic location. Recovery might well be faster if the government lets its people take the lead, in recognition that 2.6 million heads are better than one.