Thoughts on Tan Jee Say's Economic Regeneration Ideas

I have just read the 3-part summary of Tan Jee Say's paper "Creating Jobs and Enterprise in a new Singapore economy – Ideas for Change" as presented by The Online Citizen. There is much that I can agree with in the paper, especially with regard to the deleterious effects of the casinos, the need to consider a minimum wage as well as the errors of 'trickle-down' economics. Without addressing his ideas on a point-by-point basis, I'd like to a different perspective on some of those ideas, as well as to point what where I think his ideas are fundamentally flawed.

Manufacturing vs. Services

My first disagreement is his claim that the increased volatility in Singapore's economic output has its cause in the manufacturing sector. While evidence from big economies such as the US have suggested that a service economy does have lower volatility, we have to remember that the US has a internal market, and that it has 'bought' that lower volatility at the very high cost of structural budget and trade deficits.

From an Austrian School perspective, I would argue that the increased volatility in recent years is actually due to the more volatile global aggregate demand situation, driven as it were in by the persistent money printing of the advanced economies, leading to multiple asset bubbles and ever-greater misallocation of capital.

As for moving out of manufacturing and becoming more service-oriented economy, I am not quite convinced that this is the way to go if raising productivity is a prime concern. From my business experience, the empirical evidence for the rate of diffusion of technical innovations in the domestic services industry is very low. Apart from MNCs and GLCs who have deep pockets to invest in process improvement technologies, local companies are very reluctant to undertake such enhancements, even with the plethora of government subsidies and incentives that are currently available. Apart from the availability of cheap foreign labour, there appears to be some structural rigidities in the domestic economy which allows many inefficient companies to continue to operate free from the forces of 'creative destruction', which I have yet to figure out.

Besides this, if we use the example of the United Kingdom, we see that if we remove the world-class City of London, the so-called knowledge economy there is arguably non-existent. Given that none of the service sectors identified in the paper are areas were Singapore is already world-class, how confident are we that the move to a service-based economy will not result in structural deficits or persistent low-productivity? Would Germany, Japan or South Korea be a better model for us?

Family Regeneration

Given that the paper used a moral argument against the casinos, I was somewhat disappointed that it stated that the root causes of our low fertility lie in the stresses and high cost of having children. As I have argued elsewhere, this problem is not amenable to economic solutions, since it has to do with the fundamental issue of an individual's worldview and moral compass. Given the self-centred, materialistic ethos that pervade mainstream Singaporean society, we ought not be surprised that having children is not considered a priority amongst many married couples. Furthermore, I would also argue that the fundamental existential insecurity arising from Singapore's small size and geographical location have also contributed to our unwillingness to reproduce, unless that is countered by strong religious beliefs. As such, unless the problem is addressed from a worldview perspective, all measures will ultimately be ineffectual.

Fundamental Problem

The fundamental problem with the model proposed in the paper is that it appears to assume a global macro environment that is a mere extrapolation of the one that has been extant in the past 40 years, which had provided the stability and economic structure for Singapore to grow rapidly. This can be seen in the strategy of making Singapore into a service hub, which assumes that this region is prosperous and stable enough to want to use our services. It fails to account for the possibility of unfriendly competition from neighouring countries, as had happened, for example, during Mahathir's reign in Malaysia, where he adopted many policies aimed at weakening Singapore's competitive advantage. Furthermore, with the inevitable need of the US and other advanced countries to repair their national balance sheets, the free-trade regime that we have operated under may no longer exists, as newer rising powers such as India and China are more inclined towards a statist model of capitalism. Under such a scenario, the free-trade assumptions underlying the strategies will not be valid. Whither then our sources of growth?

Lastly, the paper also does not account for the possible threat of resource and energy scarcity, which can lead to geopolitical instability in the region, and a weakening of Singapore's position relative to the resource-rich countries around us. This, in my view, may well be THE defining issue for Singapore in the coming decade.

Notes: A follow-up article on this topic can be found here.

Causes of Slow Future Global Growth

I am currently reading the latest book by prominent deflationist A. Gary Shilling entitled The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Table 6.4 of the book shows 9 causes which Dr. Shilling believes will be responsible for slower economic growth for the global economy in the years ahead. I reproduce the causes below:

1. US consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail imports of the goods and services that many foreign nations depend on for economic growth.
2. Financial deleveraging will reverse the trend that financed much global growth in recent years.
3. Increase government regulations and involvement in major economies will stifle innovation and reduce efficiency.
4. Low commodity prices will limit spending by commodity-producing lands.
5. Developed countries are moving toward fiscal restraint.
6. Rising protectionism will slow, even eliminate global growth.
7. The housing market will be weak due to excess inventories and loss of investment appeal.
8. Deflation will curtail spending as buyers anticipate lower prices.
9. State and local governments will contract.

With regard to point 3, this issue has also been raised by others like Russell Napier, Harold James and Ian Bremmer.

I disagree with point 4 as I believe that peak oil and resource scarcity will drive up prices relative to industrial goods and other services.

As someone who thinks our future will be one of inflation rather than deflation, I would disagree with some of the positions taken by Dr. Shilling. That said, I still take his views seriously as they are well argued and reasonable, and I want to be aware of the risks if his deflation thesis were to be correct. One risk that comes to mind is Singaporeans' ability to service their mortgages in a deflationary world. That's a big red flag for the Singapore economy, in my view.

US-China Trade Frictions

Below is the video clip of an interview with Gordon Chang, an uber-bear on China, on the country's recent spat with Japan and its recent belligerence. Unlike John Xenakis, Mr. Chang does not think that US-China conflicts are inevitable.