Resource Nationalism in Indonesia

Given what some believe to be the peaking of production of various natural resources as well the fact that agricultural and water resources are increasingly valuable, it would come as no surprise that commodity producing countries are gaining more bargaining power.

In relation to this topic, Asia Sentinel recently published an article entitled Indonesia's Growing Economic Nationalism, which is well worth a read.  I don't agree with the author's view that Indonesia will be hurt by being more protectionist.  In fact, I think that the country is moving from a position of strength, and will be able to use the bull market in commodities to its advantage.

From Singapore's perspective, the most immediate impact would be that DBS Bank would probably not be allowed to acquire Bank Danamon, which I feel is not a big loss to Singapore, given the fact that DBS has had a poor track record in overseas acquisitions.  From a longer term perspective, we need to watch out for Indonesia exerting its economic might on Singapore for both economic and political ends.  We may be moving into another era where the neighbourhood gets less friendly.

Indon Natgas Supply Risks

The Jakarta Globe carried a story on Sep 22 where a top minister called for cuts in Indonesia's natural gas exports to Singapore, claiming that such exports were excessive and that the gas was needed for domestic use.

While I have no doubt about the ever-increasing domestic demand for natural gas in Indonesia, it is interesting to note that Singapore has been singled out even though countries such as Japan and South Korea take larger volumes of the country's gas exports in the form of LNG.

What this illustrates is that because Singapore is small, we are naturally taken as being 'easy to bully'.

As I have written repeatedly on this blog, we are moving into an era of resources nationalism, where countries with good resource endowments want to use them to gain leverage over others that are dependent on such imports.  In such an era, Singapore's power relative to its resource rich neighbours will be weakened, and so we can expect more 'bullying' from them in the coming years.

Given the risks to our natural gas imports, which is used to generate electricity, we need a coherent plan to reduce reliance on imports to the greatest extent possible, even though we will always need to import.  But so far, we haven't got a plan.

Long-term Strategic Issues and The 1-trick Pony

I stopped expending effort on reading temasekreview.com a very long time ago.  The reason was quite simple: After several weeks of reading articles on the site, I realised that they essentially attributed all of Singapore's problems to 1 thing - the lack of opposition representation in Parliament to serve as a check on the PAP government.  Having thought long and hard about the variety of issues and challenges facing the country all my adult life, I found such thinking to be rather ridiculous.

I had not wanted to broach this issue for a long time on this blog since its main focus is on the energy and resource scarcity issues facing Singapore, and not on politics.  However, today, Google News Search returned an article from that site discussing the long-term strategic and economic issues facing Singapore which also covered the issue of energy and resource scarcity.  And so I decided to do a very quick scan to see what it was about.  What provoked this blog post response from me was the following passage from that article:

This election, did NOT discussed these medium to long-term strategic issues. I believe we have NOT the right political structure and institutions of essential checks, balances and even the much-desired provocation of directional input in the opposition to drive our economy in these times of great turbulence.

Having concerned myself with the energy and resource scarcity issues for the past 6-7 years as well as being a keen student of global macroeconomic developments since my JC days, I found the aforementioned assertion to be patently absurd.  If having the 'right' political structures and institutions with checks and balances were the solution, then:

• Why can't the USA come up with a credible energy policy to wean itself away from crude oil imports, a promised repeated by every president since Richard Nixon?
• Why can't EU countries face the fact that they are fiscally bankrupt, with public-sector workers deep in denial when fiscal austerity was attempted?

I can list a whole host of strategic economic and resource issues faced by the democracies in the developed world for which there is no political will on the part of these countries to confront, but the 2 above should suffice for illustrative purposes.  There are obviously many other factors besides the lack of checks and balances that account for these problems not being addressed.

While the benefits of checks and balances are undeniable, blaming all of our problems on their absence is stupid and unhelpful.  But for a site which dares to publish unverified rumours as if they were true and then not apologise when found later to be false, I guess expecting mature and responsible behaviour is asking for too much.

Current Reading: The Crash Course

I have just completed the book entitled The Crash Course: The Unsustainable Future of Our Economy, Energy and Environment by Dr. Chris Martenson.

This is my second contact with Dr. Martenson's work after watching his highly educational documentary DVD of the same title. The documentary is available for free legal download here.

The strength of the book is the presentation of the linkages between energy, the environment, and our debt-based global monetary system. It shows how given the way the monetary system is currently set up, exponential economic growth is required. Unfortunately, since no system can grow exponentially in a world of finite resources, the monetary system will HAVE TO implode at some point when hard resource limits are hit.

The other strength of the book is its simple but comprehensive coverage of Peak Oil and related energy issues, which for me was a good 'revision' after following this issue for more than 5 years.

I believe that once we understand the link between finance/economics, energy and the environment, we will see why the 2008 Global Finance Crisis has not actually been properly fixed, and that something bigger will be coming our way.

The book is available for loan from the NLB.

IMF: Rising Food Prices May Be Here to Stay

The IMF has warned again that rising food prices may not be a temporary phenomenon.  In an article in the Finance and Development magazine, it has noted that food prices are now close to the highs of 2008.  A summary of the article can be found here.

Unfortunately, the IMF has only attributed the problem to poor harvests, the use of biofuels and higher energy prices. It has ignored the fact that aggressive money printing by the advanced economies have also contributed a large part to the problem.

Worrying About Sustainability

Member of Parliament Dr. Teo Ho Pin commented in Parliament that the Budget had not adequately address the country's sustainability needs over the next few decades.  He was referring to the issue of Singapore's carbon emissions.  While what he said is true, I would suggest that he had nonetheless missed the whole point with regard to the issue of sustainability.

Being a peak oil advocate, I believe the key issue is how we can sustain our current high standard of living given the expected shortfall in energy production that is expected to hit the world within the next 10 years.  If we cannot find a solution to overcome the constraints of the expected decline in fossil fuel production, the persistent shortfall of supply relative to demand will automatically mean lower carbon emissions, and thus make the issue of carbon footprint totally irrelevant.

In a world of energy shortfalls, people will be worrying about their livelihoods, not carbon footprint.  That's the reality of the situation.  Singapore as a transport hub that also has a large tourism sector is very vulnerable to shortfalls in liquid fossil fuel supplies, as these cannot be replaced with other types of fuels for transportation in a meaningful way within the next 10 years or more.  That will be the real issue of sustainability for Singapore in the coming decade.

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.

Future Growth Amidst Resource Scarcity

It appears to be axiomatic amongst our policy makers that the future of Singapore depends on raising the productivity and knowledge intensity of our economic activities. While this strategy is undoubtedly important insofar as it helps to reduce our dependence on foreign labour, as someone who subscribes to the global resource scarcity thesis, I sometimes wonder how far we can go as a country given the fact that we have little control over the most fundamental aspects of all human economic survival - food, energy and water. (As an aside, our ability to produce Newater has merely transformed our water problem into an energy problem, since Newater production is energy-intensive.)

Two days ago, I came across an analysis by John Taylor, Chief Investment Officer of FX Concepts, a forex research company. He argued that with the Internet and the proliferation of knowledge, it has become less scarce a commodity:

Countries that control more of the factors of production will be dominant. Today, the tables seem to be turning on the West. As education has become almost universal, knowledge, intellectual expertise, and competent labor have become less expensive and less valuable as a result.
[...]
Because the playing field has become level for the first time in history, we would argue that, at this time in history, the battle has shifted to raw materials. If we assume that today's critical resources are gas, oil, agricultural output, and rare earths, Europe is totally out in the cold and the US is supported only by its strength in food production. Although commodities have played a diminishing role in economic history and, thanks to scientific advances, should continue this long-term trend, the scramble for scarce resources should impact economic cycles and growth in the decades ahead.

Given that knowledge is intangible and it's production is not directly constrained by the physical reality of limited resources, his argument certainly has some merit, in my view. And if he is correct in his assessment, there will be very important and serious implications for Singapore's economic future. This is an issue which neither the government nor the opposition parties has addressed publicly.

Food for thought as we savour Chinese New Year delicacies.

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.

Food inflation and Price Caps

Someone, in a letter to the Today newspaper published on Monday, suggested that the government implement measures to cap price increases in essential food items to fight what he perceives to be profiteering. The example of Malaysia was used by the author to justify the feasibility of price controls.

That the idea is unsound is very obvious when one considers the following points:

• Malaysia has significant domestic food production capabilities, and doesn't have to be a price-taker on the international food market.
• It has an elaborate government bureaucracy designed to subsidise various parts of the food production value-chain so as to keep prices low.
• Capping food prices in Singapore's context will mean a fall in supply if the caps make selling some items unprofitable for importers.
• Price caps benefit both the rich and poor, so that if subsidies were involved, it would be an inefficient use of taxpayers' money.

I think the government's approach of targeted help for the lower income group is a better method as it does not create as much distortions in the food market and help is only given to people who need it. For the rest of us in the middle class, we can adjust to higher food prices by cutting back on other discretionary spending.

That said, the government can help to some extent by using its influence on NTUC Fairprice to have the latter introduce more price competition in the food market, so as to minimise the risk of profiteering. Using competition to fight profiteering is far better than using legal sanctions, as anyone who understands elementary economics will know.

North-South Expressway - A Mistake Perhaps?

As someone who uses the CTE occasionally, I can understand the frustrations of the users of that overcrowded expressway, being taxed to death via ERP and still having to endure traffic jams. The corresponding desire for relief through the construction of the North-South Expressway (NSE) is therefore very much a legitimate one.

That said, I can't help but think whether or not building it is the right thing to do. Given what I feel is a significant chance of global oil shortages by the middle of this decade, I would not be surprised if fuel would initially be rationed to be followed by an outright ban on the driving of private vehicles as the liquid fuels situation grow more dire. If this scenario were to play out even partially, it would mean a very significant drop in road capacity all over the country. This will entail all the resources used to build the NSE being wasted. From a peak oil perspective, allocating the resources to build the Thomson MRT line may actually be a better use of our national wealth.

In any case, I really feel sorry for the people who stand to lose their homes because of the NSE. To me, there is a risk that their sacrifices would have been in vain.

Cutting Our Defence Budget?

The papers today carried a letter from Ms Hazel Pua of the Reform Party written in reply to MND Minister Mah Bow Tan's op-ed piece some days back defending the affordability of HDB flat. Various very good points were made in the letter to argue that HDB flats are now less affordable, with Minister Mah's assumptions taken part rather cleverly.

That said, I would disagree with part of the following:

The Reform Party is happy to offer some other options for consideration: Cutting the defence budget; reducing the payments made by HDB to the Singapore Land Authority for the purchase of land to build HDB flats; and cutting ministerial salaries.

To my mind, the above statement appears to suggest that our current level of defence spending is unnecessary. But in the absence of a war to test out the adequacy of our military, such a claim is untestable. To draw an analogy from IT, it is like trying to argue whether one's off-site backup system is cost-effective when there had been no data disasters before to quantify the range of possible losses.

I think cutting the defence budget is a terrible idea. As I have maintained throughout my writings on this blog, the world is moving into a period of greater geopolitical risks, driven largely by resource scarcity. Given our dependence on foreign resources for our most basic needs, it is paramount that we have a strong military as a kind of leverage against any hostile foreign intentions. Furthermore, such military force will likely be required to keep our sea lanes open in the face of terrorist threats. Ms Pua and the Reform Party have made the rather common error of thinking that if Singapore is friendly towards other countries, they will reciprocate. I would suggest that they read some of the local language newspapers of our neighbours if they have not seen the vitriol poured out against Singapore on a fairly regular basis.

The Reform Party's letter again shows, in my view, that the coming elections will only be about domestic issues. The bigger storm clouds coming over the horizon are being ignored by all political parties.

Vietnam protests against China mapping

More troubles between Vietnam and China, this time over the way a PRC government agency has drawn its maps marking the Spratly and Paracel Islands are PRC territories. This has been reported by the FT Chinese edition today:

中国政府上月启动的一个在线地图服务受到了越南政府的强烈批评。这是由于中国姿态日益强硬，造成地区摩擦的又一个体现。

Vietnam has protested the PRC action, and this has been reported by the Vietnamese media, an English version of which can be found here.

Definitely something to keep an eye on.

Storm Clouds Over the Horizon

While the drumbeat of Singapore politics has become louder in recent months, I am of the opinion that the focus of the discourse has so far been too parochial. There are some of the storm clouds that I see over the horizon and that could have impact on Singapore within the next 5-10 years, but which has so far not been covered in the discourse.

In this article, I shall outline some of the issues that I think will have major consequences for the long-run viability of our country. Admittedly, since I don’t have the power to predict the future, these points are somewhat speculative, although I have done some homework in all areas.

Peak Oil

Some experts such as Dr. Colin Campbell and Prof. Kenneth Deffeyes have argued that global peak oil production had actually peak in 2005, based on current available data. Production of liquid fuels has kept up with demand so far due to other sources like coal-to-liquids and gas-to-liquids technology. While new ways will be found for extracting oil and gas, the fact that the Brazilians have to drill for oil more than 7 km below the earth's surface for their Tupi field shows that the era of cheap oil is over.

Peak oil will result in very high volatility in the crude oil market, as high oil prices triggers recessions in economies. Such recessions will bring down demand and thus prices for a while until recovery takes places, at which time prices move up again and the cycle repeats.

As high prices take its toll on the global economy, trade will be reconfigured as businesses seek to move their production closer to their customers in order to cut down on the distance over which they have to ship their goods in order to cut transportation costs. A preview of this happened in 2008 when some US manufacturers found that moving production from China back to the US or Mexico made a lot of sense when oil was over US$100 per barrel. Besides this, tourism will be affected as high fuel prices forces airlines to cut routes and ground planes, as had happened in 2008.

Since the Singapore economy is very dependent on trade and tourism, peak oil could have a very large negative impact on our livelihoods.

To make things worse, high fuel prices will definitely lead to higher food prices since we import almost all of our food from abroad, sometimes over long distances.

Resource Scarcity

Due to changes in the weather cycles (not anthropogenic global warming), global food production could consistently fall short of demand. This explains the current ‘land grab’ that many countries are engaging in over in Africa and South America, as previously covered by this blog. Furthermore, the availability of potash and phosphorous could also be constrained, resulting in lower fertiliser production.

In terms of other minerals, peak oil proponents like Richard Heinberg have argued that we will soon experience declines many key industrial commodities.

And let us not forget the issue of water scarcity. As covered by the National Geographic magazine in April 2010, water conflicts are starting to surface, especially in the Tibetan plateau (China and India) and the Nile region.

As resources get scarce, there could well be conflict between countries competing for those limited supplies to satisfy their own economic needs. Global cooperation will decline and the world will become more unstable, again not good for Singapore's economic model.

End of USD as Reserve Currency

If the US Federal Reserve continues current policy of debasing the USD, it could well only be a matter of time before confidence in the currency collapses and the world is forced to move to a new currency regime.

While I don’t claim to know what the likely impact of such a scenario will be for Singapore, the fact that our country is a large holder of US government debt makes the possibility of financial losses quite high should the USD lose its reserve currency status. What this means for us as citizens is that our CPF savings will suffer losses as well.

Besides this, since our independence, we have only had experience with a USD-based global currency system and nothing else. One could even argue that our economic policies were designed to take advantage of the global trade system made possible by the USD’s reserve currency role and the attendant global credit expansion cycle since the early 1970s. Once that changes, we will have to figure out how to adjust our economy to the new global architecture, and whether or not we will be up to the task remains to be seen.

War

That the US is in decline is by now quite obvious, except for people like Stratfor’s George Friedman. As we move toward a multi-polar world, there could actually be more instability, if the Hegemonic Stability Theory is correct. This is especially so as the world faces the reality of resource scarcity and there is heightened competition.

Besides this, based on historical analysis, some cycle theorists and market experts believe that we are now in a Kondratiev Winter, and some believe that major wars have to occur before the next upswing in the global economy. From a generational cycle perspective, John Xenankis of Generational Dynamics predict a war between China and the US.

If the world were to move into a period of conflict, it would again mean that Singapore’s economy will be affected, since we depend on peace for our economic model to work.

Conclusion

Since this article is about threats to Singapore, I have not covered the more optimistic factors that will affect our future (e.g. Asia’s rising economic power etc). What I hope is that more Singaporeans will take a look at these possible threats and make preparations to deal with them in whatever way they can, and of course, pray that they don’t come to pass.