Resilience
Without a manufacturing sector, we will lose the knowledge of how to make things, and this will make us more dependent on trade. In times of peace and prosperity, this may not be a bad thing, as we seek to maximise the Ricardian benefits of trade. However, I don't believe we are in such times. In fact, quite the opposite: I believe that we are moving into a time of great uncertainty, conflict and war.
That having manufacturing improves a country's resilience was amply brought home to me when I saw factories in Japan cranking out essential items to support the victims of the earthquake and tsunami in Sendai.
Imagine what would happen if Singapore is hit with a large-scale disaster and we have to wait for outsiders to send us materiel needed for life support because we have neither knowledge nor industrial capacity to make them.
Peak Oil
When the effects of peak oil (and relative energy scarcity) becomes widely felt, there will likely be a widespread collapse of trade, tourism and other services, since the growth and sustenance of these are highly-dependent on the availability of cheap fossil fuels.
What do you think will happen to demand for healthcare and education (2 sectors favoured by Tan Jee Say) when the world struggles to cope with energy scarcity? When energy and food consumes more and more of people's incomes around the world, what do you think will happen to the amount of money left over for discretionary items such as vacations and financial services?
If we have only a service economy, this means that the impact of such a collapse will hit us disproportionately. A more diversified economy will allow us to work through the transition period while switching over the more sustainable forms of energy.
Income Inequality
My reading of Tan Jee Say's economic vision is that he desires to see a reduction in income inequality in Singapore. While this is definitely laudable, trying to achieve this outcome via a service economy is the wrong way to go. To take the closest comparable example, we see that income inequality in Hong Kong is higher than in Singapore, and it is largely a service economy.
Besides this, the evidence from the last century of economic development suggests that under the current global economic regime, a service economy almost always evolve into a FIRE (finance, insurance and real estate) economy. We can see this in places like the US, UK and Hong Kong. Such an economy invariably rewards speculation and punishes activities with long gestation periods, such an entrepreneurship. When speculation is rewarded over hard work, inequality always worsen because most people do not have the means or wherewithal to engage in those speculative activities such as trading futures or flipping condos. It also makes the economy more prone to boom-and-bust cycles.
On the other hand, economies where there is a healthy respect for manufacturing, such as Germany and the Scandinavian countries, appear to be less prone to speculative bubbles in recent years.
With regard to the argument that Singapore's manufacturing depends on cheap foreign labour in order to survive, and thus have a negative impact on income distribution, I would argue that the same can be said of our service economy, as evidenced by the legions of PRCs and Filipinos in many service outlets. In my view, this has to do with immigration policy rather than industrial policy.
As the government runs out of ideas on how to grow the economy, it has tried the brute force method of increasing factor inputs, which means ever greater manpower and capital are needed. And given that we don't have enough people, the obvious thing to do is to import them from abroad. If we reverse this policy and take the longer, tougher road of growth via productivity improvement, then this wage suppression factor would disappear, irrespective of whether we have a manufacturing sector or not.
Tan Jee Say's ideas don't make sense. Singapore's only advantage in our history was our natural position as a port. Shipbuilding & repairs come naturally as part of the industry. Sembawang & Keppel shipyards are among our prize industries. They only require so much foreign labour because our own citizens prefer not to take these jobs. They have been around a long time and the new immigrants are probably not here to work in the new shipyards. Service sectors such as healthcare and teaching will always be an expense for taxpayers. Whilst they are essential, and it would be great to have more healthcare workers and teachers, we will need more foreigners to provide services in healthcare, which already has a serious shortage of staff. The foreign healthcare staff is one of the reason why our healthcare bill is not higher than it is. If we spend even 1 billion on creating healthcare jobs in the short term, how will we expect our children to sustain it without being able to generate wealth? Mr Tan Jee Say may truly want to contribute to Singapore, we could give him the benefit of the doubt, but can we trust someone with such illogical ideas, especially one who should know better, with a degree in economics? What is his track record as a financial advisor? Has he made money for his clients or himself? As for the casinos, I think gambling is a crazy thing to do, but I thought we didn't want a nanny government to save us from ourselves.
ReplyDeleteHi, very valid points raised. But I would also like to ask if we have read his paper in full and understood it holistically. It doesn't do justice if we just read some newspaper reports, esp those that are biased.
ReplyDeleteThe paper did not say manufacturing should go to zero. It merely mentioned that unprofitable ones should not be allowed to continue with more tax breaks.
It is true that economies with more services usually also see more unemployment such as US. This is a structural issue with a service oriented economy. However income inequality might not be higher as a result.
Even as of today, our Gini index is higher than UK, France and even US. (Yes, US!) We are only lower than HK. All 3 countries have less than 20% of their economy coming from manufacturing.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html
Germany and Japan still has a big manufacturing, but they also have an edge. Nobody makes better cars, or bullet trains better. Can Singapore make something that is so good that nobody would defeat us?
On education and healthcare, I would say Singapore stands a chance. There is no leader in Asia yet. Yes, US and UK are giants, with Ivy League and Oxbridge. For medical, US is also leading. But they are far away.
There is no education or healthcare leader in Asia. Singapore still stands a chance to be a hub. Our private sector also has made some impression. Mt E hospital is attracting all the rich Indonesians, Chicago and Insead chose their MBA campuses here. If the Govt enters in full force, we might make it work.
Mr Tan Jee Say had thought through these issues profoundly. It's worth a 2nd look, rather than just brushing it aside.
I don't think I have just brushed his ideas aside. Many of his ideas were discussed in class when I was attending graduate school in economics more than a decade ago. As such, I have also thought long and hard about the issues and strategies that he had raised.
ReplyDeleteMore importantly, my criticisms of his ideas have as their basis not the perspective of economic development theory, but from peak oil and pending resource scarcity considerations, which are major concerns of this blog. Shortage of key primary economic resources is the 800-pound gorilla which has been COMPLETELY missed by Tan Jee Say. Of course, to be fair, it has been missed out by every single politician standing for elections on May 7th.
That is true, his paper does not address resource scarcity at all. It was not his focus, I guess.
ReplyDeleteThe issue of resource scarcity deserves its own 45 page or even 450 page report, if you ask me.
Already nobody is reading his report in full, just making unjustified remarks about the huge cost, poor concept etc. He has addressed these concerns well in his report.
Just on the 60bn, it was stated - it would be spent over 5 yrs, in 6 different sectors. And our Govt budget surplus could have funded without additional taxes. The surplus was over 100bn fr 2005-09.
On resources, personally, I think there are limited things that our Govt can do.
We are building an LNG terminal - that is good, at least we can now reduce dependency on coal.
PM said we might build a nuclear plant but I guess that is difficult now after Fukushima.
We can have more renewables, but they are not grid efficient and consume land - a scarce resource.
On soft commodities, we cannot grow crops either.
We are pretty much screwed. It will take a lot more brainstorming to come up with something. Meanwhile we strengthen the SGD, which is a good start I guess.
Back to Tan Jee Say, I think the issue with his proposals is sustainability. While the first 60bn can be invested with zero or low return. We need the schools and hospitals to be sustainable - ie at least breakeven on an annual cashflow basis.
This is not addressed in detail, though I believe it would involve Singapore attracting foreign patients and students to subsidize the locals.
8percentpa, thanks for sharing your views!
ReplyDeleteMy take on TJS's proposal on moving manufacturing out of Singapore is this: Though he said the viable ones can remain behind, he mentioned that they should not enjoy new aids and incentives in the long run. This is equivalent to saying that in the long run, there will be no more manufacturing because without incentives the cost of operations will be high and they will eventually be lured to cheaper places. So - the end result will be the same - No manufacturing in Singapore.
ReplyDeleteWith regards to his $60b projects, what was not mentioned is the running cost after 5 years. What is the project take 10 years - as mentioned in his report "It takes 5 to 10 years to transform Singapore"? Another $60b. What about the maintenance cost after 5 years or 10 years? $3-5b a year easily? Can Singapore sustain this sort of expenditure?
ReplyDeleteEnterprise plan - $2b per year forever!
Family plan - $2b per year forever!
Next, on the school and hospital plans, we do not have so many teachers, and doctors and nurses thus we have to rely on FT - so FT issue again?