Saturday, 27 April 2013

Lessons from S'pore's success story

The global economy is not out of the woods yet. Quantitative easing could cause inflation and competitive devaluations, slowing world trade. What factors help determine a country's success in a globalised world where wealth and welfare increasingly converge?
By Richard Lambert, Published The Straits Times, 26 Apr 2013

BACK in the 1980s, the epicentre of the world's financial shocks lay in the countries of Latin America.

In the late 1990s, it was Asia's turn for big trouble.

In the past five years, though, the earthquake mainly hit the developed countries of Western Europe and the United States, and their economies have still not recovered from its impact. The emerging markets have emerged relatively unscathed and have turned into the main engine of global growth.

This process of convergence truly is something new. But is the great convergence sustainable?

Professor Kishore Mahbubani is convinced that it is. He writes (in his new book The Great Convergence): "The great convergence that our world is experiencing is now irreversible. Too many forces have been unleashed to shrink the world. They will only gain momentum in the coming decades. And if we look at our lives carefully, no matter where we live, we can clearly begin to see that our lives are being affected daily by events or decisions made all over the planet."

Among other things, he cites the global reach of social networks and the vast increases in connectivity between and within different countries. He talks about the way the financial system has become integrated across the globe so that trouble on Wall Street is instantly here reflected in Singapore. He discusses the way in which students are studying in different institutions around the world, sharing ideas and values. His list goes on.

Other writers take a different view. For example, Mr Ruchir Sharma argues in his book, Breakout Nations, that "scores of 'emerging' nations have been emerging for many decades now. They have failed to gain any momentum for sustained growth, or their progress has begun to stall since they became middle income countries".

He gives many examples: Malaysia, which appeared on course to emerge as a rich nation until the financial meltdown of the late 1990s; the Philippines and Sri Lanka, which were billed as East Asian tigers back in the 1960s only to see their growth falter badly well before they reached middle-income levels. In short, he concludes glumly: "Failure to sustain growth is the general rule, and that rule is likely to reassert itself in the coming decade."

So who is right?

I'm not bold enough to come up with an answer. But I have been around long enough to know that trends don't usually last forever. And I could imagine circumstances in which the benign story of the past decade or two could be checked, if not reversed.

One obvious example is the way the international banking system now seems to be Balkanising, with banks almost everywhere retreating to their home bases in the wake of the financial crash in the West. Regulators in the US are requiring that foreign banks hold much higher levels of capital in their jurisdiction than in the past. Banks in Europe are pulling back loans from their partners in the euro zone and cutting their balance sheets down to size.

So it looks like global financial integration is on the wane, at least for the time being.

At the same time, the central banks of the US, the euro zone, the United Kingdom and most recently Japan are now conducting the most extraordinary monetary experiment in financial history. In a bid to boost demand and lean against fiscal austerity, they have been buying bonds, mainly from their governments, on a truly astonishing scale.

We don't know how successful they will be in unwinding their enormous bond holdings in a timely and orderly manner. But we do know markets have a tendency to overreact and could get very jumpy at the first sign of interest rates rising from levels which haven't been seen before in the modern era.

We must worry that all this quantitative easing could have implications for inflation, and even for competitive devaluations, with adverse consequences for global trade. I'm not suggesting that this will happen. But I do believe that the international economy is still in a dangerous and unstable phase, and that it's too soon to think we are out of the woods.

The Great Convergence could be tested in the years ahead, and it therefore makes sense to look for the qualities that will make the difference between success and potential failure in countries around the world.

And this is where I turn to the Singapore story. As a complete outsider, I could make some spectacular gaffes. But the challenge in this context is irresistible. So here goes.

Geography as destiny

TO START with, it's obvious that geography matters. In his book, The Bottom Billion, Paul Collier writes about the plight of those people who have missed out on the benefits of globalisation. He argues that they tend to live in countries which have a number of common features. One is that some of the poorest countries in the world are landlocked and have bad neighbours. And indeed a significant number of countries right at the bottom of the United Nations league table come into this category - no access to the sea or to international trade routes, and neighbours from hell.

The opposite is true as well, as Singapore has demonstrated. It has used its prime location on the planet to turn itself into an international entrepot on an almost unparalleled scale. Expressed as a proportion of its gross domestic product, its exports of merchandise goods are more than twice the size of its nearest rival, and its exports of services also top the global league table when measured in the same way.

Of course, that's not just the result of an accident of geography. Strong governance and strong institutions are the key, and most of them are summed in a series of interviews with Mr Lee Kuan Yew published two years ago under the title Hard Truths To Keep Singapore Going.

How, he is asked, do you have a strong economy? He answers: "By maximising your human resources. Your people, the way they are trained, organised, educated to serve the world's needs, which means infrastructure, connections, linkages with those parts of the world which will add value to our lives. Second, we leapfrogged the region because they wanted to squeeze us. We brought in multinationals."

I looked around for some data to support these claims. Here are some of the things I found. In a league table of Asian Universities published in the Times Higher Education Supplement a couple of weeks ago, little Singapore had two universities in the top 12: the National University of Singapore came second only to the University of Tokyo. For comparison, giant India has only three institutions in the Asian top 100, and all are highly specialised. The Indian Institute of Technology at Khragpur is the highest placed, standing at number 30.

When it comes to the performance of 15-year-old students in reading, mathematics and science, Singapore again compares with the best of the world, well ahead of the likes of Germany or the US. As for bringing in the multinationals, foreign direct inflows between 2007 and 2011 worked out at 18 per cent of GDP, which was not as high a proportion as in Hong Kong but well ahead of most other economies in the world.

A strong emphasis on the quality of government and high standards of governance are other recurring themes of the Lee Kuan Yew interviews: He argues repeatedly that they have been the foundation of Singapore's growth and transformation.

There's also a focus on merit - as he puts it: "Not equality of rewards but equality of opportunity in education, housing, health and so on. And a system based on meritocracy. That's the basis on which we have had intercommunal harmony and inter-religious tolerance."

It's certainly had an impact on the well-being of this city state. Singapore now stands at No. 18 on the UN's Human Development Index, having climbed a full seven places in the rankings since 2007. For comparison, France is in at No. 20, and the UK - which has also risen in recent years - at No. 26.

And there's another thing that comes through strongly in the interviews - a sense of real anxiety, a worry that citizens might become complacent in their relative prosperity and forget the qualities that have turned the country round. He says his greatest fear is "a leadership and a people that have forgotten, that have lost their bearings and do not understand the constraints that we face".

"Small base, highly organised, very competent people, complete international confidence, and ability to engage the big countries. We lose that, we're down. And we can go down very quickly."

Strong investment in human and physical capital. Sound governance and an economy in which everyone can aspire to have a stake. An openness to international capital and trade. Concern for the future. These appear to be some of the key ingredients of Singapore's success.

Countries with shrinking, ageing populations will struggle to sustain their economic performance over time. As the number of workers relative to retirees declines, the tax burden of supporting those senior citizens increases. So countries like Japan and Germany, where the working age population could fall by roughly a third by 2050, will face growth problems and fiscal pressures. And this is a challenge for Singapore too, as it must be with its fertility rate among the world's lowest at 1.2 compared with a replacement level of 2.1 and, for example, 1.9 in the UK.

The writer is chancellor of the University of Warwick and former editor of the Financial Times. This is extracted from a speech delivered to University of Warwick alumni.

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