Sunday, 22 November 2015

DPM Tharman: Ensuring progress in a world of troubles

At The Straits Times Global Outlook Forum yesterday, Deputy Prime Minister Tharman Shanmugaratnam spoke of the structural changes afflicting the global economy and stressed the need to innovate, master skills and nurture creativity so as to be able to seize the opportunities available. Below is an excerpt from his speech.
The Straits Times, 21 Nov 2015

Beyond the developments that hit the headlines, or the short-term spikes in financial markets, there's also a steady shift that underpins all of this, a steady shift to a new phase in global affairs. One that will be marked by slower economic growth, especially because of the changing demographics in a whole range of countries; slower growth in trade as well, especially because of the evolution of the Chinese economy; and a state of continuing tensions coming out of sectarian conflicts, now globalised.

But it's also a world of opportunities. And for a small country like Singapore, there's no lack of opportunity even in a world of somewhat weaker growth, a world with troubles that keep recurring. Opportunities that will come to innovative cities, to individuals with deep skills and to teams that bring people with the right skills together.

Part of the complexity that faces policymaking in both governments and businesses comes from the fact that we are seeing a confluence of both cyclical and structural forces in every major economy. In the United States, and especially in Europe and Japan, the cyclical challenge remains even years after the global financial crisis, which is to recover and get back to normal. In China, it's the other way round; it's about working out the excesses of the last few years, managing the slowdown and getting back to sustainable growth.

But whether it's moving from undershooting or overshooting towards the normal, these cyclical challenges are happening at the same time as deeper structural shifts in their economies: the longer-term trends that are taking them, and taking the world, from an old normal to a new normal.

Take the two largest economies - the US and China.


Everyone is fixated on when the FOMC (Federal Open Market Committee) is going to raise interest rates - to get off from what they call the "zero lower bound" in interest rates. It's an important decision, but it's all about weighing up the cyclical movements of the economy and prices. Even then, if you look at it over the last few years, I think it has to be said that monetary policy with massive quantitative easing and zero interest rates has not been very effective in stimulating a cyclical recovery in any of the advanced economies. And more importantly, monetary policy, although it's what headlines are often about, is not what determines the fundamentals that shape the future. And there are serious structural challenges that have yet to be tackled in the US.

Middle-class households have seen no increase in real incomes for a very long period of time - about 15 years or so. Jobs are also disappearing in the middle of the workforce. That's not a cyclical phenomenon. It began long before the global financial crisis.

At the same time, there's a large shortage of skills. So there are two things happening in the middle of the US workforce - jobs being lost, which is the traditional story of a "disappearing middle", but also jobs going unfilled because employers say they cannot find people with the right skills. There's a whole range of jobs requiring middle- and upper-end skills, whether it's nursing specialists, skilled technicians, a whole range of jobs for which employers can't find the right skills. That, too, is a structural challenge in the US and most advanced economies.

And third, not often noticed because it's a problem that's creeping on the US and much of the advanced world, is that there is a looming pensions and healthcare financing crisis. In time to come, that will be the big crisis. Pensions and healthcare financing commitments, what economists call "unfunded liabilities", are getting larger and with few serious solutions being proposed. So there are serious problems coming in much of the advanced world.


China likewise faces a confluence of cyclical and structural forces.

It faces large overcapacity, or the overhangs following its efforts to stimulate its economy after the global crisis - overhangs in heavy industries, in the property market, and local government and corporate debts. Those are the cyclical forces, and they are leading to a significant slowdown in the short term. But China has also embarked on a fundamental shift in the nature of its economy, a change in the longer-term pace and composition of growth. It's moving away from investment-driven growth to an economy driven by consumption, and by services more than manufacturing.

But what has been less noticed is an important structural shift in Chinese manufacturing itself. Remember, China is still a manufacturing powerhouse. It has not lost but gained global market share in the last five years. There's a shift that's taking place within manufacturing, where China is onshoring more of its production. We had a global supply chain that China was part of for many years, within Asia especially. Whatever China made, you'll find inputs coming from a whole range of countries. China is now producing more of those inputs itself, and hence lengthening its own value chain. That's a natural evolution in the Chinese economy. They are moving from labour-intensive, low-cost production, fitting together things that have been produced abroad, towards producing more of the higher value inputs themselves. That shift is having significant effects around the world, especially for South Korea, Taiwan, Singapore and Japan which used to provide them with these inputs.

Most fundamentally, China has embarked on reforms leading to a market-driven economy, and that's the most complex economic reform agenda anywhere in the world. It requires great adroitness, to avoid upsetting the cart and setting back the whole reform process. Reforms of the state enterprise sector, and the progressive liberalisation of the financial sector.

But even if China succeeds in its reforms, it is an economy moving to a slower path of sustainable growth. Its working age population is already beginning to decline in absolute terms. So it will be growth driven not by employment but by innovation and technology. Foxconn plans to introduce a million robots, and the economics is clear. The industrial robots of today are already cheaper than the average worker in Chinese factories. China is going to be the largest user of industrial robots in the world by next year, larger than the major European countries combined, larger than the US. Vanke, their largest property developer, plans to substitute one third of jobs with robots - to clean the floors, guard buildings and drive around residential estates.

Technology is being introduced at a remarkable pace in China and it's going to drive their growth. Still, it will be slower growth, and especially after 2020. It will have to come entirely from productivity growth, and even though the Chinese economy as a whole is still catching up from a low level, it will be difficult to sustain growth at more than 6 per cent beyond this decade.

It is the structural forces, more than the cyclical, that will weigh heavily on every economy in the coming years. Demographics alone, the slowing of labour force growth, would subtract 1 percentage point of gross domestic product (GDP) growth globally over the next 20 years, compared with the last 20.


But if the demographics is not helping, what about productivity? Productivity growth, which is still a bit of an enigma, has slowed significantly almost everywhere in the last five years. In the major advanced economies, it's been less than 1 per cent per year in the last five years, after growing at about 2 per cent for a decade and a half before that. There's a wide range of views on how this will shape out in future. The techno-optimists point towards what's already happening at the cutting edge - in robotics, in the "Internet of Things", in big data and artificial intelligence. But the argument is about whether what's happening in leading firms, those at the cutting edge of these technologies, is going to be spread throughout their economies. There has not been much evidence of that diffusion across the economy so far, and the gap in productivity between the leading global firms and the rest has in fact widened greatly in the last decade. We cannot say yet if the techno-optimists or techno-pessimists will be right.

But it would not be prudent to bet on a sharp revival any time soon. Taken together with the demographic forces, we have to expect slower growth for many years to come.

Trade growth, too, is slowing.

For the first time since the 1970s, it is growing more slowly than global GDP. I don't myself think that this is going to be a continuing slowdown, and it doesn't change the fundamental advantage in any economy that comes from trading with the world. But the shift that's taken place is not surprising and it could continue for a number of years. We are seeing slower trade growth particularly because of what's happening in China - China demanding less inputs and raw materials from the rest of the world - and we've seen the end of the commodity super-cycle. And slower trade is also because of the shift in economies of the advanced world from manufacturing to services, which is less import-intensive.


How does this come together for Singapore? We, too, are faced with cyclical headwinds.

The manufacturing economy is effectively in a technical recession. Overall, we are still growing, we're not in recession, but we're growing below what would be our medium-term potential. But beyond the cyclical forces, which we have to watch carefully over the next year, it is the structural challenges that we, too, have to be focused on in Singapore.

We have to get used to the fact of a tight labour market. By 2020, we're down to virtually 0 per cent domestic labour force growth. We will need foreign labour in various sectors but we can't grow the foreign labour force indefinitely, or increase the proportion of foreigners relative to locals indefinitely. So we have to get used to lower labour force growth. The only way we can grow is by making significant improvements in every sector, bring in new ways of business, so as to raise productivity. That's not just the only way to grow the economy. It's also the only way to sustain income growth for the middle class, and those with lower wages too.

The electronics industry is an example. It's been hit by strong cyclical headwinds - like in Taiwan, South Korea and Hong Kong. But we are also seeing a reconfiguring taking place in our electronics industry - the introduction of frontier technologies, and a move towards high-value production. Micron, for example, is investing US$4 billion (S$5.6 billion) in a new facility by 2017, to produce 3D Nand flash - that's cutting-edge. There's also a service side to this - the design work and other services that come with advanced manufacturing. Out of the current cyclical weaknesses, we've got to make these structural moves, reconfigure and move towards much higher-value activity.

What it comes down to is to grow through innovation. It means becoming an innovative society. That's what we're moving towards. And that's what will best assure us of progress even in a world of troubles and weaker growth.

It means a few things.

First and most importantly, SkillsFuture. Up and down the ladder, across all types of jobs, whether you're helping out in elderly care, in the local community, or a driver working with technology in domestic logistics so that one person does the job that four people did previously, whether you're in finance where you have to get used to disruptive technologies that will take over a whole set of routine functions that were previously done by people: Everywhere, we have to equip people with the skills that enable them to work in a technology-enriched world, so that we preserve jobs and so that jobs get better.

We can do it. Through SkillsFuture, we're going to invest in every individual throughout life. It's not just what happens in the first 12 or 16 years of your education. It's throughout life. And we have to reduce our focus on the grades you get early in life, and increase our focus on investing, in developing everyone's abilities and skills through life.

Second challenge, we have a dual economy. The firms that are dealing with the world - typically the larger firms but we also have small firms exporting or investing abroad - have been doing well. They've shown robust productivity growth. But there's a large segment of the economy, particularly in domestic services, in construction, where productivity growth has been weak. So it really is a dual economy, like in some other advanced economies. And we've got to crack that duality. We've got to work cluster by cluster, industry by industry, to develop chains of innovation that combine the strengths of large firms with the small, combine the foreign with the local firms. We have to develop innovation and skills collectively, in each supply chain and throughout the economy so that innovation becomes pervasive.


The third factor comes down to culture. Innovation is not just about having broad ideas of change.

It also requires, first, deep specialist skills. Whether you look at the German firms that are at the frontier, or the Japanese or Swedish in various industries, when you visit them, when you look at why they are world leaders, you will find people who have deep mastery of skills. Not that they were highly educated when they were young, but they are developed through life and they become masters of what they are doing.

It's not just a matter of training schemes and WDA (Singapore Workforce Development Agency) incentives. It's about a culture - taking pride in mastery and getting respect from customers and the public because you're the master of what you're doing. That's a culture we must aspire towards.

We need to also change the culture in education, and that involves all of us - parents, teachers, students. So that when children are young, we are less obsessed by the grades they get and how finely we can differentiate one child from the other, and focus more on giving them diverse experiences. No one knows for sure how we get creative people. But there's one thing that there is some consensus on, and backed by science, which is that diverse experiences help, particularly as you grow up. Diverse experiences and interaction with people from diverse backgrounds, that helps. And that means everything you do on the sports field, in the dance hall, in debate, in outdoor adventure. And even when you're just daydreaming. There's something that studies of the human brain over the last decade tell us.

They've got these high-resolution brain-imaging experiments that show how your brain works when you're doing different activities. And the brain process that's working when you're engaged in creative activity, when your brain is going beyond existing boundaries, is the same brain process that lights up when your mind wanders and meanders.

We've got to let children have enough time to flex that part of their mind as well when they are young. And give them many more, diverse experiences.

ST Global Outlook Forum: World affairs 'shifting to a new phase'
It is marked by tensions and slower growth, but growth opportunities exist for the innovative: Tharman
By Yasmine Yahya, Assistant Business Editor, The Straits Times, 21 Nov 2015

Recent spikes in volatility, whether in financial markets or the political arena, have grabbed headlines.

But quietly underpinning them is a shift towards a new phase in global affairs marked by slower growth and continuing tensions, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

Speaking at The Straits Times Global Outlook Forum, Mr Tharman, also Coordinating Minister for Economic and Social Policies, gave an overview of the global trends.

He said growth opportunities still exist for "players who are innovative, individuals who are skilled and teams that bring the right skills together". Part of the world's complexity today comes from the confluence of cyclical and structural factors in virtually every economy.

In the case of the United States, the cyclical challenge of lifting economic growth rubs up against long- term structural issues such as stagnating household incomes, the disappearance of many jobs in the middle of the skills spectrum and a shortage of much-needed skillsets, he noted.

In China, cyclical issues such as the unwinding of excess debt and property oversupply come as the economy shifts away from manufacturing and investment-driven growth to growth driven by consumption and services, he added.

Even in manufacturing, structural change is under way, which will affect other economies, he said.

"We had a supply chain that China was part of within Asia... whatever China made you'll find inputs coming from a whole range of countries. China is now producing more of those inputs itself," he said.

That shift is having dramatic effects on economies such as South Korea, Taiwan, Singapore and Japan as the inputs that these economies once contributed are now increasingly being made in China itself.

Also, such structural shifts will increasingly weigh on growth, Mr Tharman added. "I don't myself think that this is a permanent slowdown but we're going through a period, a number of years, we're going to see slow trade growth."

Still, the world does not lack opportunities, but to keep tapping them, Singapore has to move towards an economy driven by innovation - and an innovative society.

Through SkillsFuture, the first step, the Government aims to equip people with skills so that they can work in a technology-rich world so that jobs are preserved and better jobs created.

Second, the Government will work with companies to create "innovation chains", linking large firms with small ones and foreign firms with local ones, so that technological advances will be diffused throughout the economy and innovation becomes pervasive.

Third, a cultural change is needed. Parents and teachers should be "less obsessed" about grades and focus more on giving children diverse experiences, while workers should take pride in mastery in their fields.

Many innovations are already occurring, from a recent lecture at Nanyang Technological University via a holographic display, to the launch of new mobile apps and smart devices, he said.

"Something is gradually bubbling up in Singapore, but we have to give it a real push across the board."

Coordinating economic and social policies 'a tough task to find right trade-offs'
By Idayu Suparto, The Straits Times, 21 Nov 2015

Coordinating both economic and social policies involves the tough task of finding and managing the right trade-offs so that economic opportunities can be maximised while social issues such as healthcare can be well managed, said Deputy Prime Minister Tharman Shanmugaratnam yesterday.

Mr Tharman was elaborating on his new role as the Coordinating Minister for Economic and Social Policies - a position he was appointed to in September as part of Prime Minister Lee Hsien Loong's restructured Cabinet line-up.

Mr Lee had said the position of Coordinating Minister - there are two in the Cabinet - was created to address a more complex policymaking environment and the need to coordinate responses to challenges involving multiple ministries.

Mr Tharman cited manpower as one example where it was important to coordinate the Government's economic priorities with those of the other ministries.

"The task of coordination is really to find the right trade-offs in economic policy because they are tough trade-offs. It's not just a manpower issue for the Ministry of Manpower; it's an economic opportunity issue for MTI (Ministry of Trade and Industry), for example, and Monetary Authority of Singapore (MAS) and other economic agencies," he said.

"We've got to decide how to manage manpower - in an environment where manpower growth is going to be very low - which sectors to promote, which sectors to stop promoting. Those are tough decisions to make," he said at The Straits Times Global Outlook Forum.

The same challenges also apply in managing the social portfolio. Providing healthcare, for example, involves a collective policy approach from various ministries.

For instance, the Government will have to find solutions to deal with the issue of healthcare in a sustainable fashion and ensure that it remains affordable.

"It's a real challenge and it's not just the Ministry of Health" that will be involved, Mr Tharman said. "It's also the Ministry of Finance, and it's the MSF (Ministry of Social and Family Development)."

Singapore 'must equip people to work in tech-enriched world'
By Idayu Suparto, The Straits Times, 21 Nov 2015

As Singapore moves progressively towards an economy driven by innovation, it must equip its people with the skills to work in a technology-enriched world so as to avoid a polarisation of the workforce.

Deputy Prime Minister Tharman Shanmugaratnam illustrated this point at The Straits Times Global Outlook Forum yesterday. On a recent visit to a Cold Storage supermarket outlet, he met several workers who had kept their jobs and performed better as the company adapted to new technologies by upgrading their skills.

One of them was Ms Alimah Md Yusof, 45, who is a senior manager of operations audit and has been with the firm for 29 years. She started off doing her cashier job the old-fashioned way, collecting cash from customers from her desk.

But she now handles the outlet's new automated cash management system in a small control room. The new role involves making sure customers have a smooth experience at the self-checkout counters.

Cash from the recently installed self-checkout counters is put into a machine that counts it in less than 30 seconds. Previously, it took the cashiers five hours to count the notes and make sure they added up, Mr Tharman said.

"She handles that process and she spends the rest of her time walking around the store, helping people with self-checkout and helping to advise customers," he added. "She's enjoying her job and she's still employed in the same firm."

Although technology and innovation will play an increasingly important role in Singapore's economy, jobs can be preserved and better jobs can be created, Mr Tharman said. "We've got to avoid a divide in our workforce" within each age cohort and between young and old, "and it can be done", he said.

'Strong leadership needed to avoid shift to political extremes'
By Trixia Enriquez Carungcong, Assistant Foreign Editor, The Straits Times, 21 Nov 2015

In periods of uncertainty, like in the aftermath of recent terror attacks by the Islamic State in Iraq and Syria (ISIS), there is a greater need for good leadership that would hold the centre even as popular pressure pushes politics to extremes, said Deputy Prime Minister Tharman Shanmugaratnam.

In a question and answer session at The Straits Times Global Outlook Forum with Mr Warren Fernandez, editor of The Straits Times, he said that recent attacks like the bombings and shootings in Paris and the downing of a Russian airliner in the Sinai Peninsula in Egypt last month have helped forge a "new degree of unity" in the fight against terrorism.

But in a less dramatic fashion, politics in the United States and Europe has shown a disturbing shift away from the centre.

"For a long time, the politics of Europe, of the UK and of the US was basically revolving around the centre-left and the centre-right," he said, citing the mainstream Labour Party and Conservative Party in Britain, and the Republicans versus the Democrats in the US.

But he said "if you look at the shifts of the last five to 10 years, the centre has weakened, the extremes have gotten stronger", pointing to the recent electoral gains made by the hardline National Front in France, Germany's anti- immigrant Pegida movement and the UKIP (UK Independence Party).

Offering a closer examination of the UKIP's performance in this year's general election, he said "you have to remember that although it didn't win many seats in the UK elections, it won a significant amount of votes and threatens now to take away votes not just from the Conservatives but from the Labour Party, that same base of working class votes".

Mr Tharman suggested that one reason for the rise of the extremist parties is the growing insecurity felt by a growing number of voters. Sectarian conflicts, the flow of immigrants and the lack of job security among the middle class, along with long-term worries about paying for pensions and healthcare all contribute to this insecurity. "That tends to feed in to a weakening politics of the middle," noted Mr Tharman.

To prevent a turn to a more reactive and inward-looking society, there is a need for strong political leadership that can unite people around "what they share in common, which were the values of the middle all along", he said.

Plugging the Republic into networks of the future
The Straits Times, 23 Nov 2015

Deputy Prime Minister Tharman Shanmugaratnam, who is also Coordinating Minister for Economic and Social Policies, touched on a wide range of issues, from macro-economic trends to shifting social policies in Singapore and across the world, at The Straits Times Global Outlook Forum last Friday. Below are excerpts from his comments.


China has embarked on a fundamental shift in the nature of its economy, a change in the pace and composition of growth. That's well known - it's moving away from an investment-driven growth to an economy driven by consumption and by services more than manufacturing.

It's making progress on that journey. But what has been less noticed is an important structural shift in Chinese manufacturing itself. Remember, China is still a manufacturing powerhouse.

It has not lost, but gained, global market share in the last five years. There's a shift that's taking place within manufacturing, where China is onshoring more of its production.

We had a global supply chain that China was part of for many years. Whatever China made you would find inputs coming from a whole range of countries, and from within Asia especially.

China is now producing more of those inputs itself, and hence lengthening its own value chain. That's part of a natural evolution in the Chinese economy. They are moving from labour-intensive, low-cost production, fitting together things that have been produced abroad, towards producing more of the higher-value inputs themselves.

And that shift is having significant effects around the world, especially for Korea, Taiwan, Singapore and Japan who used to provide them with these inputs.

But there's still tremendous opportunity for trade with China at the higher end of the value chain - look at Europe and the United States, for instance.

They produce more or less the same things - America has more energy resources but otherwise they've got more or less the same structure of production - but there's tremendous trade between Europe and the US, because people look for different specialisations, and the middle class all over the world want diversity, they want distinctive products, something different from what the neighbour is using.

So that's the challenge and opportunity for us. We've got to trade with China at the higher end, have a specialisation, a skill, a novelty that adds value to them.


Everywhere we go in the world we find Singapore is still in demand. We are fortunate to have a very strong brand, a brand of reliability, and people trust us.

But that alone is not good enough. We need deep skills. There has to be something innovative in what we are offering.

We also have to stay plugged into networks. A few weeks ago there was a major India-Africa conference in Delhi. It was between India and the African nations. But in addition to the African nations, India invited Singapore.

We're not part of Africa or South Asia, but they invited Singapore because they see us as part of the networks of the future. That's the real advantage we have.

So stay plugged in, maximise the potential of the Trans-Pacific Partnership and our free trade agreements, help our small and medium-sized enterprises (SMEs) take advantage of our networks. That's a real priority for the future.


There are lessons from both the right and the left that are important to sift. Our policies have shifted to the left, but the values that underpin our policies are sometimes associated with conservatives. Taking responsibility for your family, being responsible to keep a job and keep improving on your job, being socially responsible.

These are things which the traditional left in Europe and elsewhere has tended to move away from over the decades, although they started with it. The original social democratic model revolved around those values. The values of personal and family responsibility have to underpin all our efforts.

The State is taking more responsibility, there's more collective responsibility, but it can only work and it can only lead to a dynamic society if it goes hand in hand with personal and family responsibility. And we should not be at all shy to talk about these values. It's what underpins a better society.

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