ETHOS Issue 06, July 2009
There is still some debate about where culpability for the economic crisis should lie, and whether it could have been prevented at all, as recent writings by Paul Krugman and Martin Wolf contend. Buoyed by years of seemingly illimitable growth, corporate and public institutions in highly sophisticated economies pursued aggressive policies based—as it turned out—on risky, unsupported and less than prudent assumptions about the future. For this failed gamble, the world is still paying a price whose final sum has yet to be fully determined.
Equally striking are the signs of danger which were already evident before the storm. In the general exuberance leading up to the crisis, cautionary voices such as economists Nouriel Roubini and Raghuram Rajan were roundly ignored—they have since turned out to be mostly right. ETHOS, marking the 10th anniversary of the Asian Financial Crisis in October 2007, noted familiar structural weaknesses in financial practice and regulation in the US sub-prime loan crunch—a precursor to the full-blown economic pandemic to come. Yet there was an unspoken belief among sophisticated Western economies that they could not possibly fall as thoroughly or as quickly as those in the developing world. Where it occurred, this institutional inability to imagine, anticipate and plan for a volatile future with unintended consequences surely amounts to a profound failure of governance.
Ironically, the downturns of the late 1990s and early 2000s may have stiffened the economic resilience of some countries. In the case of Singapore, they led to the development of new policy approaches and operational capacities such as the Workfare Income Supplement scheme and the Finance Ministry’s countercyclical fiscal strategies. These policy instruments and capabilities—along with decisive new measures announced in the 2009 Budget—have become invaluable assets in the fight to mitigate the economic tsunami’s negative effects, to which an open economy like Singapore’s is particularly vulnerable.
Viewing the crisis through the lens of economic history, Bradford DeLong suggests that while the US will still recover from the recession as the world’s economic hyperpower, it ought to put in place institutions and policies in preparation for a world in which other giants will eventually dominate. Indeed, the Ministry of Trade and Industry’s Economics and Strategy Division has considered several ways in which the global economy might evolve after the crisis abates.
Singapore has a confident chance of tiding over the economic tsunami relatively intact. But it would serve us well to start looking at new opportunities which might have opened up since the crisis. Prices and rents have declined; labour has become more available; more are willing to try new ventures. Some market barriers to entry have been reduced. Smaller local enterprises—particularly those which have been prudent in recent years—may find new breathing space to grow. New industries, such as green tech, may be on the rise as traditional sectors shift priorities. It is possible that public investment in fresh fields, at relatively lower cost and with the added benefit of economic stimulus in a downturn, may reap enduring dividends in the post-crisis future.
Significantly, this is already the counter-crisis strategy of some developing nations, who remain cautiously optimistic at a time where most of the world’s advanced nations are devoting tremendous resources to economic firefighting. Relatively unscathed economies such as Oman and Brunei, having husbanded their resources during the boom years of high oil prices, have stepped up the diversification of their economies, markets and asset base. Once the recovery takes hold, they aim to be better poised than the competition.
Times of crisis test the mettle of the public service, and none more so than a crisis which has so dramatically restored the public sector to a place of leadership and prominence in economic life. It is perhaps fitting that we begin this issue of ETHOS with veteran public servant Peter Shergold, who highlights five key qualities that civil servants need to meet national challenges—and national expectations—in difficult times. We close with Bryan Caplan’s insights into Singapore’s policy-making environment where necessary but tough policies are carried time and again through the democratic mill.
I wish you, as always, a productive read.