Rethinking Recovery: Possible Discontinuities and Domestic Implications

ETHOS Issue 07, Jan 2010

INTRODUCTION: THE FATE OF GLOBALISATION

The US sub-prime crisis of 2008 and its aftermath presents a timely reminder that globalisation brings both opportunities and threats. Over the years, Singapore has benefited from global economic integration, particularly in international trade and finance. At the same time, we have realised that greater integration means greater exposure to a variety of "imported threats", like the Asian Financial Crisis, September 11 attacks and the SARS and H1N1 pandemics.

While some analysts argue that the worst of the global financial crisis appears to be over, there are reasons to remain cautious. Apart from the recent Dubai credit crisis, anxieties about the mounting national debt and high unemployment rate in the US indicate that the prospects of recovery are still relatively fragile. More importantly, the scale and magnitude of this crisis suggest that post-recovery, there could be some substantial discontinuities— highly disruptive changes from current circumstances—in Singapore's future external operating environment. Commentators such as Joseph S. Nye and Dani Rodrik have written about how the edifice of globalisation could eventually unravel, due to severe long-term effects of the crisis.¹

This article discusses two related questions: What possible discontinuities can Singapore expect in the next 10 to 15 years, after a decade of mostly unfettered globalisation? How could our domestic priorities be affected?

POSSIBLE DISCONTINUITY 1: BEYOND US / CHINA-DRIVEN GROWTH

Since the 1990s, the symbiotic relationship of China and the US (or "Chimerica", to use historian Niall Ferguson's term) has been the global economy's main growth engine.² "Chimerica" accounts for 13% of the world's land surface, 25% of its population, 30% of world GDP and 50% of global growth over the last six years. The magnitude of this financial crisis, having put a substantial dent on "Chimerica", is likely to usher in a new global growth model as both countries continue to recover. Already, China has led the way in the global economy's resurgence in spite of the US' sluggish recovery, by spending far more to stimulate domestic demand. In addition, bigger and less-indebted emerging economies such as Brazil appear to be less dependent on US consumption than commonly believed, and could "democratise" global growth further.³

Implications for Singapore

Export-reliant economies like Singapore will have to move into new markets that serve as alternative sources of demand. Currently, 61% of Asia's exports, including those of China and India, have final consumers in the G-3 economies of US, Japan and the European Union.⁴ The burgeoning urban middle-class in emerging markets will likely provide a new source of demand, due to higher untapped consumption potential.⁵ In addition, a geo-economic axis between Middle Eastern and North African (MENA) and Asian economies, based on complementary factors of production, could develop.⁶ Furthermore, the long-term trend of much higher energy costs in the future will reduce the competitiveness of manufactured products in Asia for shipment to distant markets, such as Europe or the Americas,⁷ and precipitate the development of new trade alliances.

Apart from opportunities, Singapore will also need to operate in an environment with greater resource constraints. Notwithstanding the shift away from "Chimerica-driven" growth, the global economy is likely to remain volatile in the short term as major industrialised and emerging economies restructure. In addition, the risk of certain economies pursuing protectionist trade policies, plunging the global economy into a period of prolonged stagnation, remains very real.⁸ In such a world, we may have to continually prioritise and re-prioritise the way in which resources are allocated—difficult trade-offs may have to be made across competing priorities, with emphasis on, for example, social assistance programmes.

POSSIBLE DISCONTINUITY 2: THE RISE OF STATE CAPITALISM

Since the end of the Cold War, Anglo-Saxon free-market capitalism has been the dominant economic model. Over the years, developed and emerging economies alike have engaged in a series of privatisation and deregulation exercises to shift the ownership of industries from the public to private sectors, albeit at different paces and with differing intensities.⁹ This trend of privatisation has been reversed with the current crisis. The governments of the US and other developed economies have been intervening directly to bail out troubled financial institutions and big corporations. Simultaneously, the governments of emerging economies, facing increased uncertainty about their growth prospects (and political longevity) due to the current crisis, have increased direct intervention to prop up domestic demand by investing more heavily in state-owned enterprises and government-linked private companies.¹⁰

While the governments of developed and emerging economies may not intend to directly manage their respective economies indefinitely, it is uncertain when they will eventually withdraw their direct involvement. Prolonged state interventionism, due to the current crisis, may inadvertently lead to free-market capitalism being replaced by state capitalism—an economic model where the state functions as the leading economic actor and uses markets primarily for political gain—as the new dominant model. Already, in sectors as diverse as petrochemicals, power generation and port management, a growing number of governments are no longer content with simply regulating the market, and instead use the market to bolster their domestic political positions.¹⁰

Implications for Singapore

While state capitalism is not a new historical development, its possible displacement of free-market capitalism as the dominant economic model presents several uncertainties for Singapore's open and globalised economy. Under the model of state capitalism, business and politics are intimately linked, such that access to markets, resource allocation and trade incentives would be decided more on the grounds of political considerations (for example, privileging local over foreign companies) than that of principles of economic efficiency or profit maximisation. For example, China recently imposed anti-monopoly laws aimed at curbing the influence of large foreign companies in its domestic markets.¹¹

Should governments feel a greater need to make stronger protectionist gestures, as proof of their commitment to their respective economies, Singapore could also face greater uncertainty in terms of international trade and investment opportunities. More government investment by emerging economies, such as China, to build up domestic consumption levels could lead to the "crowding-out" of private investments or foreign capital. In addition, domestically, we could also see more populist calls to prioritise the building up of local enterprises and industries instead of leveraging multinational corporations, foreign direct investments and global markets.

POSSIBLE DISCONTINUITY 3: DAWN OF A NEW FINANCIAL ARCHITECTURE

For decades, the international monetary and financial systems have been loosely regulated and based on the US dollar as the reserve currency.¹² The historical roots of this system lie in the Bretton Woods architecture, established in a world where most major economies had been decimated by World War II and the US was the only power capable of providing a reserve currency.

However, the scale of the financial crisis could possibly lead to the creation of new supranational regulatory bodies, measures and currencies. At the international level, the G-20 London Summit in April 2009 saw the creation of a new Financial Stability Board dedicated to monitoring leverage and inter-connectedness of international financial institutions.¹³ In addition, prominent members of the G-20 have proposed the implementation of a "Tobin Tax" on financial transactions,¹⁴ to guard against excessive risk-taking behaviour—a measure that Brazil recently implemented.¹⁵ At the regional level, China, Japan and South Korea have agreed to enhance existing cooperation and led the setting up of a regional pool of reserves under the "ASEAN + 3" grouping, to protect the region against speculative attacks and provide countries in crisis with liquidity.¹⁶

There have also been growing calls for the world to be less dependent on the US dollar. China has suggested that US dollar-denominated assets could be exchanged for more Special Drawing Rights from the International Monetary Fund (IMF), while Japan and Russia have respectively voiced their support for the yen and the rouble to be the base unit of currency exchange in Asia and the ex-Soviet Union states, replacing the US dollar. At the same time, economic historian Barry Eichengreen suggests that the Yuan may become an important international currency alongside the US dollar sooner than expected.¹⁷

Implications for Singapore

The prospects of increased regulation suggest that future financial innovation will most probably come at a higher cost, contributing towards slowed growth for financial sectors. In other words, investors will be primarily attracted to stable and secure markets to store capital, rather than risk investing in new and emerging markets or industries. Hence, a country's international reputation and standing will factor more prominently as criteria for attracting capital inflows.

The creation of supranational regulatory bodies will place increased pressure on member countries to conform to new and stricter international standards and protocols. While this may create opportunities for Singapore to leverage its reputation for clean government and high performance standards, it could also limit our financial policy options. In addition, our financial regulators and institutions may need to address further uncertainty in managing monetary and exchange rate policies, or investment portfolios, should new currencies arise to either complement or even displace the US dollar.

POSSIBLE DISCONTINUITY 4: FROM US UNILATERALISM TO GLOBAL MULTILATERALISM

Based on current trends, the international geo-political system is projected to be markedly different in 2025 compared to today.¹⁸ This can be seen as the latest development in the evolution of an increasingly complex world order, driven by greater diffusion of power. After the Cold War, the international system evolved over time to become "uni-multi-polar",¹⁹ where the US remained the only superpower, but steadily counterbalanced by the gradual "rise of the rest"—regional powers such as China, India, Russia and, to a lesser extent, Brazil and Iran.²⁰

Following the severity of the financial crisis, the world is likely to become increasingly "multi-polar", where strong regional nations compete, conflict and coalesce with each other and alongside influential non-state actors, such as multinational corporations, in the absence of a "global policeman".²¹ Should more supranational and subnational entities (i.e., influential citystates) emerge to contest for power and influence in the international arena, the world could even be shifting towards an era of "non-polarity", where power is even more diffused.²²

Implications for Singapore

As one of the most globalised countries in the world, Singapore will have to be prepared for an increasingly fragmented and chaotic world order as multi-polar systems have historically tended to be unstable. We may have to consider whether there is a need to augment our strategic alliances by establishing even closer ties with China—by 2025, China is projected to overtake Japan as the world's second largest economy.20 At the same time, there may be value in continuing our current pro-ASEAN-integration stance, to compete effectively against the increasingly influential East Asian bloc.

CONCLUSION

Singapore has experienced both the benefits and ill-effects of globalisation, and must continue to navigate the uncharted territory ahead. The world's ability to digest and adapt to these key discontinuities will determine whether the next phase of development will be characterised by a different form of globalisation or a dark period of de-globalisation. As always, Singapore will have to stay nimble and adapt to global changes, given its size and lack of natural resources. In the face of possible drastic discontinuities, a strategic rethink of the Government's fundamental roles, strategies and internal capabilities may be in order. This may include honing in public officers the instinct to identify and anticipate critical uncertainties and their potential implications for our operating environment.

NOTES

1. Nye, Joseph S., "Which Globalisation Will Survive?", Project Syndicate, 2009 and Rodrik, Dani, "A De-Globalised World?", Project Syndicate, 2009.
2. Ferguson cites how China is the net lender to the US' debts, which in turn allows the US to support China's export-dependent economy. Ferguson, N., "What Chimerica Hath Wrought", The American Interest, January–February 2009.
3. "Decoupling 2.0", The Economist, May 2009.
4. "Uncoupling Asia: Myth and Reality", Asian Development Outlook 2007 (Philippines: Asian Development Bank, 2007).
5. "Searching for a new source of global demand growth", Deutsche Bank Global Markets Research, December 2008.
6. MENA economies are rich with capital and feedstock (oil, gas, petrochemicals and basic inputs for heavy industry) but lack labour, whereas Asian economies have abundant labour, less capital and scarce feedstock. In addition, Gulf States have also been slowly developing state-owned multinational enterprises aimed at Asian markets in sectors such as logistics, heavy industry and telecommunications. See Hertog S., "Secular Trends in Gulf Geo-Economics", presented at the Second Franco-Singapore Conference on the Impact of the Middle East on Southeast Asia and Europe, December 2008. http://www.mei.nus.edu.sg
7. Bhaskaran, M., "The Crisis and Beyond", Asian Economic Outlook, December 2008.
8. The risk of protectionism, albeit in the guise of environmental or other well-meaning laws, is also likely due to projected higher energy costs and scarce strategic resources.
9. Notwithstanding the dominance of free-market capitalism, privatisation had been practised unevenly across developed and emerging economies. While developed economies such as the US and Europe had been much more aggressive in adopting free-market capitalism, emerging economies such as China, Russia and India were operating economies which had relatively more direct state influence alongside privatisation efforts.
10. Bremmer, I., "State Capitalism Comes of Age: The End of the Free Market?", Foreign Affairs, May/June 2009.
11. "Hard to Swallow–Coca Cola and China", The Economist, March 2009.
12. Gilpin, R., Global Political Economy–Understanding the International Economic Order (New Jersey, USA: Princeton University Press, 2001).
13. "G20 Summit: Global Financial Crackdown is Cost of Solving Crisis", The Telegraph, April 2009.
14. "G20 tasks IMF to probe 'Tobin Tax'", Reuters, September 2009.
15. Brazil had imposed a 2% tax on foreign portfolio investments in October 2009 to guard against excessive speculative behaviour.
16. "Asian Monetary Fund, Take Two", Far Eastern Economic Review, 2008.
17. Eichengreen, B., "The Irresistible Rise of the Renminbi", Project Syndicate, 2009.
18. "Global Trends 2025: A Transformed Word", National Intelligence Council, 2008.
19. Huntington, S., "Global Perspectives on War and Peace or, Transiting a Uni-Multi-Polar World", American Enterprise Institute for Public Policy Research Bradley Lecture Series.
20. The phrase, "the rise of the rest", is used by Fareed Zakaria in his book The Post-American World (New York, W. W. Norton & Co, Inc., 2008) to describe the "catching up" of emerging powers such as China, Russia and India.
21. Haass, Richard N., The Reluctant Sheriff: The United States after the Cold War (New York, USA: Council on Foreign Relations, 1997).
22. Haass, Richard N., "The Age of Non-Polarity", Foreign Affairs, June 2008.