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Dialogue with Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance, moderated by Mr Ho Kwon Ping, Executive Chairman of Banyan Tree Holdings, at the Singapore Forum 2015

11 Apr 2015

Moderator: Good afternoon DPM. First of all, those who know you know you are a modest person. We all agree that you had a far ranging expiration of issues that defy easy capture in a single phrase by anyone here. You didn’t participate in the morning’s lecture by [President Yudhoyono], but in a way your remarks perfectly synchronise with what he said. There are completely perfect counterpoints to the optimism that he conveyed, about the growing middle class and internet connectivity, and you’ve tempered with some very important remarks on how we can be an optimistic region but we need to take stock of the challenges. If I may, just to start with one question. In your career you’ve occupied many positions in public service and gone through many experiences. To the extent that we’ve had lessons of our own, what would you say were some of the major lessons that you’ve gone through in your public life in terms of challenges to Singapore that may be of relevance to some people in audience and to the larger region than Singapore itself?

DPM: First of course, we have to be genuinely modest about whether lessons can be transported from Singapore, a relatively small country, a city state, to larger and more complex societies. Second, the major lessons I take preceded my public life and really go back to the early days of Singapore independence. We made strategic decisions – Mr Lee Kuan Yew in particular and his team – which turned out to be major stabilisers for our society. These were strategic decisions that enabled a major source of cohesion in our society.

Urban planning is sometimes thought of as a job for the architects and transport planners, but ultimately is about the social dynamics – of every neighbourhood and every city. The most intrusive social policy in Singapore has turned out to be the most important one. It’s more intrusive than most liberal societies would contemplate, and that is a rule on ethnic balance in every single block of Singapore’s public flats. Public housing covers about 85% of the population – so it’s the norm for Singaporeans. Every block and precinct has a rule on ethnic balance, which means that on the same floor and taking the same lift up and down every day, you have quiet, daily interactions that become normal. Most critically, kids go to schools that are integrated, as they tend to go to schools that are close to where they live especially when they are young. And when you grow up together, doing sports or dance or other things together, you become more comfortable with each other.

Being willing to have some intrusive rules in the interest of cohesion, and in the interest of preserving common space in society, is critical. We did it in our own ways given our circumstances, and there will be different ways for different societies. But we cannot think that the natural workings of societies will somehow produce cohesion. Usually the opposite happens.

Moderator: Thank you sir. I think DPM’s remarks were very much tailored to a larger theme than Singapore alone, remarks about how to have a sustainable broad based growth and also how to maintain social cohesion. These are problems that affect every society from developed to developing. Can I now open it to the floor for anyone who’d like to have questions?

Question: Thank you Mr DPM. I am Dr Tho Soo Han from Korea. It’s extremely important how the political leaders in every country in Asia can persuade people on the importance of the open policy, not just about exports – imports but about financial liberalisation. The real cause of confusion that is preventing understanding about the truism is the impact of export on job creation. This is related to technology development. Also in terms of employment intensity for exports this has been more rapidly dropping than domestic demand like consumption. Restaurants employ more people than factories that create a similar amount of value add and production. How can we ensure that this trend in the declining job creating capability of this open sector is compatible with the harmonious creation of the society?

With this open policy in Asia, the way social safety nets are structured now are not very compatible. Open policies are always regarded as doing with harsh things, e.g. job creation effects and the more intensification of the social safety nets may be the factors that contribute to people’s misunderstanding of the truism. I would like to hear your views about how political leaders in Asia can help address people’s misunderstandings about the truism, to make people more convinced about the open policy.

DPM: I think those are two very important observations. First, if we take the view that our objective in economic policy is to benefit the broad populace, not just the most talented or a small group of entrepreneurs, it is our task as politicians to show how competition and external orientation bring benefits to you – in your wages, in your ability to have new opportunities, for you to have better jobs over time. It has to be evidenced-based, not just rhetoric, and we need to use all the evidence from the firms and industries that have succeeded to spread the message. There’s nothing like the success of strategies, because success begets the thinking that this is the right way to go. Getting an early start and making sure we succeed through participation in global market is important. Evidence is important. People must see a rise in living standards.

We have now not just the race against demography that I was talking about earlier, but also the race against intelligent machines. There is a whole new range of innovation taking place, driven by the digital revolution and artificial intelligence, and it will be everywhere. Even in China, the cost of a robot has now become cheaper than the cost of a worker, at least in coastal China. The curves have crossed – it used to be that workers were far cheaper than robots, but now wages have risen significantly and robots have become cheaper. China has succeeded in its strategies, but it too will face this challenge of keeping good jobs at a time when cost efficient technologies can increasingly do what humans used to do. Likewise in Singapore, Korea and many advanced countries. We have to develop a whole new set of skills and aptitudes that make the most of the uniqueness of humans – the ability to be creative, to multitask, to deal with uncertainty the way that machines generally can’t. And not restrict this form of nurturing and training to just a few talented people, but extend it to the broad majority in our society.

But the benefits of participating in the world are real. They bring improvements in living standards and we’ve got to have that as part of our political narrative, a narrative that is based on evidence, in all our countries.

The second question on social security, I think this is extremely important. In general, Asia is behind the curve. It is focused on the economic task of uplifting people from poverty, but the region hasn’t focussed enough on sustainability over time – what happens when people get older, when happens when they fall sick, what form of insurance do we have. How do we provide a level of support for people, a level of collective support, that still ensures that people take responsibility for themselves.  We know the problems in the West. They’ve got an unsustainable social system. We’ve got to avoid those problems, but we’ve got to have a system that is fair for the people. We can’t just leave it to the market. We can’t leave it to people to fend for themselves. In every society we need some degree and form of social support. But how to do it in a way that’s sustainable, so that unlike the West we don’t put an ever-bigger burden on the next generation? That’s a challenge that we are spending a lot of time on in Singapore – developing a fair but sustainable social support system.

Question: My name is Charon Mokhzani (Y.Bhg.Dato’ Charon Wardini bin Mokhzani, Managing Director, Khazanah Research Institute). I work for the Khazanah Research Institute. If I could just pick up on two issues that you said. On the first issue of artificial intelligence and hollowing out of middle class, I share your fears. We could get to a world where those who are either have been lucky enough to have inherit wealth, or luck to have the aptitude to succeed in the world would be wealthy, and we won’t have any good jobs for anyone else. So we will either be extremely wealthy or work in services to serve the extremely wealthy and that is quite a depressing future.

Second thing is on social cohesion. You said very rightly that one of the successes in Singapore is the housing and in education where people had to mix. That was true of Malaysia as well, certainly when I grew up. But the problem is that if you are rich you can opt out of the system. Those who are privileged and wealthy and those lucky enough to succeed can create their own cocoons where they don’t have to deal with messy problems like people of different colours or religion or with different viewpoints. How do you see social cohesion happening in this new world of artificial intelligence and globalisation?

DPM: There’s a way in which the two points are related to each other. The insecurity that people feel due to technological advances and the changing nature of jobs is one that can weaken the sense of social cohesion on a broader level. We have to have to tackle both problems.

I’m not yet convinced that we are going to see the loss of middle class jobs. There are two trends that are happening. First machines are getting more intelligent and they can do what humans could do before. Every job that has a well-defined set of tasks can be coded, can be done by machines and also exported to the rest of the world. That is true. That is already the case for advanced economies like the United States. But at the same time, there’s another important trend you notice in the advanced world. Employers say they cannot find people with the skills they need, for what are very good jobs. So there are two things happening at the same time. Machines are taking over what human beings were doing before, but there’s also a shortage of skills in the market. If we apply our minds to shape our institutions, shape a skills curriculum and shape lifelong learning to develop the skills of the future, there will be new jobs and opportunities. How we respond to the situation therefore determines the outcomes. If we take a defeatist attitude and say, look the machines are coming, then good luck to you. But it need not be that way. There are jobs and opportunities that we can create for ourselves by developing the skills and creating new demands.

On the second point I think you are touching on a very important issue of public schools versus private schools. In Singapore we’ve adopted the strategy of keeping the school system public. We have a very small number of privately funded schools but they are not at the apex of the system; they are a safety valve, mainly for parents who have spent time overseas and the kids have not been part of the education system, they find it easier for them to bring their children back into this small number of private schools. The system is a public school system and we try as best as we can to make sure that it is one that sustains social mobility. Regardless of ethnicity or social background or parent’s incomes, you’ve got to have a fair chance of succeeding. Keeping a public school system is critical, and not going the easy route of trying to develop excellence by allowing for more and more private schools.

The US is a classic example. It may have some of the best private schools in the world – very well resourced, very well motivated teachers, flexible curriculum, not so exam-focused etc. But that’s a small fraction of the US system. The US public school system is in bad shape, quite unfortunate what it does for the average kid and what it does for the kids that come from a below average socio-economic background. The US still succeeds because it has that entrepreneurial ability and innovative ability coming out of the cream, and by importing the best from the world. But the future for the average worker isn’t great. In fact in the last 30 years there have been no improvements in median incomes. It’s the most vibrant economy if you think about entrepreneurship and innovation, but if the central objective is to achieve broad prosperity and improvement in living standards, it goes back to what we do in education and how we help everyone acquire skills and advance through life. I say this not to criticise the US or any other country, but it’s what we should all reflect on. That’s our central objective and it starts with what we do early in people’s lives.  

Question: My name is Munir Majid (Tan Sri Dato’ Dr. Mohd Munir Abdul Majid, Asean Business Advisory Council Member) from the Asean Business Advisory Council. DPM I wonder if you could share Singapore’s experience in terms of cooperation and working together between the public and the private sectors. I ask not just because it may be relevant to other countries individually but also because there is a lot of rhetoric in ASEAN about ASEAN working together w the private sectors, but I see a lot of gaps and potholes in the way they propose and do not effectively work with the private sector when trying to achieve economic and social objectives. Could you share with us your experience in terms of how it could be translated into an ASEAN context?

DPM: Let me make a couple of observations. First, some of the strategies that appear to have succeeded in Japan and Korea in a much earlier phase (50s, 60s, and to some extent 70s), where the state took an active role in trying to promote industries and even individual firms – those strategies are no longer open to countries. First because of WTO rules. And second we have to take in evidence that competition helps. Competition both domestically and with the rest of the world really helps. It spurs innovation and allows living standards to improve. So foremost in our minds as economic policy makers has to be a mindset about competition, allowing for competition between firms in the same industry, exposing them to international competition, and for larger countries also having competition between states and cities and provinces. It’s been a real motive force. We need to strengthen that mindset in ASEAN and elsewhere – competition really helps.

Second, coming down a level, what are our instruments for public-private sector cooperation? Having measures that are transparent and across board is ideal, such as tax incentives where anyone – you invest in R&D or mechanisation, you get a tax reduction. It’s clear and transparent for each firm, how much they will get. This is superior to wanting to choose which firms or which industries to benefit. So tax incentives are very useful ways of supporting the private sector.

A third point I’d make is that in the social sphere there’s also a lot of scope for cooperation between the private and public sector. There are examples all over Asia. For example in India, leading private corporations are remarkably innovative in the social sphere – in education, in water purification, sanitisation, health delivery. Private corporations that have a social arm are amongst the leaders in innovation and in delivery of social services. Tapping on their technologies and the management mindsets of the private sector – developed in competitive markets – for the development of social services is an interesting opportunity.

Question: My name is Chang Min Li from Seoul Korea and I met you DPM when you were minister of education many years back. My question sir is there is a sense in Asia that Asia's rise will go on forever. And I think that type of assumption is both very arrogant and perhaps even wrong. For two reasons, if you look at the demographic trends in China, Japan and even the richer parts of Asia, they are quite negative. By the mid of this century 2050, Japan's population and current fertility rate will fall to about 85 million. By 2100, some report said, Japan's population will fall to 47 million. So, in 50 years’ time, grandmas and grandpas won’t be joining the SDF. So my question to you sir is, how can Asia make sure that these negative demographic drivers in Korea, in Singapore, Hong Kong etc., can be overcome?

And my second question is, virtually every single major country in this region has huge growing income inequality and that will have social and political repercussions. In some regions it is already happening. So how can you as one of the key leaders of this country, look into those two issues and offer some sage advice. Thank you.

DPM: Another very important question that confronts many of us already and will eventually confront all our societies.

First, I think there are some opportunities to begin. Ageing is not all about negatives. It’s also about the positives. Our people are, one of the wonderful things is that people are much healthier than they used to be and we've now got remarkable longevity in many of our societies. It’s because of advances in medical science, the different jobs that people did throughout their careers. They’re just able to live healthier lives for longer. Lets' try and make the most of it. How can people keep learning when they're well past their 50s or even past their 60s? How can they stay active, active economically or active in the community? There is a real opportunity and there are some lessons to be taken from some of the advanced countries, countries that are less ageist than us. Asia is still a rather ageist place at work. In countries where people are able to stay very active in the workforce, are respected for the skills they have, the wisdom they bring to the workplace, and where customers and the public treat them with a certain respect. There are some lessons. We have got to treat everyone who is an older worker with respect and not see them as having reached the end of their careers and we are just keeping them employed and giving them a wage. It's not just ‘makan gaji’, you know. They want to do a better job. How can we shape the job around them so as to maximise their potential. Maximising our potential at every age is I think a very important mind-set.

Second point, however, as I mentioned earlier on, we've got to avoid the mistakes of Europe and the United states which have unsustainable social security systems. We've got to be fair to the low-income aged, without imposing a growing burden on the younger population. It does mean that we shouldn't be too generous with the affluent aged. You've got to have schemes which target support at those who are poor, those who are ill and without family support, target our support at them. Because once you start extending support to everyone who gets older regardless of their means, you are going to impose a big burden on the next generation and it's an unsustainable burden.

Question: This is Isha Ahluwalia (Isha Judge Ahluwalia, Chairperson, Indian Council for Research on International Economic Relations, Spouse of Singapore Forum Advisory Board Member, India) from New Delhi . I can’t resist after hearing you on public private cooperation asking you about your wisdom on the role of public-private partnerships, particularly, in financing infrastructure. Some years ago, in India we saw this as a major institutional innovation but right now we are going through a phase where we feel that it's not really working. We need a dispute resolution mechanism and there are all kinds of problems. I'd like to know for governments which don't have financing to put in place the infrastructure that they need, is there a role for public-private partnership and how can we ensure that private sector puts in finances to bridge this gap?

DPM: It's a very good question. The short answers is that the private sector’s participation in public infrastructure is still a big opportunity, and is going to be necessary. It's going to be necessary because public finances around the region are in finite supply but the demand for infrastructure is great.

There is a lot of private money waiting on the sidelines. Insurance funds, pension funds, a lot of long-term money that's waiting on the sidelines. And there is a lot of demand for new infrastructural projects, so we have to find a way of matching that money waiting on the sidelines with the demand. The public sector itself cannot finance that demand. Our task is to have predictable regulatory frameworks fair to the consumer, not just fair to the private sector provider, but they’ve got to be predictable for the private sector provider. The problem in the past has often been about too much unpredictability. So when problems arise, as they will from time to time, there's a loss of confidence that comes about because of a messy dispute resolution system. Building standard clauses into contracts upfront, standard clauses on dispute resolution in particular, is critical.

Second opportunity is this. The banks are flush with funds for now. There is still no lack of banks who are willing to put money into infrastructure finance, assuming these are bankable projects. But we really have to think ahead. It will be a matter of years before the banks themselves are not going to be major sources of finance for infrastructure, and we need the capital markets.

The capital markets therefore need to be developed in Asia, to be able to sustain infrastructural funding. The banks typically go in during the construction stage or what's called the greenfield stage, because the capital markets usually don't get involved at that stage. But beyond the greenfield stage, there's ample scope for capital markets to be involved, through infrastructure bonds and the like, so that long term investors like pension funds and insurers can come in and take over the role of banks beyond the construction stage. This again requires predictable regulation and very clear clauses and provisions in the loan documents and the contract documents upfront, to enable this handover from banks to the capital markets. Especially when there are individuals at the other end of the capital markets, such as investors in mutual funds somewhere in the world. They cannot deal with uncertainty, much less so than banks can. So we need very clear regulation, dispute resolution clauses and all the clauses that matter when problems arise. That has to be set out upfront. Fortunately, this is not rocket science. There are good examples already. We can borrow from those examples and standardise the documentation. This is something which we are now developing. The AIIB and the others are I am sure going to be quite active in ensuring that we have got this ability to spur private finance. Spur private finance in a major way so as to complement public finance.

Question: I am Wan Saiful Wan Jan (Chief Executive, Institute for Democracy and Economic Affairs (IDEAS), Malaysia). I want to follow up on some of the answers that you give to the previous questions. And I want to ask two very specific and quite narrowly-focused questions, if you don’t mind. Firstly, how did you reconcile your enthusiasm and the answers you have given on market economy with the government’s role and even ownership of businesses in Singapore and maybe even in this region? Secondly, what is Singapore’s position at the moment with regards to the Trans-Pacific Partnership when negotiation? What is Singapore’s position on the state-owned enterprise chapter?

DPM: The two questions are related and important ones. In general, state-owned enterprise hasn’t had a very good record internationally. Whether about the United Kingdom and France, or when you talk about many Asian countries, it hasn’t had a very good record. And the main reason it hasn’t had a good record is because there is favourable finance that is being provided. When favourable finance is provided almost on a permanent basis, the incumbents, the people who run the organizations, tend to assume that the organizations are there basically for political reasons and their jobs are secure.

There is nothing inherently wrong with state enterprise if they don’t follow those practices. In other words, if we subject state enterprises to the competition of the marketplace in every sense, there is nothing inherently wrong with state enterprise. The reason why state enterprises in Singapore are by and large profitable, are competitive internationally, and by the way as a norm, tend to have significant private shareholding including foreign shareholding, is because they are subject to the marketplace. There is no favour that is given to them. The relationship he Ministry of Finance (MOF) has with Temasek, for instance, which is a 100% owned by MOF, is purely that of a shareholder who is able under the rules to tap on the investment income Temasek earns for the purpose of our Budget. We never get involved, not at all, in their business decisions, their choice of investments, the way they manage their enterprises. And likewise within Temasek, between the holding company and the subsidiary companies, there is a relationship that ensures the subsidiary companies are subject to the marketplace.

So it is a very important issue of governance. As shareholder, we want returns and we want returns for the long term so that we can spend on our Budget. For us to get these returns on a sustainable basis, we’ve got to preserve the independence of state-owned enterprises and subject them to competition in a market economy.

Question: I am Ronaldo Llamas, Political Advisor to the President, Philippines. Singapore is a great model for synergy between sustained growth and equity and social protection. And to a great extent, it should have a competitive edge in the global economy but in significant parts of the Asian region, equity is more a deficit. Based on your experience, not providing a formula but what are the tips and lessons for the region where in we don’t only pump prime growth and permutation but we pump prime equity or else it will create some social and political net buys which may explode sooner or later. Thank you.

DPM: It is a very complex field how we achieve growth with equity and I’m not going to pretend to give you a comprehensive answer. I have highlighted two features of our experience, which may be of some relevance to others. One was the criticality of home-ownership. Your standard of living is not just your wages, it is also your assets and the sense of security that comes from owning a home. That has been a critical part of Singapore’s strategies from early on. The fact that the working class, the ordinary man and woman, were able to own their homes. The fact that, till today, if you look at bottom 20% of households by income, over 80% of them own their homes. It’s a very important part of Singapore’s social and economic story. Once you own a home, it gives you pride, it also means you’re likely to stay employed because you want make sure you can service the mortgage on your home. You don’t want to lose the home. It also means that if the economy does well over time, they know the value of their home goes up as well. And that makes the population interested in economic prosperity, because it is broad prosperity. That too is an advantage.

The second point I’ll make without elaborating has to do with the criticality of education that is aimed at the majority. Not just the most talented, not just those who would go to the private schools in some countries, which was the question earlier, but an education that is aimed at raising the averages, and everyone. That is really critical.

Moderator: We have time for probably only one more question. Is there anyone who has a question?

DPM: Lest anyone thinks that Singapore has all these wonderful lessons for everyone else, let me just repeat that very little was actually invented in Singapore. Almost everything we did was done by first going out to the rest of the world, trying to spot lessons that we could get from them. Someone who has already done an innovation, whether it is social, economic or technological. Then see how we can apply it in Singapore. That’s the SOP, the standard operating procedure, in every agency, every single public agency. It came partly because we are a small country, a small young country. So by force of circumstance, we’ve had to look outward. But this mindset of not thinking you’ve already got it in your own head, and you’ve already worked out the best ways, Of looking out for the best lessons internationally and trying to see how we can import them into our own societies, is a very useful mindset. Singapore was not the source of wisdom. We merely borrowed, adapted and tried to do things a little better.

Moderator: DPM, I think for all of us who have ever been involved in anything that Singapore government has done, we can certainly testify that there are so many study missions abroad to study every issue to death before we do anything. So it is absolutely true that we really study whatever is out there and then I guess we try to take different pieces and try to create something that is uniquely Singaporean. I think we have come to the end of today’s session. DPM is the last of three key-note speakers. You has so to speak the last word and if I may, to me the last word you have said, which you said several times is my main takeaway are your words that nothing is pre-ordained and I think that is a very timely reminder for all of us here today because we wouldn’t be here if we did not believe in the Asian century that President Yudhoyono spoke about that we wouldn’t be in here if we were not essentially optimists but it is also too easy to be caught by ubers, complacency and to believe that this Asian Century is going to come about. I think you have given us some very timely reminders and of the specific issues of how nothing is preordained and how we need a lot of hardwork, attention to detail and attention to all the potential social fractures that are out there in order to achieve the Asian Century. So could I ask all of you to on behalf of all of us, could I thank you then for your time.