Opening Remarks by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance, at the Singapore Forum 201511 Apr 2015
Distinguished guests and friends,
1. I thought in my opening remarks I will focus on the challenges that are common to all of us, not just in Asia but internationally. Everywhere in the world there is a real challenge of first, sustaining broad prosperity – not just economic growth but a breadth of benefits in our societies. Sustaining broad prosperity, a steady and broad-based growth in living standards, that is the first challenge. It is a challenge in the advanced economies, the developing economies, and those in between as well.
2. The second challenge that we all have is that of keeping our societies together. It’s about cohesion and keeping a forward-looking spirit amongst all members of our society. And that is a challenge which requires continuous work. It is work that is never fully done, and each time we think we’ve achieved a new social compact, a new basis for social cohesion, new challenges come up either in the rest of the world or domestically.
3. So these are two central challenges we all face, which all political systems face. And all political systems ultimately derive their legitimacy from how they handle these two challenges: sustaining broad prosperity and keeping people together, keeping a forward-looking spirit.
4. On the first issue – how we can achieve broad-based prosperity. If you read the newspaper headlines or magazine articles, the mood is despondent. Christine Lagarde (Managing Director of the IMF) mentioned a few days ago that we face the prospect of the new mediocre becoming the new normal: mediocre growth globally, and in the advanced economies especially, becoming normal. That’s a very real prospect, to be frank. The advanced economies are now in a new phase. They have not broken out of the rut of a loss in confidence, high unemployment, low investment and very little of this forward-looking spirit.
5. Asia and the countries in the region have a bit more of a tailwind behind us. Some things are going for us; young populations, the scope for urbanisation, a rapidly emerging middle-class, and the advantages we can get out of regional cooperation. So some things are going for us.
6. But I think it is important to remind ourselves that nothing is preordained. Growth is not preordained; Asia’s ascendance is not preordained; our catch-up with the advanced countries is not preordained. And indeed, the whole history of the 60 years following the War has not been one of remarkable catch-up on the part of developing countries with the most advanced. There was a phase in which Europe and Japan caught up with the United States or came close to American levels of income and productivity. A few smaller Asian economies then moved up quite quickly and are now what you might call upper-middle-income countries – for example South Korea, Taiwan, Singapore. But there have been few other examples of convergence with the advanced countries.
7. The economists thought that convergence would happen almost automatically and logically over a long period of time, but it has not happened in most places. China is one the few recent exceptions, which I will come to later. In Latin America, the level of productivity today compared to the United States is the same as what it was in 1960. And the same is true for much of the developing world. There are some successes; in our part of the world, for instance, Malaysia has moved up. But still I would say we are underperforming our potential in the region. There is potential to catch up, to converge, which has to be a story of skills, technological progress, strong institutions, or the mechanisms of advancing market capitalism for the benefit of our citizens. We are underperforming our potential.
8. So, we have things that are going for us. And there is a tailwind. But nothing is preordained and serious reforms are necessary in every economy, in every society, and regionally, if we are to achieve our full potential.
9. The fact that the advanced economies are in a slow growth mode, or almost no growth mode, might lead some people to think: “Well look, the frontier isn’t moving very fast, it’s easier to catch up with the frontier because the chaps in front are not moving ahead.” In fact, the situation is the reverse. It’s counterintuitive. When the chaps in front are not moving ahead, life gets more difficult for everyone. Paradoxically, life gets more difficult for everyone because the leading countries become more inward-looking. There’s a certain amount of domestic paralysis that comes to decision-making on both domestic and international issues, international trade initiatives get stymied, and the spirit of international cooperation gets weakened. So when the countries that are close to the frontier are in trouble, everyone finds it more difficult. There’s a real challenge, and it means even more serious reform in each and every of our societies.
10. I want to highlight two areas which require more fundamental thinking on everyone’s part. The first may sound like a truism, but unfortunately is not accepted as true by everyone. And that is, an outward orientation in economic strategies is still far superior to an inward orientation.
11. It was a big debate in the 50s and 60s. We thought it was settled because of the markedly superior performance coming out of an outward orientation. But the tendency to look inward is always there. The tendency to think: “Why don’t I substitute for imports through my own domestic production?” There is always that tendency.
12. The mantra of the international organizations does not help. The new mantra is that of moving away from export oriented growth towards domestic demand. This mantra is, I think, over-stated amongst international organisations and some prominent economists. On the face of it, there is some sense in it because the world economy is growing more slowly, and domestic demand in Asia is growing because of the emerging middle class. But that is a demand perspective. And what leads to growth at the end of the day is not demand but supply: skills, entrepreneurial capability, technological progress, productivity. That’s what leads to improvements in living standards. It is what happens on the supply side, not demand side.
13. So, yes, there is domestic demand in Asia that is growing faster than the rest of the world. But the question is whether our production, both in goods and services, should be aimed at the domestic market, aimed at substituting for imports through domestic production, or do we aim at the global market and open up our own markets to external competition. You can reduce your current account imbalances either by reducing exports, or by keeping exports healthy and vibrant and at the same time growing your imports and opening up your markets to competition. The two look the same when you look at current account balances, which are greatly focused on at the G20 and other international discussions. But they are very different when we look at the acquisition of skills; technological progress; entrepreneurship.
14. So focus on the supply side. When you focus on the supply side, it is uncontested that looking outward and competing in global markets, and subjecting our own markets to competition, is a superior strategy for all of us.
15. The second reason why it is important to look outward and not inward has to do with political economy. The strategy of producing for domestic markets and protecting yourself quietly or loudly from imports is also a strategy which is prone to, what the economists call, ‘rent-seeking’ and regulatory capture.
16. Domestic lobbies aimed at getting benefits for themselves, and vested interests, usually incumbents in most economies, those who are already in a position of advantage, tend to manipulate the system better than others – better than start-ups, better than new players. So the political economy of import substitution or of any inward-looking strategy is one that is prone to supporting existing elite, and with scope for various forms of abuse. That’s another important reason why we have to stay outwardly focused, stay market-oriented.
17. So that is one theme, the need to stay outward oriented, that I wanted to highlight. We need to keep reminding ourselves of it.
18. The second theme has to do with us thinking fundamentally about skills and capabilities. Asia has a demographic dividend, as we often put it, outside of China. China is a society that is getting older, but emerging Asia outside of China has a demographic dividend of young populations. That is potentially a huge advantage. However, it is not a given that it is going to be a dividend, as opposed to distress. It may well be demographic distress.
19. A very large proportion of emerging Asia’s population is now below the age of 20, about one-third, whether we look at India or Indonesia or South-east Asia at large. About one-third that is below the age of 20, and they will soon be in the workforce. And as it stands now, a very large proportion of our young people are not prepared for the work of the future. It is only a demographic dividend if people are well-prepared and confident for the work of the future.
20. Two reforms are worth serious thought. One, across Asia, education tends to be too academically focused at every level, including at the universities. You need a solid academic base in every society. But this academic model of education has been extended across society, with the result that you have a large number of graduates in China and India today who have difficulty getting employment until they go for re-training. It is true in most societies, even in Korea and Taiwan, a significant proportion of graduates who find themselves redundant and frustrated. The same is true in the United States, United Kingdom and Europe. Over-academisation of education.
21. The second problem is the front-loading of education, in the first 18 years of life, or perhaps first 22 years of life. That combination of an overly academic education and front-loading it to that first phase of life doesn’t prepare people well for the future. No one knows what the future will be and what skills will really be needed. It is impossible to prepare for the future in those early years of life.
22. If you take a kid who is now 10 years old, someone who is in primary school as we call it. By the time he or she graduates from a tertiary education, computers would be, the experts say, about 100 times cheaper and, very importantly, 100 times smarter. It is going to transform the world of work, in almost every area. What we now know of as areas where you have good middle class jobs would be areas where you have highly intelligent machines. We want to make sure that our people are there, benefitting from the machines and still being masters of machines, not servants. How do we achieve it – in manufacturing, in logistics, in services, call centres, in every area – that’s a real challenge.
23. It means moving away from a model where we think that we can prepare people in the first 18 years, 22 years for a lifetime of work and confidence in themselves, towards one of continuous development through life. Continuous development, lifelong learning, has to be the way to go. Learning that is integrated with the real world, integrated with developments in technology, integrated with opportunities that arise, has to be the way to go.
24. That is the first challenge I wanted to talk about – how we can achieve broad prosperity for the future.
25. The second challenge is that of keeping our societies together, at that time of globalisation of sectarian conflict. A new phase, the globalisation of sectarian conflict, is now with us and will be with us for a long time to come. It means thinking very hard about how we preserve societies that are cohesive; where people have pride in their own cultures, religions and values, but have a very strong sense of common identity. How do we achieve it? How do we achieve a spirit where everyone feels that they are advancing together and that they are first and foremost members of the same society? That is a challenge that we all face, including in the advanced countries. Don’t forget that about one quarter of the foreigners who joined ISIS come from the United States, Europe and Australia.
26. Every society faces this challenge. The whole experiment in of multiculturalism in Europe has by their own admission failed. As Merkel put it very bluntly a few years ago, it has failed. What was thought of as a neat, liberal model of multiculturalism has failed.
27. Each society is different in its composition and in our histories, but we all have to do fundamental thinking. How do we hold people together? How do we give them the pride of their own beliefs, cultures, but maximise common space in our societies and develop a common identity for the future. It is critical to all of us. Critical from every dimension – economic, social, moral, political – that sense of common identity. So when we talk about smart cities, urbanisation and the quality of life, it is not just about the technology, not just about the economic opportunities. It is about integration. It is about opportunities. It is about shared futures. We have to place that foremost in our minds.
28. Thank you for listening to my opening remarks.