Most countries reaction to Covid19, whether you call it
stay-in-place, work-from -home, lockdown, circuit-breaker has made the large
majority of us, especially in cities, go back home. And some of us are lucky
enough to continue work from home. This is also a time where many things will
change, but also a time when we can think about what the virus has done to the
lifestyle we were swept and caught in, whether we can go back to the past normal,
whether indeed we could.
A recent article highlighted by my friend Shih Shen (1)
paints an interesting picture of what the author thinks the world will be like
postCovid, specially for Singapore. You can find the full article here (2).
Just like, in my view, governments have a large role to play in lessening the
socio-economic pain from Covid19 (3), governments have a large say in what the
new normal will look like. And since I am writing this blog rather than just
recommending the article, you can guess I disagree with some conclusions and
advice given.
But first, let me quickly summarise the article.
First the impact of Covid19
- The resurrection of Industrial policy to counter China’s
statist practices will mean it will be harder for Singapore to attract foreign
investment
- Corporate risk reduction and national security will mean more
production will take place at home rather than overseas – plus could be a
condition of loan bailouts.
- Singapore should review the policy of cumulative budget
surpluses, which
- decrease local consumption (basically
the government is saving rather than spending),
- act as an inter-generational transfer
mechanism from poorer to richer (saving in the past presumably to spend in the
future and future is richer than the past since economy grows constantly)
- act as a transfer from tax paying
Singaporeans to foreigners (via businesses who employ foreigners benefiting
from government loans/subsidies)
- Singapore government (and others) do not need to accumulate
surpluses and reserves because they can easily borrow, including from their own
central banks, at historically low interest rates
- Countries like Singapore that require the government to
balance their budget over the elected period (5 years) place unnecessary
constraints on the government, plus
- Put pressure on the local currency to
strengthen thus undermining local competitiveness or
- Force intervention to manage exchange
rate, which may lead to accusations of mercantilism
- Globalisation will decline, so countries like Singapore who
depend on it will suffer most
- Travel restrictions will hit tourism
and ability of foreigners to work in Singapore
- Hence Singapore should decrease
reliance on foreign workers who would be impacted by travel bans anyway
- Protectionism will impact supply
chains for essentials including rice
- MNCs will de-globalise
- “footloose” functions such as
Research, finance, training will return to home country
- Supply chains will be diversified to
reduce dependency on single/few sources
- They will become “multi-domestic”
locating in self-sufficient markets
- Singapore lacks the scale, and even
large Singapore-based MNCs will suffer as countries beef-up their own domestic
industries
And hence, as a reaction:
I Singapore should have enhanced safety
nets, since now the government is giving due credit to low-wage service workers
in public-interfacing roles who ensure society runs such as cleaners, this will
be hard to roll-back. Hence Singapore residents should have universal
entitlements rather than the current bureaucratic process
II With technology, Singaporeans should
take up the above roles played by foreign workers with the help of technology
and the (un-explained, unless this refers to issues with travelling) rise in
the cost of low-wage foreign workers, and the government should make it worth
it for these Singaporeans
III Government should to direct transfers
to people rather than to businesses, especially since these may benefit foreign
shareholders and other countries given the import-intensity of these companies.
The article is elegantly written, I have re-worded it in my
summary to strip the article of some of the applied make-up, so we can see what
the author is really getting at.
I also have friends, including some in politics who are
arguing that their country should become self-sufficient, especially in staples
and basic necessities (the debate is still on whether everyone would need to
grow tapioca in order to make the essential bubble teas (4))
Trying to be self-sufficient will cost you
What I would like to point out, in cases where people are
going all isolationist/protectionist is very simple. If it was more profitable
for you to devote resources to manufacturing something at home rather than
importing it, chances are you would already be doing it. That’s one of the
basic building blocks of International Trade, comparative advantage – you focus
on things you are relatively better at, I do the same, and we trade.
If it was cheaper for Singapore to grow tapioca, make it into
flour, and make the balls for the bubble tea, especially given the craze for
bubble tea, it would have happened. Not forgetting the tea itself, that prefers
high ground and cool air to thrive, something a bit hard to achieve on the
equator with a highest point of 164 metres (5).
Therefore, it may be a better idea to stock up tapioca flour
instead. During good times, around 2 to 3 months supply of essential goods or
ingredients such as tapioca flour can be kept in reserve, and this stock
rotated so as to keep it fresh.
Every country has limited resources, hence allocating them is
essential. Ideally, your resources are already best allocated, in crisis, then
they can be reallocated (6). Sure you can’t train a doctor, or an
epidemiologist in a short time, but for many other services, people can be
redeployed, using skills the already are equipped with.
Let me first start addressing the impacts that the author
discussed (summarised above)
1 Industrial Policy – are you ready for higher prices?
Industrial Policy to some is protectionism to others. An
economy protects a portion of its economy from competition in the hope that it
will be self sufficient. The question is whether industrial policy will affect
investment overseas.
Of course, having access to a protected market allows you to
charge higher prices and make as much profit as you would if you were producing
from lower cost/more efficient countries. But this also means that customers
would have to pay more than they did before.
Yes, there may be more employment, but the cost would be
higher prices.
2 Corporate Risk Reduction – all eggs in an expensive basket
is not risk reduction
The idea is that more production will take place in the home
country, and this would mean less investments overseas including Singapore.
While companies may have to commit to move some production “back home” as part
of their ‘bail-out’ by their home governments, this is not a risk reduction
strategy. On the contrary, this is putting too many eggs in a basket. Chances
are companies would do the minimum required by the ‘bail-out’ and argue that
for the sake of their customers they will do some stuff overseas, else, as
above, customers would pay higher prices.
3 Impact of continued budget surpluses
3.1 Decrease local consumption – sacrificing food today for
food in tougher times is not necessarily bad
Sure, if the government chooses to save, then yes, it is
consuming less. But just as humans, governments save for rainy days.
3.2 Intergenerational transfer mechanism – so what?
Again, yes; if governments save and only spend much later,
then you may be doing an inter-generational transfer. And the assumption that
you are depriving poorer people to benefit richer ones assumes that people will
get continuously richer over time.
I do understand that this is a current train of thought. NTUC
Income, the insurer, is running campaigns to break the inter-generational
dependency (7). I personally think there is no right or wrong answer, as long
as people agree. Some parents like to leave inheritance, some children feel
responsible for returning the favour to parents who took care of them when they
were young and pure burdens (economically).
Singapore policies around this have been quite interesting.
On one hand, the move from a Pay-as-you-go system of retirement where the money
you save today goes to feed the old today and you will be fed by tomorrow’s
youth, to a fully funded system where your savings will be feeding you (for a
nice article please refer to (8) by Prof Hoon, a very good economist) thereby
decreasing inter-generational link; and on the other benefits of living near
parents (9).
Basically I do not see anything fundamentally wrong, or at
least it is better to give savings to the next generation than to saddle them
with our debts (10)
3.3 Transfer from Singaporeans to foreigners – xenophobia
much?
I really don’t get this argument, apart from saying it is
xenophobic. I will come back to these sentiments later.
4 Easy to borrow nowadays – for how long?
To me this is one of the most difficult pieces to swallow. In
my previous blog I illustrated the case of the 1973 oil shock, and how
economists who were only used to demand side issues were totally oblivious to,
unable or unwilling to see the supply shock, and thus recommended strategies
that made things worse.
This is in similar vein: since today interest rates are low,
I will assume they will stay low for ever and therefore we can borrow easily
for ever.
Secondly, this furthermore assumes that central banks have
reserves to lend, that exchange rates will not be too affected, and that the
crisis is local rather than global – if everyone wants to borrow funds,
interest rates will not stay low for ever, unless lenders abandon usual
practices.
5 Balancing the budget
5.1 Strengthening currency undermining competitiveness – It
is part of usual Singapore policy, thus adjusted
Singapore has a policy of strengthening the Singapore dollar,
and so far it has worked, forcing companies to search for more efficiency
thereby maintaining competitiveness. Only recently due to Covid19 has the
policy stance changed to neutral (11).
By being able to maintain a strong Singapore dollar, the MAS
allows itself room to manoeuvre. The key is that there is room to manoeuvre and
MAS, as shown, does take advantage when needed.
5.2 Mercantilism by intervening in exchange rate – usually
works if currencies are ‘undervalued’
As mentioned above, Singapore has a policy of slow steady
appreciation of the Singapore dollar. I think it is very hard to accuse
Singapore of mercantilism; this epithet has been thrown at China for
undervaluing the Yuan, thereby allowing it to run balance of payments
surpluses, but Singapore has the opposite policy, and this has not proven
harmful yet. But again, policies can be adjusted when the time comes.
6 The death of globalisation.
I am not a great fan of unchecked globalisation, you can read
Joseph Stiglitz’s book if you want to learn more (12); globalisation is not
perfect, there are isolationist winds, but whether everyone should or will
follow is an interesting question.
6.1 Tourism and ability of foreigners to work in Singapore will
be impacted – yes and no
For sure tourism will be hit; until recently Singapore hotels
were running staycation programmes targeting locals to make up for the lower
arrival of tourists (13), and all industries who depend on tourism spend will
suffer. But that is during the Covid19 restriction period; unless the author
expects travel for tourism to dry up and not come back once travel restrictions
are lifted. This is something that the industry has to think about, use the
learnings and plan accordingly, again removing risk from the business.
As for the ability of foreigners to work; foreigners in
Singapore on long term passes are still here, working – at least for those in
‘essential industries’. True, those here may be unable to leave for now, but
contracts and long term passes can be granted extensions as has already been
done. Whether this will deter people from working in foreign countries I am not
so sure. Therefore, to argue that this would affect Singapore in terms of
dependence on foreign workers is pushing things a bit far.
6.2 Protectionism will hit supply chains, including rice –
yes, but that’s not really new – red herring
Supply chains will be hit in case of any crisis, whether it
is war, pandemic… Indeed, there is greater risk with pandemics because people
are not allowed to leave home; unless special provision is made for specific
industries (Singapore does) supply chains will be affected.
The solution is something that countries, including
Singapore, have been doing for years, it is called stockpiling of
non-perishable essentials (14). It is possible that the size of national
stockpiles may increase, but that’s a manageable problem.
Also, Singapore and Malaysia have shown how countries can
work together to alleviate such issues with borders closed except for food
trucks and drivers being exempt from 14 day quarantine (but with strict
behavioural guidelines) for example (15).
6.3 Deglobalisation
6.3.1 Foot-loose functions will go back to home country – for
some yes, but is not a major problem
This is an interesting idea. If countries require MNCs to
bring a minimum percentage of production to home country, indeed it would make
sense to move fixed costs to the more expensive location so that it can be
charged back and spread over large volumes. That actually is not a bad solution
for most (except the trainers/finance people employed overseas), and customers
prices are not that badly affected (as compared to bringing actual production
back home and increasing the cost per product much more).
In any case, many MNCs have already moved their
administrative functions out of Singapore.
Research however may be a different beast altogether. There
are many reasons why research facilities locate overseas; the cost of manpower
is probably not really the largest concern (many research labs are staffed with
expatriates anyway), but the legislative framework (for example in some
countries it is much faster to test some pharmaceutical products – human trial
– than in others), and all support (4G networks in Yangon are among the fastest
in Asia for example) and infrastructure as well as the availability of a
community of researchers (external economies of scale) matter. So the impact on
research is debatable.
6.3.2 Supply chains will become more diversified – yes, so
what?
It is a given that supply chains will be diversified, this is
a normal part of reducing the risks. What does this imply for Singapore? If you
imagine that the total number of computer chips bought worldwide is not
changing, then this diversification will mean a reshuffling among existing
providers; some will win, others will lose, but chances are the impact will not
be huge unless, say Singapore has been a high cost source and most companies
diversify away from Singapore.
This is possible, but this is just part of the normal cycle
of business. Recently I was doing some work for a distributor, and looking at
pricing. The key is that despite competition, this more expensive option was
doing well still. The key is to know the tipping point at which customers would
diversify away; there is a premium that customers are willing to pay for
quality and other facilities such as financing. But is competition gets
cheaper, then the company will have a decision to make. It’s just part of
business.
6.3.3 Multi-domestic – may be, but cake and eat it: isn’t
this a contradiction to the flight to home country?
This is an interesting argument. It argues that MNCs will
evolve into a loosely grouped combination of relatively independent
organisations devoted to their own ‘local’ markets. Therefore, economies like
Singapore that are too small domestically may see an exodus of companies, may
be moving to Indonesia or Malaysia to serve their local markets instead.
I find this argument odd, in the sense that rather than
taking advantage of cost differences and producing products wherever most
profitable, they would localise, presumably sharing technology and possibly
management practices. This will surely increase the prices/squeeze profits. Also
we must remember that for example Mr Trump had a say as to where masks produced
by 3M across the world went to (17).
Furthermore, unless regional trade agreements also disappear,
such as the ASEAN FTA, and collaboration among countries goes away, there is
little need to change how some MNCs are addressing the ASEAN market.
And as a last point, flight to home country is not new.
During the financial crisis, it is public knowledge that funds in ASEAN simply
dried up as financial institutions decided to lend in riskier home country
rather than their hosts; not driven by profit, but by national concerns (18).
Summary of impacts
I think that the author is a little bit alarmist and takes a ‘nationalistic’
view of things. There is nothing wrong in that; it may come to pass. There is a
strong wave of nationalism in the world as shown by the election of leaders
such as Trump, Modi, Morrison, the rise of people like Salvini.. (19) But for
reasons I have discussed above, I am not in agreement. These impacts can happen
if we assume the worst in people, but evidence points to not everybody being in
agreement.
How about the reactions?
I Enhancing Safety Nets because hard to roll-back – correct
answer, wrong reason
The argument is that the measures deployed by the government
to help the “low-wage service workers in public-interfacing roles” will be hard
to roll-back. Let me split this argument into 2 pieces. First is the call for
enhanced safety nets, second is the reasoning for that call: current policies
being hard to roll back.
It is not hard to roll back, at all. The Singapore government
has made it clear that these measures are a reaction to the crisis, have made a
great show of how this is the time to plunge into reserves (20) (meaning this
is an exceptional circumstance, even saying this is not just a rainy day, but a
storm (21)).
However, certainly we should relook at the value that people
deliver. I was at a hawker centre the day before the ‘circuit breaker’ hit, and
heard a member of the management of the cleaners telling the cleaning auntie
that she shouldn’t come to work the next day because there will be no work.
That is reality. Does this auntie deserve help? Yes. Can she get it? A little
easier than before. But what, to me, is the problem is the ease at which she
was let go. In my previous blog I stressed how government should help mollify
the impact of Covid19 by giving cash directly to people, subsidising wages. But
in this case, the auntie would get nothing. I think that every company who
releases people should be tracked (it is easy not difficult to d in Singapore,
just makes the grey economy a whiter shade of pale (22)). The aim of government
policies should be to keep people in employment in these uncertain times. So
yes, a better safety net is needed. There could even be an argument for a
minimum wage.
II Singaporeans to replace foreign workers (due to their
increasing costs) – Xenophobia much Donald? Costly
This argument is a really weird one. First, what increasing
costs of foreign labour? Does the author mean the increasing levies imposed by
the government, the money going to the government, and distributed back to
people? Or does the author mean foreign workers are getting better paid as
costs of living rise, and that should not happen?
The Singapore government has been promoting automation, the
use of technology to increase labour efficiency thereby decreasing the use of
labour. But still, not many Singaporeans take up these jobs; and if they did,
as the author rightfully says, they would need to make it worth it for the
Singaporeans. This simply means increase in costs, and thus prices. A recent
post calculated that labour costs make up around 28% of the cost of a pizza
(23). So you will feel any increase in labour costs.
III government should give transfers directly to employees
especially because foreigners would benefit – Xeno.
Again, there are 2 parts, the recommendation – to give help
directly to employees rather than businesses – and the reason – because the
money will go to foreigners.
In my previous blog I argued for the same action, but my
reason was that businesses may not pass on the benefits to the workers. So I
agree with the reaction.
But the reason given by the author is that some of the funds
would go to foreigners, a leakage from the economy, to me, simply displays intentions
Mr Trump would be proud of. Again, nothing wrong, but the question is whether
this is the kind of thinking we should be having.
Summary of reactions:
These are decent policy recommendations, but the reasoning,
to me, is wrong, displays extreme nationalistic approach. Singapore depends on
the rest of the world, becoming extreme nationalistic would be disastrous.
Fortunately, the government – not infallible – has been taking a decent
approach – rehousing foreign workers for example (albeit late) and taking care
of them (24).
Easy to criticise, so what do I believe should happen?
Well, this is the blog I was writing before I cam across this
academic article; the article is, to me, an illustration of how some people
will think; and as you can gather from this blog, it’s not something I think we
should do. Hopefully my next blog will show some of the things we should.
- https://www.linkedin.com/posts/shih-shen-wong%E9%BB%84%E4%BF%8A%E7%87%8A-mba-itil-98608216_covid-19s-implications-for-singapores-future-activity-6655374126724800512-11SR
- https://www.academia.sg/academic-views/covid-19s-implications-for-singapores-future-economy/?fbclid=IwAR0c2nQ28Ffm71T0eRCUb75mGv2pen3X6ArTmMvhyRl8iNNZF-F7WzxqqqI
- http://thegatesofbabylon.blogspot.com/2020/03/quoth-kassandra-nevermore.html
- http://theindependent.sg/controversy-over-bubble-tea-shop-remaining-open-during-circuit-breaker/
- https://en.wikipedia.org/wiki/Bukit_Timah_Hill
- https://www.straitstimes.com/singapore/manpower/sia-cabin-crew-redeployed-to-care-for-hospital-patients
- https://www.income.com.sg/lastsandwichgeneration
- https://www.straitstimes.com/opinion/why-cpf-style-systems-generally-work-better
- https://www.hdb.gov.sg/cs/infoweb/residential/buying-a-flat/resale/living-with-near-parents-or-married-child
- https://www.youtube.com/watch?v=xVlRompc1yE
- https://www.straitstimes.com/business/economy/mas-sets-zero-appreciation-path-for-singdollar-with-switch-to-neutral-policy-stance
- https://singapore.kinokuniya.com/bw/9780141986661
- https://sha.org.sg/staycation-deals
- https://www.straitstimes.com/singapore/spore-has-contingency-plans-for-supply-disruption-from-malaysia-sufficient-stockpile-if
- https://www.straitstimes.com/singapore/most-supplies-from-malaysia-delivered-as-usual-chan
- https://www.investopedia.com/terms/e/externaleconomiesofscale.asp
- https://www.nytimes.com/2020/04/03/us/politics/coronavirus-trump-3m-masks.html
- https://www.bis.org/publ/work356.pdf
- https://2020thegatesofbabylon.blogspot.com/2019/12/those-who-rule-data-will-rule-world.html
- https://www.straitstimes.com/politics/president-halimah-yacob-gives-in-principle-support-to-draw-on-past-reserves-for-second
- https://www.businesstimes.com.sg/government-economy/singapore-budget-2020/taking-singapore-through-uncertain-storms
- https://www.youtube.com/watch?v=Mb3iPP-tHdA
- https://www.instagram.com/p/B_BfKX8nEXg/
- https://www.straitstimes.com/singapore/spore-to-take-care-of-foreign-workers
