Spend a vision with me: April 2020

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.

Spend a vision with me

Sunday 19 April 2020

PostCovid: A new world, or the old world gone worse?