Today, as we contemplate life after 60, we can still be confident of our domestic strengths. In addition, our regional hinterland while having its share of problems is still better off than competing regions. However, the global environment has taken a nasty turn for the worse. The damage from the recent dislocations will take a while before it is seen in the data but we should not be complacent in thinking that the world will somehow absorb these shocks without much damage.
It cannot be business as usual for Singapore. In 1965, we took on a dangerous world by casting aside old policy models and finding ways to re-invent ourselves. We must find the gumption and sense of daring to do so again.
The world is now a much more hostile place for small countries like Singapore
Singapore is in a totally new era. The old familiar safeguards and engines of growth will not help us as much as before. The world had already become vulnerable after the steady accretion of geo-political tensions, domestic social problems, financial imbalances and economic headwinds in the past decade. Now that the new American administration has cast doubts on its security alliances, made military threats against its neighbours and launched trade wars against friend and foe alike, those vulnerabilities could turn into outright crises.
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Indeed, the ground has shifted under our feet. What made Singapore’s extraordinary progress possible is now in danger:
The rules-based international order that gave weaker nations a modicum of protection has been undermined. International agreements and agreed norms of conduct as well as the security alliances that helped to keep the peace have also been shaken to the very foundations.
The globalisation that underpinned Singapore’s role as a manufacturing and commercial centre is faltering as protectionist policies spread and backlashes grow against immigration and liberalised capital flows.
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Facing challenges on all fronts
The consequences are very serious.
First, more frequent political troubles are likely to occur, globally as well as in our neighbourhood. After all, Southeast and East Asia will be the main arena for contestation between China and the US. Even if outright military conflicts can be avoided, there will be big power pressures to take sides as well as tactics such as cyber-security attacks, influence operations that sow confusion and disunity within communities and other forms of intimidation. Big power interventions in crisis countries such as Myanmar cannot be ruled out either.
Second, as protective mechanisms for small nations weaken, small countries will become more insecure. We are in a world where agreements are no longer honoured. Understandings on working together for mutual benefit are less appreciated. Just in recent weeks, we have seen the US impose tariffs on Singapore despite the free trade agreement we have with it. The US has also pressed countries into trade deals that offer the US concessions that are not available to other countries. That violates a key principle of the global trading regime, that of the Most Favoured Nation status — the idea that concessions made to one country would be available to all others unless those concessions were part of a free trade agreement. The World Trade Organisation is no longer effective as a guardian of global trade governance and the security alliances that provided deterrence for small nations are also no longer reliable.
Third, the economic damage from the trade wars and other changes brought in by the Trump administration is only just beginning to be evident. The sharp fall in job creation in the US in the past three months reflects how American firms are reducing hiring as they worry about how Trump’s massive tariff increases will hurt them. Worse still, as their inventories of imported goods brought in before the tariff increases took effect are depleted, these firms will have to either raise prices to consumers or take a cut in their profit margins. In most cases, the US will not be able to replace imports with domestic production any time soon. So, most exporters to the US are in a position to shift the cost of the tariffs onto Americans. In short, US economic growth will slow but inflation will perk up.
That will put the Federal Reserve in a dilemma on monetary policy: cutting rates could fuel more inflation while not cutting rates will hurt economic growth. With the Fed likely to act cautiously, political pressures on the Fed will intensify. Concerns about the independence of the central bank will reinforce worries about the fundamentals of the US dollar which rose following the passage of the American budget a few weeks ago — a budget which guarantees an unsustainable fiscal trajectory in coming years.
Additional headwinds will come from the harsh crackdown on illegal immigration which has cut net inward flows of foreign labour into the US to its lowest level in decades, Several sectors such as construction, farming and retail which rely heavily on foreign workers will suffer.
Countries outside the US will also face challenges. With so many aspects of the trade deals with the US unsettled, businesses will defer capital spending and hiring. One critical factor that remains unclear is how much difference there will be between tariffs on China versus tariffs on exports from Southeast Asia. If China faces significantly higher tariffs, production could be relocated to our region. But if the differential is small, Chinese exporters will raise their productivity and cut costs and so remain competitive relative to our region. Our guess is that when the dust settles, geo-political differences between the US and China will result in China suffering much higher tariffs — but right now, we simply cannot be sure.
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In the meantime, exports from China and elsewhere will be diverted from the US market to other markets, probably at lower prices: the resulting flood of imports will raise trade tensions and hurt domestic producers. Local producers will also be forced to cut costs, adding deflationary forces to their economies.
In the long term, there will be other constraints on global economic growth. A world economy distorted by tariffs and other forms of protectionism will be much less efficient, with higher costs and less dynamism. Capital will be re-allocated from the most efficient companies to those who enjoy tariff protectionism and those who are adept at lobbying the political elite for tariffs and other favours. Separately, defence spending will continue to rise significantly as well, diverting funding away from productive purposes.
Are there silver linings?
Overall, the world economy will probably suffer weaker growth in both the near term as well as over the longer term. However, within this, there will still be areas which a small and nimble economy like Singapore’s can exploit.
First, even the trade wars and other policy shocks will not stop the march of technology. In the US, excitement over artificial intelligence has sparked off a gigantic capital investment boom. Maybe some of this will be wasteful but there will be a lot of innovations and new products and services that will be created, and that will boost productivity and consumer choice. In China, too, the massive investment in R&D, seeding high-tech companies and in developing research scientists in so many fields will produce great innovations — as we can see from China’s success in electric vehicles, renewable energy, robotics, drones, AI and more recently in bio-pharmaceuticals.
Second, if our assumption that tariffs on Southeast Asia will be less than those on China, we should see continuing foreign direct investment into the region. As the regional business hub, Singapore will benefit from the resulting increase in the region’s trading, financing and other business needs.
Third, oil prices could fall further if oil producers continue raising production. Over the weekend, the major oil exporting nations agreed to raise oil production by 547,000 barrels per day in September, the most recent of several hikes since April. More increases are likely to be announced in September. So, even if the US imposes sanctions on Russian oil as many fear, supplies of oil will probably grow sufficiently to more than offset that effect. Lower energy costs would support economic activity while reducing inflationary risks, and so allowing central banks in Asia to continue cutting rates.
Fourth, protectionism has so far focused on goods trade while services trade continues to grow. Singapore can continue to leverage off the edge it has in a range of high-value services such as finance.
What needs to be done?
These silver linings do not alter the basic story — the world is a darker and more dangerous place. And engines of growth that we relied on are fewer and less potent.
When global conditions were more favourable, it was right to make a bet on globalisation, free trade, multinational companies and free market economics. When the times were good, it did not matter too much if we downplayed the downsides of this Singapore growth model such as the over-reliance on multinational companies, the neglect of indigenous private enterprises, inadequate attention to forging close economic ties with the region, an inflated cost structure and a desultory domestic equity market.
Now, with the growing threats to Singapore’s position clearly evident, there is a need to re-examine the old model and address these drawbacks. There are many areas which need this re-thinking but a few are floated here as examples:
In a world of fragmented globalisation or even de-globalisation, we need a more diverse corporate ecosystem where the domestic private sector plays a bigger role even as we continue to welcome foreign investment. We know from successful experiences with the Mittelstand companies in Germany and their equivalent in Japan the broad contours of how to do this such as dedicated funding institutions for small and medium enterprises (SMEs), government help to seed apprenticeship programmes for such SMEs, and changes to competition policy and fair trade regulations to strengthen the bargaining position of SMEs relative to bigger companies.
It is time for a major push to reduce costs in Singapore, especially costs that arise from policy decisions. For example, does Singapore’s policy framework to reduce congestion through extraordinarily high costs of private transportation really produce benefits that exceed their costs? Are the land pricing policies of the Singapore Land Authority still the optimal way to allocate land? Would shifting the balance of power between landlords and tenants a bit more in favour of tenants lead to lower rentals without loss of efficiency?
Is it time for a bolder approach to forging greater integration with the immediate hinterland? Singapore has done well in gaining profitable synergies with the Chinese economy. But its track record in Southeast Asia and India is less impressive. In a more fragmented world, we may have no choice but to work closely with the region. A small start has been made with the Johor-Singapore Special Economic Zone but that is not enough.
In turbulent times it is those who re-examine their models, and question their long-held assumptions and taboos who will come out stronger. We have done it before — after all, that is what our founding fathers excelled at. With the right shifts in strategy, we can enjoy many more decades of prosperity and progress.
Manu Bhaskaran is CEO of Centennial Asia Advisors
