Singapore Finance Minister Tharman Shanmugaratnam acknowledges Singapore has an unemployment problem. That is why Singapore doesn't want to raise income taxes — "certainly not corporate income taxes" — because "our key objective should be to see private investment grow, as the basis for long-term growth", he tells the International Monetary Fund's Finance and Development magazine.
He emerges as the odd man out among the Asians interviewed in one respect. He says growth will continue to depend on exports, which is true for Singapore, while others see the need to transform their economies. They are Ajith Cabraal, governor of the Central Bank of Sri Lanka; Shuli Hu, a leading Chinese journalist; Yung Chul Park from Seoul National University; and Raghuram Rajan, professor of finance at the University of Chicago and economic adviser to the Prime Minister of India. Read the interview here.
F&D: How has the crisis affected your region and how has the region responded to it?
Shanmugaratnam:If you look at the Asian region, or East Asia in particular, this was not a case of a balance sheet recession. This was an economic crisis for us, but it was caused by balance sheet problems elsewhere. Our banks were sound, and government finances by and large were in good condition. Several governments which 10 years ago had serious fiscal problems had since been running down their deficits, and in some instances have been running surpluses so as to reduce debts.
We took a big knock because global trade fell, and so did foreign investments. But it would have been much worse if our financial systems themselves had problems on their balance sheets.
It also meant that the region, from China down to Southeast Asia, was able to respond aggressively to the crisis, and could play a significant role in the global effort to counter the recession through public sector stimulus. In Singapore, for example, we had a fiscal stimulus of 6 per cent of GDP, delivered in one year, which helped reduce job losses and helped prepare firms for the recovery.
F&D: What do you think will be the longer-term changes and challenges in Asia as a result of the global economic crisis?
Shanmugaratnam: We have to shift our sights to the long term, even now. We have to manage problems in the short term—particularly unemployment—as well as we can. But how we manage the short term, and how we exit from fiscal stimulus packages, must depend on what we want to see over the long term. If we focus only on the short term, we risk undermining our chances for self-sustaining growth beyond the current recovery.
Our key objective should be to see private investment grow, as the basis for long-term growth. What this means is that we shouldn’t want to raise income taxes in order to raise more fiscal revenues, and certainly not corporate income taxes. Fiscal exit strategies must reflect that objective. The aim is not just to reduce fiscal deficits and to prevent public debt from going out of control, but to do so in ways that give incentive for private investment to grow.
There is the question of where future demand will come from, since the U.S. consumer can no longer drive this. East Asia’s growth will depend increasingly on how much demand it generates within the region itself. But it would be a mistake to move away from global markets. The real source of East Asian growth over the last three decades has been the remarkable gain in knowledge and techniques, obtained by plugging into global markets—whether through exports or imports. Global markets spur the spread of knowledge. If we give that up, and focus production on home markets, we are going for lower long-term growth in East Asia—and globally. The real challenge therefore must be to grow East Asian demand and allow for increased imports. Abandon export subsidies, but don’t abandon exports.
Here is what Shuli from China and Park from South Korea say on this issue:
Hu: I think in Asian countries like China, people are starting to think about the transition to a different economic model, following the crisis. We need to move from a more export-led economy, export-led growth to a more domestic model to achieve balanced growth. We need to correct this imbalance ourselves. However, it is very difficult to do because export-led growth has been taken for granted for several decades as a successful economic model.
Park: In the short run, the most significant challenge these policymakers will face is dealing with fiscal policy management. Sooner or later, the effects of fiscal stimulus packages will wear off, and at that point what will these countries have to do to sustain reasonable rates of growth? My concern is that they may turn to export promotion again, which is really something that they should try to avoid, if they are serious about resolving global imbalances.
Second—and related to this dependence on exports—they should try to rebalance growth by reforming their policies and adjusting development strategies to rely less on exports and to depend more on internal demand. And, at this stage, they don’t seem to have any idea about how they should go about restructuring the economy to boost domestic demand as a major source of economic growth.