Singapore is, by common consent, one of the most open economies in the world. Yet, more than 80 per cent of the Singaporeans live in public housing, the buses and trains are run by two government-linked companies, the mainstream media really state media – the television stations owned outright by a state investment firm, the print monopoly traditionally headed by former government ministers or officials – and many of the top local companies are also linked to the government.
And this economic model has worked very well for Singapore.
As I mentioned in an earlier post, Joseph Stiglitz says in his book, Freefall:
Government has played an especially large role in the highly successful economies of East Asia… Singapore, Korea, Malaysia, and a host of other countries followed and adapted Japan's (government-led growth) strategy and saw per capita incomes increase eightfold in a quarter century.
But when did Japan emerge as an economic giant? After American occupation following the Second World War.
Japan's government-led growth strategy was similar to what happened in America.
America before Reagan
The Roosevelt administration played a big role in the US economy first to get over the Great Depression and then to fight the Second World War. Industrial production grew and so did the economy.
Stiglitz, Paul Krugman and Robert Reich have all written about how the American people benefited.
The income gap narrowed as labour unions negotiated higher wages for workers while the rich became less rich as income taxes rose to pay for social welfare.
All that changed under President Reagan, who cut taxes and deregulated the economy.
Now the same wide gulf separates the rich and the poor in America that existed before Roosevelt, says Stiglitz.
I wonder what he would say about Singapore, where the Gini coefficient is even higher.
But Singapore, unlike America today, has low unemployment. The Singapore government succeeded in protecting jobs during the recent recession. It's no small achievement considering the huge job losses in other countries.
Recession in America
Stiglitz, in Freefall, says eight million jobs were lost in America.
Twelve million jobs would have to be created to get the US economy back in shape, he adds, because every year one-and-half million young people enter the job market.
Stiglitz thinks a US economic recovery is at least two years away. In Freefall, published in January this year, he writes:
As this book goes to press, the prospects of the (US) economy returning to producing at its potential even within a year or two are dim… to get unemployment back to normal levels will require sustained growth in excess of three per cent, and that's nowhere on the horizon.
He blames the Obama administration for "muddling through" the economic crisis. He is critical of the bank bailouts which, he says, benefited the bankers. Obama's economic advisers – Larry Summers, Timothy Geithner, Robert Rubin – and the Fed chairman Ben Bernanke, he says, are the same people who gave free rein to the banks, leading to the US housing bubble and the recession.
Stressing the need for greater government oversight, he says in the preface:
I believe that markets lie at the heart of every successful economy but that markets do not work very well on their own. In this sense, I'm in the tradition of the celebrated British economist John Maynard Keynes…
In a later chapter, he writes:
Iceland is a wonderful example of what can go wrong when a small and open economy adopts the deregulation model blindly. Its well-educated people worked hard and were at the forefront of modern technology… Today, the reckless behaviour of their banks has put the country's future in jeopardy.
Exports and official reserves
But deregulation and the banks were not the only forces to blame. Globalization also played its part with its export-led model of growth and the policy pursued by many countries, including Singapore, to build up official reserves. Stiglitz explains:
If the sum total of what people around the world want to buy is less than what the world can produce, there is a problem – a weak global economy. One of the reasons for weak global aggregate demand is the growing level of reserves – money that countries set aside for a "rainy day".
Developing countries put aside hundreds of billions of dollars to protect themselves… from the discomfort they feel at turning to the IMF for help. The prime minister of one of the countries ravished by the global financial crisis of 1997 said to me, "We were in the class of '97. We learned what happened when you don't have enough reserves."…
These were all good reserves for accumulating reserves, but they had a bad consequence: there was insufficient global demand… For a while, the United States had come to the rescue of with debt-based profligate consumption, spending well beyond its means. It became the world's consumer of last resort. But that was not sustainable.
Stiglitz points out how much the global economy depends on America. He writes:
in the beginning, many in Europe talked of decoupling… the growth in Asia would save them from a recession. It should have been apparent that this too was just wishful thinking. Asia's economies are still too small (the entire consumption of Asia is just 40 per cent of that of the United States) and their growth relies heavily on exports to the United States.
Stiglitz notes without regret that the recession has led to "a loss of faith in American-style capitalism".
New anti-trade surplus global reserve system
He advocates a new global reserve system, where countries would no longer have to stockpile dollars and buy US T-bills. While this would reduce the flow of foreign money to America, it would also make American goods more competitive because the dollar would fall in value, he says.
The present system also leads to trade imbalances, he points out. While some countries run trade surpluses, others face trade deficits.
"In a well-designed global reserve system, countries with persistent surpluses would have their currency reserve allocation diminished," he says, "and this, in turn, would encourage them to maintain a better balance."
I wonder what that would mean for a small country like Singapore which depends on exports and runs trade surpluses. But Singapore has never lacked economic vision, enterprise and resourcefulness.
Stiglitz also calls for new barometers to check a country's well-being. The gross domestic product is not a good indicator, he says:
Measuring GDP in the United States didn't really give a good picture of what was going on before the bubble burst. America thought it was doing better than it was, and so did others.
That led to the US housing bubble as more foreign money flowed into the country.
Alternatives to GDP
Stiglitz writes:
No single measure can measure the complexity of what is going on in a modern society, but the GDP measure fails in critical ways. We need measures that focus on how the typical individual is doing (measures of median income do a lot better than measures of average income), on sustainability (measures that take account, for instance, of resource depletion and the worsening of the environment, as well as of indebtedness), and on health and education. The United Nations has developed a more comprehensive measure that includes education and health, as well as income. In these metrics, the Scandinavian countries do far better than the United States, which ranks thirteenth.
But even when economic measures are broadened to include health and education, they leave out much that affects our sense of well-being. Robert Putnam has emphasized the importance of our connectedness with others. In America, that sense of connectedness is weakening, and the way we have organized our economy may contribute.
The Himalayan Buddhist kingdom of Bhutan has attempted to carve out a different approach. It is trying to create a measure of GNH – gross national happiness. Happiness is only partly related to material goods. Some aspects, like spiritual values, can't and probably shouldn't be quantified. But there are others that can be (like social connectedness). Even without quantification, though, focusing on these values highlights some ways that we should be thinking about redirecting our economy and our society.
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Danger and opportunity
Stiglitz concludes:
The Washington consensus policies and the underlying ideology of market fundamentalism are dead…
It has become a cliche to observe that the Chinese characters for crisis reflect "danger" and "opportunity". We have seen the danger. The question is, Will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends? We now have the opportunity to create a new financial system that will do what human beings need a financial system to do, to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which the difference between the haves and have-nots is narrowing, not widening, and, most importantly of all, to create a new society in which each individual is able to fulfil his aspirations and live up to his potential, in which we have created a community that treats our planet with the respect that in the long run it will surely demand. These are the opportunities. The real danger now is that we will not seize them.
The last sentence is pessimistic. But note the vision. This is a book worth reading.
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