Dialogue with SM Tharman Shanmugaratnam on “Anticipating A New World” at the Singapore Summit 2020 Virtual Conference

SM Tharman Shanmugaratnam | 14 September 2020

Dialogue with SM Tharman Shanmugaratnam on “Anticipating A New World” at the Singapore Summit 2020 Virtual Conference on 14 September 2020. The dialogue was moderated by Conference Chairman Ho Kwon Ping.


COVID-19 and Deglobalisation

Mr Ho Kwon Ping (Moderator): It has been said that any major disruptive event accelerates already existing trends that we have been seeing in the world, (such as) the trend towards de-globalisation before even COVID-19. What do you think will happen to de-globalisation and globalisation as a result of this pandemic?

SM Tharman Shanmugaratnam: That’s a question that affects all of us. We all want to see a world that remains connected, and virtually no serious player you talk to wants to see a bifurcated world.

The question is how we can arrive at a more robustly designed form of global connectivity – more resilient global supply chains and economic linkages between countries. It is entirely possible.

We’ve got to avoid the extremes. The world is moving away from the hyper-efficient form of global supply chains that we had in some industries – just-in-time production, little redundancy or spare capacity, and when the COVID-19 pandemic hit, the chain broke. There were no alternative sources, when one link of the chain goes down, the whole chain goes down.

It was hyper efficient in the static sense – in the short term – but it is not efficient in the longer-term sense. COVID-19 will not be the last pandemic; in fact, the scientists say the big one has yet to come. There will be other shocks too, such as geopolitical shocks. So even if you think about efficiency as a goal, if you think about efficiency in a dynamic and longer-term sense, it requires that we build diversification of supply sources, and build some redundancy into the system. That’s what leading global companies are doing or working towards.

But the other extreme, which is on-shoring or near-shoring, is not going to work either. First, it is not resilient, because if you rely entirely on domestic suppliers, they can go down too. They go down in the pandemic. Neither is it good for growth, and at the end of the day, we are concerned about both resilience and growth. The leading companies want to grow by being plugged into the world and global markets, and also by being able to take advantage of capabilities around the world in addition to their home strengths. On-shoring, which has appeal as a political mantra, is not going to enable that growth or serve the people it intends to serve.

What we’ve got to do is to move towards a more robustly designed form of globalisation, with more diversification, more redundancy built into supplier networks and logistics, and better risk management, which is an often overlooked factor. Not just where you located activities, but how you manage risks across the global supply chain. Your ability to flex production from one plant or site to another at short notice, to respond quickly when crisis hits, and to manage inventories for this longer-term efficiency, with enough redundancy. Risk management of supply chains will be a critical attribute of the most successful companies.

A further point about this more robust globalisation. It accentuates the role of the most trusted places. We are already seeing that. COVID-19 has exposed the difference between places which are reliable and can be trusted, and the others. The leading companies are now placing even more importance on trust and reliability as criteria for where they locate significant investments.

Trust in government is critical. But it is also about social trust. If you look at New Zealand, Korea, Singapore, Japan, the countries that are coming out well in COVID-19 with very low fatalities and very low long term costs, they are countries where people have trusted government, and have tried to follow the norms, the guidelines and the rules. But they are also countries where people knew that the public good required that everyone plays their role, and if everyone plays their role, everyone will be better off.

So social trust, trust in governments and trust in the whole national system is now a critical competitive advantage when we think of the ways in which globalisation will evolve. 

Singapore’s Positioning

Moderator: That sounds like a soft advertisement for Singapore. I was going to say that my major takeaway from that is that, as you have said, all this talk about on-shoring is largely political rather than economic in nature. When you talk about things like diversification, redundancy, risk management, and so on, the role of Singapore as a traditional hub may have evolved over time. Times have changed. How then do you see the role for Singapore remaining still a hub in a different way, as supply chains have to diversify, become redundant, de-risk and so on? Clearly, the role for Singapore as a hub remains but somehow would change also. How do you see that change happening?

SM Tharman: You are quite right. First, our future does rest on being a hub – in manufacturing, finance logistics, data, R&D. We cannot be a middling business centre. We have to be a regional and global hub in each of these areas, in order that our people have the best opportunities to improve their lives and have a good quality of life.

It means, first, working on trust and reliability, which I was just talking about. It means having deep skills in each of the areas that we are active in. And it also means being open and connected. Each of these three things is continuous work.

Trust is continuous work. Having a reliable system is continuous work. Building skills, through national education systems, lifelong learning and continuous upgrading at the workplace is continuous work, and we are putting great effort into it. Being open and connected is continuous work. Trade and investment – we are amongst the most active players internationally and in the region in striking bilateral, plurilateral and multilateral deals.

But openness also involves openness to people. That is the most challenging task that every society faces. Quite different from openness to trade and investment.

It first requires clarity about our objective, which is to maximise opportunities for our own people. That’s our objective. It is not growth per se, it’s about maximising opportunities for Singaporeans. Second, clarity with regard to the economic strategies required to achieve that, which has to be that we play the role of a hub and make ourselves competitive as a hub economy. That’s the only way we are going to maximise opportunities for our people, not just people at the top, but people across our whole workforce.

And clarity that the two things are related – we can only maximise opportunities for people, if we are successful as a regional and global hub. If we are a middling business centre or think we can get our growth out of the domestic economy, not only will we not be able to grow opportunities for Singaporeans, but more of them will leave. In fact, we already have a significant number of Singaporeans working in New York, San Francisco, London, Hong Kong. More will leave. So, that’s clearly not an option. But by the same virtue, we cannot sustain our openness if we do not provide enough opportunities for our own people. It is not socially or politically sustainable. 

No society can be blindly open. It is not sustainable. But how do you manage openness? How do you ensure that opportunities are really being created through openness? It is more of an art than a mechanical task. It is a key challenge in economic and social policy, which we are completely focused on. 

Keep developing Singaporeans at every skill level, help people to develop deeper skills, greater mastery, moving on to adjacent skills, sometimes having to switch sectors but developing the skills required to do well in those new sectors. That’s the first task.

Second, anchor firms in Singapore and anchor their regional and global businesses in Singapore, which must mean having the best international teams here – international teams with both foreigners and Singaporeans.

Third, ensure fair hiring and promotion practices, which we take very seriously and even more seriously now because we are in a downturn and will be in an era of slower growth. We take that very seriously and will lean against the firms who do not take that seriously and hold them accountable. 

Fourth, I would say we’ve got to be mindful also about the need for adequate diversity of nationalities even amongst the foreigners who are with us. Avoid significant concentrations of one nationality. That too is something that we are talking to firms about. 

Fifth, we also have to control the overall number of foreigners relative to the locals we have. If we want to preserve openness to the top-tier talent and entrepreneurs, we have to control the overall number of foreigners and make sure that the broad middle in our society and those at the lower income levels have opportunity and face fair competition.

That’s the art, and it is continuous work. Control the overall numbers, go for diversity, develop Singaporeans to the most, and make sure that firms have incentive to have regional and global teams in Singapore, with both foreigners and locals within them. But we are very clear about our objective – to maximise opportunities for Singaporeans.

The Fiscal Challenge of the Next Decade

Moderator: Thank you. If I may change to a more global topic because, as you know, our audience for Singapore Summit comprises top CEOs from multinationals and many of them have relationships with Singapore that go on for a long time back to Mr Lee Kuan Yew’s days and so on. Many of them like to hear from our leaders, not only because our leadership has views on Singapore, but has a lot of insights on the world as a whole. You in particular, in your role in the past as chairing the IMF ministerial committee and your prevalence in global economic affairs, I have been asked to ask you some questions that deal with the world – questions which, in fact, a lot of CEOs are grappling with today.

The first one is the issue of debt. Pre-COVID-19, global debt was already piling up, both at the national level and at corporate level. It is building up even more now and continuing to grow. A lot of businesspeople are just wondering where this is going to go towards in terms of sovereign debt growing in developing countries, debt defaults and so on, and private debt. What is your take on the issue of increasing debt at a time of increasing recession?

SM Tharman: It is not the issue in focus now, but it is going to be a major issue in the next decade. Governments have done the right thing to spend more in the midst of this crisis. They are spending more not to stimulate demand, but to prevent the bottom from falling out – to avoid huge human cost, and to avoid a large part of the corporate sector going bust. 

Governments have done the right thing, and in most advanced countries, they have had to borrow more, and some borrowing a lot more. That has been a sensible economic strategy in the midst of this crisis and facing the uncertainty that we do. In Singapore, we did not have to borrow, but we drew significantly on reserves. But the big issue in the next decade is how to ensure the debts are sustainable. 

It’s quite obvious that you cannot keep increasing your debts, but I do not believe that the new high levels of debt that many countries are now moving towards are going to be sustainable without imposing a significant cost on growth, as well as a cost to equity within their societies. 

It is not like the post-war period. After the Second World War, many of the advanced countries started with very high levels of debt – in United States, UK, and many European countries. But they brought it down dramatically over 30 years. How did they do it? Rapid growth and high inflation. Both of those are not possible anymore. Rapid growth is no longer possible – these are now ageing societies, and productivity growth is much lower than before. Nor is high inflation going to be tolerated by older societies. It could be tolerated when societies were young, and everyone's incomes were going up. It is not going to be tolerated now.

Neither can we assume that today's very low or negative interest rates will remain that way forever. Economists have a range of scenarios, but it will be imprudent for policymakers to assume that. At some point, interest rates will normalise. We do not know when, but at some point, they will. The OECD and others have done simulations to show that even a modest normalisation of interest rates, at the much higher debt to GDP ratios that many economies are heading towards, will impose a significant cost on government budgets. Which means you either cut back on other expenditures, or you have to crowd someone else out of growth. 

The real challenge is going to be fiscal reform. You cannot go for sudden austerity – that would be foolish. But we’ve got to find a way in which the design of government budgets – both the type of expenditures and the way in which taxes are designed – can be consistent with growth and equity, without simply growing the size of budget of continuous deficit spending. 

Very few advanced countries are addressing that issue now. Germany is one of the few advanced countries that runs a primary surplus. Italy does too – a primary budget surplus; they have to. But it is going to need fiscal reform, not simply cutting down spending, but quality spending and ways of raising revenue that do not hit growth. 

How do we incentivise higher levels of private investment? Because that is at the core of slow productivity growth, and at the core of secular stagnation, which is a real risk. How can we design government budgets so as to reignite animal spirits? How do we encourage private investment to serve public purpose, including private investment in an inclusive digital infrastructure and to prepare for the sustainable economy? It’s not just an issue for the long term, but for today. And the move away from fossil fuel subsidies, still significant in many countries, has to be a priority.


Paying Attention to the Bottom Leg of the ‘K’-shaped Recovery

Moderator: That sounds like a very tall order for governments. I do not know how companies are going to deal with their private debt.

There is another issue besides debt that a lot of CEOs have been wondering about and want your take on it too. They are trying to understand what is happening with the public markets – the new curve that people are talking about – no longer U-shaped / W-shaped / L-shaped. It is a K-shaped curve where one spike is where big tech is still rising rapidly, the stock market is doing really well, and the other side of the ‘K’, the real economy is plunging downward. How do you, as an economist, as a global observer of financial affairs, how are the rest of us going to interpret what is happening with the K-curve?

SM Tharman: It is not a contradictory picture. The tech firms, or the winning players in tech are doing very well. The pandemic has speeded up the digital revolution. Many more things have gone remote, like almost all of this conference. Tele-presence is now the norm in everything, including in health, education, and tele-presence in a whole new range of areas. That’s boosting the tech businesses, both hardware and software. But they do not actually occupy a large part of the US or global economy. So, the surge in the S&P index reflects their weight within the index, but if you look at the mass of firms, the mass of employment, that’s not a world that is doing well.

The real issue for public policy and for business leadership must be about the bottom leg in the K. Within almost every society, the unfortunate fact is that those who have been worst hit by the pandemic have been the lowest paid, and those whose jobs were already the most vulnerable.

Women have been disproportionately represented in the retail and F&B sectors, and there is now a risk that the rise in female labour force participation that we saw over many years will see some reversal, particularly amongst those at the lower end of the income ladder.

SMEs too are part of the bottom leg of the K-curve. If you listen to experts and policy makers around the world, there is concern – coming out of COVID-19, and coming out of pre-existing trends that were leading to ‘winner takes all’ or ‘winner takes most’ – that a significant portion of the SME economy is not going to survive the next few years.

If we do not address that challenge forthrightly, there is a real risk of a significant proportion of SMEs being wiped out. We are quite focused on wanting to avoid that in Singapore, through our fiscal strategies, and through our industry upgrading strategies, our industry transformation maps. But it’s a real risk, and SMEs are not just a percentage of an economy. They employ people, they are part of what constitutes local economies, and they are a critical part of our society. So, I do not think we want to end up with a world, two years from now, where you have more heavily concentrated industries, where the winners might be doing well in their own right, but there is a bleak landscape outside of them.

Most fundamentally, if we talk about that bottom leg in the K-curve, it is really about the developing world. I think we are entering a phase where we may see a reversal of what was achieved over the last 30 years, where a significant number of developing societies had started moving up the ladder and catching up – low income moving to lower-middle income, and lower-middle income moving to middle-income. The pandemic, combined with other recent trends, is now making that reversal a very serious possibility.

Capital flows are discriminating in a way that accentuates the movement down. The countries that have been worst hit in terms of public health systems, and being able to manage this crisis, will find themselves at even greater disadvantage. 

Outside of China, if you look at Africa, much of South Asia and Latin America – they have been the worst hit in terms of the economic fallout from COVID-19, worst hit in terms of their ability to equip their health care systems, least able to use fiscal policy to offset the slump, and worst hit in terms of education, because the number of kids who have been out of school in the emerging world is enormous. It is a huge setback for a generation.

So, we may be getting a perfect storm. We now face a much more serious problem globally than we have seen in a long time, and it’s not just about US-China tensions, but about a developing world that feels left out, an emerging world that becomes a submerging world, and a very large group of young people – the demographic bulge entering the workforce or early in their careers – finding little opportunity, and trying to fend for themselves in the informal market. That is a recipe for instability, not restricted to them, but instability for the world.

Building Alliances in a Weaker World

Moderator: That may have a much longer term, though less dramatically evident effect then even as you mentioned the China-US decoupling. But I am going to go to that now, because I have got some questions coming in on that. As you can imagine, this is a continuation of last year.

Last year the China-US Cold War was really on, the decoupling was talked about, if you remember in our sessions, the decoupling has really accelerated now. I have got a few questions which as you can well imagine, it is the same question but a different time, and we want your take on it. That question basically is “Is a multipolar world going to even be possible? Or is this decoupling now going to be inevitable?” How bad do you think it will get? It seems to be really getting worse and worse. And importantly, the nub of the question is, how can ASEAN and Singapore, stay neutral as things worsen between China and the US?

SM Tharman: My sense is that things will get worse before they get better. Multilateralism is at greater risk today than it has been in a long time, and greater risk now than a year ago. But there is a lot that we can do – those of us in ASEAN, the Indians, the Europeans – to strike alliances, including plurilateral alliances. You work with whoever is like-minded to ensure that we stay open and in fact become more open.

If you look for instance at digital connectivity, we are now striking new deals. Singapore has one with New Zealand and Chile, with the Australians, and we are working with the Japanese and others internationally to reduce the friction that exists in digital connectivity. Try to ensure that firms, small and big, can benefit from cross-border data exchange and aggregation.

It will take a while for US-China tensions to subside, and it will probably get worse before it gets better. We might get a situation that remains broken for a long period of time, gets more fragmented, without actually arriving at a new economic Cold War.

But I think there is enough space for the rest of us to continue to find ways of having win-win partnerships, including with China and with the US. I find it very hard to imagine global businesses retreating from China. It is a very large market and it is still a market with significant growth. I find it very hard to imagine them retreating from Asia. They will be reorganising their business in Asia, more ‘China plus 1’ strategies, but businesses will want growth.

A More Active Coordinating Role for the State

Moderator: This sets a word of optimism at a time when everyone is so worried about this. I think we probably have time for one more question. I have a question that actually goes back to what you were talking about earlier, when you talked about how the pandemic is going to really destroy a lot of SMEs, the private sector is going to be very hard hard-hit. At the same time, we talked about how governments are incurring more debt and so on.

This question is a very interesting one. It is about whether you think in Asia in particular – and perhaps even in the rest of the world – the state is going to be playing a much larger role as a result of COVID partly because of the decimation of the private sector, partly because of the crisis that is going to arise. What does that mean in general? What are the implications if the state plays a much bigger role and the private sector begins to retreat? Do you see any implications from that?

SM Tharman: The state will inevitably have to play a larger coordinating role. As I mentioned earlier, I do not think it sustainable for the state to play a larger role in terms of ever increasing budgets, but it will have to play an increased coordinating role to ensure a market economy can function better, and to ensure society can stay cohesive. It means first, working together with industry, unions and educational institutions to ensure that people who lose their jobs can get new jobs quickly, which does not happen quickly or naturally in a marketplace. You need coordination.

Second, it involves ensuring that the digital and other platforms that help SMEs are put in place, and we mitigate market forces that lead to increased concentration. Again, the state has to play the coordinating role.

Very importantly too, the state has to play a role in keeping trust in society and avoiding divisiveness. There are some societies where divisiveness is on the rise, and where the state may even be accentuating it. The role of the state must be to keep the centre strong in society, and to find every way in which contending parties can find some basis for consensus. That role too, has grown.

Looking a Year Ahead

Moderator: We have come to the end of our session so if I may, put a trick question to you. We are meeting in rather strange circumstances this year. Certainly, next year, when we hold the Singapore Summit again, I hope it will be a lively affair with several hundred people, you will have the opportunity to mingle and so on.

In your view, if you were to look ahead one year from now, what do you think will have been the most significant change? I do not refer to November, leave that out. But in terms of global economic change, when we meet again, with all our audience one year from now, what would you say would be your biggest takeaway (or) change that has happened to the whole world as a result of COVID-19?

SM Tharman: I think first, there will be greater recognition of the plight of the vulnerable across societies, and a greater desire to uplift their lives.

Second, COVID-19 will not be over, but you will have by then, cheap, quick and non-invasive testing and better understood protocols for isolation and social distancing that will mitigate transmission. If we are lucky, we will have effective vaccines, but it is very unlikely that effective vaccines will be accessible to a large part of the world's population. Very unlikely because even if we succeed in getting effective vaccines, manufacturing at scale and distributing at scale through the very cold chains required – -20 to -80 degrees centigrade – is going to be a huge challenge. A large part of the world is not going to have access to that for quite a while.

Don’t think of vaccines as a silver bullet. It requires a whole set of tools – cheap and quick testing, social distancing, people wearing masks because it is the responsible thing to do, and all the social protocols that have to become the norm in every civilised society.

Moderator: We may still have a virtual conference next year. 

SM Tharman: No, I think by then the norms would have been developed for travel, at very least between countries which can trust each other. I think there is high chance that we will have a physical conference. 

Moderator: On that optimistic note, let me thank you once again, Senior Minister Tharman for starting the Singapore Summit Virtual Conference with a great dialogue. We hope to see you again next year, Sir.