SM Tharman Shanmugaratnam at the China Development Forum: Macro Policies, Stable Economic Growth and Recovery

SM Tharman Shanmugaratnam | 26 March 2023

Remarks by Senior Minister and Coordinating Minister for Social Policies Tharman Shanmugaratnam at the China Development Forum, Session 2: Macro Policies, Stable Economic Growth and Recovery on 26 March 2023.


Distinguished Guests, 各位嘉宾, 大家早上好.

Let me complement what has been said by my fellow-speakers so far, and take a longer view of the challenges we face. The topic of this session has to do with macroeconomic policy. It's worth asking ourselves, what are we responding to? What are the fundamental challenges that we're responding to?

Reorienting economic policy towards the central challenges of our times

First, we’re dealing with the consequences of an extraordinary period of easy monetary policy, principally in the advanced countries but also as a consequence globally. An extraordinary period of low or negative real interest rates, plus large-scale quantitative easing, that may eventually come to be seen as the largest mistake in macroeconomic policy in many decades. We're now dealing with the consequences of having to exit from that regime. We're seeing the early consequences of the instabilities that have come about from having stayed far too long with extraordinarily easy monetary policies.

The second challenge we face has to do with shocks and disruptions that are now part and parcel of the economic, social, and political landscape. We've had in the last 20 years three pandemics, the last of which, still with us, being the most serious pandemic in living memory. We've had a major global financial crisis. Very importantly, we're also seeing environmental shocks growing in intensity and frequency. The heatwave in China last year was the most severe in human history. Europe went through extreme drought over the last year. We've had floods of unprecedented scale internationally – with Pakistan experiencing the most severe. And wildfires. Environmental shocks are now baked into the system – not random, but part of the landscape.

Third, we’re facing profound risks building up in the underlying, slow-moving changes. Most importantly, because climate change and the loss of biodiversity has been accelerating. And we have a global water crisis that is developing alongside those threats. It's a three-headed global environmental crisis: global warming, the depletion of natural capital, and a growing water crisis. That's the undertow; that's the underlying build-up of risk that erupts from time to time, and is probably our largest challenge.

Fourth, we have of course, the demographic challenge that Minister Liu Kun referred to. The demographics are changing fundamentally, not just in China, and not just in several Asian countries. If you look at the global system as a whole, we are reaching the so-called ‘Lewisian turning point’ - an era of surplus labour is coming to an end. You still have a lot of it in South Asia and sub-Saharan Africa, but if you look at the global economy as a whole, we're coming to the end of an era of surplus labour. We now have to find ways of growing productivity and spurring income growth – no longer by shifting manpower from low-productivity agriculture into industry and cities, but by growing productivity from within each sector and within each firm. Intensive growth of productivity, rather than the extensive development that comes from just simply shifting resources. It’s a new phase in the global economy.

When we look at these challenges together, I would say that we pay far too much attention to macro-economic cycles and demand management, and not enough attention to pre-empting the shocks that are now going to be part and parcel of modern life. We respond to shocks after they happen, at huge cost, rather than invest to avoid them and prepare for them in advance. Most importantly, we are well behind in the race against the shifts in the Earth system, the environmental risks that are building up.

We have to refocus economic policy, as well as our political strategies, for an era where the central challenges have to deal not with cycles of growth, credit, inflation – although those are important – but with the shocks that are coming our way – be they pandemics, the shocks that will increasingly surface because of the shifts in the Earth's system, and geopolitical disruptions.

It does mean focusing more, to use the language of economics, on the supply side rather than the demand side.

We have to recognise that there are limits to monetary policy. Monetary policy is important in taming cycles of inflation. But if you are too ambitious for too long, there are consequences, and the consequences can be destabilising. Whole business models in the private sector have been shaped by an era of zero or negative real interest rates. Those business models are no longer viable, and we’re going to see instability as we exit from that phase. So we need more circumspection around what we can achieve through monetary policy.

Then we have to think about how fiscal policy operates. How does fiscal policy address those central challenges which are of the supply-side nature? Generating new ways in which productivity can grow? Addressing the fact of an aging population across a large part of the world? And most fundamentally, addressing the environmental challenges we face. How does fiscal policy – already now with relatively high debts in the system, high debt-to-GDP ratios – address this?

First, we need to unleash innovation, particularly in the green economy, with much greater ambition. That means using fiscal incentives and government regulation to stimulate private sector innovation in the green economy. Kristalina Georgieva had referred to the potential of the green economy as well. Its potential to spur growth is very significant, roughly one percentage point addition to GDP growth per year, if we fulfil the investment needs of the transition to a low-carbon world. It's a huge opportunity.

Second, we have to refocus on public goods, both domestically and globally. We have under-invested in public goods. We have to refocus on public goods, particularly the public goods necessary to prevent and prepare for crises and shocks, such the R&D and healthcare infrastructure needed to prepare for pandemics, and the capacity for continuous ls development of skills in adult populations. We know how to do it, but we're putting very little resources into it globally. It is remarkable how after the worst pandemic in living memory, we’re going back to normal - a very small amount of resources is being set aside to prepare for the next pandemic. We are reverting to economic irresponsibility and the political myopia that risks future catastrophe.

A word more about investing in education throughout people's lives. I say this not as a mantra. It is fundamental to addressing the demographic challenge we face. Aging societies do not have to be pessimistic societies, or societies where people feel that the future has limits. We have to invest in people at every stage of our lives. That's the way to ensure that we enable people to stay engaged at work for longer, and importantly, allow everyone to contribute to productivity and innovation. We can’t just leave it to the market. It requires public, private, and people sector collaboration. So that, too, has to be a priority.

Thirdly, we have to ensure that as countries refocus on industrial policy to build up capabilities, we do so in a manner that keeps the global economy open. The industrial policies of late have been unmistakably protectionist. And if we carry on along that track, we will see what Kristalina Georgieva spoke about, which is not just a fragmentation of the global economy, but the real risk that we break up into blocs. Everyone will be worse-off for that. Innovation will suffer; productivity growth will suffer; each of the blocs will suffer. Engaging in industrial policy to develop capabilities, to spur innovation, has to be done with more imagination and more recognition of the fact that an open global economy is a source of strength for every nation.

This brings me to my final point, which is that the US-China tension and the way it is managed will clearly have great bearing on the global economy, great bearing on all nations. An era that sees competition on a scale that has never been seen before between two major powers, must also be an era that sees cooperation between them in addressing the largest challenges that we all face –climate change, a global water crisis, the loss of biodiversity – and the challenges which are not new but still very present – such as the risks of global terrorism and of nuclear proliferation. How the US and China are able to combine competition – including perfectly legitimate, economic competition – with the need for cooperation is going to require considerable strategic ambition and skill. But it will matter to the US; it will matter to China; and very importantly, it will matter to the world.

I obviously speak from the perspective of a very small country, which depends on the global economy and its stability, and our ability to invest in advance to anticipate the shocks that are coming. We depend on that for our future. But I believe it's not just small economies that depend on that. We all depend on that.

So let's refocus on the supply side, and not just be obsessed by demand cycles. Let's refocus on the largest challenges we face, which are of an existential nature, and of a demographic nature. Let's build optimism wherever we are. Let's build optimism and recognise that openness is ultimately the best form of resilience for each of our societies.

Thank you very much.