Tharman shares hard truths to keep the post-Covid economy going

“Once you are out of work for a long period of time, skills tend to fade and employers also tend to look at you differently because they know you have been out for some time,” says the veteran minister at the first digital DBS Asian Insights Conference on July 23. He also notes that there is also a social and psychological dimension to long-term unemployment as well, which quickly falls into a vicious cycle as workers become less employable the longer they stay out of the workforce. Singapore has sought to prevent job loss with wage subsidies and traineeships for workers who nevertheless find themselves out of work.

But such measures are not purely a number’s game, warns Tharman, who points out that governments should not just dump their workers into just any position. Ideally, the jobs and traineeships that workers are re-deployed to should have some relevance to their previous skill set, not only to prevent adjustment difficulties, but also to tap on their existing skill set so that they can enter brimming with confidence. “Never underestimate the way that previous skills and old skills are relevant to the future. They are always relevant,” he assures Singaporeans.

For such policies to succeed, the senior minister says that firms will have to “play ball” and cooperate with the government’s policy initiatives. In return for government support, Tharman — who was once named Finance Minister of the Year by Euromoney — emphasises that the corporate sector must help the state achieve its socio-economic priority of creating jobs and keeping Singaporeans in employment. Large firms like tech giant Google and local bank DBS have already heeded the government’s call, with the latter planning to create 2000 jobs in Singapore this year.

In the shadow of the activist state

For such measures to succeed, a significant amount of trust must exist between the public and private sector in order for both sides to undertake collective action in good faith. The prevailing conception of an adversarial role between state and markets no longer holds water in a more chaotic world where the initiative of markets and coordinating power of government must come together to deal with new challenges. Even before the pandemic, luminaries like Joseph Stiglitz had declared the market fundamentalism of the Reagan-Thatcher revolution dead and buried.

The growing role of the state in coordinating the response to the Covid-19 pandemic and resulting recession has seen many observers reflecting once more on its role in modern society. At a virtual discussion organised by the Lee Kuan Yew School of Public Policy (LKYSPP) on July 22, Bloomberg editor-in-chief and former editor of The Economist John Mickelthwaite predicts a push towards big government both as a result of more successful handling of Covid-19 by more interventionist states, as well as a long-term drift towards statism since the twin turning points of 9/11 and the Global Financial Crisis of 2007-2008. Still, he believes that high debt levels and the high expenditure of government intervention will check this statist turn.

Some observers like Rana Foroohar, global business columnist at Financial Times, cheer the return of “big government”, arguing that more government intervention will ease some of the excesses of the laissez-faire economics of the neoliberal 1990s and 2000s. She believes that more intervention will ease high levels of inequality, underregulation of business and substandard provision of public goods. Yet others like Raghuram Rajan, former Governor of the Reserve Bank of India are more circumspect, fearing that “big government” would not only lead to economic inefficiency and loss of economic dynamism, but even the erosion of civil liberties.

Tharman, however, believes that this debate between big and small government is stale and oversimplified. Speaking at the LKYSPP event, he argues that while markets may have failed in their basic task to provide for growth and wage gains via productivity improvements, he also does not think that it is either efficient or economically viable to take a greater economic role for itself. While government must remain streamlined and stick to its own areas of competency, this does not preclude a more activist style of governance.

“We need a new compact between state and markets, state and community, that makes the most of the energies of the markets...but uses markets not just to achieve private gain, but to achieve public purpose,” Tharman says emphatically at the LKYSPP discussion. While he does not support a return to large states per se in terms of size and spending, he believes in a system that has faith in government activism. Governments must have a sense of moral purpose, the confidence to mobilise the population to pursue common goals and to coordinate state resources strategically.

According to Tharman, the first priority of governments is to recentre executive and fiscal policy on the provision of public goods like healthcare, education and livable cities in an equitable manner. Such objectives do not actually require a large amount of resources so long as governments focus on doing what they do best. An effective state, Tharman notes, focuses on delivering on public goods by tapping into the considerable energy of the private sector and communities. Singapore achieves better healthcare and education outcomes despite spending less on these than most developed states.

The Perils of Monetary Expansion

As Covid-19 mercilessly ravages the global economy, desperate central bankers — once grey-haired disciples of financial prudence — are one by one bending the knee to the altar of “magic money”. Central banks have begun to create and borrow money freely to stimulate their economies, which appeared to have minimal inflationary consequences following the Global Financial Crisis. After a decade of austerity, governments are ready to re-open their purses as they bet on a similar pattern in this Covid-19 recession.

Tharman is sceptical of the validity of such a cavalier approach to economic policy. For countries outside the US, any reason for nervousness on the part of investors such as geopolitical shocks or even the fact that the government is running large debts, could very easily affect market confidence and result in interest rates spiking upwards. Governments would then face higher marginal interest rates when trying to roll over debt to subsequent years. “The laws of gravity will continue to operate,” he muses.

Higher levels of debts mean higher levels of fragility, he continues, noting that countries pursuing such a policy in the long-term would be exposing themselves to a sudden downward spiral in financial markets. Incurring large amounts of debt would also mean less money for the government to spend on education, research and development and protection for low income groups, with the proportion of government budgets needed to service debts compounding over time due to interest rates — a much less productive use of fiscal resources.

Rajan agrees, noting that there is no such thing as “no limit” in how far a central bank can expand its balance sheets. Buying up government debt to expand balance sheets is basically borrowing money from the banks at the reverse repo rate to lend that money to the government. The “limit” of this expansion is reached, he says, when markets lose confidence in the state’s ability to service rising debt levels or if banks prefer other more lucrative assets besides government debt. There is no such thing as a free lunch when it comes to monetary expansion.

Tharman is somewhat concerned about the potentially long-term scenario of low interest rates worldwide, even as the concurrent Chairman of the Monetary Authority of Singapore recognises that central banks “have to do what it takes” in a crisis to protect their economies. Following a decade of extremely low interest rates since the Global Financial Crisis, he says, this has led to higher levels of corporate leverage and a search for yield with money flowing indiscriminately into emerging markets and into high-risk investments.

Tharman also observes that these low interest rates have led to heightened levels of financial risk in the system even before the Covid-19 pandemic — partly as central banks suppressed risk premiums and encouraged investors to embark on a search for yield. Moreover, economic studies have shown that this increased risk has not delivered a significant payoff in corporate investment. Worse, suppressed interest rates will likely hurt returns on long-term investments like pension funds, hindering the readiness of people around the world for retirement, potentially leading to higher saving rates that could ultimately dampen growth.

The Death of Emerging Markets?

The biggest losers of this crisis are unfortunately, likely to be emerging markets (EM), since these have significantly less resources than developed markets (DM) to stimulate their economies. This is especially worrying for the global economy, warns Tharman, since it is the rapid growth of these economies that drives most of the world’s growth. “When we think about the future of the world economy, it is fundamentally about whether the emerging world is going to continue to emerge, or whether it is going to submerge,” he says ominously.

And this risk of submergence is considerable indeed, cautions Tharman, since most EMs lack the fiscal wherewithal and credit standing to stimulate their economies like DMs. He fears that the gains made in the past two to three decades will unravel and pour cold water on their stories of development with considerable social, political and geopolitical costs. Inaction, notes Rajan — a former International Monetary Fund (IMF) Chief Economist — could see EMs lose the “economic muscle” to make a full recovery, especially if trade continues to slow down following Covid-19.

“I have to say that the multilateral response, not for any fault of the multilateral institutions...has been relatively timid so far,” laments Tharman, who was once touted as a future IMF chief. He notes that the IMF quotas have often lent much larger to DMs rather than the EMs who need them more, while a special drawing rights agreement for all countries made following the global financial crisis has not been fully supported this year due to geopolitical concerns. Rajan blames the US and China for not exercising global leadership, calling for a truce on trade disputes at least with regards to non-sensitive items to rescue the EMs.

“It is just the wrong thinking, even if you are thinking of our own interests. Our own interests depend on that of the rest of the world,” Tharman says with exasperation. He takes comfort however, in the agency of smaller states and middle powers, who stepped up to continue the Trans-Pacific Partnership following the withdrawal of the US. Ultimately, if the great powers do not step up, it falls to such countries to more proactively shape the rules-based international order they wish to see together.