SINGAPORE (Apr 17): The International Monetary Fund (IMF) just released shockingly downbeat forecasts showing the world economy contracting nastily this year. Even if the outcome turns out to be better than the IMF believes, it is clear that the Covid-19 crisis is one of the most severe challenges we have faced in many years. As we go about managing the crisis, a number of difficult questions have arisen — and two in particular need attention.
The first is that an act of god such as a pandemic causes losses which have to be shared out and financed. What is a fair and efficient way to divide up the losses among the key players — governments, workers, shareholders, banks and insurance companies?
Second, we seem to be in an era of frequent shocks each marked by unpredictability and complexity. How should our policy approaches adjust so that we are better equipped to deal with such crises?
How best to apportion the burden of losses from a shock event?
This is a unique recession where public health exigencies require that governments impose stringent restrictions on human activity, restrictions which cause immense losses in the economy. Singapore’s economic output is set to plunge in the second quarter and continue falling through at least the third quarter before perhaps beginning a recovery. That means substantial job losses, little income earned by the self-employed and collapsing profits for businesses. Many firms might be forced to shut down for good. Beyond that, falling valuations of stocks and bonds have laid waste to many portfolios, hurting the adequacy of retirement savings and the ability of pension funds to deliver what they had promised. And, it will not be long before home prices decline as well.
Some of these losses — such as portfolio losses — will have to be borne by individuals. But for the other losses, is it fair to ask ordinary folks and companies to shoulder them when workers and companies are not responsible for the downturn, one caused by unavoidable government measures?
In many disasters, such as floods or fires, it is insurance companies that absorb a good part of the losses. However, most insurance policies contain exemptions for pandemics since it is difficult to calculate the potential losses and probabilities. Clearly, that leaves a big hole in our system of sharing risks. And that raises the need for state-sponsored insurance schemes to step in where the private market has failed. These can be funded out of taxes or be structured as special insurance schemes whose premiums are paid by the corporate sector.
But for now, there being no such insurance schemes, the losses have to be borne by the various players in an economy. As we can see from the following, each of these options have their pluses and minuses:
• Employees of companies will lose jobs and suffer wage cuts. Freelance workers and the self-employed will lose out on income opportunities. If most of the burden is placed on workers who are the majority of the population, the welfare consequences would be severe. In many cases, ordinary folks do not have much liquid savings to rely on if there is an abrupt loss of wages. But, there are two further problems if individuals were made to bear the brunt of these losses. First, they would cut back on their spending which would deepen the recession. Second, where they are unable to service their loans they would default, shifting the losses to banks — but also putting financial stability at risk. In short, placing too much of the burden on individuals could aggravate the crisis.
• Shareholders of large companies will also endure losses because profits will fall or turn into outright losses. However, these bigger companies are better-positioned to minimise losses. Many can be expected to lay off workers or cut salaries, or they can use their market power to force their suppliers to accept delayed payments or to cut the prices they charge for goods and services supplied.
• Owners of smaller companies will also similarly try to minimise their losses but, not having much clout, they will be less able to shift the burden of losses to others.
• That leaves the government — and there is a lot that the government can do. It could subsidise rents and wages and so take some of the burden. The government could also encourage continued lending by banks through risk sharing schemes under which the government would take a high share of any loan losses. Indeed, Singapore is employing some of these schemes. However, this option also has costs. Public sector deficits might grow as a result, and the burden of the losses is effectively being shifted onto future taxpayers that raises uncomfortable questions of inter-generational equity.
• Another approach could be for the government to force landlords to cut rents and banks to forgo interest payments for a while. In other words, the government shifts the burden of losses to corporations, especially those seen as “rentiers”, those who earn passive income from owning property or because they have a monopoly over something. However, this would mean that governments were interfering in the free market or worse still imposing obligations on companies retroactively, which could set bad precedents for the future.
Given these challenges, how should losses be allocated in a sustainable and equitable way among the stakeholders in an economy? There are no hard and fast rules but it seems to us to be fair if the share of the burden should vary according to the resources of each of these parties:
• Governments have tremendous financial resources such as the accumulated surpluses from previous years and access to relatively cheap borrowing. Thus, it is only fair that the government should take a big share of the losses. In Singapore’s case, the government has been piling up massive surpluses for decades and so is well-resourced. Indeed, the three budget packages announced by Deputy Prime Minister Heng Swee Keat which amount to more than 10% of gross domestic product essentially mean that the government accepts that it has to show the way in absorbing the losses. However, because very few Singaporeans know the true value of the reserves or the actual cash flow received from these investments, it is difficult to assess how much the government can prudently spend. But our back-of-theenvelope calculations suggest that it has the scope to do a lot more.
• Large corporations also have considerable access to retained profits and, like the government, are able to borrow relatively cheaply. Many have dominant positions in a market giving them pricing power which they have used to extract large profits in the good years. It is only right that they bear a higher share of the losses than small firms or individuals. Within the large company sector, those deemed to be rentiers such as landlords should step up to the plate even more. It might be quite fair if office and retail landlords are required by the government to forego rents for a few months.
Improve our resilience and ability to adjust to severe future shocks
This is a big issue that will be studied in detail once the crisis is over. However, already a few important issues have emerged for us in Singapore.
The first is the need for automatic stabilisers, which quite often arise from social safety nets. In an economy with a well-structured unemployment insurance scheme, for instance, there is no need for discretionary special budgets that offer one-off government handouts as unemployment benefits would kick in as soon as a worker lost his or her job. But one glaring hole in Singapore’s safety nets — among others — is the sad lack of protection against unemployment. Another gap we need to address is the plight of our elderly who, lacking savings to finance a decent retirement, are forced to work. Yet, many of them have lost their jobs because of the lockdown. In a more volatile world that will experience many more downturns, addressing these gaps will become more pressing.
The second is the need to listen to the feedback from the ground, including from those who might appear to be discordant voices. The plight of the roughly 200,000 foreign workers is a blot on Singapore’s name that should never have been allowed to happen. Hundreds have been infected by the virus while tens of thousands are quarantined in dormitories now acknowledged as over-crowded and unhygienic. Singapore owed these migrant workers a duty of care which we failed miserably to fulfil. Non-governmental organisations like Transient Workers Count Too (TWC2) have been raising concerns over this poor treatment for years, as have prominent persons such as Ambassador-at-Large Professor Tommy Koh. More recently, TWC2 had specifically warned of the risk of an outbreak of Covid-19 infections in the dormitories. It looks like this warning was not heeded — at tremendous cost to the foreign workers but also to public health in Singapore.
Clearly, the government alone cannot be expected to notice every problem or to discover every threat to the country that might emerge. Our society and economy are much more complex and rapidly changing for that and it is clear that even the most well-meaning government official might have blind spots.
To be resilient, every country needs an ecosystem that allows rigorous self-inspection, so that the whole of society is able to sieve through information, analyse the data, raise concerns about potential risks or threats, and be given a fair hearing in the media and other platforms, so that their findings reach a broad audience. It is fair to say that Singapore has not achieved what is necessary in this area. We do not have a Freedom of Information Act, for instance. Data needed to understand important issues — such as the size of our reserves — is not available.
As TWC2’s example showed, it is difficult for those outside the establishment to be heard.
The third area is the regulation of competition — in particular whether there is a fair balance between large and small firms. It does not sound right that in a slowdown, large companies are able to squeeze smaller players by delaying payments and forcing price cuts onto them. Similarly, large landlords have been allowed to dominate over tenants for a long time — a constant complaint from the business sector but which has yet to be properly addressed. The recent controversy over delivery firms charging high commissions for food delivery could be another example of the small guy being taken advantage of. Clearly, there is a need for better regulation to ensure fair trading practices.
Separately, there is a risk that the deep recession we are suffering will cause many small businesses to close, leaving only a few big ones to dominate their markets. That loss of competition could lead to higher prices, poorer treatment of consumers and a less dynamic economy.
This crisis will eventually pass. But as one American leader once said — never let a crisis go to waste. Our current travails with the Covid-19 emergency should open our eyes to the gaps that exist in our system and encourage us to resolutely overcome those weaknesses. Only then can we be in a better position to face the next big challenge — whether it is the area of how to allocate losses or in building a more resilient ecosystem.
Manu Bhaskaran is CEO at Centennial Asia Advisors
