In the 11th November 2008 print edition of The Straits Times, Political Editor Chua Lee Hoong writes an article titled “High growth brings high risks, for nations too“:
High growth brings high risks, for nations too.
By Chua Lee Hoong
Political Editor, Straits Times
11 November 2008Five years is all it will take to ruin Singapore, MM Lee Kuan Yew said recently.
Watching the financial crisis claim one victim after another in quick succession in recent weeks, I have been wondering if Mr Lee wasn’t being too optimistic. Perhaps it won’t take five years; perhaps a couple of years might be enough!
Lest you think I have taken leave of my senses, let me hasten to add that I make that remark in light of the cataclysmic collapse of Lehman Brothers and the bizarre bankruptcy of Iceland.
Take Lehman Brothers first.
If a 158-year-old investment bank everybody thought was solid as a rock can collapse, can something similar happen to a Singapore institution? And if such a collapse happened, would the Republic be able to survive as a financial centre?
What Lehman Brothers held in liabilities was 3x the total deposits in all the banks in Singapore combined, say some analysts. So the answer to the question – Can the Republic survive? – is “No”. Singapore will go belly-up, like Iceland did last month.
Just a year ago, Iceland was ranked by the UN Human Development Index as the most developed nation in the world. Its per capita gross domestic product was twice that of Singapore’s. It had enjoyed a decade of high growth, fuelled by financial deregulation in the 1990s.
And then it went bankrupt for the oldest reason in the world: It borrowed too much.
Swashbuckling entrepreneurs borrowed to buy up assets in Europe; Iceland’s banks financed their expansion not with deposits but with reckless borrowing from overseas. The central bank allowed it all to happen by keeping interest rates high at 12 to 15 percent, inducing the inflow of deposits from overseas.
Result: Its banks collapsed under the weight of external debt estimated at EU$50bil, compared to a GDP of EU$8.5bil. Iceland now has to borrow from the IMF and Russia to keep its economy going.
If bankruptcy can happen to Iceland, what is there to prevent Singapore, another small nation, from following a similar path?
Nothing very much, really. Except the wits of its political leaders and monetary regulators, and the financial buffer provided by the reserves accumulated over many years.
Singapore’s leaders have reminded the country time and again how important it is to have prudent ministers who will make decisions for the long-term good, and to save for a rainy day.
Let’s fess up, most of us had become tired of hearing those reminders. But the rainy day is upon us, and it would be thoroughly churlish not to say now that those injunctions were right.
All we need is an incompetent leader with no experience in steering the economy or setting monetary policies, and we won’t need five years before we start seeing the negative effects.
I was particularly chilled by a question raised by a visiting American academic the other day: Why has no one attacked the Singdollar?
Why chilled? Because 10 years ago, speculative attacks on the Thai baht led to the collapse of the Thai Economy and the Asian financial crisis.
That someone can ask the question about the Singdollar means that no one should rule out the possibility of it being attacked by speculators intent on profiting from doing so.
I have no knowledge of whether there have been such attacks, but my guess is that there have been few. Speculators know that Singapore can defend its dollar, thanks to its accumulated reserves.
Still, reserves are not finite. A sum of $150b has already been pledged to guarantee bank deposits in Singapore up to 2010. $100b or two here , a $100b or two there, and surely there have come a point when our reserves are significantly less – and we are consequently more vulnerable. It would be foolish to think that the reserves are a bottomless pit.
As the current turmoil has highlighted, being wealthy is no guarantee that you will not be vulnerable.
And Singapore is particularly vulnerable, thanks to its policy of going for high growth and high inter-connectedness with the world economy.
That policy has brought growth of 7 to 8 percent a year when times were good.
Singaporeans have been told this repeatedly and have come to accept it as an article of faith – no connection with the globalised world means no rapid growth.
But what they might not have grasped – until now – is that high returns also means high risk, even for a country.
If Singapore were North Korea or Myanmar, insulated from the global turmoil, it wouldn’t be so vulnerable. But it wouldn’t be very wealthy either.
Once you’ve cast your lot with the global economy, there can be no decoupling.
But would Singaporeans have it any other way?
Probably not, which is why it is so critical how you choose your financial planner – or your political leaders.
It is most amusing to read Chua’s nearly vacuous article of doom and creation of a climate (economic) fear. Chua advocates a stabilising political environment, one bereft of change, to help stave of economic doom. Somewhat similar to Bush’s miraculous 2004 electorial victory. But US citizens have spoken their mind and voted accordingly, seeking fresh blood to fix its problems. Does Barack Obama, a short-term US Senator and one that honestly lacks the relevant experience to be the ruler of the civilised world, have as Chua puts it, “experience in steering the economy or setting monetary policies”? Hardly. However what he would have would be a team that does, including Warren Buffet.
Do our Finance Ministers past and present possess the training and disciplines to run an economy? No. Political leaders exist to lead politically, but by and large the real decision builders are the people actually in the industry, be it GIC, Temasek, DBS, et al. Suits. A portent of one such as “All we need is an incompetent leader…before we start seeing negative effects” ranks of fear-mongering. Claiming that our political leaders are directly responsible for economic success is blatant stealing of credit. Claiming political wisdom when times are good and uncontrollable global waves beyond the powers of our political leaders when times are bad really have to stop. However it must be admitted that the accumulation of reserves is a good and far-sighted move by MM Lee, as in Nation Building 101 (of which MM Lee could be co-author), that is one of the bedrocks of a nation of zero resources.
Chua herself admits nothing will help Singapore stave off a global economic meltdown, but the difference between Singapore and Iceland is that Singapore did not carry our reckless practises. Similarly, the US did what it did, but China didn’t. Size and any alleged similarity between Iceland and Singapore are moot. Actions alone determine who survives and who doesn’t. Does Singapore have better regulation or policies differentiating itself from Iceland? Different yes, better, maybe not. The lack of a regulation resulting in the current High Notes 5 fiasco and the resultant action needed by the Government to back $150b of deposits is a sure sign of that.
Temasek is looking to lose big in ABC Learning. Are our political leaders to be blamed for this, as our competent leaders? Did the regulators, our political leaders, the suits not see the heavy liabilities or asset leveraging that ABC Learning had done? Or are they to be forgiven for uncontrollable global forces?
There is nearly no clear link between staving off economic doom and voting for our incumbent political masters that Chua has brought up. One really wonders what the purpose of the article is for.
