Pragmatism, eclecticism are S'pore's two 'isms'

oct 25,2010


These are excerpts of a speech by Permanent Secretary (Trade and Industry) Ravi Menon at the Singapore Economic Policy Forum last FridayECONOMIC policy is at an inflexion point. The financial crisis of 2008 to 2009 has altered the way we perceive the free market. The idea that competitive markets are sufficient to ensure efficient outcomes and stable economies is under heavy intellectual fire. Barry Eichengreen says the crisis has 'cast into doubt much of what we thought we knew about economics'. Paul Krugman says that much of the past 30 years of macroeconomics was 'spectacularly useless at best, and positively harmful at worst'.

But rumours of the demise of market-based economics are premature.

The balance between markets and government is the central issue in policy debates over economic development.

The crisis has revealed significant imperfections in market mechanisms: information asymmetry, moral hazard, systemic risks, and behavioural or non-rational motivators of choice. It has also revealed the inherent limitations of government: In a globalised and complex economy, governments have fewer levers to pull, and these levers are less potent than before. Neither market fundamentalism nor central planning has worked.

As we look for a new paradigm, each country will have to find its own balance between markets and government.

The two 'isms' that perhaps best describe Singapore's approach are: pragmatism - an emphasis on what works in practice rather than abstract theory; and eclecticism - a willingness to adapt to the local context best practices from around the world.

Singapore's approach can be summed up as: Governments need markets and markets need government.

First, governments need markets. That the market plays a central role in Singapore is well-known. According to the World Bank, Singapore is the easiest place in the world to do business. According to the Heritage Foundation, Singapore is the freest economy in the world, after Hong Kong. There are virtually no import tariffs, no export subsidies, no exchange restrictions, no price ceilings, no minimum wage, no rent control. Income tax rates are among the lowest in the world, and government expenditure as a percentage of GDP well below most countries.

Equally, if not more importantly, government policies have been strongly guided by the application of market principles. Be it in industrial policy, medical insurance, congestion pricing, social security, regulation of utilities, or allocation of land, Singapore has assiduously applied market mechanisms and price signals. 'Getting the economics right' has been a hallmark of governance.

Second, markets need governments. Economic development does not occur naturally. It needs pre-conditions, and if these do not exist, government needs to create them. Markets function best under some exacting conditions - rule of law, perfect information, absence of coordination failures, and no monopoly power.

But the irony is that governments sometimes have to be in markets to en-able these conditions.

This is where free marketers are disenchanted with Singapore - the Government has never hesitated from guiding the development process or intervening in markets where it believes such intervention will lead to superior outcomes.

The objective of government intervention in Singapore is neither to suppress nor to supplant markets, but to support and sustain them. Government intervention has sought to harness the power of the market to manage and grow the economy.

Reasonable people have argued - and quite rightly so - that not all of the Singapore Government's interventions have worked. But that is a reason to scale back, modify or even withdraw the intervention, not to reject the role of government altogether.

Adapting from a framework first proposed by Dani Rodrik to describe the role of institutions, let me illustrate how government in Singapore has intervened to try to make markets work better, in four key respects.

First, the Government has sought to enable markets. This includes ensuring rule of law, property rights and public infrastructure - functions that most governments perform. But in Singapore, enabling markets has also included industrial policy and capability development, subjects of continuing controversy in policy circles around the world.
Second, the Government has sought to regulate markets. This includes supervision of the financial sector, competition regulation, and taxation of negative externalities. A key feature of Singapore's approach has been the shift towards lighter regulation accompanied by risk-based supervision.
Third, the Government has sought to stabilise markets. This is the bread-and-butter of macroeconomic management. Singapore's basic approach in monetary and fiscal policy is not far from global practices.
But its efforts to address asset price inflation and credit crises are interesting examples of targeted interventions that harness market forces.

Fourth, the Government has sought to legitimise markets. Globalisation, free trade, and open markets lead to significant dislocations. Some of the sharpest debates over the role of governments centre on this: To what extent should governments facilitate adjustments, redistribute incomes or provide social safety nets, so as to maintain public support for market-oriented policies? Singapore has sought to find its own middle ground on this complex challenge.