Saturday, July 27, 2013

Sleeping on the other side of the world

Walking through Vienna in the late evening hours I paused to hear two very talented young women play a classical piece. I mean Berkeley College top of the class talented, just playing on the street. The sound of music in the center of the city made me think of some of the differences between Singapore and Vienna. Two small places with high standards of living, diverse histories, some striking similarities and stark differences. I have been slow to post as this trip has been long and tiring but exciting intellectually. Too much time awake at 4 AM though in very different time zones.

There was no music on the streets in Singapore, nothing but the sounds from the shops and stalls in the crowded quarters such as Chinatown and Little India. In Vienna street music is everywhere. In the morning you can hear the radios as the restaurants are cleaned from the busy night.

Working people are present in Vienna. You see dusty construction workers on the subway, some neighborhood cafes and the trams after their shifts. While in Singapore, I never did see anything similar. The subway in Singapore is immaculate and filled with young people and office workers. In Vienna there are actually signs that life doesn't end at 30. The subway in Vienna is typical of the way it feels in one of our cities. It looks used but is fast and efficient and like a modern city has a good complement in the trams and buses. I didn't use the bus in Singapore but they were present and the transit network is vast. Remember cars are quite expensive there so they need to heavily invest in public transport.

Most importantly, Vienna and Austria have the political pluralism that Singapore has yet to achieve. In the Straits Times there were discussions during my visit about what political pluralism would mean for the city-state. The opposition holds only 6 seats in the unicameral legislature out of 87. They didn't win one seat until 1984. It is not likely that other parties will have a significant impact on Singapore for many years. 

Austria is another case entirely. Like many European countries its politics are divided between the center-left Social Democrats (including the brilliant Mayor of Vienna, Haupl) and the conservative People's Party and the xenophobic Freedom Party. There are Greens and right wing populists that make for a divided parliament but vibrant political life.

Both are prosperous, small and ethnically rather homogenous. Austria is one of the few EU countries where real estate values are higher today than before the crisis (so too Singapore, can you say bubble in German?) But there is no other choice but messy democracy and all that it implies for developing the full rights of humanity. With the noise and dirt comes the violins that sound like weeping into the warm vibrant summer night.

Thursday, July 25, 2013

Singapore and Economic Development

Safely enjoying a coffee in Vienna and thinking back to the early part of the trip. One of the main questions we discussed during the week was the applicability and sustainability of the model of growth used by Singapore as a strategy for other developing countries. As the following graphic shows, Singapore has experienced a very high rate of growth going back to the early 1960's and its independence. There have been some small blips along the way, yet the nation has withstood the global crisis of 2007-2009 and the Southeast Asian crisis of 1997.

The simple model of growth we discuss in the class includes a modified Hecksher-Ohlin theorem. Nations specialize in those goods which are compatible with their factor endowments. The endowments being labor, land, capital and human capital (or entrepreneurial ability). Some of these are given by nature (how much oil sits under your land) or legal agreement (the size of your country) and are difficult to change over time. Others are subject to policy, meaning that growth can come from the improvement in quality of the factor, not just its quantity.

For a small country like Singapore (pop of 5.4 million today after much growth and immigration) the investment in human capital and education has been critical to its long term success. They provide subsidized tuition to Singaporean students and students from abroad willing to commit to remaining employed in a Singapore registered company for three years after graduation. They have a loan program to make up the difference. While tuitions vary based on discipline, social sciences are about 7500 per year and business 8500, they average about how the full cost. Public education at the primary and secondary level is centralized and built on the British model. The workforce is relatively well educated and wage rates are high. Yet the economy still grows.
source World Bank


Singapore's early years of growth were fueled by foreign direct investment and controls over labor. They took a path of control in the political and economic realms that would be alien to liberal democratic countries. They engaged in forced savings through a social security scheme that provided additional capital from its residents. The inflection point came in 1985 when the economy shifted to a positive capital account balance and the amount of national savings exceeded investment. Singapore has generated significant internal resources and now does more FDI externally than it receives from abroad (it is still an attractive place for FDI). The sovereign fund has over SGD 1.2 Trillion (not a misprint) under its control.

source World Bank

Singapore has taken advantage of its physical location to build a major shipping sector. It sits on trade routes between east and west and has a very prosperous deep water port. The economic plan concentrates not on one industry but a range and Singapore has successful sectors in Finance and Insurance as well as technology and other manufacturing. 

They have succeeded in developing labor, capital and land with huge incentives to entrepreneurial efforts (special tax and trade policies) but is transferable? Singapore is small, compact (Indonesia has 6000 inhabited islands), ethnically homogenous (but getting more diverse) and wealthy. For a significantly larger country, could the same type of economic planning work if there are strong ethnic, religious or regional divides that complicates the division of efforts? Would the world participate through loans and FDI for a country not following liberal democratic norms (Singapore ran a persistent current account deficit and had net capital inflows from the early 1960's until mid 1980's)? Some aspects of the experience could be copied such as the concentration on education and training, but it is not likely that the wide range of policies could (for example, everyone can't run a current account trade surplus, someone has to have an offsetting deficit). But what makes Singapore fascinating is the nature of the small controlled experiment and its unique flavor and what we can learn to do and not do to build economic, political and social structures.

Monday, July 22, 2013

Rent seeking behavior and the economics of commodities

I am taking a small break from writing about Singapore to draw attention to a major story that appeared in the NY Times over the past few days. It appears that Goldman Sachs has been operating Metro International, an aluminum warehousing operation in a manner that inflates the price of the commodity in a classic illustration of "rent seeking". The activities described if accurate, account for high profit and low value added activity, shifting costs to customers and consumers.

In Microeconomics, we teach students that there is no profit in the long run. We make this counterintuitive claim because profit is different in an economic sense than it is in an accounting sense. In accounting profit is the net of revenues and costs, But in economics we are concerned not just about those costs but also the opportunity cost. This is the cost of forgoing the next best opportunity. Meaning that if the accepted rate of return in the economy is 5%, then anything below that is a loss. In the long run we assume that firms can't exceed that rate of return because if there are opportunities for higher than normal profits then firms will enter the market and drive down returns (given a lack of barriers to entry, meaning free entry and exit). There is an incentive then for firms to try to create profit by manipulating markets or government to capture higher than normal profits, economic rent.

In the Goldman Sachs example, the Federal Reserve gave permission for banking institutions to speculate in the commodities market in 2003. Goldman subsequently purchased Metro International which offers warehousing services for aluminum. According to sources cited by the Times, Metro has significantly slowed deliveries of the commodity, at the same time they make money charging rent to customers for warehousing space. The amount of material under the control of Metro has skyrocketed from 850,000 tons in 2010 to over 1.5 Million tons today (it was less than 100,000 tons in 2008).

This is rent seeking writ large. The Federal Reserve has to decide over this next year whether it will continue to allow the banks to control commodities. It is obvious that Goldman does not need aluminum for its operations (nor do the banks like JP Morgan Chase which is trying to do the same for copper), yet they have identified a way to capture profit by simple financialization. There is no value added to the customers, there has been no operational or technological improvement by their ownership just more money flowing to the pockets of execs at the banks at the expense of other businesses and consumers. They manipulate markets and regulators to allow them to capture above normal profits, rent seeking.

Friday, July 19, 2013

Multicultural environment of Singapore

Those who know Singapore know it is a relatively small city-state at the tip of a Malaysian peninsula. Singapore won its independence from Malaysia 48 years ago (after previously getting independence from the UK). It is a relatively new country with new cultural, political and economic foundations. You do not have to spend much time here to see the richness of the multicultural environment.

The Asian influence is strong with a Chinese, Malay, Indonesian and Indian components. I have a Japanese friend here and I am certain there are representatives of other Asian ethnicities here as we'll. There is a Chinatown, Little India and an Arab Street. 

There is the great central mosque, the Sultan Mosque. It anchors the Arab Street area (which is really a quarter). In honor of Ramadan there are special food and shop activities in the latter part of the day near the mosque. Yesterday we met with officials from the Singapore Management University which attracts students from around the world and the director of the institute we visited was an Indian national who has lived here for over 30 years.

And it works. While the political elite is largely of Chinese descent there are significant contributions across the ethnicities. Why does this multiculturalism work? Since Singapore is a small place; 287 square miles and 5.4 million people there is a rational basis for the need to make sure everyone has the capability to make a contribution. Since the birth rate is relatively low, there is a big emphasis on immigration. For example, foreign students are invited into Singaporean universities with subsidized tuitions if they are willing to spend three years working for a Singapore registered company. With this policy they combine the support for human capital development and that of openness to people's from other countries. Typical of many policy choices here, it is rational, there is an incentive, so they do it.

By the way there are many Caucasian visitors and residents here.

Thursday, July 18, 2013

Infrastructure in Singapore

One of the interesting features of Singapore is the intense capital investment in infrastructure. Everywhere you go there are good roads, access to public transit and sidewalks. This facilitates life in a densely populated area. Not surprisingly, given the market orientation of the system here, there are incentives and disincentives to lessen traffic and consume public transport. To own a car here is quite expensive.

In fact, car ownership requires payment of a fee that is in excess of the open market value of the car. So cars which are expensive to import become even more expensive to operate as you are paying the price of the car again as a one time excise. On the upside they offer lower (basically free) prices for the subway during  early morning hours. The subway system is comprehensive and efficient. It is convenient and comes frequently. Clean and comfortable it is one of the best transit systems I have ever experienced.

The nation invested significant funds in its deep water ports to capitalize on its strategic sea lane position. I had an amazing view of the shipping lanes on my ride in from the airport and I have never seen so many big ships off a coast. All said the smart investments have contributed to Singapore's high rate of economic growth and high quality of life. 

Wednesday, July 17, 2013

Initial thoughts on Singapore

I have been here all of almost two days so not by any means an expert but it is a very interesting place. Doing serious research on economic performance here and their focus on human capital for talks later this week. My first takeaway is that I will never complain about the humidity in Boston again. Wow, dripping here constantly. Never felt humidity like this before and that is saying something as I spent my entire life in the Mid-Atlantic and New England regions where humidity is the norm.

The urban environment is quite green in that there are trees and grass everywhere. This photo is of Marina Bay and the three towers of the casino/hotel there. The top is a a park. This is a common site in Singapore as they have rooftop gardens on some buildings including one across the street from my hotel. Singapore is not green in the recycling sense as there is no sign of any efforts. Not sure where all   the garbage goes however.

The people are friendly and cafe life is similar to Europe in that nobody bothers you and service is no speedy. But just relax and take it in and enjoy. At least that has been my philosophy so far. Favorite coffee place is Symmetry which is near the Arab Street area and the great Mosque. Best mocha ever and the food is tasty.