Global-is-Asian Issue #19

ISSUE #19 Oct 2013 – Jan 2014

Plotting Indonesia’s “Median Competitiveness Web”

Policymaking with markets

THE BIG IDEA

Our Singapore Conversation: Telling National Stories Public Engagement

by Kenneth Paul Tan

I

n August 2012, I was invited to serve as a committee member of the year-long national-level public engagement exercise

called Our Singapore Conversation (OSC). I accepted the invitation partly because I wanted to contribute to a

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Telling national stories

potentially constructive effort to rejuvenate the public sphere, and partly also because I wanted to study, from the inside, the Singapore Government’s ongoing efforts at public engagement. In an article published in the August 2012 issue of Ethos, I had argued that, where public engagement in Singapore was concerned, a gap separated rhetoric and practice.

OSC was the latest in a series of national-level public engagement exercises that began in earnest in the late 1980s. In my research, I have been interested in this transitional period that witnessed subtle but profound changes in developmental Singapore’s strong state as it negotiated and adapted to the... p continued on page 3

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DEAN'S PROVOCATIONS

Can we trust markets?

C

an we trust markets to solve our problems? This may well be the defining question of our time.

Until recently, policymakers especially in the West, believed that markets Kishore Mahbubani were better than governments in finding good solutions to social and economic problems. This was the intellectual legacy of the famous ReaganThatcher revolution. The 2008-2009 global financial crisis, however, was clearly a result of excessive reliance on market wisdom.

Today, there is a deep new questioning among public intellectuals and policymakers about the balance between the role of markets and of government.

This issue of Global-is-Asian is timely as it touches on this fundamental question of our time. In America, for example, there is a ferocious and ongoing debate between the Obama administration, which believes that government should intervene to provide minimum health insurance to all, and the Tea Party advocates who believe that markets should provide health insurance, not the government. By pointing out how both government intervention and market mechanisms have their shortcomings, the article by M. Ramesh and Wu Xun make a valuable contribution to a key global debate. It also illustrates Singapore’s own struggle to find the right balance between markets and the government.

Many other Asian countries are facing this challenge. The Indian economy has slowed down considerably because the government has not freed its markets sufficiently. China’s leaders have also announced after the recent significant Third Party Plenum in November this year that China would now pay greater attention to markets structures in a bid to stimulate growth. According to Xinhua news agency, the market will now

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Oct 2013–Jan 2014 ·

play a “decisive” role in allocating resources. In this context, it is wise for Razeen Sally to remind us that markets have intrinsic strengths – freedom and allowing the flourishing of individuals.

Asia’s successful economic growth is also a result of the blossoming of ideas and innovations and the strengthened animal spirits that flow from the creation of open markets.

Nobel laureate Amartya Sen spoke wisely, when he said (at a visit to the Lee Kuan Yew School of Public Policy) that for societies to succeed, we need to balance the invisible hand of free markets with the visible hand of good governance.

Even if we have agreement on the right policy prescriptions (already a gargantuan task), the implementation of the right policies will not be easy. Many good public policies fail because of bad implementation. This is why public policy education to strength this “visible hand” is vitally important. Good public policy education of course, is not just about implementation but the whole enterprise of strong governance, of guarding the guards while pursuing the good life for society as a whole. Both governments and markets require good governance.

Kishore Mahbubani is Dean of the LKY School of Public Policy, and author of The Great Convergence: Asia, the West, and

the Logic of One World.

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THE BIG IDEA

Our Singapore Conversation: Telling National Stories (continued from page 1)

opportunities and threats that accompanied economic, social, cultural, technological, and political transformations within a rapidly globalising neoliberal city-state.

Although OSC took pains to explain how the perspectives, aspirations, and ideas of almost 50,000 participants had filtered into the policy process that culminated symbolically in the Prime Minister’s National Day Rally speech, it seemed to me that we needed to understand OSC as more than just a mechanism for collecting and aggregating policy input from a citizenry that had become more able, interested, and motivated to participate in the policy process.

At the Institute of Policy Studies’ Conference on Civil Society held on 11 November 2013, I argued that deliberative democracy can thrive in Singapore if we work consciously towards building an inclusive, representative, and fair civic space that is structurally supported by principles and procedures promoting reasonable dialogue in conditions where citizens and their government can speak without fear and in good faith that others in the dialogue are also seeking outcomes that are good for all. And yet, it had seemed to me that OSC was also more than just an exercise in developing deliberative democracy.

I carefully studied OSC’s predecessors such as The Next Lap in 1991, Singapore 21 in 1999, and Remaking Singapore in 2003.

Each of these exercises had a roughly similar form and occurred not long before or after critical general elections and during a period of some economic or political turbulence (turbulence by Singapore’s standards, that is). There was clearly a pattern.

In August 2013, I presented a paper at a conference in Bangkok that described three possible lenses to help explain OSC more deeply. First, OSC may be viewed as a high-profile activity designed to satisfy a more assertive middle-class desire for recognition. This is a familiar liberalisation story about Singapore’s evolution into a global city, where more globally exposed citizens have become equipped with knowledge and experience to participate productively in the policy process and the desire to be recognised as autonomous individuals populating the higher reaches of Maslow’s hierarchy.

Second, OSC may be viewed as a state-led public ritual.

Rapid modernisation, urbanisation, globalisation, and liberalisation have all induced alienating tendencies, ontological insecurity, and a loss of community, history, and certainty. As both a global city and a nation-state, Singapore needs national narratives to

animate the Singapore identity and provide coherent frameworks of meaning and value to orientate and motivate its citizens and their government towards the achievement of a collectively desirable future. By stimulating widespread, open, and heartfelt dialogue on issues of national importance, OSC was in effect an exercise in collective national storytelling, drawing out tens of thousands of personal stories that intertwined with one another to create a richer and more complex Singapore Story.

Third, OSC may be viewed as a spectacle of nationhood and active citizenship, produced as part of distractive strategies that were, in turn, a part of broader ideological work needed for politically and economically challenging times. One version of this idea is to say that OSC served ideologically to repair a social compact that had weakened over recent years as indicated by widespread dissatisfaction with rising inequality and costs, rapid demographic transformations, and infrastructural strain in a crowded city. Perhaps the most pronounced expression of this dissatisfaction came in the form of the 2011 General Election that yielded the worst result the incumbent had ever achieved since Singapore gained independence.

All in all, it would hardly be a surprise to argue that OSC performed a conservative ideological role. But I would also argue that the exercise was productive of new conditions of possibility for political change.

Compared to previous national-level public engagement exercises, OSC reached out to a significantly larger and more varied group of Singaporeans. The dominance of committee meetings and top-down forums in previous exercises gave way to peer-topeer engagement through creative, less hierarchical, and skillfully facilitated forums that made every effort to stimulate imagination and not to close off discussion, no matter how tempting it might have been to do so. The context of a more diverse and critical citizenry and an active social media environment raised the bar for OSC, since its efforts had to pass the scrutiny of a skeptical public.

For many who participated in its activities, OSC was a practical opportunity to nurture civic and democratic skills through deliberative practices that went some way towards enriching the Singapore Story and strengthening the prospects for a stronger democracy.

Kenneth Paul Tan is an Associate Professor at the Lee Kuan Yew School of Public Policy and Vice Dean (Academic Affairs)

· Oct 2013–Jan 2014

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4 OPINION-EDITORIALS

Wealth management for all seasons?

Relative to Switzerland's, Singapore's wealth management industry is a recent phenomenon. Its development has also been more state-driven. Wealth management was first identified in national development plans as a potential growth industry in the late 1980s. The Government has since introduced a slew of grants, concessions and tax incentives to attract fund managers to Singapore.

In contrast, Switzerland's development as a wealth management centre was more organic and involved much less state intervention. In the 16th century, Jean Calvin created a favourable environment for Protestant refugees by liberalising rules on usury, thus consolidating Geneva's role as a banking hub. In 1713, banks were banned from revealing client information by the Great Council of Geneva, laying the bedrock of banking secrecy in Switzerland.

Compared with Singapore, Switzerland lacks a long-term strategy directed by a powerful central authority. Will the traditional industry-driven approach that has underpinned the rise of Western financial centres withstand the test of time? Or will younger state-driven Asian financial centres prove more effective? A close observation of the development of Singapore and Switzerland as offshore financial centres may provide some preliminary answers.

Woo Jun Jie and Yvonne Guo, PhD candidates at LKYSPP, in Straits Times, 3 December 2013

Building ASEAN as a learning community In October 2003, member states endorsed the ASEAN Concord II (Bali Concord II), which established a vision for economic integration through the ASEAN Economic Community (AEC). At the 2007 ASEAN Summit in Cebu, the 4

Oct 2013–Jan 2014 ·

Below is a recent selection of commentaries and op-eds by our faculty.

deadline to establish the AEC was shortened from 2020 to 2015.

As announced at the ASEAN ministerial meeting in Brunei in August 2013, 79.7% of items in the AEC Blueprint have already been implemented. Despite this progress, the realisation of the AEC remains a formidable goal.

It is imperative that ASEAN leaders go beyond the current approach, which is mainly focused on reducing barriers and building infrastructure connectivity. The AEC’s current vision and its four pillars should be strengthened with a fifth pillar: building ASEAN into a learning community.

This approach is strategically important for ASEAN in three ways. First, it can help ASEAN turn the development gap among members into a source of motivation to experiment with new ideas.

Second, ASEAN can learn a great deal from the European Union about economic integration. This includes policy development and institution building. In particular, the European Union’s ‘open method of coordination’, in which countries share information on best practices and use gentle peer pressure to encourage improvement, is an effective approach that ASEAN could adopt.

Third, by emphasising a learning community while implementing regional integration, the ASEAN Secretariat would improve the learning capabilities of the bloc and its member countries. With this focus, it is imperative that the ASEAN Secretariat develop a database that provides robust and timely data on economic conditions, performance and reform initiatives among member countries, along with a comprehensive set of international best practices, especially from the European Union, to deepen economic and institutional integration.

Vu Minh Khuong and Kris Hartley, Assistant Professor and PhD student, respectively, at

LKYSPP in East Asia Forum, 29 November 2013

Europe not quite the paradigm of peace Many claims about how Europe has overcome its past demons are true only in relative terms. When compared to Asia, Europe has achieved far higher levels of reconciliation between age-old enemies.

Yet, the continent still holds traces of its past.

Two issues illustrate this clearly: war reparations and territorial disputes.

Earlier this year, the government of Greek Prime Minister Antonis Samaras resurrected his country’s bid for war reparations from Germany. German Finance Minister Wolfgang Schauble was said to have responded that "the issue was settled a long time ago. Paying reparations is out of the question".

There are similarities here with the argument reiterated recently by Japan's Chief Cabinet Secretary Suga Yoshihide.

All issues of wartime reparation, he said, have been "completely and finally" settled by the 1965 treaty with South Korea that normalised relations.

Europe is also not entirely free of rival territorial claims. The British and Spanish spat over the British overseas territory of Gibraltar flares up periodically. This past summer the issue was revived when the Spanish government argued that Gibraltar laid artificial reefs in waters that "are not theirs".

The cat-and-mouse chases between fishing boats and patrol vessels have also been reminiscent of events that have characterised the Senkaku/Diaoyu and South China Sea stand-offs.

The European model of integration and reconciliation is rightly presented as an attractive approach to overcoming age-old enmities. As always, however, the devil is in the details. Asia has much to learn, although Europe's lingering issues

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of wartime memory and border spats suggest that it, too, is not quite the finished article yet.

Heng Yee Kuang, Associate Professor and Assistant Dean (Research) at LKYSP in Straits Times, 22 October 2012

America’s Loosening Global Grip Few Americans are aware of what Washington lost globally in the recent debt crisis.

For starters, America has always provided the gold standard for democracy.

America has carried a moral authority when it spoke to the world. Now that moral authority has been eroded.

Another major loss will be in the geopolitical arena. In 1980, in PPP terms, America’s share of global GDP was 25% while China’s was 2.2%. Come 2017, the American share will decline to 17.6% and China’s will rise to 18%. Most Americans seem convinced their country will remain the world’s leading power. Yet the vast majority of the world sees an irreversible change occurring.

The third loss may prove to be the most serious. Today, America enjoys an “exorbitant privilege” of being able to print the world’s reserve currency … because the rest of the world still has full faith and confidence in the U.S. dollar as the global reserve currency. Many countries have begun to quietly hedge their bets. More and more trades will be done in other currencies, especially the Chinese yuan.

America can certainly regain the strong grip it had on the global imagination. But to regain it Americans must first understand what they have lost. The American Declaration of Independence said that America should show “a decent respect to the opinions of mankind”. The first way to show respect is to listen to the opinions of mankind. Non-Americans make up 96% of the world’s population – and they are losing their awe for the country. Why not begin to

understand that global opinion on America has changed so fast in recent years?

Kishore Mahbubani, Dean at LKYSPP in The National Interest 21 October 2013

Pakistan: a culture of intolerance Suicide bombings on 22 September at Peshawar's All-Saints Church, which is designed like a mosque to reflect interfaith harmony, killed 83 worshippers and injured more than 125, bringing to focus the danger minorities face in the militancy raging across Pakistan.

While the law provides for equality and protection, the state machinery stands by passively as hate crimes increase against the minorities.

Minorities now expect little protection from the state. The mystery for them is not the identity of their attackers. It is answering why the Pakistani state cannot–or will not–protect them.

Societal intolerance apart, the minorities face several kinds of discrimination and a worrying level of state inaction about it. School and college curricula are not tolerant towards diversity. Minorities face severely limited prospects for jobs, especially at the senior levels, and the Pakistani passport identifies a person through his/her religion.

Paradoxically, much of Pakistan appears oblivious or has given in to the cancerous extremism that is consuming a society that seemed tolerant until the 1970s. Faith now determines identity in Pakistan.

In order to roll intolerance back Pakistani leadership needs to take stock and begin anew. Pakistan needs to adopt fair economic policies that provide opportunities to the youth. The state must establish rule of law without fear or favour, value human life, and provide essential services to the less privileged.

Cities make the wealth of nations More than ever, cities – especially existing and aspiring “global cities” – are the lifeblood of the global economy. The competitiveness of cities – what makes them more productive and successful – increasingly determines the wealth of nations, regions and the whole world.

According to McKinsey Global Institute, as of 2007, 1.5 billion people (22% of the world’s population) lived in the world’s 600 most populous cities and accounted for a GDP of US$30 trillion (S$37.6 trillion) – well over half the global GDP. In 2025, McKinsey reckons that the top 600 cities will have 25% of the world’s population and nearly 60% of global GDP. What are the ingredients that make cities more productive? Some vital municipal policies are parochial: urban planning and zoning, housing, water, sanitation, policing and so on. But the most successful cities, like the most successful nations, also have stable public finances; low, simple and competitive taxation; and transparent business regulations.

They are also characterised by strong and impartial rule of law, openness to trade and foreign investment, and a welcoming environment for foreign talent. Other factors include good “hard connectivity” – roads, transit systems, ports and airports; and good “soft connectivity” – education, skills and technology diffusion.

Like nations, cities with limited – but effective – government and competitive markets do better than cities with big, inefficient government and distorted markets.

This reinforces the message that there is a good deal of overlap between city competitiveness and national competitiveness.

Razeen Sally, visiting Associate Professor at LKYSPP, Straits Times, 20 September 2013

Sajjad Ashraf, Adjunct Professor at LKYSPP in Asia Times Online, 15 October 2013

· Oct 2013–Jan 2014

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THE BIG IDEA

How do Governments Work with Markets in Policymaking?

by Alvin Lee

T

he proper role of markets and the state in allocation of resources and provision of the good life has long been a subject of debate. Wu Xun and M. Ramesh of the LKYSPP recently took a fresh look at the issue in policymaking with “Market Imperfections, Government Imperfections and Policy Mixes: Policy Innovations in Singapore” (Policy Sciences, September 2013).

They argue that the potential of government interventions or market mechanisms as core policy instruments can be eroded by fundamental deficiencies in both. This is why both need to work together in a reciprocal relationship, a duality they call the policy mix.

When markets and states go wrong Wu and Ramesh go beyond the conventional understanding of market failures, which is that the pursuit of private interests leads to inefficient outcomes due to monopolies, externalities, information asymmetry and the like. They identify several other market imperfections, such as the fact that markets on their own often cannot address policy goals of equity, social justice and equality, or that human beings are not actually rational economic agents but instead exhibit bounded rationality, which undermines the working of markets as intended.

Parallel to this, Wu and Ramesh also identify a set of government imperfections which tie the hands of government when

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Oct 2013–Jan 2014 ·

addressing tough policy problems. For instance, principal-agent tensions are pervasive in government because of the challenges of measuring and monitoring performance in the public sector.

Governments are also often unable to access all the information or capabilities to make the right policy decision and encounter high administrative costs in doing so.

These imperfections of market and state lead to what they term the duality paradox, as highlighted in Figure 1. Market imperfections require governments to step in through regulation, direct provision of public goods and taxation, but the effectiveness of these interventions may be undermined in turn by government shortcomings such as principal-agent problems. These government imperfections may in turn require the use of market mechanisms such as privatisation of state enterprises or implementing user charges, with all their attendant imperfections.

Wu and Ramesh argue that the duality of market and government imperfections requires a policy mix of both government interventions and market mechanisms to address many complex policy problems. For example, the presence of natural

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MARKET IMPERFECTIONS

• Loss of economic efficiency due to classic market failures • Lack of mechanisms to pursue goals other than efficiency • Market power • Transaction costs • Public distrust towards profit motive in essential services • Bounded rationality

GOVERNMENT IMPERFECTIONS

Government intervention

• Limited capability in accessing necessary information • Principal-agent problems • Power of organised interests • Administrative costs

Market • Strategic mechanisms responses • Lack of competition • Financial sustainability Figure 1

monopolies such as in the provision of telecommunications or utilities is a market imperfection. But government regulation of such monopolies leads to its own failures such as rent-seeking behaviour, which in turn require market mechanisms to offset.

Land transport in Singapore-a policy mix To illustrate what a policy mix of government and market mechanisms looks like, Wu and Ramesh use the case of land transport in Singapore. Due to rising household incomes and unreliable public transport, the private vehicle population roughly doubled from 70,000 to 140,000 between 1960 and 1970 alone. The Singapore Government instituted a series of interventions to limit the number of cars on the roads, culminating in the Vehicle Quota System (or VQS) in 1990. Under this system vehicle owners are required to purchase a ten-year licence called a Certificate of Entitlement (COE) in order to purchase a car, and the number of COEs is determined by the Government on the basis of prevailing traffic conditions and

road capacity.

But the scarcity of COEs offers rent-seeking opportunities for organised interests and even corruption, hence the need to introduce a competitive bidding system. The use of this market mechanism of auctions to allocate COEs leads in turn to criticisms of distributional inequity as lower-income households are bid out of the market for vehicles altogether. Part of the Government’s response was the rapid development of public transport as an effective alternative to cars, with high standards in route design, scheduling and safety. The authors argue that using a mix of policy instruments in controlling car ownership and usage has not only been effective, it has also provided political support for the development of public transit as a viable alternative to congested roads choked with cars.

The policy mix provides a promising framework for understanding how the strengths of markets can counter government weaknesses, and correspondingly, how the strengths of government can address market imperfections, in a reciprocal relationship that adapts to the complex policy problem at hand. · Oct 2013–Jan 2014

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BOOK REVIEW

THE GREAT CONVERGENCE ASIA, THE WEST, AND THE LOGIC OF ONE WORLD

By Kishore Mahbubani

The Promise of Coming Together, the Reality of Being Different

by Azad Singh Bali

T

he essential premise of the convergence thesis is that all economies will eventually converge to similar per capita income levels, as poor developing economies grow faster relative to developed economies. The convergence thesis focuses mainly on the examination of institutions which underpin economic growth and development in the now-rich economies and how they can be emulated and supplanted in different contexts.

In The World is Flat, Thomas Friedman alluded to an economic convergence in commerce and business that resulted from increasing integration of national economies with the global economy.

Kishore Mahbubani in The Great Convergence argues that, not only is there a convergence in income levels, but also in living standards and human development. And, the process of convergence is upheld by the acceptance of modern science, logical reasoning, transformation of the social contract and multilateralism. The book is laced with warm optimism that 88% of humanity will soon converge to and experience the living standards now available to the richer, Western developed countries.

His essential thesis is that this unprecedented convergence has geopolitical repercussions, which are not understood by the ‘West’, and the multinational institutions it dominates.

And now, the world needs to reassess how it conducts its affairs.

Essentially, the countries today no longer resemble “a flotilla of…

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Oct 2013–Jan 2014 ·

separate boats”; rather, they are “193 separate cabins on the same boat” in search of a “captain or crew”. Mahbubani looks to reforming global institutions in response to these recent trends.

This is not the first time that Professor Mahbubani has put forth this thesis. Earlier, he has documented the rise of Asia, celebrated the economic prowess of its burgeoning middle class, questioned ‘western’ arrogance and plotted the trajectory of their economic and geopolitical decline in his previous writings. He has developed the convergence thesis further in this, his fourth book, but he leaves the skeptical reader unconvinced on many counts.

It is a giant leap of faith that the G20 ‘saved the world’ in the 2008-09 economic crisis, and that it could be considered a model going forward. The substantive monetary easing in advanced economies was outside the agreed upon stimulus framework by the G20.

Economies did what they had to do to resuscitate growth in spite of the G20 framework.

While it helps Mahbubani’s argument to pitch “the West” against “the rest”, it is unclear if the world can indeed be so neatly divided into two. Asia is far from united on several fronts. China, Asia’s fastest growing and most ‘peacefully rising’ economy, has border issues with at least South Korea, Japan, Philippines, Vietnam, and India. If India’s per capita income is projected, growing at a modest 8% in real prices, it will still continue to be a middleincome economy after three decades.

One of the most significant global trends, which Mahbubani does not reflect adequately, is changing demographics. What is peculiar about Asian demographics is that most Asian economies are going to grow old before they become rich. This impacts not only retirement, but also other economic aspects such as infrastructure, urbanisation, employment and consumption. The ageing ‘Western world’ enjoys high-income levels to support their retirement and maintain standards of living. This cannot be said about many Asian economies, including China and India.

While we are experiencing unprecedented changes in demography, economic development and living standards, we are far from replicating institutions that support economic development and fostered growth in advanced economies. Moreover, we also need to distinguish if growth in developing economies is in reality dependent on growth in advanced economies; the recent growth slowdown in the aftermath of the crisis has renewed attention in the decoupling hypothesis.

In all, Professor Mahbubani’s thesis is perhaps very far ahead of his time – his convergence thesis can perhaps only offer a view darkly seen from his rear-view mirror. It is useful to be reminded that objects in the mirror are often as distant as they seem.

Azad Singh Bali is a PhD Candidate at LKY SPP : bali@nus.edu.sg

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BOOK REVIEW

THE SINGAPORE WATER STORY

By Cecilia Tortajada, Yugal Kishore Joshi, Asit K. Biswas

by Aditi Raina

W

hen Singapore became independent from Malaysia in 1965, water presented a curious paradox. On the global water index, it was one of the wettest - yet driest - countries in the world.

Clearly, for this small city-state with a geographical area of just 714.3 km2, a low-lying topography and no natural aquifers, lakes or significant rivers, water security would be a key area of concern.

Even though Singapore received more than the global average of rainfall, its small size limited its capacity to store and harvest the rainwater. Further, its dependence on imported water from Malaysia, which had in the past threatened to stop the water, enhanced the country’s vulnerability as well as drive towards water self-sufficiency.

Over the past 50 years, Singapore has strategically planned for, invested in and innovated towards diversifying its water sources in order to reduce its reliance on outside sources. This has been done in conjunction with meeting the water demands of domestic, commercial and industrial sectors (as well as for nature and recreational use) that have increased from 70 to 310 million gallons per day between 1965 and 2011.

This has led to the development of alternative sources of water that are commonly known as the Four National Taps, i.e. water from local catchment areas, imported water from Malaysia, reclaimed water (known as NEWater) and desalinated water. It has done this without limiting its economic growth and pace of urbanisation.

In the book, the authors successfully tell this remarkable journey of a city-state that within five decades transformed from a third-world country to being a pioneer in water supply and management.

The eight chapters chronicle different aspects of this journey

including the historical developments and comprehensive urban development plans; the legal, regulatory and economic instruments; the nation’s extensive public education and information strategies to encourage pragmatic use of water; the decade-long process of cleaning up of the river systems of Singapore that revitalised the areas around it; and last, the role of media in the Singapore-Malaysian water relationship.

At each stage, the authors highlight the crucial role played by the comprehensive, pragmatic, forward-looking and long-term policy planning perspective adopted by the Government, catalysed by the highest level of political support and interest by the nation’s founding father, Lee Kuan Yew. It is notable that decades before the term ‘sustainable development’ was officially coined by the Brundtland Commission 1987, Singapore was already on a path that recognised that investing in the environment and preserving its natural resources were as important as urbanisation and economic development.

Today, it stands as an example of how both economic growth and high environmental standards can be attained simultaneously by adopting a comprehensive and integrated approach to development.

The book is a must-read for policy makers and water managers interested in integrated planning. Singapore’s story is that water policies stand or fall, not by themselves, but as part of a larger urban development puzzle.

It is true that Singapore’s experience does not travel well. Land acquisition or getting people to comply with significant changes, is difficult. Singapore also benefits from its one-level governance structure. In the book, a lot of attention is paid to the outreach work of the Public Utilities Board (PUB) in spreading awareness about water conservation and its role in reducing water demand, but it is unclear how much of the success of its water campaigns is due to the PUB’s work, and how much to the larger context of strict laws, regulations and pricing schemes. Also, the authors do not mention any alternative paths that Singapore could have followed, which would have made for an interesting analysis and discussion.

In policy work, while replicability is always a concern, the use of cases and deep understanding of a single case also has a central place. In this endeavour, the Singapore Water Story makes a useful contribution. It provides a good account of how this nation-state transformed water, from a vulnerable spot in its security landscape, to a key area of policy expertise.

Aditi Raina is a PhD student at the Lee Kuan Yew School of Public Policy, working on issues of water and rural development with the Institute of Water Policy. : aditi.raina@nus.edu.sg

· Oct 2013–Jan 2014

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10

Measuring competitiveness in Indonesia

by Tan Khee Giap and Mulya Amri

Background

IN the global game of one-upmanship, there is no better friend than data. Gita Wirjawan, now Indonesia’s Trade Minister, understands how performance is improved through competitive pressure. This was his motivation early in 2012, for coming to the Asia

Competitiveness Institute (ACI) at the Lee Kuan Yew School of Public Policy to discuss how the 33 provinces of Indonesia can engage in friendly competition with one another.

He wanted them to vie for the spot of “best-performing” province.

ACI had already done similar work in the 34 Greater China Economies, 35 States and Federal Territories of India, and the 10 countries of ASEAN. It took one year, travels to all 33 provinces, and many intense conversations, before ACI was ready with its analysis. In February 2013, the English version of the book capturing its key findings was launched in Singapore. The Indonesian edition was launched in Jakarta in June 2013 by the Coordinating Ministry of Economic Affairs, Republic of Indonesia, together with the Indonesian Employers Association (APINDO).

Competitiveness Analysis: ACI’s Approach The ACI adopts a comprehensive view of competitiveness. Here a province is said to have high “overall competitiveness” if it has robust macroeconomic foundations, a vibrant private sector, inclusive, effective and efficient governance, and a high quality of life that includes excellent infrastructure. ACI’s overall competitiveness index is broken down into four “environments”: 1) macroeconomic stability, 2) government and institutional setting, 3) financial, business and manpower conditions, and 4) quality of life and infrastructure development. Each environment is further broken down into three “sub-environments”, such that the overall competitiveness index is composed of 12 sub-environments.

Overall, the ACI uses 91 unique indicators. About 60% of these are sourced from the national statistics agency for the latest official data available (year 2010), while the rest are generated from surveys with local business owners, academics, and provincial government officials.

Technological infrastructure (33.3%)

Regional Economic Vibrancy (33.3%)

25%

25%

QUALITY OF Physical LIFE & infrastructure INFRASTRUCTURE (33.3%) DEVELOPMENT

Productivity Performance (33.3%)

How to Read the Competitiveness Ranking Table Each of ACI’s indicators has a unique unit of measurement. For example, the province’s GDP is measured in millions of Rupiah, while the length of paved roads is measured in kilometres. To resolve these differences and enable the indicators to be aggregated according to their sub-environment and environment, a statistical technique called standardised score is utilised. The standardised 10 Oct 2013–Jan 2014 ·

Standard of Living, Education and Social Stability (33.3%)

Labour Market Flexibility (33.3%)

FINANCIAL, BUSINESS & MANPOWER CONDITIONS

25%

Financial Deepening And Business Efficiency (33.3%)

Openness to Trade and Services (33.3%)

Attractiveness to Foreign MACROECONOMIC Investors STABILITY (33.3%) GOVERNMENT & INSTITUTIONAL SETTING

25%

Government Policies and Fiscal Sustainability (33.3%)

Institutions, Governance and Leadership Competition, (33.3%) Regulatory Standards and Rule of Law (33.3%)

score measures the relative performance of a certain province in comparison to the average performing province, regardless of the unit of measurement. Thus a province which has a standardised score of zero can be said to be an ‘average performer’, while those which have positive scores are above-average performers, and those with negative scores perform below average. The ranking table for “overall competitiveness”, along with standardised scores for each province, is presented here.

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COMPETITIVENESS RANKING TABLE RANK

PROVINCE

SCORE

RANK

1 2 3 4 5 6 7 8 9 10 11

DKI Jakarta Jawa Timur Kalimantan Timur Jawa Barat Jawa Tengah DI Yogyakarta Banten Kepulauan Riau Bali Riau Sulawesi Selatan

1.7576 0.6644 0.5523 0.5113 0.4282 0.2757 0.2343 0.1708 0.1371 0.1152 0.0993

12 13 14 15 16 17 18 19 20 21 22

PROVINCE Sumatera Selatan Kalimantan Selatan Sulawesi Utara Gorontalo Aceh Sumatera Barat Sulawesi Tenggara Sumatera Utara Lampung Sulawesi Barat Kalimantan Barat

Zooming in on Particular Provinces, focusing on Specific Environments An analytical tool called the “Median Competitiveness Web” plots the scores of the province according to the 12 sub-environments in comparison with the median score generated from all 33 provinces.

This way, one can easily see the performance of a particular province in terms of specific sub-environments, in relation to the averageperforming province.

Here we show the Medium Competitiveness Web for Kepulauan Riau province based on official statistics for 2010 and ACI surveys conducted in 2012. We see that Kepulauan Riau, located just across the strait from Singapore, and includes Batam, Bintan, and Karimun Islands, performs well above the median score for most of the 12 sub-environments. Openness to Trade and Services and Productivity Performance are notably high, which makes sense given the presence of industrial zones. However, subenvironments related to Government and Institutional Settings have lower scores than the average. This could be due to the overlapping national, provincial and local regulations which account for some inefficiency on how different parts of the province are governed.

For comparison, we show the Median Competitiveness Web for Sulawesi Utara province. Sulawesi Utara is not very strong in terms of macroeconomics and business vibrancy. Its scores related to these are either the same as or slightly lower than the median scores. This is understandable given the smaller size of the province.

However, Sulawesi Utara scores quite well in terms of Government and Institutional Setting, which means that the currently weaker economy is somewhat compensated by having a well-performing government.

At first blush, it appears a reduced economic vibrancy tends to lower complexity and hence a higher ease of governance. However, just like the case of Kepulauan Riau, a high score in some areas is not enough to pull up the overall competitiveness of the province.

More effort needs to be mobilised by each province to build on their

SCORE

RANK

0.0816 0.0146 -0.0259 -0.1130 -0.1444 -0.1559 -0.1655 -0.1683 -0.1956 -0.2062 -0.2273

23 24 25 26 27 28 29 30 31 32 33

PROVINCE

SCORE

Sulawesi Tengah Papua Jambi Kalimantan Tengah Bengkulu Nusa Tenggara Barat Kepulauan Bangka Belitung Papua Barat Maluku Maluku Utara Nusa Tenggara Timur

-0.2311 -0.2378 -0.2506 -0.2681 -0.2735 -0.2969 -0.3085 -0.3179 -0.3438 -0.5107 -0.6014

strengths and improve on their weaknesses. One of the more useful aspects of the ACI study is in providing a map of such opportunities. Each province will then have specific policy recommendations to improve their competitiveness.

Tan Khee Giap is Co-Director of Asia Competitiveness Institute Mulya Amri is Research Associate at Asia Competitiveness Institute, and PhD student at LKYSPP

Median Competitiveness Web (MidCW) Analysis: Kepulauan Riau 2010 Regional Economic Vibrancy Standard Of Living, 5 Attractiveness To Education Foreign Investors 4 And Social Stability 3 Technological Openness To 2 Infrastructure Trade And Service 1 0 -1 -2

Physical Infrastructure

Government Policies And Fiscal Sustainability Institutions, Governance And Leadership

Productivity Performance

Labour Market Competition, Regulatory Flexibility Financial Deepening And Standards And Rule Of Laws Business Efficiency Median

Kepulauan Riau

Median Competitiveness Web (MidCW) Analysis: Sulawesi Utara 2010 Regional Economic Vibrancy Standard Of Living, 5 Attractiveness To Education Foreign Investors 4 And Social Stability 3 Technological Openness To 2 Infrastructure Trade And Service 1 0 -1 -2

Physical Infrastructure

Government Policies And Fiscal Sustainability Institutions, Governance And Leadership

Productivity Performance

Labour Market Competition, Regulatory Flexibility Financial Deepening And Standards And Rule Of Laws Business Efficiency Median

Kepulauan Riau · Oct 2013–Jan 2014 11

12

THE GIA LECTURE

Letting loose wild ideas clearly better than elsewhere in the developing world.

The story of Asia’s recent economic success is not one of elite So out of sheer necessity and armed leadership and brilliant strokes of policy from the top. Rather, it is a blooming of ideas and innovations from the large middle ground, with pragmatism, Asian leaders opened up from an empowered marketplace of people and their animal spirits. their economies. But I don’t think that the Associate Professor Razeen Sally believes that an open market reforms originated from intelligent people economy is the way forward for societies to progress because free with far-sighted strategies. trade leads to wealth, freedom and stability The real story has been under-reported.

The real story is that young and hungry populations are making use of their possibilities and their economic freedom to do sian econothey looked for models from outside to copy interesting and creative things, making Asia mies have – “best practice” examples as it were. probably the most interesting part of the been liberalising at Asians found some of those better pracworld today. a faster pace than tices in the West, particularly in the United It is not the miracle of the top – rather, at any time in hisStates, but they also found examples closer I think things worked in the opposite way. tory. One thinks of to home, such as Hong Kong and Singapore.

Governments, out of necessity, have introRazeen Sally the big opening of These had been free ports since the British duced more space for markets because the China from 1978, set them up in the 19th century. They also alternative failed. And as a result, indithe market reforms of India from the early drew inspiration from other countries in viduals, companies and so on, have taken 1990s, while ASEAN countries started East Asia, which were liberalising and doing earlier.

I think the hunger to catch up to living standards and freedoms in the West was a catalyst for change in Asia. For a long time, most of Asia fell behind the rest of the world, particularly the West, because markets were suppressed by heavy-handed government interventions, and people’s life chances were constrained in all sorts of ways.

What this meant was that Asians were much poorer with far fewer opportunities than their counterparts in the developed world. This was a gap that kept widening over most of the 20th century, having started quite considerably from the early 19th century.

Many societies had hit points of crisis and it was clear not only to the elite, but also to the masses, that something had to be done. So they started to open up and then

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12 Oct 2013–Jan 2014 ·

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advantage of those opportunities and markets have expanded across borders.

That progress has seen the emergence of a larger middle class, which is now one of the big phenomena in Asia: a middle class which not only demands more goods and services but also civic rights, political freedoms and for governments to be more accountable.

All those things are happening in Asia but there are worldwide ramifications because we are talking about 60% of the world population. What happens here inevitably reverberates elsewhere.

To me, free trade is a trinity comprising an economic imperative (the pursuit of prosperity), a moral imperative (the quest for freedom) and a geopolitical imperative (the search for stability).

Hong Kong and Singapore exemplify the trinity more than anywhere else.

Both city-states have a rags-to-riches story because their economically-empowered citizens and residents have used their liberty in all kinds of interesting ways. This also ties back to the moral imperative of individual

freedom. You are expanding the individuals’ space, which is morally good as they could do interesting and useful things with their lives–for themselves, their families and their communities. In diplomacy and international politics, having borders as open as possible, especially to commerce, is perhaps our biggest insurance policy that governments and armies are not belligerent and don’t make war with each other.

One criticism of globalisation is that it has created inequality as more rewards go to more talented or educated individuals. This is one of today’s challenges.

At one extreme, small, open economies like Hong Kong and Singapore are well off but they are finding it difficult to get reasonably high rates of growth while relying disproportionately on immigrants and foreign workers, creating unequal growth and social tensions.

But then, we should not conclude that we should have more restrictions, more government intervention and less globalisation–that would close off opportunities for many people.

In fact, the solution might be to open up even more.

Hong Kong for example, has a land market that is essentially controlled by the Government and which supports a cartel of property tycoons. A welfare state for the super-rich coexists with a basic safety net for the relatively poor. Singapore has the government-linked companies and the Government intervenes quite heavily in capital and land markets. Private-sector SMEs are squeezed between the GLCs on the one side and MNEs on the other.

Decades-long policies of social engineering have resulted in all sorts of unanticipated distortions – not least in housing. All the above restricts competition, disproportionately benefiting small minorities of “insiders” at the expense of “outsiders”. But these are the mildest examples: every other country in Asia, and indeed beyond, is worse to a greater or lesser degree.

Asia’s prospects are endangered by hidebound governments and institutions that have not been reformed sufficiently to liberate individuals and markets. That could seriously compromise Asia’s future.

So we should have more competition and a limited role for the government.

Government as “umpire” should do fewer essential things better in the public interest, rather than doing lots of things badly as a “player”.

But the optimist in me says that, given what’s happened so far and the animal spirits unleashed in this most dynamic part of the world, there’s momentum building up for more openness and individual freedom.

That process has every chance of changing the world.

Razeen Sally is Visiting Associate Professor at LKYSPP. He is also Director of the European Centre for International Political Economy (ECIPE), a global-economy think tank in Brussels, which he co-founded in 2006.

· Oct 2013–Jan 2014 13

14

Robert Shiller:

Explaining Irrationalities in the Stock Market

by Yvonne Chen

E

conomist Robert Shiller was awarded the Nobel Prize this year, along with two other economists Eugene Fama and Lars Hansen for their “empirical analysis of asset prices”.

He has been teaching and researchYvonne Chen ing at Yale University Department of Economics since 1982, and currently teaches graduate level macroeconomics and an undergraduate course on financial markets. I had the privilege of taking his macroeconomics class while at graduate school. His intellectual curiosity and dedication to students left a deep impression on me.

Professor Shiller is one of the pioneer researchers for behavioural finance, a field that emerged in the 1980s. In the 1960s and 1970s, academic research in empirical asset pricing was dominated

by Fama’s efficient markets hypothesis.

Then, the key idea was that stock prices always incorporate all available information about fundamental values. When irrational behaviours emerge in the market, “smart money” always eliminates them.

The strong version of the hypothesis thus holds that stock market prices do not deviate from their underlying fundamentals for long - such deviations are constantly and instantly corrected by those with more information. Consequently, no one can ‘beat the market’ on a sustained basis. Instead, stock market prices always followed a ‘random walk’.

Although conceptually elegant, this efficient markets hypothesis was put to a severe test in the 1980s when anomalies of the stock price movements could not be explained by its tenets.

In his seminal paper, “Do stock prices move too much to be justified by subsequent changes in dividends?”, Professor Shiller demonstrates that there was excessive volatility in stock market prices by comparing them with the present values implied by the efficient markets model. Such high volatility could not be reconciled with the theory unless one assumed – improbably – that the coefficient of risk aversion was extremely high. These contradictory findings 14 Oct 2013–Jan 2014 ·

generated significant controversies in asset-pricing research and finally led to, as Professor Shiller puts it, “the blossoming of behavioural finance”, in the 1990s.

Along the way, Professor Shiller created two important databases to facilitate research in behavioural finance. One of them was the Stock Market Confidence Index, which is currently maintained by the International Center for Finance at Yale School of Management. This quarterly survey, started in 1984, provides the longest time series data on US investors’ attitudes and confidence.

One of the major findings derived from the time series is that investor confidence increased significantly between 1989 and 2000.

Professor Shiller described that phenomenon as “a proliferation of wishful-thinking theories about a new era that would propel the stock market on a course that, while uneven, is relentlessly upward”.

The other highly-cited database is the Case-Shiller Housing Price Index. This index, now published regularly by Standard and Poor’s, covers housing prices of more than 20 cities and has become one of the most important measures of housing values across the US. In addition to academic research, Professor Shiller also became a household name for his bestseller books, Irrational Exuberance and Animal Spirits. Both books were timely. Irrational Exuberance correctly anticipated the bursting of the dot.com bubble. Animal Spirits (which Professor Shiller co-wrote with Nobel laureate, George Akerlof ) was one of the first books written in the immediate aftermath of the 2008 global financial crisis which explained the crisis in terms of people’s beliefs and how the ‘stories’ of our times can drive market prices.

In these popular writings, he manages to convey complicated ideas of behavioural finance in a highly accessible way. They extended the often very technical financial research to beyond ivory towers of academia, and have benefitted many individual and institutional investors.

Yvonne Chen is an Assistant Professor at LKYSPP. Her areas of research include health economics, applied econometrics and development economics

15

Security dilemmas in Southeast Asia:

The South China Sea conflict as Asean’s Achilles’ heel

by Syed Mohammed Ad’ha Aljunied

T

he Western concept of sovereignty, primordial ideas of territorial reach and democratisation forces that challenge authoritarian regimes overlap to form ASEAN’s key security dilemmas.

These three core security dilemmas could pose serious threats and prevent ASEAN from fulfilling its 2015 goal of a “Security Community”.

Let’s use the analogy of the sprinter. He faces high injuries risks to his hamstring, calf and tendon. But it is the Achilles tendon that is critical to prolonging his competitive life span. Once it snaps, it signals the end of his career.

Without domestic peace, inter-state harmony and regional stability, the regional institution will suffer the fate of sprinters whose muscles have been worn down over time. More than 40 years of effort will be thwarted.

ASEAN’s injury records

Border skirmishes and stand-offs have long bedeviled relations between Southeast Asian states such as Thailand, Cambodia, Myanmar, Malaysia, and Indonesia and, to some extent, Singapore. These impasses challenge the states’ sovereignty and legitimacy as well as the stability of ASEAN. However, Southeast Asian states that have had muscles strained are still able to overcome these “nagging injuries” .

Even though Indonesia went into a socio-political and economic decline for almost a decade after 1997 when former President Suharto lost power, it has

recovered in all aspects, once again returning to being a regional power in Southeast Asia.

ASEAN’s flexible engagement in the clash of wills between Myanmar’s military junta and civil society illustrates how a political impasse can be managed through a regional institution that is respected by all parties involved. Thailand and Cambodia are another recent example. They had acceded to the International Court of Justice’s decision over Cambodia’s ownership of the Preah Vihear temple.

However, the frustrations of an “aspiring great power” is a different state of affairs.

China is raring to “sprint forward” and take a key role in regional affairs. The U-shaped string of islands in the South China Sea, which China claims to be part of its historical territory, illustrates China’s perception of itself as a dominant maritime power. China claims that it has rightful stakes in areas and islands surrounding the Gulf of Tonkin, Spratly and Paracel Islands (Hoàng Sa Islands) as well as that of Natuna Islands.

In February 1992, China passed a law declaring the entire South China Sea as its territory. Other stakeholders and claimants such as Vietnam, Taiwan, the Philippines, Malaysia, Brunei and Indonesia have contested these claims for more than two decades. Naval skirmishes have erupted with Vietnam and the Philippines since 2005.

ASEAN’s Achilles’ heel

The South China Sea is one of the platforms that China could use to demonstrate its great power ambitions; Professor John

Mearsheimer, renowned international relations expert, has said that an aspiring middle power can only become a great power if it first achieves being dominant regionally.

Though the nature and approach of war have evolved and major wars in East Asia as well as South East Asia are unlikely, there is a limit to diplomatic and military deterrence to inhibit further naval stand-offs between China and Southeast Asian states.

According to a RAND Corporation report, China has made substantial investments in its subsurface naval force modernisation. The Chinese Huludao shipyard is the only nuclear-powered submarine-building facility in the Asia Pacific. Though the South China Sea environment is unfavourable to anti-submarine warfare, Chinese submarines can operate with reasonable effectiveness. Thus, Chinese submarines can launch short-to-medium-range ballistic missiles that could threaten military as well as civilian shipping.

Other Southeast Asian states can illafford a belligerent China. The value of trade that moves along the South China Sea is valued at US $1 trillion annually and China holds 10% of this. If the Chinese continue to sabre rattle, ASEAN states’ distrust of China will only deepen and slowly, but surely, erode the diplomatic bonds that it has built with Southeast Asia over the last two decades.

Former Chinese Premier Deng Xiaoping once said: “Calmly observe the situation; secure our footing; cope changes with confidence; conceal capacities and bide our time; skillfully keep a low profile; avoid sticking one’s head out; be proactive.” This wise foreign policy approach advice has kept the peace but it is an increasingly taut state of affairs. If these strained relations finally snaps, it would cost both China and Southeast Asia their peace and prosperity.

Syed Mohammed Ad’ha Aljunied is a Research associate (International Relations) at LKYSPP.

· Oct 2013–Jan 2014 15

Asian Development Bank and LKYSPP joint programme

Getting Policies and Practices Right

by Aika Bolat

T

he Asian Development Bank (ADB) and the LKYSPP have to address management and policy challenges in the public sector in Asia. The focus this time is on specific public policy issues in China, India, Indonesia, Mongolia and Pakistan.

The ADB believes that governance, public policy and public sector management (PSM) in developing countries must improve to grow their economies and deliver public services more effectively.

Its Strategy 2020 is committed to achieving sustained and equitable development, improved quality of life and eradication of poverty in Asia Pacific. However, one challenge is how to access and share knowledge in governance, public policy and PSM.

Asian policies and applicability

Formed in October 2012 under the lead of Eduardo Araral, Assistant Professor at LKYSPP, the ADB-LKYSPP project examined policies from Asian countries and considered their applicability to others such as China’s public-private partnership projects in the water sector for India. These studies and policy recommendations were developed jointly and an executive programme was delivered in May this year.

On 28-29 October, the conference, “Getting Policies and Practices Right:

Public Sector Management Issues in Asia”, presented the research results conducted in the past year in five areas: health sector governance in China; water sector publicprivate partnerships in India; the impact of fiscal decentralisation on infrastructure in Indonesia; natural resource management in Mongolia; and the role of microfinance in promoting financial inclusion in Pakistan.

Coming together to assess the results and recommendations were ADB experts, LKYSPP faculty and senior level policy makers from all five countries.

Dr. Bindu Lohani, Vice-President of the ADB, and Professor Kishore Mahbubani, Dean of the LKYSPP opened the Conference by highlighting the importance of sharing knowledge in effective policy implementation issues in order to improve governance.

Country representatives included Mr. Lakshminarasimham Krishnan, CEO of IL&FS Urban Infrastructure Managers Ltd. (India); Mr. Marwanto Harjowiryono, Director General for Fiscal Balance of Ministry of Finance (Indonesia); Mr. Dash Bat-Erdene, Adviser to the Minister of Mines (Mongolia); Ms. Aban Haq, COO of the Finance Network (Pakistan); Assistant Professor Alex He, Hong Kong University (Hong Kong) and; Mr. Wei

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Zheng, a National Officer from UNICEF (also a MPA student at LKYSPP).

Among the conference highlights were Mongolia’s recent developments in mining policy. A proposal to introduce a Resource Rent Tax (RRT) in the mining sector would help the government create a sovereign wealth fund from revenues of some of the world’s richest gold and coal deposits. A macroeconomic analysis was conducted by Professor Dodo Thampapillai, Environmental Economist at LKYSPP, together with Dr. Jan Hansen, Senior Country Specialist at ADB based in Mongolia and Ms. Aigerim Bolat of LKYSPP. Mr. Dash Bat-Erdene and Dr. Banzragch Delgermaa, Mongolia’s ambassador to Singapore acknowledged the efforts made by the ADB and LKYSPP, and spoke about the importance of creating a sovereign wealth fund in Mongolia. They also highlighted the need to learn about the establishment of sovereign wealth funds from countries such as Singapore, Norway and Israel.

For more information on the joint project , contact Aika Bolat at Executive Education, LKYSPP at sppaika@nus.edu.sg

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