Professor Howard Hunter, President, Singapore Management University

Faculty and Students of Economics from NUS, NTU and SMU,

Ladies and Gentlemen

Good evening.

Introduction

Last year, when we held the first MTI Economic Dialogue, it was soon after the collapse of Lehman Brothers. Since then, the world has seen the most severe economic contraction since the Second World War. At the height of the crisis, global stock markets lost more than 50% of their market capitalization, and world trade collapsed by more than 30%.

The reputation of economists has also taken a beating. Over the past year, many have asked, “Why did no one anticipate the credit crunch?” Paul Krugman, a Nobel-winning economist himself, wrote a widely-circulated essay entitled, “Why did Economists get it so wrong?” If economists, till today, cannot agree on the fundamental causes of the crisis, what does it say about their profession? Why are existing models so incomplete and inadequate? Some commentators have even suggested that the recent recession points to the failure of economics as a profession and discipline!

But that would be an unfair critique. To be fair, economists have provided us with frameworks and behavioral insights that have enriched our understanding of the world. Just as Henry Ford once declared that “failure is only the opportunity to begin again more intelligently”, the recent recession should sweep away some old dogmas, and give rise to new, fresh insights.

Role of Economics in Singapore Public Policy

One of the old dogmas was a blind faith in the self-regulating power of markets. Many renowned economists have built their entire careers arguing that markets have an inherent ability to achieve an efficient equilibrium by themselves, with no need for the government or any other institution to prod them in one way or another. But if markets were indeed so efficient, why was credit so badly misallocated and mispriced to the subprime markets? And why did financial markets regard the accumulation of these toxic assets as a good and innovative activity right until the housing bubble burst in the US in late 2007?

The reality is that markets are not always efficient, bubbles do form, and governments may, on occasion, need to curb excessive speculation. As you have learnt in your classes, market failures also occur where asymmetric information, natural monopolies, or externalities exist. Governments therefore need to set the overall framework, through tax, monetary and financial regulation policies, for markets to work.

But at the same time, Governments must be cognizant that their interventions may sometimes cause more harm than good. For governments to even begin to understand markets, let alone intervene appropriately, proper and rigorous analysis is critical. Although economics is not perfect, it yields useful insights across a spectrum of public policy questions. The answers to these questions affect not just the headline GDP figures, but also the lives of ordinary Singaporeans. Let me highlight three broad areas.

First, for a small open country like Singapore, international economics is critical. Singapore's monetary policy is centered on the management of the exchange rate. Decisions on the slope and width of the exchange rate policy band, impact not just the competitiveness of our companies, but also the inflation outlook. In fact, one can argue that setting monetary policy in a small open economy is a greater challenge than in a large continental economy. You need timely analysis of economic conditions, application of macro-economic theories, thorough understanding of foreign exchange markets and, finally, judgment.

Second, Economics is also a powerful tool to evaluate questions like what kinds of industries are best suited to Singapore. The decisions to attract semiconductor wafer fabrication plants, Integrated Resorts, Lucas film animation studios, and contact lens manufacturers to Singapore were informed by cost benefit analyses. These analyses took into account social and environmental externalities, and the comparative advantages that Singapore and Singaporeans enjoy. We also factored in the potential linkages between the large multinational companies and our small and medium enterprises. For example, our wafer fab manufacturers purchase supplies and equipment from our local precision engineering firms. The results of these cost-benefit analyses affect the quality and quantity of jobs available for you and your peers.

Third, the long-term sustainability of our planet depends on how governments around the world deal with climate change. Unregulated markets will fail to take into account the negative externalities of pollution and energy production. How can we best incentivize our population to cut back on their energy consumption? One option is to tax electricity usage, but this imposes a disproportionate burden on the poor, and the demand for electricity by most households is quite inelastic to changes in electricity prices. Behavioural economics suggests that people behave differently if they have real-time feedback. Using this insight, the Energy Market Authority has experimented with smart meters, which provide real-time feedback on electricity consumption. We found that households using these meters quickly reduced their energy usage to below the national average.

The Economist Service

The three areas that I have highlighted – international economics, industrial organization, and environmental economics – give a sense of how sound economics analyses, based on theory and econometrics, form public policy in Singapore.

Today, as Singapore charts its future course amidst fundamental structural shifts in the global landscape, rigorous analysis and intellectual honesty is especially critical. Over the past year, our Economists have used macro-models of the Singapore economy to estimate the impact of budgetary measures, and conducted analyses to understand our industrial and export structures. They have also studied demographics and marriage, and evaluated the impact of policies such as the Workfare Income Supplement on employment and wages.

Most of our Economists come under the broad umbrella of the government’s Economist Service. Our Economists work on a very wide range of issues across the whole of government, including international trade issues, manpower and labor policies, and environmental and energy concerns. Our Economists tell me that they find tremendous intellectual fulfillment, a collegiate working environment, and significant policy influence. They also enjoy excellent professional development opportunities, including overseas study trips and graduate school scholarships. Many of them are here with us tonight and I hope you will take the opportunity to find out more about what they do.

Congratulate Book Prize winners

The winners of the MTI Best Thesis awards further demonstrate how economic models and methods can provide insights that inform public policy. As Singapore’s population ages, ensuring retirement adequacy has become increasingly important. Han Yi, the thesis prize winner from NUS, studied the Advanced-Life Delayed Annuity, or ALDA, which commences payouts only at an advanced age where the risk of outliving one’s assets is substantial. Using Singapore mortality and interest rates, Han Yi discovered that the ALDA is superior to traditional annuities. While she found many similarities between the ALDA and Singapore’s CPF LIFE scheme, she noted that they are not identical. Han Yi thus proposed a private market for ALDA alongside the mandatory CPF LIFE scheme.

The other two winning theses investigated issues directly relevant to the recent financial crisis. SMU’s Harvey Cheong sought to understand why many of the securitized products that collapsed had received triple-A credit ratings. He found little evidence that it was due to conflicts of interest by credit rating agencies. The joint thesis by Chiam Yee Hong, Zhou Yuan and Yos Virin from NTU tried to improve upon value-At-Risk as a measure of portfolio risk. Looking ahead, the ability to evaluate credit risk and systemic impact is important especially as government regulators work on preventing future crises.

The analyses by the thesis prize winners, and the book prize winners, highlight the value and potential of critical and creative thinking, and I offer my congratulations to them.

Conclusion

It is an exciting time to study Economics, and to be an Economist. I urge you to fully apply your minds to your studies. But as you learn new theories, never be blinded by the mathematics, and always keep a healthy skepticism for pristine economic models. Models, with their simplifying assumptions, are not ends in themselves. They are ultimately tools to train us to make good judgments about the real world.

I am pleased that the universities have partnered MTI to organize this Economic Dialogue. I look forward to a lively and rigorous debate during the session later.

Thank you.