Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

Thursday, 5 November 2015

Singapore's Start-up Drive

As Singapore seek new growth sources, the micro-nation is positioning itself to become Asia's start-up hub. By promoting outside the box thinking in the economy, Singapore could see political spillover as the government looses control over the new commanding heights of the 21st century information economy.

Lee Kuan Yew's (LKY) passing in March signaled both the (belated) death of Singapore's 20th century political and economic paradigms. The government, now run by LKY's son, may in the future still maintain a firm hand; however, Singapore's highly educated, mobile, and technologically savvy youth are pushing for a more open society. 2015 has been an auspicious year for the Asian micro-nation as it also celebrates its 50th anniversary.

With LKY notably absent, Singaporeans are understandably nostalgic, but also enticed by the future. While the government is “listening, hearing criticisms, receiving feedback and improving itself” according to Burhan Gafoor, high commissioner to Australia, political change will be spurred by the changing nature of Singapore's economy.

Singapore needs a new growth formula

Singapore's government long fostered growth by controlling the commanding heights of the economy and focusing on specific sectors such as shipping, shipbuilding and the financial sector. Large formalized institutions and their attendant hierarchies allowed the government to keep close tabs on the economy, while garnering legitimacy from their sound economic stewardship. The problem now facing Singapore is that as a mature economy it can no longer rely on these sectors alone to ensure growth.

From 2004 to 2014 Singapore's annual GDP growth declined from 9.5% to 2.9%, largely due to a maturing economy. Companies in the aforementioned sectors have also seen their stock performance decrease, with some being cut from the benchmark Strait Times Index. This is a major issue as shipping, ship building, and commodities have long been behind the lion's share of Singapore's market capitalization. Specifically, the average daily trading volume for these sectors has dropped from $1.24 billion in 2010 to $816 million in 2014.

Hozefa Tapiwalla, head of research for Southeast Asia at Morgan Stanley sums up the paradigm shift that Singapore is undertaking.

"Historically [the Singapore government was] focused on industries and what they wanted and what they don't want. What they are doing right now, as a strategy and philosophy clearly, is saying we clearly don't know what's going to work," he said. "Hence, it's facilitation now, rather than directing which sectors and what's going to work."

In order to maintain economic vitality and public confidence, the long-ruling People's Action Party (PAP) government needs to foster growth in emerging sectors, notably information technology, e-commerce etc. LKY encouraged wise investments and Singapore boasts a robust sovereign investment fund.

Singapore pursues foreign entrepreneurs

Singapore can capitalize on its ethnic and linguistic links with many parts of Asia to help foster the creation of an Asian investment and entrepreneur hub. This strategy is proving successful, as witnessed by Alibaba's decision to base its overseas business headquarters in Singapore. Alibaba also announced that Aliyun, its nascent cloud computing branch will also be headquartered in Singapore. In explaining the decision to be based in Singapore, Ethan Yu, VP at Aliyun stated that “many Chinese enterprises we serve have stepped out of China and come to Singapore.”

Singapore has been proactive in attracting foreign tech firms, launching the EntrePass program, a streamlined visa for foreign entrepreneurs seeking to found and run businesses in Singapore. Unlike similar programs in other countries, EntrePass allows applicants to have raised start-up capital from any source, not just Singaporean investors. Applicants can also apply for permanent residency in two years – or after only one renewal of the one year visa. Similarly, as part of its National Framework for Research, Innovation and Enterprise launched in 2008, Singapore touts the Global Entrepreneur Executives initiative; an investment scheme designed to convince high growth / high tech firms to relocate to Singapore.

Creating a domestic start-up ecosystem

Alongside attracting foreign firms, Singapore is seeking to promote its domestic start-up scene. Singapore's current leaders can take inspiration from LKY's statement that “the quality of a nation’s manpower resources is the single most important factor determining competitiveness.” To this end Singapore is harnessing the creative energies of its population in order to drive innovation. The aforementioned National Framework also include programs for 1:1 funding matching plans for early-stage ventures.

There is also the Technology Incubation Scheme which comprises diverse incentives including offering to provide 85% of start-up capital when investors contribute the remaining 15%. The Infocomm Development Authority of Singapore (IDA), which was created at the turn of the millennium, is fostering local start-ups. Through IDA's investment subsidiary, Infocomm Investments Pte, IDA is promoting its accelerator program which seeks to grow and build high-growth tech start-ups at the seed and early-stage levels.

These various programs have spurred a start-up wave in Singapore, with new firm creation rising from 54,000 in 2010 to 77,000 in 2014. Moreover, Temasek – Singapore's sovereign investment fund – has sought to diversify its portfolio by backing various start-ups; with unlisted private investments now comprising 30% of Temasek's portfolio – up 10% from 2004.

As a result, venture capital investment in the tech sector has risen from less than $30 million in 2011 to more than $1 billion by 2013. Singaporean millennials are also increasing becoming interested in the start-up ecosystem, with investment clubs springing up at Singapore's universities. These clubs accept members from all faculties and are training the next generation of entrepreneurs, with the National University of Singapore (NSU) Investment Society holding a public symposium at the Singapore Stock Exchange. These programs are disseminating into wider society, as 9% of Singapore's workforce are currently employed in start-ups.

Political spillover

As the government encourages people to think outside the box and explore new ideas, it risks more people questioning other elements of Singaporean society. By fostering public input and energy in shaping Singapore's economic trajectory, PAP looses the monopoly on economic leadership which has underwritten its legitimacy. Having said that, by promoting start-up creation via state incentive and investment schemes, the government may well seek to shape the nascent start-up ecosystem so as to be dependent on and comfortable with a government directed capital pool. This would allow the government – in some sense – to continue to exercise a top-down approach. Such a plan is however fraught with danger, and is likely unfeasible given the fluid and fast-paced nature of venture capitalism.

Kenneth Tan, vice dean of the Lee Kuan Yew School of Public Policy, commenting on LKY passing, made a pertinent point about Singapore's situation in stating that he expects

“the opposition to make inroads now, and in part this is to be expected in a more mature society. I hope that they do become a stronger opposition […] so we can go back to being the kind of place that experiments with alternative ideas.”
As Singapore encourages experiments with alternative ideas in the economy, it may well be sowing the seeds of diversification in the political sphere as well.

Originally written for Global Risk Insights

Monday, 1 June 2015

China Claims Ethnic Discrimination in U.S Espionage Case

As Sino-American economic ties have increased, there have, in recent years, been repeated claims that China is engaging in systematic economic espionage. In response to the indictment of six Chinese nationals on charges of economic espionage, Chinese media sources have claimed that the U.S. is guilty of ethnic persecution. Specifically, the focus on potential Chinese spies has led Global Times, a news organ of the Chinese Communist Party (CCP), to state that:
The U.S. has a history of indulging in persecution of certain groups of immigrants by using the Espionage Act. We hope Chinese-Americans won’t suffer from this because of China’s rise [sic].
Whereas the official Chinese government statement was less harsh, it is clear that Beijing considers this issue a serious problem. The CCP often expresses the full scope of its displeasure by allowing state-affiliated news outlets to publish provocative statements on contentious foreign affairs issues. This allows the Chinese government to issue a comparatively moderate statement, thus appearing measured and collected, while avoiding blame over the statements of outlets such as Global Times.

While the actual degree (if any) of ethnic profiling in economic espionage investigations is debatable, there has indeed been a significant uptick in allegations of economic spying in the U.S. Specifically, the FBI has reported a five-fold increase in economic espionage indictments since 2008. Among those Chinese nationals involved in this latest case, three are in academia, with another three individuals working for American tech firms.

With regards to the academic suspects, they consist of two professors from Tianjin University, as well as an electrical engineer, all of whom were graduate students attending the University of Southern California. All three individuals have been accused of stealing designs for micro-electric devices which have both commercial and military applications. The remaining suspects were working for Avago Technologies and Skyworks Solutions: both companies are involved in creating components for various sophisticated mobile devices.

Of the six individuals in question, only one – Tianjin University professor Zhang Hao – is likely to be arrested, as the remaining five persons are in China. Since Beijing does not have an extradition treaty with the United States, Zhang Hao is likely the only one to be tried. Zhang was taken into custody at Los Angeles International Airport, having arrived in the U.S. to attend a conference. The circumstances surrounding Zhang’s arrest have led some Chinese media outlets to accuse the U.S. of entrapping Zhang by inviting him to the aforementioned conference.

Moreover, this latest economic espionage case involving Chinese nationals is likely to sour an upcoming U.S. visit by Chinese President Xi Jinping in the fall. Economic spying generates significant anti-Chinese feelings within the American political establishment, and among the general public, who blame underhanded Chinese tactics for lost American jobs and competitiveness. This in turn bolsters China hawks who pressure Obama to take harder stance on China.

Originally written for Youth Independent

Saturday, 11 April 2015

Indonesia's Economic Reforms: Audacious or Autarky?

Following his election in 2014, Indonesian President Joko Widodo has sought to fulfill campaign promises to develop the Indonesian economy and tackle the deficit. To this end, Widodo has sought to bolster domestic industries with increased subsidies and tariffs. Widodo's reforms are seen as generating substantial confidence for domestic businesses in the pharmaceutical, tourism, commodities, and tech sectors; however, the efficacy of these measures remains uncertain.

Indonesia Seeks Increased Foreign Investment

Indonesia's 250 million people constitute an emerging market with great promise which has hitherto languished. Indonesia's current leader, Joko Widodo, is seeking to jump-start the economy with a proactive reform package and FDI drive. Recently, Indonesia and Vietnam pledged to double bilateral trade to $10 billion by 2018, as well cooperate on the delineation of exclusive economic zones (EEZs).

Furthermore, Widodo has expressed his support for the Chinese led Asian Infrastructure Investment Bank (AIIB), calling for greater Chinese investment in the country. Consequently, recent negotiations with China have yielded aerospace and high-speed rail deals, as well as an agreement on taxation. Widodo also stated that he hopes for a currency swap deal with China and that bilateral trade will top $150 billion by 2020.

Indonesia also recently announced that its was adding 30 countries to its visa-free travel list. Previously only 15 – mainly southeast Asian – nations had enjoyed visa-free travel to Indonesia. This visa reform is expected to attract one million additional tourists, generating $1 billion for the Indonesian economy. Interestingly, Australia has been left out of the new visa-free travel list. Despite being the third largest (12%) source country for tourists to Indonesia, Australians will still need visas to visit. This is an obvious snub to Canberra, as relations with Australia are at historical lows due to the fallout from the Bali Nine drug smuggling ring.

Jakarta Announces Slew of Audacious Domestic Reforms

While Indonesia is seeking greater foreign investment, Widodo's reform package is at its most audacious in the domestic sphere. Widodo is seeking to reduce the deficit by implementing an import-substitution-industrialization (ISI) program alongside his social reforms. Indonesia's recent implementation of universal health insurance has boosted confidence in the domestic pharmaceutical industry, which expects a 12% rise in annual profits to $6 billion, surpassing industry growth rates of 7.6% for 2014.

Currently, Indonesia imports more than 90% of the raw materials required for pharma production from China and India. Consequently, the Indonesian government is expected to provide support (industry experts argue $1.08 billion is needed) for basic chemical production. The government is also simplifying permits for both domestic and foreign pharma companies, in order boost local production.

Widodo Faces Challenges
Indonesia is a major player in the commodities market, and has recently implemented export levies on palm oil ($50 per metric ton for crude, $30 per metric ton on refined palm oil). Moreover, the government will be implementing additional taxes with rates ranging from 7.5 – 22.5% when palm oil prices are over $750 per metric ton. These levies are expected to raise $885 million and will primarily fund the government's bio-diesel program, subsidizing 2.5 million tons at 4000 rupiah ($0.30) per litre.

The government has stated that these levies are design to help reduce oil imports, aid local agriculture, as well as fund replanting and research. To demonstrate its commitment to bio-diesel, Jakarta already raised the bio-fuel subsidy from 1500 rupiah to 4000 rupiah in February; and staring in April, the mandatory blended bio-diesel content limit was raised from 10% to 15%. The government has also stated that it is considering implementing similar export levies in the rubber and coffee industries; with commodity prices rising sharply on this news.

A Smart(phone) Move?

Perhaps the most interesting element of Widodo's economic reform package is Jakarta's intention to create a domestic smart phone industry. In an effort to reduce the country's trade imbalance, Indonesia has implemented minimum local content levels for imported smart phones; imports which cost Jakarta $3 billion a year. Currently, most Indonesian smart phone imports come from China, yet the new 30% local content rules have seen an increase in domestic manufacturing. Specifically, importers must manufacture in Indonesia or have their import licenses revoked by 2016/2017.

Polytron products shown off in Jakarta
Image Credit:

This move has drawn criticism from the U.S, which argues that such quotas breach international trade law and punish American smart phone companies such as Apple. Indeed, Apple and co. have been seeking to break into Indonesia: one of the last large markets without significant smart phone penetration. Another concern for American companies is that the new local content rules also mandate 20% local content in research and development for phones sold in Indonesia. Companies would have to have a design and development centre in the country in order to comply with the new laws; according to Industry Minister Saleh Husin. Interestingly, Minister of Communications Rudiantra has stated that “local content” could also potentially encompass design via intellectual property laws.

Industry Minister Saleh Husin
Image Credit:

Until last year there was no smart phone manufacturing industry in Indonesia. Since then 15 companies have submitted plans to the Industry Ministry for smart phone production – including Samsung which has opened a factory outside Jakarta. Indonesian local content rules themselves are not new, but the concentrated focus on boosting domestic industry is. Polytron, the first Indonesian company to produce 4G phones relocated from China in 2012 in order comply with local content rules. This initially caused concern for Polytron as manufacturing costs where up to 50% higher in Indonesia than China.

However, Jakarta has sought to support Polytron and similar companies by tailoring legislation to their favour. Despite being a smaller player in the smart phone market, Polytron already has 35% local content in their devices, putting them at an advantage over larger foreign players. The Indonesian government has also informed Polytron that if the company reaches 40% local content, Jakarta could up the minimum requirement to 40%; further benefiting Polytron.

Jakarta's ambitious program to cut the current account and trade deficits has boosted confidence in many domestic industries, while eliciting complaints from American smart phone companies and the Australian tourism industry. It remains unclear if these reforms have poised Indonesia for economic dynamism, or if Jakarta has just dynamited its chances, losing competitiveness to other emerging markets in the region.

Originally written for Global Risk Insights

Sunday, 5 April 2015

Singapore After LKY: A Nation in Transition

The passing of Lee Kuan Yew (LKY) – longtime ruler and modernizer of Singapore – has raised questions about the future of the prosperous micro-nation. Whereas some worry about the future of a rudderless post-LKY Singapore, others argue that the country is strong enough to survive his passing. Indeed, Singapore's stability hinges more on its ability to surpass, rather than preserve, Lee's legacy.

Lee Kuan Yew ruled Singapore from 1959 until 1990, overseeing the creation of a economic giant touting first world living standards, a global financial hub, and negligible corruption. After stepping down from power, LKY mentored successive Singaporean leaders, witnessing his eldest son Lee Hsien Loong become premier in 2004. LKY retired from public life in 2011, and passed away on March 23rd 2015 at the age of 91

Many fear that post-LKY Singapore will witness the rise of factional politics which undermine the nation's legendary stability and competitiveness. In 2011, the People's Action Party (PAP) – Lee's longstanding ruling party – received 60% of the vote: its lowest vote share since independence. This result itself was 6.5% lower than the PAP vote in the 2007 election. Moreover, current premier Lee Hsien Loong, now 63, has openly stated that he does not wish to be premier past 70. Consequently by 2020, Singapore will face an ever less popular PAP, as well as lack a clear successor.

Simultaneously, Singapore has experienced heightened calls for increased freedoms (Singapore currently ranks 153 out of 180 on the Press Freedom Index) from a wealthy and well traveled younger generation. In response the government launched 'Our Singapore Conversation' in 2012, a program which has hosted over 660 dialogue sessions to promote greater public input in government. Although a largely symbolic gesture, the program does demonstrate a greater willingness to foster an engaged citizenry.

Young Singaporeans are demanding a more democratic nation, a development which – alongside the death of LKY – has been noted by the country's political exiles. Some see the death of LKY as an opportunity for a loosening of censorship, yet Lee Hsien Loong has made little effort to roll back the controls instituted by his father. Many self-imposed exiles cite the repeal of the Internal Security Act as a key pre-requisite for future democratization. The Act allows authorities to detain anyone considered a risk to stability for up to two years, and has long been used to silence and expel leftist opposition in Singapore. 

Current Premier Lee Hsien Loong
Image Credit: The Guardian

Alongside a young, more demanding cohort, Singapore faces a rapidly aging population. Singapore's median age is 39.3; double that what awaited LKY in 1959, with the nation's elderly population set to triple by 2030. This demographic shift has led to heightened calls for greater social spending, with the government announcing changes in the national pension system to better support lower and medium income workers. Moreover the government has announced increased welfare spending, paid for by an increase in the top marginal tax rate: set to increase from 20% to 22% by 2017.

Whereas under LKY the government sought to minimize social spending in order to focus funds towards growth, welfare spending is not anathema to his legacy. Lee himself stated that “the quality of a nation's manpower resources is the single most important factor determining competitiveness.” Strikes were outlawed for this reason, but increased welfare spending also increases worker productivity as fewer man hours are lost to illness and injury.
In recent years, Singaporeans have been voicing greater concern about inequality in the island nation, as the country's Gini coefficient increased from 0.46 in 2004 to 0.464 in 2014. Currently, in order to attract the best talent to the government, Singapore indexes public sector salaries to comparable positions in the private sector, leading to some of the highest government wages in the world.

During the same period annual GDP growth decreased from 9.5% to 2.9%. This is largely the sign of Singapore's maturing economy, yet the country must remain vigilant in order to adjust to 1st world growth rates. Demands for greater social spending coupled with the attendant costs of an aging population are putting pressure on government budgets. As both growth patterns and demographics change, Singapore needs to alter its economic model in order to maintain balanced budgets.

Ironically, the key to maintaining future stability is for the PAP to adopt many of the policies of the Left, the very opposition formerly suppressed in the name of stability. Despite decreased vote share in 2011, clever gerrymandering saw the PAP retain 81 of 87 seats. However, the opposition led by the centre-left Worker's Party of Singapore, seeks to further prompt the government to address inequality and other social issues previously overlooked in the name of growth and modernization.

Kenneth Tan, vice dean of the Lee Kuan Yew School of Public Policy states that he expects;
“the opposition to make inroads now, and in part this is to be expected in a more mature society. I hope that they do become a stronger opposition […] so we can go back to being the kind of place that experiments with alternative ideas.”

Singapore's very existence is a most audacious experiment, one founded on hyper-capitalist sentiments. The economically savvy technocrats running the country are fully aware that a lack of competition in the market causes stagnation. The conceptual leap to competition in governance ensuring Singapore's vitality is a small and logical one.

Image Credi:

Thum Ping Tjin of Oxford sums up Singapore's dilemma by highlighting that;

“What constrains [the government] from truly embracing new challenges in their inability to let got of the past […] the lack of Lee Kuan Yew may actually, if they are wise, liberate them from a lot of historical baggage.”

Pragmatism has always been the defining characteristic of Singaporean governance. LKY did not fall into the 'cult of personality trap'; creating instead a competent bureaucracy not utterly reliant on a great leader. Lee was also open to revision. He dropped his longstanding anti-casino stance in order to capitalize on growing Asian tourism and counter manufacturing competition from China. LKY also encouraged wise investing, with Singapore's sovereign wealth fund now managing over $100 billion, and state owned investment company Temasek Holdings Pte overseeing $165 billion.

The passing of LKY has not signaled a drastic loss of market confidence in Singapore. As LKY lay on his deathbed, Singapore surpassed Australia to become owner of the world's highest yielding (2.48%) AAA rated government debt securities. The day LKY died, there was no volatility on the Singaporean stock market: in fact the Singaporean dollar rose 1.2 cents against the dollar, closing more than two cents higher by week's end.

The death of LKY will undoubtedly lead to a nostalgia-fueled boost to PAP popularity; however, pining for the past cannot supersede preparations for the future. Singapore may been forged by one man, but it is also stronger than any single leader. Lee laid the ground work for the creation of modern Singapore; compared to lifting a nation out of the third world, Singapore's current challenges are truly, first world problems.

Originally written for Global Risk Insights