29 July 2010

Economic Growth And Over-Crowding

The projected GDP growth rate of 13-15 per cent this year is extremely rapid, even after taking into account the 1.3 per cent contraction last year.  GDP has already grown 4.3 per cent per annum over the past four years in spite of the recession.  If GDP grows 14.0 per cent this year, it will have grown 6.2 per cent per annum over the five years ending this December.

This is much higher than our target medium-term GDP growth rate of 3-5 per cent per annum for the next decade.

The sustainability of the medium-term growth target is premised on (among other things) improvements in labour productivity of 2-3 per cent per annum.  Increasing headcount will provide the remainder of the growth.

The past decade was different.  GDP growth of 5.0 per cent per annum was achieved mainly by increasing the number of employed persons by almost one million, or 3.8 per cent per annum.  GDP per employed person grew only 1.2 per cent per annum.

This year's projected growth requires 100,000 more foreign workers, which will increase the number of foreign workers by almost one-tenth in one year, notwithstanding the higher foreign worker levy.  This does not take into account other foreigners who will be granted permanent residence or citizenship (80,000 last year), many of whom will end up in the labour force.

It is not clear how many of these additional foreign workers and new residents are already here.  GDP can grow 14 per cent this year even if there is no sequential quarterly (i.e., quarter-on-quarter) growth in the second half of this year.

The foreign workers and new residents need space and facilities — accommodation, private and public transportation and road space, facilities for recreation and social interaction, schools for their children, clinics and hospitals, prisons etc. — and they need these to be made available at very short notice.

Many of these facilities are also used by the general population.

Can our physical infrastructure and our society cope with the sustained influx of foreign workers and new residents of this magnitude?

Singapore is a city state.  If an American doesn't like living conditions in New York, he can move to Los Angeles or Chicago, or any one of a number of smaller cities and towns.  Here, we have no choice.

Vibrant economic growth is needed to provide enough meaningful jobs for our citizens.  But if growth far exceeds that which can be supported by our citizens, together with a modest number of permanent residents and foreigners, we should consider forgoing some of it.

06 July 2010

Banks Should Not Consolidate Further

Like many other companies, Singapore banks wish to extend their geographical footprint to tap offshore business opportunities and grow their bottom lines.

But, banks are different from other commercial or industrial enterprises.

Firstly, banks serve important functions in the local economy, intermediating between their depositors and their borrowers.  They lend to the large multinationals and to the SMEs, which are mostly ignored by the global banking giants.  In the process, banks help them to grow.

Secondly, a significant part of their funding is derived from their non-bank customers — ordinary people like you and me — who place much of their life savings with the banks.  Their deposits are protected, but only up to the coverage level of deposit insurance, which stands at $20,000.

What will happen if one of the banks runs aground?

While the management of the banks will try to be prudent, it is their business to take risks; if they are overly cautious, they will likely achieve little and returns will be meagre.  However, human judgement and decision making are just that — human.  Seemingly well managed banks, even global behemoths, have failed.  It is unrealistic to expect that no Singapore bank will ever fail.

Adequate capitalisation is a defence, but too much of it is a drag on return.  However, even with a capital adequacy ratio of, say, 15 per cent, a bank has 6.67 times as much risk-weighted assets as capital, and this is after taking the credit risk of assets that are considered to be not so risky at less than their full face value.

Already, the three Singapore banks are probably too big to fail.  Reducing their number will ensure that they will be too big to fail.  But only because tax payers' money will be used to prevent the financial system from collapsing.

Depositors too may suffer, as deposit insurance may prove insufficient.