Jiakai Jeremy Chua
Imperative for Future Growth: Sharing the Political Space Behind Economic Decisions
So the fear tactics have been put on the table, not an atypical strategy of the PAP as we head into election week. Where credit is due, the PAP has been responsible for much of the economic miracle that is our country, our Singapore. I admire it, and many people around the world are simply in awe with the strides we have made economically. Yet, to retain support of its traditional voter base and to keep the swing voters from swining against them, the PAP shamelessly trumpets the economic fall of our country should more seats in parliament be taken up by the opposition forces.
Even Lee Kuan Yew himself assures Aljunied GRC voters that they will “regret” their decisions to send Low Thia Khiang’s formidable team to Parliament Place – - while his successor, Lee Hsien Loong, speaks omniously of “dark clouds” looming over the economic landscape ahead. Are the PAP politicians accurate, or are they merely invoking economic paranoia for their own political gains? I, strongly believe that the PAP may be mistaken in their assessment and representation of the Singaporean economic situation; and I hope to tackle their claims with some sound and basic economic principles, those of which usually imparted in introductory economics courses.
The Stationary State: A Malthusian Apocalypse?
Malthusian crisis of sorts?
What’s Economics without a confusing graph? Never would I have thought Professor John Vrooman’s Punk Economics could come in handy — but here it goes. (See Left) Daunting, I know, but let us take this slowly. Since our current political woes have a lot to do with demography and economic sustainibility, we must confront a Malthusian crisis of sorts.
David Ricardo articulated the idea of the “Stationary State”, that infinite economic progress is not actually possible without changes in exogeneous factors. In this case, let us call it technology. His conclusions are based on the Malthusian Population Principle which states: ”The power of population is indefinitely greater than the power in the earth to produce subsistence for man.”
In more modern dress of course, we call it the “Steady State Economy” and it is usually represented by the Solow-Swan Growth Model — a variation of which you see above. Onwards to the graph, Vertical Axis is Output (Y) and Horizontal Axis is Population (N). The Natural Rate of Subsistence is represented by the straight diagonal line from Origin, and this is the amount of Output (Y) required to feed the population at N persons. For example, for every 2 persons, 2 Y is needed. The Production Function is represented by Y(T0), and the area under this curve is the Total Output (Y) at N persons.
One will notice that the curve becomes flatter and flatter as N increases due to diminishing marginal returns on production. For the most part of this graph, Y>S. Total Output – Subsistence = Profit. The profit rate is endogenous, an incentive to encourage population (N) growth. This profit rate however falls and gradually becomes 0 as we move towards Y=S. Again, this is due to diminishing marginal returns on Y.
Where Y=S, this is represented by the intersection of S and Y(T0). At this point, the economy cannot grow anymore, unless one can shift the Y function higher. This can only occur from improvements in technology, as represented by Y(T1). But this process of population growth and falling profit rate continues again and the stationary state is merely delayed. Therefore, infinite economic progress can only occur with infinite upward shifts in the Y function.
A Macro- Application: Singapore’s Economic Situation
Our country has always been promoting upward shifts the production potential through infrastructure upgrading, and continuous investments in old and new sectors alike (such as R&D, education, tourism, etc.). This underscores the kind of economic growth that our country experiences, and there is much to marvel about it. However, the current government policies in the last decade have also been accompanied by promoting economic growth (or avoiding the stationary state) through the relaxation of immigration policies and incentives for immigration to our shores.
Nothing wrong with that in face of the global labour situation, but this also has the undesirable effect of rendering the Subsistence function flatter in the long-run – - resulting in depressed wages where the natural rate of Subsistence is forced fown because of increasingly different average standards of living in population. While the immigration policies for economic growth increases profit rate, it only delays the stationary state again. But only this time, Singaporeans in general have to face decreasing standards of living after adjustment for inflation, where Profit Rate has an inverse relationship with Wage Rate, assuming Y(Tn) is constant.
Nevertheless, the country is also facing problems trying to bring Y(Tn) higher. Contrary to what Tan Jay See suggests, the casino is not the last economic card of the government. We still have many unplayed cards for improving Y(Tn), but it is increasingly difficult because there are also diminishing marginal returns to the technological/infrastructural improvements one can introduce to the economy. So what seems to be happening despite our attempts to grow economomically, is that we may already have passed through Y=S into the S>Y segment, in which we cannot seem to support the current population (N). If this is not the current reality, it will be the future. The only solution is to discover new ways of pushing Y(Tn) again, not increase N in itself such that it increases only the profit rate. I believe that one of the most convenient ways to do so, is to introduce a technology improvement that has rarely been seen in our country: Political Technology.
Political Technology
The government has always capitalized on its one-party majority to push for economic reforms, and it has served the country well, too well in fact. Very little debate, very little resistance, less a hindrance for business to go on. But this political system may have also excised the kind of ideas that may help us move into the impossibility space of the Production Possibility Frontier. For the PAP-dominated government, an arrogance and sight complacency begins to set in slowly, for the most part because it does not have enough checks and balances on the policies proposed — resulting in diminishing marginal returns on its own current political system.
Therefore, I propose that by establishing a stronger opposition presence in parliament, one can stave off the effects of diminishing marginal returns. In fact, it will also have a multiplier effect in the kind of ideas that can be brought to the table in 1) externalities (marginal social benefits) for the people, in addition to 2) increased upward shifts of quality in technology improvement on Y(Tn), ensuring continued economic growth.
Is the current economic situation bad for Singapore? Not quite as bad as it may be in the future if we continue to stick to the current political technology, which is in itself already experiencing diminishing marginal returns on its system, and will continue to do so. If we are to ensure further economic development in Singapore, we need to change the political inputs of our Production Possibility Frontier. Until the PAP learns to share the political space behind its economic decisions, its effectiveness in the economy will continue to wane. And then, we will have more problems struggling against depressed wage rates and an increasingly stagnant production function.
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Photo coutesy of Wikimedia Commons.
Part 2 will be on monopoly of political systems and allocative efficiencies, a micro- analysis of the PAP and the PAP-dominated government in face of the current economic and political climate in Singapore.
