Message from Singapore: When the West Is No Longer in Control

Tharman Shanmugaratnam knows how to charm his audiences. “In Singapore, we tend to spend a lot of time thinking about what could go wrong,” he said at a recent conference in Washington, D.C. “Even so,” he continued, “we end up rather optimistic because if you think about what can go wrong early enough and focus on what you can do to prevent it from happening, you usually come out all right.”

And yet, behind his genteelness is a steely mind that lays out in clear language for anybody willing to listen just how much the world is changing before our own eyes. Says the minister at the conference, which was sponsored by the Bertelsmann Foundation: “Looking at the global economy, what worries us the most is, first, the unacceptably high level of unemployment in the United States, not just in Europe. Second, the whole fiscal model — particularly in Europe and, to a lesser extent in the United States as well — needs remaking. What is required isn’t marginal changes and tinkering here and there, but a fundamental rethink of the whole social contract.”

That’s a clear statement from the man who rose to global prominence when he was appointed as chairman of the IMF’s policy advisory committee (IMFC) in March of this year.

He argues that because these are structural problems that do not have their origins in the financial crisis and have been building up for a few decades, they “will not be solved in two or five years. It will take at least ten years to find a way out of these problems and move towards a solution that is politically and socially satisfactory in democratic societies.”

On a note of optimism, he says, “I think the solutions are there. They do require a level of political consensus, though, that is not yet fully apparent either in Europe or the United States. In particular, they require a society-wide sense of decisiveness that allows all parties to focus clearly on the challenges of the future.”

Against this rather sobering backdrop, why does Mr. Shanmugaratnam, who made his earlier career in the Monetary Authority of Singapore, believe there is reason for optimism? Because “we have an immense opportunity in front of us — in a word, infrastructure investment.”

Tantalizingly, Mr. Shanmugaratnam sees this field as the great new global equalizer, but with a spin. He argues, “In the United States and in most advanced economies, there is a big opportunity to rebuild infrastructure, which really means reinvesting in the future.”

The elegant spin — and strict reinterpretation of the doctrine favored by the U.S. Treasury and Federal Reserve — comes in when he addresses the topic of the savings glut. Acknowledging that much of the international debate in recent years has been dominated by talk about this phenomenon, he begs to differ. “In my view, what we have seen in the last 30 years was something quite different, a significant reduction in rates of investment around the advanced world. Rather than worry about a savings glut, what we had to contend with was actually a reduction in investment.”

His statement is about the most elegant and compelling takedown of U.S. economic doctrine heard in quite some time. In one fell swoop, he builds a bridge between much of Asian thinking and Europe’s. Even the Obama Administration can’t quite disagree. After all, is it not always in favor of doing more for U.S. infrastructure?

Expanding the arc of his powerful global rebalancing argument, Singapore’s finance minister goes on to say that “the same opportunity for infrastructure investment exists in the emerging world. What we are going to see in the next decade is a confluence of two very interesting opportunities — the rebuilding of infrastructure and capabilities in the advanced economies as well as a new wave of investment in the emerging world outside China. China has already an extremely high investment economy likely to remain that way for a while.”

Putting these two trends together explains the root cause of that unlikely new global thing that takes getting used to: optimism made in Singapore. “When we put these two trends together, it is reasonable to expect the biggest building boom and the biggest investment boom that we have seen since the post-World War II period, that is, since Europe began rebuilding after 1945.”

However, before everybody declares victory and moves on, Mr. Shanmugaratnam comes to the most interesting part of his thinking. Sounding a bit technical, it is here that the global cultural revolution is taking shape: “This fundamental shift in the global economy presents a whole set of important structural issues because most of these investments are going to be taking place in the emerging markets. In addition, most of the savings involved is going to come from the emerging markets. And yet, financial markets are still ill-equipped to intermediate between savings and investments in the emerging markets.”

In other words, contrary to the times when capital flowed from the north to the south, from the developed world to the developing one, from now on it’s the other way around. While it had been considered a fluke that developing countries like China would use their savings to send to rich countries like the United States, this is a structural phenomenon.

Given the state of depletedness of the coffers of most Western governments, they will have to rely on savings largely being sent from Asia.

Mr. Shanmugaratnam is far too elegant to put it quite this directly. Instead he offers that the new world of global finance “will require all of us to think very hard about how we can encourage cross-border flows that function well over the long term and are of a relatively stable nature. Regrettably, if anything, the trend in recent years has moved in the opposite direction. In the case of insurance funds or pension funds, owing to national regulatory frameworks, there has been a greater emphasis in recent years on national boundaries — in other words, invest within your own countries so as to reduce risk rather than think about diversification of portfolios on a global basis.”

In plain English, what the minister seems to be getting at is that the Western world — and especially America — needs to forget about setting the rules of the game unilaterally. It’s now a global process.

He is undoubtedly right in his assessment — and understandably cautious about speaking his mind too clearly, especially considering that he was speaking them in the lion’s den, less than a mile from the U.S. capital. It will take a lot of getting used to for U.S. politicians and regulators alike to accept this new world of a rebalanced approach as to who gets to set the rules.

Mr. Shanmugaratnam undoubtedly knows that, as a matter of principle, Americans have no problem with the notion that he who has the capital gets to set the rules. Except for that he is far too experienced not to be aware that this basic principle of capitalism has always come with a comfortable cultural bias, since it has been Americans for a long time who had the funds and the regulatory power.

Fascinatingly, the minister also comes around to pitching the importance of Singapore as a financial center, in the most elegant of terms. “As far as emerging markets are concerned,” he opines, “financial markets there are still rather illiquid. There is not enough debt issued and capital markets are generally weak. However, if one aims for stable long-term investments, one has to recognize that even long-term investors need secondary markets. They need deep, liquid markets to mitigate their risks.”

Services that, no doubt, can be excellently provided in Singapore, where house prices are rising in line with the tantalizing future prospects of the city as a regional — and indeed global — financial center.

In conclusion, Mr. Shanmugaratnam offers this insight: “While there is a whole set of technical and regulatory issues to be addressed, we should not lose sight of the big picture. What lies ahead is a world of phenomenal opportunity, provided we find the right ways to make sure that the key intermediate product of this new world — cross-border capital flows — are stable in nature rather than destabilizing.”

Welcome to the new world.