Ensuring a fair and inclusive society

Deputy Prime Minister Tharman Shanmugaratnam last Friday outlined how the Government intends to fund its new approach to broaden social safety nets. Speaking at an event organised by the Academy of Medicine, this is an excerpt of his speech:

OUR objectives are clear. We will do more to help those who start with less, starting from young, and ensure that every citizen has a fair share in Singapore's success.

We will do more to give the elderly a sense of security and provide special recognition to the pioneer generation of Singaporeans who worked with lower wages and built up the nation. And even as we intervene boldly, we will ensure that our policies can be funded and sustained well into our children's generation.

We have a good starting point. While the more mature economies built up large debts during their rapid growth years and when their populations were young, we did the opposite. We built up savings.

They will now have to take significant sums from their budgets each year - at least 2 per cent of GDP - to service these national debts. We are in the opposite position of being able to get 2 per cent of GDP from the income on our reserves to spend each year on our social and economic priorities.

Let's keep clearly in mind a few priorities as we go forward so that we ensure that policies for a fair society are not just for two or three electoral terms, but for generations ahead.

First, we should continue to target subsidies at those who need them the most, instead of committing to benefits for all.

Universal subsidies are not just wasteful, but inequitable. They are also hard to take away once given. Even in the UK today, despite severe fiscal pressures and with the Conservatives in government, they have found it too difficult to cut entitlements that benefit the upper middle class and rich elderly.

Second, we should design spending and subsidies in ways that reinforce individual effort and responsibility for the family, values that keep our society strong.

This is not about leaving things to self-reliance or about leaving families to face uncertainties on their own. It is a strategy of government support for efforts by individuals to learn and strive to achieve their aspirations to own a home by working and paying down a loan, and to save for their retirement needs.

It may be a paradox, but this paradox of active government support for self-reliance has to run through all our social policies. It is how we help people to stand with pride and contribute to society.

Third, the Government must, for the same reason, find every way to catalyse and support community initiative for a fair and just society.

One of the paradoxes of the welfare state has indeed been the way an active state has freed people from the social and moral bonds of family and local community. We must strengthen, not weaken, the values that drive us to be our brothers' keepers. Our tax incentives and grants must continue to support the community and civic sector, and aggressively so.

Fourth, we must maintain a progressive system of taxes and benefits.

It is in fact more progressive than meets the eye. For instance, take our income taxes. Our top marginal rate of 20 per cent is low when compared with many other countries. But in fact, our income tax schedule includes Workfare (WIS) or negative income taxes for lower-wage workers. If you are older and of lower income, you get a 20 to 30 per cent credit from the Government through Workfare.

So our income tax schedule is actually 50 percentage points wide - from 20 per cent for the top income bracket all the way down to minus 30 per cent.

This progressivity in our system is even more so when we add in housing grants, which are the second pillar of our social strategies. The housing grants provide significant mortgage savings for lower-income couples.

Taking Workfare together with these housing grants, we are effectively providing low-income couples at the 10th percentile of the income ladder with benefits equal to about 30 per cent of their lifetime incomes.

This is, in fact, a conservative estimate as it does not take into account the appreciation in value of their homes, which even with modest assumptions implies significantly greater lifetime benefits. It also does not account for other subsidies that they receive, which substantially outweigh the taxes they pay through the GST.

We will preserve and build on this progressive system of taxes and subsidies in future, even when eventually, in future terms of Government, we find it necessary to raise revenues to support our growing health-care needs.

Finally, we cannot think about a fair and inclusive society purely in wage or income terms, or in terms of redistribution.

It is also about people having access to a quality living in public spaces: for sports and arts, or just to relax in. We take public spaces seriously in Government, including providing green and blue spaces near our HDB estates.

Or about opportunities to keep learning no matter how old you are, even if you are not learning for the purpose of work, but because there is something inherently satisfying about learning.

It must involve developing a spirit of fellowship as our young grow up in schools.

It has to include a workplace culture that treats all employees with respect, including our blue-collar workers.

And it must include Singaporeans pursuing causes which they feel lead to a better society and doing something to help their fellow citizens see a better life.

So let me conclude. We are in transition as a society. We are no longer a developing nation, but we are not yet truly an advanced nation because our level of productivity, our skills and the wages of our ordinary workers are not there yet.

We face many challenges. Can we keep median incomes growing at a healthy pace and avoid what has happened elsewhere, not just in the developed economies but also in the Asian newly industrialised economies? Can we keep social mobility going, even as many among past generations of poor Singaporeans have already succeeded in moving up? There is no assurance that we will succeed, but that makes it all the more necessary that we put all we can into succeeding.

We are starting from a position of strength, not despair. We have one of the best education systems in the world and we have the most successful public housing programme in the world. We have, by international reckonings, one of the better health-care systems in the world. We also have the lowest rate of unemployment among developed societies, including Hong Kong, Taiwan, Korea.

But whether we do better at the end of the day will not just be a result of whether we've got the right policies and incentives and taxes and subsidies, but whether we retain a culture of responsibility in our society and the spirit of fellowship that I spoke about. We all play a part in keeping ours a fair and just society and taking pride in making it so.

Lessons from S'pore's success story

By Richard Lambert   The Straits Times   Published on Apr 26, 2013 

BACK in the 1980s, the epicentre of the world's financial shocks lay in the countries of Latin America.

In the late 1990s, it was Asia's turn for big trouble.

In the past five years, though, the earthquake mainly hit the developed countries of Western Europe and the United States, and their economies have still not recovered from its impact. The emerging markets have emerged relatively unscathed and have turned into the main engine of global growth.

This process of convergence truly is something new. But is the great convergence sustainable?

Professor Kishore Mahbubani is convinced that it is. He writes (in his new book The Great Convergence): "The great convergence that our world is experiencing is now irreversible. Too many forces have been unleashed to shrink the world. They will only gain momentum in the coming decades. And if we look at our lives carefully, no matter where we live, we can clearly begin to see that our lives are being affected daily by events or decisions made all over the planet."

Among other things, he cites the global reach of social networks and the vast increases in connectivity between and within different countries. He talks about the way the financial system has become integrated across the globe so that trouble on Wall Street is instantly here reflected in Singapore. He discusses the way in which students are studying in different institutions around the world, sharing ideas and values. His list goes on.

Other writers take a different view. For example, Mr Ruchir Sharma argues in his book, Breakout Nations, that "scores of 'emerging' nations have been emerging for many decades now. They have failed to gain any momentum for sustained growth, or their progress has begun to stall since they became middle income countries".

He gives many examples: Malaysia, which appeared on course to emerge as a rich nation until the financial meltdown of the late 1990s; the Philippines and Sri Lanka, which were billed as East Asian tigers back in the 1960s only to see their growth falter badly well before they reached middle-income levels. In short, he concludes glumly: "Failure to sustain growth is the general rule, and that rule is likely to reassert itself in the coming decade."

So who is right?

I'm not bold enough to come up with an answer. But I have been around long enough to know that trends don't usually last forever. And I could imagine circumstances in which the benign story of the past decade or two could be checked, if not reversed.

One obvious example is the way the international banking system now seems to be Balkanising, with banks almost everywhere retreating to their home bases in the wake of the financial crash in the West. Regulators in the US are requiring that foreign banks hold much higher levels of capital in their jurisdiction than in the past. Banks in Europe are pulling back loans from their partners in the euro zone and cutting their balance sheets down to size.

So it looks like global financial integration is on the wane, at least for the time being.

At the same time, the central banks of the US, the euro zone, the United Kingdom and most recently Japan are now conducting the most extraordinary monetary experiment in financial history. In a bid to boost demand and lean against fiscal austerity, they have been buying bonds, mainly from their governments, on a truly astonishing scale.

We don't know how successful they will be in unwinding their enormous bond holdings in a timely and orderly manner. But we do know markets have a tendency to overreact and could get very jumpy at the first sign of interest rates rising from levels which haven't been seen before in the modern era.

We must worry that all this quantitative easing could have implications for inflation, and even for competitive devaluations, with adverse consequences for global trade. I'm not suggesting that this will happen. But I do believe that the international economy is still in a dangerous and unstable phase, and that it's too soon to think we are out of the woods.

The Great Convergence could be tested in the years ahead, and it therefore makes sense to look for the qualities that will make the difference between success and potential failure in countries around the world.

And this is where I turn to the Singapore story. As a complete outsider, I could make some spectacular gaffes. But the challenge in this context is irresistible. So here goes.

Geography as destiny

TO START with, it's obvious that geography matters. In his book, The Bottom Billion, Paul Collier writes about the plight of those people who have missed out on the benefits of globalisation. He argues that they tend to live in countries which have a number of common features. One is that some of the poorest countries in the world are landlocked and have bad neighbours. And indeed a significant number of countries right at the bottom of the United Nations league table come into this category - no access to the sea or to international trade routes, and neighbours from hell.

The opposite is true as well, as Singapore has demonstrated. It has used its prime location on the planet to turn itself into an international entrepot on an almost unparalleled scale. Expressed as a proportion of its gross domestic product, its exports of merchandise goods are more than twice the size of its nearest rival, and its exports of services also top the global league table when measured in the same way.

Of course, that's not just the result of an accident of geography. Strong governance and strong institutions are the key, and most of them are summed in a series of interviews with Mr Lee Kuan Yew published two years ago under the title Hard Truths To Keep Singapore Going.

How, he is asked, do you have a strong economy? He answers: "By maximising your human resources. Your people, the way they are trained, organised, educated to serve the world's needs, which means infrastructure, connections, linkages with those parts of the world which will add value to our lives. Second, we leapfrogged the region because they wanted to squeeze us. We brought in multinationals."

I looked around for some data to support these claims. Here are some of the things I found. In a league table of Asian Universities published in the Times Higher Education Supplement a couple of weeks ago, little Singapore had two universities in the top 12: the National University of Singapore came second only to the University of Tokyo. For comparison, giant India has only three institutions in the Asian top 100, and all are highly specialised. The Indian Institute of Technology at Khragpur is the highest placed, standing at number 30.

When it comes to the performance of 15-year-old students in reading, mathematics and science, Singapore again compares with the best of the world, well ahead of the likes of Germany or the US. As for bringing in the multinationals, foreign direct inflows between 2007 and 2011 worked out at 18 per cent of GDP, which was not as high a proportion as in Hong Kong but well ahead of most other economies in the world.

A strong emphasis on the quality of government and high standards of governance are other recurring themes of the Lee Kuan Yew interviews: He argues repeatedly that they have been the foundation of Singapore's growth and transformation.

There's also a focus on merit - as he puts it: "Not equality of rewards but equality of opportunity in education, housing, health and so on. And a system based on meritocracy. That's the basis on which we have had intercommunal harmony and inter-religious tolerance."

It's certainly had an impact on the well-being of this city state. Singapore now stands at No. 18 on the UN's Human Development Index, having climbed a full seven places in the rankings since 2007. For comparison, France is in at No. 20, and the UK - which has also risen in recent years - at No. 26.

And there's another thing that comes through strongly in the interviews - a sense of real anxiety, a worry that citizens might become complacent in their relative prosperity and forget the qualities that have turned the country round. He says his greatest fear is "a leadership and a people that have forgotten, that have lost their bearings and do not understand the constraints that we face".

"Small base, highly organised, very competent people, complete international confidence, and ability to engage the big countries. We lose that, we're down. And we can go down very quickly."

Strong investment in human and physical capital. Sound governance and an economy in which everyone can aspire to have a stake. An openness to international capital and trade. Concern for the future. These appear to be some of the key ingredients of Singapore's success.

Countries with shrinking, ageing populations will struggle to sustain their economic performance over time. As the number of workers relative to retirees declines, the tax burden of supporting those senior citizens increases. So countries like Japan and Germany, where the working age population could fall by roughly a third by 2050, will face growth problems and fiscal pressures. And this is a challenge for Singapore too, as it must be with its fertility rate among the world's lowest at 1.2 compared with a replacement level of 2.1 and, for example, 1.9 in the UK.

Spend more, to keep healthcare affordable

BY  JEREMY LIM

http://www.todayonline.com/commentary/spend-more-keep-healthcare-affordable

Singapore’s health system is lauded internationally for its ability to achieve outstanding health outcomes at very low national spending. Yet, 72 per cent of Singaporeans believe “we cannot afford to get sick these days due to high medical costs”, according to a 2012 Mindshare survey.

How can this be? Our low national spending on healthcare is the envy of the world and yet Singaporeans are so worried about healthcare costs.

What makes a great healthcare system? Healthcare planners the world over dream of the ideal health system: High quality, low cost and universal access for all citizens. How would Singapore rank along these dimensions?

The quality of Singapore healthcare is top-notch; 850,000medical tourists in 2012 is testament to our high standards.

What about access? Geography advantages us and, unlike many large countries which need extraordinary measures to provide for far-flung populations, Singaporeans are hardly a stone’s throw from a doctor and barely a 15-minute drive from a hospital.

Our weakness lies in affordability, or at least the perception of affordability. Ironically, why we spend so little may account for why there is so much anxiety.

INDIVIDUAL RESPONSIBILITY: A DOUBLE-EDGED SWORD

In many developed countries, healthcare is funded collectively. Citizens are enrolled into a national health scheme and funds drawn based on individual need. These “solidarity” schemes are designed to offer medically necessary care without consideration of the ability to pay.

Singapore has eschewed this path, with then-Prime Minister Lee Kuan Yew asserting: “Subsidies on consumption are wrong and ruinous ... for however wealthy a nation, it cannot carry health, unemployment and pension benefits without massive taxation and overloading the system, reducing the incentives to work and to save and care for one’s family — when all can look to the state for welfare.”

The Government declared health an “individual responsibility” in the 1980s and established Medisave and MediShield, enabling individuals to finance and hence be “responsible” for personal healthcare.

The principle of emphasising the private financing of healthcare through individual responsibility supported by family has been praised for helping Singapore achieve remarkable cost constraints, but there has been a human cost. While the Government has successfully mitigated the risk of wanton state spending, the consequence arguably is that financial risk from medical catastrophe has been passed to individual citizens and their families, with resultant anxiety.

Support from Medifund is possible, but only upon applicationand on a case-by-case basis with no certainty of coverage, complete or otherwise. C-class wards provide subsidies which can be as high as 80 per cent, but paying even the remaining 20 per cent may be impossible for hefty bills; 20 per cent of S$50,000 is still too heavy a burden for low-income Singaporeans.

THE GERMAN EXAMPLE

And healthcare costs can be very unpredictable.

While virtually every country imposes co-payments to guard against over-consumption, many countries, especially European nations, operate on the reverse principle to Singapore. Co-payments are preserved as with Singapore, but the individual’s share of the total bill is capped — for instance, in Germany at 10 per cent of monthly income — with the government assuming the financial risk for unexpectedly large bills. No need to apply for special dispensations or subsidies.

Princeton University economist Uwe Reinhardt, speaking of the German health system, declared about medicalbankruptcy: “That’s almost impossible … I have not ever read of Germans going bankrupt over healthcare.”

In Singapore, MediShield lifetime dollar coverage is capped at S$200,000 (soon to be S$300,000) with high deductibles and sub-limits on what clinical services can be covered. All these collectively enable relatively low premiums to be imposed and render MediShield financially very healthy — but similar to the structuring of subsidies, financial risk is borne by individuals and their families, with no certainty of help from Medifund or other schemes.

The theme is consistent: In our healthcare financing model, safeguards are built first and foremost to ensure system financial viability and sustainability.

A HUGE MIDDLE GROUND

Defenders of the system will point out the many financially struggling “welfare states” and proclaim Singapore must never go there. But it should be noted that between where we are today and the “fiscal extravagance” of the welfare states, there is a huge middle ground.

Singapore’s total public spending as a proportion of gross domestic product is only 13 per cent, a far cry from the 40 per cent that Finland spends. Singapore’s government spending on healthcare is just above one-third the total, with a long way to go before even sniffing the four-fifths that is the case in the United Kingdom.

Health Minister Gan Kim Yong’s commitment following the release of the Population White Paper — to “look at how we can restructure our primary care sector, our hospitals including our intermediate long-term care sector”, that is, the entire healthcare landscape — is reassuring, especially when juxtaposed against earlier comments on looking at healthcare affordability from the patient’s perspective. Times are changing.

“To live well, live long & with peace of mind” is the mission of the Ministry of Health. How can we balance “individual responsibility” with ‘peace of mind’? Between 13 per cent and 40 per cent, between one-third and four-fifths, where do we want to be?

Dr Jeremy Lim has held senior executive positions in both public and private healthcare sectors. He is currently writing a book on the Singapore health system. This is part of a series on health policies in Singapore.

Why Spore's education system must evolve

RELOOKING the determined pursuit of excellent grades is not a precursor to a "de-grading" of systems of assessment and an inevitable descent into mediocrity. Rather, it challenges the assumption that grades matter above all else in the real world of commerce, social interaction and governance.

Performance-focused employers need people who can deliver results - execute tasks, demonstrate innovation, cut deals, size up opportunities, weigh risks, manage projects, raise revenues, solve problems, communicate issues, negotiate agreements and interact with diverse groups. Having scored top grades in science, literature or maths is no guarantee that a candidate can easily acquire such competencies that increasingly count more in a fast-changing world.

This lies at the heart of the debate on the future of Singapore's education system, as expounded by Education Minister Heng Swee Keat when he noted that schools would have to move beyond equipping students for examinations and prepare them for life. Towards that end, secondary schools will offer by 2017 a programme intended to help students understand the relevance and value of what they are learning. Another programme will encourage them to better understand both themselves and their relationship with others. These schemes will institutionalise cognitive values necessary if the education system is to help Singapore meet the qualitatively new demands of the globalising economy.

That the country can focus now on these higher-order skills attests to its success in first ensuring a strong educational foundation for its young. However, unlike times when students had to be made employable in an industrial economy, today's information economy demands that they are equipped for workplace demands that cannot even be foreseen when a child enters school. Hence, the need, as Mr Heng made clear at his ministry's annual workplan seminar recently, for all-round students who can collaborate with people from different backgrounds in an environment that is volatile, uncertain, complex and ambiguous.

Parents and educators can make a real difference by laying aside their own assumptions and experiences. They need to help children learn to live in the complex world in new ways. This is largely uncharted territory with no study guides, assessment workbooks and private tutors readily available. It is at home, around the dinner table, in particular, that children get to imbibe a sense of what they must do to thrive in a challenging world. And it is in school that they will be transformed, beyond the changed curricula, by the cultural change of making them more than the sum of their grades.

The Straits Times  Oct 03, 2013

 EDITORIAL

Singapore's balancing strategy

 By Fang Fang, Ding Yuqin And Lu Hao

"W E WISH to have another Lee Kuan Yew but this is impossible. Many countries have to wait for generations before they see a Lee Kuan Yew, we are already very lucky." These were remarks made by Singapore Prime Minister Lee Hsien Loong in a recent live television show, Ask the Prime Minister.

In the hour-long programme, he also talked about Singapore welcoming its 50th year of nationhood in two years' time. He said that 50 years in a country's history is not considered long but the 50 years of Singapore's foundation as a nation had profound effects. Singapore's commercial vibrancy and political image as transparent, clean and efficient, as well as its unique foreign policy philosophy, has been examined by scholars from many countries.

Some praise Singapore as enjoying influence far beyond their own countries'; others are unhappy that Singapore holds an ambivalent attitude towards Japan despite being invaded by imperialist Japan in the past. Others say that Singapore's philosophy of practicality has led it to "chase" China economically but "softly balance" China militarily and politically. But to Singapore, which once boasted that it was a "poisonous shrimp", the most pragmatic strategy was to co-exist with the big fish in the international arena.

As a tropical city-state, Singapore lacks geographical strategic depth and natural resources. Despite all this, Singapore highly values its independence and autonomy as a country, and takes great pains to avoid becoming a satellite state of any big country.

Mr Lee Kuan Yew once defined Singapore's international strategy as such: a poisonous shrimp. A shrimp might be small but its poison could pose a threat to the big fish in international oceans, and so it will not be eaten by the big fish and can co-exist with them.

Since its founding, Singapore has gradually formulated a "balancing strategy". Singapore's geopolitical vulnerability has a lasting effect on its foreign policy.

Of its 5.4 million population, about 75 per cent are of Chinese ethnicity, and Chinese is one of the four official languages. Despite its cultural "affinity" (with China), Singapore established diplomatic relations with China only on Oct 3, 1990 in order to avoid suspicions from neighbouring countries.

Singapore achieved independence in August 1965. When it first gained independence, Singapore was faced with a severe and complex regional and international environment. Malaysia, Indonesia and other countries at the time adopted an anti-China policy, and some viewed Singapore as the Trojan horse of China in South-east Asia. Therefore, Singapore began to comprehensively deepen its relations with China only after Indonesia restored diplomatic relations with China in February 1989.

An April 27 Global Risk Insights article on Singapore's dilemmas and challenges states that it is common knowledge that Singapore placed supreme importance on its security.

Nanyang Technological University's defence and strategic studies researcher Chen Sicheng highlighted that as the smallest country in Asia with a "siege mentality", Singapore must adopt a flexible and nimble foreign policy. Therefore, Singapore's philosophy in dealing with big countries, and in its foreign policy in general, was pragmatism. As a result, Singapore's relations with other countries often would show "contradictions".

Singapore supports the United States' continued presence in South-east Asia, and welcomes the US' "pivot to Asia" policy. However, some quarters disagree with the view that Singapore is being "one-sidedly" pro-US, and although Singapore hopes to "balance" China through the US, it certainly does not wish to see bad relations between China and the US.

Singapore hopes to keep all stakeholders - including China, the US, Japan and the Republic of Korea - actively involved in regional affairs through various regional cooperation mechanisms. To Singapore's leaders, it is better to maintain its own security through regional competition among several big countries, than to hand over its fate to one big country.

Former US secretary of state Henry Kissinger has on more than one occasion described Singapore leaders' analysis of world politics as "cold-blooded". Singapore is unfazed by such an assessment. Former foreign minister George Yeo once said: "The fact is, we have to be so. We had to survive under very limited circumstances, and so our world view could not be subjective or emotional." These remarks reflect Singapore's "pragmatic" foreign policy.

Singapore has always viewed the US market as a major engine of its own growth. However, since 2007, Singapore's trade with China has far surpassed that with the US, and China has become a far more important trading partner of Singapore. Pragmatic Singapore has therefore placed greater importance than before on China.

Some scholars say that among the Asean countries, Singapore is the architect and front-line advocate of a pro-US "balance of power" strategy. However, when the US criticises Singapore's "core interests", Singapore would unabashedly react. For example, Singapore reacted strongly to the US State Department's Human Rights Report 2012, calling the US criticisms of Singapore's Internal Security Act an act of double standards and hypocrisy.

Being able to influence the will of big countries is a source of pride for Singapore but Singapore is also deeply aware of the limits of its influence. Such a "balancing foreign policy" at times benefits Singapore but sometimes also puts Singapore in a predicament of having to make hard choices.

This is a translated excerpt of an article which first appeared on Sept 27 in the Chinese-language Global Times, or Huanqiu Shibao.

The Straits Times

www.straitstimes.comPublished on Oct 02, 2013

S'pore world No.3 for human capital

By Fiona Chan Senior Economics Correspondent

A NEW index that measures a country's ability to make the most of its workers has ranked Singapore as the third most successful in the world and the best in Asia.

The Human Capital Index, developed by the Geneva-based World Economic Forum (WEF), put Singapore just behind Switzerland and Finland in maximising the long-term potential of its labour force.

Of the 122 countries assessed, Japan was the only other Asian country to make it to the top 20 - in 15th place. The United States was one spot behind.

Not far below were Malaysia and South Korea, in 22nd and 23rd places respectively, while China - the top-ranking BRIC nation - came in at 43rd.

The WEF, a non-profit global organisation that aims to improve the state of the world, awarded Singapore high scores in three of the index's four criteria: the quality of the workforce and employment, education, and the working environment.

However, it fared less well in the last category: the physical and mental well-being of its workers.

This was mainly due to "the burden of disease in the country" - Singaporeans under the age of 60 suffer more deaths from non-communicable diseases than many other countries - which takes a toll on workers and businesses, the WEF said.

Workers here also reported high levels of stress, according to the index. As a result, Singapore ranked 13th in the "health and wellness" category.

In contrast, Singapore was awarded second place in the "workforce and employment" category.

It was recognised for its high labour force participation rate - the proportion of people able to be actively involved in the workforce - as well as the quality of skills and experience gained by its workers.

In particular, Singapore was seen as the second most successful country in the world at attracting talent, losing only to Switzerland.

The WEF also lauded Singapore's "exceptionally strong" quality of education and the "high level of tertiary education among the adult population", which landed the country third place in the education category.

Special mention was given to the quality of maths and science education here, which was deemed best in the world.

On top of that, Singapore scored well in terms of its infrastructure, legal framework and other elements that create a conducive environment for the development of a talented workforce. It came in fifth in this "enabling environment" category.

Most of the other countries that performed well in the Human Capital Index were from northern and western Europe, which accounted for eight of the top 10 spots, said the WEF. Singapore and Canada were the only exceptions.

"The key for the future of any country and any institution lies in the skills and talent of its people," said Mr Klaus Schwab, the WEF's founder and executive chairman.

"In the future, human capital will be the most important kind of capital. Investing in people is not just a nice to have; it is imperative for growth, prosperity and progress."

fiochan@sph.com.sg

www.straitstimes.com

Published on Oct 02, 2013

Cities make the wealth of nations

 By Razeen Sally For The Straits Times

 ADAM Smith called it the wealth of nations. Two centuries later, we talk about "national competitiveness". The World Economic Forum's annual Global Competitiveness Report, for example, identifies the policies and institutions that boost national productivity, which determines competitiveness and economic growth.

Perhaps we should also focus on cities. More than ever, cities - especially existing and aspiring "global cities" - are the lifeblood of the global economy. The competitiveness of cities - what makes them more productive and successful - increasingly determines the wealth of nations, regions and the whole world.

But the competitiveness of a city does not stand in isolation. Cities are still linked to their immediate hinterlands and embedded in their nations. In other words, the competitiveness of a city and the nation of which it is a part are intertwined and mutually reinforcing.

The map of the global economy most of us have in mind is one of nation states connected to each other via trade and the movement of capital, people and technology. That is still highly relevant. But throughout history, the most intensive cross-border economic transactions have been between cities - mostly cities located on coastlines.

It is therefore useful to think of a different map of the global economy: one of cities connected across land borders, seas and oceans through the exchange of goods and services, foreign investment, workers and border-hopping technologies.

Unprecedented levels of urbanisation make this city-based map especially relevant. Three years ago, for the first time in history, over half the world's population lived in cities. Urban areas also account for over 80 per cent of global gross domestic product (GDP). According to McKinsey Global Institute, as of 2007, 1.5 billion people (22 per cent of the world's population) lived in the world's 600 most populous cities and accounted for a GDP of US$30 trillion (S$37.6 trillion) - well over half the global GDP. The top 100 cities, with a GDP of US$21 trillion, accounted for 38 per cent of global GDP.

In 2025, McKinsey reckons that the top 600 cities will have 25 per cent of the world's population and nearly 60 per cent of global GDP.

What does this mean for the "competitiveness of cities" and the "wealth of nations"?

Most productive policy innovation is happening in cities and sub-national regions. It is not happening at the level of national governments or in international forums like the United Nations, the European Union and the G-20. Policymaking is more flexible and practical the closer it is to the citizen. Cities often emulate each other and adopt best international practice better than nations do.

This is even true of cities and state governments in the United States at a time when politics in Washington, DC, remains gridlocked. In the EU, national governments and EU institutions are stuck in sclerotic political cartels with failed policies. Can Europe's cities break out of this straitjacket and unleash long-delayed reforms?

Perhaps. But this century's story of cities and the wealth of nations will more likely be scripted in the emerging world - outside the West. Asian cities, stretching from India to China and North-east Asia via South-east Asia, will be the main players. McKinsey's list of the top 600 cities contains 220 from developing countries. But it estimates that, by 2025, 136 new cities will join this list - all from developing countries. Of the new entrants, 100 will come from China alone.

What are the ingredients that make cities more productive? Some vital municipal policies are parochial: urban planning and zoning, housing, water, sanitation, policing and so on. But the most successful cities, like the most successful nations, also have stable public finances; low, simple and competitive taxation; and transparent business regulations. They are also characterised by strong and impartial rule of law, openness to trade and foreign investment, and a welcoming environment for foreign talent. Other factors include good "hard connectivity" - roads, transit systems, ports and airports; and good "soft connectivity" - education, skills and technology diffusion.

Like nations, cities with limited - but effective - government and competitive markets do better than cities with big, inefficient government and distorted markets. This reinforces the message that there is a good deal of overlap between city competitiveness and national competitiveness.

My role models are Hong Kong and Singapore. Both regularly top the rankings of the Global Competitiveness Report, the World Bank's Doing Business Index and the Simon Fraser Institute's Economic Freedom of the World Index.

Government is relatively small, clean and efficient, and markets are relatively competitive and highly globalised. Nowadays, Hong Kong and Singapore are the logistics and services hubs for Asian trade. Modern global supply chains plug them into other cities in Asia and beyond.

These two cities may be exceptions, but they have set the standard for other Asian cities to follow.

To me, free markets and free trade produce a virtuous trinity:

They promote growth and prosperity - the economic imperative.

They expand individual freedom - the moral imperative.

Cities, more than anything else, sustain peaceful international relations - the geopolitical imperative.

I think of cities in this context. They might indeed be the best available political-economic units to promote prosperity, freedom and peace - better perhaps than nation states, and certainly better than most mechanisms of global governance.

stopinion@sph.com.sg

The writer is visiting associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and chair of the Global Agenda Council on Competitiveness of the World Economic Forum.