Singapore in a time of rising risks
Globalisation means that we are all exposed to the functioning of political institutions in large economies such as the United States, the European Union and China. Large country decision-making on trade, monetary and fiscal policy, or security and climate change, has direct international repercussions.
Singapore is particularly exposed to global developments because of its very high external share. The Singapore economy is currently running strongly on the back of global GDP growth that is as high as it has been since 2011. The flipside is that Singapore is also exposed to risks to the global economic and political system. Indeed, Singapore’s exposure to risks to the international economic system has been clear these past several weeks.
President Trump’s announcement of US tariffs on steel and aluminium, followed by widespread exemptions, and the tit-for-tat announcements of tariffs between China and the US on a wide range of goods over the past week highlight the significant risks to the rules-based, global trading system that Singapore has benefited from. Indeed, along with other export-oriented economies, Singapore’s equity markets have been volatile over the past month or so as sentiment changes on the prospect for protectionism and a trade war.
It is hard to know how exactly this will play out in the US and around the world. But these actions may be the start of something more significant as the US continues to retreat from its leadership role in international trade.
"And recent developments in China have the potential to be at least as consequential."
The National People’s Congress has recently approved the removal of the two-term limit on the Chinese Presidency, allowing President Xi to remain in office indefinitely. This development is not altogether unexpected, but it is still a bracing moment – and perhaps one of the defining moments of the early 21st century. The return of personalised rule brings to a halt the gradual process of institution building in China that was designed to reduce the chances of the chaos of the Mao era returning.
It is not clear that this move precedes a particular economic policy agenda. It may be that a more dominant President Xi oversees the transition to a more sustainable, less debt-driven, higher quality growth model. But the evidence of a commitment to economic reform is far from clear: state enterprises are dominant, the Party’s role in corporate governance has been extended, the business environment facing foreign companies in China remains difficult, and decisions on which companies grow often seems as much political as economic.
The period of economic reform and opening up has been in hiatus for some time under Mr Xi, and the argument that the consolidation of political power is a necessary precursor to economic reform seems increasingly weak.
President Xi’s term has also coincided with a more assertive foreign policy stance; from the ongoing military build-up, to South China Sea island building, to the way in which China uses a mixture of economic sticks and carrots to sanction countries from South Korea to Norway. And China has hardened its stance with respect to the autonomy of Taiwan and Hong Kong.
It is quite possible that the constitutional change will lead to a more assertive, less constrained Chinese foreign policy, from Taiwan to the South China Sea and beyond. President Xi’s closing speech to the People’s Congress was uncompromising in this regard, committing to ‘ride the mighty east wind of the new era’. This would create an additional set of risks for smaller states in the region.
Of course, outside commentators have a chequered record in interpreting China’s political system. It may be that an ambitious programme of reform and development will be pursued in a more stable political environment, and that there are some economic benefits to this constitutional change at least in the short term.
However, at a minimum, the consolidation of power raises the risk profile of China significantly. The economic outlook will increasingly be contingent on decision-making by one person. It may be that President Xi makes sensible policy decisions for a time, but there is less to stop poor decisions – which are inevitable at some point. And the ongoing focus on ideological alignment (‘Xi Jingping Thought’), the fusing of party and state, and various crackdowns on freedom of expression, further reduces the space for policy debate.
There are fewer checks and balances in the Chinese system as power consolidates, and removal of term limits will weaken the consensus-style model of decision-making. The probability of things going badly wrong – the ‘bad emperor problem’ – is higher. It is not clear that the constitutional change will lead to greater stability in decision-making. Rather it creates meaningful potential for significant jumps in policy.
The past century of Chinese history does not provide much confidence in personalised governance, which is why the presidential term limit was established in the 1980s. And the weakening of institutions that support the orderly transfer of power will likely become a critical challenge at some point in the future. It may also be that this constitutional change signals concern about weakness rather than projecting strength.
Overall, the distribution of possible outcomes over the next decade and beyond in China is significantly wider. It may be that better outcomes are delivered under this model, although I am sceptical, but material downside risks have also been created.
These developments matter directly for the citizens of China. But these developments also have a broader systemic effect. The global economic outlook is increasingly sensitive to the risk profile associated with political institutions in China. China is increasingly at the centre of the global economic and political system. China now accounts for 15 percent of global GDP (in USD terms), over 10 percent of global exports, and about 30 percent of global GDP growth, up markedly from 20 years ago.
The growing political risk profile in China translates directly into a higher global economic risk profile, both in terms of the impact of economic disruption within China as well as in China’s relations with the rest of the world. A China shock now will shake the world.
Advanced economies are subject to political risk, as we have seen recently in the US and Europe. But the nature of political institutions and norms in large emerging markets like China creates significant potential for disruptive political shifts. And as emerging markets continue to grow in importance, the global economic and political risk profile will also increase.
Small countries like Singapore are at the sharp end of this, because of their acute exposure to China and the global economy more broadly. Over 25 percent of Singapore’s (NODX) exports are sent to China and over 15 percent of Singapore’s direct investment abroad. Singapore’s overall economic performance is tightly linked to the strength of the Chinese economy. There was some experience of this in the summer of 2015 as economic and market turbulence in China impacted on Singapore and region. And, of course, Singapore is exposed also to the systemic effect of a China shock on the global economy.
I remain positive on the global economic outlook, and on the outlook for small advanced economies. But the global economy does not run independently of the international political environment, and the higher level of political risk in China is a systemic issue for the global economy. Combined with the growing risks around international trade, Singapore should prepare for interesting times ahead.