Social Economics

Posted on May 6th, 2017

Economic Islands

I was thinking recently about the sustainability of an economy like Singapore’s. It seems be an exception rather thI was thinking recently about the sustainability of an economy like Singapore’s. It seems be an exception rather than the norm: a simultaneous city and nation. What’s more is it’s a literal geographical island. Every single day, ships loaded with cargo make their way through its port, as do planes through its airports and trucks through its northern land checkpoint with Malaysia. This cargo has to sustain a population of more than 5.5 million people consuming about three meals a day, and much more beyond that.

It seems a rather unnatural situation. Surely this means basic items like food and water have high cost structures resulting in high prices. While this is most certainly the case for scarce land, the problem of import cost is somewhat abated by Singapore’s role as a trade hub.

And yet one cannot deny the fact that, on a high level, almost everything consumed in Singapore must be imported: the cement, the wood, the rice, the cars. All of this must be paid for in foreign currency: in other words, through the derived value of the Singapore Dollar (SGD) itself. If other countries need not the SGD, Singapore quite literally starves to death. And where does this derived demand stem from? Fistly, one needs SGD to purchase the few products the island does natively possess, namely land. A rising wealthy class around the region in search of stability and infrastructural efficiency ensures relatively robust demand here. Secondly, there is a huge value-add manufacturing sector, whereby the country imports products, adds value to them, and then technically exports them soon after. Thirdly there is financial demand for SGD as an important regional currency in a financial hub, from high-frequency to longer-term transactions. And finally, perhaps most interestingly, there is the demand for Singaporean labor, which could be considered a sort of value-add in the services. Think the multinationals (MNCs).

Given most of what is consumed in Singapore starts off abroad, in some sense the entire pie to be shared amongst residents comes from these four sources. The entire rest of the domestic economy, from barbers to restaurants and cafes, shares in and redistributes this pie of essentially foreign origin.

Not So Anomalous

This seems like a very fragile situation. If derived demand for the SGD wanes, Singapore is in big trouble. And indeed massive areas of traditional influx are on a downward trend. There is contraction in the banks, insurance companies, the entire shipping sector as China turns to domestic instead of export-driven growth, the oil sector with a global supply glut and consequently low prices, and much more. How is the nation to survive as a geographical, political and most importantly economic island through such storms?

And yet if one takes a step back, one perhaps realises that this situation is not that anomalous at all. Consider any large city, be it London, New York or Dakar. Each has a population of millions. None grows a significant portion of their food. City are typically net importers of the basics. The only reason that the population does not starve (for the most part) is that it generates sufficient economic value to have purchasing power.

Unlike Singapore, this value routing doesn’t need to hop through currencies, but the principle is the same: it just hops through prices instead. Unlike Singapore, socio-economic dynamics take place within a single political bloc. This has some repercussions. A city-nation-state has to negotiate trade terms with surrounding countries; London need not as much with surrounding regions in the UK. The labour force is also more fluid outward (but not inward) in places like London. If unemployment is too high, people can more easily move out of the city, but remain in the country. Singapore’s population might find this harder. However, given a large portion of the country’s workforce is non-resident, there is a significant outward buffer. What’s more is that there is more control on inward flow: Singapore can throttle its immigration on a city level, tautologically. London must accept legal residents from other parts of the country or region.

So no doubt there are nuances, and economic and ideological trade offs on both ends. But through this lens, economic islands like Singapore may not be anomalous as they first seem. Cities are as cities do.

Universal Basic Income - Wait, What?

So what are the prospects for an economy like Singapore’s? Or, more generally, what are the dynamics of competition between the cities and nations of the future? Allow me a small tangent.

Numerous explorations have been made into the future of work, and most notably the stratification of incomes, from Ryan Avent’s The Wealth of Humans to articles in the Economist. The theme of the day is increasing automation through robots and software, increasing returns to capital instead of labour, and a smaller workforce earning more of the pie, with masses in economic mediocrity and poverty.

Many have argued that in such circumstances, capitalism has to be revised. If remuneration is tied to economic productivity, and humans are just not that productive anymore, we are faced with a very clear choice between destitute masses (with social turmoil), and novel ways of distributing wealth without excessively hindering capitalist incentives. Unfortunately it’s not just a logical decision, but a social transition, which means it will likely be slow, painful and messy, if it happens at all.

Regardless, one leading contender among ways forward is Universal Basic Income. In other words, a small stipend for every person, no strings attached. Take any economy (geographically or otherwise delineated), tax the sources of value-add, and redistribute among all the “stakeholders” of that economy.

And so we are at last led precisely back to our point on economic versus political boundaries. As mentioned, London and Singapore are very similar as cities, except that London has (1) a common currency with the rest of the larger nation (including agricultural and other sub-economics), and (2) is part of the same economic union.

This means that were the idea of a Universal Basic Income to gain ground (which I argue it inevitably must), London has to share its pie amongst a much wider demographic base. This likely means higher taxes i.e. less competitiveness. More broadly speaking, in the future, economic “units” that are able to generate value-add more efficiently, be that intrinsically through a smaller population, or through clever innovation, will be the most competitive economies. They will attract more of the decreasingly human factors of production, and have more leeway for investment in infrastructure and its people per capita.

Thus the tables are turned, and what may seem an Achilles’ heel for a city-state, may in fact prove to be its secret economic weapon in the long-run. .