SM Goh Chok Tong at the Panel Discussion on “The Financial Crisis Of 2007-09: Lessons from developing countries for the US”

I want to focus my remarks on how China and Singapore managed the impact of the Global Financial Crisis. China, as you know, is an emerging economy which is, however, larger than Japan’s. Singapore, on the other hand, is a small but open economy.

The direct impact of the sub-prime crisis on the financial sector of China, Singapore and the other Asian countries was limited. After the Asian Financial Crisis of 1997/98, Asian banks were generally well-capitalised and their balance sheets strong. Their exposure to sub-prime mortgages and Collateralised Debt Obligations (CDOs) was very small, partly because of prudence but also partly because the financial players were less sophisticated and had not dabbled in complex structured products.

However, the knock-on impact on the real economy was large. As consumer confidence in the west plunged, stock prices and exports in Asia fell off the cliff. Nearly US$7 trillion of wealth was wiped off Asian stock exchanges. Singapore, being a globally connected economy, was the first Asian economy to slip into recession in the third quarter of 2008. Its growth rate in 2008 was 1.8 per cent, down from 8.5 per cent a year earlier. In 2009, it was -1.3 percent.

The impact on China was less. It lost only 2 percentage points from its double-digit growth rate in 2008. China’s main fear was massive unemployment which could lead to potential social unrest. To head it off, China unveiled a US$600 billion (RMB 4 trillion) stimulus package in November 2008. The package focused on infrastructural works and stimulating domestic consumption.

To drive domestic consumption as well as production, China launched two subsidy programmes. In the Home Appliances to Countryside programme, rural consumers received subsidies of up to 13 percent of the purchase price of home appliances. Besides driving up production of these goods, the programme also raised the quality of life in rural areas. For the urban population, China introduced a similar Old for New programme. It provided subsidies of up to 10 percent for consumers who replaced their old home appliances with new ones. In addition to these two programmes, China also expanded the coverage of medical insurance schemes to reduce the need for precautionary savings and hence encourage spending.

Unlike China, Singapore’s trade is 3 times our GDP. Our economy contracted sharply in line with the fall in exports. Stimulating domestic consumption was not the solution. It would not lead to increased domestic production. Instead of pump-priming, we focussed on building resilience in the economy.

First, to prevent a potential outflow of bank deposits, we put in place a blanket guarantee for all bank deposits in Singapore, including those in foreign banks. We had to do so even though our banking system was sound because other jurisdictions like Hong Kong, Malaysia and Australia were doing so. Not matching them could precipitate a huge outflow of funds, thus destabilising our financial system and economy.

Next, as banks tightened their lending, we had to ensure that our companies continued to have access to funds. We introduced a special risk-sharing initiative. The government shouldered the risks of up to 80% of the loans with the banks taking only 20% of the risks. This incentivised banks to lend. We avoided a credit squeeze.

Third, we put in place a Resilience Package, not an anti-recession programme to stimulate domestic consumption and production. It costs US$15.5 billion (S$20.5 billion) or about 8% of GDP. The Resilience Package aimed to encourage employers to hold on to their workers and to upgrade their skills in readiness for the economic upturn. How did we do this?

First, to stave off retrenchments, the government introduced a Jobs Credit Scheme. Under the scheme, for a limited period of up to two years, the government provided a grant to employers to cover 12% of each local employee’s wages, capped at US$230 (S$300) per month. Together with other measures such as cut-backs in bonuses, reduced overtime and in some instances, voluntary and involuntary no-pay leave, our companies were generally able to ride the downturn without having to retrench workers.

Second, we incentivised employers to use the lull period to upgrade the skills of their workers under a Skills Programme for Upgrading and Resilience (or SPUR). Under this scheme, the government subsidised up to 90% of the course fees and the payroll of those sent for training and re-skilling. This not only reduced the holding costs of keeping workers on the payroll, but also helped companies and workers to reposition themselves when growth returned.

Our approach of cutting costs to save jobs rather than cutting jobs to save costs worked. Unemployment rose only marginally to a peak of 3.3% at the height of the crisis. And when the global economy turned the corner, our companies were able to quickly ramp up their production to meet the surge in demand. For this reason, our GDP growth rebounded by a massive 18% in the first half of this year, and output has recovered to a level that is even higher than the pre-crisis period. For this year, our growth is expected to be at the top end of the 13 – 15% range.

Lessons For The US

I would hesitate to draw lessons from the way Singapore and China handled the financial crisis for the US. One, the structure, size and complexity of the problem for the US and the Asian countries were vastly different. Second, the firestorm was in the US while the Asian economies felt only the heat. But I want to make four points.

One, innovative activities – richly prevalent in the US as the most productive economy in the world – carried to the extreme can contain far-reaching risks as seen, for example, in the IT Dot.Com bubble in early 2000s and the recent financial crisis which saw the widespread use of highly creative credit instruments. While innovation should not be stifled, we must understand the products fully and be aware of the attendant risks. Also, we must build up buffers to address possible spill-over risks. Hence, banks need to be well-capitalised and corporations should not be over-leveraged. With regard to banks, this refers not only to an appropriate level of Tier I capital but also its quality.

Two, growth of the property sector and the stock markets must be based on underlying economic fundamentals. Regulators must be vigilant of short-term speculative bubbles leveraged off cheap liquid funds. Asia learnt its lesson from the property and stock market bubble in the Asian Financial Crisis. In Singapore, we are always on the lookout for potential bubbles, especially in the property sector. We periodically act pre-emptively to let some air out of property bubbles before they burst with a bang. The use of direct and targeted tools and administrative measures (e.g.imposition of maximum loan-to-value ratios, stamp duties on transactions, control of land sales) have proven to be effective. Broad monetary policy actions may not be best suited since they can be blunt, and if applied too aggressively, can have unintended negative effects on the entire economy.

Three, though I do not think this could be done in the US because of the size of its economy and its free market philosophy, a scheme to save jobs by sending workers for training during a recession and to reduce costs for companies, may help in maintaining confidence and morale of the workers.

Finally, I would reiterate that globalisation is beneficial to all countries, both big and small. Asia has always recognised this reality through its outward oriented development strategies. Globalisation presents both opportunities and challenges. Policy makers can no longer formulate and implement policies based on a “closed economy model”, which sometimes larger countries like US might be inclined to do under political pressure.

For the next decade, I believe Asia will continue on its open growth trajectory. This will hold much economic opportunities for the US. It is better for Asia to be coupled with the US than for it to be decoupled.

Thank you.