Weekly: Asian Insights Conference 2018 Special

DBS’s Asian Insights Conference 2018, Jubilee Edition, takes place on July 13. We are pleased to issue three major papers on the occasion of the conference.
Taimur Baig, Tieying Ma12 Jul 2018
  • Paper 1: we look at three scenarios for Singapore in 2030—BAU, reinvention, or decline
  • Paper 2: Asia in 2030; projecting regional income with institutional and climate factors in mind
  • Paper 3: digital currencies are changing banking profoundly; some relevant data and scenarios
Photo credit: DBS

Outlines of the conference papers follow. Full papers will be released next week.

Singapore in 2030: BAU, reinvention, or decline?

In the decade ahead, to 2030, a series of structural dynamics will impact on the outlook for Singapore. For example, factors such as medium-term demographic and productivity trends, the impact of technology and regional integration, and the international trading system.

Singapore’s economic performance over the past several decades has been exceptional, and the country now sits at the income frontier. However, recent GDP growth rates are markedly lower than in the past few decades. This is consistent with the experience of small advanced economies that are close to the income frontier.

Taking into consideration productivity and demographic trends and ongoing structural reforms, a baseline of ~2-2.5% GDP growth on average over the period to 2030 is a reasonable starting point: 1.5% labour productivity growth plus 0.5-1.0% labour force growth. This is low by Singapore standards, but is healthy compared to other countries at the income frontier.

Strategies pursued by both China and the US are causing challenges to Singapore’s traditional growth model, with trade frictions rising and regional supply chain facing risks of disruption or fragmentation.

An ongoing wave of technological change, impacting a wide range of activities, from production to finance, will have a profound impact on Singapore. Policies to harness these changes are critical for the long-term prospect of Singapore, something the authorities are keen to pursue.

Regional integration is a win-win for Singapore, and it should take a leadership role in the region to facilitate it.

With aging and slowing of growth, considerable investment needs to maintain a tech-ready and environmentally sustainable infrastructure, fiscal resources need to be managed judiciously.

We consider three possible scenarios for the next decade: (i) business as usual; (ii) reinvention, and (iii) global regime change. Under the first scenario, efforts to improve productivity continue, but rising costs and adverse demographics keep firm level profitability below-par and the fiscal position under pressure. Growth slows toward 2%, in line with advanced economies at the income frontier. The second scenario envisions Singapore leveraging new opportunities from disruptive technologies, becoming an incubator of innovation and global best practices, with its firms expanding rapidly into international markets. Singaporean capital and knowhow place it in between China and India as a regional conduit of business, finance, and talent flow. Consequently, Singapore takes the top slot in global income rankings. In the third scenario, a series of setbacks in global trade and political order causes reduced market access, superpower rivalry, global market volatility, leaving Singapore with few viable options to maintain competitiveness. Growth slows, and per capita income growth stagnates.

Given its buffers and a nimble economic model, Singapore should be well-positioned to deal with forthcoming challenges and opportunities.

Asia 2030: Balancing optimism with realism

We believe in Asia’s bright future because of its large population base, favourable demographic dynamic, high savings rate, world-dominating manufacturing base, macroeconomic and political stability, and an impressive track record of development in recent decades.

Asia is also highly heterogenous, with a mix of aging and youthful societies, large and small nations, advanced and emerging economies, and those with strong macroeconomic shock absorption buffers and those without. All Asian economies however face some common factors—climate change, rising inequality, worsening environment for trade, and technological disruption.

Our Asia 2020 project, undertaken in 2011, had a reasonable general approach and conclusion—a vibrant Asia was rising as the most important global economic force, and by the end of the decade, it was expected to provide the most growth, and the best market returns, in the world. But it turns out that the report’s projections were too optimistic, expecting the gains from trade and openness of previous decades to continue, and underestimating the lingering drag from the 2008 Global Financial Crisis.

Perhaps more critically, our Asia 2020 report focused excessively on measures such as income or GDP. Not only does this ignore the costs associated with environmental degradation and weak institutions, it also provides misleading signals for investors.

While thinking about 2030, we have attempted to build on top of income projections, looking at institutional factors and social indicators. This is important as several structural challenges and opportunities are likely to emerge through the period until 2030 that will greatly impact the outlook for the Asian economies.

Several dynamics that have supported the economic development of the Asian economies in recent decades are weakening, and there are many changes in the international environment. We consider aging, technology, human capital, climate change, and geopolitics over the next decade to imagine Asia in 2030.

Digital currencies, banking, and central banking

Considerable work is being done these days on digital currencies, catching the attention of the public and policy-makers alike. Ranging from cryptocurrencies backed by blockchain to the notion of central bank digital currencies, a new frontier has opened.

The issues around digital and crypto currencies are fascinating but daunting. The basic concept of fiat money is formidable, with nontrivial underpinnings.
The notion of digital currency entails consideration of payments system, banking, monetary policy, and financial stability.

Add to that layers of computer science and cryptography necessary to understand cryptocurrencies, it is little wonder that misperceptions abound.
Neither electronic payment nor electronic money is new. More than a century ago, banks and traders communicated in real time via telegraph, settling payments and executing trades. Central banks have been managing the issuance of reserves to banks electronically for many decades. Mobile payment and digital wallets have been around for nearly two decades. What has changed is mobile computer power and connection speed, making digitalisation ubiquitous.

Is cash dying due to digitalization? We begin by looking at some data on usage of cash and noncash around the world. In the context of Singapore, we present some findings based on monthly data from DBS Bank’s 4.9 million accounts. We don’t see cash disappearing, for some good reasons.

We then lay out some key elements of the crypto currency phenomenon and its potential use and limitations. We like the technology underlying cryptos, but see many limitations getting in the way of their wide proliferation.

We conclude with the provocative concept of central bank digital currency, which is at once old and new. We imagine a world without cash, and conjure what that would mean for banks, nonbanks, and policy. Giving the people central bank accounts credited with digital currency could change finance, banking, and central banking fundamentally. These are very early days; we don’t see any monetary authority rushing in this direction.

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Ma Tieying

Economist - Japan, South Korea, & Taiwan

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