Tipping Point – the Lessons of Economic Geography

This is an overly ambitious post, to tackle a broad range of subjects that had been discussed in Singaporean cyberspace over the past couple of weeks (population, budget, income inequality etc). It would be near impossible to present detailed arguments within each topic, so there will be gaps in some arguments that are left unplugged. The reward that comes from running this risk is being able to see the various arguments in totality, within a single post, and allowing them to be strung around the single theme of economic geography. This post is also my reflection to a recent article by Prof Anthony Venables, who has had a career analysing spatial economics at the LSE.

A Barely Noticed Seismic Shift

Back in 2001, Singapore was in her worst recession. As the factories relocate to China, the whole country was paralyzed with fear. How could we compete against the behemoth? The statistics were frightening - more than a billion consumers, millions of skilled graduates each year with quality to match, at a fraction of our cost. Fast forward to 2006, and Singapore's job creation and stock market were at record highs. What happened? Good policies? CPF cuts? The effect of casinos? Luck? Perhaps.

For me, the single most important shift came almost imperceptibly – a seismic change in the mindset towards seeing Singapore as a global city. This was the all important change in semantics; I only began to appreciate the effect belatedly. When it became clear that we were not fighting sure-to-lose battles against the whole of China or India, but competing against other global cities, the intellectual vision started shifting. As the intellectual vision changed, the fear lifted, and one began to see the options and tradeoffs in ever greater clarity. Do we want to become a gambling society or country? No. But can the casinos help us become a global city? Yes, so it is the correct decision to have them and manage the risks. What was previously an ‘over my dead body’ decision became a no-brainer yes overnight.

The Perils of Being Small

But global cities like New York, London, Tokyo, Shanghai and Hong Kong are all big, thick and dense. A 4-million city is more likely to be an also-ran city. KTM recently wrote about the perils of 6.5 million people in Singapore. Some of the perils, like congestion and environmental stress are real enough. However, the lack of jobs to go around is not one of them. Notwithstanding the demographic argument, there is a greater danger to being small.

Professor Venables sums up the stakes in this game: Concentration of people and firms is good for productivity. Who benefits most from this concentration? The intuitive answer is that since the rich are getting richer, they must be the biggest beneficiaries.

Scratch beneath the surface of this argument and one soon realises that local immobile factors benefit most (obvious once you understand that mobile factors can seek higher returns elsewhere). Singaporeans therefore, particularly those who do not have the option of moving away, gain most from growing the size of an economy that exploits the productivity gains arising from concentration. Fear not when foreigners come to Singapore. Start worrying when they stop coming!

Those 2 percentage points

The denser the network, the higher its productivity. The fact that advantage begets more advantage has important ramifications for policy. What is a 2 percentage point shift from direct to indirect taxation? Not much, if the world is static. But in a dynamic world, a little shift may make all that difference. Prof Venables writes, “whichever country gets slightly ahead will have higher productivity and become the more attractive location for further investment, while the other country will fall behind . . . small initial differences will generate large differences in outcomes.”

It may first be one firm that moves to Singapore. But in coming here, it adds more jobs, incentivises more local workers to train, and encourages foreign talent to come. More firms then come, to access the thicker labour market, and further reinforce the initial small change. Economic theorists call this ‘cumulative causation’, but the idea is in fact a simple one: snowballing effect. Past the tipping point, it becomes an avalanche.

Progress is not without price or pain. Some will find this adjustment difficult. One immobile factor – land – will become too expensive for some locals to bear. As native Londoners worry about being priced out of the property market, Singaporeans look with bleary eyes as high-end condominiums spiral out of reach. The condos used to be objects of aspiration, now they feel like another universe. The rising prices of flats, road use, car taxes, rent, and many components of living costs reflect this space premium. Singaporeans are fed, up with progress, so said Mr Brown. But was he right?

If indeed advantage feeds on itself, slowing down becomes a non-option. If Singapore stops growing, the snowball forms elsewhere. While society should definitely care for its poorest, it should not be paralyzed from moving forward. Remember, when investment stops coming, it is the immobile local factors that suffer most – the highly mobile professionals or the rich will just pack and go to where the party is. We end up hurting those we are trying to help.

A Sticky Situation

EPL fans cannot fail to notice that it is often the newly promoted teams that are relegated soon afterwards. It is always the same four teams that qualify for the Champions League. Again, in a world where advantage feeds on itself, this is not a coincidence, nor should it come as a surprise. The longer a team stays in EPL, or the more it plays in CL, the more TV money and experience it amasses. Soon enough, it becomes quite impossible to dislodge the top teams. Globalisation amplifies this, since the top dogs are getting an ever larger pile of TV money from a growing global audience. Fact of life: Advantage can stick.

Likewise, London has become stickier than ever as a global financial centre, almost impossible to dislodge in the foreseeable future. LSE and LBS charge students an arm and a leg for the privilege to be here. Every one puts up with congestion, poor infrastructure and high rent. But you cannot afford not to be here because every one else is. It is also for the same reasons why Singapore has so far failed to dislodge the US even after pouring billions into bio-sciences. Once the avalanche occurs along a certain path, it is difficult to shove the snow to the other side of the mountain.

Which industries should Singapore try to tip? Where are the tipping points? It is hard to know for certain. Prof Venables acknowledges, “The role of pro-active industrial policy remains intensely controversial.” This was clearly attested to by the public salvos over Singapore’s life sciences effort only very recently.

While Singapore may not yet be a life sciences hub, we are certainly succeeding in other areas. Are the casinos the catalyst? Is it the tax cut? Is it the foreign talent policy? The effect of each by itself may not be exactly quantifiable, or statistically meaningful to GDP growth. But clearly, the more decisions Singapore gets right, the more likely it will trigger the snowball effect. Globalisation has made Derek Wee’s and everyone else’s lives, tougher and more unpredictable. But it also has the potential to entrench Singapore’s location advantage if the correct decisions are made now. If Singapore can forge ahead into the league of global cities, the advantage gained will also stick for some time to come. This is the valuable lesson of economic geography.