STRUCTURAL reform was foremost on Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam's mind yesterday, as he delved into the complex issues and risks that confront Asian and Western economies.
Speaking at a conference hosted by DBS, Mr Tharman noted that the "easy" phase of growth in Asia has ended, with the next phase to come not from domestic demand, but from restructuring and productivity gains that can be complex amid legacy issues faced by countries such as China, India and Indonesia.
"A bit too much has been made of that story. Domestic demand, at the end of the day, doesn't drive growth over the long term," he said.
Productivity growth in most of Asia, excluding China, has been lax. The level of output per worker is between 10 and 30 per cent of that in the advanced economies, said Mr Tharman.
To that end, Singapore, which is still on a productivity push, cannot be ranked alongside the advanced economies yet.
"We've got a very high per capita GNP or GDP, but the median income level - and the actual average level of productivity - is not truly advanced. It's basically an upper- middle-income society."
Still, there has been some progress in productivity in Singapore's manufacturing sector, Mr Tharman noted. In the food manufacturing industry, productivity has increased 25 per cent in the last three years.
"We can be a high-value, diversified economy," said Mr Tharman.
And becoming a "truly advanced economy" is not a matter of dictating wages, even as the government tightens the labour market to create "incentive and pressure to innovate", he said.
"We have the opportunity to invest in the skills and the ingenuity of Singaporeans, and release entrepreneurial energy."
In fact, many new businesses are formed in Singapore each year, but there is a lack of differentiation - meaning that some restructuring is also needed in the enterprise scene, Mr Tharman said. "We need more disruptive players in every sector."
Asked about China, Mr Tharman noted that while China has made great strides and has "the most competent" economic team among the major economies, it is facing the most complex issues in the world that are weighed down by legacy.
These include the size of shadow banking, linked in part to the credit needs of municipal governments in China that are not being matched by productive ways of revenue growth. And China has to calibrate any major restructuring, which often comes with retrenchment.
"It can't afford to take that dive in growth . . . because the risk of social disruption is a very serious one. They've had it once every 25-30 years over a long period of time. I don't think they want it again," said Mr Tharman.
India, which is now under the new leadership of Prime Minister Narendra Modi, has "the best chance" in a long time of making strong economic gains, said Mr Tharman, as Mr Modi is focused on introducing more efficiency, such as in streamlining approval for projects. But it also has legacy problems, such as a significant fiscal deficit - solutions to which could include the difficult task of creating a nation-wide consumption tax that replaces a range of taxes at the state and federal level
As for Indonesia, its young population can prove to be an impediment to growth as a quarter of them are not educated, or employed. "If you don't (educate and train), then the demographic dividend becomes a demographic challenge, to put it mildly," said Mr Tharman.
Structural reform is also needed among advanced economies, which can also no longer rely on loose monetary policy to address long-term issues such as unemployment. "I don't see a hard landing in global economies. The real risk we face is prolonged subnormal growth," he said.
The longer the central bank, such as the US Federal Reserve, takes to deal with unemployment, the more futile its efforts will be, as those who have been out of work for a long time are no longer in demand in the workforce due to skills atrophy, said Mr Tharman. "That is the quietly growing tragedy of the post-crisis environment in the US and in Europe."
Meanwhile, risks of financial-market exuberance are building. In a speech this week, Fed chair Janet Yellen indicated that to tackle this, regulations can be used to keep the banks in line. But Mr Tharman noted instability is also building up among non-banking institutions.
This also points to a broader issue of the risk of over-reliance on central banks: "That you let Congress off the hook, and you could say the same in Europe," said Mr Tharman. "What it really takes is structural reform."