Wednesday, January 19, 2005

Entrepreneurial society and economic cycles 

Nominated MP Loo Choon Yong touched on economics in yesterday’s debate on the Presidential Address.

Singapore needs entrepreneurs of all types: big and small, low-tech as well as high-tech. Studies have shown that economies with greater entrepreneurship experience higher growth rates, greater job creation and less severe boom and bust economic cycles.
I agree with him. The Singapore government has tended to put more emphasis on big businesses and high-tech entrepreneurship. But small, low-tech businesses are also important.

Dr Loo’s statement that economies with greater entrepreneurship experience less severe boom and bust economic cycles also raises an interesting question: Does greater entrepreneurship lead to shallower economic cycles? Or do shallow economic cycles facilitate entrepreneurship? Or is there some other causal factor for both phenomena?

As far as I am aware, economies with higher proportions of output contributed by domestic consumption are more likely to experience shallower economic cycles. Export-oriented economies — like Singapore — have more pronounced boom-and-bust cycles.

It is a well-known fact that Singapore has one of the highest — if not the highest — savings rate in the world. The converse of that, of course, is that it has one of the lowest consumption rates in the world.

Both the export-oriented nature of Singapore’s economy and its high savings rate are direct products of government policy. Consider this excerpt from a report by Morgan Stanley economist Daniel Lian:

For a long time now, we have been arguing that Singapore’s domestic demand will remain structurally weak as a result of economic policy... [I]ts three-pronged economic strategy has always had an external spin... [T]he government builds up...the economy through leveraging on global demand.

The emphasis on high savings is the other side to this external orientation. Saving has been encouraged [and] used to feed global asset demand as excess national savings over domestic investment are channelled towards building what is now a vast external economy.

The high beta [i.e. volatile] nature of the Singapore economy is highly apparent. During the period 1997 to 2003, the upswing in the economy (1999 to 2000) was clearly tied to a sharp expansion in external demand, whereas the contractions (1998 and 2001) and periods of relative stagnation in the economy were tied to either a contraction or poor growth in external demand... In our view, Singapore is now the highest-beta economy in Asia in terms of its exposure to and dependence on global demand and its lack of domestic demand initiatives.
Now let’s consider the sectors that entrepreneurs tend to be attracted to. According to the Global Enterpreneurship Monitor (GEM) 2003 Global Report, 61 percent of new firms and start-ups were found in consumer oriented sectors.

Indeed, the GEM 2003 Singapore Report showed that 38.7 percent of new firms and start-ups in Singapore in 2002 were found in retail, hotel and restaurants, dropping to 25.8 percent in 2003 when Singapore suffered from Severe Acute Respiratory Syndrome. This was the sector with the highest level of entrepreneurial activity. In contrast, entrepreneurial activity in manufacturing was the lowest among the main sectors at 0.9 percent in 2002 and 6.1 percent in 2003.

The implication is clear: Entrepreneurial activity tends to be concentrated in sectors catering to domestic consumption. This raises the question of whether Singapore’s bias against consumption might have adversely affected entrepreneurial activity. Indeed, according to the GEM 2002 Global Report, the retail, hotel and restaurants sector took 50 percent of global entrepreneurial activity, a much higher proportion than in Singapore.

So is Singapore’s low consumption rate affecting Singapore’s entrepreneurial activity? Is it the reason that the team that compiled the Singapore Report concluded that “[r]elative to the other 30 GEM 2003 countries, Singapore had lower ratings for attributes related to entrepreneurial opportunities”?

There is another implication from the GEM 2002 Global Report. While 50 percent of overall entrepreneurial activity was in retail, hotel and restaurants, 58 percent of necessity-based entrepreneurial activity — that is, entrepreneurial activity undertaken by people who cannot find other work — is in this sector. In other words, those who are hit in a downturn and need to turn to self-employment or start their own businesses are even more likely to turn to consumption-oriented activities.

Singapore’s economic policy of favouring exports at the expense of domestic consumption may be accentuating its economic downturns, and offering relatively little by way of entrepreneurial alternatives to those adversely affected by such downturns.


Good post.

“Singapore’s economic policy of favouring exports at the expense of domestic consumption may be accentuating its economic downturns, and offering relatively little by way of entrepreneurial alternatives to those adversely affected by such downturns.”

A point not appreciated by policymakers here. It makes their incessant calls for entrepreneurship sound hollow.

And if the result of government policy is to further increase economic uncertainty and risk, on top of what you’ve noted is a rising global trend (Peter Gosselin’s LA Times article is excellent. See also Robert Shiller’s “the machine that ate my job” and Brad de Long’s “America’s coming social democracy” in the project syndicate), the case for social security in this country can only be strengthened.

I’d take your argument one step further though. The problem is not just cyclical, but structural. Economic historian Walt Rostow once noted that economies tend to go through 5 stages of growth - the traditional society, preconditions for take-off, take-off, drive to maturity and the age of mass consumption.

So here we are, passed the ‘drive to maturity’ but unable/unwilling to progress into the age of mass consumption. The problem of a shrinking and fearful middle-class.

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