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-BeyondIndonesia-IndochinaasASEAN'sNextFrontier-TheEurozoneCrisis:ReviewingExpansionaryAusterity

-RethinkingHumanCapital

TheFortnightInBrief(18thMarchto31stMarch)

US:ContinuedCommitmenttoLowInterestRates

IntheFOMCmeetingMarch20,theFederalReservecommittedtokeeping

interestratesnearzeroaslongasunemploymentremainedabove6.5%andinflationoutlookstayedbelow2.5%.ThescaleoftheFedsassetpurchaseisexpectedtocontinuebutmaybealteredastheeconomycontinuestoheal.TheU.S.economygrewata0.4%annualrateinQ4of2012,upfroma0.1%estimateearlierduetoanincreaseinnettradeandnon-residentialconstruction.Slowerconsumerspendinghoweveroffsetthegains.10-yeartreasurynotesalsofellforasecondquarterasinvestorssoughthigheryieldingassetsastheeconomycontinuestoimprove.

AsiaPacific:ChinasPropertyCoolingMeasuresandJapansEscapefrom

Deflation

Chinaattemptstocoolitspropertymarketbybanningsingle-personhouseholdsfrombuyingmorethanoneresidenceandincreasingtheminimumdown-paymentforallsecondhomebuyersinBeijing.Thecityalsoimplementeda20%taxonpropertycapitalgainsinabidtoreducethe5.9%increaseinthecapitalshomeprices.Meanwhile,JapansConsumerPriceIndexfell0.3%,extendingitslosingstreakforthefourthconsecutivemonth.Thecountryhasbeenplagued

withdeflationfortwodecades.WhilethenewBankofJapanGovernorHaruhikoKurodahasvowedtoachieveatargetof2%inflationintwoyears,therecentfallintheCPIhasshownthatthisisanuphilltask.

EU:ControversyinCyprus

LastSaturday,Cyprus'centralbankconfirmedthatmajordepositorsinCyprus'biggestbank,BankofCypruswilllosearound60percentofsavingsover100,000euros.Initialsignsthatbigdepositorswouldtakeahitof30to40percent-thefirsttimetheeurozonehasmadebankcustomerscontributetoabailout-hadalreadyunnervedinvestors.Thus,thetougheningofthetermscouldverywell

indicatetheendofCyprusasahubforoffshorefinanceandcouldaccelerateeconomicdeclineandbringsteeperjoblosses.Meanwhile,CypriotPresidentNicosAnastasiadessaidonFridaythatthe10-billioneurobailouthadcontainedtheriskofnationalbankruptcyandwouldpreventCyprusfromleavingtheeuro.

IN

COLLABORATIONWITH

PROUDLYSUPPORTEDBY

ISSUE 36

1 APRIL 2013

SMU Political-EconomicExchange

ANSMUECONOMICSINTELLIGENCECLUBPRODUCTION

540

550

560

570 S&P500

530

534

538

542

546 MSCIACAsiaEx.

291

293

295

297 STOXXEurope600

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Copyright 2012 SMU Economics Intelligence Club2

BeyondIndonesia-IndochinaasASEAN'sNextFrontier

ByKennethHo,SingaporeManagementUniversity

Inrecentyears,IndonesiahasbeenthedarlingoftheASEANregionandhasbeenthetargetof

massiveforeigndirectinvestmentsandmanyMNCsexpansionplans.In2012,FDIofUS$23

billionexceededeventhegovernmentsambitioustargetby10%.Fromtheashesofthe1997

Asianfinancialcrisis1,Indonesiadulylearntitslessonsandimplementedbroadreformsto

improvecompetitivenessandpoliticalleadership.Today,thestoryofIndonesiaiswell

understoodbytheinternationalcommunity.Ithasoneoftheyoungestpopulationsinthe

worldand,domesticconsumptionandarisingmiddleclasswilldriveitsfuturegrowth.The

questionthenbecomes:whatisthenextfrontierforASEAN?WhichisthenextIndonesia?

Certainly,in2012,attentionhasbeenfocusedonMyanmarforfinallyopeningupthecountry.

Increasedpoliticalstabilitywillcertainlyimproveitsbusinessenvironmentinthenextfiveyears.InadditiontoMyanmarhowever,thebroadregionofIndochina(Vietnam,Myanmar,

CambodiaandLaos)holdsimmensepotential.Overthenextfiveyears,theIndochinaregion

couldverywellexperiencethegreatestimprovementinitsbusinessenvironment.

Large,youngandgrowingpopulation,growthinGDPpercapitaaredriversofgrowth

Asacollective,theIndochinaregionhasapopulationof180million.Thisisonlyslightly

smallerthanthatofIndonesia(240million).Indochinaspopulationisalsoveryyouthfulwith

amedianageofbetween21.4to29.9years.ThisiscomparablewithIndonesia'smedianage

(28.5years)andinsharpcontrasttomostofthedevelopedworldwhichcurrentlyfacesageingpopulationissues.

ThisyoungandvibrantworkforceisakeystrengthfortheregionasitstrivestogrowitsGDP

percapitawhichiscurrentlyonlybetweenUS$900(Cambodia)toUS$1,400(Vietnam).If

leadersareabletodeploythelabourresourcesintokeyindustries,theIndochinaregion

mightbeabletoenjoythesamemiraculousgrowththatIndonesiahasenjoyed.From2003to

2012,Indonesia'sGDPpercapitamorethantripledfromUS$1000toUS$3500.

Atitscore,theIndochinaregionhasrichpotentialandisstructurallysimilartoIndonesia.To

successfullyrealizeitspotentialhowever,strongleadershipisrequiredtoimprovethepoliticallandscape,buildnecessaryinfrastructure,educateitspopulationanddrawn

internationalinvestmentsandexpertiseintotheregion.Fortunately,thisprocesshasalready

begun.

Improvementinpoliticallandscapeandfriendlypolicyhasdrawninvestmentsintothe

region

Theregionhasalreadysetitselfonthedevelopmentpathbyimprovingthepoliticalstability

ineachofthefivecountries.ThemostnotableexampleisMyanmar,whichtookamajorstep

in2012byholdinganelectionandeasingupmilitarycontrolafteralmost50yearsofmilitary

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rule.TheinternationalcommunityhastakenthisverypositivelywiththeUSandEUpartially

liftingeconomicsanctionsonMyanmar.Thishasopenedthedoorsforvariousconglomerates

andcorporationswhohavebeguninvestingheavilyinthecountryforthefirsttime.IntheOil

&Gassector,variousInternationalOilCompaniessuchasChevronhavebidedforExploration

andProductionrights.Coca-ColaCo.alsomadeitsfirstshipmenttoMyanmarinmorethan60

years.

BeyondMyanmar,theentireIndochinaregionhashadasimilarlypositiveexperience.

CambodiaandLaoshavebeenthetargetsofvariousresourceexplorationinvestmentsin

recentyears.In2011,twosignificantprojectsinLaoswerethedevelopmentofaBauxiteand

AluminaplantbySinoAustraliaResourcesCoaswellasasteelfacilitydevelopedbyLaoIron

andSteel.

Theseinvestmentswilldrivedevelopmentinthesenationsandresultinapositivefeedback

loop.Ingeneral,initialinvestmentsdrivemuchneededinfrastructuredevelopmentsuchas

roads,railways,powergridsandeducationspendingthatmakessubsequentinvestments

moreattractive.Thedemonstrationeffectfromthesuccessofinitialinvestmentswillalso

attractsubsequentinvestmentstotheregionandbringadditionalcapitalandexpertiseinto

theregion.

Manufacturingandresourcestobekeyindustriesinthenearterm

Aswithmostnationsthatfollowthetraditionaldevelopmentpath,theIndochinaregion's

comparativeadvantageliesintheprimaryandsecondarysectors2.Specifically,resourcesand

manufacturingareitskeyindustries.

TheIndochinaregionisblessedwithawealthofnaturalresourcesfrommetals,oilandgastoagricultureandforestry.Infact,internationalinvestmentsinresourceshavebeenpouringin

tothevariouscountriesforsometimenow.Today,VietnamisalreadyproducingGold,

Bauxite,Copper,TinandTitaniumtonameafewresources.InCambodia,theOkvaugold

explorationprojectdiscovered729,000ozofgoldin2010.Muchofthisinvestmenthasbeen

spurredbytheresourcepotentialandfriendlyinvestmentpolicyintheregion.Forexample,

Cambodiaallowsinvestorstoleaselandforupto70yearsandforeignersareallowedtoown

100%ofinvestments.ThisisincontrasttoothercountrieslikeIndonesia,whichhasturned

slightlymoreprotectiveofitsresources.Fromanagriculturalstandpoint,Indochinas

favourableclimateisastrongadvantage.InVietnamforexample,Riceyieldsareamongthehighestintheworldat5.6milliontonsperhectareperyearvstheglobalaverageof4.3.Going

forward,thereareplanstoexploitcashcropssuchasArabicacoffeeinLaosandRobusta

coffeeinVietnam.Thisfavourableclimateensuresthatthesenationsareamongthelowest

costproducersintheworld.Othercashcropsunderreviewincluderubber,pepperand

cassava.

Thesecondengineofgrowthislikelytobemanufacturing.Theregionhasalowlabour

manufacturingcostofonlyUS$80/monthforaworkerwhichisevenlowerthanChina'sat

US$250/month.WithChina'slabourcostsettorisefurther,Chinamightloseitsedgeasa

lowest-costmanufacturerintheworld.Indochinamightstarttostealmarketshareand

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becomeoneofthefactoriesoftheworld.Already,MNCssuchasNikehavebegunshifting

theirproductiontotheIndochinaregion.

Longerterm,ashifttodomesticconsumptionwilllikelybenecessary

Longertermhoweveramoresustainablegrowthpathcanonlybeachievedifthereisashift

towardsdomesticconsumptionfuelledgrowth3.Fortunately,theregioncertainlyhasthe

necessaryconditionsforthis.Itslargeandyouthfulworkforce,ifdeployedandeducated

appropriately,canbecomearisingmiddleclassandenjoyGDPpercapitagrowththatcould

spurdomesticconsumption.Allthishowever,stillrequirestheestablishmentofkey

institutionsandsocialsafetynets.Hopefully,theregioncandrawfromthelessonsinChina,

whichiscurrentlytryingtorestructuresocialsecuritysothatitspeoplefeelcomfortable

spendingtheirsavingsinsteadofsavingexcessivelyforfuturemedicalcosts.

ASEANEconomicCommunityandregionalcooperationmightbefurthercatalysts

Increasedregionaleconomiccooperationmightbeanadditionalcatalysttothedevelopment

oftheIndochinaregion.Specifically,theASEANEconomicCommunity,whichaimstocreate

anintegratedeconomicregionby2015,isthecornerstonepieceinthispuzzle.Thusfar,

67.5%ofthetargetsoftheAEChavebeenachievedandregionalleadersareconfidentthat

mostofthekeyagreementswillbeimplementedby2015.

TheASEANEconomicCommunityaimstocreateasinglemarketandproductionbasein

ASEAN,removetradebarriersandallowfreeflowofgoodsandservicesaswellascapitaland

labouracrosstheASEANregion.ThisgivesthenationsofIndochinaamuchlargermarketfor

itsresourceandmanufacturingexportsandalsoreducestradebarrierssuchas

import/exporttaxesacrosstheASEANregion.ItwouldalsogivetheASEANblockmorebargainingpowerininternationaltradenegotiationsmuchliketheEuropeanUnion.Another

keyconcessionintheAECthatisinIndochinasfavouristheEquitableEconomic

DevelopmentclausewhichaimstonarrowthedevelopmentgapforCambodia,Laos,

MyanmarandVietnam(CLMVnations).Thesenationsgetmorefavourabletermsandalonger

implementationtimelineforvariousAECtargets.

Conclusion

Asacollective,theIndochinaregionisstructurallysimilartoIndonesiawithalarge,growing

andyouthfulpopulationandstrongpotentialGDPpercapitagrowth.RecentimprovementsinitspoliticalstabilityandfriendlyinvestmentpolicieshavedrawnininitialFDIthathasputthe

regiononthedevelopmentpath.Theseinitialinvestmentsarelikelytodriveinfrastructure

development,spuradditionalinterestintheregionandleadtoasignificantimprovementin

thebusinessenvironment.

Inthenearterm,Indochinasedgeliesinresourcesandmanufacturingbutforsustainable

long-termgrowth,itwillhavetoimplementstructuralreformsanddevelopkeyinstitutionsto

spurdomesticconsumption.TheASEANEconomicCommunity,ifsuccessfullyimplemented

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by2015,mightalsobeacatalystfordevelopmentasitprovidesIndochinawithalarger

marketforitsresourceandmanufacturingexportswhilereducingtradebarriers.

Overall,theIndochinaregionhasthemostinterestingandexcitingstoryinASEANwith

significantparallelstoIndonesia'smiraculousgrowthstory.Withtherightleadershipand

execution,itcouldverywellexperiencethemostsignificantimprovementinbusiness

environmentinthenextfiveyears.

Sources:

1. InvestmentCoordinatingBoard(BKPMIndonesia)2. CIAWorldFactBook3. WorldBankWorldDevelopmentIndicators4. CIAWorldFactBook5. UnitedStatesGeologicalSurvey6. UnitedStatedDepartmentofAgriculture(USDA)7. FoodandAgricultureOrganizationofUnitedNations(FAO)8. ASEANEconomicCommunityBlueprint9. AECScorecard

1TheAsianfinancialcrisiswasaperiodoffinancialcrisisthatgrippedmuchofAsiabeginninginJuly1997,andraisedfearsofaworldwideeconomicmeltdownduetofinancialcontagion.

2Theprimarysectoroftheeconomyisthesectorofaneconomymakingdirectuseofnaturalresources.Thesecondarysectoroftheeconomyorindustrialsectorincludesthoseeconomicsectorsthatcreateafinished,tangibleproduct.

3Domesticconsumptionfuelledeconomyisaneconomythatisprimarilydrivenbyitscitizensconsumptionandisrelativelylessdependentonforeigntrade.

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TheEurozoneCrisis:ReviewingExpansionaryAusterity

ByEdisonYong,SingaporeManagementUniversity

AusterityintheEurozone

ThecrisisbesettingthePIIGSisastoryofstructuralproblemsinthewelfarestates.Tosolveit,Austerity1wassoldbyGermanyasthebitterpillthatthePIIGShadtoswallowforitspastfiscalprofligacy.WhilethiswastrueforGreecewhohadfalsifieditsbalancesheetstoentertheEuro,Spain,ontheotherhand,haditsfiscalhouseinorderupuntilthecrisis.TheSpanisheconomywassoonriddenwithamassivehousingbubble,aidedandabatedbyeasycreditfromGermanbanks.

Austerityhopedtoreduceborrowingcostofthesetroublednationswhichhad,attheheightofthecrisis,peakedabovethepsychological7%threshold.However,thefiscalbelt-tighteningonlyforcedanalreadydepressedeconomyfurtherintodepression.Thepolicyfailedtogainsubstantialtractionamonginvestorsasinterestratesremainedhigh,missingitsoriginalgoaltoquellmarketfears;muchlesspavingacrediblepathforcountriestorepaytheirdebt.

Figure1:UnemploymentRatesfortheEurozoneandtheU.S.

Source:TheConscienceofaLiberal,PaulKrugman,TheNewYorkTimesNov172011

KeynesianStimulusvs.Austerity

TheEurocrisisservedasarealworldtestforeconomicmodels,withtheU.S.andEurozonepursuingcontrastingpoliciesofKeynesianstimulus2versusausterity.Thedivergenceinunemploymentrates(Figure1)andeconomicrecovery,albeitslow,betweentheEurozoneandAmericasuggeststheineffectivenessofausterityanditsconfidence-inspiringpoliciesoncethoughttofosterrecovery.Forallitsbrutalbelt-tighteningpoliciesaimedatappeasingthebondmarketandloweringinterestrates,investorsarestillwearyofholdingSpanishandItalianbonds.

Austerityprogramspushforreformbyslashinggovernmentspendingonpublicprojectsandsocialentitlements.Whilenecessaryinaddressingtheunderlyingstructuralproblems,thishasalsoresultedinahugedragontheworldeconomy.WithEuropebeingalargecustomer

forforeigngoodsandservices,theirbelt-tighteninghasimpactedthegrowthofmany

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exportingcountriesliketheU.S.andChina.Intodaysglobaleconomywheresomeonesspendingisincomeforanother,theseausterityresultshavebeenfarfromtheECBsPresidentJean-ClaudeTrichetsvisionofrenewedconfidenceinEuropesfiscalhouse.

ThoughtheAustriansarequicktonotethatallthiseasymoneyfromtheFederalReserveandtheECBisverylikelytocausearepeatoftheGreatDepression,otherslikePaulKrugmanandBradDeLonghaverefutedthisclaim.Inflationcouldbecomeaprobleminthefutureas

recoveryimproves,butdoesnotoccurovernightasmanyfearmongerscasuallyimply.Likeningthepossibilityofrunawayinflation,iftheU.S.,BritainorGermanypursuesamoreaggressivemonetarypolicy,withthehyperinflation3ofZimbabweistomakeafalseequivalence.UnlikeZimbabwe,thesecountrieshavetheabilitytoraiserevenueanddonotsolelyrelyonprintingmoney.

TheDangersofAusterity

Goingfurtherdownthepathofausterityhasahigherchanceofprolongingtherecession,anddoeslittleforgrowth(whichmightbetheonlywaythePIIGScanrepaytheirdebt).Soisthisanendorsementofdeficitspending?Notinnormalcircumstances,no.Butneitheristhisa

normalrecession.Thepainofunemploymentandausterityonthemiddleandlowerincomegroupsisreal.Andausteritydoesnothingtoalleviatethehardship.Butperhapsthemostdevastatingeffectofausteritythatdemandsimmediateattentionisthethreatoflongtermunemploymentamongyouths.Addressingthisissuemustbethefocalpointofanydiscussionlestthelongtermunemployedbecomeunemployable.

LikeGreece,creditorsmightonedayloseconfidenceinU.S.orBritainsabilitytoserviceitsdebt.However,empiricalevidencethusfar(treasuryyields)hasyettosuggestsuchaphenomenonisonthehorizon.Upagainstazerolowerbound,withfirmsandconsumersdeleveraging,fiscalpolicyisrequiredtoputtheglobaleconomybackonrecovery.

Sources:

1. ConscienceofaLiberal,PaulKrugman2. TheNewYorkTimes3. TradingEconomics

1Austeritydescribespoliciesusedbygovernmentstoreducebudgetdeficitsduringadverseeconomicconditions.Thesepoliciescanincludespendingcuts,taxincreases,oramixtureofthetwo.

2AKeynesianstylestimulushappenswhenpolicy-makersdeliberatelyseektostimulateoneormoreofthecomponentsofaggregatedemandtoboostoutput,jobsandincomesduringaneconomicrecession.

3Hyperinflationoccurswhenacountryexperiencesveryhigh,accelerating,and

perceptibly"unstoppable"ratesofinflation.Insuchacondition,thegeneralpricelevelwithinaneconomyrapidlyincreasesasthecurrencyquicklylosesrealvalue.

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RethinkingHumanCapital

ByTimothyOng,SingaporeManagementUniversity

RethinkingHumanCapital

HumancapitalhasdevelopedoverthepastdecadestobecomeoneofthecentralelementsofmoderneconomicgrowththeoryevidentinResearchandDevelopment(R&D)aswellastheinnovationprocess.Closertohome,humancapitalhasbecomeincreasinglypertinenttousinrecentyearsasechoedbymountingsentimentsagainsttheinfluxofforeignlabourortalentdeemedvitalforoureconomichealth.Withthisgrowingstrainonoursocialfabric,itiscriticalthatweunderstandthedynamicsofhumancapitalanditsrelatedagglomerationeconomies1whichleadtogrowth.

ForeignLabourandEconomicGrowth

Oneargumentputforthisthatincreasingnumbersofforeignlabourwouldspureconomic

growth.Thisbuildsonthelogicthatdenserandlargerpopulationswouldcreatesignificanteconomicbenefitsforcitiesthroughagglomerationeconomies,whichleadtotheexpansionandspreadofknowledge.Thiswouldthengenerateexternalitiesandspill-overeffectswhichincreasethestockofknowledgeforeachindividualfirm,leadingtoself-reinforcingincreasingreturnstoscalethatwouldspureconomicgrowth.

However,suchbroadlogicovershadowsthefinedetailthatthiswouldapplyonlytocertainindustriesinwhichhighlevelsofskillandexpertiseplayanessentialrole.AsstatedbyseveralestablishedeconomistshereinSingapore,Thebenefitsofagglomerationdonotapplytolow-cost,labour-intensiveindustrieslikeconstruction,cleaningorsecurityservices.Intheseindustries,moreworkersdonotleadtolargerincreasesinoutputperworker.

Nonetheless,low-skilledforeignlabourhasacrucialroleinurbanlifetodaydespitepossiblenegativeexternalitiessuchasincreasedcongestionorwagestagnation.Wearebalancingonaveryfinetightrope.Areductioninsupplyoflow-skilledworkersmayincreasecostssignificantlyandhavemajorrepercussionsoneconomicgrowthandindustriesthatheavilyrelyonthem.Ontheotherhand,aglutoftheseworkerswoulddepresswagesandreducetheincentivesforfirmstoupgradeworkersandraiseproductivity.

Thepatternofgrowthineconomiestodayhaveinadvertentlyresultedinlow-skilledworkersbeingcomplementarytohighlyqualifiedandprofessionalworkersbyensuringthemaintenanceofournetworks,infrastructureandservicesthatkeeptheentireurbansystem

inoperation.Theyareespeciallyessentialhereinourlocalcontextasmostofuswouldshunworkasmeniallabourers.

CreativityandInnovation

Lookingbeyondthesupplyoflabourforeconomicgrowth,wecanalsoturntocreativityandinnovationthehallmarksofhighlyskilledhumancapitalwhichplayacriticalrolethroughentrepreneurship.Knowledge,whoseflowisfacilitatedbyagglomerationeffects,isalsoanessentialinputtobuddingbusinesses.Moreover,giventhehighlydiversifiedandknowledgeintensivenatureofSingaporesindustries,suchagglomerationeffectswouldalsogiverisetoJacobianexternalities2conducivetofurtherinnovation.

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Simpletermsyetwithlatentpotential,creativityorinnovationcanbedevelopedandexpandednotonlythroughafirmsexpenditureonR&Dbutalsobysimplyincreasinginteractionamongpeopletheessenceofagglomerationbenefitsderivedfromspatialclusters.Thenotionthatinteractionamongindividualsleadstopositivegrowtheffectsisalsoconsistentwiththewiderliteratureonlearningandknowledgespill-oversinlocallabour

markets.

ThisalsodrawsuponakeyideaintheclassicsofurbansociologybyGermanphilosopherFerdinandTonniesthataclimateofopennessandtoleranceincitieswouldfreeindividualsfromthechainsoftraditionoranxietiesaboutbeingjudged,andthatinturn,encouragespeopletobemoreimaginativeandinventive.

Onanindividuallevel,manyofuswouldpossessadecentlevelofknowledgeandsomeformofimaginationoranother.Shouldwethenunderstandthevaluethataccompaniescreativityandinnovationintodayseconomy,aswellastheliberationofcreativeenergiesfromhavingsuchanopenclimate,eachpersonwouldthusbeabletoplayasmallroleinshapingthe

futureeconomysimplythroughthesharingofideasandexercisingofanopenmind.Onanaggregatescale,thiswouldtendtowardsanidealclimateofopennessandtolerance,whichlendsitselftogreaterpositiveexternalitiesandknowledgespill-overs.

Likewise,theopennessofacitywouldalsofostercreativityorvariousopportunitiesandprovideaconnectiontotheglobalnetworkofknowledge,capitalandservices.AnaddedadvantageofSingaporeisthatitdoesnotsufferfromdeeplyrootedlocalspatialsegregationalongthelinesofclass,colourorlifestylewhichplaguesmanysociallydiversecitiesaroundtheworldandleadstoadisruptiveclimateforcreativityandinnovation.

Naturallythiswouldbegthequestionofhowopennessoratolerantclimatecouldbe

determined,beingqualitieswhichcannotbedirectlyobserved.AccordingtotheeconomistRichardFlorida,toleranceisindicatedbydiversitywhichcouldthenbemeasuredbyacompositeindexoftheincidenceofartists,gaysandforeign-borninthepopulationasthesegroupsaregenerallysuggestiveofanatmosphereofopennessandforbearance.Onthemacrolevel,theOPENCitiesprojectbytheBritishCouncilgivesthedefinitionoftheopennessofacityasitscapacitytoattractinternationalpopulationsandtoenablethemtocontributetoitsfuturesuccess,withSingaporebeingoneof25citieswith25%ormoreforeignbornresidents.

Figure1:Citieswith25%ormoreforeignbornresidents(alphabeticallyarranged)

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AninterestingperspectivetonoteaswellwouldbeFloridastheoryofinnovation3whichclaimsaparticularcreativeandmobileclasswouldcongregateatplaceswithanopen,tolerantclimateandleadtotheaccumulationofhigherlevelsofhumancapitalwhichthenspurscreativity,innovationandultimatelyleadstoeconomicgrowth.However,difficultieslieinmakingthegeneralassumptionthatpeoplewithtalenthavepreferencesfortoleranceor

diversity.

Figure2:SingaporesGiniCoefficientamongEmployedHouseholds,2000-2010

Inrecentyears,whileSingaporehascertainlybecomeaprosperouscity,ithasalsobecomeincreasinglyunfairwithgreatersocialunrestandwideningincomedisparities.Thisis

reflectedinthespeedatwhichourGinico-efficientrosefrom0.430to0.452inthespanoftenyearsfrom2000.Growthisindeedacrucialelementwemustpayheedtoyetweshouldalsonotletiteclipseotherimportantfacetsofoursociety.Atthesametime,wehavetochangetheparadigmofourthinkingandexploreotherwaysinwhicheconomicgrowthmaybepossible.

Conclusion

Toconclude,thereareimportantdynamics,whichcouldleadtoeconomicgrowthinthisthree-wayrelationshipbetweenadiverseyethighly-skilledknowledgeintensivesector,agglomerationeconomiesandtheirexternalitiesaswellasaclimateofopennessandtolerancethatfostersgreaterinnovationandcreativity.Thesalientpointfromthisperspectivewouldbethateachindividualcouldcontributetowardsthebuildingofabettersocietythroughopennessandtoleranceinhisorherownpersonalcapacity,andthiswouldindirectlybutultimatelyalsoleadtoeconomicgrowth.

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Sources:

1. IPSCommons:EconomicMythsintheGreatPopulationDebate(DonaldLow,YeohLamKeong,TanKimSong,ManuBhaskaran)

2. JournalofEconomicGeographyRethinkingHumanCapital,CreativityandUrbanGrowth(MichaelStorperandAllenJ.Scott)3. JournalofEvolutionaryEconomicsAgglomerationEconomies:MarshallvsJacobs(GerbenvanderPanne)

4. MICRO-DYNWorkingpaper:AgglomerationExternalitiesandEntrepreneurshipmicrolevelevidencefromSweden(ApostolosBaltzopoulos)

5. BritishCouncil:UnderstandingOPENCities

1AgglomerationEconomiesarethebenefitsthatfirmsobtainwhenlocatingneareachother

2JacobianDiversityExternalitiesaretheknowledgespill-oversbetweendifferentindustriesoradiversifiedlocalproductionstructure

3FloridasCreativeClassTheoryisatheorypositingthatmetropolitanregionswithhighconcentrationsofthecreativeclass(technologyworkers,artists,musicians,lesbiansandgaymen,"highbohemians")wouldexhibitahigherlevelofeconomicdevelopment

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TheS&P500isafree-floatcapitalization-weightedindexpublishedsince1957ofthepricesof500large-capcommonstocksactivelytradedin

theUnitedStates.IthasbeenwidelyregardedasagaugeforthelargecapUSequitiesmarket

TheMSCI Asiaex JapanIndex is a freefloat-adjustedmarket capitalization indexconsisting of10developedand emergingmarket country

indices:China,HongKong,India,Indonesia,Korea,Malaysia,Philippines,Singapore,Taiwan,andThailand.

The STOXXEurope 600 Index is regardedasa benchmark for European equity markets. It represents large, mid and small capitalization

companiesacross18 countriesof theEuropean region:Austria,Belgium,Denmark,Finland,France,Germany,Greece,Iceland,Ireland,Italy,

Luxembourg,theNetherlands,Norway,Portugal,Spain,Sweden,SwitzerlandandtheUnitedKingdom.

Correspondents:

VeraSoh(VicePresident,Publication)vera.soh.2011@economics.smu.edu.sgSingaporeManagementUniversitySingapore

NgJiaWei(VicePresident,Operations) [email protected] SingaporeManagementUniversitySingapore

SamuelOng(PublicationsDirector/Editor)samuel.ong.2010@business.smu.edu.sgSingaporeManagementUniversitySingapore

YingyuZeng(LiaisonOfficer)yingyu.zeng.2010@economics.smu.edu.sgSingaporeManagementUniversitySingapore

NgYongxiang(MarketingDeputy)

yx.ng.2011@accountancy.smu.edu.sgSingaporeManagementUniversitySingapore

DarrenGohXianYong(Editor)

darren.goh.2010@business.smu.edu.sgSingaporeManagementUniversitySingapore

EdisonYong(Writer)UndergraduateLeeKongChianSchoolofBusinessSingaporeManagementUniversityedison.yong.2010@business.smu.edu.sg

TimothyOng(Writer)UndergraduateSchoolofEconomicsSingaporeManagementUniversitytyong.2011@economics.smu.edu.sg

KennethHo(Writer)UndergraduateLeeKongChianSchoolofBusinessSingaporeManagementUniversity

[email protected]

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