Applying the ideas of Adam Smith in Singapore and the world

Today, the tenets of global capitalism are being rejected by populists everywhere.

Protectionism is rife, open immigration is being resisted, and governments implement restrictive regulations that stifle consumer choice and business competitiveness.

In such a context, it is timely to reflect on the ideas of the Scottish economist and moral philosopher Adam Smith.

He was a proponent of market liberalism, which emphasises the free exchange of goods and services, capital, people and ideas as well as a society subject to the rule of law and limited government.

His intellectual contributions not only shaped how future scholars thought about the economy, but also transformed the course of history.

This month marks the 295th birthday of Adam Smith, and his market liberal illuminates many challenges relating to trade, immigration and public policy that Singapore and the world faces.

Recent research reveals that the world’s top 60 economies have adopted more than 7,000 protectionist policies, which poses a challenge for small and open economies like Singapore.

One driving force behind protectionism is the concern over “trade deficits”, based on the belief that when a nation’s imports exceed its exports, it is losing out to its competitors, necessitating fairer terms of trade.

This rhetoric has certainly been employed by Donald Trump to great effect as he shows no signs of backing off from a trade war with China, European and other key trading partners.

This argument concerning trade deficits is not new, but was first made by the mercantilists of Adam Smith’s time.

They were concerned about an adverse balance of trade, and thus advocated protectionism to stem the outflow of gold.

In response, Adam Smith articulated that trade is win-win, since a country that produces more than it consumes would still be prosperous, regardless of its trade balance.

A narrow focus on trade balance would be mistaken, considering that most of us experience a “trade deficit” with our local supermarkets, yet it would be illogical to call for “fairer terms of trade” by reducing our purchases with say NTUC Fairprice, Sheng Siong or Cold Storage.

Trade is win-win, and economic production generates wealth for households and makes goods accessible to the masses.

THE QUESTIONS OF IMMIGRATION AND NATURAL LIBERTY

The case for open immigration, however, is more difficult to make.

It is widely believed that an uncontrolled influx of immigrants reduces local jobs, depresses wages, puts a strain on infrastructure and potentially even dilute the national culture.

Even the Singapore government has in recent years moderated its open door policy to foreign workers to more sustainable levels.

According to a leading economist, Michael Clemens from the Washington-based Centre for Global Development, “there are trillion dollar bills on the sidewalk” to be gained through global open borders.

When labour freely moves to where it is best utilised, global productivity increases, enriching the wealth of nations. It is estimated that the world would be US$78 trillion dollars richer if immigration restrictions were lifted.

The benefits of open borders apply even to immigrant-receiving countries. Most immigrants hail either from the bottom or at the top rungs of the skill-ladder, and thus complement rather than replace local workers.

Foreign workers do jobs that many Singaporeans do not wish to do, freeing Singaporean workers to concentrate on value-added activities with higher earning power.

Highly-skilled immigrants set up businesses, create jobs and transfer much needed knowledge to the local economy. Immigrants are also not passive consumers of resources.

They don’t keep their salaries in their pillows, but also spend them, generating income and jobs.

“I am a firm believer that the more talents you have in a society, the better the society will grow,” Singapore’s founding prime minister Lee Kuan Yew once said.

Importantly, Adam Smith also emphasised that socio-economic progress is best achieved not through central planning nor social engineering.

To him, when a society relies primary on market forces, it will achieve prosperity that is not foreseen by any one specific party.

This does not imply that government has no role to play, but that it should restrict itself to maintaining fundamental market institutions of private property, rule of law and the enforcement of contracts.

It is no surprise that Singapore has achieved tremendous economic progress in a short span of time while ranking in the top tiers of the Ease of Doing Business Index and the Index of Economic Freedom, both measuring how well these Smithian institutions are preserved.

This emphasis on what economists call “spontaneous order” is especially relevant for Singapore in our effort to harness disruptive innovation and entrepreneurship for the future economy.

While Singapore performs relatively well on innovation rankings, our low productivity scores are an open secret. We also do not fare well when the specific measure of innovation efficiency is looked at in particular.

One policy recommendation in the tradition of Adam Smith would be for Singapore to rely less on industrial planning as an economic strategy, which involves the government making big bets on specific industries deemed promising.

This point has been the subject of research by economists such as Joseph Wong from Cornell University, who explained that the large investments into biotech industries by Asian developmental states have not produced commercial blockbusters and that “commensurate profits have not followed”.  

Innovation is an inherently uncertain phenomenon and would require a greater reliance on private actors to experiment with new ideas in the marketplace.

This, in the context of Singapore, may involve shifting to a greater focus on the services industry rather than export-oriented manufacturing, the mainstay of our economy of old.

The economist Linda Lim has proposed in “Singapore Perspectives 2015” a downsizing of the state management of industry.

This can help release scarce capital and labour resources to the growing comparative advantage that Singapore enjoys in supplying services to regional countries.

Singapore has effectively reinvented itself over the years, and overcome many problems through its pragmatic attitude to trying out ideas that work, even if unconventional.

While it is today unfashionable to support market liberal ideas, it is my belief that the intellectual legacy of Adam Smith contains the seeds of wisdom that should be re-applied for the future of Singapore, and the world.

ABOUT THE AUTHOR:

Bryan Cheang is a PhD candidate in the Department of Political Economy at King's College London, and also the Director of Adam Smith Center in Singapore.