Tag Archives: economics

What made Singapore’s economy?

One of the reasons I determined to study economics was because Singapore was a country labeled as an economic miracle, and I thought it’d be cool to figure out what was behind it. For decades, we’ve been told that it was the brilliance, hard work and sacrifice of our forefathers, strong leaders and a little bit of circumstances that made us what we are today.

It was a nice feel-good lesson but it wasn’t always easy to make clear of what it means for the future. There was limited strategies that we could adopt out of it. We did also learn that Singapore was a trading hub so it was vital that the world trading system went on and developed, because we facilitate that trade across west and the east, and we served those large vessels, and loads of containers, bulk goods that had to change hands in our location. So the port we had serviced these people and lots of local companies and industries grew to support that.

Even that wasn’t enough; it was thanks to the brilliance of our early leaders which attracted industrial players to set up shop in Singapore, provide employment, opportunities for skills, and provide an industrial core on which we could develop from. To accomplish all that, we need to have good and well-educated labour force, and a very stable environment. The strength of our government is delivering on all of that.

Today, our economy remains extremely reliant on trade, though one may argue that our original intent was to use trade to lift ourselves up enough to develop our own industrial giants and core. A couple of countries like Taiwan, Korea, Japan and even China sort of achieved that but Singapore remains much stronger in terms of the bringing in foreign direct investments, and providing services to parts of the economy that’s doing very well. We have yet to really build up strong giants, opt-ing instead to play the financial game which is heavily reliant on money as an asset.

I think it is clear that we had spotted an opportunity to bring ourselves out of poverty through the economic strategies but after it delivered good results previously. From now, we will need to figure out the way forward that does not merely involve repeating past actions, but improving upon those past actions more radically. Finally, we ought to recognise that our final goal is to create our own industrial champions that can secure a footing in the global stage.

60 years on, we have matured a lot as an economy but I think it’s only the beginning.

Trump tariffs

We live in interesting times and as an economist, I find it hard to resist commenting on the events I’m living within. I got into economics because I’ve been fascinated by trade, the amazing ability for the world to grow in production just because it is able to specialise in different things and thereby contribute to overall growth and prosperity of the world. The challenge is that being good at different things can affect how the overall increase in wealth or production is distributed. But if we care mainly about the world being able to do more together at the same time, we just want to maximise trade. On the other hand, if we care about only what we get individually, on relative terms with others, then yes, trade can get contentious, even if we are getting more on an absolute scale than if we hadn’t trade.

There is quite a couple of forces within the US economy that is generating the symptoms that we are seeing including the huge trade and budget deficits. None of them is going to be easily resolved through the use of trade tariffs. And yes indeed, there will be a need for the world system of trade, foreign reserves and financial exchanges to shift. The question of how it will shift and whether the transition is smooth or not will depend on both the actions of US and the rest of the world. Trump’s approach of bringing people to the negotiating table doesn’t make so much sense when he is simultaneously weakening his hand while trying to strike deals with multiple parties.

What that shows is a highly ego-centric or US-centric view of the world that will prove to be self-destructive. I’m not saying that the whole of US thinks or act this way but the fact that such a leader is voted into office makes things more difficult than it is. Obviously the electoral college system might need to be rethought or reformed but there’s probably too much gaming of the system that is taking place.

Back to the point about tariffs. By imposing a broad sweeping tariff system across the world, what will happen is that overall cost of living and consumption will rise in the US given how much it is dependent on imports (the deficit themselves reflect that). The goods or services where demand is more price sensitive might find themselves switching more towards domestically produced ones assuming that they exists and can be priced competitively. Otherwise, the status quo + higher tariffs will prevail. The government will maybe raise their revenue from customs but the US consumers are ultimately paying these tariffs. So on the trade front, nothing really happens, and on the government budget front, the government is probably going to get a bit more revenue to reduce their budget deficit.

If we assume that the reason for US budget deficit is that the government isn’t taxing enough relative to their spending, then it means they will have to somehow find ways to obtain more from the value that they are bringing to the markets. Perhaps it is the rule of law, or regulation of the markets, the government isn’t charging the fair amount to the beneficiaries, or allowing too much leakages (think corporates avoiding taxes or billionaires parking their returns in offshore tax havens). If we assume the richest ones are the most mobile, then applying tariffs would simply worsen the inequality situation in the US.

Hydrogen’s bad news

Things hasn’t been the most positive for hydrogen the past 2 years or so. Hyzon Motor is on the verge of ‘giving up’, while When one look back, it is a wonder why we felt comfortable ignoring some of the bigger problems associated with hydrogen. It is definitely less ‘trendy’ to tout hydrogen as the solution for the energy transition these days.

One of the challenge about the climate and energy transition is that it is a transition. And that means there is going to be change happening over time; and the challenge is that we don’t really know what the end point is in terms of the technology and pathways even when we know that we’re trying to have a go at net zero.

In the meantime, as we struggle to determine what we’ll use to fuel our aircrafts or vessels, we are making decisions on replacing these equipment, and trying to project cashflows over an asset lifespan or 20-30 years. These all without the certainty of the fuel being available is extremely challenging. So instead, we are more likely to bet on things not changing rather than things changing.

Hydrogen continues to face an uphill battle when it comes to the science, the technology and economics. But there is still good reasons for us to continue refining the technology we have. In the mean time, while we are still trying to decarbonise what we can, we try to leverage the resources that are available more immediately. We can optimise our biofuel supply chains more to achieve lower carbon intensity. Along that journey, we can improve our traceability of feedstocks and biofuel supply chains.

Now, biofuels or any of the new fuels will never be as ‘cheap’ as fossil fuel. And just because they are chemically almost equivalent to the hydrocarbons we dig from the ground doesn’t mean they are the same. This means we will have to continue working at pricing carbon and allowing the real price of carbon to hit all of us. Governments can protect the economically vulnerable not by blocking the transition but ensuring that more and more of that carbon revenues gets directed to support the vulnerable who may not be able to deal with the cost from the transition.

Biofuels could even be a commercialisation pathway for green hydrogen as the hydrogen can contribute to boosting the biofuel yields of organic feedstocks in the FT-Gasification pathway and improve the overall economics of the project when there is access to cheap renewable electricity. It’s almost like blending e-fuels into the mix already. This is a plausible intermediate step for us to encourage more green hydrogen production to sufficiently create more scale to bring down the costs.

The technology surrounding logistics for hydrogen then needs to improve before the end-use equipment would transform. Changing end-use equipment is still the hardest to do. Even if it’s just the heavy industrial users who have to change.

So the good news is that we may still eventually land on hydrogen in some shape or form. It may not be what we are envisioning now, but it’s vital to recognise that the time horizon is probably a lot more stretched out than we think.

War against biofuels

As I continued my work promoting the circularity of recovering organic waste and residue for energy purposes (mostly through the production of various biofuels), I begin to see the challenge that this space face.

Right now, EU is putting strict rules around the feedstocks allowed for the biofuels that count towards decarbonisation in their jurisdictions and hence the emergence of ISCC EU standards and certification for the value chains surrounding biofuels (and of course, other renewable fuels). Some crop-based feedstocks are allowed, but most crop-based feedstocks are being penalised by the indirect land-use change (ILUC) considerations – which are being reconsidered at the moment. However, there are some groups who are outright against crop-based feedstocks and considering them unsustainable.

Transport & Environment, in particular, have been rather against the whole idea of biofuels and champion a future that is based on hydrogen. They view biofuels as transition fuels that have no place in a net zero world. Consider the letter crafted to push shipping companies away from biofuels for green shipping just because they claim particular crops have been devastating the environment. They continue their assault on palm and soy industries instead of working alongside to find solutions to help these industries boost yield and reduce deforestation. Consider the achievement of the corn industry in the US, driven by the need to produce bioethanol. Won’t it be better if people work together to realise such improvement and increase the supply of alternative fuels in the world rather than screaming doom and gloom about one feedstock or another?

So what kind of doom and gloom are they perpetuating here, you ask? They commissioned a study by Cerulogy showing that “palm and soy oil would likely make up nearly two-thirds of the biodiesel used to power the shipping industry in 2030 as they represent the cheapest fuels to comply.” Again, the concern is food supply being affected as the resources are directed to energy; and also deforestation driven by these crops as feedstock? Isn’t EU Deforestation Regulations (EUDR) meant to look into these areas? Why not just use the tracking and scrutiny to prevent that damage instead of creating blanket bans? Use an lifecycle assessment-driven approach? And focus our efforts on developing clearer standards for lifecycle assessments rather than trying to exclude solutions before they hit the ground?

Well, if you really want to promote hydrogen, you can also consider the environmental damage from the lack of circularity in the solar, wind and battery materials space. The thing about green hydrogen is that it will require intermittent renewable power and these resources do also take up land space. They may not compete with food crops because they use marginal land; or that livestock can continue to coexist amidst solar panels. Wait, food crops could be grown with other parts of their biomass directed to fuels too! And many of these crops can be directed towards animal feed for feedstocks.

I agree that we probably want to think through a bit how the incentives we create can have very bad unintended consequences. But trying so hard to do that on biofuels is not going to undo the problems introduced by decades of subsidising the fossil industries via various policies. Those distorted incentives are plaguing us till this day.

Why is there such a war against biofuels? I don’t get it.

Decarbonisation challenge

The energy transition is difficult, not least because people cannot agree on which solution to pursue. People are concerned that the world will go down the wrong path and bring us to the brink of a different disaster instead. Yet we are arguing with each other in front of the ticking time bomb of climate change while the problem of huge amounts of carbon emissions continues.

Behind these ‘energy transition experts’, the energy users are beginning to realise they must take charge of their future energy destiny. There is not going to be a straight-forward answer but they will have to figure out what works for them while decarbonising their energy use. And this is why government and policymakers ought to continue ensuring proper pricing of carbon in their system, and defining standards to track and trace the carbon emissions along supply chains.

The basic operating principles are: (1) ensuring emissions data is tracked and that (2) carbon emissions are priced (it can be paid for by anyone in the value chain as they ought to be able to pass on the price until it hits the ultimate direct emitter so that they are incentivised to lower their emissions). These two principles would already do wonders without complexifying things.

The oil majors want us to find energy transition difficult. They want to be the ones to empathise with the huge challenge ahead of us. Because if we are discouraged and slow things down, we can at least buy more fossil fuel in the meantime. Or we can find ways of paying for carbon dioxide removal directly from their fuel emissions or from the air so that it is fine to continue using fossil fuel. Those are more obviously the wrong paths we don’t want to go down. The more natural gas you use right now that comes from the geological reserves, the more empty caverns available for these players to store carbon dioxide in the future.

It’s not easy to cut through the smoke; and we can definitely be more careful with the process by which we arrive at the ideas we have strong convictions about. But if we can keep to those principles and to try and keep solutions simple, we can get to the answer.

Economics and efficiencies

Dr Janeway’s article on False Economies highlights some of the philosophical underpinnings of the modern, capitalistic study of economics that drives the system to behave in ways that endangers the entire economy’s long term prospects at times.

There were so many different themes brought out in the article that is worth more investigation and appreciation. The point that Arrow-Debreu’s work points to the fact that our markets in reality would never be efficient is something that we do not embrace enough of – especially in public policy.

The lack of political courage and unwillingness to be accountable to policy decisions drives the notion that we must ‘leave things to the market’. And today, with the world facing the climate challenge, I do not believe that the market is the solution to deal with the challenge. The political will to align incentives, define standards and mobilise efforts is necessary.

The recent Oxfam study about the rich getting richer faster than the poor being uplifted shows that, indeed, we have enough money to deal with the world’s problems. But far too often, it is either in the wrong hands or working towards the wrong goals. Economics assumes the market would direct resources to the ‘right goals’ but this goal-selection process at present is dysfunctional.

Capital’s bargaining power

Recently a friend and I was working on some business ideas. We were thinking through scenarios where smart people come up with great business ideas or business models that can generate impressive returns but require capital to do. If the capital markets work perfectly for the specific risk profile of the business (assume that it can be assessed correctly), then all capital should only be able to demand the market rate of return on capital.

We ran some simulations on this. To simplify the whole business and risk, we assume it is a very low-risk infrastructure project that returns constant cashflow across 10 years, one year after the initial cash injection. A project that can bring in >27%, when raising all of its funds from a capital owner, should be split 60-40 if the market hurdle rate is at ~12% for that risk and tenure. This means that though the capital holder is financing 100% of the project, he needs to give up 40% share of the returns to the ones who structured and pulled the project together.

Now, when the project returns rises to 33% over 10 years; and the market hurdle rate remains at 12%, then the capital holder needs to give up 49% share. This means that if the project that the smart guys are able to put together can return more than 33%, then the capital owner needs to give up more than 50% of the returns even though he is contributing 100% of the upfront capital. This is a hard bargain for the ‘entrepreneurs’ organising the resources to strike with capital holders.

This is perhaps how the Thomas Piketty argument about the relative bargaining power of capital gets played out. At the same time, capital can afford to be more patient because the cost of upkeeping capital isn’t as high as trying to upkeep a living person with the wits and capabilities to develop all the ideas and organise the resources. And because capital is more ‘tangible’ and ‘calculative’, it can keep forcing all kinds of cost upon labour side of the equation. In this blog post, labour basically includes the ‘entrepreneurial’ elements as well that is typically somewhat associated with capital.

This is where debt comes in. Instead of getting a co-investor, the project entrepreneur should be able to borrow to finance the project. And the debt tenure can be shorter. A simple solution could be to take out a 4-year debt at 7% interest; this would require the entrepreneur to sacrifice 85% of the project cashflow for the first 4 years, in exchange for the rest of the project’s cashflow. Technically, when structured as a debt, the market interest rate should be lower than the market hurdle rate. Yet because the ‘project’ is new and may not have a sufficient track record, financiers may demand collateral and other risk-management tools to enhance the credit standing. Technically, when structured as a debt, the market interest rate should be lower than the market hurdle rate. Yet because the ‘project’ is new and may not have a sufficient track record, financiers may demand collateral and other risk-management tools to enhance the credit standing. This means that the entrepreneur would have to give out more than he needs to reduce the risks of the capital holder further despite the risk profile of the project.

So, the entrepreneur who does not have any capital to contribute will be seen as having a mouth-watering return since there isn’t any ‘capital at risk’ for the entrepreneur, but the reality is that there is some opportunity cost. Yet if the entrepreneur’s salary is built into the project returns, then he doesn’t have the ‘opportunity cost’. The extra upside would be his ‘supernormal return’.

When oil saved the environment

In Seth Godin’s new book, This is Strategy for, he had a chapter (the book has over 200 chapters, all of them short and highly readable) on killing whales.

He documented the rise of the whale-hunting industry in the 1800s where sperm whales were hunted down for their blubber. The activity was both dangerous and lucrative because a single sperm whale’s blubber could yield many barrels of lamp oil. The demand for lighting onshore and offshore fueled the whaling activity.

For a time to the mid 1850s, it seemed like they could just go on and hunt sperm whales to their extinction. Yet the earth today still has sperm whales. Thanks to the discover of petroleum and hence the advent of keroscene used in oil lamps. The cost of keroscene was much more competitive than lamp oil made from whale blubber and the petroleum industry was also costing less human lives.

Climate solutions that displace fossil fuels would need to achieve cost reductions to scale. But we could all inprove their chances by removing fossil fuel subsidies and pricing carbon. Of course, that will “hurt” the cost of living for many people. But if we think about it at system level, it is more about a sort of attachment to the current status quo of how we value different things, and refusing to change that.

I don’t think we could derive any sort of moral authority from the market to say we’re producing something that destroys our future because it is cheaper. We may not have a future to spend that surplus savings on. At the system level, we will have to help one another cope with changes.

Fast followers

Being a fast follower is a good strategy; it allows you to take in the lessons from those who have tried and failed first. It is even a strategy that enables you to become a leader from public’s eyes.

But the challenge for the fast follower who gained leadership status is falling into the trap of thinking they are the leader. Their skills in curating what they learnt from the mavericks, scaling what was small and bringing things to market fast, are not going to be suited for what is required to take real leadership: influencing the market, uncovering innovation from their own values and principles.

They may have to pivot at some point when they’ve outcompeted all those whom they were fast-following.