“Competition”, a word commonly associated with the notion of globalization.  Though globalization has brought improvements to the standard of living to most parts of the world, it has also facilitated the migration of jobs.

Job migration was previously limited to the manufacturing sector.  Companies moved their factory operation from high cost nations to low cost ones.  But job losses are no longer restricted to just the manufacturing sector, services that were previously immobile can now migrate with ease with the help of technology.

Services such as software programming, call centre services, and other business process outsourcing services, can now be outsourced to other nations – such as China and India - at a lower price.  Though cheaper, the quality of service is comparable to using a local service provider.

To compete in this new globalized world, many Singaporeans now know that “differentiation” is the key strategy to survival.  We now know that being just productive is not enough. We have to be innovatively productive.

Interestingly, even though we know that this is the dominant strategy, we are unable implement it.  This article aims to explore the reason to the inertia using two finance theories – the REMM and Game Theory.

A REMM Nation – Defining the Core of Intentions

It is always interesting to sit in a coffee shop (low cost coffee house) in Singapore and listen (not eavesdropping because they speak so loud) to the comments of the patrons.  More often then not, coffee shop patrons (especially the senior generation) would voice their comments about the government and their policies.

Though comments from the patrons often contain criticism of government policies that is not the most interesting part.  What catches my attention is the, so often used, noun “The People” and pronoun “We”.  The intention of adding these terms into the critical conversation is to emphasize that their analysis (and subsequently their criticism) revolve around the welfare of the population.  Comments therefore represent the nation as a whole and not just the individual.

But ironically, we all know that such may not be necessary true.  People will only voice their concern over policies that affect them adversely but to argue against any policies based on self-interest is never popular.  We therefore often mask our self-interest almost always behind the façade of altruism.

What does this have to do with our competitiveness?  Lots, because we can now assume that people in general are self-interested and they will evaluate all policies and options according to that self-interest.  We can also argue that each individual will be resourceful enough to undertake strategies such that their self-interest is maximized.  In other words, people are “Resourceful, Evaluative, Maximizers”.

What do the population in a nation generally try to maximize? They will try to maximize their utility (enjoyment or happiness) with the least possible effort (including risk).  Individuals will therefore try to undertake as much utility as possible for themselves while transferring the as much effort as possible to others.

What about governments?  Shouldn’t government set policies and strategies such that the majority of the population benefits from it?  The answer is, of course, a “yes”.  But are politician really perfect agents (a person who will maximize the preference of the principal, while, if necessary deny his own) of the nation? To answer that, I will have to quote Professor Michael Jensen:

“The logic in which the political (perfect agent) model figures so prominently is simple, though it will not withstand careful scrutiny.  Whenever individuals acting on their own behalf will not bring about the “desired” outcome, government must take a hand…

The fatal flaw in the above propositions is their assumption that when politicians intervene, they act to accomplish the desired result – that is, they act in public interest.  Those who argue for such government intervention simply assume that politicians can and will behave in accord with the desires of the electorate.

Individually and collectively, legislators have an interest in enlarging the role of the state and as REMMs, they engage in continuous marketing of programs to achieve that end.”
- “The Nature of Man” by Michael Jensen

The individual objective of politicians is to stay in power.  To achieve that, politicians have to therefore ensure that they are continuously elected.  Actions of the government therefore have to be beneficial to the electoral whole.

Dominant Game Strategy between People and Government

So, we now know that the true intention of the people is to acquire as much utility for themselves with the least possible effort while the government wish to stay in power through continuous election.

But the politician’s job, once elected, expands.  As the ruling party, the government’s objective is to ensure the continuous survival of the nation.  This means that they have to collect information, forecast and foresee treats and opportunities of the future, and formulate strategies and policies around the forecast.

At this point, some may question if such strategies and policies formulated may have elements of self-interest – namely personal wealth.  As we have mentioned, the only self-interest of the politician is that of being continuously elected.  There are many rewards of staying in power and to sacrifice these rewards to increasing personal wealth is irrational in nature.

Since the interest of the nation may differ from the interest of its inhabitants, it is reasonable to assume that policies may not always be people friendly.  For example, Singaporeans have been encouraged (some would argue that its by force) by the government to undertake pay cuts and flexible wage structure in order to increase cost competitiveness of the nation.  Such will reduce the utility gained by each worker and also increase the effort to acquire that utility - workers now have to undertake the risk of varying income stream.

But really, such policies have their positive points.  When a nation undergoes an economic downturn cycle (or recession) where actual economic output is less then its potential output (recession gap), prices in the market should, theoretically, adjust to eliminate this gap.  Unfortunately, in reality, prices of goods and services (including labor) are “sticky” in nature.  This stickiness therefore causes economies to stay in recession longer than if prices adjust instantaneously and automatically.

Most people had undertaken the pay cuts and flexible wage structure with much displeasure but they do know that it is necessary.  They would therefore try to reduce that displeasure.  Generally, the objective of pay cuts is to increase cost competitiveness of homogenous workers and businessmen.  One solution for them is to differentiate themselves by continuous innovations. 

But differentiation is difficult and requires much effort – from forming concepts to implementing the solution or idea.  The differentiation strategy is also risky since it requires implementing ideas that were not empirically tested.  Our REMM people would prefer a strategy that will reduce such efforts.

They would therefore choose another strategy (the dominant strategy) when undertaking a difficult policy - whine.  The people do know that politicians are REMMs. They also know that politicians will need their vote to stay in power. The people can therefore send signals of no confidence through continuous whining.  The solution by politicians is therefore to reduce the disutility of the “bitter medication” through the use of “sweets” - compassionate distribution and government assistance. 

The side effect of this sweet – the need to differentiate through innovations is muted.  This, in turn, reinforces the need for the homogenous labor market to cut cost further to improve cost competitiveness.

Blaming the Macroeconomic Structure of the Nation

Some people blame the failure of our ability to innovate on the macroeconomic structure of our system – namely the central planning system of our labour market.  If the labour market is allowed to decide, it will find its way.  The supply of labour and the demand for labor should find its equilibrium if given a chance to explore.

There are many reasons why our economy, to date, is predominately centrally planned.  I will state two.  First, it is common knowledge that Singapore has only one resource – labour.  Efficient allocation of this resource is therefore of utmost importance.  Though it is true that market allocation method allocates resources to its best use, it is costly to use and may take a long period of time to find its equilibrium.  Central planning system aims to reduce the cost of using market forces and at the same time increase the speed of reaction to changes in market factors. 

The other reasonable argument is that Singapore is a small economy (with a small population).  The consumption portion of our GDP is relatively small.  National income therefore has to be supported by the external component – net export or foreign consumption.  Unfortunately, competition in the international arena requires competitors to have size and strength.  With a small economy, Singapore market is unable to grow local enterprises fast enough for this competition.  The solution is therefore to implement central planning system.  Government therefore acts on behalf of local enterprises to acquire income from foreign trades and redistributes these incomes through government spending. 

Should this system be changed?  I will not speculate on the possible outcomes.

Conclusion

We have seen in the game situation that the reason why we don’t innovate is partially due to our knowledge that politicians are also REMMs.  Unfortunately, once we don’t innovate, the only competing strategy we can rely on is “cost competitiveness”.

I have also explained why it may be difficult to pursue the ideology of moving towards a more market orientated planning system – taking the costs and benefits of using the market into consideration.

We may therefore have to adjust our mentality back to the bad old days – that our labour force is cheap, diligent, and productive, but unable to innovate.  This labor force therefore has no choice but to elect a team of elite innovators to lead our economy into the global markets.  The profits earned are then entrusted to a team of elected authoritarians who would then redistribute such profits through government spending.  As a result, the people are left with only one remedy when such distribution is deemed unfair – whine and complain.

Any opinions or comments ?