Published Date: 04 August 2003

Opening Speech by Dr Khor Hoe Ee, Assistant Managing Director, MAS, at the Economic Society of Singapore Annual Seminar, Singapore Polytechnic Convention Centre



1   Good morning and a very warm welcome to the Annual Seminar on Understanding the Singapore Economy, organised by the Economic Society of Singapore.  Before I get down to introducing today's seminar, I would like to acknowledge the contribution and support of the Lee Foundation for today's event.  The ESS is very grateful for its kind and generous sponsorship. 

2   The ESS Seminar provides a platform for enhancing our students' understanding and appreciation of economics, through raising the awareness of current and topical economic issues facing Singapore.  Today, I am pleased to have with me, three distinguished speakers who will share with you their views and insights on three important topics (SARS, FTA, and Economic Forecasting) that are of special relevance to Singapore, particularly in light of the current economic backdrop. 


3   In recent years, our economy has been hit by an increasing number of shocks, starting with the downturn in the global electronics industry in 1996-97, the Asian financial crisis in 1997-98, the bursting of the tech bubble in 2001, not to mention the geopolitical fallouts from the Sept 11 terrorist attacks, Bali bomb incident last year, and the US-Iraq war earlier this year.  But even before the US-Iraq war was over, we were confronted with a challenge of a different nature, one which we had not encountered before -  the outbreak of SARS.

4   SARS was, in many respects, different from the externally-driven economic shocks that we typically encounter.  Lives were lost, morale was hit, and a pervading mood of fear and paranoia gripped our economy overnight.  Domestic demand was directly affected, as consumers avoided crowded places and chose to stay at home for fear of contracting the virus.  The sharp contraction in Singapore's GDP in the second quarter this year largely reflected the debilitating impact from the SARS outbreak, alongside continued weakness in global demand.

5   In a short while, Mr Edward Robinson, Principal Economist from the Monetary Authority of Singapore, will elaborate on the economic consequences of SARS on the Singapore economy.  He will take you through the economic developments prior to and following the SARS outbreak, including the fiscal and monetary policy response to the crisis. 

6   Fortunately for us, the spread of SARS receded quicker than expected, and the worst of the outbreak is already behind us now.  Singapore was taken off from the World Health Organisation's list of SARS-affected countries on 31 May.  With Taiwan and China also subsequently removed from the list, the transmission of the disease appears to have been contained globally.  We have resumed our normal daily activity and the fear factor has largely dissipated.  Nevertheless, even as we wrap up the chapter on our battle with SARS, we should remain mindful of, and be prepared for, the possibility of a second wave of outbreak, which has not been ruled out by the WHO. 

7   Compared to past epidemics, such as the 1918 Spanish flu and the 1957 Asian flu, SARS was brought under control relatively quickly.  Today's mass communication technology has led to global awareness and knowledge of the disease within a very short period of time, allowing preventive measures to be quickly put in place around the world.  Yet, ironically, it was also this faster flow of information that had resulted in a sharper withdrawal in the public's behaviour.  Increased globalisation and international air travel has allowed the disease to spread more quickly and rampantly across the globe.  As a result, the economic impact of the disease was swifter and more severe. 


8   In this respect, there is an important similarity between SARS and other external economic shocks that have hit Singapore, namely, the effects of globalisation.  While globalisation and openness to the outside world have brought many benefits to the Singapore economy, it has also made us more vulnerable to external events and cross-country contagion.  

9   As a small and open economy, Singapore is heavily dependent on the rest of the world, and indeed, we have to be, in order to continue growing and developing.  We import the bulk of what we consume, and in turn, we have to export to pay for these imports.  Trade is three times our GDP, and foreign direct investments account for around three quarters of total manufacturing investment in Singapore.  As a result, we cannot afford to shut ourselves out from the outside world. 

Free Trade Agreements

10   Singapore's continuous pursuit of trade liberalisation and integration is one of the key elements of our commitment towards embracing an open and globalised world.  It is in our interest to ensure an open and rule-based international trading environment for goods and services to flow freely.  I am sure you would have read about the free trade agreements, or FTAs, that Singapore has signed with several of our major trading partners.  To date, Singapore has concluded FTAs with New Zealand, Japan, the European Free Trade Association, Australia, and most recently and importantly, with the United States of America.  We are also in the process of discussing similar agreements with Korea and Canada, amongst several others. 

11   Going the FTA route was not entirely smooth sailing for us.  Bilateral FTAs is a contentious issue.  You are probably aware of how bilateral FTAs have come under a barrage of criticisms from policymakers and economists alike.  Pascal Lamy, the European Commissioner for trade, even described the rising number of FTAs in the world as an "epidemic".  Why is this so?  The problem with preferential trade agreements, as argued by opponents of FTAs, is that they could damage free trade by discriminating against non-member countries.  Many economists, led by Professor Jagdish Bhagwati, have contended that bilateral FTAs would undermine the WTO and its progress towards multilateral free trade.  Negotiating an FTA is challenging, especially when dealing with a big and powerful nation like the US.  It takes courage and conviction on our part, and compromises have to be made.

12   Indeed, there are many other interesting issues involved in Singapore's FTA strategy, and I will leave it to our second speaker, Mr Ong Ye Kung, Principal Private Secretary to DPM Lee Hsien Loong, to tell you more about them.  As Deputy Chief Negotiator for the US-Singapore FTA team, Ye Kung was intimately involved in our successful trade talks with the US.  I am sure he will be able to give you a more vivid anecdotal account of the FTA process that goes beyond what you read in the newspapers.  We hope that this will provide you with interesting insights on Singapore's position on FTAs, the thinking of our policy makers, and the valuable lessons gained along the way.

Economic Forecasting

13   As you probably would have gathered by now, globalisation is a double-edged sword for Singapore.  Even as we continue to seize on the opportunities of being an open economy to enhance our economic well-being, we must also be on our guard against the perils of external shocks, which can significantly impact on our economy.  While we cannot prevent these shocks from hitting us, we can cushion their impact by making sure that our economic institutions are robust and our economic policies are sound.  In this regard, economic forecasting has an important role to play.  It is my privilege now to introduce you to Professor Sam Ouliaris from the National University of Singapore, who will share with you the objectives and techniques of economic forecasting.  But before that, let me just touch briefly on the subject from a central banker's point of view.

14   "Economists have forecasted 9 out of the last 5 recessions", so goes a common joke about economic forecasting.  An economist is also said to be an expert who will know tomorrow why the things he predicted yesterday didn't happen today.  You might ask: if economic forecasting is never going to be accurate, why do we forecast in the first place?  Well, admittedly, economic forecasting is more an art rather than a science, or for that matter, an extremely difficult art, especially during turbulent and uncertain times like these.  The accuracy of economic forecasts is hampered by two inherent risks: first, uncertainties that are known but unquantifiable and hence cannot be predicted with precision.  I am referring here to events such as the uncertainties over the US-Iraq war which was widely anticipated but no one was sure when it would start or how long it would last.  Business spending just freezes up in the face of such uncertainties.  Second, the risk of idiosyncratic shocks, such as SARS and September 11, that are totally unpredictable.  Skeptics often point to the numerous misses in economic forecasting to downplay the usefulness of formal econometric models in policymaking.  To the contrary, I believe that economic forecasting provides policymakers and central bankers with a disciplined framework for policy formulation.  During times of great uncertainty, it becomes an even more relevant and important tool for assessing the economic outlook as it helps to define the limits of our knowledge and ignorance. 

15   Let me elaborate a little on how the MAS uses forecasting techniques in its conduct of monetary policy.  As monetary policy affects the economy with long and variable lags, MAS formulates monetary policy in a forward-looking manner using a variety of economic models and forecasting tools.  This is accomplished through simulating and evaluating the impact of monetary policy over the medium term using macro econometric models of the economy.  Hardly any central bank in the world conducts monetary policy by "looking out of the window", a term coined by former Fed Reserve Vice-Chairman, Professor Alan Blinder, to refer to a strategy of taking actions one step at a time without any clear idea of what the next few steps will be. 

16   MAS introduced the Monetary Model of Singapore, also known as the MMS, in February 2000.  The MMS shares many of the features of the best modeling practices around the world.  While we recognise that models are an indispensable tool for policy analysis and forecasting, they cannot replace old fashion common sense and sound economic judgments.  We have to supplement output from the model with sectoral analysis, survey data, market information and our own judgment. 

17   No macroeconomic model - no matter how comprehensive - can capture fully the complexities of the economy or anticipate fully developments in the external environment.  In particular, macro models cannot capture irrational behaviour such as the herd psychology of investors, nor anticipate social and political upheavals, or a medical emergency like SARS.  Uncertainty and our less-than-perfect knowledge of the economy calls for some degree of humility and vigilance in the conduct of monetary policy, as well as regular reviews of policy as new information becomes available.  Yet, in spite of its limitations and imperfect track record, economic forecasting is still a useful and essential exercise for policymakers.  I quote from the great English economist, John Maynard Keynes who once said that "I would rather be vaguely right than precisely wrong"1.


18   Policymaking is becoming more challenging in the increasingly complex and capricious world that we live in today.  Globalisation provides us with greater opportunities, but risks and uncertainties also increase at the same time.  We have to learn to live and cope with these challenges, no matter how trying the process.  The topics for today's seminar bring together different aspects of current economic developments and policy making in Singapore, and I hope that you will find the presentations useful and interesting. 

1 Reported in Shove, "The place of Marshall's Principles in the development of economic theory," Economic Journal, December 1942, p. 323.