Financial crisis has become full-blown economic crisis, says George Yeo

Donaldson Tan / Head, TOC International / London

Cambridge – Last Friday, Minister of Foreign Affairs George Yeo visited Cambridge University in conjunction with its 800^th Anniversary. During the visit, he discussed the state of the world and the global economic crisis with Singaporean students. “No one is sure where the bottom is or how long this crisis will last, “ he said. “In the meantime, tens of thousands of companies will go bankrupt and tens of millions of people will lose their jobs. What started as a financial crisis has become a full-blown economic crisis. For many countries, worsening economic conditions will lead to political crisis.”

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Mr Yeo spoke out against government interventions in this global economic crisis. Public policies worldwide can hinder the market from reaching the bottom. “Many stimulus packages being proposed will make the adjustment more difficult”, he said, “For example, bailing out inefficient automobile companies may end up prolonging the pain of restructuring at tremendous public expense.” Attempting to shortcut the process may worsen underlying conditions. He also commented that the wages and salaries of Americans, Europeans and Japanese are being held down by billions of Asians and Africans who are prepared to work for much less. He expects protectionist pressures in America, Europe and Japan to grow, in order to keep jobs at home.

He highlighted the White House’s growing dilemma between injecting liquidity into domestic financial markets and managing an international reserve currency. “If governments try to prevent the re-pricing of assets and human beings, international markets will force the adjustment. A country that is over-leveraged living beyond its means will itself be re-priced through its currency. Its currency will be devalued, forcing lower living standards on all its citizens.”

Furthermore, in response to a TOC enquiry, he acknowledged that the calibrated move by the People’s Bank of China to call for the replacement of the US$ as the international reserve currency will put the coming G20 Summit in a precarious position. The minister said that while it is unlikely for any currency to replace the US$ as an international reserve currency, there will be political and economic obstacles in promoting global acceptance of a super-sovereign international reserve currency.

The world today is at similar crossroads as it was during the Great Depression. A global leadership vacuum marked the Great Depression in the 1930s. “Despite the shift of power across the Atlantic, while Great Britain could not lead, the United States would not lead. In between, the world economy fell,” Mr Yeo said. Great Britain then is United States today while United States then is China today. The US is China's most important export market while China is the most important buyer of US Treasuries. Moreover, today’s world is more complex as due to its multi-polarity, no particular value system will hold complete sway over others. The current crisis has already caused many people to question the nature of capitalism, socialism and democracy. “With the world in turmoil, many developing countries are studying the Chinese system wondering whether it might not offer them lessons on good governance. For the first time in a long time, the Western model has a serious competitor,” Mr Yeo said.

Responses from Singaporeans at Cambridge

A Singaporean commented that the role of Germany, the world’s biggest exporter, in the modern-day epic of the clash between Western and Eastern civilisations is often underestimated. She also noted that Singapore government has succumbed to China’s soft power. “Despite the failure of the Suzhou Industrial Park, the Singapore Government has direct and indirect stakes in the Tianjin Eco-City Project and the Guangdong Knowledge City Project. I also wonder if the objectives of the Speak Mandarin Policy has shifted towards preparing Singaporeans to be employees at Chinese firms.”

Another Singaporean was disappointed that BG(NS) Yeo did not touch on the Singapore economy and the Resilience Package. He was unsure of the Package’s effectiveness to buffer and shield the Singapore economy from the global economic crisis. He also felt that the government was not clear on how long the Package should last. “There should be economic indicators published quarterly to ascertain the continuity and success of certain schemes in the Resilience Package, such as the Job Credit Scheme and the risk-sharing initiative for trade finance and SME loans, “ he said, “This will send a clear signal to the private sector, so that the firms and the public can make timely adjustment should the government suspends or ends these schemes.”  

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