Chart Explaining Singaporean Economic Political Model

This chart is used for explaining Singaporean economic and political model with comparison to Anglo-Saxon style free market model with a small government and European social democratic welfare state model with a big government. Also, the idealistic world view created by European classical idealism is briefly introduced as an opposing side of the Singaporean model.

The vertical axis scales how big a government is in a model. Bigger government implies a central government role is significant to intervenue into economic and social issues and to administrate a huge scale of public sector. By contrast, smaller government implies government role is limitted for intervening into economic and social issues and more likely to let private enterprises and voluntary will of indivuals to look after public goods and services.

The holizontal axis scales the attitude toward equality. The right side puts priority on taking inequality for granted as a mean of promoting meritocracy stimulating a high aggregate productivity under an elitist socioeconomic structure. The left side puts priority on more egalitarian values where socioeconomic inequality is minimised with a high effort.

The modern Western politics tends to focus on the one dimensional spectrum based on the conflicting view between the European social democratic model regarding highly of a relatively egaritarian policy with a generous welfare state programmes and the Anglo-Saxon style free market economy promoting meritorcratic competition and optimising the productivity level under competition. The former has a relatively less confidence on entirely letting private individuals and market handling economy and social policy with their voluntary will and a relatively stronger confidence on relying on a government role looking after public. The latter has a strong condidence on a free market and private individuals in it voluntarily looking after both themselves and the others and is sceptical about government roll of intervening it.

Singaporean politics is so unique that it combines both a big government looking after a nation like the European welfare state model and a free market economy and meritorcacy like the Anglo-Saxon model. Singaporean model has a strong confidence on both a powerful government intervention and a voluntary force of free market and private individuals. The big goverment roll provides the public safety backed up by the strong law enforcement, the guardianship of harmonising citizens with multiculturalism and public education programme, and well-developed healthcare services. However, the big government of Singapore does not disrupt free market competitions based on free voluntary will of individuals and corporation, and it actually encourages it enough to establish such a strong meritorcratic socioeconomic structure accomplishing a miracle economic growth.

On the other hand, Singaporean model has some negative feedbacks from some endogenous citizens frustrated by the socioeconomic poliitcal system. Singaporean model applies the pragmatic attitude of adapting any existing socioeconomic policies not being constrained by ideologistic politics, and its utilitarianistic realism merely focuses on the national well-being as a hole. So, the rapid economic growth and the public safety are exaggerated meanwhile the frustration of relatively poor individuals and minority's view points tend to be overlooked.

Singaporean model is far from the classical idealism described by various European philosophical theories which aspires to invent an alternative which is not yet established but worth to attempt to establish. Producing an eccentric genius inventor like someone obtaining a Nobel prize is not a priority for Singapore. Although the voluntary will of individual is highly admired there, an individual sovereignty and her/his uniqueness are relatively more disregarded than strengthening the aggregate strength of a nation.

Overall, this comparison demonstrates more than one pathway of promoting small/big government and meritocracy/egaritarian policy. Singaporean model is refered to as an example of implimenting a unique pragmatical perspective policy as a successful and yet controversial example.

Economic Political Compass/Spectrum

From economists' point of view, the economic scale based on goverment size (big v.s. small) in Political Compass is not useful to explain the real impact of policy on economy. In the real world economy, government size does not seem to matter whether a nation/community impliments elitist or egalitarian policy. The real matter is the intentional objective whether a government or a community aspires to accomplish.

Both capitarist economy based on a severe competition of private enterprises and socialist economy mainly operated by a government central planning support meritocracy establishing an efficient mechanism of sustaining productivity and a rigid hierarchy maintaining a stable social order. By contrast, more egalitarian economies may keep a feasible balance of government size and freeness of private enterprises, and this balance varies across different geographic and ethinic characteristics.

Singapore and South Korea encourage a high economic freedom of private business competition and also maintain a roll of big government propping up public goods and social order. In these nations, the big government sustaining the stable social order and bearing the responsibility of administrating public sectors assist growing the private businesses and the furthermore economic freedom. In addition, Singaporean and South Korean economy keeps their capacity of controlling business cycles. While remaining the relatively free market economy, their big and proactive government is prepared for mitigating either overheated or hard-falling of their business cycle.

Modern continental European nations tend to focus on encouraging more egalitarian values and freedom of expressions more than economic efficiency. Their government roll is bigger than the U.S.A. and the U.K. but smaller than both socialist and the aforementioned emerging Asian nations. In particular, the current Eurozone seems to be afrain of an excessive government intervention into its economy because of the predicted excess cost of implimenting it in such a huge economic zone with its unstable fiscal and regulatory structure which is still not well integrated. This unstability is also the cost of accomplishing their ideal of European integration with an egalitarian value.

Scandinavians are far more famous for accomplishing egalitarianism while maintainig their reasonably strong economy as well as their political and social stability. They still keep their proactive capacity relatively more than the Eurozone because they are not in a part of a massive complicated economic zone like Eurozone. But, Scandinavian economic policy is not so much proactive because they have been historically famous for their conservative macroeconomic policy reluctant to spend government expenditure for economic stimulus. Instead of spending for incentivising the macroeconomic performance, they put priority on sparing their expenditure for their generous welfare programming for their egalitarianism.

Judging from these examples, the key scales of distinguishing economic policies should be the "efficient but oppressive v.s. egalitarian" axis and the "proactiveness v.s. passiveness" axis instead of a simple big v.s. small axis. An efficient but oppresive policy with a proactive attitude focuses on sustaining a remarkable economic performance while their stratified elitism may increas a frustration of subordinate citizens. An egalitarian policy focuses on spending for their egalitarian ideals while sacrificing their efficiency of stimulating their economic performance.

There is an notorious policy which should be called the "efficient but oppressive and passive". This one has been frequently seen in various primitive developing nations and the USSR style communist nations. Their passiveness comes from their lack of economic ratinale of either not understanding economics or intentionally abandoning economic well being for their eccentric dogma. The egalitarianism is also ignored because the minority ruling class controlling their dogmatic state hold their ultimate power of controlling the rest of people.

The "egalitarian and proavtive" policy hardly appears in the real world but Islamism often indicates the economic policy in their teaching. Islam is famous for involving teaching about economy in their religious teaching which claims for letting money following without not stuck in one place and being generous to give away for saving deprived ones. This policy suggests for a volutary religious will of individuals instead of a modern government intervention for implimenting egalitarianism so that this is another remarkable example of something the "big v.s. small government" does not seem to explain.

Rosh Hashanan! Happy Jewish New Year!

Khavar Yakar, Rosh Hashanan!

Dear friends, Happy Jewish New Year!

La Vietnamienne

Empirical evidence prooving Liquidity-trap: Lower interest rate does not stimulate economy

This was posted on 4th Septermber, 2011:

Why is the economic recovery not stimulated even though the central banks offer the sizably low interest rate which is close to zero? Many people imagine that if the interest rate is low, the economy should be stimulated. The reason is that the cost for companies paying the interest rate of their debt and for entrepreneurs planning to borrow money to start their new business is low.

However, this is only the microeconomic factor, which is a static analysis focusing on the individual economic agent's performance, and does not take account of the time effect and the environment interacting with this agent's performance. This means it ignores the macroeconomic factor which is the dynamic analysis taking account of the future expectation and the wide scale economic environment.

The problem is that, even though the interest rate, the cost of borrowing, is low, if the expected return from investing to economy is low, banks and the other forms of financial institutions are reluctant to lend their money. In addition, the entrepreneurs are discouraged from borrowing money to invest to their business if the future expectation is not good for their business due to the current economic environment.

This phenomenon is called the "liquidity-trap" which was originally mentioned by Professor John Maynard Keynes. During the world economic depression in 1929, many economists thought the economy would be eventually recovered if the central bank tried to increase the liquidity of money supplied by lowering the cost of borrowing money. However, this expectation did not happen. Keynes analysed this problem by explaining the liquidity of money was stuck in their flow due to the lack of confidence in investment. Keynes also put emphasis on need of the price inflation to increase the investment volume. If the price inflation is taking place, the real value of the money borrowed at a certain past time period goes down, and the nominal value of the revenue gained at each time period keeps increasing (the real value of the revenue is kept almost constant). By contrast, if the price deflation (i.e. the "minus" inflation) occurs, the financial economic situation is the opposite effect of the inflationary period.


This project assessed whether positive or negative the correlation between the interest rate and the investment share of GDP. London Interbank Offered Rate has been newly introduced by the IMF, WEO Database, Country Data recently so this newly introduced variable was used as the variable representing the interest rate. Although, there are only the US and Japanese one for London Interbank Offered Rate, the USA and Japan are the best candidate countries to assess the effect of the liquidity trap because they are experiencing now! In addition this variable is a very useful indicator of the interest rate effect on economy because this interest rate index takes account of the various money transactions between various banks and the other forms of financial institutions.

* "London Interbank Offered Rate" is denoted as "the interest rate" and "the nominal interest rate" in this project.

* There are two indicators of the investment share of GDP. One is "the percentage investment share of GDP times the (natural) log of GDP", and another is "the (natural) log of the GDP times the percentage investment share of GDP"

* All the logalisms used in this project is the natural log.

* These OLS regression analyses are based on the fixed effect model which involves the dummy variables (the binary variable) for the different units (countries).

* The variable called "Time" denotes the time trend whose valometer increases as the time passes.

First of all, the simple Ordinary Least Squares (OLS) regression analysis was run. The investment share of GDP is regressed on the logged interest rate. The result offered is shown in the figure below:


This OLS regression is the percentage investment share of GDP times the (natural) log of GDP:




This OLS regression is the (natural) log of the GDP times the percentage investment share of GDP:



These results show that the positive correlation between The investment share of GDP and the interest rate. It is really disappointing for those who trust the monetary policy of both the current US Federal Reserve Bank and Bank of Japan. It is also surprising for many microeconomic financial analysts because it indicates that the business grows when the cost of borrowing and the interest payment on company-debt is high. This contradicts the basic static ( = nominal) cost and benefit analysis. Thus, these results affirm that we certainly need a complex dynamic ( = real ) cost and benefit analysis.

Is it logical to say that "We should rather increase the interest rate to recover our economy?" No, this is not logical. It is not logical to say "Higher the cost for companies and entrepreneurs is, higher the confidence of consumption and investment is".

This aspect suspects that the interest rate is not exogenous (the condition to be a good explanatory variable not being controlled by any other factors (variables)) so that it can be endogenous (controlled by some other factors. This situation leads the analysis inconsistent if this endogenous variable is used as an explanatory variable).

There is an international financial economic theory stating that the interest rate is given by the exogenous factor we are hardly able to control rather than we give the interest rate to control the economic situation. This theory suggests that the interest rate is set according the price inflation rate to make the real interest rate (the nominal interest rate minus the price inflation rate) to as zero as possible. Therefore, this theory rejects the classical and the monetarist theory of the interest rate which states that the low interest rate lowers the cost for the entrepreneurs i.e. stimulating the economy. This theory claims that the interest rate is an indicator of the price inflation. It means that, when the interest rate is high, the expected rate of the price inflation, which increases the business opportunities, is high.

* This is the theory in the developed economies where the hyper-inflation risk caused by the mal-fiscal functioning tends to be low.

All in all, there is a room to assume that the inflation rate stimulates the investment share of the GDP. Therefore, it tested if the logged investment share of GDP is positively correlated with both the interest rate and the logged price inflation rate (In the later texts, the price inflation rate is written as the inflation) as follows:


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This proves that the inflation is positively correlated with the investment share of GDP. However, there is a concern that the interest rate and the inflation are correlated each other. If the explanatory variables in one OLS regression are correlated each other, it tends to disturb the OLS analysis result.

So, it suggests to assess the endogeneity of the explanatory variable. By following Keynes' theory and the theory claiming the interest rate is given, the interest rate is assumed to be positively correlated to the inflation. This inference also claims that the Two Stage Least Square (TSLS) regression analysis, instead of the OLS, to regress the investment share of GDP. The first stage regression, which is called the "auxiliary regression", to regress the interest rate, the candidate explanatory variable of the investment share of GDP, on the inflation, the instrument variable of the interest rate, the explanatory variable.

The other reason why the inflation is wanted to be used as an instrument variable and the interest rate is wanted to be used as an instrumented explanatory variable is that this project attempted to explain the whole mechanism explained by the theory and assess if this theory actually proves the real world economic situation. Because it assumes that the interest rate is highly controlled by the inflation. Therefore, the inflation had to be used as an instrument variables so that it cannot be used as one of the explanatory variables.


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These results proved that the inflation is positively correlated with the interest rate as the theories suggest.

The fitted value of the interest rate instrumented by the inflation rate (and Time if necessary) was saved to use for the second stage regression, which is the primary regression of the TSLS analysis.

There are two analyses because "the percentage investment share of GDP times the (natural) log of GDP" and "the (natural) log of the GDP times the percentage investment share of GDP" are assessed a little bit differently. The former one was regressed on the interest rate instrumented by both the inflation rate and the Time meanwhile the latter one was regressed on the interest rate instrumented by the inflation rate only.

Both kinds of regression analyses are based on the non-linear model because there is assumed to be the optimum interest rate affected by the optimum inflation rate which maximise the investment share of GDP. The positive but reasonable rate of the inflation is a indication of the circulation of economic activities running well and the economy is expanding not too fast. However, the positive and high inflation rate decreases the real value of individual economic agents' income, and discourages saving, the source of financial economy, and supply of the investment available (The net present value of the amount of money invested declines over time). In addition, as the (nominal) interest rate is determined by the inflation rate (in order to set the real interest rate (the interest rate minus the inflation)). Therefore, in order to find the optimum inflation rate and then the optimum interest rate (= The intercept + Coeff. x "The inflation" + error) are required to find out!


The regressions below are "the percentage investment share of GDP times the (natural) log of GDP" on the interest rate instrumented by the inflation and the time trend:


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According to the three criteria (denoting the smaller number shown by each criterion implies the better model), the regression above without including the time trend as one of the explanatory variables is a better model than the other with the time trend as one of the explanatory variables. This reason would be because the time trend is already included in the instrument variable of the interest rate.

The other sorts of models with various kinds of formulae, such as the liner model ( I = a + b x R + error) and the cubic formula ( I a + b_1 x R + b_2 R^2 + b_3^3 + error ), are regressed. Nonetheless, the square formula (The second degree formula) came up as the best model to demonstrate the correlation between the investment rate times the GDP. By observing the both models above, both formulae has the global maximum value. Therefore, this result indicates that the optimum interest rate instrumented by the inflation rate exists.

The figure below contains the matrix graph (the top one) showing what the interest rate given by the inflation and the year is, and the other (the bottom one) showing what "the percentage investment share of GDP times the (natural) log of GDP" given by the interest rate instrumented by the inflation and the time trend is:



These graphs indicate the following phenomena:

# The real interest rate (the gab between the interest rate and the inflation rate) tends to be minimised as the year (Time) passes.
(This could be considered because of the global financial liberalisation which has increased the degree of competitiveness of the global financial market. )

# The optimum interest to stimulate the economic activity is between 1.77 and 2.14.

# In 1980 (and possibly before), the high inflation is discouraged the economic activity level more than the low inflation.

# In 1990 and after, the lower inflation discourages the economic activity level far more than the high inflation.


The regression below assessed "the (natural) log of the GDP times the percentage investment share of GDP" with the same method as "the percentage investment share of GDP times the (natural) log of GDP" assessed in the previous regressions.



For "the (natural) log of the GDP times the percentage investment share of GDP", the interest rate is only instrumented by the inflation because this model needed to include the time trend as one of the explanatory variables. This reason is because the dependent variable "the (natural) log of the GDP times the percentage investment share of GDP" is increasing over time so that the regression model had to involve the explanatory variable explaining this factor. It also had to exclude the time trend from the instrument variable of the interest rate in order to avoid including one same variable for two different indicators.

The figure below contains the matrix graph (the top one) showing what the interest rate given by the inflation and the year is, and the other (the bottom one) showing what "the (natural) log of the GDP times the percentage investment share of GDP" given by the time trend (Exogenous) and the interest rate instrumented by the inflation is:



These graphs indicate the following phenomena:

# The optimum inflation rate stimulating the economic activity is 2.48, and the optimum interest rate is 1.5 then.

# Lower the interest rate is implies lower the economic activity level is.



Having observed these results given by the regression analysis (based on the fixed effect model), the sizably low interest rate is less likely to increase the liquidity of the money supply flowing into economy. As Prof. Keynes suggested, the USA and Japan may need to expect the exogenous shock in their economy, such as technological growth and finding a new natural resource and/or a brand new invention, and/or the strong positive planning policy intervention other than the monetary policy.

All in all, the policy makers cannot merely control the interest rate to expect the economic recovery. Hence, the current US and Japanese monetary policy seems to be very unreliable to stimulate the economic recovery.

Monopsony: Why unemployment rises despite the inflation

Recently, many economists wonder why unemployment rises whilst the price is inflating and more jobs are available than immediately after the last financial crisis especially in the developed economies. Japanese labour market is the remarkable market by means of observing this problem.

According to the common sense of the mainstream economic pattern, employment should rise when the price is on trend toward the inflation and the labour. Furthermore, the number of job recruits has increased although not so many candidates apply for.

The answer about it came up after considering who still holds more power in the market. The matter is that the bargaining power is not symmetric in the labour market. On the top of the bargaining power, the involuntary unemployment caused by the wage lower than the efficient wage also influences this situation. This situation is where the purchaser holds more power than the supplier, and this is called monopsony.



Focusing on the graph above, the wage is considered as the cost for the employer (purchaser) who attempts to maximise the profit by lowering the wage s/he has to pay. Then, instead of purchasing labourers (supplier) at the equilibrium point where the wage labourers are willing to receive and the wage the employer is willing to pay meet, the employer sets the wage (the cost) lower than the equilibrium point.

Under this case scenario, the employer is able to set the wage where the marginal revenue and the marginal cost intercept each other so that s/he can enjoy maximising profit. Even though the price inflation takes place, as long as the employer holds the power of controlling the supply of labourers, the price inflation does not force this employer to increase the wage.

The labourers still have a weak bargaining power because the unemployment is still high so that the labourers still face an intensive competition when they are looking for a desirable job. The fundamental problem is that the wage rate reduced by the monopsonic power of the employers does not fulfil what many labourers want. Therefore, the involuntary unemployment emerges despite a rise of the employment opportunity.

The employers are still happy because there are still some employers willing to be hired at the rate lower than the equilibrium point. This is also caused by the discouraged labour mobility where individual labourers are reluctant or handicapped to change a job flexibly. Many individual labourers have become too precautious to come out from they have already secured a job. This situation occurs under the risky environment of finding an alternative desirable employment opportunity and the intensely regulated market discouraging employers from being flexible to hire new employees.

There are various ideas of solving this matter to increase the employment and the wage level. Imposing the minimum wage regulation pushes the wage meeting the equilibrium point the wage will rise and employment may rise when it reaches to just the equilibrium point. Deregulating the labour market may increase the labour mobility by motivating employers to flexibly hire employers without being worried about the regulation after hiring them and encouraging employers finding a better employment opportunity.

Someone may claim that it can be caused by the qualitative issue than the quantitative issue such as the wage and the quantity. The matter can be how enjoyable the job is for employers especially for the younger generation. In case of many developed countries, the work ethics differs across different generation groups of individuals. Enjoyability related to the working environment and the characteristics of colleagues may affect. In addition, the employers' mentality of choosing employees may restrict her/his preference of hiring new employees due to the misunderstanding of what the current labourers claim for nowadays.

Overall, although there are various potential solutions, the current problem of the monopsony does not seem to be solved yet. Many of those who are concerned with these aforementioned matter need to revise this asymmetric shape of the market to rationally tackle with it after understanding its mechanism.