Ethos Issue 4, Apr 2008

The Challenge of Growth
Interview with Paul Romer

Noted economist Paul Romer, proponent of the New Growth Theory, assesses the role of the public sector in sustaining growth in Singapore and the wider Asian region.

How would you assess Singapore’s current approach to development?
When people think about the development process, they sometimes look for a silver bullet, or the one policy or model that will drive growth. I think that is too naive. The growth process is very complicated. There are no silver bullets, no single model that everyone can copy. Singapore is a distinctive case of successful development under unusual conditions, so we should think of Singapore not as a model but as a very interesting data point.

I think the Singapore Government has done the right thing by conceptualising development around the idea of a city rather than a nation. Singapore’s development as a financial centre à la New York or London is well underway; perhaps Hong Kong is a little bit ahead but there is good reason to think Singapore will keep moving up as a financial centre. You also have a clear vision of how to grow as an entertainment and tourist destination.

There is a little bit more uncertainty about Singapore as a “Silicon Valley”—as a centre of entrepreneurship. Entrepreneurship is something that many people learn first-hand, when there is an environment with plenty of entrepreneurial or start-up types of experience. People who live in that environment often go on to start other companies, and if there is the finance and legal infrastructure to support that, one little seed can grow into a whole culture of entrepreneurship. The question in Singapore is how to create that environment.

Singapore’s public sector has had a central role in directing development in the past. As the economy matures, should state involvement be scaled back in order to allow an entrepreneurial sector to flourish?
This is one of the oldest questions in economics: What is the role of the state and what is the role of the market? We tend to think of the government and the market as substitutes. But if you limit government to those activities where it is uniquely important, then in those key areas, what the government does is a complement to what the market or the private sector does. If the government does its job better, it enhances all the activities of the market. This is where thinking of Singapore as a city rather than a nation helps: you realise that there are many interesting ways in which the government can create value, such as through measures like land use planning.

When you think about the problem this way, the challenge is for the government to keep its focus on those complementary activities where its role is critically important. The problem in having, for example, a government-run phone or airline company is not so much that you suppress entrepreneurship in telecoms or aviation, but that it distracts the government’s resources from areas like education, research, and technological development where its role is uniquely important.

What positive roles can a government play in spurring innovation and enterprise, without detracting from its core competencies and mission?
If you look around the world, government is often influential in promoting new technologies, but exactly how it should do this is a subtle question. In some cases, governments have been important consumers for high-tech goods. For example, in the early development of the transistor, the US Department of Defense wanted extremely high-reliability transistors for missiles and satellites, whereas Sony wanted transistors for cheap, portable radios. So digital consumer electronics developed more rapidly in Japan than in the US.

In the 1970s, when Japanese firms were dominating consumer electronics, this looked like a mistake in US policy. Yet the Department of Defense probably helped speed up the development of integrated circuits and helped establish the US lead in digital information processing.

The general lesson one can learn from this episode is that it can be very difficult to predict how government interventions will affect the economy. However, if a government ministry tries to develop knowledge or technologies that will help it do its job better, it can result in more effective government—and sometimes in technologies like integrated circuits that benefit the broader economy.

I think the lesson for Singapore is that it could consider more mission-oriented funding for basic research across a whole range of agencies. These agencies could fund research in universities to help them achieve their own missions. This might also help with entrepreneurship. For example, I have spoken with the Ministry of Education and I think there is some very important mission-oriented basic research that they could do that could have both a direct application to Singapore’s educational system, and that could also result in valuable commercial spin-offs.

Page 1 I 2 I 3