Tom Pepinsky

Category: Economics

  • Does the Kra Canal Threaten Singapore?

    A recent essay in The Independent (Singapore) warns that plans to construct a new canal across the Isthmus of Kra are an existential threat to Singapore.

    If the Kra Canal truly becomes a reality, ships would certainly consider by-passing the Strait of Malacca and Singapore altogether, making the Singapore’s all-important geographical location redundant. We may truly become a third world country after all.

    The idea of bypassing the Strait of Malacca altogether is apparently quite old, as the essay illustrates. By cutting (literally) across southern Thailand, the argument goes, freighters can save time and fuel costs.

    Such worries about Singapore’s vulnerability are greatly overblown, for two reasons. First, a Kra Canal isn’t in the same league the Panama Canal or the Suez Canal. And second, geographic location is hardly the source of Singapore’s economic strength.

    The first argument is straightforward if rather uninteresting. According to Wikipedia, the Kra Canal could cut 1200 km off of the shipping distance from the Indian Ocean to China or Japan. The Suez Canal shortened journeys by 7000 km, and the Panama Canal by almost 13000 km. Yes, fuel could be saved, but nothing to match what is saved by Panama and Suez. And the question of time or money saved is far from clear. That depends on the efficiency of the operation of the canal, and the costs charged. The essay cited above suggests that the canal tolls could be economical, but I would bet that costs would be higher than budgeted, and it remains free to travel through the Strait of Malacca.

    The second argument is the more interesting one. It is plain that Singapore sits right at one of the world’s most valuable shipping lanes. Yet Singapore does not profit anymore from this location itself, because Singapore (unlike sea-based empires such as Srivijaya) does not control the Strait of Malacca, which are subject to free passage under international maritime law.

    What Singapore enjoys today, and what sets it apart from its neighbors, is political stability, contract predictability, logistical efficiency, and trade openness. To threaten Singapore, the Kra Canal would need to outperform in Singapore across all of those dimensions. Doing so is far from an easy task—nearly every country in Southeast Asia has experimented to one degree or another with free trade zones, and these have not done much to unseat Singapore’s dominance in logistics and trade. The Port of Singapore is a hub not because ships have to float past Singapore, but because ships choose to load and unload there. Anyone who has stopped by Tanjung Priok in Jakarta, which sits near to the Sunda Strait, can see first hand why geography is not destiny.

    Even if the Kra Canal were built, and even if a sophisticated logistics operation could be developed that rivaled the remarkable Port of Singapore, this would not be enough. Logistics are integral to Singapore’s economy, but just as important is Singapore’s position as a hub for finance and investment in the greater region. Again, other regional players have attempted to create financial hubs to rival Singapore (e.g. Labuan in Malaysia), but with limited success. Much like Hong Kong’s historic position with respect to greater China, Singapore’s strategic economic advantage is that it is literally an island of political stability and contract enforceability in a region where such political and economic institutions are rare. Could Thailand and China create such institutions in, say, Hat Yai? Almost certainly not.

    The point is that in the contemporary international economy, Singapore’s geographic advantage is no longer solely determined by its position along a vital sea lane. Its geographic advantage today comes from its relative political stability and contract enforceability vis-a-vis the other countries in a region of more than half a billion people. That political stability, in combination with a long history of openness to trade and capital, means that Singapore is the best place for a multinational to set up shop in the region, and the best place for traders to trade in the region. Lower freight costs through southern Thailand would not change that.

  • Transactions Costs in Strange Places: Geertz on the “Bazaar Economy” of “Modjokuto”

    Today I teach the Coase Theorem in my undergraduate Politics and Markets class. In a directed grad reading on Indonesian political economy, we are covering Clifford Geertz’s Peddlers and Princes. I did not anticipate that the two would have much relevance for one another, but they do. Specifically, the description of transactions costs in a bilateral exchange. From Chapter 3 in Peddlers and Princes, describing the pasar [= bazaar] in the fictionalized town of “Modjokuto” (actually Pare), East Java:

    The sliding price system, accompanied by the colorful and often aggressive bargaining which seems to mark such systems everywhere, is in part simply a means of communicating economic information in an indeterminate pricing situation. The continual haggling over terms is to a degree a mere reflex of the fact that the absence of complex bookkeeping and long-run cost or budgetary accounting makes it difficult for either the buyer or the seller to calculate very exactly what, in any particular case, a “reasonable” price is. Pricing is much more a matter of estimates in a situation where highly specific comparative and historical data are simply not available; instead of exactly calculated prices, one finds the setting of broad limits within which buyer and seller explore together the finer details of the matter through a system of offer and counteroffer. The ability to operate effectively in the gap of ignorance between a price obviously too high and one obviously too low is what makes a good market-trader: skill in bargaining—which includes as its elements a quick wit, a tireless persistence, and an instinctive shrewdness in evaluating men and material on the basis of very little evidence—is the primary professional qualification.

    Even more important, however, the sliding price system tends to create a situation in which the primary competitive stress is not between seller and seller, as it is for the most part in a firm economy, but between buyer and seller.

    The rest of Chapter 3 describes various types of firms and firm-like things, from the toko [= shop] to the perusahaan [= enterprise] and many others. It also describes the problem facing many entrepreneurial Javanese traders as one of organization, not market orientation. (This compares nicely with my characterization of the Arab trading communities in Java, which draws in part on Geertz’s other work on Modjokuto.)

    There was a time in which anthropologists and economists really could learn from one another. Sadly, not so much anymore, given trends in both disciplines.