Mr Speaker, Sir, I rise to support the Motion of the hon. Member for Kim Keat. The President of our Republic has reminded us that we have thrived in the past because of self-discipline, hard work, thrift and enterprise. He also exhorted hon. Members to be guided by the long-term interests of our people and not to be swayed by short-term political considerations. We should take his reminder and his exhortation seriously. We have only to ponder upon the twin problems of inflation and recession, affecting the advanced countries and the international economy, to realise the truth of the President's words. In the advanced countries, government expenditures tend to increase inexorably, spurred by misguided, if well-motivated, compassion for the unemployed and the underprivileged. Every congressman and senator tries to get government projects for his own constituency. Subsidies are used as vote-catching devices. Such expenditures and subsidies must be financed by higher taxes or by printing more money, or both. Higher taxes hit those who are able to pay, penalising in the process not only the feudal rich but also the hard-working and the enterprising. Since higher taxes are politically unpopular, governments then resort to the additional, and easier, way of printing more money to finance the higher expenditures. The net result of the process is, firstly, the erosion of incentives for hard work and enterprise, and secondly, inflation, which penalises the thrifty, pensioners and fixed income-recipients, and which causes disorientation in production and consumption. Governments then react to curb inflation, principally by reducing the rate of increase in money supply. However, in the meantime, demand-pull inflation, which was caused by the monetary and fiscal excesses, becomes wage-push inflation, as trade unions attempt to compensate for cost-of-living increases. The problem is made worse, because trade unions demand wage increases in excess of productivity and cost-of-living increases. Thus, inflation continues; at the same time, recession is brought about, as business firms experience a liquidity crunch on top of increasing costs of production. Since recession, which causes unemployment, is politically dangerous, the next reaction is to stimulate the economy by cutting taxes and easing credit. It is politically difficult to cut expenditures. In the meantime, tax revenues in a recession tend to decline, as income and employment are lower. Therefore, the tax-cut results in a huge budget deficit, which must be financed by borrowing or by easing credit. Borrowing at a time of recession is supposed to depress the economy further; hence, printing more money or easing credit is the standard solution. Thus, we see in America, President Ford's proposal to cut taxes to the tune of US$16 billion, and we read about his difficulties in getting Congress to trim expenditures. The two most depressed sectors in America are housing and the motor vehicle industry. Whether people who get the tax rebates will spend on housing and motorcars is one question. What happens to the money supply is a more critical question. And the rate at which the economy will turn around and with what degree of inflation depends on how much the confidence of businessmen has already been eroded. In the meantime, the Europeans are also easing fiscal and monetary policies and the Japanese are expected to do likewise shortly. What is disturbing to me is that, with so much global interdependence in trade, investment and money flows, there is hardly any attempt at coordination of policies as vital as monetary and fiscal. Therefore, I would expect another round of inflation, without much alleviation of unemployment. I hope that the harvest this year will be good, for, with world food stocks so precariously low, any shortage will send food prices soaring, thus compounding inflation. There are three reasons why I expect further inflation. Firstly, monetary and fiscal stimulation produce considerable price effects for a given reduction in unemployment. Secondly, not many people are aware that monetary and fiscal policies do not work the same way when the exchange rate is floating and there is considerable mobility of capital. Thirdly, although there is controversy among economists, I am inclined to the view that floating exchange rates are an engine of international inflation. This is because wages and prices are flexible upwards but not downwards. So a depreciation of the exchange rate causes prices and wages to rise while an appreciation does not do the reverse to the same degree. The result is a net increase in world inflation. Another worrisome aspect about floating exchange rates is that there is a loss of stability - a loss of a stable point of reference. As hon. Members know, the American dollar has been depreciating rapidly and the OPEC countries are concerned about the price of oil as it is currently denominated in the American dollar. So far as I can see, there can be no return to stability and fixed exchange rates until and unless the major industrial countries are willing to coordinate their monetary, fiscal and trade policies. For us in Singapore, we have no choice but to accept floating rates as our trade and sources of investment are diversified. We can have a fixed exchange rate if the international economy returns to a fixed rate system or if we tie ourselves exclusively to a particular currency and therefore a particular trading area. Our floating exchange rate poses a policy dilemma. On the one hand, allowing our rate to float upwards, as it has recently, may be helpful in reducing imported inflation, provided our importers and wholesalers pass on the benefits to retailers and consumers. On the other hand, allowing our dollar to appreciate would penalise the competitiveness of our goods and services abroad. To hold down the value of our currency would require the Monetary Authority of Singapore to buy up foreign exchange. However, unless such foreign exchange is sterilised, this would result in an undesirable increased money supply generated by the banking system. Sound monetary management is vital to the health of our economy especially when our exchange rate is floating. Our problem is compounded by the international mobility of capital. If other financial centres raise their interest rates, we have to raise ours, or else money will flow out, and conversely. To maintain our own set of interest rates independently would require controls on capital movements or interest equalisation taxes, or both. Such measures, however, would hinder our development as a financial centre. We have therefore to balance the gains from being a financial centre against the loss of control over interest rates and money supply. I, therefore, welcome the amalgamation of the Currency Board with the Monetary Authority of Singapore to form a central bank. However, I would urge Government to keep careful track of monetary policy at the highest level. This is because of the instability in the international monetary system and because, under floating exchange rates and capital mobility, monetary policy is a major instrument of control over economic activity. The lessons that emerge for us should be quite obvious. Firstly, we should continue to exercise financial prudence, making sure that new expenditures are properly justified and that the means to pay for them are available. Any fiscal deficit can only be justified if the projects enhance development and will eventually directly or indirectly pay for themselves. Secondly, we should maintain our climate of confidence for investors, ensuring that we do not erode incentives for hard work and enterprise. Thirdly, wages should be related to productivity. Workers must not get the attitude of wanting higher wages without acquiring the skills, the experience, or putting in the effort. In this connection, Sir, the National Productivity Board will do its best to promote productivity committees, and to help formulate policies to gear wages to productivity. The National Industrial Relations Committee has already met to discuss these issues. The members of the committee are drawn from the NTUC, the Singapore Employers' Federation, the National Employers' Council, the Singapore Institute of Management and the Labour Ministry, under the aegis of the National Productivity Board. Acquiring skills and raising productivity are the keys to our survival and prosperity. Some people have argued that it is meaningless to increase productivity at a time of recession because firms already have difficulty in selling their products or services. Increasing output with a given input is only one way of looking at productivity. More important to us at this stage is to minimise inputs for any desired level of output. I therefore welcome the Labour Ministry's move to set up an Industrial Relations Division and the reorganisation of the NTUC. Tripartism must be exercised, not just at the top level. To achieve results, Sir, the principle must permeate down to the rank and file. What we should learn from the mistakes of the advanced countries is that wages are too important to be left to ordinary collective bargaining and that a spirit of mutual cooperation must prevail. Workers should be committed to the viability of the firm and both workers and management should keep in view the national interest. The fourth lesson we can draw is that fiscal and monetary policies should he made to serve the long-term interests of the nation. Short-term expediency leads to traumatic stop-go policies. We must indeed educate our people to accept unpleasant, even painful, measures that will pay off in the long run. We complain about high PUB bills, bus fares and HDB conservancy charges. It would be expedient, easy and popular for the Government not to raise such charges. But how will these services be financed? Higher taxes or printing more money are the alternatives - the first penalises the hard-working and enterprising, and the second produces inflation which, as hon. Members know, is indirect taxation. In the end, if we follow expedient measures, we shall all be the losers. Mr Speaker, Sir, there are many difficulties ahead as there is considerable uncertainty and instability in the world economy. As a small, open economy, we are highly vulnerable to external events. We can, however, by being vigilant, insulate ourselves to some degree. We can ensure our viability by working harder, by being prudent, and by maintaining a proper longer-term and national perspective. Our younger people must acquire greater skills and diligence. Perhaps the current difficulties will bring a dose of realism to the spendthrift and the job-hoppers, spurring them towards thrift and greater endeavours. 4.15 p.m.