Use Metrics Wisely
Even as the world braces for the next financial crisis, calls are growing to adopt more holistic measures of economic progress. To address these global economic challenges, professionals will need to understand as well as measure the nuances and complexities of the broader economy.
Use Metrics Wisely
Use Metrics Wisely
Fears of a global financial crisis have heightened in the past year due to the ongoing US–China trade dispute and, more recently, the COVID-19 outbreak that has to date reached every continent except Antarctica. Given the increasing interconnectedness of the global economy, a slowdown in one country or region is likely to spread quickly around the world. Reflecting this trend, a study by Deutsche Bank found that financial crises are happening more frequently nowadays.
Financial crises — be they stock market crashes, currency crises or sovereign debt crises — are usually preceded by very high levels of credit growth and capital mobility, as well as elevated risk-taking, lending or investing into questionable endeavours. Yet despite these warning signs, financial shocks are difficult to predict. “It is often hard to see who is ultimately lending to whom, and where debts are concentrated. Bubbles are hard to identify,” said Associate Professor Anthony Tay from the Singapore Management University (SMU)’s School of Economics. He is also the School’s Associate Dean (Postgraduate) and Programme Director (Postgraduate Research).
If and when a crisis does break out, one major concern is whether Asia’s financial sector is sufficiently mature to manage the fallout. While regulatory reforms in the wake of the 2008 global financial crisis have strengthened regional financial systems, they may not be robust enough to cope with the structural changes to the global economy that have occurred over the past decade.
All the more reason why measuring and forecasting volatility spillovers across markets is so important, said Assoc Prof Tay. “Finance professionals need multidisciplinary skills — an understanding of financial markets and products, knowledge about how macroeconomic policy can affect financial markets, and econometric skills for properly analysing economic and financial data, and quantifying risk. They also need translational skills, to translate new research into practice.”
Proportion of the total population aged 65 years or older worldwide who are expected to be in Asia by 2030
LOOKING BEYOND GDP
Beyond these more immediate challenges, longer-term threats to the global economy are also looming in the form of climate change issues, rising healthcare costs and ageing societies, and the widening income gap. Indeed, some economists wonder if markets are focusing on the wrong metrics altogether. There has been a growing chorus of voices in recent years questioning whether GDP growth and stock prices are the best indicators to measure economic progress.
“Stock prices and GDP have shortcomings as economic indicators. For instance, rising stock prices in a time of slow economic growth may reflect the search for higher yield rather than a true increase in value of a firm’s assets,” said Dr Joshua Greene, a Visiting Professor who teaches in SMU’s Master of Science in Economics programme.
Another perceived flaw of GDP is that it fails to capture economic sustainability or the relative happiness of a population. Even as GDP expands and stock prices soar, wealth and income inequality has widened in many societies, with the less well-off seeing little improvement in their living standards. According to the latest Credit Suisse Global Wealth Report, the world’s richest one per cent own 44 per cent of global wealth.
Faced with a rapidly-ageing population, Asian countries are also paying more attention to health economics. This carries implications for retirement pensions and healthcare expenditures, both for the government and private employers. Among economists, discussions often revolve around quality-adjusted life years for the elderly. Said SMU’s Assistant Professor of Economics, Zhang Xuan: “We should aim to not only extend one’s life expectancy, but also improve one’s health benefits with their living years.”
Rather than strictly using GDP as a measure of welfare, various solutions have been proposed. Asst Prof Zhang opined that a dual focus on subjective wellbeing and physical health status could help alleviate the social isolation and loneliness experienced by many older adults. To tackle inequality, Dr Greene suggested instituting tax policies to better redistribute wealth from the wealthy to the lower-income groups. He also encouraged countries to take a closer look at their Gini coefficients.
In the same vein, a number of holistic assessments of economic performance have been developed. Metrics such as the Genuine Progress Indicator, the United Nations’ World Happiness Report, the United Nations Development Programme (UNDP)’s Human Development Index, and the Organisation for Economic Co-operation and Development (OECD) Better Life Index are steadily gaining traction.
Coming to grips with how economic, financial and social issues are intertwined, as well as how to measure and analyse them, is thus increasingly on the minds of businesses and policymakers alike. After all, as Assoc Prof Tay said, “The best start to dealing with any phenomenon is to understand it, and to understand a phenomenon, we have to be able to measure it.”
SMU offers a Master of Science in Financial Economics (MSFE) programme, a multi-disciplinary degree which provides a rigorous grounding in economics, econometrics and finance, taught by a mix of academic researchers and industry professionals. For more information, click here.
SMU also offers a Master of Science in Economics (MSE) programme, which provides a strong core in economic theory and data analytic skills. Based on their individual needs and interests, students can choose from different tracks: Applied Economics, Econometrics and Quantitative Economics. For more information, click here.
SMU School of Economics was ranked 1st in Asia and among the top 10 worldwide for Econometrics Research, and 79th worldwide for overall Economics research, in the Tilburg University Economics Schools Research Ranking based on contributions from 2013 to 2017.