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FT: China - Entrepreneurship

 

October 21, 2011 1:50 pm

China searches for the next Steve Jobs

By Kathrin Hille in Beijing

When Dave McClure, a venture capital investor from Silicon Valley, spoke at an internet entrepreneurs’ club in China last week, he had a lot of praise for his hosts.

“Chinese entrepreneurs are most likely smarter and more aggressive than [those] in the US,” he told the audience. “Beijing is one of the few places in the world where the pace of innovation is faster than in Silicon Valley.”

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But in China, the recent mood has been more sober. The death of Apple founder Steve Jobs this month triggered rounds of soul-searching over why the country lacks technology entrepreneurs as successful as Mr Jobs or Mark Zuckerberg of Facebook, who came up with products that changed the world.

“Chinese companies can be expected to have market valuations and business models like Apple’s within ten years but it is difficult to expect any type of Apple-like innovation,” says Lee Kaifu, the former head of Google China who, with his incubator Innovation Works, has become a guru for internet start-ups in China.

Although the number of Chinese internet users – now at 500m – has overtaken the population of the European Union and that growth keeps hatching new internet ventures everyday, most of these copy ideas from the US.

To name the best-known examples, Baidu, China’s largest search engine by revenue, is a copy of Google, while RenRen, China’s largest real-name social network, was modelled on Facebook. China is estimated to have as many as 5,000 clones of Groupon, the US daily deals site.

That is not because the founders lack creativity, they themselves argue. “The reason you set up a business is that you want to solve a certain problem or need you see around you,” says Gong Yu, a veteran internet entrepreneur and chief executive of Qiyi, the internet video site owned by Baidu.

“But China’s internet is just so many years behind that of the US, so internet entrepreneurs in the US will inevitably encounter many problems and needs first.”

Many Chinese web business founders agree. “It’s not about being smart but about being there first, just like gathering mushrooms,” says Wang Xing, founder and chief executive of Meituan, one of China’s first Groupon copies and the country’s most prolific internet business closer.

Mr Wang has been billed “the Mark Zuckerberg of China”, mainly because he followed Facebook, founded in 2004, with what is now RenRen, a similar site launched in 2005 as Xiaonei, or On Campus. Less than a year later, he sold that business for less than $4m to Oak Pacific Interactive, the company which took it public this year. RenRen is now valued at $2.25bn.

“I studied computer networks, therefore I have an understanding for social networks, it’s the same pattern,” he says. But when he made that connection, Friendster and Facebook were already there.

Mr Wang is not apologetic. He believes that Chinese consumers are not yet mature enough in terms of income and tastes to need revolutionary new internet products.

“When consumption develops, there are three phases,” he says. “The first is focused on quantity, providing enough to meet demand, the second on securing product quality, and only during the third will people start developing tastes. On the internet in China, we’re still very much in the second phase.”

Experts observe that, given China’s vast market, it is natural to exploit easy business opportunities first. “In the US, entrepreneurs have to be innovative to find market opportunity,” says Mr McClure. “If you live in a country with a population of 1.3bn and you see an idea that works, it would be foolish not to copy.”

This extremely pragmatic mindset is a common trait among most Chinese internet entrepreneurs. “Many start-up founders in the US start out with a technological idea they want to realise, and don’t worry about money until much later,” says Chen Tao, a partner for China at Roland Berger Strategy Consultants.

“In China, it’s the other way round. Monetisation comes first, innovation comes later.”

The biographies of many Chinese internet entrepreneurs reflect this more conservative outlook. Very few are university dropouts like many of their US counterparts. Most have much more industry experience before they start their own business than their American peers.

Robin Li worked as a software engineer for a division of Dow Jones and for Infoseek, an early US web search engine, before setting up Baidu in 2000. Jack Ma lectured at university on international trade and headed an IT company set up by a unit of the foreign trade ministry before he founded Alibaba, China’s largest e-commerce company by revenue, users and transaction value in 1999.

At Qiyi, Mr Gong’s background is similar. “Although I knew already in university that I very much wanted to set up a business, I didn’t feel ready,” he recalls. So he first went to work as a software development and maintenance engineer at Itochu, the Japanese trading company, and later helped set up the China unit for a company founded by a friend in the US before he dared to start his first own venture, the online portal focus.cn.

“On the first day, the office was completely empty – it was just me,” he says, recalling how unfamiliar and slightly fearful he felt.

There was no long tradition of entrepreneurship in the People’s Republic of China when the country’s first internet companies were set up. Capitalism was new, and the internet even newer. The resulting caution can be seen among the investors who back the sector, as well as its entrepreneurs.

Lei Jun, China’s most prominent homegrown angel investor, only backs the companies of friends or friends of friends, and prefers serial entrepreneurs because the chances of success increase over time. Mr Lei has invested in less than 20 companies such as Vancl, an online clothing retailer, and Keniu, a security software maker.

But foreign venture capitalists and stock market investors, a far larger source of funding for Chinese technology start-ups, follow similar principles. The rise of the thousands of Groupon clones in China has been fuelled by a wave of venture capital money from the US.

Benjamin Joffe, chief executive of Plus Eight Star, a digital strategy consultancy, says: “Investors love to recognise something they know.”

Copyright The Financial Times Limited 2011

October 21, 2011 1:58 pm

Copying remains but that will change

By Kathrin Hille in Beijing

If there is anything Chinese internet users are as passionate about as stealing cabbages in social games such as Happy Farm, it is the debate about who came up with the idea for such games in the first place.

“It was not [US company] Zynga who invented farm games – those were around in China first,” says Li Shanyou, the founder of Ku6, one of China’s leading internet video sites, who now heads the centre for entrepreneurship and investment at China Europe International Business School in Shanghai.

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Although the incessant cloning of foreign internet sites such as Facebook, Twitter or Groupon in China have given Chinese entrepreneurs a bad name as mere copycats, there are cases where China was early or first in developing certain internet products or business models.

Farming games are the most-cited example because 5 Minutes, a Chinese game company, completed development of Happy Farm in May 2008, well before the start of Farmville, Zynga’s equivalent in the US.

But there are several other cases where Chinese internet entrepreneurs did not follow a US lead.

Sina Weibo, China’s leading microblogging site which was seen as a Twitter clone when it started, has now transformed into a service combining a microblog and a social network. It has many features Twitter does not have, for example allowing users to watch videos inside a post.

Baidu, China’s largest search engine by revenues, pioneered Tieba, a social network where people can form discussion groups based on search queries they have in common.

Tencent, the company that operates QQ, the world’s largest instant messaging service, came up with QQ Groups, a service that allows users to form message groups, something that did not exist in the west at the time. Taobao, China’s largest consumer e-commerce company, set up an instant messaging service before Ebay acquired such capabilities by buying Skype in 2005.

Chinese executives cite YY, a completely voice-based instant messaging tool, and UCWeb, the independent mobile browser, as further examples of China-first innovation.

But none of these have created a stir beyond China’s borders on the scale of Facebook or Twitter – mainly because the innovations were not as far-reaching or disruptive.

“Chinese internet entrepreneurs are particularly strong in micro-innovation – tweaking existing models to fit the needs and habits of consumers in this market,” says Mr Li.

Industry experts believe that will not change until China’s internet has become much more mature. “I think there will be a window of at least another ten years for building internet businesses based on ideas copied from the US ,” says Gong Yu, chief executive of Qiyi, the online video site owned by Baidu.

Chinese executives believe the area most likely to spawn major innovation will be the mobile internet because Chinese web users are going mobile much earlier than their American counterparts. Says Mr Gong: “If anywhere, this is where China will come up with something really different.”

Copyright The Financial Times Limited 2011.

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FT: Swiss tried to put ceiling on franc before

Swiss tried to put ceiling on franc before

By Claire Jones, economics reporter

Published: September 6 2011 17:27 | Last updated: September 6 2011 17:27

Switzerland’s reputation as a safe haven has long supported the country’s currency and Tuesday was not the first time that the central bank has tried to put a ceiling on the franc’s appreciation.

In October 1978 – a little more than five years after Switzerland abandoned its fixed exchange rate – the Swiss National Bank set a ceiling above which it would not allow the Swiss franc to rise against the Deutsche mark.

The central bank faced similar circumstances then as it does now. A rise in the Swiss franc had raised the chances of a recession and deflation. The SNB had intervened in the foreign exchange market but with little success. It had introduced levies on foreigners’ Swiss franc deposits – again to little avail. With interest rates already very low, the SNB regarded the ceiling as the only option left.

In one regard, the ceiling worked. The Swiss franc declined against both the Deutsche mark and the dollar. But inflation rose. In order to defend the ceiling the SNB had to buy foreign currency in exchange for Swiss francs. But the central bank was forced to buy foreign currency on such a grand scale that the amount of Swiss francs in circulation rose to a level that caused inflation to rise, eventually peaking at 7 per cent in 1981.

The SNB abandoned its fixed exchange rate in 1973 for similar reasons – inflation had surged to as high as 12 per cent in the early part of the decade. Throughout the 1970s, very loose US monetary policy – and high global inflation – not only pushed the Swiss franc higher but contributed to price pressures when the central bank tried to cap the currency’s gains.

More than 30 years later, monetary policy in the US – and across advanced economies – is equally loose. But, so far, central banks’ willingness to cut rates and increase the size of their balance sheets has not pushed inflation to the levels of the late 1970s. The SNB will hope Switzerland does not prove the exception.

Copyright The Financial Times Limited 2011.

FT: Vietnam sees more women filing for divorce

September 5, 2011 3:50 pm

Vietnam sees more women filing for divorce

By Ben Bland in Hanoi

Just a few months after getting married, Nguyen Thu Trang knew that she had made a big mistake. But, in a Confucian society that places a high value on female obedience to men, she was fearful about how her family and friends would react if she sought a divorce.

“Divorce is often seen as a black mark on a family and I worried about what people would say,” says the 24-year-old office worker from Hanoi. “When I told my mum what I wanted to do she cried every day, but I had to think of my own happiness.”

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Ms Trang, who went to university in Switzerland, is one of a rapidly growing number of young, professional Vietnamese women filing for divorce, emboldened by increasing financial independence and the shifting social values that have accompanied communist Vietnam’s integration into the global economy. She has since remarried and subsequently helped a number of her friends pluck up the courage to leave unhappy marriages.

In many Asian countries, divorce rates have been rising as women become more economically independent and more willing to challenge traditional, socially conservative values.

In China, the divorce rate has doubled in less than a decade, rising from 0.9 per 1,000 people in 2002 to 2 per 1,000 people last year, according to government statistics cited in the state media

Vietnam has also seen a particularly sharp rise in the number of divorces, which have increased by nearly 50 per cent since 2005, when legal reforms made it easier for couples to divorce in cases where there is mutual consent. While marriage remains the dominant social unit in Vietnam with 72.7 per cent of people aged over 15 married or widowed and only 1.7 per cent divorced, that figure is rising.

There were 88,591 divorces last year in the country of 87m people, according to the supreme court, a rapid increase from 79,769 in 2009 and 65,351 in 2008.

This nascent social transformation is being driven by women, who make up the majority of divorce petitioners, with economic pressures, lifestyle differences, adultery and abuse cited as the main causes, according to social researchers.

“Traditionally, Vietnamese women were expected to accept what befalls them,” says Tran Thi Van, assistant representative of the UN Population Fund in Vietnam. “But changes in their status and income have made modern Vietnamese women more independent and less influenced by tradition.”

Rapid economic growth has created more opportunities for women to earn a good independent income, especially in urban areas, where divorce is far more prevalent.

“Many of the cases I see involve younger people,” says one divorce lawyer. “Our open economy and society is leading to more westernised thinking.”

He adds that while many Vietnamese men seek respite from a difficult marriage by visiting a brothel, for women the only way out is through divorce.

The jump in the number of cases is flooding Vietnam’s inefficient court system and the government is considering a proposal to set up dedicated family courts, according to a legal official.

In one recent high profile divorce, a court in Hanoi refused to rule on how one of the country’s wealthiest couples should divide their $500m of assets, arguing that judgment should be made in a separate civil case.

Researchers believe that the scale of marital problems in Vietnam is much worse than the official statistics suggest because enduring discrimination deters many women from leaving unhappy and sometimes abusive marriages.

“Like with many of my friends, my husband cheats on me all the time but my mother says it is my own fault for not satisfying him and that I must keep the family together,” says one 32-year-old Hanoi businesswoman and mother of two.

Vietnam’s socially conservative and overwhelmingly male leaders are concerned about the jump in divorce numbers, one of various social changes that threaten to undermine traditional control structures. In a typical example of government propagandists’ attempts to tackle the issue, local state-owned TV in the province of Hung Yen, bordering Hanoi, aired a talk show entitled “How to reduce the divorce rate” to mark Vietnamese family day on June 28.

However, Nguyen Thanh Tam, a researcher at the Hanoi-based Institute for Family and Gender Studies, thinks officials are wrong to push back against divorce.

“It won’t lead them anywhere,” she says. “How can you tell a 30-year-old to stay in a marriage when it has stopped functioning?”

Rather than undermining Vietnam’s progress, Vo Thi Hao, an outspoken writer, argues that the growing cohort of empowered, divorced women will drive the country forward.

“After divorce, women with a good education, a career and a good social network do much better because they are freed,” says the 55-year-old divorcee, who wrote a popular collection of short stories called 101 Stupid Mistakes by Men. She believes the divorce rate will continue to rise sharply as traditional social values ebb away.

“Many of my friends say that staying in an unhappy marriage is like unpaid prostitution,” she says. “In Vietnam today, if it wasn’t for fears about the harm to personal reputation, up to 80 per cent of women would file for divorce”.

Copyright The Financial Times Limited 2011.

FT: Economics: Rituals of rigour

August 25, 2011 8:16 pm

Economics: Rituals of rigour

By John Kay

After mistaken claims made ahead of the global crisis won much academic support, long-held assumptions were called into question – but the real world often remains overlooked or ignored

The reputation of economists, never high, has been a casualty of the global crisis. Ever since the world’s financial system teetered on the abyss following the collapse of Lehman Brothers three years ago next month, critics from Queen Elizabeth II downwards have posed one uncomfortable yet highly pertinent question: are economists of any use at all?

Some of this criticism is misconceived. Specific predictions of economic growth or levels of the stock market – gross domestic product will rise by 1.8 per cent; the FTSE 100 index will stand at 6,500 by year-end – assert knowledge that those making such predictions cannot have. Economic systems are typically dynamic and non-linear. This means that outcomes are likely to be very sensitive to small changes in the parameters that determine their evolution. These systems are also reflexive, in the sense that beliefs about what will happen influence what does happen.

If you ask why economists persist in making predictions despite these difficulties, the answer is that few do. Yet that still leaves a vocal minority who have responded cynically to the insatiable public demand for forecasts. Mostly they are employed in the financial sector – for their entertainment value rather than their advice.

Economists often make unrealistic assumptions but so do physicists, and for good reasons. Physicists will describe motion on frictionless plains or gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. This is as legitimate a method in economics as in physics.

Since there are easy responses to these common criticisms of bad predictions and unrealistic assumptions, attacks on the profession are ignored by professional academic economists, who complain that the critics do not understand what economists really do. But if the critics did understand what economists really do, public criticism might be more severe yet.

Even if sharp predictions of individual economic outcomes are rarely possible, it should be possible to describe the general character of economic events, the ways in which these events are likely to develop, the broad nature of policy options and their consequences. It should be possible to call on a broad consensus on the interpretation of empirical data to support such analysis. This is very far from being the case.

The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics. Macroeconomics deals with growth and business cycles. Its dominant paradigm is known as “dynamic stochastic general equilibrium” (thankfully abbreviated to DSGE) – a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households.

The study of financial markets revolves meanwhile around the “efficient market hypothesis” – that all available information is incorporated into market prices, so that these prices at all times reflect the best possible estimate of the underlying value of assets – and the “capital asset pricing model”. This latter notion asserts that what we see is the outcome of decisions made by a marketplace of rational players acting on the belief in efficient markets.

. . .

A close relationship exists between these three theories. But the account of recent events given by proponents of these models was comprehensively false. They proclaimed stability where there was impending crisis, and market efficiency where there was gross asset mispricing.

Regulators such as Alan Greenspan, former chairman of the US Federal Reserve, asserted that the growth of trade in complex financial investments represented new and more effective tools of risk management that made the economy more stable. As late as 2007, the International Monetary Fund would justify its optimism about the macroeconomic outlook with the claim that “developments in the global financial system have played an important role, including the ability of the United States to generate assets with attractive liquidity and risk management features”.

These mistaken claims found substantial professional support. In his presidential lecture to the American Economic Association in 2003, Robert Lucas of the University of Chicago, the Nobel prizewinning doyen of modern macroeconomics, claimed that “macroeconomics has succeeded: its central problem of depression prevention has been solved”. Prof Lucas based his assertion on the institutional innovations noted by Mr Greenspan and the IMF authors, and the deeper theoretical insights that he and his colleagues claimed to have derived from models based on DSGE and the capital asset pricing model.

The serious criticism of modern macroeconomics is not that its practitioners did not anticipate that Lehman would fall apart on September 15 2008, but that they failed to understand the mechanisms that had put the global economy at grave risk.

Subsequent policy decisions have been pragmatic and owe little to any economic theory. The recent economic policy debate strikingly replays that after 1929. The central issue is budgetary austerity versus fiscal stimulus, and – as in the 1930s – the positions of the protagonists are entirely predictable from their political allegiances.

Why did the theories put forward to deal with these issues prove so misleading? The academic debate on austerity versus stimulus centres around a property observed in models based on the DSGE programme. If government engages in fiscal stimulus by spending more or by reducing taxes, people will recognise that such a policy means higher taxes or lower spending in the future. Even if they seem to be better off today, they will later be poorer, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. This property – sometimes called Ricardian equivalence – implies that fiscal policy is ineffective as a means of responding to economic dislocation.

John Cochrane, Prof Lucas’s Chicago colleague, put forward this “policy ineffectiveness” thesis in a response to an attack by Paul Krugman, Nobel laureate economist, on the influence of the DSGE school. (In an essay in the New York Times Prof Krugman described comments from the Chicago economists as “the product of the Dark Age of macroeconomics in which hard-won knowledge has been forgotten”.) Prof Cochrane at once acknowledged that the assumptions that give rise to policy ineffectiveness “are, as usual, obviously not true”. For most, that might seem to be the end of the matter. But it is not. Prof Cochrane goes on to say that “if you want to understand the effects of government spending, you have to specify why the assumptions leading to Ricardian equivalence are false”.

That is a reasonable demand. But the underlying assumptions are plainly not true. No one, including Prof Cochrane himself, really believes that the whole population calibrates its long-term savings in line with forecasts of public debt and spending levels decades into the future.

. . .

But Prof Cochrane will not give up so easily. “Economists”, he goes on, “have spent a generation tossing and turning the Ricardian equivalence theory, and assessing the likely effects of fiscal stimulus in its light, generalising the ‘ifs’ and figuring out the likely ‘therefores’. This is exactly the right way to do things.” The programme he describes modifies the core model in ways that make it more complex, but not necessarily more realistic, by introducing parameters to represent failures of the model assumptions that are frequently described as frictions, or “transactions costs”.

Why is this procedure “exactly the right way to do things”? There are at least two alternatives. You could build a different analogue economy. For example, Joseph Stiglitz – another Nobel laureate – and his followers favour a model that retains many of the Lucas assumptions but attaches great importance to imperfections of information. After all, Ricardian equivalence requires that households have a great deal of information about future budgetary options, or at least behave as if they did.

Another possibility is to assume that households respond mechanically to events according to specific behavioural rules, rather like rats in a maze – an approach often called agent-based modelling. Such models can – to quote Prof Lucas – also “be put on a computer and run”. It is not obvious whether the assumptions or conclusions of these models are more, or less, plausible than those of the kind of model favoured by Profs Lucas and Cochrane.

Another line of attack would discard altogether the idea that the economic world can be described by any universal model in which all key relationships are predetermined. Economic behaviour is influenced by technologies and cultures, which evolve in ways that are certainly not random but that cannot be fully, or perhaps at all, described by the kinds of variables and equations with which economists are familiar. The future is radically uncertain and models, when employed, must be context specific.

In that eclectic world Ricardian equivalence is no more than a suggestive hypothesis. It is possible that some such effect exists. One might be sceptical about whether it is very large, and suspect its size depends on a range of confounding and contingent factors – the nature of the stimulus, the overall political situation, the nature of financial markets and welfare systems. The generation of economists who followed John Maynard Keynes engaged in this ad hoc estimation when they tried to quantify one of the central concepts of his General Theory – the consumption function, which related aggregate spending in a period to current national income. Thus they tried to measure how much of a fiscal stimulus was spent – and the “multiplier” that resulted.

But you would not nowadays be able to publish similar work in a good economics journal. You would be told that your model was theoretically inadequate – it lacked rigour, failed to demonstrate consistency. To be “ad hoc” is a cardinal sin. Rigour and consistency are the two most powerful words in economics today.

. . .

Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game.

For many people, deductive reasoning is the mark of science: induction – in which the argument is derived from the subject matter – is the characteristic method of history or literary criticism. But this is an artificial, exaggerated distinction. Scientific progress – not just in applied subjects such as engineering and medicine but also in more theoretical subjects including physics – is frequently the result of observation that something does work, which runs far ahead of any understanding of why it works.

Not within the economics profession. There, deductive reasoning based on logical inference from a specific set of a priori deductions is “exactly the right way to do things”. What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics.

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

The writer, an FT columnist, is a visiting professor at the London School of Economics and a fellow of St John’s College, Oxford

Macroeconomic modelling: Ways to simplify that are very different from those of a physicist

Robert Lucas, aged 73, is John Dewey professor of economics at the University of Chicago. Prof Lucas and Chicago colleagues, along with others such as Edward Prescott and Thomas Sargent, are the founders of the programme known as “dynamic stochastic general equilibrium” (DSGE), which dominates teaching and research in macroeconomics.

The programme has been described as “freshwater economics”, because the leading proponents have been based at locations such as Chicago, Rochester and Minnesota, in contrast to those in the seaboard strongholds of “saltwater economics” at Harvard, MIT and Stanford, who followed a more Keynesian tradition.

In 1995 Prof Lucas was awarded the Nobel prize for economics, and in his prize lecture he provides a succinct summary of his central model. He makes a number of assumptions. Individuals are rational, calculating welfare maximisers. They live through two periods: work in the first and retirement in the second. There is only one good, which cannot be stored, or invested in capital projects. There is only one kind of work, and older and younger generations do not support each other.

This simplification method is very different from the physicist’s simplification, which abstracts to focus on a single element of a problem. Prof Lucas has described his objective as “the construction of a mechanical artificial world populated by interacting robots”. An economic theory is something that “can be put on a computer and run”.

Structures such as these are “analogue economies”, complete systems that loosely resemble the world, but a world so pared down that everything is either known or can be made up.

Such models are akin to a computer game. If game compilers are good at their job, events and outcomes loosely resemble those observed in the real world – they can, in a phrase that Prof Lucas and colleagues popularised, be calibrated against observation.

But it obviously cannot be inferred that policies that work in a computer game are appropriate for governments and businesses. It is in the nature of these self-contained systems that successful strategies are the product of assumptions made by the authors.

Copyright The Financial Times Limited 2011.

ST: SIngapore and Water

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The Straits Times

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Published on Sep 3, 2011

 

Quenching Singapore's thirst

A water pact with Malaysia upon which Singapore used to depend expired this week. Its end was marked by a cordial handover of a water catchment area in Johor and treatment facilities - a powerful testament of Singapore's progress towards greater self-sufficiency in water. Insight tells the story of that quest.

 

By Elgin Toh

A SIMPLE turn of the tap did not guarantee water if you happened to be in Singapore on April 24, 1963.

It was the first day of a water rationing exercise that would last 10 months.

An unusually dry spell both in Singapore and in the Tebrau River area in Johor - a primary water source for the island - caused water stocks to plunge dramatically, leaving the authorities with little choice but to impose restrictions.

For four days a week, depending on which area you lived in, you were either deprived of water between 8am and 2pm or between 2pm and 8pm.

People who did not ordinarily read the newspapers or listen to the radio suddenly found themselves having to scan headlines or turn knobs at least once a week - to stay informed about rationing schedules.

Those who forgot to store water in pails at home during the allocated timings had to stand in queues to use public taps.

The cost of food went up.

A government advisory that called for the washing of cars and watering of gardens to be 'kept to a minimum' clearly did not stop some. A forum letter in The Straits Times on May 3 had one reader wondering 'why the gentleman living opposite me still finds it necessary to water his lawn non-stop for 14 minutes' a day.

Eerily, the spying on neighbours went further than that.

Another letter on May 17 read: 'At a time when the state is facing an acute water shortage, is it proper for a person to bathe three times a day? That is exactly what my neighbour and his six children are doing every day of the week.'

Eventually, the rain returned and the reservoirs filled up. Curbs were finally lifted on Feb 28, 1964 - ironically, on a day when heavy rainfall caused an 11-year- old boy to drown.

Singaporeans who lived through that angsty period learnt a lesson they never forgot: that water, or the lack thereof, was a major source of weakness for the island-state.

This week, a no less momentous milestone in Singapore's aquatic history was crossed, but with far less public interest. A 50-year water agreement signed in 1961 - one of just two between Singapore and Malaysia - drew to a close.

As a result, a catchment area in Johor more than five times the size of Singapore's Central Catchment Nature Reserve ceased to serve Singapore's water needs, but with nary an eyebrow raised.

Public indifference, however, can be seen in a positive light. It is arguably a testament to Singapore's success in overcoming its water vulnerabilities.

What has happened since 1963?

In the words of Dr Joey Long of the S. Rajaratnam School of International Studies, 'the tables have turned'.

'While in the initial years Singapore's access to adequate water was viewed through the lens of security and survival, Singapore's present circumstances should be viewed with more optimism,' he said.

In 50 years, a virtuous mix of visionary leadership, meticulous groundwork and scientific advancements has helped Singapore exorcise her hydro-demons.

A tiny island-state ranked 170th out of a list of 190 nations in fresh water availability appears to be leapfrogging its way into water independence.

A matter of life and death

BUT there was a time when the situation was a lot more tense - and not just because people had to line up at public taps and tolerate dirty cars.

In 1970, seven years after that depressing drought, water security continued to keep Singapore's leaders awake at night.

'If these chaps do not observe the agreements, it will be a very serious matter for us,' said then Prime Minister Lee Kuan Yew, referring to the two Singapore-Malaysia water agreements, in a meeting with Professor S. Jayakumar before he took over as Singapore's permanent representative to the United Nations.

'It is a matter of life and death... it can lead to war,' he added.

Never far from Mr Lee's mind was the threat from Malaysian premier Tunku Abdul Rahman, relayed to him by the British, that 'if Singapore doesn't do what I want, I'll switch off the water supply'.

Coming just days after independence, the threat - though never acted upon - convinced him that 'as long as I was totally dependent on Malaysia's water supply, we would always be a satellite'.

That, combined with the Japanese blowing up water pipes that carried water across the strait from Johor in 1942, was what drove him to seek water self-sufficiency from the get-go, he later revealed.

The cards dealt to Singapore in 1965 were not promising.

The bulk of its water came from Johor. Two agreements signed in 1961 and 1962 allowed Singapore to buy water for 3 sen per 1,000 gallons (4,546 litres), excluding land rental costs in the catchment areas.

The expiry dates of the two water pacts were 2011 and 2061 respectively.

The 1961 agreement gave Singapore full and exclusive rights to draw water from Gunung Pulai, Pontian, Skudai and Tebrau. The 1962 agreement allowed Singapore to collect up to 250 million gallons of water a day from Johor River.

In exchange, treated water was sold back to Johor at the price of 50 sen per 1,000 gallons, which was below cost.

The two agreements were confirmed by both Singapore and Malaysia in their separation agreement and promptly lodged with the UN.

The British also left behind three reservoirs - MacRitchie, Peirce and Seletar.

At once, Mr Lee and his Government swung into action. One of his first initiatives: forming a unit under the Prime Minister's Office to coordinate water policy.

Singapore lacked natural aquifers and groundwater. But it did not lack rainfall, per se, receiving from the heavens 2,400mm annually, comfortably higher than the global average of 1,050mm.

Rather, what could not be found in abundance were water bodies and land that could 'catch' the rain.

In 1969, the capacity of Seletar Reservoir was enlarged and its catchment scope broadened.

The 1970s saw a flurry of activity.

The Government began studying the feasibility of various conventional and not-so-conventional water sources, and published in 1972 the Water Master Plan. This is seen by water experts as the first long-term blueprint for water resource development here.

Upper Peirce Reservoir was completed in 1975. That same year, Kranji River was dammed to separate seawater from freshwater. This created Kranji Reservoir - one of the first of several reservoirs formed this way.

But the Government also took chances with the not-so-likely. It constructed an experimental plant to recycle used water - a predecessor to Newater.

Unfortunately, the requisite technologies, such as reverse osmosis, were still premature. The tests failed to persuade policymakers that the idea was sufficiently economical or reliable and no permanent plant was built.

As the economy grew rapidly, it soon also became clear that Singapore could not simply expand reservoirs indefinitely. Industry was competing for land use.

A concerted effort at promoting conservation began. The first 'Water is precious' campaign, launched in 1971, reduced water consumption by 5 per cent.

Four decades on, the public education drive continues in schools, factories and the media, whether it is exemplifying 'water efficient homes' with toilets that use cistern water-saving bags or mandating self-shutting delayed action taps in buildings. To drive home the message, a water conservation tax was later introduced. It is levied today at a rate of 30 per cent for the first 40 litres per month. Beyond that, the tax rises to 45 per cent. The Government's aim is to cut per capita consumption from 155 litres today to 140 litres by 2030.

The 1980s and 1990s

THE 1980s saw both bright spots and dark ones in bilateral ties. From time to time, threats to fiddle with Singapore's water supply, whether serious or not, emanated from Malaysian society or officialdom or both.

In 1986, for instance, the visit of Israeli President Chaim Herzog to Singapore stoked anger across the causeway, prompting some to call for the treaties to be revoked or at least re-negotiated.

There was good reason for optimism in the late 1980s, when the two sides penned an agreement supplementing the 1962 one. Singapore was given the go-ahead to build a dam across Johor River and to buy water over and above the original limit of 250 million gallons a day.

A decade passed. As it considered its long-term water needs, Singapore's leaders decided to negotiate supplementary agreements to extend the supply of water from Johor beyond 2061.

In 1998, in the wake of the Asian financial crisis, the two sides came close to an agreement on a 'water-for-funds' deal, which was later called off.

Another round of talks took place in 2000 but differences remained over the sale price of raw water from Johor. There was initial agreement to raise the price from 3 sen per 1,000 gallons to 45 sen, and later to 60 sen.

Malaysia then said it wanted to unilaterally revise the price to RM6.25 per thousand gallons, a move Singapore insisted was not legally sound. After rounds of strongly worded exchanges in various forms, the matter quietened.

Ambitious new strategy to add two big taps

Four big taps

THE Singapore Government had been hard at work exploring alternative sources of water.

Even as talks with Malaysia ran into an impasse, efforts on another front were headed for a breakthrough that would 'change the whole equation', in the words of Dr Lee Poh Onn, a fellow at the Institute of Southeast Asian Studies.

After the failed 1974 experiment, Singapore decided to give recycled water another shot, sending two engineers to the United States in 1998 for a study trip.

Upon their return, they reported findings that suggested recycling had become viable, thanks to, among other things, advances in membrane technology. Subsequent studies corroborated the findings, prompting the Government to construct the first demo plant in Bedok in 2000.

The three-step process eventually adopted for the production of Newater involved filtration and reverse osmosis, removing particles as small as 0.001 microns before disinfecting the water under ultraviolet light. The water met US and UN standards and was, indeed, purer than tap water.

By May 2002, the Government was finally ready to go public with its bold new water strategy.

It was an ambitious plan to double the different types of water sources Singapore relied upon from two to four by 2011, the year the 1961 agreement with Malaysia expired.

Instead of relying only on water collected in reservoirs here and bought from Johor, there would be 'four big national taps' within 10 years. The two new 'taps' were desalination plants and Newater or water-reclamation plants.

In his speech to Parliament, then Environment Minister Lim Swee Say declared: 'Singapore certainly can become completely self-sufficient after 2061, if need be.'

The year 2061 was significant as it was when the 1962 water agreement with Malaysia would expire.

A toast to the future

FOR Newater to succeed, the public had to be willing to drink water that was previously sewage.

'Public acceptance is not guaranteed at the start. Recycled water has been rejected in Australia, where people term it 'yuck' water,' said Dr Eduardo Araral, assistant dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore.

'Singaporeans accepted it both because they are are pragmatic and because they trust the Government's promise that Newater is safe to drink,' he added.

Some 60,000 'toasted' with bottled Newater during the 2002 National Day Parade, including Mr Goh Chok Tong, who was then Prime Minister. Singapore now has five Newater plants, the largest of which is at Changi. Newater is used both in industries and indirectly for households, after it is mixed into reservoirs.

The next significant breakthrough came in desalination technology, although some call this success story a work in progress.

As the cost of desalting seawater fell by more than half in the decade leading up to 2002, PUB called for and received tenders to build a plant. In 2005, a desalination facility using reverse osmosis membranes was commissioned in Tuas. It was built by SingSpring, a wholly owned subsidiary of Hyflux. A second desalination plant in Tuas should be ready by 2013.

Of the current daily consumption of 380 million gallons, Newater and desalination now make up 40 per cent. PUB aims to raise that to 80 per cent by 2061, when all agreements with Johor expire.

Meanwhile, work on other fronts continue.

The completion of Marina Barrage in 2008 increased Singapore's water catchment area from half of its total land area to more than two-thirds. Studies are under way on the possibility of increasing this in future to 90 per cent through the use of treatment plants that handle both salt water and fresh water. There are now 17 reservoirs - up from three in 1965 - including Marina, Punggol and Serangoon.

Less visible upgrades may not be any less important. PUB has an ongoing programme to replace leaky asbestos cement water pipes with more corrosion-resistant ones. Also, an underground system of pumps and pipes connecting Singapore's reservoirs was completed in 2007 to prevent wastage by transferring water from full reservoirs to less full ones.

Turning weakness to strength

'I NEVER imagined we could progress from a situation of crisis to the situation of opportunity today,' said Dr Lee.

A dramatic turn of events, which he ultimately puts down to political will, means the water issue is now more likely to evoke hope than anxiety.

Research and development projects are creating jobs and expertise that can be exported. The PUB expects the GDP contribution from the water sector to grow from $0.5 billion in 2003 to $1.7 billion in 2015, with the number of jobs doubling to 11,000 by 2015.

To be sure, some latent risks remain.

Dr Araral warns, for instance, that skyrocketing energy prices in the future may yet cause problems for the much-vaunted but relatively fuel-guzzling desalination project, although that may in turn spur the development of other sources of water.

Terrorism, too, could derail the most carefully constructed of systems.

'Security experts note that water reservoirs are attractive targets of terrorists,' he said.

Nevertheless, most agree that whatever happens in the future, the achievements as they stand today already exceed the wildest of expectations - not least among them those of the water rationing generation.

Singaporeans can rest with the firm assurance that their secure access to this life-giving commodity is no longer in the hands of others.

elgintoh@sph.com.sg

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The Straits Times

www.straitstimes.com

Published on Sep 3, 2011

 

The water story

 

1857: Philanthropist Tan Kim Seng donated $13,000 to construct Singapore's first waterworks and piped water supply.

1867: Singapore's first reservoir, MacRitchie, completed.

1927: Water agreement signed between British-controlled Singapore and Johor Sultan. This agreement is superseded by the 1961 agreement.

1961: First water agreement signed between Singapore and Malaysia. Singapore gets full, exclusive rights to draw water from Gunung Pulai and three other areas for 3 sen per 1,000 gallons.

1962: Second Singapore-Malaysia water agreement signed, allowing Singapore to buy water from Johor River at the same price.

1963: Public Utilities Board (PUB) set up to take charge of water supply. Also, start of 10-month-long water rationing due to drought.

1965: Singapore separated from Malaysia. Both countries agree to abide by 1961 and 1962 agreements.

1971: First water conservation campaign launched.

1977: Start of 10-year-long Clean Singapore River campaign.

1990: Signing of supplement to 1962 agreement, allowing Singapore to build a dam across Johor River and to buy water over and above original quota of 250 million gallons a day.

2000: The beginning of Singapore- Malaysia water talks that end in stalemate in 2003. The two sides could not agree on price.

2001: Restructuring of PUB so it took charge of not only water supply, but also drainage, water reclamation plants and sewerage systems.

2002: Launch of Newater - or recycled water - technology, which decisively paves the way towards water independence for Singapore.

2005: First desalination plant completed in Tuas. A second plant, also in Tuas, is expected by 2013.

2008: Inaugural International Water Week, which became an annual conference on water solutions. Also, Marina Barrage was completed, the first reservoir here in the heart of the city.

2011: 1961 water agreement with Malaysia lapsed. Singapore returns all land and facilities, saying handover does not affect adequacy of water supply.

ELGIN TOH

Copyright © 2011 Singapore Press Holdings. All rights reserved.

FT: Beware the inner reptile

Karen Armstrong's 4Fs; Sapolsky's flight/fight and chronic stress.

Beware the inner reptile

By Gillian Tett

Periods of acute stress in the markets offer intriguing examples of how our brains work

Back in the days of the “last” market crisis in 2008, a senior official at an interdealer broker – one of the firms that trade securities – observed an interesting pattern. Until then, he, like most traders, had assumed that finance was becoming an increasingly global, computerised game. In a world ruled by the internet, it was easier than ever before to trade with anyone, anywhere. In an era of 21st-century cybermoney – if not Star Trek – finance, bankers had evolved to control space and time.

But when Lehman Brothers collapsed, evolutionary “progress” crumbled. Suddenly, traders started placing orders by telephone, rather than computer, dealing only with people they knew personally. They were also refusing to take long-term decisions. Sometimes there were entirely rational explanations for this shift, but mostly the reaction was instinctive. “It was almost primeval,” my friend quips.

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I have been pondering this comment during the last week, amid the latest market shock. Periods of acute stress in the markets are always fascinating to observe, since they can reveal much about how financial and political systems operate. They can also offer intriguing examples of how our brains, or cognitive maps, work, giving a subtle twist to the age-old concepts of human “fear” and “greed” – or rational self-interest, as the economic profession would argue.

Take a look, for example, at some fascinating research by Andrew Lo, a finance professor at MIT. Lo trained initially as an economist, but he has also spent part of his career trying to knit together the work of psychologists, neuroscientists, biologists and economists. In particular, he is fascinated by the idea that the evolution of the human species has left our brains with three parts. He identifies those parts as a central, “reptilian” core, which was the first to evolve, functions most rapidly and controls reflexive behaviour (by shutting down bodily functions that are in shock, say, to improve chances of survival); a “mammalian” layer that controls social desires and emotions (intuition, sexual urges and so on); and then the outer, “hominid” layer, which developed last and controls rational, sophisticated thought.

In normal circumstances, our hominid brain predominates. However, the mammalian (or emotional) brain never disappears, and reptilian instincts come to the fore in a crisis. And this has an important implication for finance: while “rational” economic theories can explain markets when our “hominid” brains are predominant (ie, most of the time), they are inadequate when our emotional, mammalian or instinctive, reptilian brains predominate.

Lo does not consider this a malfunction, but part of the adaptive techniques that have allowed humans to react to our environment and learn from mistakes over millennia. Thus it is no good arguing endlessly (as academics have done in recent years) about whether the efficient market hypothesis really works – it works when we are “hominid”, but not when we all turn “emotional” and fight for survival.

Unsurprisingly, many traditional economists hate Lo’s ideas. The problem with this theory – like most forms of behavioural finance – is that it is hard to turn into a tangible investment strategy. Well, not unless somebody finds a way to post a sign above bankers’ desks that reads: “Watch out, a reptile moment approaches!” But perhaps the real value of Lo’s idea is that it illustrates a point that we all instinctively know, but which economists and bankers sometimes forget: namely, that humans do not behave consistently, all the time.

Even our own perceptions of time can shift. Peter Atwater, a JPMorgan banker-turned-consultant, has recently been advising investment firms on strategy – and this has left him convinced of the importance of looking at “horizon preferences”. In times of calm markets, when people are confident, they plan for the long term, deal with strangers and reflect on the world as a whole.

At times of stress, though, time, social and geographical horizons collapse – and not only in moments of extreme tension. Atwater believes that the present slow-burn sense of insecurity is fostering a wider, longer-term shift towards “narrow” horizons, and this is influencing how finance and politics evolves. Cognitive maps change in ways we do not always notice.

None of this will be of much comfort to those traders who have just endured a brutal, rollercoaster week (even though people such as Atwater insist that analysing horizon preferences can enable you to be much smarter about your portfolio). They trust cyber finance.

But, personally, after several decades in which finance has been dominated by theories influenced by Newtonian physics, I find it very cheering that researchers such as Lo are trying to hop across other academic silos. The longer the crisis lasts, the more likely the field of behavioural finance will be boosted. Calling a banker a “rodent” or “snake”, in other words, may no longer be just a term of abuse. Right now, it may be a form of analysis too, and one we would be foolish to ignore.

gillian.tett@ft.com

Copyright The Financial Times Limited 2011.

FT: Light reading

August 12, 2011 6:23 pm

Light reading

By Carl Wilkinson

This summer we’ve finally embraced the e-book – but what does this mean for writers and publishers?

In the departure lounge at Heathrow Airport people are reading. There’s nothing particularly unusual about the scene – we read all the time, on buses, trains and planes. What stands out here is that many of these readers are glued not to tatty paperbacks or glossy hardbacks or even those large format airport specials but e-books.

It’s all part of what is being dubbed the “Kindle Summer” – the first summer when e-books have sold strongly, marking a turning point for publishing. And if you’ve recently packed for a beach holiday, as I did last week, you’ll understand the benefits. Why take a stack of heavy hardbacks that eat into your precious luggage allowance when you can take an e-reader stocked with thousands of books? Gone is that mad rush at the airport bookshop as you try to find something you might want to read; and gone is the suitcase crammed with hardbacks packed “just in case”.

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In April, the Association of American Publishers announced that for the first time e-books had outsold all other traditional formats; and since the beginning of April, Amazon.co.uk customers have been purchasing Kindle books over hardcover books at a rate of more than two to one. “E-book sales are rising, and rising faster than previously predicted, led in the most part by the Kindle,” says Philip Jones, deputy editor of the Bookseller. “Penguin reported in July that its global e-book sales in the first half were up at 14 per cent, while in the UK it agreed with the general consensus that e-books now make up about 6 per cent of their trade/consumer business. We expect e-books to be at about 10 per cent by the end of the year.”

So what does this all mean? Are we reading more? Are e-books taking over from physical books? Are hardbacks about to go the way of vinyl? And where does it leave readers, writers and publishers?

There are now several major platforms for e-books. Amazon’s Kindle is the market leader, but Apple’s iBooks, Barnes and Noble’s Nook, Waterstones and retailers such as Kobo have all expanded the horizons of e-books in the past couple of years. Although each platform has its own unique feel, what are selling particularly well across all devices are thrillers, misery memoirs and blockbusting popular fiction.

Yet, while readers are embracing the digital book more than ever, this shift hasn’t been easy for publishers. The music industry struggled through the impact of Napster and the rise of the MP3 player, but publishing – one of the most traditional of all the creative industries – has until now remained relatively resistant to change.

“Culturally there was resistance pretty much at every publishing house,” says Michael Bhaskar, digital publishing director at Profile Books. “People thought that e-books and digital publishing were out there to kill books and the book industry.” That attitude has slowly been replaced with one of acceptance that digital is here to stay and that publishers (and writers) must adapt to survive. “Digital isn’t a way of killing print books, but supporting them. It’s the content that matters most.”

Making the transition from an entirely print world to a print and digital one is far from easy. It’s not simply a case of digital books bringing in extra sales. As Jones points out, the overall fiction market is down 13 per cent year-on-year and “sales of hardback novels through BookScan’s Top 5,000 bestseller list were down 5 per cent year-on-year, with paperback novels down 17 per cent.” Many readers who would once have paid full price for a physical book have migrated to e-books.

From the readers’ point of view, it’s not hard to see why. Joe Dunthorne, author of Submarine, says: “When reading all 1,200 pages of Infinite Jest last year, I cut my copy into three chunks (re-binding each bit with masking tape) to make it easier to carry. But then, each night, I had to come home and catch up on the footnotes. Needless to say, it was annoying. Now my girlfriend’s reading it on Kindle, and it’s ideal. David Foster Wallace’s Infinite Jest seems like a good enough reason, on its own, to buy an e-reader.”

Earlier this year, e-books had a prominent breakthrough when the judges of the 2011 Man Booker Prize were given a choice of how to read the 138 contenders. “We could choose to use Kindles or not – as I recall two did and three didn’t,” says the novelist Susan Hill, a judge on this year’s panel. Hill’s book Howards End is on the Landing (2009) explored her experience of rediscovering old books during a year of reading – something that couldn’t happen in a purely digital world. Did she embrace the Kindle for her Booker reading? “I didn’t read on a Kindle and have never even seen one,” she says. “I am a real book person – and always will be. I am a great laptop person and an internet/Twitter/Facebook one too so I am no Luddite; but the real printed book is a joy – it ain’t broke so ... ”

However, many book-lovers are embracing the e-book. The thriller writer and former literary agent Emlyn Rees is now an e-book fan: “I got a Kindle for Christmas and now read more books on it than not. It’s particularly great for holidays, in that you can load it up with beach reading, without having to pay airlines for the privilege of carrying all that extra weight.”

This summer, Rees’ publisher Constable and Robinson has been using e-books to grow word-of-mouth interest in titles that it will then publish in the autumn as physical books. Rees’ Hunted has been selling for just £1 as an e-book throughout July and August, garnering praise from Jeffrey Deaver and Sam Bourne. It will be published as a £12.99 hardback in September.

“All writers have to embrace e-books,” says Rees. “Any writer with a mainstream publisher is going to have to get used to promoting their e-books online as the market is growing so quickly it can’t be ignored. The main arguments concerning the pros and cons of e-books come down to royalties and piracy. What slice will the writer get of the electronic pie and how can they protect themselves from having their work distributed for free?”

One of Constable and Robinson’s literary bestsellers is Jennifer Egan’s Pulitzer Prize-winning A Visit from the Goon Squad. The novel, also available as an e-book (£5.99), has become an iPhone and iPad app. For just £2.99, readers get not only the full text of the book but the audiobook, video and illustrations. It’s hard to see how the £7.99 paperback can compete.

Meanwhile, Scottish crime writer Ian Rankin’s Edinburgh iPhone app has been downloaded more than 30,000 times and has just been launched on Android phones. The free app isn’t a book, but a guided tour of the city that has inspired Rankin’s writing and demonstrates that authors are no longer simply confined to producing traditional works. “Novels, films and games will start overlapping more and more,” says Rees. “You’re seeing this already in the gaming world, where titles such as LA Noire and Alan Wake are hybrids of crime fiction novels and games, only where players get to help shape the narrative. The novel as we know it might not hold any appeal for future generations.”

But publishers have to be cautious about how they embrace the digital possibilities. The question hanging over these complex and often expensive apps is: are they commercially viable? They require investment and can ultimately compete with other products such as the hardback or paperback, cutting publishers’ margins. Henry Volans, Head of Faber Digital is more positive. “If publishers don’t stretch what you can do then start-ups will. I think there’s an imperative to innovate.”

Faber, in partnership with Touch Press, is behind two of the most successful iPad book apps produced so far. TS Eliot’s The Waste Land, originally published in 1922, features a performance of the poem by Fiona Shaw and readings by TS Eliot, Ted Hughes and Alec Guinness, plus copies of the original manuscript. The Solar System by Marcus Chown is an interactive guide commissioned specially as an app with a hardback version due for publication in November. Both apps sell for £9.99 each and, Volans tells me, earned back their production costs in six weeks and are now in profit. “At one point,” he says, “The Waste Land was the third highest grossing iPad app in the UK. It’s quite thrilling to see a difficult literary poem among all those other things.”

Yet, digital books are not simply running amok. Physical books, far from obsolete, are competing with their digital counterparts. Hodder’s new Flipback books, for example, printed on wafer-thin paper and bound along the long edge are tiny, light and easy to read – like an e-reader. For mainstream hardback books we could also see a push to greater quality and exclusivity. “As digital culture becomes more prevalent the value of speciality culture becomes greater,” says Bhaskar. “I’m convinced that we’ll start to see more limited, boxed and numbered editions produced on incredible paper with extra design features. We’ll see the resurgence of the book as a sort of collector’s item.” Paperbacks and more disposable types of books, however, may not fare so well.

We can also expect new financing models for authors. In the US, Amazon has “dropped a brick in the publishing pond” with its digital self-publishing element (in June, John Locke became the first self-published author to sell a million e-books through Amazon). In the UK, the Unbound project is publishing books by pitching ideas direct to readers who then stump up the funding for the ones they want to read. When an idea has received 100 per cent of the financing needed, the writer starts work and “investors” receive a copy of the finished product. Terry Jones has started on Evil Machines, due in October, and Tibor Fischer has 76 per cent of the funding needed to start Crushed Mexican Spiders.

Literary agents, too, are getting in on the act. Last year, Andrew Wylie launched Odyssey Editions to publish modern classics by the likes of Saul Bellow and William Burroughs as e-books through Amazon. Part of the move was to cut publishers out of the loop. Next month, the agent Ed Victor will follow Wylie, setting up his own e-books imprint Bedford Square Books.

“I started Bedford Square Books for three reasons,” Victor explains. “One was to please my authors, to have books that they thought were dormant living and breathing again. The second reason was to have fun. I was a publisher, but the last book I actually published was in 1972. I’m learning about how you publish and market books in the 21st century and it’s fascinating. And the third thing is not to lose money.”

Bedford Square Books will begin by publishing six titles by Victor’s authors that are no longer in print. “I’m not doing this to compete with publishers, I’m publishing books that they didn’t want to publish,” he says. “I am now able to say to a publisher: ‘Would you like to reissue this wonderful book or shall I?’ It gets their attention.”

But while digital publishing has opened up the means of publishing to anyone with a computer, pity the poor reader. Sitting on a beach with my Kindle, I didn’t start trawling through all the books by authors I’d never heard of. Instead, I downloaded Julian Barnes’ The Sense of an Ending , which was published while I was abroad, but could be downloaded. When faced with vast choice, we gravitate to what we know. The brand (be it author or publisher) is all important. One of the biggest – JK Rowling – will begin selling Harry Potter e-books exclusively through her Pottermore website in the autumn. It is a canny move for the author, allowing her to maintain complete control (and reap the benefits).

Below the horizon, there is also mushrooming creativity from new start-ups keen to break the mould. This summer, 24symbols.com, a “Spotify for books”, has launched. Readers can download e-books either ad-supported without charge or for €9.99 per month ad-free. Meanwhile, small digital non-fiction publishers such as atavist.net and byliner.com are finding niches for new forms of writing. Byliner made a splash in April publishing Three Cups of Deceit by award-winning author Jon Krakauer, about allegations that Nobel Peace Prize nominee Greg Mortenson fabricated parts of his bestselling books. Known as “Singles”, these e-books are intended to be read in a single two-hour sitting.

Fiction writers, too, could benefit. “There are so many possibilities for interactive fiction, which is where I see the e-readers really coming in to their own,” says Dunthorne, who has just published his second novel Wild Abandon. “I’ve been writing literary Choose Your Own Adventure stories, and these seem perfect for digital.”

“Writing always changes and evolves,” agrees Bhaskar. “Tweeting, blogging, the way people interact on social media – all of those things are new forms of writing and what we will see is new great writers master these forms. It’s a new commercial and creative challenge for writers. Publishers have to be there to help make it a success.”

There are, of course, hurdles to this brave new digital world. Sitting on the plane, waiting to fly home, I heard a voice: “I’m sorry sir, could you turn that off for take-off?” I’ve never been asked to switch off a book before.

Copyright The Financial Times Limited 2011.