The "invisible heart of society" is necessary for markets to work well, and for governments to curate and coordinate all players so that there is a sense of mutuality of interests, said Senior Minister Tharman Shanmugaratnam yesterday.

He said economies cannot just rely on the invisible hand of the market or the visible hand of the government.

"Mutuality of interests is what allows the system to be dynamic, as an economy, but it also allows people to feel good about their role in society," he added.

He was responding to a question about the need for a more activist and expanded government for global cooperation and multilateralism at the DBS Asian Insights Conference, where he was one of two keynote speakers.

The dialogue, held at the start of the two-day conference, is titled "The Economics of a Pandemic" and was moderated by DBS Bank chief economist Taimur Baig.

"I've no doubt that governments will grow in importance," Mr Tharman said, adding that the growing emphasis on governance will outlast the current Covid-19 crisis.

"Ultimately, we need a new way of ordering the relationship between the state and markets, and between the state and community."

Mr Tharman's reference to an invisible heart of society is a nod to The Third Pillar, a book published last year and written by Professor Raghuram G. Rajan of the University of Chicago, the other keynote speaker.

The invisible hand of the market or the visible hand of the government is not enough for markets to do well, said Mr Tharman.

"You need the invisible heart of society," he said. "State, markets and community are the three pillars that keep societies together."

Prof Rajan, a former Reserve Bank of India governor and former chief economist at the International Monetary Fund, had argued that strengthening and empowering local communities help ensure that groups are not left behind.

Earlier in the dialogue, Prof Rajan stressed the importance of countries working together and called on global leaders to focus on building on similarities.

Both speakers made the case for countries to stay open for trade.

Prof Rajan noted countries that cannot stimulate domestic demand must then have growth coming from "outside, at least in the recovery phase (of Covid-19), and this is why it's extremely important that trade and global investment remain open over the next few years".

"We've had huge frictions before the pandemic, but (at) this point... we need leadership to call a truce."

"There is really an enormous role for global leadership here, and especially a coming together of the two most important countries," he added, referring to the tensions between the United States and China.

"My hope is that the US presidential election will be a turning point (to improve on the two countries' ties)," said Prof Rajan.

Mr Tharman said the most thoughtful and forward-looking companies are injecting some diversification in their global supply chains, rather than moving everything onshore.

He said: "They are going for multiple supply chains, somewhat simpler supply chains, but there will still be a role for the Singapores, Vietnams, the Finlands of the world.

"There will still be a role for countries that are competitive at their game to be part of global supply chains, and we must encourage emerging countries to stay plugged in to the world, and not think that a domestic strategy alone is going to get them out of the problems we now face."

He added that the responsibility of all countries is to keep both virtual and physical lanes open.

"There has been a tendency, because of the pandemic, to try to protect my own country first, but it is short-sighted."

He pointed out that, even when it comes to the medical supply chains and big global supply chains, very few countries are producing everything on their own.

"In fact, virtually no one is, so we depend on open supply chains, even for essentials," he said.

Countries may want to produce a little more critical supplies themselves, "but we're all going to be dependent on predictable and open lanes internationally", he added.

On the prolonged ultra-low interest rate environment, Mr Tharman, who is chairman of the Monetary Authority of Singapore, said central banks have to do what it takes in a crisis but keeping interest rates low for too long may not be ideal.

He warned of unintended consequences that may be brought about by the prolonged ultra-low interest rate environment.

He said that even before the Covid-19 crisis, the world had seen an extended period of low interest rates and substantial liquidity, contributing to much higher levels of corporate leverage.

"We entered this crisis with a lot of risk in the system already," he said.

Remaining in a very long period of low or negative interest rates will also hurt pension funds, insurance funds and any long-term money management, he said.

Returns will come down, and people will be less prepared for retirement and may thus save more and consume less, dampening growth as a result, he added.

"So we need to be a little sceptical about this strategy as a means of promoting growth," he said.