Reinventing the Rice Bowl

May 03rd 2012

During the election, I offered some assurance to Singapore’s PM who seemed to be at the helm of a  Party that had clearly run out of ideas. “Don’t worry, PM Lee, if you don’t have any policies you can pinjam them from the Reform Party.” You can watch and hear me saying it here. (http://www.youtube.com/watch?feature=player_embedded&v=f1RSMUm3ahY)

The PAP still doesn’t have any good ideas. How could it be otherwise? I have always said this, from my first public utterance in  December 2008 at an informal memorial service organised by Chee Soon Juan in Hong Lim Park (the only outdoor space legally available to us Singaporeans to gather in) to my latest article in Wired Opinion, Disneyland with the Death Penalty Revisited, April 2012.  The PAP with its cadre system based on the communist Kuomintang structure and its stranglehold on the constitution  and its huge ministerial salaries is packed with ‘Yes Men’. That doesn’t necessarily lead to corruption as many think but to flabby thinking and a dearth of new ideas.

http://www.wired.com/opinion/2012/04/opinion-jeyaretnam-disneyland-death-penalty/all/1

No surprise then that the PAP have made frequent use since then of my generous offer and do indeed frequently pinjam my ideas. (Of course It is easy to pinjam without giving credit from someone whose proposals and solutions are never given space in the public arena due to a blackout)) The latest pinjam bandit is Mr Cedric Foo, who chairs the Government Parliamentary Committee for Transport talking about increased competition as a solution for the transport Industry.  Increased competition is rather a mantra of mine in these pages, actually.

Here are two articles  specifically on competition in the transport sector,

Another Round of Monopoly Anyone?, (http://sonofadud.com/market/another-round-of-monopoly-anyone/),

Comfort and City Cab. Two more pies with fingers in them, (http://sonofadud.com/market/comfort-and-city-cab-two-more-pies-with-fingers-in-them/).

So does this mean that the PAP and I are now perfectly in synch? Well, despite what Cedric Foo said yesterday it is unlikely that anything will change any time soon without a change of government. I pointed out in those previous articles that,  just as in politics the PAP were unwilling to allow any real competition to develop, so in the economic sphere their preference has been for oligopoly over competition.

There is one more significant article they have borrowed from. “Suggested Lines of Inquiry for the SMRT Committee” (http://sonofadud.com/stories-from-the-stairwell/suggested-lines-of-inquiry-for-the-smrt-committee/):

To quote yesterday’s ST,  ”Mr Cedric Foo, who chairs the Government Parliamentary Committee for Transport, said the state taking over rail operations was not the answer to the problems that have hit the operator. It is not the model that is critical, he said. What is crucial is having in place an effective regulatory system and appropriate penalties to ensure operational efficiency. More competition will also ensure a better system.”

Mr Foo said: ‘The problem is not enough competition, not just in the rail sector but the bus sector as well… We should bring in people with more experience and expertise.’ This includes foreign operators, he added.

Compare that to what I said in my article, “Suggested Lines of Inquiry for the SMRTCommittee” (http://sonofadud.com/stories-from-the-stairwell/suggested-lines-of-inquiry-for-the-smrt-committee/):

 “The crisis has highlighted the need for either, stricter more independent regulation of SMRT and SBS Transit, as monopolistic competitors, or deregulation and the opening of the transport network to greater competition…

Fourthly, and ironically in light of my call for stricter regulation, the crisis has highlighted the need for greater competition. The transport network was thrown into greater disruption because of the lack of alternatives to the MRT network…We need deregulation of the transport network so that other operators, provided they can satisfy the regulator as to deliverability and safety, can enter the market.

While it may be impractical to have two MRT operators on the same line we can certainly have independent bus operators who compete with the train operators and are not part of the same monopoly…More competition would also be likely to lead to greater investment and a better travel experience for commuters. Both SMRT and SBS, being monopolists, will constrain investment to maximize profits.”

Ironically shortly after I pointed out the relative age of our bus fleet, the PAP government gave Comfort Delgro and SMRT a present in Budget 2012 in the form of 800 new buses that they did not have to pay for.

My article went on to say:

Even with the deliberate overloading of our transport network through a policy of uncontrolled immigration, the fundamental question remains.  Is the MRT network commercially viable at all even with the government already taking on all the costs of the network infrastructure?  I suspect that the real reason that the government does not want any competition in public transport is that bus services could undercut the MRT. The result would be that it would be forced to cut its fares resulting in the government having to subsidize the MRT operators or take them back into public ownership.

At this point people inevitably ask whether nationalization is the answer. Arguably nationalization would be better than the faux-privitization we have at the moment, with SMRT a listed company controlled by Temasek and increasingly subsidized by the Singapore Land Authority or directly by the government as in the case of the new buses. Of course the SLA benefits indirectly as the value of the land it owns goes up when the MRT network is extended so it probably makes commercial sense for it to contribute to infrastructure but not maintenance.

However I continue to believe that competition in the private sector  is preferable to nationalisation provided the regulator does its job because competition and the profit motive provides an incentive to improve efficiency and service standards. The consumer gains:

In economic terms greater competition led to consumers capturing more of the area under the demand curve (what is known by economists as consumer surplus).  However the gains to consumers in the form of lower prices and more capacity outweighed the losses to producers.  It is likely that this would happen here if public transport was opened up to competition.

If there had been greater private sector involvement in the MRT from the start in the form of non-recourse project finance then the burden of losses from greater competition would have been borne by the banks and bond-holders rather than the taxpayer. I am worried that the reported $60 billion which the government is spending on construction of new lines may never be recouped and was undertaken without any debate in Parliament and without the government making explicit the cost-benefit analysis that led to the decision.

Finally I would like to comment on Foo’s hints that the government would be bringing in foreign expertise. When Foo added, “We should bring in people with more experience and expertise. This includes foreign operators” he admitted they can pinjam to talk the talk but even Foo knows they can’t actually walk the walk unless they also pinjam a set of foreign legs.

The PAP internet brigade is fond of loudly shouting down any reasoned discussion of the issues with the words “What can you do for the voters?” And it is true that the Opposition parties in Singapore cannot threaten voters. They cannot explain to constituents that if the residents do not vote for them they will have to withhold upgrading of their public housing estates where 90% of them live. http://sg.news.yahoo.com/blogs/singaporescene/pm-lee-don-t-upgrading-pay-less-tax-20110405-231901-526.html

But on this evidence the pertinent question we should be asking is not what can the Opposition do for us the people but what value does the PAP add?

The government’s stock response to any crisis is to bring in foreign expertise, as Cedric Foo hints will be done now. This rather begs the question of why Singapore, which has been running an MRT network for thirty years and invested tens of billions of dollars, should need to pay for foreign expertise. After all we are not setting up a transport network from scratch nor are we running one of the busiest one in the world on an infrastructure that is 150 years old in places. Yet again the PAP has shown their willingness to slavishly adopt foreign and Western models in business but continue the mantra that we should have a closed system when it comes to ideas.

Why not just do away with them as the middle men and go directly to bringing in overseas expertise. We could bring over the leaders of any advanced Nation and save a small fortune on salaries. Can we pinjam a whole parliament?

Trying to explain away the steep rises in theCPI, Tharman has pointed out that they are mainly due to rises inCOEcosts and market rents which do not affect the majority of Singaporeans. Rents for public housing may have outpaced house prices over the past year. However this barely begins to correct the divergence between house prices and rents over the last twenty years. The HDB resale price index has increased some 340% over the last twenty years while the CPI, of which housing costs represent 25%, has only risen 40%.  If one took Tharman’s arbitrary choice of methodology to its logical conclusion then theCPIhas seriously understated inflation over the last twenty years. If this is true then median real incomes are much lower than the government has claimed and may in fact have fallen over much of this period.

Two days ago DPM Tharman commented in the State-controlled media on the fact that the Consumer Price Index (CPI) was 5.2% higher than a year ago. He explained that more than half the inflation rate was accounted for by higher COEs on cars and the effect of higher market rents on homes:

“The CPI index shows a very high inflation figure of 5.2% but in fact, for the majority of Singaporeans, it’s not so bad. The vast majority of Singaporeans, who already own their homes and are not buying a new car, will not feel the effects of these sharp increases,”

By these words Tharman merely demonstrated how out of touch Ministers, with their multi-million dollar pay packages, are with the problems of ordinary Singaporeans. His comment that Singaporeans who are not buying a new car will not be affected is uncomfortably reminiscent ofMarieAntoinettewho, when told that the peasants could no longer afford bread, is reputed to have asked why they could not eat cake instead. It is rather like a multimillionaire saying how fortunate poor people are because they are not faced with the high cost of fuel for their private jets or air-conditioning bills for their mansions. Or theCEOof a large company saying that he understands what the workers he has to fire are going through. But then again why should I be surprised? Tharman is of course a multi-millionaire and so are all his Cabinet colleagues!

His statement makes no economic or logical sense either for the minority of Singaporeans who are already car owners. What difference does it make if they are not buying a car this year? Is Tharman really saying that price increases this year, assuming they are not reversed, will not affect car buyers in future years?

But it is Tharman’s comments about the way housing costs are measured in the CPIthat caught my attention. By claiming that the way the Department of Statistics tracks housing costs does not reflect the experience of most Singaporeans, he is conceding what I said in my blog back in February 2011 (http://sonofadud.com/market/wages-failing-to-keep-up-with-inflation/):

We have had rapid economic growth fuelled by generous tax breaks for foreign investment and cheap foreign labour from abroad without any rise in underlying productivity and a 25% rise in population over the last ten years. This has pushed up property prices and rents and undoubtedly been a big contributor to domestic inflation. However the CPI fails to reflect this in full because it uses what is called an imputed rent for owner-occupied housing instead of an index of mortgage servicing costs plus depreciation. Thus the CPI for housing only rose by 5.3% between January 2010 and January 2011 while the HDB resale price index was up by 14% between the fourth quarter of 2010 and the fourth quarter of 2009. So we are getting in all likelihood a serious understatement of the true inflation rate and an even more serious erosion of the purchasing power of Singaporean workers.

I am glad that Tharman is vindicating what I said there. However he is trying to have his cake and eat it. The government has been silent about the divergence between the enormous rise in the HDB resale price index over the last twenty years and the much smaller rise in the housing component of the CPIas measured by owner-equivalent rent.  As I say here (http://sonofadud.com/market/inflation-a-worry/):

Certainly we can see this effect in the CPI index. The HDB resale price index has risen some 340% in the last twenty years while median nominal household income has risen by only just over 100%.Even though The Department of Statistics uses an archaic method of calculating housing costs the effects are still apparent.

Despite the enormous rise in house prices the rise in owner-equivalent rents as calculated by the Department of Statistics has been much smaller. If we had used an index of mortgage servicing costs plus depreciation, as is used in theUK, in calculating the housing component of theCPIthen it is likely that theCPIrise over this period of some 40% would have been significantly higher.  This in turn would have negatively impacted any government claims of a rise in the real median incomes of Singaporeans.

There are several reasons why one would use a measure of imputed rent. TheCPIis only concerned with the cost of consuming a basket of goods and services necessary to maintain your standard of living. Therefore for housing owners any calculation of the cost of housing must try and isolate the consumption of housing services from investment gains or losses through holding housing assets.  Using an estimate of how much it would cost to rent an equivalent property is one method of doing this. TheUScurrently uses this method but in the housing bubble there was a huge divergence between rents and housing prices and the ratio of house prices to rents rose as much as 40% up to 2006. It has since fallen back with the property price crash but this correction has not yet occurred inSingapore. InSingaporethere has been a similar credit-driven expansion in the ratio coupled with some uniquely Singaporean factors such as the government’s monopoly on supply. The small size of the HDB rental market relative to owner-occupiers is another factor that might lead one to suspect any estimates of housing costs derived from imputed rents. It undoubtedly does not help that the Statistics Department is not independent of the government and that it exhibits limited openness and transparency about how its methods. As an example of best practice, the Bureau of Labor Statistics in theUSinvites public comment before it changes its methods of calculation. Our Department of Statistics should do likewise.

Finally Tharman is as usual only telling half the story when he says that the majority of Singaporeans own their own homes. 85% of Singaporeans may live in public housing which is on 99 year leaseholds but this is more a reflection of how the government has constrained demand by monopolizing supply. A significant proportion of the 85% will include people such as young Singaporean adults who have to live with their parents. They cannot afford to move out because prices have soared to unaffordable levels. For this group it is not simply not true to say that increases in housing costs whether in the form of prices or rents will not matter. Since HDB apartments are only on 99 year leasehold it is surely not correct to treat it in the same way as freehold housing is treated. I am not aware of any explicit promise from the PAP that HDB apartments will be upgraded and the leases restarted though Singaporeans have come to expect it (and the PAP have used the threat of withholding upgrading to win elections, most notably at Cheng San in 1997). Therefore if the Statistics Department were being properly rigorous they would include amortization in their calculation of housing costs. This would have made housing inflation in theCPIconsiderably higher and real income gains much lower.

Yesterday I wrote about the PAP government’s willingness to bail out the Eurozone with generous contributions to the IMF’s lending facility (http://sonofadud.com/2012/04/25/659/). Yet a US$4 billion loan (which represents more than US$1200 for every Singaporean man, woman and child has seemingly been given without Parliamentary approval or informing Singaporeans beforehand:

As usual, this has all been decided and announced without telling Singaporeans first or debating it in Parliament. The first we got to hear about it was through the IMF announcement on April 20 just as the Spanish people only got to hear about their king’s elephant-hunting jaunts when he was injured.

It is noteworthy that Tharman and our government feel that they can be so generous with our money. Meanwhile we remain in the dark about the real value of our financial assets.  The only thing we can be certain of in addition to death and taxes is that we will never get to spend the assets we and our parents work so hard to put into the state coffers.

In democracies things are very different. In the UKthe Chancellor GeorgeOsbornewas forced to defend his decision to commit US$15 billion (which is only about US$250 per UKcitizen) in Parliament. He argued he did not need Parliamentary approval because Parliament had previously approved an increased UKcommitment to the IMF of £40 billion of which £10 billion remained unused. Nevertheless he was given a rough ride and accused by the Opposition Labour Party of “running scared of Parliamentary scrutiny (http://www.bbc.co.uk/news/business-17794990).

One of the MPs in his own party commented that “We might as well put £10billion in the nearest litter bin.” Other Tory MPs said that they were discussing with lawyers whether the original Parliamentary approval could be revoked.  The unhappiness in theUKis in spite of the Euro zone market being much more important toBritainthan it is toSingapore. TheUKhas slipped back into a double dip recession for which the coalition government’s austerity policies are largely responsible.  The US$15 billion spent on helping to bail out countries likeSpain, which was downgraded again yesterday, could be better spent at home with more effect on stimulating output and employment.

Australiaalso agreed to a US$7 billion contribution (about US$300 per Australian). Australians on the whole enjoy a higher standard of living than Singaporeans. Yet the Opposition Leader Tony Abbott still said the government should explain why it was making such a large contribution to the IMF, especially as the United Stateswas not making a contribution.

InSingaporeour government has as usual shown its disregard for the sovereignty of Parliament by not recalling it to debate the loan. Unfortunately our Parliamentary Opposition has also not raised this issue. The big question is: is the loan constitutional? I would argue that it is not. Under Clause 144 of the Constitution any loans require Parliamentary and also Presidential approval. It has been argued that the Minister of Finance alone is able to approve loans to the IMF without Parliament’s approval under Clause 144(1) b. This gives a specific exemption allowing the Finance Minister to approve increases inSingapore’s quota at the IMF without seeking Parliamentary approval. However it is clear from the text of the IMF’s statement that this loan represents additional commitments over and above the quota increase agreed in 2010:

“There are firm commitments to increase resources made available to the IMF by over $430 billion in addition to the quota increase under the 2010 reform. These resources will be available for the whole membership of the IMF, and not earmarked for any particular region.

“The resources would be channeled through temporary bilateral loans and note purchase agreements to the IMF’s General Resources Account. Should it become necessary to use these resources, adequate risk mitigation features, conditionality, and adequate burden sharing among official creditors would apply, as approved by the IMF Board.” (http://www.imf.org/external/np/sec/pr/2012/pr12144.htm)

I am not a lawyer but it would appear that since this is not a quota increase but a loan it would not be covered by the specific exemption. Therefore it would be unconstitutional unless Parliamentary approval is obtained. It would also require Presidential approval.  The government has not disclosed whether the latter has been obtained.

It would indeed be strange if the Finance Minister alone could approve this loan as there is arguably a clear conflict of interest with Tharman’s role as Chair of the International Monetary and Financial Committee of the IMF.

We need to restore the sovereignty of Parliament as a check on the executive. The PAP government should be required to make the case to Parliament as to why bailing out the generous welfare systems of Euro zone members is more important than looking after Singaporeans.  Instead it can behave with complete impunity and ignore or amend the Constitution at will because there are so few Opposition members in Parliament. This has to change. Until we have a competitive and democratic political system the interests of the broad mass of Singaporeans will continue to be ignored and “inclusivity” will remain a hollow phrase.

Despite Prof.Lim’s undoubtedly good intentions, the solution to wage stagnation for Singaporeans is not some central planning directive taking us back to the Soviet era. It is Singapore’s lack of democracy that is holding us back. What we need now is thoroughgoing reform ofSingapore’s political institutions so that they become more democratic and inclusive and thus more responsive to the interests of the bulk of Singaporeans and not just a narrow elite.

I read the outlines in our State media of Prof. Lim Chong Yah’s proposals for restructuring the Singapore economy with some scepticism. Among the questions that immediately sprang to mind was how we were going to simultaneously reduce our dependence on cheap foreign labour and raise the wages of the low-paid (by 50%!) without either a statutory minimum wage or greater curbs on foreign labour. Without either of these Singaporean workers would just be priced out of the market which I assume is not the intention. The State media were predictably short of details given that a minimum wage has up till now been anathema to the PAP government.  HoweverProf.Lim’s proposals have been criticised by the head of the NTUC, Lim Swee Say, as “very risky” and likely to lead to unemployment. This has always been the government’s line whenever discussion of a minimum wage has come up. However such criticisms are disingenuous as they omit to mention that Singaporeans have been priced out of working in several sectors because of undercutting by foreign workers and therefore there may not be much additional unemployment among Singaporeans. In fact it could lead to higher employment of Singaporeans while at the same time spurring restructuring of the economy towards higher value-added activities and cutting our dependence on foreign workers.

However Prof.Lim’s proposals go much further than a minimum wage and amount to wholesale state intervention in the labour market to determine wages. This would be anathema to me as a free market economist. Despite the longstanding efforts to burnish Singapore’s market credentials with international media and global business, the proposals are revealing of the appeal of Communist and statist central planning to many in the government and establishment. As the former head of the National Wages Council, Prof.Limwas responsible for the policy of pushing up wages rapidly at the beginning of the 1980s. This was aimed at bringing about the restructuring of the Singaporeeconomy towards higher value-added activities.  I remember discussing this plan with my Director of Studies at Queens’ College Cambridge in 1981. His comment was that this was classic development strategy. However the policy was abandoned after the economic recession in 1986 when there was a big rise in unemployment. In the 1990s as labour force participation rates rose towards full employment levels there was an ideal opportunity to resume the restructuring of the economy and to move away from low-value added activities and our dependence on extensive growth without any increase in underlying productivity. But, rather than let the growth rate decline the government chose instead to  open the gates wider to foreign labour, first a trickle but one which had become a deluge by the late 2000s. This kept our growth rate high and impressed foreigners but caused wage stagnation for those workers at the 80^th percentile and below and probable real wage declines for the bottom two deciles over the period 1998-2010.

Since I pointed out in 2009 that the emperor had no clothes the PAP government have started enthusiastically talking the language of restructuring and higher productivity and cutting our dependence on foreign labour while making noises about how “inclusive” they are. They devoted a whole Budget to it in 2010. The truth is that the government would not like any curbs on foreign labour but they have been reluctantly forced to be seen doing something after the last election where unhappiness at uncontrolled immigration was a major factor.  Hence they have come up with the gradualist policy of raising foreign worker levies instead. While a tax (which is what the levies are) is generally preferable to a quota because the price mechanism is a more efficient way of allocating resources than quantitative restrictions, there are potential drawbacks. I have already pointed out that raising levies may not be enough in a situation where employers are able to source cheaper labour from poorer countries to replace Chinese and Indian workers who find themselves priced out of the market.

One has to ask why the PAP government have pursued economic policies for so long which are not in the economic interests of the broad mass of Singaporeans. After all governments in democratic countries have been voted out of office for what is perceived as their failure to control immigration. The flood of workers from Eastern European countries that had joined the EU was a factor in the Labour government’s defeat in the UKin 2010. Clearly for our government it was not lack of knowledge of the economic consequences of their policies.  As Why Nations Fail* makes clear, history is littered with examples of countries with extractive political institutions that have pursued policies that have impoverished the bulk of the population but allowed a small segment to get immensely wealthy.  Singapore also suffers from non-democratic and non-inclusive political institutions. This in turn ensures that policies that favour a small elite get implemented and that economic institutions get less inclusive. By allowing in cheap foreign labour and cutting real wages for ordinary Singaporeans the PAP government increases the share ofGDP going to profits and the high-paid. High economic growth rates and increased profitability do not translate into higher living standards for the bulk of Singaporeans but do serve to justify high salaries for the leaders of our GLCs, our Sovereign Wealth Funds, senior civil servants and of course government ministers. At the same time higher property prices stemming from a deliberate policy of uncontrolled immigration also benefits the elite who in turn are quite happy to support the non-democratic nature of our political institutions.

*Why Nations Fail, byDaronAcemoglu andJamesA.Robinson