Monthly Archives: October 2011

Singapore.The Stagnant Society?

Many years ago I remember seeing a book entitled “The Stagnant Society” which was about the relative decline and low growth rate of the UK.  As a result living standards rose more slowly than the more dynamic European economies. There were both economic explanations (a lack of investment) as well as the harder to quantify sociological ones (a rigid class structure which led to both a poorly equipped educational system and a general disdain for manufacturing and trade).

Forty years later Singapore seems to be in danger of falling into the same trap. The problem of relative economic stagnation for the bulk of Singaporeans is highlighted in a report by MOM published this week. ( )

Their figures show that real incomes for the bottom 20% of Singaporeans barely increased over the period 2001-2010 while median real incomes rose by only 1.2% p.a. All the growth occurred during the period 2006-2010 which is suspicious. I suggest that there are three reasons why income growth may look better than it in fact was:

  • In 2009 the government changed the definition of full-time employment from 30 hours or more per week to 35 hours. This would have provided an immediate uplift to statistics as a section of lower-earning workers was moved from being classified as full-time to part-time employment.
  • The number of residents (citizens and permanent residents) increased by 7% over the period 2006 to 2010. If the incomes of new citizens were considerably higher than the median then the median would have risen but there may have been a smaller change in the median incomes of the original Singaporeans.
  • MOM use the CPIto calculate the rise in real incomes over this period. However as Secretary General of the RP I had already expressed serious doubts over whether the current method of calculating CPI accurately tracks housing costs.  These take up more of the expenditure of lower and median incomes (around 25%) than they do of higher income groups ( The Statistics Department bases its calculation of housing costs on imputed rentals. The Statistics Department’s method of calculation fails to capture the rise in mortgage servicing costs which will be driven by rising prices (HDB Resale Price Index up 70% over ten years). Nor does it capture the depreciation in HDB properties which are only 99 year leaseholds.  The rental sector is very small and most Singaporeans have to buy. While rents have fallen over the last few years in line with interest rates the HDB resale price index has continued to rise strongly. Also is the fact that average flat sizes have decreased reflected in the CPI?  This is an example of so-called hedonic indices which attempt to track changes in quality of the goods in the basket and reflect these. The lower income groups also spend more of their incomes on food and utilities, the costs of which have risen faster than the general index in the last few years.

The report goes on to say that median monthly income per household member among citizen headed employed households increased by 1.8% p.a. in real terms over the same period. This is a measure that MOM appears to have trotted out specially. However this has even more problems than the first measure. The number of dependents per household has been falling as a consequence of Singapore’s declining birth rate. So income per household member would rise even without any rise in median real incomes.

Even if the MOM’s statistics are accepted at face value there would appear to have been little real income growth for the majority of Singaporeans. However given the caveats above the picture is undoubtedly worse than it appears.

While I would not contend that Singapore is unique in having these problems,  the fact is that we have a government which trades purely on its record for delivering the goods economically. That after all is why we are told we need to put up with the lack of personal and political freedom.  The government has set itself an ambitious target of 30% median real income growth by 2020. That seems like pure pie-in-the-sky now given the state of the global economy.  By 2016 I see the electorate being less forgiving than they were in 2011. Who knows? By 2016 Singaporeans may be much closer to putting a non-PAP government in office for the first time.

Fat Tails and Unknown Unknowns

The Pulau Bukom refinery fire is finally out and fortunately with no loss of life. For Shell though, their biggest refinery is out of action, possibly for an extended period. Still a good outcome when one considers the fifteen lives lost and over 100 injuries in the BP oil refinery fire at Texas Cityin the US in 2005.

If the explosion and fire had occurred onJurongIsland, home to nearly three times the refining capacity of Bukom as well as a host of other downstream chemical plants feeding off the refineries, the results could have been catastrophic. Much closer toSingapore  a catastrophe there could have resulted in serious loss of life particularly if fires or exploding debris had hit the mainland. Nothing is known about the causes of the Bukom explosion. In Texas the explosion was caused by the failure of indicators to detect leaking hydrocarbons which were then ignited by a diesel engine that was left running in contravention of regulations. Here the initial indications are that the explosion started in the pump room and then spread.

It is good that the government has announced so quickly that there is to be an inquiry into the causes of the fire though less explicable is the decision to have the inquiry conducted by the Ministry of Manpower (MOM) alone. Surely the National Environment Agency (NEA) should be involved as well. Even more alarming is the fact that the Workplace Safety and Health Commission, which will be investigating the fire, is chaired by none other than the Chairman of Shell. It would be hard to think of a more obvious conflict of interest! At the very least he should recuse himself and step down while the inquiry is in progress.

Longer term, the government’s practice of appointing industry insiders to regulatory bodies should cease. In the sphere of public transport we have the Public Transport Council which is packed with representatives from the industry itself as well as the government and NTUC (which is of course a shareholder inSBSTransit).  I was not the first to draw attention to this as back in 1999, JBJ in one of his Parliamentary speeches, bemoaned the fact that thePTCwas filled with industry representatives and included hardly any of the public who are the biggest users of public transport.

This cosy relationship has certain discomforting parallels with Japan. In Japanlax regulatory oversight combined with a culture of secrecy and a cosy relationship between regulators and industry was a big contributor to the severity of the Fukushima Daiichi nuclear accident and to the deliberate downplaying of the environmental risks after the accident. However while in Japan the practice of regulators taking subsequent positions with the companies they regulate has been widely assailed at least it does not go as far as Singapore where the industry would appear to be responsible for regulating itself!

All well and good, you might ask, but what has this to do with the “fat tails” of the title? This refers to the hypothesis that random events are normally distributed with 95% of possible events falling within two standard deviations from the mean and 99.7% within three standard deviations. A fat tail means that the likelihood of an extreme event is much higher than would be predicted if events followed a normal distribution. The financial crisis of 2008 was so unanticipated because based on a normal distribution such events should only have occurred once every thousand years or so. Yet in practice they seem to roll around with increasing frequency. In fact hedge funds have been set up to try and take advantage of this discrepancy by buying what they perceive to be cheap out-of-the-money options. Their profit profile then becomes the opposite of most of the other financial players in that they are prepared to tolerate small losses over an extended period with the expectation of huge gains when these seemingly extreme events occur. And this is in fact what happened in 2008 with funds like the Black Swan fund associated with Nicholas Taleb.

My point is that, even though the petrochemical industry in Singapore might have had a good safety record up until now, are the government aware of the potential risks of an extreme event of courting so much investment in a high-risk industry so close to a densely populated urban centre? Are Singaporeans aware of the possible downside? There is a reason why these companies choose to site so much of their petrochemical investment in Singapore and why the construction of new refineries so close to large cities would be a political no go area in the US or most other advanced countries. Our air quality is already in the bottom quartile among cities in developed countries according to the latest World Health Organization study ( and strangely enough the only major city in theUS with an air quality as bad asSingapore’s is at the centre of the domestic oil industry (Bakersfield,California).    How many Singaporeans do you know with adult onset asthma and allergies? These conditions are usually closely linked to air quality.

Just as a trader who makes money by running more risk looks good until the market blows up, so we should worry that our government is pursuing economic growth at all costs by running unnecessary risks.  Marginal investments which yield little economic benefit to Singaporeans in terms of jobs or tax revenues may be pursued with incentives that end up both being expensive for the taxpayer and pushing up the price of scarce inputs like land. For instance did the petrochemical companies pay for the land reclamation that created Jurong Island? I hasten to add that I have no special axe to grind with the petrochemical industry and I welcome foreign investment. However there needs to be a proper cost-benefit analysis and the results should be made public through a Freedom of Information Act.

The government’s flawed approach is illustrated by the reasoning behind the euphemistically named Integrated Resorts which employ mostly foreigners and have high social costs (although my objections are not based on the criteria that lead others to seek a ban on moral or religious grounds). If the sole criterion for whether an investment is worthwhile is whether a business makes money, and that only in the short term, then why not liberalize drug-taking which would be a huge money spinner?

In my last article onUBSand GIC, I speculated as to whetherUBS’s whole edge in the wealth management business was due to its willingness to cut legal and regulatory corners which made even more questionable why GIC was so keen to get a piece of the action:

“I agree that smuggling diamonds out in toothpaste tubes is a strong way to generate wealth for your clients and if it weren’t illegal, I too would love a piece of that franchise. (”  In any case our government has always welcomed foreign leaders who might find it difficult to travel elsewhere, such asRobertMugabe fromZimbabwe who happened to be staying at theSheratonTowers when I was staying there, on one of his regular shopping trips.

Most Singaporeans are aware now, thanks to my regularly publicizing the fact, that the lion’s share of Singapore’s growth did not come about by raising the productivity of our workforce but by importing foreign workers. The floodgates were opened to overseas labour, at great cost to the incomes of native Singaporeans, as our government courted raw economic growth with what appears to have been no evaluation of the external costs or their impact on our welfare or even, in the case of hazardous industries like petrochemicals, the underestimation of the risk of extreme events. This is still continuing as demonstrated by the government’s plans for a nuclear power plant in Singapore, ignoring the closeness to the urban centre (perhaps they will locate it on Jurong Island citing the potential synergies!).

If the Pulau Bukom incident has drawn attention to the dangers of extreme events being underestimated and more generally to the need for a more transparent quantification of the costs and benefits of major investments, then it will have served a useful purpose. Call me an old cynic but somehow I doubt that this will happen.


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