Monthly Archives: November 2011
You’ll be dead before you can spend it! Singaporeans enter the 20th year of unnecessary, self -imposed austerity.
Watching the Euro-zone unravel has so far almost been like a moral fable for Singaporeans. Be honest! Who out there isn’t feeling a sense of Schadenfreude? The original Greek or Irish problem on the periphery of Europe and investor flight from European sovereign debt has spread via Spain and Portugal, to Italy and even France, Austria, the Netherlands and Finland.
This moral fable could be said to illustrate the dangers of profligate governments who have bought electoral popularity with populist policies and high levels of welfare spending and are now paying the price. As an economist I would say that the only certain moral to this story is, ‘beware the folly of entering a currency union without a fiscal union’. The rest is open to debate.
In a desperate attempt to stave off default and unlock emergency funding from the ECB and latterly the IMF, those beleaguered states have agreed to scale back their generous social welfare programmes, increase existing taxes and impose new taxes. All of this results in an externally imposed, endless round of “austerity” budgets. As I write it is not only the financial axe that is being wielded. The Euro-zone governments are discussing a solution which will essentially involve a loss of political and economic sovereignty by the countries facing insolvency. This prompted one friend to say that the Germans, by having the most competitive exchange rate when entering the Euro (coupled with a high level of productivity and skilled labour) have achieved a mastery over Europe where Hitler failed.
However, the solution being imposed on the weaker economies would be likely to condemn them to years of lost output and slow growth as compared with higher levels of output and employment in the stronger countries. Without a true political union, which is unlikely to be acceptable to the richer Euro-zone countries such as Germany, it is difficult to see how the currency union can survive longer term.
According to the popular logic of the anti-populists such policies as free health care, free education and old age pensions, lead to a lazy workforce that demands uncompetitive levels of wages. Thankfully for us our wise government has never fallen for the easy route of giving the people what they want (or need or deserve). On the contrary they have ensured that Singaporeans have been kept on an austerity diet almost since independence. Pity the struggling European economies but don’t forget to look in your own backyard when you shed a tear.
We have very little welfare spending (except the ‘ give-aways’ at election time when the government throws around money away in an untargeted manner) and one of the lowest expenditures as a proportion of GDP in the developed world on education and health. Let me repeat that. One of the lowest public expenditures as a proportion of GDP in the developed world on education and health. As we know the expenditure in terms of private money coming from your own pocket is very high indeed with exam success being directly correlated to expenditure on tuition. In Singapore we are proud to have developed a world class system of ‘hire ‘education. As well as the private financial burden we have the devastating personal social costs of long term medication and care required for old age, cancer, chronic illness or disabilities both physical and mental.
Despite the government’s harping on how this has resulted in low taxes for median-income Singaporeans compared with Europeans, these income groups are not really any better off. Europeans generally receive free health care and completely free education -which is mostly compulsory up to the age of 16. (a vital child protection safeguard). Singaporeans have to pay for medical care with Medisave and Medishield and are often forced to top this up or go without treatment because of gaps in coverage or inadequate savings. We also work up to 50% longer hours to achieve living standards on a par with the less affluent Euro-zone countries.
The end result of this scrimping and saving is familiar to all. The Government has run huge and persistent surpluses as a proportion of GDP(between 5% and10% of GDP though in 2007 it was considerably higher than this) for over twenty years. This includes revenues and receipts from current and past reserves as well as revenues from land sales and capital receipts. I believe it is misleading to exclude these revenues and receipts from the Budget. The Government further disguises its exceedingly comfortable fiscal position by using an accounting convention of subtracting both current and development expenditure from current revenues. It then adds back only (at most) 50% of the revenues from the Sovereign Wealth Funds, Temasek and GIC. Our Opposition needs to demand a proper accounting
The high levels of government saving are partly responsible for a current account surplus of over 20% of GDP. Because the MAS intervenes to prevent the Singapore $ rising too far, this is reflected in the growing holdings of official reserves and the overseas assets held by our Sovereign Wealth Funds, Temasek and GIC. It is true that Singapore has avoided a situation where the Government has had to issue foreign currency debt and in fact has a substantial net asset position (particularly when its ownership of 80% of the land is included!). The benefit is that we have avoided the problems of the Euro-zone where the deficit countries are being forced to cut back on spending and raise taxes.
But is this a good thing and does it make our government fiscally wise? In a way that is like saying that a starving man has avoided having a starvation diet imposed on him by voluntarily deciding to impose it on himself first. Some of you will be acutely aware that those holding the food supplies make sure they themselves have a very rich diet. The wonder is that whilst they earn millions of dollars for cabinet roles you agree to tighten your belts, take on extra work, move dad into the corridor, rent out your rooms and die slowly without the dignity of care and medication. If you are still feeling smug bear this in mind. Even with cutbacks the countries embracing austerity programmes will still have almost free public health and education while Singaporeans do not.
There is really no justification for the continual accumulation of reserves and government surpluses once these have reached a level sufficient to provide for a serious crisis. Our Government passed this level some years back but continues to insist on its necessity. Meanwhile CPF holders are being forced to take unilateral changes in the terms on which they can get their money back. This is despite the low returns on CPF savings having been one of the major contributors to the growth in overseas assets. The present generation of Singaporeans has been robbed, supposedly to pay for a future generation of Singaporeans, despite accelerating technological change and productivity growth making all but certain that future generations will be much richer than the present one.
The big question is will we even benefit from our enormous overseas assets? I believe we are fooling ourselves if we think that by actually saving all this money we will get to spend it or that our children will. GIC, Temasek and MAS have yet to come clean on how much it has invested in Euro-zone sovereign debt and how much it stands to lose should there be a debt default in the worst case or just a restructuring. As I said before, there is no-one in Parliament willing or able to demand an account.
Presently the countries that have run large current account deficits for many years, such as the US and many members of the Euro-zone, are acutely aware that the counterpart of their deficits is excessive saving in the surplus countries, mainly China but also Japan, Korea, Germany and of course Singapore. They know this prevents them from being able to achieve satisfactory levels of growth, output and employment. The Euro-zone has already turned to China and asked the Chinese Government to buy more Euro-zone debt. This has allegedly infuriated many ordinary Chinese who complain about how poor they are compared with the average European. Their anger should be directed at their government which has held down consumption and domestic living standards to create a level of reserves far higher than necessary. This has allowed a situation in which they now find themselves held hostage to the debtor nations. It is likely that our Government faces the same pressures from the EU to invest in bailing out the insolvent members of the Euro-zone.
It would be far better if our reserves were spent on benefiting Singaporeans in the first place rather than hijacked by political considerations. That is why I have consistently called for a reduction in our general budget surplus, measured as widely as possible, to a much lower figure, say under 1% of GDP over the course of an economic cycle. The funds could be invested in basic improvements to Singaporeans’ health and education as well as cutting taxes.
I have also called for the privatization of Temasek and GIC with the distribution of shares to Singaporeans. If they are owned directly by the people then it will be more difficult for them to be held hostage to foreign political pressures.
Another Round of Monopoly Anyone?
In Parliament on Monday the Government announced changes to the Telecommunications Act designed to give them powers to require a telecoms company, or Telco, to divest its assets and business to a separate entity should it be found to be engaging in anti-competitive behaviour. Also the government now has the power to take over any network or services if it is in the National or public interest to do so.
According to the Minister for Information, Communications and the Arts, Dr. Yaacob Ibrahim, the Government is committed to ensuring fair competition ‘because ultimately we believe that this will drive prices to an affordable level for all Singaporeans’. This sounds suspiciously similar to what I have always said. Namely, that competition is as vital in business as it is in politics. In particular I was sceptical not so far back, of the Worker’s Party plans for nationalising the transport industry when I felt that competition (with a strong neutral regulator ) would always be in the best interests of the consumer. My caveat was that I always point out that what we think of as privatised here in Singapore is not really that privatised.
Are these proposed changes to the Telecommunications Act anything other than a public relations charade designed to give the appearance of opening up the domestic economy to more competition? In fact they do nothing to reduce the power of government-owned or controlled cartels which dominate many of the key consumer sectors of the economy?
Who, after all, is the ultimate owner of the three Telcos operating in Singapore? SingTel, though listed, is majority-owned by Temasek. As is Starhub, in which Temasek has an interest, either directly or indirectly, of about 57%. Even the third player, M1, has Keppel Telecoms (an 80% owned subsidiary of Keppel Corporation in which Temasek holds 22%) and SPH Multimedia (part of Mediacorp) as holders of a third of its shares. The Malaysian state Telco, Axiata, owns a further 20%. In any case, a large number of the directors and senior managers at all three Telcos are either MPs, or have a Civil Service or GLC background. Since the Government clearly controls the telecoms industry already, the need for extra powers to nationalize it in the public interest would appear to be unnecessary.
Normally competition regulators use measures of market concentration such as the Herfindahl-Hirschmann Index (HHI as an important measure of whether mergers should be allowed. This is obtained by summing the squares of the market shares of the participants. 10,000 would be a perfect monopoly while a score approaching zero would be close to that ideal of economists, perfect competition. Any score above 2500 would indicate a highly concentrated market though regulators would also take account of other factors as well. These include barriers to entry and new technologies in trying to assess whether historical market shares are a good guide to future pricing power. On the basis of the HHI, Singapore’s telecoms market is thus highly concentrated with a score approaching 10,000 since the Government has a significant stake in all three players and outright control of the biggest two.
When all three Telco providers are either owned by the Government or the Government can be said to exercise significant influence over their management and strategy, how is it possible for the Government to say it is committed to ensuring fair competition? In addition surely it is not believable that the Government can be relied upon to regulate itself when its clear economic interest lies in ensuring that all three companies maximise profits by not competing on price. Is it any coincidence that Singaporeans pay significantly above what UK consumers pay for mobile phone usage (between 50% and 100% more based on a simple comparison of price plans)? Singapore consumers also often have to pay for their phones whereas these are bundled into other countries’ price plans, making the deal for the consumer worse than the headline figures might suggest. The situation is even worse when comparing pre-paid plans, which are used by the less well-off. This extends to international roaming, where up till now there has been no regulation to protect consumers.
The solution lies not in relying on the Government to do the right thing and regulate itself but to sell off the majority stakes in the three Telcos so they no longer have a common shareholder. At the same time the Competition Commission of Singapore (which is ever eager to come down hard on Indonesian maid agencies but displays a strange reluctance to investigate government monopolies) needs to be strengthened. Its workings should be more transparent. A start would be more hearings on matters of public interest to which consumer organisations would be invited to make submissions.
Despite the industry regulator, the Infocomm Development Authority (IDA) having lifted all restrictions on the number of licences granted for telecoms business since 2000, we strangely still have an industry which is wholly dominated by government-linked entities.
What has happened in telecoms is not an isolated instance but applies to a whole range of domestic industries and utilities, where the Government is either the sole player or controls, directly or indirectly, a significant part of the market. We can start with land, where the Government owns approximately 79% and of course housing where the HDB is the developer, the builder and together with CPF, most often the lender for the houses most of us live in. Public transport is a duopoly between SMRT, a Temasek-controlled corporation, and SBS Transit, where the major shareholder is NTUC, a government-linked cooperative. Other domestic industries in which the government or government-linked entities have a significant economic interest or a monopoly are food retailing (NTUC), banking (DBS and StanChart), electricity supply and distribution, retail and office space (CapitaLand and CapitaMalls), airlines (SIA and Silkair), shipping (NOL) and media and newspapers (Mediacorp and SPH).
So is the Minister merely being hypocritical when he talks of wanting to ensure “fair” competition or does he really not understand the corporate structure and shareholdings of the companies involved and how markets work? Perhaps this is just another Singaporean example of Newspeak, to invoke George Orwell and 1984, and in Singapore “competition” means monopoly. Given the Government’s dominance in the economy, how does Singapore get rated year after year near the top of certain indices of economic freedom. There is of course no such thing as a completely free market, and I believe that a certain amount of government intervention is required because of market failure. But, even so, Singapore continues to be cited as an example of free market success when it is much closer to state capitalism of the Chinese variety. At our stage of development such policies have outlived their usefulness and are actually holding us back. A complete break with the policies of the past is needed in the economic sphere just as much as in the political one.
My response to your comment on gridlock and the understanding of the masses.
This article is written in response to a comment I received on my latest article. I thought it was important to respond at greater length than the space permitted for comments.
THE COMMENT:
Chieh Schen Tengsays:
Hi Kenneth,
The parallel you drew is timely. There are many symptoms of groupthink that can be seen from your examples, such as a stereotyped view of the enemy, (whether Woodford or Goodyear), which is one advantage for the group in getting foreigners. There also appears an unquestioned belief in the group’s morality. However, change in the Singapore situation is more difficult and need to come from the masses, which is why I am somewhat less optimistic, for several reasons. First, the masses here do not understand or do not want to understand. Second, it is always someone else’s job to do it. I am still a little optimistic because if the second is solved, the first solves itself. I am somewhat bearish in that after the tipping point is reached (which it will), instead of change, there is gridlock, and the masses get punished in a different way.
MY RESPONSE:
Good points. I agree that currently Singaporeans including those in the Opposition Party ranks are bemused or confused by the notion of democracy, transparency and accountability. The PAP know exactly what it is and that is why they go to such great lengths to hinder it or to muddy the understanding of it. When I entered into politics I said, in an interview published in Today newspaper, that my aim was to “normalise democracy.” By this I hope to address what you call ‘First ‘ in relation to the majority of Singaporeans. I also of course addressed ‘second’ by standing and by example encouraging many others to come forward for the first time. So now we have many new faces. These are the “someone else whose job it is” as you say and you are right to be optimistic.
At this moment we have 6, 7or 8? non PAP Parties broadly on the left and more or less all the same from an ideological point and then The Reform Party in the centre with a liberal ideology. To be more optimistic about the “someone else’s” in Singapore we need to see them start congregating around a set of principles or ideologies until the aims and the philosophies of the different parties are consolidated. Then the people will be more able to understand and they will have true choice.
Currently too much of Opposition politics is about personalities, egos, springing surprises and one-upmanship. The ideology of many Parties in Singapore seems to change according to who is in charge at any one time. The philosophies are not stable. The personalities involved change Parties at the drop of a hat. Not because of deep rooted ideological differences as they would in a developed democratic Nation but purely in the quest for power. Again with the single exception of The Reform Party which is unique in Singapore because it is run as democratic institution ( similar to the NGO Aware) all the Parties in Singapore, including the PAP, operate under the cadre system . Therefore those personalties who are more interested in power, media coverage or promoting their own egos rather than promoting a political ideology must game-play or wait for a weakness in an established Party. If this fails they simply leave, or start a new Party which will have a manifesto identical to the old one in every substantial detail except for the fact that they are now at the head of their own closed circle cadre. Hopefully this is merely a stage of development in our experience of political expression.
When Singaporeans can say, I’m a Socialist, Liberal, Libertarian (or whatever term we have) and therefore I will most likely support X Party because they are the Socialist Conservative or Liberal Party then we will know that we have developed a framework for democracy. We must then deal with the PAP’s mechanisms for preventing that expression from being heard. You finished your comment by surmising that true democracy will bring us gridlock and the masses will be punished rather than rewarded. This spectre of gridlock, currently much in vogue, is one of those PAP mechanisms. It is a more sophisticated mechanism than the old ones. The technique of blatantly threatening people will no longer suffice if Singapore is to keep a place on the global stage. The threat of gridlock has more in common with MM Lee’s assertion during GE 2011 that we would be daft to oust MBT. The people dutifully complied, helped by some sabotage from within the Opposition itself abetted by a Politcal Party with no specific ideology and willing to take any one on board. This very dramatically took the spotlight away from Tampines allowing the government to facilitate the resignation of the very minister they told us we would be daft to remove in a democratic manner.
The first step in normalising democracy is to get people used to the mechanical processes involved. To learn to understand by actually participating in an election so that National Elections are no longer a theoretical exercise.as they are in communist countries and military Juntas. Certainly we at RP played a major role in ensuring that every seat would be contested last GE and our first GE. It is regrettable that the Tanjong Pagar representative did not take up my offer of help including the offer of a Commissioner of Oaths. Had he done so then that team would also have entered the contest and every seat would have been contested. Never mind. By next GE every seat being contested will be a norm for General Elections in Singapore rather than an exception.
So let us now say we reach a stage where we have true Parties with clear, identifiable ideologies and a people who are habituated to the mechanisms of elections and democracy. Let us pass over for the moment the obstacles of GRCs , gerrymandering, The Newspaper and Printing Presses Act, funding obstacles, the Elections Department being in the Prime Minister’s Office , libel laws and self censorship. So despite these obstacles we reach a tipping point. You claim that you fear this will lead to gridlock and that the masses will be punished.
I can’t agree. Gridlock is the new word for Westminster style politics or democratic politics used by those who claim that it is unsuitable to a uniquely Singaporean or Asian culture . That is the whole point of my article. To say that asking uncomfortable questions and an Opposition doing what it is supposed to do will lead to gridlock or chaos is just an excuse for secretive organizations to carry on with a culture of secrecy and prevent shareholders exercising control over the management, in the case of Olympus, or the people of Singapore taking control of their destiny.
Ultimately lack of competition and accountability is a recipe for stagnation and decay. Look at the Soviet Union compared to the USA or Imperial China compared to the West. You say that the masses will get punished if we have democracy. The masses have been punished in Singapore by our government’s focus on achieving easy economic growth through the import of cheap labour and focusing on low technology rather than taking the difficult route of raising productivity. Real incomes have stagnated for the bottom 80%. It was only after we raised the issue of Singapore’s bottom of the league table productivity growth and the disastrous effects of the virtually uncontrolled flood of foreign labour on the incomes of those in the bottom 40% of the income distribution that the government claimed to be reversing course in the last election. While a strong Opposition and the need to answer tough questions may slow down the government’s ability to rush legislation through Parliament, it ensures that the policies we get have been held up to scrutiny first and we get less bad policies, of which Singaporean history offers plenty of examples. It also ensures that feedback on the effects of those policies is heard much earlier and the threat of reverses at the polls forces their reversal.
The criticisms of the US system of government which harp on about gridlock are thus wide of the mark and in fact increased scrutiny and checks on a too powerful executive are precisely what the founding fathers intended. While many in Singapore may point to the time taken to introduce new policies as a shortcoming it has prevented so far at least the quick adoption of the austerity policies that have been so harmful to the European economies.
Fortunately it appears that the tide of history is running in favour of those who favour questioning and accountability rather than secrecy with the rising number of democratic countries in Asia and the protests throughout the Arab world. Even China is not immune as evidenced by the rising tide of public anger over scandals like the high-speed trains accident. The inevitable concomitant of higher levels of education is that people will more control over their own destiny and how they are governed and will be less easy to fob off with the Culture argument. Rather than being punished, a changing political culture will at last ensure that the masses directly benefit from policies enacted in their name.
Like this:
What Lessons does the Olympus Saga hold for Singapore and our SWFs?
Olympus has been much in the news recently. Originally a camera company, these days much of its business comes from medical technology such as endoscopes and microscopes. It also gained the distinction of being one of the few Japanese companies, including Sony and Nissan to appoint a foreign CEO. Namely, Michael Woodford, a Briton.
On October 14th Olympus sacked Mr. Woodford after he raised questions about what he saw as unjustifiably large payments totaling US$1.3 billion in relation to certain corporate transactions. Olympus blamed the sacking on major differences between Michael C. Woodford and the rest of the management team.
As soon as I read the news I couldn’t help thinking of Charles ‘Chip’ Goodyear. The sentiments expressed in the official statements sounded so similar. Then again I am always wary of monoliths, whether non-democratic governments or multi-national companies, which wheel out Culture as an excuse for carrying on doing what they do without accountability.
Indeed Olympus issued a statement which in addition to the major differences cited goes on to say that the company will establish a Japanese style management in which “all our employees will head for the same direction” (sic). Here in Singapore they like the phrase ‘Asian values’ and in fact Temasek Holdings and PAP government statements can sound very similar to the Olympus board when they call for “cohesion” and “constructive” politics. Simply asking awkward questions and refusing to keep quiet is out of step with Japanese style management values/Asian values.
What were the details of the transactions about which Woodford sought answers? In 2008 Olympus acquired Gyrus Group, a British company, for over US$2 billion. In connection with this transaction it ended up paying US$687 million to a pair of obscure corporate advisory firms headed by two Japanese bankers. This payment represented nearly one-third of the value of the acquisition. Usually the fees in this type of transaction are around 1% of the value of an acquisition. Once they had got the money, the two bankers behind the advisory firms wound them up. They have since refused to comment. After the news broke, the FBI have also announced that they are conducting an investigation to see if any US laws were broken.
Olympus also paid US$773 million in 2008 to acquire three small loss-making firms in businesses unrelated to its own. In making the acquisitions it was advised by a company called Global Company which owned stakes in the three companies. The relationship with Global Company was overseen by Mr. Kikukawa, the company chairman. This is the same Kikukawa who dismissed Woodford. After buying the companies, Olympus within a year wrote off two-thirds of the acquisition cost.
After Mr. Woodford’s sacking and the subsequent revelations about questionable payments, Olympus’s share price collapsed, falling by 50%. In typical Japanese fashion Mr. Kikukawa was forced to commit the metaphorical seppuku and resign. In Japan this falling on the sword is usually seen as the end of the matter and business goes on as usual with a new name at the helm. In fact the company has promised a third-party inquiry but this clashes with statements by the new Chairman who is still insisting that there were no improprieties.
Today there were more revelations. Robert Mundell, a Nobel Prize-winning economist and the only foreign director on Olympus’s board when these transactions took place, made three trips to Japan prior to joining the board which were paid for by Axes Japan, a company owned by the same people who owned the advisory firm, Axes America, that was paid the outsize fee. However it is not known whether Mundell attended any of the meetings which approved the transactions or whether he recused himself.
In Olympus’s case the company has been punished by the markets for what appear to have been shareholder-value destroying transactions. Previously bullish analysts have swiftly revised their ratings and the company will be forced to pay lip service to the values of transparency and accountability by commissioning a third party inquiry. However much management might wish to escape scrutiny of their activities by appealing to strictly Japanese values this is impossible when their company is listed on the first section of the Tokyo Stock Exchange and has or had a significant international shareholding. The scandal has prompted even the Japanese PM to weigh in. This is highly unusual for a Japanese leader but he feels the controversy will harm his country’s image.
To quote his words, “it will be a problem if people take the events at this one Japanese company and generalize from that to say that Japan is a country that does not follow the rules of capitalism.” He is worried about the damage this could do to Japan’s reputation as a place to invest.
As I said above, the Olympus affair would appear to have uncanny parallels with the resignation of Chip Goodyear as CEO-designate of Temasek, a few months after being appointed. In this case there was no public sacking. Instead the resignation was supposedly by mutual agreement citing “unresolved strategic differences”. The lack of explanation failed to satisfy Singaporeans. It is notable that when pressed in Parliament to elaborate on the reasons for the resignation Finance Minister Tharman said that it would not be in the public interest to do so.
If Temasek had been a publicly listed company, then the lack of disclosure might have been a strong signal to investors that perhaps corporate governance was not all it should be and that they should head for the exit. After all asymmetric information between corporate “insiders” and “outsiders” is a key reason why there is a share price discount for poor corporate governance.
However Temasek (and GIC) are not publicly listed. Thus Singaporeans are locked in to their “investment”, with no ability to sell and get their money out. They cannot sack the management if it is deemed to have performed poorly. And they can’t even ask for a third Party enquiry. That is why I have consistently advocated the privatization and listing of Temasek and GIC and the distribution of shares to Singaporeans so that we become actual stake-holders rather than fantasy ones.
Too often the words “Asian values” are used in a self-serving manner designed to prevent questioning and accountability. The British president of Olympus was sacked for being” un-Japanese”. But they knew he was not Japanese when they appointed him. They seemed taken aback that he was demanding answers to questions that the company’s board did not want asked. In truth his sacking had little to do with being Japanese or not. They just did not want the extent of their destruction of shareholder value exposed.
In Singapore unfortunately our government and most of our Parliamentary Opposition seem to have the same mindset. Sadly our Opposition, with one or two exceptions, has so far been prepared to play the same role as the tame external directors on Olympus’s board and not hold the government to account. What we need in Parliament is more Mr. Woodfords and less Mr. Kikukawas.
Our government is always keen to slavishly import ideas and so-called expertise from Britain and other democratic countries when it suits them. The state controlled media are quick to report slavish adulation of our government by foreigners that were it critical would be swiftly condemned as interfering in domestic politics. We should not be gulled into thinking that the right to ask questions and demand accountability and transparency are a Western import we should do without. Just as shareholders have the right to demand accountability from the managers of the companies they own, so we as citizens have the right and indeed the duty to subject government policies to scrutiny and hold ministers accountable. Indeed it is key to our ability to be taken seriously as a First World nation.
