Monthly Archives: April 2012

Royal Elephant Shoots Part 2

Yesterday I wrote about the PAP government’s willingness to bail out the Eurozone with generous contributions to the IMF’s lending facility ( 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 UK the Chancellor,  George Osborne was forced to defend his decision to commit US$15 billion (which is only about US$250 per UK citizen) in Parliament. He argued he did not need Parliamentary approval because Parliament had previously approved an increased UK commitment 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 (

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 the UK is, in spite of the Euro zone market being much more important to Britain than it is to Singapore. The UK has 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 like Spain, which was downgraded again yesterday, could be better spent at home with more effect on stimulating output and employment.

Australia also 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 States was not making a contribution.

In Singapore our 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 in Singapore’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.” (

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.

Tharman joins the King of Spain in a Royal Elephant Shoot.

Recently the Spanish King was in the news after it was discovered he had been shooting elephants in Botswana. The outrage was not sympathy for the elephants but the discovery that he was on a luxury safari in Africa so soon after expressing his sympathy for the plight of the 20% Spanish unemployed. This demonstration of royal hypocrisy caused an outrage among ordinary Spaniards who had just been told that they will have to endure years of austerity.

Our own ‘royalty’ continue to demonstrate their own brand of hypocrisy, faulty logic and poor understanding of basic economics. Our own Finance Minister Tharman was at a news conference held by the IMF on April 20 where he mentioned an involvement by the PAP government that I had warned of and indeed predicted in this blog back in December 2011.

Last December in  (Self-imposed Austerity,, I ridiculed the spin of our state-controlled media that, due to the wise governance of the PAP, Singapore had fortunately avoided having austerity imposed on them by external circumstances. I pointed out that the welfare system in the Eurozone countries, even after taking the austerity medicine prescribed for them, in my view mistakenly, by the European Central Bank and Germany, was still far in excess of the meagre and begrudging safety net available to Singaporeans. Statistically we have one of the lowest public expenditures as a proportion of GDP in the developed world on education and health. 

Crucially I said,

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.

Lo and behold what I predicted has now more or less come to pass. On Friday Tharman told the audience that the PAP government had agreed to contribute US$4 billion (about $5 billion) to the IMF as part of a capital-raising designed to bolster the IMF’s resources for lending to Eurozone countries requiring bail-outs.

What hypocrisy! To put it mildly, this may not be especially palatable to ordinary Singaporeans who have constantly done without the safety net available in even the poorest Euro zone countries so  that Singapore can build up its reserves for a rainy day.

It is true that our money is being loaned to the IMF rather than the debtor countries themselves. The IMF was at pains to point out that the additional money was not earmarked for any particular region. This is presumably because of the sensitivity that poorer countries are being asked to bail out relatively affluent ones.

It is also true that the IMF has never defaulted on its debts. However this is because the developed countries have always provided it with additional resources when required. It cannot be said to be the equivalent of investing in US Treasuries.

Significantly the US has so far refused to pledge any money. One of the reasons for its reluctance to help is presumably because as a democracy their citizens are unlikely to view favourably providing taxpayer dollars to support the lifestyle of relatively affluent countries.  Nevertheless the present round of contributions are likely to be only the beginning if Spain, Italy or even France and the Netherlands were to follow Ireland, Greece and Portugal down the road of debt restructuring accompanied by external bailouts. I find it difficult to see how this can be avoided unless these countries agree to abandon the Euro or the Germans have a change of heart.

If there do need to be fresh bailouts then presumably Singapore would have its arm twisted to make much bigger contributions. Also the increasing austerity fatigue evident among the electorate of these countries will make the next round of IMF-led bailouts much riskier.

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.

I’m sure you are pleased to know where the money you earn is going and that whilst our poor get poorer, our lean middle class is squeezed ever harder, Europe’s Royalty continues to party!

While I am not in favour of creating a welfare culture I have always espoused safety nets, counselled against unnecessary austerity and put forward proposals for returning state assets to those who earned them by schemes such as privatising Temasek holdings with a distribution of shares to Singaporeans. I do not see why the savings squeezed out of our long-suffering citizens by an austerity diet should be used to subsidize other countries whose citizens enjoy a higher standard of living and much more generous safety net.

Elsewhere in his remarks Tharman called on debtor countries to put their public finances in order and cut deficits which he said was necessary to put them on a sustainable growth path.  His prescription is unfairly asymmetric because it puts all the pain of adjustment on debtor rather than surplus countries like Singapore, China and German.  He also demonstrates faulty logic falling for the ‘fallacy of composition.’  It may be sensible for an individual country to try to increase its savings rate by cutting its budget deficit. But if all countries try to do so, then the result will be a catastrophic slump in output and employment. This is the 101 of Keynesian Economics yet it has been forgotten by most politicians worldwide.

Although Tharman was not an Oxbridge scholar for his BA, I know from my conversations with him at Cambridge, where he took his MA, that he used to be a better economist than that. Therefore I would put his espousing of the conventional wisdom down to a desire not to make waves or rock the boat. Unfortunately this group think is something that all our Ministers and PAP MPs learn early on and that million dollar salaries make a difficult habit to break.

That is why we need a democratic revolution in Singapore if we are to ever get genuinely innovative thinking.

The rich are different to us…..they have more money

Yesterday I talked about the importance of democracy and inclusive political institutions to ensure inclusive economic institutions and prevent the adoption of policies that only benefit a narrow elite. These days one cannot pick up a government-owned newspaper or turn on the TV without  being told that PAP’s goal is to build an inclusive society.  However we will find it difficult to build an inclusive society whilst we continue to have non-democratic and non-inclusive political institutions.

The last few weeks we have been treated to tantalizing revelations about how important dynasties and family relationships are in China. In today’s FT there is an article about the downfall of Bo Xilai (Bo’s Downfall Sheds Light on Nepotism, Both Bo Xilai and Gu Kailai are children of revolutionary generals and Bo’s father, Bo Yibo, was one of the “eight immortals” who ruled China behind the scenes in the 1980s and 1990s. Their other siblings all hold important posts in state-owned companies or have control companies that do business with the Chinese government. While Bo Xilai was the General Secretary of Chongqing his wife was a lawyer who set up and benefited from a number of business ventures both inside and outside China. In fact it was the threat that her financial dealings were to be exposed that allegedly led Gu Kailai to kill the British businessman Neil Hayward.

It is ironic that the Chinese Communist Party, which like the Soviet Communist Party, seized power with the tacit consent of the majority by promising to raise the masses out of poverty and eliminate inequality should be captured by a group of elite family dynasties.  Recently Bloomberg reported that the 70 richest delegates to China’s National People’s Congress were worth an aggregate of $89.8 billion, or more than a billion dollars each.

“In other countries children of politicians often get opportunities that others don’t but the problem in China is there is absolutely no transparency and there is also a strong sense of entitlement, that this money is their birthright,”   said one person with close ties to top political families in China.

“The problem for the Party is that exposing the Bo family businesses makes people realize that this is how it works for everyone.” (FT)

The importance in business of having family ties to or friendships with politicians is of course not a phenomenon that is confined to China. In Africa, Uhuru Kenyatta is reported by Forbes to be owner of Kenya’s biggest dairy company and one of Africa’s 40 richest residents. He served as deputy prime minister of Kenya and is the son of Kenya’s first president, Jomo Kenyatta. In the Mideast, the Bin Laden family made its riches through construction contracts for the Saudi government derived from the close relationship of Mohammed bin Laden and his sons with the Saudi royal family.* The former President of Egypt Hosni Mubarak’s family are reported to have accumulated a fortune of US$80 billion.  The family of the deposed Tunisian strongman are estimated by Al-Jazeera to have taken US$17 billion with them when they left the country while the Gadhafi family wealth is estimated at a seemingly implausible $200 billion by the new regime.

However one should not be surprised at this. After all non-democratic political institutions tend to be extractive and frequently serve just to maintain the power and privileges of an elite, whether a group of families as in China or a hereditary aristocracy as in Europe. A vicious circle develops in which dominance of  political power helps the elite to increase their economic power which in turn reinforces their political power. They have some interest in economic growth as long as it raises their wealth and they have to keep living standards for the masses either rising or not deteriorating enough to pose a threat to their rule. In this North Korea appears to be an exception, as the Kim dynasty is now into its third generation despite having reduced the bulk of the people to starvation and absolute destitution.

Here in Singapore “Inclusivity” will remain just another buzzword without  full democratic institutions to back it up.  As a former colony there was already a history of extractive political institutions.  The struggle to build new democratic ones was not helped by one party walking out and handing a walkover to the other so early in our post-independence history.

Our new buzzword should be transparency. While we have a Code of Conduct for Ministers that requires them to disclose their income, assets and liabilities to the PM upon taking up office – this does not go far enough. I propose that we need to  move to full annual public disclosure including the property and incomes of spouses and dependents. The same rules should be extended to senior civil servants, judges and senior management and directors of GLCs. This would only bring us in line with what public servants are required to do in democratic countries. For instance in the US, the Ethics Act requires annual disclosure of financial information by the president, vice president, members of  Congress, federal judges, presidential appointees, and other officials and employees earning at or above a specified pay-scale or with policymaking responsibilities. There are similar laws in Canada and many European countries while the UK has announced plans to make public ministers’ tax returns.


More Democracy is the Solution Not Shock Therapy

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 80th 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


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