Author Archives: kjeyaretnam

My Response to David Pilling from the Financial Times

Screenshot 2015-04-11 15.41.30Screenshot 2015-04-11 15.43.24Screenshot 2015-04-11 15.45.48Screenshot 2015-04-11 16.10.36I have reproduced above  David Pilling’s article that I refer to in my last blog post “Perspiration without Inspiration. Singapore’s Role in the Asian Economic Boom.”

Below is the letter that I wrote to the FT in response and which they did not publish:

 26 February 2015

Letters Editor

The Financial Times

1 Southwark Bridge

London SE1 9HL

Dear Sir,

I refer to today’s article by David Pilling on Lee Kuan Yew’s legacy where several inaccuracies stand out

Pilling asserts that Singapore has a higher material standard of living than the UK, US and Norway. This is simply untrue. Even on GDP per capita, Norway’s is about twice Singapore’s. In any case, Singapore should be ranked against comparable cities and not countries. On the Brookings Global Metropolitan Monitor by comparison, which ranks cities by GDP per capita on a Purchasing Power Parity (PPP) basis, Singapore only comes 14th in the top 20 metropolitan areas. Macau is at the top and there are twelve North American cities above Singapore.

GDP per capita is also not a good measure. Singapore has a very high ratio of employed labour force to total population because almost 40% of the workforce are foreign workers. Singaporeans also work the longest hours of any developed country. On a GDP per hour worked we rank near the bottom of the OECD countries at a level that is only about 60% of the US.

Our distribution of income is also one of the most unequal in the world with a Gini coefficient of 46.3, significantly higher than the US and other developed countries. A UBS survey in 2011 found the purchasing power of Singapore’s workers’ wages to be well below that of many other Asian cities and around the same level as workers in Kuala Lumpur or Moscow.

Incomprehensibly, Pilling talks about LKY’s achievement “in conjuring a prosperous city state from an unpromising history and geography”. The Straits of Malacca have always been at the intersection of major global trade routes. As early as the 16th century the Portuguese said “Whoever is Lord of Malacca has his hand on the throat of Venice.” In 2011 one-quarter of the world’s traded goods or about 35% of the world’s container trade and the major part of the Asian oil trade passed though the Malacca Straits. Historically It was Stamford Raffles not Lee Kuan Yew who spotted Singapore’s potential as the best harbour in the region and long before 1960 we were one of the top three busiest ports in the world.

Yours sincerely,

Kenneth Jeyaretnam

Perspiration without Inspiration. Singapore’s Role in the Asian Economic Boom.

The death of Lee Kuan Yew has shown that much of the rest of the world believes that he  brought about an economic miracle in Singapore. Furthermore the world believes that this miraculous progress  was due  to his leadership skills alone and that no other person except him would have been able to achieve the same.  The iconography and the hagiography have long been etched deep  into the mythology of Singapore and almost universally  accepted.The fact that Lee senior was not even an economist and so an unlikely proponent of an economic miracle seems to have passed everyone by as have the contributions of Goh Keng Swee and Albert Winsemius.

Like all Singaporeans I have become inured to the never-ending, “Oh hail the dear leader who led us forth from the primordial mangrove swamp” type of propaganda.  The hapless and charmless Singaporean teenager Amos Yee pointed out in his now illegal You Tube broadcast that Lee Kuan Yew’s books are shoved in your face at every turn. But then Amos Yee is only 16 and hasn’t had as much time to get bored with it all as some of us older Singaporeans.  Despite this, even I was  impressed by the cringe-worthy  sycophancy of  an FT editor, David Pilling who wrote just before LKY’s death that, His [LKY’s]  punchily written memoir, From Third World to First, shows an acute awareness of his achievement in conjuring a prosperous city state from an unpromising history and geography.”   Sadly, Pilling’s paean was as short on quantifiable facts as it was high on praise. I wrote a letter to the FT rebutting it which as usual the FT declined to publish. You can read my letter below and the original article here.

David added a new twist to the old myth with his assertions about our unpromising geography and history. Not to mention that he unquestioningly accepts the title of Third world to First. I will just take a short detour into a mini blog article, to deal with that book’s unpromising title as it perfectly illustrates Lee Kuan Yew’s second rate intellect, willful adoption of outmoded ideas and deliberate mendacity.

From First World to First World and how we never achieved Third World status.

The terms  First,  Second and Third World  came into usage in the 1950s at the height of the cold war era. First World referred to the nations that allied with the United States namely: The UK, Western Europe and  other Allies such as Canada, Apartheid South Africa, The Philippines, Thailand, Iran under the Shah, Turkey, Namibia and Australia.   Second World referred to those nations that allied with the Communist nations of  the Soviet Union and China namely: Ethiopia, Yemen,  Eastern Europe, Vietnam and Cambodia. All other Nations  that were not aligned with either the US/UK  as First World or with The Soviet Union /China as the Second World were called the Third World. Namely India and Pakistan much of  Africa but also Sweden and Finland and Switzerland.  Yes, those Swiss standards of living are Third World standards.

So if we want to be accurate the title of Lee Kuan Yew’s book could be translated as From Switzerland To The Philippines, From Sweden To Namibia or the more snappy,  from Finland To Thailand. The fact is that by those definitions we were already First World by 1975 when the terms came into being and definitely by 1959 before Lee Kuan Yew came onto the scene.  It is true that possibly because much of Africa was in the Third world it became common to link Third World with  underdeveloped, lacking economic prosperity or poor standards of health and education.  Similarly prosperity and democracy became synonymous with the US and The First World. However and this is a big however,  used in that way these terms are not only inaccurate but are viewed as pejorative terms, as classifications that judge rather than describe. Educated people don’t use them as we have more accurate terms such as lesser developed, fully developed and emerging. I remember my own son at the Primary school level talking about developing and emerging economies in geography.  As those World Classifications  were outmoded and false decades before the paperback of his self promotional opus hit the shelves why then did Lee Kuan Yew still use them? He could not have been unaware that he was pulling the wool over everyone’s eyes.

Returning to Pilling’s paean let’s examine his claim that we in Singapore had an unpromising geography.  Whereas before he was uncritical now he is simply spouting nonsense. The less dramatic and simple fact is that our geography has always been our blessing, going a long way to make up for our shortage of land and natural resources. Already under the British, Singapore was one of the busiest ports in the world. Singapore is and always has been blessed with one of the best natural harbours in the world. We have an unparalleled strategic location at the mouth of the Straits of Malacca through which around 40% of the world’s container traffic and a large part of the world’s oil passes.  Lee Kuan Yew didn’t arrange, lead or masterfully control this. Talking about history lets go back to the 16th century when the vitally strategic location of the Malacca Straits was recognized by the Portuguese who took Malacca in an effort to dominate the world spice trade, then in the hands of the Venetians. Swap spice trade for oil and you can see that from medieval times through to contemporary days of international sea borne trade  our geography has been so promising that it is difficult to see how we could not have progressed.

Malacca Sultanate and Temasek

Malacca Sultanate and Temasek

We find a similar story with our historic economic record. In 1929 according to the Maddison Project data (comparing GDP per capita for countries around the world over long time periods and converted into  1990 Purchasing Power Parity [PPP] $) Singapore’s GDP per capita was significantly higher than Japan’s.  I repeat in 1929 our GDP per capita was already higher than Japan’s.  In 1950, after the Great Depression and the War, Singapore’s GDP per capita was still significantly higher than the rest of Asia.

There is a wealth of other data, photographic images and contemporary source material that I could produce in the same vein such as our exceptionally low infant mortality rates which in 1960 were already lower than Germany, Spain or Italy and close to US and UK levels.

 

Infant Mortality

Infant Mortality

I could show how the seeds of a middle class, one of the defining features of a developed economy, were already evident in the Chinese merchant classes of the late 1800s, then swelled by the British Empire’s Eurasian civil servants and their Indian clerks.  The fact is we weren’t an underdeveloped country before Lee Kuan Yew but did Singapore do noticeably better later in the period under Lee Kuan Yew’s authoritarian leadership than it would have done without the PAP in charge?

While the counterfactual is impossible to test scientifically, we can compare the periods before the PAP came to power with the period of PAP rule and also the records of comparable countries. So here  using  that Maddison Project data again, I have looked at Singapore’s GDP per capita  growth record. These are the figures for annualized compound growth for different periods:

1919-29 5.6%

1950-60 0.4%

1960-70 6.8%

1970-80 7.4%

1980-90 4.6%

1990-00 4.1%

2000-10 3.2%

So during the relatively brief period of prosperity after WWI before the Great Depression and WWII Singapore’s GDP per capita grew only slightly slower than the growth rate during the 1960s and 1970s and faster than it grew after 1980. Interestingly in 1950 Hong Kong had almost the same per capita GDP as Singapore and in 2010 it was still slightly higher.

The only period against which the PAP’s growth record looks noticeably better was the 1950s, when of course there was a chronic  dollar shortage caused by a persistent American current account surplus. This led to constraints on the growth of world trade and the recovery of the war-affected economies.   It was only in the latter half of the 1960s with the US involvement in Vietnam, the overvaluation of the dollar and the deterioration of the US current account from surplus to increasing deficit that world trade really took off.

Singapore’s economic growth is of course directly related to the growth in world trade given its position as one of the world’s major ports. After 1965 world trade grew at a much faster rate than during the interwar or immediate post-war years, which explains a large part of Singapore’s faster growth after independence. This suggests that Singapore could hardly have failed to prosper as long as it adopted an open-economy export-led industrialisation strategy capitalizing on our position at the centre of world trade. It suggests that Lee Kuan Yew’s skill was in grabbing hold of the tiger’s tail at an opportune moment and hitching himself a ride.

Lee Kuan Yew and Tungku Abdul Rahman

However, even though LKY had Goh Keng Swee, an LSE economist on his team, the adoption of this strategy may not have happened if Tungku Abdul Rahman, the Malaysian PM, had not thrown LKY out of the Federation. LKY was of course not much of an economist. Before Singapore left Malaysia, LKY favoured a Soviet- or Indian-style import substitution model rather than an export-driven one.

After Malaysia threw Singapore out, the PAP leaders did not have much choice but to adopt an export-driven industrialisation strategy. Credit for this belongs to Albert Winsemius who was Singapore’s economic adviser from 1961 to 1984. There was nothing particularly cutting-edge about it. In fact, the plan was based on a simple model in vogue at the time called “Economic Development with Unlimited Supplies of Labour” put forward by the West Indian economist and Nobel prize winner Arthur Lewis in the 1950s. Lewis’s model was similar to the Soviet model of extensive growth relying on using abundant cheap labour employed at subsistence wages, which could then be used to finance investment and employ more labour.

That is precisely what Singapore did. The CPF scheme channeled workers’ savings into investment. Foreign investment was encouraged through tax breaks and the availability of cheap reasonably educated labour.  The Government  also nationalised much of the land and established state champions in what were judged to be the most promising industrial and service sectors taking control of much of the economy that was not owned by MNCs.

A large part of Singapore’s growth in GDP per capita after 1965 was the result of adding more inputs rather than getting higher output from each unit of input. While Singapore’s economic development appeared miraculous, it was really no different from the Soviet Union’s a decade or two earlier, as Krugman pointed out in his 1994 essay in Foreign Affairs. At one time many economists feared that the Soviet Union was about to overtake the US economy in size because of its much higher rates of growth even though its productivity was much lower. Similar fears were expressed about Japan in the 1980s.

To quote Krugman:

Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per annum, three times as fast as the United States; per capita income grew at a 6.6 percent rate, roughly doubling every decade. This achievement seems to be a kind of economic miracle. But the miracle turns out to have been based on perspiration rather than inspiration: Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent….. 

Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore’s growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again…….And an investment share of 40 percent is amazingly high by any standard; a share of 70 percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past.

But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore’s growth can be explained by increases in measured inputs. There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union – growth achieved purely through mobilization of resources.”

What this shows is that clearly Singapore’s growth was based on perspiration not inspiration. There was nothing innovative about what LKY and his team did. They cannot even claim originality which belongs to Stalin and the Soviet Gosplan economists and Arthur Lewis. I would never refute an assertion that Lee Kuan Yew was an efficient but ruthless administrator who would have thrived in the Soviet Union.

Of course this growth strategy carries within it the seeds of its own destruction as increases in investment on such a scale lead inevitably to diminishing marginal returns. Krugman thought that the economic growth would slow down and stop when Singapore ran out of additional labour inputs. But for a long time the PAP were able to postpone the inevitable slowdown by throwing the floodgates open to abundant supplies of cheap labour from the surrounding region. Krugman could not have imagined that the PAP would increase our population by 60% in twenty years.

The PAP leaders would of course like to keep adding meat to the sausage machine by increasing our population further to seven, ten million or even twenty million. Recent measures in Parliament to reserve space deep underneath our present buildings for future development hint at the magnitude of future population plans and also convey the poverty of LKY’s ideas.

At the same time as the constraint on labour inputs was relaxed with unprecedented levels of immigration, there was no shortage of capital due to the very high levels of enforced saving through CPF. The share of savings in GDP (gross fixed capital formation plus net exports) has risen to more than half. Domestic consumption is only 34% of GDP, lower than in China. For a long time our excess savings have been channeled into buying overseas assets as the PAP Government  have run out of investment opportunities in Singapore.

There can be no better illustration of how inefficient our economic growth has been then our poor productivity record. LKY’s PAP always point with pride to Singapore’s high level of GDP per capita, which was ahead of the US but behind Norway and Luxembourg in 2013. But firstly Singapore should be compared with other cities not countries. On this basis according to the Brookings Global Metro Monitor our  GDP per capita measured on a Purchasing Power Parity (PPP) basis ranks fourteenth globally below Macau at the top with twelve North American cities above it.

Screenshot 2015-04-07 20.31.58

 

I would caution that Singapore’s PPP GDP per capita is not a good measure of how productive the Singapore worker is. Singapore has a very high ratio of the employed labour force to total population. This is because almost 40% of the workforce are foreign workers with no dependents. Singaporeans also work the longest hours of any developed country. A better measure is to look at the productivity of Singaporean workers. As you might expect from the way growth has been generated without any rise in efficiency, on a GDP per hour worked basis we were in 21st place in a list of 43 developed and developing countries at only  62% of the US level as of 2013 (US Conference Board). Our GDP per hour worked is below Japan’s and around the same level as Hong Kong and Taiwan where there was far less state intervention and mobilisation of resources and also where the people have considerably more freedoms than Singaporeans enjoy. By contrast our GDP per capita ranking was 3rd. Over the period 2007-12 our GDP per hour worked fell by 0.1% per annum coming near the bottom of the table and above only Norway, Greece and Italy. In 2013 and 2014 productivity growth was 0.3% and -0.8% respectively.

Screenshot 2015-04-01 22.22.52

However GDP per capita and GDP per hour worked include the share of income going to profits and is thus not a good measure of middle-class incomes. Singapore’s inequality is higher than most developed countries, including the US, whether gross or adjusted for taxes and transfers.

Thus median real income is a better measure of a country’s living standards since it avoids the skewness which is likely to affect the  average caused by the concentration of income in the top 1% of the distribution. Gallup did a ranking of countries by gross median household income measured at PPP. using data from 2006-2012. This put Singapore well below Hong Kong, Taiwan, South Korea and Japan and on about the same level as the UK. However adjusting the figure for per-capita rather than household income pushed Singapore well below Hong Kong, Japan, South Korea and the United Kingdom:

Screenshot 2015-04-01 22.21.18

 

Even that is not the full story because Singaporean workers work by far the longest hours compared to workers in other developed countries. According to the US Conference Board Singaporean workers work 25% longer hours compared with US workers who in turn work about 20% longer hours than most European countries. Singapore’s median per-capita income figure per hour worked would thus be about 20% lower if Singaporeans worked the same number of hours as US workers. This would put us below Spain and closer to Greece in terms of median per-capita income.

Again Singapore’s figures need to compared with other global cities and not with countries. A UBS survey in 2011 of the domestic purchasing power of workers in 72 cities around the world put Singaporeans’ purchasing power on a par with Kuala Lumpur and below that of Moscow, Taipei, Tokyo, Hong Kong and Seoul. Mysteriously, after the PAP Government was sufficiently concerned to comment on the results, Singapore was quietly dropped from the following year’s survey while cities such as Kuala Lumpur, Mumbai, Jakarta and Manila continued to be included.

At the beginning I looked at two areas: firstly in 1965 was Singapore an underdeveloped country devoid of natural advantages and secondly did Lee Kuan Yew’s policies result in rises in living standards that justified authoritarianism, the destruction of thousands of lives and the instilling of fear in a whole nation.  I have shown the answers to the first two questions to be definitely no.

Finally, would a different less repressive and more democratic system of government have been able to achieve the same results? The answer is definitely yes. Despite the carefully crafted hagiography and the promotion of Lee Kuan Yew as a role model for the developing world, he was not an original thinker but merely followed standard development theory at the time which owed much to the Soviet model. Just because Lee Kuan Yew ruled Singapore during a period of exceptionally rapid world growth does not mean that he should be given the credit for Singapore’s development, which in any case has been dressed up to look more impressive than it is. It is a false causality based on a statistical correlation. Western commentators are, in the words of Nassim Taleb, “fooled by randomness“.

After fifty years it is clear that the next generation of PAP leaders have no new ideas and we are increasingly falling behind in the productivity and innovation race. We must move on from the claims of how much we have advanced and gained and look at how much we have lost, how much better our lives might have been how much better they still could be with a modicum of freedom and a large dose of inspiration.

Letter to FT

Letters Editor

The Financial Times

1 Southwark Bridge

London SE1 9HL

 

Dear Sir,

I refer to today’s article by David Pilling on Lee Kuan Yew’s legacy where several inaccuracies stand out

Pilling asserts that Singapore has a higher material standard of living than the UK, US and Norway. This is simply untrue. Even on GDP per capita, Norway’s is about twice Singapore’s. In any case, Singapore should be ranked against comparable cities and not countries. On the Brookings Global Metropolitan Monitor by comparison, Singapore does not even come in the top 20 metropolitan areas and in Asia Macau ranks above Singapore.

GDP per capita is also not a good measure. Singapore has a very high ratio of employed labour force to total population because almost 40% of the workforce are foreign workers. Singaporeans also work the longest hours of any developed country. On a GDP per hour worked we rank near the bottom of the OECD countries at a level that is only about 60% of the US.

Our distribution of income is also one of the most unequal in the world with a Gini coefficient of 46.3, higher than the US. A UBS survey in 2011 found the purchasing power of Singapore’s workers’ wages to be well below that of many other Asian cities and around the same level as workers in Kuala Lumpur or Moscow.

Incomprehensibly, Pilling talks about LKY’s achievement “in conjuring a prosperous city state from an unpromising history and geography”. The Straits of Malacca have always been at the intersection of major global trade routes. As early as the 16th century the Portuguese said “Whoever is Lord of Malacca has his hand on the throat of Venice.” In 2011 one-quarter of the world’s traded goods or about 35% of the world’s container trade and the major part of the Asian oil trade passed though the Malacca Straits. Historically It was Stamford Raffles not Lee Kuan Yew who spotted Singapore’s potential as the best harbour in the region and long before 1960 we were one of the top three busiest ports in the world.

 

Yours sincerely,

 

Kenneth Jeyaretnam

 

Will the Taxpayer End Up Subsidizing Ho Ching’s Bonus?

In Budget 2015 the Finance Minister allocated $3 billion towards the construction of the new Terminal 5 at Changi Airport. He stated that he would be setting up a new fund, the Changi Airport Development Fund (CADF). The Transport Minister subsequently explained in a debate in Parliament on 11 March 2015 that this was just a downpayment and that the eventual cost would be many times more.

I have written more about the Finance Minister’s fondness for padding the Budget with allocations to new funds. These keep springing up like weeds. I have argued in “Smoke and Mirrors in the Government’s Accounts” and “How to Make A Surplus Disappear Without Anyone Noticing” that their purpose is to make current spending look higher than it is and prevent Temasek, GIC or MAS having to actually pay out the Net Investment Returns Contributions (NIRC). They are part of a circular closed system that prevents Singaporeans knowing the true state of the reserves. Once money is allocated to a fund Parliamentary accountability disappears since only the Finance Minister scrutinises the Fund’s spending. The Finance Minister is supposed to lay the fund’s accounts before Parliament but there is no evidence that any time is allocated in Parliament to discuss the performance of the funds.

My concern with the Changi Airport Development Fund is more specific. In 2009 the Government corporatized Changi Airport Group (CAG) through an Act of Parliament transferring it from the Civil Aviation Authority of Singapore in return for a capital injection valuing the CAG at $3.2 billion.

Looking at Changi Airport Group’s latest accounts for the year ending 31 March 2014 (see below) Earnings Before Interest Tax Depreciation and Amortization (EBITDA) was $1.34 billion. Putting that on an Enterprise Value to EBITDA multiple of 20 times (not unreasonable in the current low interest environment) would value CAG at $27 billion. Not a bad return considering that when MOF transferred CAG it also included $1.09 billion cash on the balance sheet so the true cost was around $2.1 billion.

CAG Accounts

The Ministry of Finance (MOF) currently still owns CAG. Such a valuable asset should be included in the Net Investment Returns Framework and also be accounted for in the Statement of Assets and Liabilities (SAL) of Singapore, which the Finance Minister is obliged to publish every year with the Budget. There are no notes to the SAL so it is not clear whether it includes CAG just as it is not clear whether it includes Temasek’s assets. However legally all assets owned by the Government should be included. That should include Temasek, GIC, MAS, CAG, CAAS, land sales receipts as well as the freehold interest in 80% of Singapore’s land owned by the Government. The taxpayer is also losing out because it is not included in the NIRC, which is defined under Article 144 of the Constitution to be the returns from GIC, Temasek and MAS even though the Government is funding the development of CAG out of taxpayer monies.

Lui Tuck Yew said that Terminal 5 would have an initial capacity of 50 million passengers a year and an eventual capacity of more than all the current terminals put together. That means it could easily double CAG’s EBITDA and raise its potential value to greater than $50 billion.

If the taxpayer is paying for the construction of Terminal 5 but the asset is owned by CAG or subsequently transferred to them for a nominal sum then whoever owns CAG will reap a huge gain perhaps even exceeding what it has made on the original transfer of Changi Airport. The Transport Minister failed to disclose the terms under which Changi Airport Development Fund will operate and how the taxpayer will be paid back. Under the Constitution, there must also be an Act of Parliament setting up CADF and its existence must be disclosed in the SAL.

At some point in the future the PAP Government clearly intends to sell or transfer CAG to another company. Article 35 of the Civil Aviation Authority of Singapore Act states that as soon as practicable after the transfer date the successor company (CAG) may be sold in accordance with Article 35 (see below). Presumably the likeliest buyer is Temasek.

Screenshot 2015-03-20 12.56.47

If CAG, which also manages foreign airports, is sold, whether to Temasek or to a foreign company or private equity firm, then the Finance Minister must ensure that this is an open auction in which the taxpayer receives full value for money. This would be true in any event and particularly the Government is getting the taxpayer to fund the new terminal. The Government must also disclose any bonuses paid to the management of CAG and to any subsequent role for the former management with a new company because of the potential conflict of interest.

The Chairman of CAG, Liew Mun Leong, a former civil servant, was formerly the head of CapitaLand Group, formerly wholly owned by Temasek and still 39% owned, was paid a $20 million bonus in just one year by his boss, Ho Ching, It was shocking to many Singaporeans at the time that a former civil servant could be paid so much when before joining CapitaLand he had been a loyal apparatchik of the Government. The CEO was formerly with the RSAF and apart from that his principal qualification seems to have been as Principal Private Secretary to Lee Kuan Yew. Many of the board members also have a role with Temasek so the connection with Temasek is pretty close, incestuous even.

Temasek’s management, and in particular Ho Ching, the PM’s wife, are paid bonuses depending on Temasek achieving more than a hurdle rate of return, which is pegged to the cost of 10-year debt according to the Temasek annual report. The report discloses that staff may get co-investment grants in which they share directly in Temasek’s returns. If Temasek succeeded in acquiring CAG this could then result in a massive bonus for Ho Ching and her management team. If she was to get even 1% of the value accretion from floating CAG this could potentially be worth up to $500 million at some point in the future.

This is all pure speculation since Singaporeans are not told how much Ho Ching is paid or how her remuneration is calculated. No one in Parliament has asked about her or her team’s remuneration. When questions were asked in Parliament about Chip Goodyear’s resignation and his leaving package Tharman was evasive and rebuffed questions with “People do want to know. There’s curiosity. But that is not sufficient reason to disclose information.” and “It will not be advisable, nor in the interest of Temasek or Mr. Goodyear, for us to comment further. It serves no strategic purpose.” It is incredible that the PAP Government were able to get away with this reply and with not disclosing Ho Ching’s remuneration given that Singaporeans own the assets and the managers who run them are public servants.

Even if CAG is not sold to Temasek at a knock-down price, we need to be vigilant against any other attempts to transfer value from the taxpayer to the management of CAG or a new purchaser. At some future point the Government may decide to put in place a poison pill triggering its sale on a change of government, rather like the PAP did with AIM. The management could decide to form their own company and acquire the assets themselves, or in partnership with a private equity firm, at a significant undervaluation, particularly if no one in Parliament is aware of or prepared to question their true value. This is not just a theoretical possibility. It actually happened with state assets that were sold off after the collapse of the Soviet regime. Similarly Nomura’s private equity group in the UK were able to purchase the Ministry of Defence’s surplus housing stock at a fraction of its true worth in the 1990s and make reported profits of US$1.9 billion.

We need full disclosure from the PAP Government on how it accounts for enormously valuable but apparently unrecognised assets like CAG and the value it assigns to them. We need to ensure that the taxpayer reaps the full financial vale of these assets particularly if she is asked to add value by paying for investments. Finally safeguards need to be put in place that the civil servants running these businesses do not enrich themselves at the public’s expense in the event of a sale and in particular that any sale, even to Temasek, takes place at full open market value. This is particularly important given the inside information possessed by the management and the PAP’s preference for secrecy. Given the close connection between Temasek and CAG and the dual roles played by many of the directors of CAG, Temasek will have insider information and an edge even if there is an auction. We have to ensure that the management of Temasek, including Ho Ching, do not reap a windfall profit because of this insider knowledge.

 

Weak Exports Confirm We Were Right to Call for A Stimulus Package Last Year

The latest figures for non-oil domestic exports were extremely weak and signal that GDP growth is likely to be weaker than the MAS’s projection for this year of 2-4%. They fell by 9.7% in February compared with the same month last year. As non-oil domestic exports comprise about 40% of GDP, it is likely that the economy will enter a recession later this year if the trend is confirmed (though on the past track record one cannot rule out further manipulation of the figures by the Statistics Department). The decline in exports to China can hardly have been a surprise for the Government as most data have indicated that China is already in recession despite the official figures purporting to show that the Chinese economy is still growing at 7%. In addition the Japanese government’s deliberate depreciation of the yen is doing exactly what it is supposed to do-curb imports and stimulate exports.

The PAP Government does not have any strategy to deal with this other than to blame it on industrial restructuring caused by their decision to restrict the inflow of cheap foreign labour in an effort to boost productivity growth. However if this were part of a planned restructuring we would expect to see a booming export sector complaining about lack of access to cheap labour. Instead local manufacturing has been forced to restructure by a combination of weak global growth and uncompetitive or poorly positioned exports. The fact that commentators expect the MAS to respond by depreciating the SGD further, a move that will cut real wages, shows that the Government is panicking and this is not a planned strategy to increase productivity. The fall in exports and manufacturing output, unless accompanied by lay-offs, will actually have the opposite effect of leading to negative productivity growth.

Reform Party have consistently called for a stimulus package to boost domestic demand since April last year in order to restructure the economy away from its dependence on exports. We called for a stimulus package of about 0.5 to 1% of GDP. Needless to say, the Government and the State media ignored our calls.

There is ample fiscal room for a much larger stimulus of about 2-3% of GDP since the Government runs a true surplus of about $30 billion a year. In addition the current account surplus has consistently been around the same size. In Budget 2015, the Finance Minister used the usual sleight of hand to produce a headline deficit for 2015 of $6.7 billion. However, he lumped together transfers to funds, like the Productivity Fund and the newly set-up Changi Airport Fund, with current spending. Once these are properly allocated and the usual conservatism in forecasting spending taken into account, the Government Budget will probably show a surplus. This is despite ignoring returns from Temasek, GIC, MAS and land sales, which need to be taken into account if we follow the correct IMF accounting framework.

In light of the latest figures showing the situation has got considerably worse we repeat our calls for an enhanced stimulus package. As we indicated in our previous calls, this should take the form of cash rebates concentrated on the middle to lower income groups. The depreciation of the SGD, whether engineered by MAS or the result of massive capital outflows, is unlikely on its own to revive the economy. Most exporting countries, like Germany, Japan, Korean, even China, are resorting to deliberate weakening of their currencies to try and boost exports in what will undoubtedly be a self-defeating strategy.

Amendments to bill will allow HDB to enter flat by force and without a warrant.

I am seriously concerned by the new Housing and Development (Amendment) Bill, which was read in Parliament for the first time on 12 March 2015. As Parliament is dominated by one Party these amendments will be passed with no real debate or oversight, that is they will be rubber stamped. Yet 87% of our citizens live in HDB so any amendments have far reaching consequences.

Firstly the HDB are given new sweeping powers to enter your flat without a warrant in cases of imminent threats to public safety and public health. They would be the judge of whether there is an imminent danger and they would only have to show subsequently that they acted “in good faith”. If the owner is not there they can enter and demolish any obstacles in their way or remove anything that impedes their investigation, like pulling up the floor or kitchen units to carry out their investigation. HDB would not have to pay compensation to the owners even if they had made a mistake, provided they acted in good faith.

Secondly even if there is no imminent danger HDB will be able to enter your apartment after a 24 hour notice period without your permission if they obtain a warrant. Again they would be allowed to use force to gain entry and to remove any obstacles that impede an investigation. No compensation would be paid provided HDB acted in good faith and followed the rules.

Thirdly, HDB gains new police-like powers to enter an apartment, make audio and video recordings and seize evidence if it believes the flat is being illegally sub-let or the owner has broken any of the other rules applying to purchasers. Under the new amendments it will be an offence not to answer the HDB officer’s questions and those refusing to answer can be compelled to do so by a magistrate. The HDB officer cannot compel you to give evidence if that would incriminate you in a criminal offence but without legal representation how many residents will be aware of their rights?

In the case of entry to effect repairs the Government has justified the new amendments by saying that they are necessary to deal with the problem of owners who refuse to cooperate or to put right problems they are causing, like water leaking from their flat and damaging the ceilings of the flats below. Khaw Boon Wan has said that in one-third of cases of ceiling leaks the problem takes over three months to fix.

However I can see several problems both with HDB

  1. The HDB has a conflict of interest in investigating any problems, as it was responsible for the construction of the flat. Quality failings in construction may be blamed on the renovation contractor and the householder will be forced to bear the cost of the repairs. There are many leaks and cracks in areas that are common and have no upstairs neighbour. There should be an independent entity involved in investigations.
  2. There are good reasons why obtaining a warrant should be necessary. Just as the police are required to obtain a warrant before carrying out a search, a warrant should be necessary for HDB to enter an apartment without the owner’s permission in all but the most serious emergency. While obtaining warrants may seem like an obstacle to efficiency, the process is supposed to act as a check on the powers of the police by requiring an independent authority (a magistrate) to sign off on the request. In cases where it goes ahead without obtaining a warrant, HDB should be held to account subsequently for the consequences should the emergency not exist or not be caused by a problem in the apartment to which forced entry has been obtained.
  3. A 24-hour notice period is too short in cases where the owner may be away or hospitalized. More effort should be made to contact him or her.
  4. HDB should not be given police powers to interrogate suspects and to seize evidence in cases where it suspects a breach of the rules. HDB officers are not police and do not have the necessary training. Also there is a clear conflict of interest just as in 1 above because the HDB will be bot investigator and judge as to whether the owner has breached its rules. Only the police should carry out such investigations.

Despite the current problems with non-cooperative flat owners and breaches of HDB rules, the proposed amendments give too many powers to the HDB with insufficient safeguards. We need to ensure that these are in place before we give HDB new powers. In the case of serious breaches of the rules the police should be the appropriate investigating authority and not the HDB. The PAP Government already possesses too many powers over citizens’ lives and acts in a high-handed and autocratic manner to which Singaporeans have few rights of appeal.

The amendments do contain some sensible suggestions such as more serious penalties for using non approved contractors and I would like to see stricter vetting of approved contractors.

I have said before that Singaporeans should be given the freehold of their HDB as part of a process of transferring power from the state to the individual and to further the goal of a property owning middle class. This has been part of Reform Party policy since 2011. A new Government should also set up a Housing Ombudsman with special powers to hold HDB to account and set aside their decisions and/or pay compensation to homeowners in cases where their rights have been abused.

Exposing the problems with CPF

roy-ngerng-2

Ho ChingAuthor’s note: This is an edited version of article I originally wrote for TOC which has not been published on my blog before today. Reading this article I surprised even myself, to see that back in 2009 I had already exposed the link between  GIC’s  funding and Temasek.  You’ll read in the article where I say,  “However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF.

If I wrote this today I wouldn’t  put in the word “may“. That is because since  2009 GIC has confirmed what I wrote that in fact GIC’s funding comes from CPF.   They say so here, “GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies”. I have also updated the level of assets of GIC. These are really the only parts of the  article that need updating.

Everything else is as true today, so maybe back in 2009 Singaporeans just weren’t ready for the message.  Fast forward to the last two years or so and thanks to the dedicated blogging and  brave public rallies of  Han Hui Hui and Roy Ngerng who started blogging on this in 2012,  my central ideas as to transparency and how our wealth is invested  have become  popularised and  a hot button issue. No doubt CPF will be at the forefront of every Opposition Party’s manifesto next GE.

My view on investments is that an extra 1% or 2 %  return is a red herring. Investment in our only natural resource, our people, could potentially have a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.

What is a Sovereign Wealth Fund?
Sovereign Wealth Funds (SWFs) are not a new idea. According to Wikipedia, the term Sovereign Wealth Fund was first used by Andrew Rozanov in an article entitled, ‘Who holds the wealth of nations?’ in the Central Banking Journal of May 2005. A SWF may be defined as a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.

Two types of SWFs.
1. The first, and the oldest form of SWF, is one set up to manage revenues from an exhaustible resource such as oil, or one which derives its assets from government budget surpluses.

One example of this type and possibly the oldest known is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues.

A more recent example of this type is the Norwegian SWF which was set up primarily to ensure that the wealth represented by Norway’s oil reserves was not squandered on current consumption but turned into financial assets which would benefit future generations.

The example we are interested in is Temasek.  It was set up in 1974 to hold stakes in the various government-controlled companies, such as DBS, SIA and Singapore Technologies, that had previously been held by the Ministry of Finance. The Temasek Holdings website states that, “Our investments are funded through dividends we receive from our portfolio companies, our divestment proceeds, commercial borrowings, a maiden Yankee bond issue in 2005 and occasional asset injections from our shareholder, the Minister for Finance (Incorporated).”

2. The second type of SWF is one set up to manage a country’s excess foreign exchange reserves. GIC is probably an example of this type of SWF since it was set up in 1981 with the explicit objective of managing our foreign exchange reserves for long-term capital appreciation. I say probably, as there is very little transparency, so it is not clear whether it is also funded by capital injections from the Ministry of Finance in the same manner as Temasek. However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF.  ( see my note that this information is now updated) No information is available on the current level of assets. The website states only that the investment portfolio is in excess of US$100 billion. However various estimates have put the level of assets at between US$250 and US$330 billion.  (Author’s note: I know now from the Statement of Assets and Liabilities that the Finance Minister has to include with the Budget (though I have not been able to access it this year) that the global total of financial assets owned by the Government is about $800 billion. Subtracting Temasek’s assets ($223 billion in 2014) and the Government’s deposits with MAS ($113 billion in 2014) from this leaves a figure for GIC’s assets of about $460 billion. However in the absence of even minimum levels of transparency this is still guesswork and could be completely wrong.)

Does Singapore  even need a Sovereign Wealth Fund?
Singaporeans need to ask,  particularly in the light of the recent investment losses, why Singapore even has a SWF  let alone two.

Look at my definition for the first type and you will see that Singapore does not meet the criteria since we do not need to manage a windfall from any natural resources. If Singapore had expanded its domestic investment and consumption over the last 30 years it would have had smaller current account surpluses and thus smaller foreign exchange reserves needing management. MAS already has sufficient foreign exchange reserves necessary to manage  the Singapore dollar. No second SWF was needed to fulfil this function.

Again without transparency we have no breakdown of how much government saving in the form of surpluses has contributed to both Temasek and GIC’s growth over the years. But we do know that the cumulative budget surplus over the last thirty years has been considerable.

Budget surpluses
Where have these budget surpluses come from in the first place. Well we all know how to save money. We cut back on expenditures. When a country cuts back on the absolute basics such as free education for its children then it creates a budget surplus. Let’s make no mistake here. No other First World Nation only has compulsory education up to the end of Primary school and even that only for a very short day.  Even our very minimal compulsory education is not even free (although heavily subsidised). I am not advocating a full welfare state but to put it bluntly, Singaporeans have helped to pay for our enormous overseas investments by going without the brights and benefits that citizens in a democracy demand.  So Singaporeans go without free universal education to secondary level, a national health insurance system and other elements of a social safety net which are characteristic of most countries at Singapore’s level of development. By making you go without the PAP builds up a huge surplus for investment overseas.

How the budget surplus should be invested: In Singaporeans
SO, the budget surplus, has been taken from the pockets of Singaporeans and represents money that you not only could  have but should have. It could and should, be returned to the citizens of Singapore in the form of lower taxes, fees and charges. It could have also been used to finance much higher domestic investment in education or in health and welfare.

Their website states that Temasek has achieved an annualized return of 18% since inception though that is based on the March 2008 asset figure of S$185 billion rather than on the current valuation of S$145 billion announced by CEO Ho Ching yesterday. Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.

Instead of the Government investing our money to pick winners through an industrial strategy there could have been greater incentives for investment and R&D in the private sector which might have led to faster productivity growth and higher levels of real incomes. And even if GIC has not been funded directly by the MOF, the growth of our foreign exchange reserves has come about through chronic external surpluses which represent domestic under-consumption and under-investment.

Co-investment
As a final insult, CEO Ho Ching announced on July 29th 2009 at the Institute of Policy Studies that Temasek was thinking of allowing Singaporeans to co-invest alongside Temasek sometime in the next ten years. How kind of her. I thought we had already invested as outlined above.  The only positive side of this news is that it would presumably force Temasek to be much more transparent about its investment process and corporate governance. In any case any personal financial adviser  would not advise an investment in a company without sufficient transparency that required due diligence.

The next step: issue shares to Singaporeans
As we all know, calls on the government for accountability and transparency in its sovereign wealth funds is not new.  However; I would go one step further! Many of you know that I gave a speech at the Foreign Correspondents Association lunch on the 2 July 2009. In answer to a question put to me after the lunch I went on record as saying that Singaporeans should be given a direct stake in our SWFs. One way to do this is  through the privatization and listing of Temasek and the issuance of shares to Singapore citizens. Another way is  through the explicit linkage of part of the value of these assets to the welfare of Singaporeans, as is done in Norway through the Pension Fund.

To counter one possible objection that our national “crown jewels” could end up being bought by foreigners the government could retain a golden share which would prevent this happening to Temasek’s portfolio of domestic GLCs. Longer term there is no reason for Singapore to continue to run large budget surpluses over the course of an economic cycle.

In conclusion whilst I will not stop any time soon on calling on our government for greater transparency and accountability into how it manages our money, I would urge us to look at credible new proposals such as mine.

Reform Party’s Wishlist for Budget 2015

The Budget Statement is only a few hours away. The Government-controlled and-owned media is full of speculation about the “goodies” that Singaporeans can look forward to. The Straits Times estimates that Government surpluses since 2011 have totalled $10-12 billion though it doubts that all or even most of this sum will be spent. Predictions for the use of all or part of this money include enhanced support for seniors, an SG50 bonus payout across the board, an extension of the Productivity and Innovation Credit (though even the Government media admit it has not worked) and tax reliefs rather than tax rebates.

Reform Party has since 2009 argued that the Government’s Budget presentation is deeply misleading and presents a wildly inaccurate picture of the resources available for extra spending or tax cuts. We begin by looking at the potential resources available and following the Norwegian model suggest that a fixed percentage of the total value of assets under management be made available for current spending. We then build on our previous proposals as to where the additional money should be allocated.

Government Resources and the Medium Term Spending Framework

The $10-12 billion total surpluses given by the ST are based on the format given in the Budget presentation, which excludes returns on reserves accumulated before the current Parliament. However we see no justification for this exclusion even if current legislation prohibits spending out of past reserves without the President’s approval. This is a basic lack of transparency and accountability which the PAP have never addressed.

In order to gain a true picture of the Government’s finances, we need to use the IMF framework, which includes interest and investment income on past reserves as well as realised capital gains on assets sold. This can be found tucked away in the Monthly and Yearly Digest of Statistics. Surprisingly no one in Parliament has mentioned this. In our response to Budget 2012, Reform Party set out the IMF framework for the Budget and demanded to know why the PAP do not follow this method

This is the table of accumulated surpluses on the IMF framework since 1999:

 

Year $ millions
1999 10,004
2000 16,0,16
2001    7,885
2002    8,715
2003 11,994
2004 12,820
2005 18,024
2006 18,347
2007 35,084
2008 21,797
2009    2,905
2010 28,247
2011 36,461
2012 29,457
Total 257,756

Using the IMF framework, which presents a much more accurate picture of the Government’s finances, we have accumulated about $258 billion in surpluses since 1999. If these were handed out to Singapore citizens we would all be approximately $80,000 richer. The real surplus over the last few years has been of the order of $30-40 billion per annum though we are missing the figures for 2013 and 2014. These figures include the returns of the Sovereign Wealth Funds run by Temasek and GIC, as well as the reserves managed by MAS and the revenue from land sales.

Reform believes that these surpluses belong to the people and are the fruit of many years of austerity during which our citizens have been forced by the PAP to go without many of the basic benefits that citizens of other rich countries enjoy, such as free education, health care, a state old age pension, and help for families with children and the disabled. We have proposed the drastic but simple solution of returning control over these accumulated surpluses by privatizing Temasek and GIC and distributing shares to Singaporeans. This was part of our Election Manifesto in 2011.

However this may be impractical in the short term. Therefore drawing on the Norwegian model we propose that every year a certain percentage of the assets managed by Temasek and GIC be added to current spending. Norway has one of the world’s biggest Sovereign Wealth Funds, the Norwegian Pension Fund, which was set up to manage revenues from its oil wealth not extracted through mindless austerity from its citizens as in the Singapore model. In Norway this is currently 4% of total assets, which represents a target real rate of return after inflation.

Every year the Government is required to produce a Statement of Assets and Liabilities (SAL) which is unfortunately two years out of date. According to the last published SAL for the year ended 31st March 2013 (which has mysteriously disappeared from the Budget website) total assets amounted to about $800 billion. However many of the assets managed by GIC are matched by liabilities to CPF holders so the net assets amount to roughly $360 billion. However it is not clear whether this includes Temasek’s $223 billion of assets. GIC should be able to make more than the assumed average 3.5% the Government pays on CPF balances but conservatively we assume that 4% of net assets can safely be spent every year without diminishing the real value of the net assets belonging to the Singaporean people. Therefore,

Total Funds Available on $360 billion = 4% x 360 = $14.4 billion

Total Funds Available on $583 billion = 4% x 583 = $ 23.3 billion

So we can safely spend between $14 billion and $23 billion extra per year without diminishing the real value of the people’s assets.

The Government already claims to allocate up to half the Net Investment Returns Contribution (NIRC) from our surplus assets to the Budget. This amounted to some $8 billion in the last Budget. However as we explained in “Smoke and Mirrors in the Government’s Accounts”, “How to Make A Surplus Disappear without Anyone Noticing”, and “Budget 2014: A Very Generous Amount of Wool Pulled over Your Eyes” this is not real spending since the Finance Minister always transfers the money to an unaccountable fund. In 2014 there was much fanfare about the $8 billion Pioneer Generation Package, which was funded by that year’s NIRC. However actual spending was estimated to be only some $400 million per annum (in 2014 only $230 million).

Reform Party proposes to increase current spending by at least $14 billion per annum and potentially more than $20 billion per annum once we get transparency on the total size of the Government’s assets. By spending we mean actual spending rather than a fictitious transfer by which the PAP shuffle money between accounts without any actual outflow. We can do this without raising taxes or cutting defence spending.

We set out below our spending priorities.

 

Reform Party’s Spending Proposals

 

  1. A Basic Old Age Pension

In our press release entitled “CPF Needs Radical Reform Not Cosmetic Changes”, we proposed that the Government fund a basic old age pension for our seniors of $500 per month over and above CPF balances up to the Minimum Sum. We costed this at less than $3 billion per annum even if this was extended to everyone currently over the age of 65. If it were only given to those on low incomes the cost would be considerably lower. We assume for the purposes of this exercise that a more targeted pension would cost less than $2 billion per annum.

 

  1. Higher Health Spending

We would allocate another $6 billion to Health expenditures. This would take spending in the current year, projected to reach $8 billion this year, to $12 billion, reaching the Government’s target for 2020 five years early.

Reform Party is in the process of reviewing our current health system with a view to combining Medishield Life, Medisave and Medisave into a unified system that would provide universal and comprehensive health insurance, including full coverage of pre-existing conditions without additional cost and ensuring that no Singaporean should live in fear of being bankrupted because they have reached their insurance limit and exhausted their Medisave funds. We shall release more details shortly.

 

  1. Family Credit

In order to help low-income families with children and as a step towards reversing our current low birth rate Reform Party proposes to institute a system of payments to families with children. We propose initially a payment of $300 per month for each child below the age of 18. Based on estimated numbers of around 800,000 children of Singapore citizens the total cost would be around $3 billion though this could be lowered considerably by restricting it to families on median incomes or less.

 

  1. Higher Spending on Education

Reform Party proposes to allocate an additional $2 billion to education spending to help pupils from low-income families, increase teaching hours, abolish fees for education, reduce class sizes and improve teaching standards. We believe that while our overall standard of educational attainment is satisfactory, this masks considerable variations between elite schools and the rest. In addition parents are required to spend considerable amounts on tuition, which should not be necessary.

Total Cost of Reform Party’s Proposals

The total cost of these proposals is $14 billion. Based on the PAP Government’s own figures, we believe this additional expenditure is both prudent and easily affordable.

We consider it to be an investment that will pay dividends in the medium to long term by increasing the productivity and quality of our future workforce. It will also help to reorient the economy more towards domestic consumption and become less dependent on exports. Finally we expect a significant portion of the cost to be recouped through higher tax receipts from higher domestic incomes and expenditures.

The Problem with Husbands and Wives in the WP, in the Ruling Family, in Our Reserves

The husband and wife team at FMSS

The husband and wife team at FMSS

The husband and wife who run the country

The husband and wife who run the country

Over the last few days PAP Ministers and MPs have lined up in Parliament to attack the WP for its lack of transparency and accountability in running AHPETC. As I said on my Facebook page, it’s about $6.6 million of Aljunied residents’ money versus $800+ billion of Singaporeans assets in GIC, Temasek, MAS and who knows how many other entities. That’s less than 0.001%.

Where does the bigger problem lie with accountability and transparency?

I will remind you of what  Khaw Boon Wan (KBW)  said during Wednesday’s debate:

“The Town Council also did not “adequately manage the conflicts of interests of related parties arising from ownership interests of its key officers,” said Mr Khaw. “It was very convenient. Husband issued payment voucher, wife issued payment.”

Yes, Khaw really did bring up husbands and wives in a debate on conflicts of interest. The phrase: The pot calling the kettle black, does not even begin to cover this.

I wonder whether the PAP appreciates the hypocrisy in attacking the WP over transparency and accountability.  While not wishing to minimise the conflicts of interest of AHPETC, the consequences are fairly small compared to the glaring conflict of interest in which the PM’s wife (Ho Ching) runs one SWF (Temasek) while Lee Hsien Loong is the Chairman of the other (GIC).  Lee Hsien Loong as the head of the Cabinet and the PM had ultimate authority to approve the appointment of his wife. As a result the PM and his wife control over $800 billion of assets.

We are not told how much Ho Ching earns as CEO of Temasek, though the fact that her husband is in a position to influence the terms of her employment and remuneration must be a serious conflict of interest that should be covered by the same disclosure requirements as related party transactions. Certainly she probably earns considerably more per annum than the $6.4 million that WP are accused of overpaying to FMSS. We also do not know whether Lee Hsien Loong is paid anything for serving as Chairman of GIC or Tharman is paid for being the Chairman of MAS.

Shanmugam weighed in to say that the MA fees had been inflated to benefit FMSS by some $6.6 million over the past four years:

“The rhetoric from the Workers’ Party is always about helping the poor man. The reality is that the Workers’ Party took money from the man in the street to give to their friends in FMSS,”
hoching580280Again the mind boggles at the lack of capacity of the PAP for self-reflection on the irony of what they are saying. We all know that Temasek has sustained serious losses before now. How much have the returns of Temasek and GIC been inflated over the years by ripping off CPF account holders and paying them a below-market rate of interest? How much has Temasek gained by gifts from the Treasury of assets below their fair market value on which the managers were able to make enormous revaluation gains when they were listed or sold? SingTel and Singapore Airlines spring to mind. This still goes on. Changi Airport Group was transferred to Temasek at a valuation of $3 billion a few years back when its true valuation is probably closer to $20 billion now. Read the TOC article on Ho Ching’s losses here: http://www.theonlinecitizen.com/2009/07/breaking-news-40-billion-losses-by-temasek-holdings/

Hari Kumar  was not slow to add his criticism:

Mr Nair said that it’s not that the AGO did not note any criminal activity, but that the AGO does not know if there was because of the state of AHPETC’s records.

Hri Kumar making sure I can't look him in the eye and demand transparency.

Hri Kumar making sure I can’t look him in the eye and demand transparency.

We have not seen any evidence of outright corruption in Temasek and GIC but we would not know anyway because of the complete lack of transparency. Parliament does not even question the fake Budget presentation which is used to hide the Government’s obscene surpluses, running at about $30 billion a year, and fend off any pressure for higher spending on social programmes.

On Friday KBW outdid his previous performance with the words:

“Where the water is murky, it’s easier to fish. Opacity creates opportunity for crooks to make money.”

Talking about murky water is especially ironic given that Muddy Waters, an American short-seller that specialises in ferreting out companies committing fraud or hiding their true financial position, said that Olam was likely to go bust because of its heavy debt load and lack of positive cash flow.  Inexplicably and inexcusably, Ho Ching chose to buy out the major shareholders of Olam by making an offer above the market price rather than wait for the company to fail and buy it out of bankruptcy with an offer to debt holders. I blogged about it in March 2014
http://sonofadud.com/2014/03/16/questions-for-the-prime-ministers-wife-on-temaseks-olam-acquisition/

And here is one of the many stories on it covering Muddy Water’s analysis.  http://www.cnbc.com/id/100272657#.

The PAP manage our reserves in a totally opaque way. Yet the PAP wants us to believe that they are immune from what history has shown to be true time and again.  Opacity and lack of accountability breed mismanagement and at worst, corruption.

These are the real conflicts of interest that pass almost unnoticed and yet are of far greater consequence to Singaporeans than a mere few million dollars in overpayments:

  1. The conflict between paying you a fair rate of return on your CPF savings and exploiting you as a cheap source of funding for GIC so it can make higher returns.
  2. The moral hazard which encourages Temasek and GIC to take higher risks because they know that the Singapore taxpayer and CPF holder will bail them out. Also if Ho Ching can never lose her job, she is incentivized to take maximum risks as she will then get a higher bonus with no downside if she loses money.
  3. The conflict between the Government’s role as owner of most of the land and desire to make a profit and its role in providing low-cost social housing
  4. The conflict between the Government’s monopoly control of many domestic industries and ensuring a competitive environment so that you get lower prices
  5. The conflict between the Government’s desire to grow the economy and revenues through the import of cheap labour and driving down wages and improving the real earnings of mid- to low-income Singaporeans.
  6. The conflict between the role of an Opposition MP as a check on the Government and a proposer of alternative policies and the job of running the TC. MPs should not be estate managers, which requires people with specialized training. One of the reforms I want to see is elected TCs and MPs free to concentrate on their proper role.

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We should not lose focus on what this attack is really about. We must resist the PAP’s attempt to turn MPs into mere town council managers. By putting the WP on the defensive over their failings in corporate governance the real aim of the PAP is to deter the Opposition from carrying out their proper function, which is to force the Government to be transparent and accountable and govern in accordance with the people’s wishes.

We must keep out focus on what really counts and that is transparency. It is transparency that comes first and every other improvement we want to see in our society, whether freedom, justice, compassion or a more equitable share in our Nation’s wealth, flows from that. We must keep up the pressure to demand that our government supplies transparency. On the other hand, should they continue to give us only muddy waters, then we will have to make use of secrecy, the secrecy of the ballot in the coming GE.

How Lee Kuan Yew and Hitler Both Love Authoritarian Capitalism

I wrote a letter to the Financial Times last week in response to an article dated 1 February 2015. The article, by Slavoj Zizek, international director of the Birkbeck Institute for the Humanities, suggested that Lee Kuan Yew would have statues erected in his name a century from now as the founding father of authoritarian capitalism. My letter has predictably not been published although the FT did get back asking me to cut it and then that they were considering it.

Dear Sir,

I refer to the article in yesterday’s FT by Slavoj Zizek.

Let me respond as a citizen of Singapore.

The writer refers to Lee Kuan Yew as the father of authoritarian capitalism. This is simply incorrect. Nazi Germany and Mussolini’s Italy were both authoritarian capitalist states and so were late-Czarist Russia, Bismarck’s Germany and Meiji Japan. Lee Kuan Yew and China have merely taken a pre-existing model, which was never particularly Asian, and adapted it.

At least Zizek sees through LKY’s and his son’s claims that the state they reign over is a “robust democracy” and rightly calls it authoritarian. He says that a century from now monuments will be built to Lee Kuan Yew implying that Singapore’s model is somehow superior at delivering the goods to the general population than democracy. However he is wrong to call Singapore’s or China’s model a free market one or even really a capitalist one. He is also wrong to say that it results in superior performance compared to democratic countries.

There is nothing particularly clever or novel about Singapore’s economic growth model. It is one based on access to unlimited supplies of cheap labour and cheap capital, obtained through forced savings, without any underlying growth in total factor productivity. Krugman expected this model to reach its limits pretty quickly. However Singapore, unlike China which is approaching its labour force limit, has the advantage of being a relatively small city economy surrounded by countries with large amounts of surplus labour. Singapore keeps its model going by allowing employers access to almost unlimited supplies from this labour pool. Foe many, if not most of these foreign workers, often heavily in debt to agents and middlemen, conditions constitute a modern form of slavery. Without a minimum wage, this supply of cheap labour undermines Singaporeans’ own job security and wages.

Whilst supplies of cheap labour and overinvestment in construction and infrastructure have fuelled our impressive rates of economic growth, productivity has predictably stagnated. On the Brookings 2013 ranking of the 300 fastest growing metropolitan areas, we came 61st below London. Our GDP per capita on a PPP basis was still below that of many US cities. However GDP per capita is an inaccurate measure of how productive our workers are since we work the longest hours of any developed country and our labour force to population ratio is much higher because of the large number of guest workers. As a result our GDP per hour worked is only some 60% of the US level and below that of most developed economies, let alone the major cities to which we should rightfully be compared. Our productivity has not grown at all since 2007.

China has adopted our model of extensive growth but a rapidly declining labour force and the falling profitability of investment are likely to bring an end to China’s rise in living standards earlier than Singapore. In fact Chinese growth, properly measured, has already fallen below that of India, a democratic model.

While incoherent and difficult to follow, Zizek seems to be making the argument that Western freedom is a burden for the ordinary citizen. Having to plan for your old age is worse than state provision. The freedom to make choices becomes a “burden”. People are better off when decisions are made for them by their rulers. Zizek has not discovered some new truth,. Fascist and Communist philosophers have made all these arguments about the supposed illusion of democracy and freedom since the 1920s.

The unspoken assertion is that authoritarian rulers acting benevolently will produce better results for their citizens than a democracy. Singapore’s Gini Coefficient is higher than that of the US and considerably higher if taxes and transfers are taken into account. There is no Welfare State and even the limited forms of public assistance available are very difficult to access. Health care is on a pay-as-you-go basis and despite the recent introduction of a limited health insurance scheme that is self-financing, heaven help anyone who through no fault of their own suffers a critical or chronic illness such as cancer. The choice is frequently between destitution or going without treatment.

Neither is Singapore a free-market paragon. All Singaporeans are required to contribute nearly 40% of their income to a regressive forced savings scheme, the Central Provident Fund (CPF) on which the Government pays a low rate of interest. The government on-lends the money to the sovereign wealth fund, GIC, whose Chairman is the Prime Minister. If that seems like a conflict of interests the PM’s wife is head of the other SWF, Temasek Holdings. Figures for the SWFs’ assets and performance are kept secret on the grounds of national security.

The Government owns 80% of the land that it compulsorily acquired, or rather expropriated, at prices well below market in the 1960s and 1970s. It controls the supply of housing in the same way. Money in the CPF can be used to buy overpriced housing from the Government monopoly. People can also buy private property but due to the artificial shortage of land this is out of the reach of most Singaporeans. While the ruling party, the PAP, claims that 87% of people own their own homes this is a fiction. In reality 10% own their own freehold homes that they can buy and sell without restriction with all the burdens that attach to freedom. 87% of our population are on 99-year leasehold in tower blocks built on land owned by the government. Singapore’s form of apartheid, the Ethnic Integration Act, determines where you can live according to a racial quota. If you are a member of an ethnic minority you may find that you can only sell your unit to another member of the same race at a discount to what you could obtain if you sold it to the majority Chinese. This is a clear restriction of the free market and a basic human rights infringement. Giving the overwhelming majority of the population no choice but to live in leasehold public housing, allows the PAP to intimidate voters.

Even in the supply of many basic goods and services Government-owned companies have either a monopoly or share the market in an oligopoly with a few private sector competitors who remain dependent on Government goodwill. Examples include mobiles, broadband, broadcasting, public transport, newspapers, electricity supply, and banking. As a result prices are often higher than in other developed countries for utilities like mobile services.

No doubt Zizek would salute this as removing freedom of choice from the ordinary person who finds freedom a burden. Far better a benevolent dictatorship that has a monopoly on most basic goods and services rather than a democratic one where capitalists make profits exploit consumers and workers.

However Zizek fails to explain how authoritarianism prevents the state from being a worse exploiter than a democratic capitalist one. Communist governments in China and the Soviet Union killed tens of millions of their own people. The death toll in China alone during the Great Famine and the Cultural Revolution is reckoned at 50-60 million. For all the hype from apologists like Zizek that regimes like China and Singapore are delivering the goods and making their people happy, what is to stop another Cultural Revolution or Stalin? The American Founding Fathers were quite correct when they placed the prevention of tyranny as a goal above that of government efficiency. While the PAP Government constantly points to supposed US gridlock as a justification for authoritarianism, that gridlock is there deliberately. US economic performance has been superior to Singapore’s on the productivity front for some time.

Singapore, while not on the scale of Chinese human rights abuses, is a good example where the Government exploits the people more ruthlessly than a democratic state would be able to. The Government makes a surplus of $30 billion a year and has supposed reserves net of debt of around $400 billion. Yet Singaporeans are denied the most basic information about the state of the reserves and the Government Budget is a model of opacity. While Western think tanks rate Singapore as corruption-free, Singapore’s system is rife with conflicts of interest and cronyism. PM Lee, the son of Lee Kuan Yew, has never held a job in the private sector and clearly would never have been PM but for his father. The Prime Minister’s wife is CEO of Temasek while the PM is Chairman of GIC. The Government says it is not in the public interest for Singaporeans to know what the PM’s wife is paid. Many MPs from the ruling party are on the board of or head up Government-owned or –linked companies, as are members of the PM’s family and his wife’s family.

Despite Zizek’s claims that the “Singapore” model of authoritarian capitalism has been wildly successful or morally superior to the democratic model, there is no doubt that most Singaporeans if able to would vote with their feet for the Western democratic model as seen in the high rates of emigration and the large numbers in surveys who say they would emigrate if they could.

Where the PAP Government has been hugely successful though is in creating a myth of success that has fooled many Western academics from both left and right. Instrumental in this has been the ability to use state wealth to shape opinion through donations to foreign think tanks while deploying the threat of defamation suits and trade sanctions to cow much of the Western press into not reporting criticism of their version of history.

Yours sincerely,

Kenneth Jeyaretnam

Singapore Gets into Currency Wars

Did you know that on January 27th the value of the Singapore Dollar dropped by the greatest amount in a single day since 2010?

Screenshot 2015-01-31 12.35.51

FT report

Screenshot 2015-01-31 12.39.11

A few days ago  the financial press  globally were startled into reporting that our currency had suddenly depreciated. Yesterday MAS put up a belated official announcement explaining that it had been a deliberate policy move.

I’d like to take a closer look at this monetary easing and show you why it will lead to Singaporeans getting shortchanged unless it is accompanied by fiscal easing and how ultimately disastrous the PAP policy of relying on exports and overseas investment is. I will show how it links to immigration policy, forced CPF savings. health care and so on. I will demonstrate  that the only solution is to re-balance the economy towards domestic consumption.

What is monetary easing good for?

Monetary easing, often referred to as quantitative easing, or QE (as the policy of monetizing government debt and other financial assets through open-market purchases by the central bank is called) has been billed as a tool to fight deflation. For the purposes of this post you will have to accept that deflation is a bad thing and to be avoided. If you want to know more or disagree just drop me a comment and I will be happy to respond.

For this post  I am also making the assumption that we only avoided a double dip recession because our government went backwards and retrospectively amended earlier figures downwards so that the drop was not so pronounced and technically we avoided a recession. But it is only technical and we are in recession to all intents and purposes or constantly on the verge of recession. The CPI ( consumer Price Index) here did in fact decrease by 0.2% in December compared to a year ago so MAS has good reason to be concerned

Why did MAS take the step of Monetary Easing ?

Naturally financial analysts have focused on the move by MAS as part of a strategy to fight deflation. This is the same reason given by the Japanese and European central banks on why they embarked on massive monetary easing.

The MAS’s own announcement states the reason is an attempt to slow the Singapore dollar’s appreciation against a basket of currencies.  So everyone agrees that MAS has got us into monetary easing in order to fight deflation.  In fact our currency immediately responded to the QE by dropping roughly 1.5% against the US dollar and is expected to fall further. We will know more on Monday.

So if our currency is dropping what’s wrong with Monetary easing?

Because monetary easing on its own is unlikely to be effective except insofar as it weakens your currency and boosts exports. The problem is that QE needs to be accompanied by a more expansionary fiscal policy aimed at boosting domestic demand.  As you depress the currency value on one side of the equation you must balance it by pumping up the domestic demand on the other. Back in the 1930s Keynes already said that a monetary policy easing unaccompanied by fiscal measures was unlikely to be effective in stimulating demand and getting an economy out of recession. Also you cannot keep your currency depressed for ever without incurring costs which mount over time.

Why are people talking about Currency Wars?

By deciding it can no longer sit back and let other exporters like Germany and Japan gain a trade advantage by depreciating their currency MAS has joined the currency wars.  Make no mistake, the latest rounds  of QE, accompanied in Japan by tax increases and in Europe by German demands for similar measures in other Eurozone countries, are not really about increasing domestic demand,no matter what they claim.  They are called currency wars because it’s about the battle over the export market. It is a move by the countries involved to gain an unfair competitive advantage by making their export goods cheaper.  It’s just an old-style currency manipulation exercise aimed at beating export competitors (South Korea and China) and gaining a bigger share of the US market, which is the only one still growing. For now.

We cannot rely on US growth. If all these countries depreciate their currencies and get a bigger share of US exports they actually detract from US growth because they are not importing equal amounts from the US. By pushing exports over imports they accumulate reserves, the bulk of which are invested in low-yielding Government securities, which become worth less and less over time. These wars are actually subtracting from US growth (which the Americans are unlikely to tolerate indefinitely) and exerting a deflationary impact on the rest of the world. Ultimately the US has the option of going bust (though more a theoretical possibility than an actual one) or imposing negative yields on foreign holdings of its currency like Switzerland. All those  countries with a claim on them via Treasury bonds in the reserves will be royally shot in the foot.

What do you mean by fiscal easing?

When I say fiscal easing I mean moves to boost domestic consumption, that is spending more or collecting less by cutting taxes.

The PAP have a mercantilist mindset. Running a big current account surplus and accumulating reserves is part of the mercantilist mindset that also sees exports as good and imports as bad. To the mercantilist, there can never be too much investment and the less domestic consumption there is the better. Since the 1970s there has been a huge drag on world growth caused by the desire of mercantilist nations to run big current account surpluses and accumulate reserves. First it was Japan in the 1980s and then South Korea and China, particularly after the Asian financial crisis of 1997. Germany also has a mercantilist mindset. In the past the PAP has expressed views that there is no point in increasing domestic consumption, as it will all be spent on imports.

As I said before if everyone together tries to reduce domestic demand and increase exports simultaneously the end-result will be a worldwide slump. The result of a much bigger accumulation of reserves is that the returns from these reserves over the long run fall to such a low-level that it would have been better if the surplus countries had spent it on consumption in the first place. Add in the fact that we are probably poised on the cusp of an era of accelerating productivity growth with automation and artificial intelligence and a strategy of hoarding reserves in ever-increasing amounts for a “rainy day” that never comes makes no economic sense.

How is this relevant to the Singapore context?

The immediate effect of our currency depreciation will be to make overseas travel or study less attractive in particular to the US and imported goods may become more expensive such as the costs of fuel but Singapore and Singapore housing in particular will start to look very attractive to overseas investors.

Many of the PAP’s economic policies are aimed at running a large current account surplus and accumulating reserves. The Government runs a budget surplus (on the correct IMF format and not the misleading one presented to Parliament as part of the annual Budget farce) of about 8-10% of GDP. That is very large indeed and means that the reserves are rising by about 10% every year.

The QE is abetted by other policies to achieve the mercantilist goals. Of course there is the  open-door policy on cheap foreign labour which makes our exports extra-competitive. At the same time this reduces Singaporeans’ wages which cuts domestic consumption. A forced savings scheme, CPF, cuts consumption even further and recycles our savings into foreign currency via Temasek, GIC and MAS to assist in keeping the Singapore dollar undervalued. The end-result of these policies is that Singapore runs a current account surplus of around 20% of GDP and continues to rapidly accumulate foreign reserves

At our stage of development such a high rate of savings is unnecessary and means we forego a higher level of consumption. Taxes on the middle and lower classes and prices for a range of products that we are forced to buy from government monopolies are higher than they should be. Spending on health, education, children and the elderly is kept down despite the fact that the first three items at least would yield higher rates of return than our SWFs are able to generate on our foreign reserves. (I have since 2012 questioned the returns that Temasek and GIC are achieving and some of my many articles are listed via links at the bottom).

What can be done instead of QE?

The Government could allow the Singapore dollar to appreciate thus cutting the cost of imported goods and raising the real value of our wages. If the Statistics Department measure of overall unemployment at 2% and citizen unemployment at 2.9% is accurate then the economy is operating at full capacity. By keeping the Singapore dollar artificially undervalued the PAP Government are acting contrary to their stated policy of encouraging Singaporean manufacturers and producers to raise productivity and move up the value chain to higher value-added products.  Decreasing the currency by QE is actually subsidising producers discouraging productivity and imposing a forced real wage cut.  This is the clearest sign that despite the lip service paid to productivity the PAP Government is returning to the only growth strategy it understands and finds easy to implement: low value-added service and manufacturing industries based on cheap foreign labour.

The Government should also loosen the fiscal austerity that it has practised for so long and spend more on domestic programmes like health, education, families and the elderly. At the moment the Net Investment Returns Contribution which is supposed to be used for current spending is instead saved in a round-tripping charade which I have called “Smoke and Mirrors in the Government’s Accounts”.  We can spend at least another $10 billion a year on social programmes without denting the reserves if the Government is being honest about GIC’s and Temasek’s returns.

As for housing I have often warned here of the dangers of a housing bubble when everyone gets excited over the rising value of their property. Government measures to cool the market did just that and now this latest currency depreciation move will reverse that and prices will go up again.

Temasek

There is one other possible reason why the Government has chosen the path of currency depreciation.  It has to do with our secretive Sovereign Wealth Funds with Temasek headed by the Prime Minister’s wife whilst he himself heads up the board of GIC. Depreciating the Singapore dollar would very effectively offset losses or bolster returns generated from the assets of our SWFs invested in foreign currencies. The last public Statement of Assets and Liabilities at 31 March 2013 showed total Government assets net of cash held with MAS of around $650 billion. All of GIC’s assets are external so currency depreciation will have the automatic effect of increasing returns denominated in Singapore dollars. The same goes for Temasek. Even the value of their holdings in Singapore equities will also go up if the Singapore dollar depreciates depending on how much the companies export. The Singapore dollar has already fallen by some 8% since June 2014 which will artificially boost the returns achieved by Temasek, GIC and MAS when translated back into Singapore dollars. We do not know how Ho Ching is paid but it seems safe to assume that higher returns will result in her receiving a higher bonus.

So not only is the PAP Government cutting the value of your wages by an unnecessary and counterproductive currency depreciation. It is cutting the value of your CPF savings too. This demonstrates, as I have always said, that the risks of Temasek and GIC will not be borne by the managers, including the PM’s wife. They will instead be borne by Singaporean CPF holders and taxpayers.

Links

https://www.roubini.com/media/ecb-quantitative-easing-wont-save-the-euro-zone-economy-roubini

http://sonofadud.com/2012/09/07/where-have-our-reserves-gone/

http://sonofadud.com/2012/09/17/a-short-note-on-where-have-our-reserves-gone/

http://sonofadud.com/2012/09/25/an-unappetising-picture/

http://sonofadud.com/2012/10/15/micas-response-fails-to-reassure/

http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-7

https://sg.news.yahoo.com/does-end-qe-mean-end-property-boom-152659782.

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