Category Archives: The market
The recent flare-up of the Indonesian forest fire problem and the deterioration in our air quality is understandably also causing temperatures to rise in Singapore. Our neighbor Malaysia is also equally if not more severely affected. This happens year after year causing severe respiratory problems for those afflicted with asthma, forcing schools to cancel outdoor activities and keeping people inside. Yet what is notable is that our government seems unable to come up with any solutions despite the fact that this has been going on since 1997. In particular they do not seem capable of applying some simple lessons from economics.
Economics teaches us that pollution is an example of a negative externality. A negative externality occurs when a third party has to bear the costs or negative impact of the production of another party. An example within Singapore would be congestion on the roads. As the roads become congested due to the increasing number of private cars, public transport users and non-car owners have to bear the negative costs in terms of longer and slower journeys, pollution, noise and congestion.
A positive externality is when the third party benefits from the action or production of others. Those who choose to forgo the comfort of a car are benefiting others. Growing plants for our own pleasure or use on our balconies ( so long as we guard against mosquitoes) actually benefits the whole environment not just us. A government that invests in education produces a host of positive externalities.
In the case of the haze from Indonesia the negative costs are primarily the additional health expenditures required to treat the problem as well as any economic losses arising from people having to take days off work. There is also the damage to the tourist industry, both short and long term. There is also the possible long term damage to health resulting from the pollution. This damage is all capable of being quantified yet it does not seem to have occurred to the government to do so. I would confidently estimate that the costs run into billions of dollars.
Now Iam going to bring in some theory. A government familiar with the Coase theorem (named after Ronald Coase who won the Nobel Prize in Economics in 1991) could have gained some insights here. Problems with externalities can be viewed as problems of the distribution of property rights. The right to pollute can be viewed as a property right as can the right to clean air. Now, in an efficient market without transaction costs this property right should go to the highest bidder, i.e. the party to whom that right is worth most.
Is there any way to stop this menace? Well, the economic loss if not the misery could be solved by the Indonesian companies involved paying Singaporeans for the additional health and other costs that we incur as a result of the pollution. However Indonesia as a sovereign state feels no necessity to compensate Singaporeans and Malaysians for the costs incurred. Disappointingly ASEAN has set up no legal mechanism for dispute resolution of this kind and the awarding of compensation for damage suffered from externalities that cross national borders. It shouldn’t surprise us that the PAP government appears unable or unwilling year in year out, to do anything beyond telling their Indonesian counterparts that the situation is serious. It shows how ineffectual ASEAN is. So penalizing Indonesia or fining them clearly isn’t workable given the current framework.
I have a much better idea based on The Coase theorem. Rather than seeking damages for the costs of the pollution we should just pay Indonesia for our clean air. Singapore could pay the Indonesian farmers and plantation owners responsible for the haze to use other methods to clear their land. We are a wealthy Nation and because we lose billions of dollars to this haze every year, this right (the right to clean air) is worth a lot of money to us.
Lacking an international legal framework to award and enforce compensation claims, Singapore and Malaysia should offer the Indonesian government a sum sufficient to compensate the farmers and plantation companies for the additional costs incurred by switching to another method but obviously less than the value to us of having clean air. The problem is that the prospect of financial payments is likely at the margin to induce new companies to enter the “industry” of slash-and-burn clearance just to receive compensation. For example if I pay my neighbours on the left to stop growing flowers in their garden because I have hay fever then the neighbours on the right would immediately start planting flowers to get me to pay them to stop.
Therefore it would be better if the compensation took the form of a lump sum payment to the Indonesian government to be given to those responsible coupled with a continuing payment towards the costs of rigorous enforcement of a total ban on such methods. This cannot be too difficult given rapid developments in drone technology to allow intensive monitoring of large areas. Singapore could also contribute towards the development of low cost but less environmentally harmful methods of land clearance.
Objections have been raised, particularly by Indonesia, that a large part of the pollution is produced by plantation companies listed in Malaysia and Singapore. We are able to raise a levy on these companies sited on our homeland. Perhaps part of the costs of compensating Indonesia can even be defrayed by levies on these companies. They are unlikely to be able or willing to escape the levy by relocating elsewhere.
So, I offer a simple solution. I am sure there are many other suggestions. The real question is why our government has done nothing about it for the last fifteen years. As always I am convinced that they have no long term plan or model capable or reacting to evolving situations. I have many times said that their plan is a super tanker set on course. They can calibrate it slightly on route from A to B but super tankers are notoriously difficult when it comes to turning a circle or changing direction. The one child policy is a perfect example of a PAP super tanker route. Population rates are particularly difficult to change and once affected almost impossible to put into reverse. Another example is the PAP economic model of growth essentially based on low cost labour which is now increasingly obsolete in the face of disruptive technologies like advanced robotics, 3D printing and automation of knowledge work.
The PAP ministers cocooned in their million dollar salaries are largely indifferent to our health and well being or are simply incapable of coming up with positive policies. Let us return to those negative externalities. I often berate Singaporeans for being prepared to put up with conditions of austerity that citizens of advanced democracies and economies would never tolerate. Maybe it would be more obvious if we were to look at what I call austerity as a negative externality.
Let’s turn this on its head. If the PAP was a farmer burning and causing haze the negative externality it produced would be obvious to you. It is not a factory of course but citizens as the innocent third party are forced to bear the negative costs of the PAP policy of unnecessary savings. Savings far beyond any level that would be considered necessary for a reserve fund, as a buffer against a rainy day. The negative externally is borne by you as over a 50 year period the PAP wilfully under spends and under invests in its citizens’ education and health. This causes me to ask once again, who do our huge reserves (even taking into account the discrepancies I have highlighted before) actually benefit? And do our people vote for the PAP believing that bearing the negative externalities is a good way of existing or have they simply had the wool pulled over their eyes?
Finally I will compare Temasek Holdings with Norway’s sovereign wealth fund. As you know I often bring up Norway’s SWF as a model of good governance and a model of transparency. Bearing in mind that Norwegians of course enjoy a full welfare state although this is not something I would advocate for Singapore. A couple of years ago Norway’s SWF made a major policy shift. They decided to invest a significant part of their funds into environmentally responsible companies. Norway’s Ambassador speaking at the time said the investment strategy was “just the start” of her country’s use of state – backed financial mechanisms to halt environmental degradations. Meanwhile Temasek is using state finance to invest in plantation companies. In 2005 it acquired CDC group’s plantation interests in Indonesia including Sumatra. So ironically if we do pay for our clean air we could be paying our own government for the right to clean air.
Benedict Chong, I don’t know if that’s his real name, has responded to my recent piece about wanting to give Singaporeans a stake in the wealth of our country. I reproduce it here as a separate article. He makes many interesting points and it is well worth reading. Please feel free to comment on it.
With regards to your article on the privatisation of both Temasek and GIC, I note certain solutions and process that you (KJ) are suggesting the Singapore government implement in order to “create a true property owning democracy”. While I like the idealism of such an idea, I am afraid that practically, it is unrealistic. And I give you the reasons below.
I will of course, focus on the answers to the questions you broached and add a few of my own.
The figure you give shows that every citizen would have a claim of up to $100,000. While this figure itself is disputable and extremely subjective, as you have stated yourself, let me bring your attention to the crux of the issue. Will the issuance of such a huge and nominally equal sum of money to every citizen in the country really make the lives of the general population better? Based on comparative analysis, the relative wealth of citizens in the country will remain equal. There is no net benefit between me and my neighbour since we are both receiving the same amount. On a ceteris paribus assumption, I would be no better off.
The injection or rather, distribution of such a huge amount of shares to the public will also result in the need to increase the monetary base/supply of SGD substantially. I assume that cumulatively, GIC and Temasek as a whole will be worth around 500 billion SGD. The distribution without payment of such shares will result in sudden inflows of apparent “wealth” that increases the total market capitalisation of SGX listed companies by up to 55%. But the money to purchase or even sell such shares has to come from somewhere. This will lead to two possibilities; inflation as money “earned” from sale of distributed shares are pumped into the economy or plunging prices as supply of such shares outstrip demand for it, making those who sold their holdings first more advantaged (so much for democracy) since transactions are carried out on basis of price and first come first serve.
Your comment on the government no longer required to make budget surpluses or even balance the budget is perhaps extremely irresponsible. There is little need for me to point to the problems in Eurozone countries as well as USA as evidentiary support for my stand. In addition, your comment on the government investing possible surpluses into SWFs also brings a moral issue to the table.
Whether you like it or not, government money in any entity means that that particular institution has been given an unquantifiable asset of implicit sovereign guarantee. In this case, will the SWFs be considered private corporations or mere Government Sponsored Enterprises? GSEs have shown throughout history to be less than prudent in their finances, regardless of whether they are publicly traded or not. So much for transparency that comes with a stock listing..
The other questions that you are merely scratch the surface. I would like to pose a few of my own questions which I hope you can answer.
1) What happens if those former SWFs meet insolvency issues in the future? Should the government backstop them or let them fail, keeping note of their huge presence in the markets?
2) Is the securities market in Singapore liquid enough to sustain such a listing?
3) Will the government regulate the company or allow is to determine its own risk profile?
4) Who will lead the former SWFs? A government appointee or member of the general public?
5) Should the incumbent government issue a set of guidance, directives or risk parameters to the company?
TRE recently posted up an article by Jeremy Chen with the opening salvo, “This is something of a response to a proposal by Kenneth Jeyaretnam to privatize Temasek Holdings and GIC and distribute shares to Singapore citizens. “ The author was attempting to rebut my Ricebowl article of 4 May 2013, “How to Create A True Property Owning Democracy through The Privatization of Temasek and GIC”.
The author gives his opinion that my proposal is flawed and comes up with a counter proposal. Supposedly. Let us begin with the so called flaws. Actually we can’t because Jeremy says, “There are more problems with the proposal,” but puzzlingly he fails to say what these so called further problems are.
Then again he says, While I respect KJ’s work……this is simply not one of his best. I believe his proposal is flawed. “Actually he neither demonstrates why my proposal is flawed nor counters it. Which is a pity. I put up an idea, it is just an idea and I would enjoy engaging in intellectual debate over it. It is not an economic manifesto and it is certainly not a blue print for using funds therefore it cannot be countered by a complete manifesto on using state funds. Jeremy’s article is merely a clever bit of name dropping, using my article as a hook, to get his own political manifesto out there.
He does write “ Firstly, there are problems related to who is entitled to how much.” That is correct, although it is a question of fine tuning rather than being a problem. I have talked about distributing shares equally although another option would be to weight them in favour of citizens current asset holding status. The fundamental point is to endow Singaporeans with ‘property’. The amount could be credited to CPF and it needn’t be the total share holding. We are talking about Temasek and GIC not the MAS official reserves after all. These are all ideas it would be timely to discuss.
When he does attempt to get to grips with my proposal he simply gets it wrong.
He writes, Furthermore, he (KJ) states that the fundamental problems his proposal sets out to address are transparency and accountability, which privatization does not directly address.
Jeremy fails to spell out why this is the case. Of course privatisation addresses transparency. Since my proposal would involve an IPO of the shares of Temasek and GIC on the stock market the companies would have to fulfil rigorous disclosure requirements. As for accountability it begins with transparency and we Shareholders can actively seek the removal of managers who perform poorly in investing our funds.
There is an alternative method of achieving transparency but not endowment, which is for Singapore to adopt the Norwegian model with regard to their sovereign wealth fund (SWF). In Norway there is a highly detailed report on the performance of the SWF and its positions are published annually and debated by the Norwegian Parliament. Norway is in fact a model of transparency in many areas and even posted up (in English) their debate on the IMF loan. I have often advocated that we adopt their model and use the accepted IMF framework for our budget reporting also.
So who is Jeremy and what is this alternative manifesto he outs here. In the interests of disclosure I am presuming that everyone who reads my blog here or reproduced on TRE, knows who I am. Jeremy Chen may not be as well known and I find it disingenuous that he does not let readers know where he is coming from. (But then that is me and this would not be Ricebowl if I was not agitating for transparency.) So in the interests of transparency, allow me introduce him to you. Jeremy is a member of SDP. I can’t say for sure whether Jeremy is a Cadre/CEC member or not. He is however definitely the author of recent key SDP policy documents particularly the one on housing and therefore responsible for the manifesto contained therein.
Which is great! Whilst I would really like to debate policy with the authors of the PAP manifesto, it is a good start to be doing it with the SDP. If we are to develop a tradition of democracy or normalise democracy in Singapore then it is about time we started debating manifesto and economic policy. At least that way there is some ideological base to the debate as opposed to the skin deep ideological veneer of the ‘ranters’ in our midst. It is good to see the big State paternalistic policies of the SDP out there and stack them up against my pro market small state ideas.
In fact Jeremy spends barely a paragraph on my proposal before unashamedly launching into a totally unconnected promotion of his manifesto. To be fair Jeremy probably thinks that my small idea is a complete manifesto for endowing Singaporeans with wealth. His manifesto is the same old Big State socialist with a capital S ideas with the added PAP favourite of believing peasants to be “daft” and unable to manage their own wealth.
He writes But I appreciate the intent to transfer wealth back to citizens. Well my intent as I said was to force some transparency out of Temasek and GIC. I do believe that we have been hoodwinked into living in conditions of austerity that the citizens of the countries we lend our money to would refuse to accept. We should all be richer by now not just an elite 10%. However I do not really seem much mileage in Robin Hood proposals. A major proposal I put out some time ago for transferring wealth back to the citizens was a proposal that they be allowed to buy the freehold of their HDB flats.
From reading Jeremy’s posting, “Using Funds Wisely and Investing in Our Seniors”, as well as his housing policy proposal, it is apparent that there is a strong collectivist and paternalistic streak in much of his economic thinking. Instead of wanting to free Singaporeans from government-controlled monopolies in every sphere of economic life and virtual serfdom in housing and employment, Jeremy seems to want to reinforce state control. This is the kind of thinking that the less well off do not deserve autonomy because they are going to make unwise decisions and squander the cash they receive on frivolous expenditures rather than “worthy” ones like education and health. From here it is only a short step to believing, like the Communists and the PAP, that government is much too important to be left to the people and that democracy is dangerous.
Jeremy’s idea of converting state housing purely into a subsidised long-term rental market would entrench the government’s control over Singaporeans and make them more dependent. By contrast my idea, which is RP policy, is to return state assets to the people to whom they should belong by right. Singaporeans should have the right to own the freehold of their HDB flats so they are no longer dependent on the government for upgrading. Town councils should be merged with the PA and directly elected so that citizens have more control over expenditures at the grass roots level and so that one party does not have a monopoly of power. And the state assets built up by years of unnecessary austerity, and invested badly by the current government, should be returned to the people. By distributing shares in Temasek and GIC and other state assets to the citizens we create a true property-owning democracy and go some way to solving the normative economic dilemma of how to reconcile a free market, with the demonstrated efficiency gains that go with it, with widely differing starting endowments between economic agents. People can then to a large extent make their own decisions over education and health and provision for old age.
However, distributing the shares of Temasek and GIC to Singaporeans was in many ways secondary to the principal objective of forcing them to be transparent and accountable. I have repeatedly called for transparency in the whole government budgeting process and drawn attention to the Finance Minister’s deliberate use of “smoke and mirrors” to hide the fact that even the Net Investment Returns Contributions are not spent but instead allocated to unaccountable funds not subject to clear Parliamentary control. This thwarts the supposed purpose of allowing the NIRCs to be used for current spending and hoodwinks the people into believing that they are seeing some benefits from the austerity needed to generate these returns. The contribution of $7.7 billion in 2012 was in any case dwarfed by the government surplus (let alone general government surplus which is usually much larger) of $36 billion.
Instead of privatizing Temasek and GIC and distributing shares to Singaporeans Jeremy instead calls for free pre-school education, university education and an old age pension. These are commendable objectives although not new or original to Jeremy as some of them were part of the Reform Party’s’ manifesto in 2011. Sadly the figures are way off. An additional $6 billion to be returned to Singaporeans is meaningless in the context of tens of billions of dollars of apparent surpluses that are accumulating each year and over which the PAP government feels little pressure to be accountable. Jeremy seems to be accepting an implicit OB marker concerning discussions of the appropriate size of the reserves and what is the ultimate objective of reserve accumulation. Instead he echoes the PAP mantra that higher taxes will be necessary if we are to have higher welfare spending though he also mentions cutting defence expenditure on hardware and finding other savings by increasing efficiency. While a review of defence expenditure is needed it is probably the wrong time to be cutting it at the moment when Asian defence spending generally is rising. Savings from reducing NS, as per RP’s policy, would be counterbalanced by the increased costs of a professional army and high technology weapons.
In conclusion, Jeremy’s article misleadingly purports to be a critique of my proposal for a property-owning democracy. However he does not even begin to come to grips with my arguments instead using my name as a hook to set out his own pet policy ideas. These mainly consist of tweaking existing PAP policies to produce higher social spending but with even greater state control. Instead my ideas aim at devolving state political and economic power to the people to develop a free Singapore.
The question of the transparency and proper accounting of our reserves has been a primary concern of mine for some time, in fact ever since 2009. A major theme has been that currently we have inadequate safeguards to prevent them being frittered away by an irresponsible government instead of being used for the benefit of the people whose hard work and sacrifice have built them up. In the RP responses to Budget 2012 and 2013 (see here and here) I complained that our Budget presentation was a masterpiece of obfuscation and misdirection and that there were several glaring discrepancies in the accounts. I followed this up with two letters to the Finance Minister (here and here) complaining about discrepancies and a further letter to Christine Lagarde, the head of the IMF (here).
I have also written extensively at www.sonofadud.com on the question of the transparency of our reserves and why the numbers do not add up(see here for just one example). A further list of links is given at the bottom of this post.
Thus as the person who raised this issue first I am well qualified to adjudicate on the issues raised in the recent argument between Christopher Balding and the person calling himself “Kok Ah Snook” .
After I had been writing about these issues for some time, I found that Chris had in April 2012 been writing in a rather alarmist and sensationalist style and making unsupported allegations of fraud about what he believed to be large shortfalls in our reserves. However his analysis was merely speculation until I spoke to him and pointed where on the MOF website he could find a sub-standard balance sheet, without any explanatory notes, which the Finance Minister is required to publish annually under the Constitution. The balance sheet is supposed to represent Singapore’s assets and liabilities.
After some discussion I then flew out to meet him in Hong Kong where we agreed to work together towards a joint presentation of what we had found. While looking at his work I noticed certain errors or implicit and unjustified assumptions that he appeared to have made in his calculations of what should the theoretical total of Singapore’s gross and net assets and pointed these out to him.
However despite what I thought was an agreement he started publishing fresh articles independently using some of the information that I had sent to him. Since it seemed to be difficult to work with him I went ahead and published my conclusions in the article above where I cited some of the errors he had made in his analysis. However despite this I broadly agreed with his conclusion that the theoretical level of gross and net assets should have been much larger differing only in the order of magnitude. Whereas Chris calculated that there was potentially over a trillion $ in missing assets my more rigorous assumptions reduced the theoretical shortfall on conservative assumptions to the level of $300 billion or so.
In later articles (see here and here) I argued that GIC would have had to have earned less than 2.5% p.a. in S$ terms, even allowing for a cost of government borrowing from the CPF of 3.5%. to generate such a low level of net assets . This was after subtracting Temasek’s publicly stated level of net assets and a conservative estimate of revenue from land sales from the total of gross assets shown in the Statement of Assets and Liabilities. This was actually much more damning because it established that even the most careful analysis suggested cause for concern that the managers of our reserves appeared to be achieving very poor returns.
So let us get back to the current controversy. I read what Mr. “Kok” wrote (and also met up with him). He is technically correct that there is no theoretical difference between owning assets worth $100 directly and owning shares in a company with net assets of $100. However I do agree with Chris that it is a cause for concern if the assets are injected into the company for free or not for fair value and that the managers of the company subsequently revalue the assets and claim the gain as their own investment performance.
The view that Temasek’s presentation is unorthodox and misleading is supported by current accounting practice (as exemplified by US Financial Accounting Standards Board (FASB) Statement No. 141 which can be found here). This requires that:
20. The acquirer shall measure the identiﬁable assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.
In the case of a “bargain purchase”, one where the fair value of the assets acquired is above that of the consideration paid, the “the acquirer shall recognize the resulting gain in earnings on the acquisition date. The gain shall be attributed to the acquirer.”
Accounting Standards Classification (ASC) 805 has superseded FASB Statement 141 but the instructions remain the same. The International Financial Reporting Standards (IFRS) has very similar, if not identical guidelines on how to treat acquisitions of undervalued assets.
Of course Temasek as an exempt private company is not required to publish its audited statutory consolidated accounts though presumably these should be in accordance with US Generally Accepted Accounting Principles (GAAP) or IFRS.
At the time of Temasek’s acquisition of these group companies from the government, even if there was no fair value determination for the companies transferred, Temasek should have recorded them at the book value they were showing in the acquiree company’s accounts. Temasek paid $354 million for the 35 companies by issuing shares to the government. It is hard to believe that this was book value even then. It is likely that Singapore Airlines alone even in 1974 had a book value of close to that figure.
If Temasek had chosen either to use fair values or book values for the assets acquired then the resultant gains should have been taken to income on the date of inception and added to the reserves. The starting base for calculation of returns would then have been much higher and subsequent returns correspondingly lower, probably by a significant amount. Even if the acquiree companies’ book value was used it is highly likely that there would have been a higher starting value for Temasek’s initial assets and a significantly lower rate of return since then.
This does matter if you are a publicly listed company because investors will look at the track record of the managers. If you were a hedge fund manager and your returns were inflated because they include returns that belong to prior periods then that would be highly misleading and probably fraudulent. Regulators would definitely be concerned. If the fund’s returns were padded by the injection of undervalued assets from other funds then this would also be misrepresentation of the true performance of the fund. Before regulators tightened their rules on marking of assets and liabilities to fair value, which should be market values as far as possible, it is probably true to say that it was fairly common for investment bank proprietary trading desks to build up hidden reserves by undervaluing some of their assets. These could then be released when necessary to cover losses or when bonus payments were calculated.
It has been argued by “Kok” among others that the glaring undervaluation of Temasek’s initial portfolio does not matter in the case of Temasek because it is a government-owned company and it is not marketing shares or investment funds based on its performance. It was just a choice of accounting treatment and after all no money was siphoned off.
However, this is far too naïve a view. Singaporeans are the investors in Temasek and ultimately the owners of the assets. If the government is able to convince them that they are better managers of these assets then they really are then the voters may be swayed to vote for them when they otherwise would not. Also the CEO of Temasek has talked in the past of co-investment funds to be sold to Singaporeans and others to allow them to invest alongside Temasek. Should these come to fruition then investors need to know what the true performance of the current managers is. The remuneration plans of Temasek’s managers are also linked to long-term investment returns. If these appear better than they really are then payouts to managers may have been larger than they should have been.
Finally a future group of managers may decide at some stage to partner with a private equity firm or firms to make a buyout bid for Temasek’s assets that a future government might accept. If some of the assets in the portfolio are still significantly undervalued, and only the future managers know about it, then Singaporeans may be seriously shortchanged. This is unlikely but not inconceivable. After all Nomura’s private equity division bought the Ministry of Defence housing stock in the UK for a fraction of its true worth generating reported profits for Nomura of US$1.9 billion and setting Guy Hands, the then head of Nomura’s Principal Finance Group, on thr road to a reported personal fortune of £100 million by 2011.
Despite Balding being on the right lines his analysis is unfortunately vitiated by some elementary mistakes as usual. These unfortunately undermine the credibility of his case though they do not affect the main argument. He mentions Changi Airport Group (CAG) and says that the government invested $5.68 billion since the late 1970s and is then selling it at a loss to Temasek for $3.2 billion in 2009. However he omits to take account of any dividends paid by CAG to the government since its inception. Given that their profit after tax in the first year after corporatization (2009/10) was S227 million the positive cash flow since Changi’s inception may have been several billion dollars. This would have reduced the headline investment figure of $5.68 billion probably significantly. Against this must be set the unexplained entry in the consolidated cash flow statement showing $580 million received from CAAS. Perhaps this represents revenues collected by CAAS prior to corporatization and subsequently paid to CAG. In this case the purchase price of $3.2 billion should be reduced by this amount. In addition CAG’s balance sheet showed cash of another $500 million as well as the $580 million and both amounts should be deducted from the purchase consideration to determine the enterprise value.
The purchase price was purely notional anyway because the purchase was financed with a simultaneous capital injection by MOF of the same amount. While the capital injection will add to Temasek’s asset base but not increase its returns, the purchase price of $3.2 billion is well below what such an asset with predictable and growing cash flows should fetch in an open auction. Recent airport sales (Edinburgh, Stansted) have achieved Enterprise Value/Earnings Before Interest Tax Depreciation and Amortization (EV/EBITDA) multiples of 15 to 17 times. Putting CAG on a EV/EBITDA multiple of 17 times implies that in 2009 it should have been worth at least $7.3 billion and on the basis of the latest results that would have risen to nearly $16 billion.
So exactly the same thing is happening as in 1974 despite recent accounting standards updates that mandate that acquired assets should be recorded at fair value in the acquiror’s books with gains recorded on acquisition. All the previous reasons why this is wrong apply here. Yet again, the Singapore citizen and taxpayer gets a raw deal because the value of the assets concerned is not being maximized as they would be if CAG was put up for auction. It would be interesting to see how the value of CAG is treated in Temasek’s statutory consolidated accounts. Of course undervaluing the asset creates a very useful reserve for a future rainy day for whoever happens to be the managers of Temasek then!
Unfortunately Chris Balding also harms the useful points he makes by the wild accusations of fraud and Bernie Madoff he flings around for which he has no evidence (though it cannot be disproved either). This risks the very valid questions about the management of our reserves being ignored or not taken seriously. Given the recent rising trend of threats of defamation suits to try and silence critidism, culminating in a government body threatening to sue an ordinary individual for the first time, there is a real risk that someone in Singapore could repeat Chris’s accusations and end up getting sued. It is notable that no one has threatened to sue me yet despite the very serious questions I have raised (though Kumaran Pillai at TOC lied and told me he had received a phone call from Temasek ordering him to take down one of my posts but could not produce any evidence when asked). This is because I make sure that what I write is accurate.
Ultimately the only way we are going to answer these questions is through transparency. That is why I have called since 2009 for the privatization of Temasek and GIC and the distribution of shares to Singapore citizens. That is the only way we will get to know what our reserves are really worth and whether the managers have been turning dross into gold or, as I suspect, the reverse.
Last week saw the funeral of one of the most divisive and controversial figures in modern British history. Her family should take comfort from the strength of the opposition to her, which is surely an indication of her strength as a leader. Meanwhile many of you have been asking me what I think of her economics or suggesting that we are ‘pro –market’, kindred spirits. So I will try to touch on her legacy and set forth my views below. If you can’t read the whole thing I will sum it up thus: Thatcher was a reckless gambler who knew no economics.
Above all else, Mrs. Thatcher sod for free enterprise and individualism. Her model was Hayek’s The Road to Serfdom and she believed in rolling back the state (State with a capital S) and reducing the share of GDP taken by the state in taxes.
While this was a commendable objective, her abandonment of Keynesian economics and misplaced faith in Hayek and the Monetarist School (via Sir Keith Joseph her intellectual mentor) proved disastrous for the UK economy, initially. Her experiment in fiscal austerity has parallels with the general enthusiasm today, not least by her heirs in the UK Coalition Government for the benefits of fiscal austerity. This enthusiasm is based on shaky theoretical underpinnings and its supposed benefits have no empirical support. Recently the most often cited statistical work in support of austerity, Kenneth Rogoff’s and Carmen Reinhart’s study purporting to show a negative correlation between growth rates and debt levels, was shown up by a Ph.D student to have elementary statistical errors. Mrs. Thatcher had in any case scant knowledge of macroeconomics to which she added her own homespun common sense. Not altogether successfully.
Her father was a grocer and she used to help out in his shop so it is perhaps not surprising that her grasp of economics did not rise above the level of elementary bookkeeping. Indeed she treated the British pubic to endless lectures about the virtues of thrift and the importance of not spending more than you earn often accompanied by a Micawberish exposition on the dangers of going into debt.
When I was studying at Cambridge the economic fallacies of her Medium Term Financial Strategy of cutting public spending and tightening monetary policy and the disastrous effects it was having on the UK economy were the most discussed topics in my tutorials. This culminated in 364 economists, including the Head of Cambridge Economics, Frank Hahn, otherwise a vocal critic of woolly left-wing thinking, signing a letter urging her to change course, in 1981. Of course Thatcher was not one to change course. ‘This Lady is not for turning’ and all that.
She would undoubtedly have lost the 1983 election, ending the experiment with free enterprise and privatization but for a reckless gamble on the Falklands war. By winning that war she instead won a landslide in the 1983 election. With a new Chancellor, Nigel Lawson, at the helm she embarked on a loosening of fiscal and monetary policy that created a housing boom and let the Tories win another term comfortably in 1987.
Ultimately her success went to her head. She became increasingly overconfident in her abilities and inclined to ride roughshod over her Cabinet colleagues and public sentiment. In a small, newly independent island Nation where the leader is always able to invoke the threat of racial conflict or invasion and economic meltdown to justify repression this may work but not in the UK. Worried about losing the upcoming election the Tory party ditched her in 1991 in truly unsentimental fashion.
I cannot help but respect Mrs. Thatcher’s views on the Soviet Union. She proved prescient about the collapse of the Soviet Union and foresaw better than most left-wing economists that the system was founded merely on adding more inputs without any fundamental rise in productivity. To show how unfashionable this view was at the time, I can still remember a BBC programme in which my Economics Professor at Cambridge urged the UK to adopt the Soviet model and leave the EU. In the same way those who criticize the Singapore model as sharing many of the features of the Soviet one are still very much in a minority here.
In fact in the last years of the Soviet Union their economy imploded and productivity growth went into reverse. Mrs. Thatcher must get some credit for having hastened this collapse though the main spur was higher US defence spending spearheaded by Reagan, which the Soviet Union had to match but could not afford to. Reagan was Thatcher’s staunchest foreign ally and they were indeed kindred spirits though Reagan was much too pragmatic to be hung up on the supposed evils of debt!
It is a pity that while Mrs. Thatcher was so prescient about the Soviet Union, she seems to have been blind to the real nature of Singapore’s success. Like many English people of her generation, she felt that the diverse ( i.e. darker skinned) peoples of Britain’s former colonies needed a firm hand. Who better to give it to them than rulers like Harry Lee, whom the former British foreign secretary George Brown is supposed to have described as “the best bloody Englishman east of Suez”. Her boundless admiration for LKY manifested itself in such stunning displays of ignorance as her comment here that “Her ( Singapore’s) leaders knew that in a free society it is the people who own the Government, not the Government who own the people.” Most of her other speeches abound with such fulsome praise for our dear leader’s achievements.
To be fair her sentiments were probably driven more by diplomatic convention rather than by deep-seated conviction. The greatest irony is that many of Thatcher’s policies of privatization and creating a property-owning democracy from the 80’s have yet to be adopted in Singapore.
In Singapore in the intervening years, the degree of state control over every sphere of our economy has increased, as has the size of the surplus extracted from the people. It is difficult to see how an economy where the state owns 80% of the land and 90% of the population live in leasehold public housing can be squared with the Thatcherite vision of a free enterprise economy where share ownership is diffused throughout the population.
Mrs. Thatcher was moulded by the Conservative government’s humiliation at the hands of the miners in 1973 and fixated on reducing overweening trade union bargaining power, which she did through both legislation forcing the unions to adopt a greater degree of democracy and through privatizing and reducing state support for the traditional mining and heavy manufacturing industries. However the direct control exercised by the PAP government here over trade unions through their control of NTUC and through the unions over mush of the workforce would have been seen by her as a violation of fundamental rights to freedom of association and more akin to the Communist model.
As we approach the inevitable end of a similarly controversial and divisive home-grown figure we might wonder how history will reassess his legacy once he is no longer there. I have said before that it will be similar to Tito’s death in Yugoslavia. The iron fist in a velvet glove who, according to his own spin, held the country together by a ruthless but necessary suppression of minority rights and dilution of political power through measures such as the Ethnic Integration Act. Unlike Tito he has been able or willing to use immigration as a tool to maintain what he sees as a favourable racial and religious balance. However , in another echo of the policies of our former colonial masters and something Mrs. Thatcher would have been familiar with, he has also shamelessly made use of and exaggerated racial and religious divisions in order to maintain and extend his hold on power.
About the only thing we can be sure of is that there are unlikely to be any protests or similar marks of disrespect at his passing, though perhaps more out of the customary apathy and fear than from deep-seated affection. Not to mention that in Singapore, protest is illegal.
Singapore ‘s economy contracted by 0.6% in the first quarter of 2013 compared with the corresponding quarter of 2012. On a quarter-on-quarter seasonally adjusted annualized basis the economy contracted by 1.4%. Since year-on-year growth is now negative does that mean we are now officially in recession?
No. The accepted convention for defining a recession is two consecutive quarters of negative growth. And thanks to some deft footwork by the Statistics Department the government has avoided that label being applied to the economy. The result is that technically Singapore has so far been spared a double dip recession even though many Singaporeans might feel as though a thief has been double dipping from their pockets.
Singapore was in fact only saved from a technical recession by the downward revision of GDP growth in the first and third quarters of the year. Initial estimates of GDP growth at a quarter-on-quarter seasonally adjusted annualized rate in Q1 2012 were 9.8% but this was revised down to 9.5% in the fourth quarter revisions. Similarly a decline of -1.5% on an equivalent basis in the third quarter was also revised down to a decline of -6.3% (see here for details). By taking growth from the previous three quarters and putting it into the fourth quarter, the end result was that fourth quarter growth came in at a positive 1.8% quarter-on-quarter annualized rate
That might have been an end of it but there were more revisions in the first quarter of 2013. Growth in the first and second quarters of 2012 was revised down again while growth in the third quarter was revised up. This resulted in a considerably stronger fourth quarter of 2012 while keeping year-on-year growth barely unchanged at 1.3% compared to the earlier estimated 1.2% (see here for details).
Many Singaporeans have been screaming foul or using the old cliché, “lies, damned lies and statistics” to describe what goes on with our statistics. To be strictly fair there may have been good reasons for the revisions to earlier quarters. It is true that initial flash estimates of GDP growth are often revised substantially later on in other advanced countries. However in other countries an explanation is usually provided for the revisions. There has instead been a deafening silence on this point from the Statistics Department.
This is no different from our government’s silence when asked for data about our surpluses and the true state of our reserves. Though in the government’s case it goes beyond silence and borders on active obfuscation. This would not be my blog if it were not to call for reform of our culture of secrecy and for greater transparency and accountability.
In the absence of an explanation from the Statistics Department for the revisions one is inevitably tempted to suspect that there may be some massaging of the figures to prevent Singapore being classified as in a technical recession. Combined with the other dubious statistics produced by the Department to show rising real household incomes, which I have highlighted here and here, it makes a compelling case for the removal of the Statistics Department from government control so as to lessen the possibility of political interference in the calculation of its statistics. (Again, it wouldn’t be my blog if it wasn’t calling for independence from government control).
The UK Parliament in 2007 passed The Statistics and Registration Service Act 2007 which “established the UK Statistics Authority as an independent body at arm’s length from government with direct reporting to Parliament …rather than through Ministers, and with the statutory objective of promoting and safeguarding the production and publication of official statistics that “serve the public good”.
We need similar reform here coupled with a Freedom of Information Act. I have called repeatedly elsewhere for greater transparency in the general government accounts, which should include all the Fifth Schedule companies and statutory boards, in particular, Temasek and GIC.
However reform aimed at improving the transparency and independence of our economic statistics in the future does not alter the reality on the ground at present. Credit Suisse in a recent research note called Singapore “the sick man of ASEAN” and said that it “must rely on a meaningful improvement in the global trade cycle to register a reasonable recovery”.
While the services sector has held up reasonably well and the construction sector has been buoyed by government infrastructure spending, the industrial production index was by February this year some 18% below its peak in 2011 (see the Monthly Digest of Statistics for March 2013). Of course 2011 was when the government had just triumphantly announced 14% growth for 2010 driven largely by the sectors (manufacturing and pharmaceutical manufacturing in particular) that are now declining. Labour productivity fell last year by 2.6% with manufacturing leading the way. The fall in productivity is if anything accelerating if the latest figures are added in.
The government is still sticking to its forecast of 1-3% growth for this year. It has been quite effective in the past in producing rabbits out of the hat, particularly when it was able to pull the wool over our eyes by confusing GDP growth (easily manipulable when US and EU demand was growing strongly by the addition of cheap foreign labour) with growth in GDP per hour worked. With the decline in our main export markets accelerating, Chinese growth slowing and several of our main trading partners such as Japan resorting to competitive devaluation to boost exports it is difficult to see where the rabbits will come from this time. With inflation at current levels the government is not going to direct the MAS to lower its exchange rate targeting to boost the economy.
Paradoxically, just as Singaporeans have not seen the real income gains that one would expect from the high growth rates of the recent past – because most of the gains have accrued to the fixed factor of land as well as the profits and surpluses of the government and MNCs – a slowdown may not initially have too severe an effect on real median incomes. Even more so if it leads to a slowdown in inflation.
The government is fond of talking of a tight labour market and warning that business will face catastrophic cost increases if we tighten the tap on foreign labour but this is contradicted by the fact that real wages continue to lag behind inflation for the bulk of workers. This does not suggest a tight labour market.
Ultimately though rising living standards are dependent on raising productivity and here the PAP government is continuing to fail to perform. If we were moving upmarket into higher value added manufacturing one would expect average wages to be higher in the manufacturing sector than in services but in fact they are lower.
We are stuck in industries that are dependent on cheap labour and increasingly vulnerable to competition from countries with access to cheaper labour supplies while any move upmarket has to contend with similar moves by China and Korea, both with access to much greater R&D resources than us. If our economic recovery is dependent on a recovery in world trade one can legitimately question what “alpha”, or value the PAP are adding. The pejorative title of “The Sick Man of ASEAN” may well prove to be the most accurate one.
I sent this letter to the Editor of TODAY yesterday in response to their misleading report about the IMF loan appeal published on 10 April. However I still have yet to receive even an acknowledgement so I reproduce the text of the letter below:
18A Smith Street
13th April 2013
I refer to the report on my appeal against the judgement denying me leave to apply for a prohibiting order in the matter of the government’s $5 billion loan commitment to the IMF, published in your newspaper on 10 April 2013.
This is an important case, the outcome of which will determine whether our citizens can enjoy the protection of rule of law and an executive bound by the Constitution. Whatever the outcome I feel it is essential that your newspaper or indeed any State media, report on the case as accurately as possible.
Your reporter Ms. Lee did approach me after the appeal to ask for a written transcript of my oral arguments. Unfortunately I did not have a transcript as my arguments were oral and not read out from a script. However I did speak to Ms. Lee on the phone later and gave her the gist of my arguments. I also sent her links to the written authorities that I had relied upon in the Supreme Court. As my oral argument had taken over an hour and I also orally rebutted several of the AG’s claims I can fully appreciate that it may have been difficult to summarise them in the limited space available.
Unfortunately upon reading the article published in Today it seems that Ms. Lee’s presentation of my argument is based only on the earlier written submissions of 28 January 2013 and does not reflect the oral arguments I actually used in court.
Unfortunately whilst I am sure this was not the intention it has produced a report of the proceedings, which is fundamentally inaccurate and misleading. Worse, it puts arguments into my mouth which I did not actually present.
This was a complex case and even Deputy Public Prosecutor (DPP) Aurill Kam requested that my authorities be excluded on the grounds that they required specialized accounting knowledge. Maybe you will allow me to clarify.
Your report says, “Mr Jeyaretnam, who represented himself in the Court of Appeal yesterday,”
It is true that I represented myself. This becomes meaningful only when you know that I felt obliged to take this course of action because of the Law Society’s previous embroilment of my counsel Mr. M. Ravi. This affected the hearing of my first application in the High Court and I could not afford the possibility that this would happen again at the appeal in the Supreme Court. As my lawyer had settled matters with the Law society by April 8th, we did apply to have him re-instated at the hearing but this was rejected.
You say, “Yesterday, Mr Jeyaretnam maintained that the Government had given a guarantee, but Deputy Public Prosecutor(DPP) Aurill Kam argued that the guarantee contemplated in Section 38 of the MAS Act is a guarantee by the Government to cover “moneys due by” the MAS.”
My arguments were based on the fact that the MAS is a government company as defined in Schedule 5 of the Constitution and that the loan commitment had been given at the behest of the government. In any case, under the MAS Act, MAS is manager of the government’s reserves and not the owner of them. I pointed out that this is identical to the UK where HM Treasury made the loan commitment to the IMF, even though the Bank of England manages the country’s reserves.
You say, “But his application was dismissed last October by High Court judge Justice Tan Lee Meng, who ruled that this article only applied “when the Government raises a loan or gives a guarantee, and not when it gives a loan”.
I argued strongly that the natural and ordinary meaning of the words strongly supports the interpretation that loans as well as guarantees required both Parliamentary and Presidential approval. The Interpretation Act supports this.
However, even if one accepted that the giving of loans were not caught by Article 144 because loans were assets, I also argued and produced conclusive evidence from a variety of authoritative sources that as a loan commitment the IMF pledge should be treated as a contingent liability. Both loan commitments and guarantees are classed as lending-related commitments and contingent liabilities under US Generally Accepted Accounting Principles. The IMF loan commitment should thus be looked at as increasing the financial liability of the government.
I went on to point out that a loan commitment could be likened to writing an option to the IMF allowing them to borrow money from Singapore at a time that was advantageous to the IMF. This interpretation is supported by the accounting rules laid down by the US Financial Accounting Standards Board No. 133, Accounting for Derivative Instruments and Hedging Activities.
The practical effect of extending this commitment was that it was most likely to be drawn upon when the IMF had suffered losses and could not borrow elsewhere. I pointed out that the very term “firewall” used to describe the new commitment suggested that it was money that was to be “burnt” or sacrificed to prevent contagion spreading from, say, a banking collapse in the Euro Zone to the rest of the world’s financial system.
You say, “Mr Jeyaretnam also argued that he has standing as a Singapore citizen and taxpayer to bring forward the application”
It is entirely misleading to report that I argued that my locus standi was based on being a taxpayer and CPF holder. I brought up taxpayer status in an, “ If… then” argument.. My point was that if Madam Vellama had standing as a resident of Hougang to bring an action for judicial review of the PM’s unfettered discretion then I had as much right to bring an action as a taxpayer and CPF holder. I pointed out the inconsistency in Justice Tan’s ruling in my case and the court’s concession of standing in Vellama’s case. The conflict between these two rulings was pointed out in an article written by Tham Lijing in the Singapore Law Gazette in February 2013. The Law Gazette is the official publication of the Law Society (See here).
I also pointed out the contradictory nature of the court’s using a distinction between public and private rights as a test of standing. It is an unjustifiable simplification of my argument to say that it was based solely on my having standing as a citizen and taxpayer.
I would be grateful if you would print my letter as soon as possible.
I refer to Joseph Stiglitz’s recent article in the New York Times. Stiglitz holds Singapore up as a model of how to achieve rapid economic growth while prioritizing social equity and income equality. He even goes as far as say that Singapore demonstrates that reducing income inequality is a necessary condition for rapid economic growth. At the same time he dismisses concerns over lack of fundamental rights that are taken for granted in democratic countries. These are viewed as at best irrelevant and at worst harmful to the main objective of achieving economic growth and raising living standards for the poor and working classes.
Stiglitz’s article is symptomatic of a long tradition among academics and economists, both on the left and right, though more extensively on the left, to view human rights and freedom as something that can be dispensed with by so-called modernizing regimes. I remember my Director of Studies at Cambridge University, back in 1982, when the first Opposition MP for sixteen years had been elected to Singapore’s Parliament, laughingly dismissing concerns about human rights violations as a few bourgeois intellectuals worrying about their freedoms while only “Harry Lee could achieve growth of 10% per annum”. It was reminiscent of similar adulation in the forties and fifties of the Soviet Union and later of Cuba.
Another Nobel Prize-winning economist, Paul Krugman, has recently written of the difficulty of swimming against the tide of economic orthodoxy, no matter how incontrovertible the evidence on your side. He was speaking about the continued insistence on fiscal austerity despite the economic nonsensicality of such policies but he might as well have been speaking about Singapore.
I have frequently pointed out that Singapore’s economic growth is based on just adding more inputs, a strategy that would long ago have run into diminishing returns were it not for the ability to access ever cheaper sources of labour inputs from the rest of Asia. Of course I am not in the same league as an economist as Stiglitz (or Krugman) but one would have expected greater scepticism from the international academic community about the Singapore success story. Even those who criticize its track record on human rights feel obliged to praise its economic growth record.
I put this down partly to the factors listed above. However it also reflects the Singapore government’s skill at co-opting leading academics and policy think tanks in the West. Singapore’s policy of sending its top students abroad to study at elite institutions like Cambridge, Oxford, Harvard and Yale also helps to ensure that foreign academics and institutions are fed the “approved” version of Singapore’s development story as well as providing a valuable source of revenue that these universities are loathe to risk alienating by criticising them.
However I shall return to rebutting Stiglitz’s claims about Singapore particularly with reference to its supposed lessons for the US on achieving income equality. In contrast with his clams, my observations as a Singaporean economist, investor, and secretary-general of the Reform Party accord with recent studies that rank our income inequality the second highest among developed countries.
Official data from Singapore are notoriously misleading and incomplete. If judged only by the Gini coefficient, the most widely accepted measure of income inequality, Singapore comes out as much more unequal than the US, particularly when one looks at disposable income rather than at income before taxes and cash transfers. On the latter measure, the OECD figure for the US in 2011 was .376 while Singapore’s was .459 in 2012, but, taking into account in-kind benefits such as health and education, the US Gini falls further to .303. We do not have figures taking into account in-kind benefits for Singapore but since it spends much less as a proportion of GDP on health and education than the US the gap is likely to widen when these are taken into account. These differences in health and education spending are discussed below.
Moreover, the country’s extremely high Gini coefficient is calculated using only the incomes of Singapore citizens and Permanent Residents. Beneath them is a huge underclass of cheap labour from much poorer countries that is about 30% of the total population. They earn very low wages and are housed often in appalling conditions with very few employment protections. Often they have huge debts to middlemen and employment agents that mean they have no choice but to continue to work for the same exploitative employer. While they may still be better off economically than in their home country the difference is likely to be marginal when all the costs are factored in. Unequal bargaining power and asymmetries of information ensure that most of the benefits accrue to the employer, often a Singaporean Government-Linked Company (GLC). Astonishingly Stiglitz’s article makes no mention of this exploitation
It is in many ways analogous to the position of landowners in the antebellum Southern US who benefited from slave labour while poor farmers who could not afford slave labour were undercut and found themselves unable to compete.
Pundits in Singapore and abroad celebrate the country’s rise in real GDP per capita since independence in 1965. But Singapore’s real GDP per hour worked is far less impressive. Singaporeans work the longest hours of any developed country (and nearly 50% more than Americans, who already turn in longer hours than most European countries.)
We also have a much higher proportion of employed population to total population because nearly 40% of our workforce consists of foreign workers who can stay in Singapore only if they have jobs.
Ultimately productivity growth is a necessary but not sufficient condition for real income gains and Singapore comes off markedly worse. Because Singapore is a small city-state of 5.5 million, the only valid comparisons would be with major American cities, and, there, the distinction is even more marked.
Stiglitz also overlooks the many unique ways in which our citizens and economy are controlled by the state. These controls limit Singapore’s usefulness as a model for imitation elsewhere.
For example, the government’s forced savings scheme, the Central Provident Fund or CPF, deducts over a third of workers’ total income and places it in the fund, where it is to be used to pay for housing or for medical bills on a pay-as- you-go basis. That amounts to a regressive savings tax, because contributions are capped at a fairly low level of income and the government has for years paid below-market interest rates on these savings balances.
Americans are unlikely to adopt such a regressive forced savings scheme, which holds down domestic consumption and generates enormous surpluses that have enlarged the state’s sovereign wealth funds, which have virtually no accountability or transparency and often achieve very poor returns, virtually none of which are spent on helping the less well-off. It is not uncommon to see elderly people who are virtually destitute and reduced to collecting cardboard or drink cans for a few dollars.
Singapore’s 90% home ownership is often compared to a level of around 65% in the US. But since the housing is public, the government owns most of the land as well as the construction company responsible for new public housing stock. All such housing is provided via a 99-year leasehold and reverts to the government, so people who have worked all their lives to pay off their mortgages will be put in the position of having to wind up bequeathing properties with little time before expiry and therefore little value. This is not home ownership but quasi-ownership. Blocks of housing only 30 years old are regularly compulsorily purchased, torn down and rebuilt (great for GDP growth and for the government’s income and balance sheet) and the residents re-homed in smaller, high–rise, higher density blocks elsewhere. This results in Singaporeans overpaying for housing of lower quality than they would with competition or a free market in land.
Moreover, the wait list for new apartments is three to four years, and to be eligible for a new flat you typically have to be married. Singles must live with their families until marriage unless they are over 35. No wonder we work such long hours and have such low fertility rates. There are not enough public rental units to make renting a viable option either, thanks to the government’s position as a monopoly owner of land and its conflict of interest between providing sufficient housing and pushing up land prices.
Singapore’s Ethnic Integration Policy obligates me and every other citizen to carry a National Registration Card declaring my race or ethnicity. According to my card, I belong to the Ceylonese minority, and I and other Singaporeans seeking quasi-ownership of public housing are subject to set quotas to “promote a balanced ethnic mix”. I cannot buy in the same estate as my family members if the ‘Indian quota’ there has already been reached. Should I need to sell, the quota may restrict my market and lower the price I receive.
Even with compulsory saving, housing is much less affordable in Singapore than in the US. The ratio of prices in relation to incomes is also much higher, while house sizes have shrunk markedly over the last ten years. Private home ownership remains an unimaginable dream for the majority of our population and more than any other economic indicator demonstrates the lack of democracy and freedoms and the gulf between haves and have-nots in Singapore. This has practical consequences in that the government has not been shy to use its control over housing to threaten voters with the loss of upgrading to their estates and public transport links should they have the temerity to believe they are free to vote for another party.
Stiglitz miscategorises Singapore’s tax system as universal and progressive. He also credits the government of Singapore with intervening favourably at the pre-tax income level in order to help those at the bottom.
But the top income tax rate In Singapore is 20%, and that is only on earned income. There is no tax on investment income or capital gains. Corporate taxes are 17%, and there is no tax on dividends. Yet Singapore has a much higher level of indirect taxes (which are regressive) than the US, including a 7% Goods and Services Tax and much heavier taxes on fuel and cars. And, as I’ve explained, the compulsory Central Provident Fund is itself in fact a disguised regressive tax.
Government monopolies in almost every area of the economy, coupled with government ownership of 80% of the land, ensure that Singaporeans pay much more than Americans for many basic goods such as food and energy.
Stiglitz says “the government made sure that wages at the bottom were not beaten down to the exploitative levels they could have been”. This does not square with Singapore’s lack of a minimum wage and basic employment protections. After paying a levy, businesses have virtually complete freedom to bring in workers from low-wage countries.
The results have been predictable. While Singapore’s total GDP has indeed increased much faster than the US, due almost totally to the enormous growth in foreign workers, real wages for those in the bottom 20% of the income distribution have declined in real terms over the last ten years while median incomes have barely risen. The gains are a statistical illusion since, to cite just one instance of the government’s misleading statistics, Singapore’s Consumer Price Index does not accurately track the enormous rise in housing costs.
The government has been spending much less on education as a proportion of GDP on education than the US. Large class sizes and, until very recently double shifts in most schools, mean that parents who want their children to do even moderately well have to as a matter of necessity spend heavily on private tuition.
Singapore does not publish figures on public health and education spending, but its government spent a much lower proportion of its GDP on health and education (1.6% and 3.3% respectively in 2013 versus US government spending in the same year of nearly 8% and about 6%) than other developed countries, and it shows. Anyone inclined to envy our education system should know that Singapore still does not have universal compulsory education beyond the primary school levelor free education. Parents still have to pay fees from pre-school through to secondary level and buy their children’s textbooks. In a BBC report from last month, a primary school teacher was quoted as saying that at his school in a low-income neighbourhood on the first day of school half the class of six and seven-year-olds showed up without textbooks because their parents could not afford them. A host of charities and benevolent societies pay not only for textbooks but also for breakfast and lunch for such children.
In health we have a pay-as-you-go system with a wholly inadequate medical insurance scheme tacked on. If a family member has a serious illness like cancer or heart disease then the cost of treatment is likely to leave the family destitute. We have a ratio of doctors and nurses to the total population which is below that of lower-income countries like Malaysia and Thailand which is shocking when you consider Singapore is just a city and has no rural areas.
In sum, there is no economic miracle in Singapore. It has always had an enviable strategic location. As far back as the late fifteenth century the Portuguese admiral Tome Pires said that whoever controlled the Straits of Malacca had a hand on the throat of Venice. At independence in 1965, Singapore was in the right place at the right time to benefit from the huge expansion in world trade.
The party in power since 1959 has focussed purely on GDP growth that has been achieved by adding more inputs, particularly of labour, rather than combining those inputs more productively. Economic growth and material gain have always been used to justify the extensive restrictions on basic rights that I have mentioned, yet Western observers, including Stiglitz, too often assume that Singapore’s repression is justified by its economic success, even though a UBS survey in 2009, comparing global cities, put Singaporean median workers’ wages on a par with those in Kuala Lumpur and far behind those of workers in Taipei, Seoul, Hong Kong and Tokyo. The UBS survey was much criticised by the government. However in the following year Singapore was dropped quietly from the survey. While an illustration perhaps of how Singapore’s economic growth, while not benefitting its own citizens, has led international companies that do business there to be wary of publishing anything that might contradict the government’s success story. Unfortunately Stiglitz has uncritically adopted that version.
In contrast to the claims in Stiglitz’s article, Singapore is no model for income equality or for generating rising living standards through productivity growth despite the sacrifice of fundamental freedoms.
However, Singaporeans have actually been short-changed by their government/landlord because they have been forced to accept housing quality and densities at a cost that in a democracy would be unacceptable.
Kirsten Han a Singaporean blogger wrote about the appalling quality of the high-rise block, higher density estate and smaller albeit new unit that her mother was relocated to under SERS.
Still housing costs might be expected to rise substantially due to economic growth and limited supply. However it is vital that we understand that high cost is to a large extent a result of deliberate government policies. What the PAP refer to as their asset appreciation policy.
First and foremost is the government’s monopoly over land and its control over the supply of housing.
Second is the government’s deliberate decision to increase the population so enormously through immigration and the foreign worker policy as well as the various measures it has taken to make HDB property look more attractive than other investments.
These have helped to push up prices but have perverted the HDB’s original aim.
Mr. Khaw mentions allowing HDB owners to own private property in 1989 as well as the decision in 2003 to allow them to sublet their flats. However he omits to mention some of the other measures that the government has taken. These include allowing us to use CPF contributions to pay for our housing loans. This was effectively a big subsidy to housing investment compared to other forms because payments came out of pre-tax income and had the desired effect of pushing up prices. In addition each succeeding Budget has brought more generous grants, which were originally intended for lower-income groups but were subsequently extended, to encourage ever more over-investment in housing.
Ultimately these subsidies and grants are self-defeating because they have just had the effect of increasing prices by the present value of the subsidies (see my earlier blog, “A Bulge in the Pipeline”). As the CPF subsidy is worth more to the wealthier (though only up to the Additional Wages limit for contributions) it has the effect of diminishing housing affordability for those in most need of public housing. Indeed HDB has come so far from its original aim that it now serves an opposite function.
Supply and demand
However the biggest contributor to higher housing prices has been the government’s policies on both the supply and demand side. Despite more than a million people being added to the population between 2001 and 2010 the stock of HDB units only rose by some 11,000 units between 2004 and 2009.
USA today also wrote about this problem that the government is creating on both the supply and demand side. http://usatoday30.usatoday.com/money/economy/housing/2011-03-15-Singapore-public-housing.htm
To quote, “ From the end of 2007 through last year, Singapore’s public housing resale price index soared more than 40%.The median price for a four-room apartment rose at the same rate during that time, from $215,000 to nearly $304,000. The actual rise, however, is “more dramatic,” because public housing flats are smaller today than in the past, says Kenneth Jeyaretnam, secretary-general of the Reform Party, a liberal free-market party.
Critics blame the price increases partly on the government’s inability to keep up with demand for public flats as Singapore’s foreign population surges.
The government is the largest landowner in Singapore, meaning “it determine(s) the market value of the flats depending on how much land it releases and the amount of flats it builds,” says Jeyaretnam.” From 2007 to 2009, residential housing flats increased by less than 5,000, while the overall population climbed nearly 400,000, according to government data.
The government has ramped up construction of public housing. But the “root problems” haven’t been addressed, according to Jeyaretnam, namely that the country has too many people and not enough housing.”
Too many people not enough housing. All those extra workers had to be housed somewhere. While allowing PRs to buy flats in the resale market may have marginally contributed to higher prices the biggest contribution has undoubtedly come from allowing owners to sublet their entire flat to foreigners and to hold private property at the same time as owning an HDB (once the Minimum Occupation Period has expired). The labyrinthine and often contradictory HDB regulations present ample loopholes to be exploited and they have been with alacrity by PRs and Singaporeans alike.
Economically renting and buying are more or less perfect substitutes (meaning that price changes in one market will be reflected immediately in prices in the other) and increases in rental yields will push up HDB prices.
These policies have made a mockery of the original intention of HDB . Instead they have been a big bribe to upper middle-income groups who have had the financial wherewithal to exploit these deliberate loopholes and anomalies. This has only served to widen income inequalities.
This government’s policies should have been to remove subsidies which largely benefited those who had more capital to start with and who in a free housing market would have been able to look after themselves.
An illusion of prosperity
Naturally, the asset side of the government’s balance sheet has increased in value as land prices have risen due to inelastic supply and ever-increasing population pressure. Because of this asset price rise HDB owners have been given the illusion of increasing prosperity.
However there has been a fundamental mispricing in the HDB market in which decreasing time to expiry of the lease has not been taken into account. HDB properties can be taken back by a future government at the expiry of the lease for no compensation. Yet properties with sixty years or less to expiry trade at very similar prices to new flats with ninety-nine year leases in the resale market. This is completely different from how leaseholds on private property are valued in Singapore. This is also completely different to how leaseholds are valued in any other country in my experience.
The buyers have been sold the fiction that an asset that has to be handed back to the government in at most ninety-nine years, and in many cases much less, will somehow ignore the laws of economics and keep on appreciating forever. Let me repeat that there has been a fundamental mispricing in the HDB market.
Singaporeans have been told by PAP ministers and in particular LKY over and over again never to sell their HDB properties, as they can only go up in value. No government that I am aware of has made such an explicit promise and it can only be characterized as highly irresponsible. If a financial investment had been promoted in this way by a broker or corporation without any mention of the risks and investors had subsequently lost money, the buyers would be entitled to compensation.
In fact the financial crisis of 2008 and subsequent recession were precipitated by exactly this kind of move to urge mortgages onto buyers who used the assets to fund consumption. For many in the US and the UK as well as the Eurozone this resulted in negative equity and ultimately foreclosure.
The problem is that there is a fundamental conflict of interest between the government’s roles as provider of supposedly low-cost housing for the masses and as monopoly owner of at least 80% of the land in Singapore. This is why the PAP government has had a vested interest in pumping air into the housing bubble. Until now they have been happy to maintain the fiction that the length of the leasehold does not affect HDB valuations. This is because with the deliberate creation of huge excess demand for housing the HDB finds it profitable to acquire existing HDB blocks from their owners and pay them compensation which is close to the price of new BTO flats. That is because they can vastly increase the density of housing on that area by doubling or tripling the size of blocks and building them closer together.
To gain an exact understanding we need to know how much the state’s land holdings are worth and how this impacts the government’s finances through the manipulation of land prices. This is one reason I called for the value of these assets to be listed In the Statement of Assets and Liabilities that the Finance Minister presents to Parliament every year at Budget time. How To Make A Surplus Disappear Without Anyone Noticing”.
Mr. Khaw’s Speech and Subsequent clarification by Blog
Khaw made two main points:
- HDB prices were likely to appreciate much more slowly than in the past
- A commitment to make new BTO flats in non-mature estates more affordable by bringing down the ratio of prices to median incomes from five and a half times to no more than four times (by his calculations)
In the article on his blog he suggested several ways this could be done without affecting the values of existing HDB owners:
- Shorter leases for the new HDB apartments.
- A radically different form of lease in which leaseholders would be charged lower prices based on historic land values but then would only be allowed to sell their flats back to the government at prices related to what they had paid for them
The latter proposal is similar to the Hong Kong system for public housing in which purchasers, who have to be below a certain income level, have to sell back to the government at a lower price or else pay back the subsidy they had received between the market price and what they paid. However in Hong Kong public housing accounts for a much smaller proportion of the total housing stock than in Singapore.
It is also similar to proposals from some quarters for flats to be sold at a price reflecting only the cost of construction and not the land cost. It is hard to see how this is distinguishable from providing rented housing for lower-income groups since the flats in question can only be sold back to the HDB. Except that this ill-thought out proposal would allow those on higher incomes to benefit from the scheme and also provide a put option for existing HDB owners in the event of a crash since they could always sell their HDB flat back to the HDB for the price they paid for them and take out the difference between that price and the scheme price in cash.
Despite Mr. Khaw’s assurances that this would not affect the prices paid for existing flats it is easy to see why this is incorrect. Both measures would have serious implications for the prices of existing HDB properties.
It is hard to see how this could be done without undermining the current fiction that
HDB properties with shorter times to run on the original lease are worth as much as newer ones. And then what would happen when the government wishes to acquire the flats with shorter leaseholds? In equity they would have to be paid less than those with longer leases. Any adjustment of HDB prices to reflect the length of leasehold is likely to have unpleasant consequences for those who have overpaid for HDB properties in the resale market based on the illusion that the government has given them an implicit promise to extend their lease for free by exchanging their existing property for one with a fresh ninety-nine year lease.
Lower Priced But Restricted Housing?
Despite the minister’s argument that this would be a separate class of housing which would not be fungible with existing HDB properties, it is likely that the creation of this option would undermine the current market prices as a large proportion of existing demand was diverted into this new option. In particular it would be likely to make the current mispricing between old and new HDB properties equally untenable.
It would also, in my view, be unattractive for all the reasons mentioned above.
It appears that the government has decided that it will get more support by lowering prices for new owners even if this has the effect of lowering HDB prices generally. Or else it has not thought through the implications carefully enough. There is a more sinister interpretation. This is that with slower economic growth and thus a declining need to expand the workforce through immigration the HDB will no longer find it profitable to increase housing densities by acquiring units from existing owners and paying them compensation that does not reflect the diminution in value caused by a shorter time to expiry of the lease. Singaporeans who have relied on HDB to be a secure investment that will never lose value may be in for some unpleasant shocks in the future.
In Part 3 I will discuss some solutions to the current dilemma that would allow Singaporeans to own their own homes rather than being leaseholders and dependent on the government.