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Pragmatism v Populism: A Deliberately Misleading Choice

In his remarks on the Presidential Contest*, Emeritus Senior Minister Goh was quoted as saying that Singaporeans must choose between pragmatic and populist politics:

“In pragmatic politics, Singaporeans will accept measures with short-term pain but long-term gain. In populist politics, they want immediate gratification and ignore the long-term costs. Which way will Singapore politics go?”

This put me in mind of the remarks of our government leaders after the 1991 election in which the PAP lost an (at that time) unprecedented four seats. Then they said they were at a loss to explain how this could have happened other than that Singaporeans had a low threshold of pain.

It is funny how gratification delay is always something that should apply to ordinary Singaporeans and not to our government elite. For example, their salaries are explicitly linked toGDPgrowth which incentivizes them to boost growth in the easiest and most short-term way possible, by opening our doors to cheap foreign labour on a massive scale, as well as employ tax breaks and holidays as well as subsidized inputs to steer foreign investment to Singapore which is likely to decamp once the subsidies end.

A good case in point is the casino industry.  It is taxed significantly more lightly here than inMacaoorLas Vegas, despite its negative externalities. Another is the biomedical manufacturing cluster, responsible for much of 2010’s extraordinary growth. So we appear to have short-term growth, vulnerable to changes in other countries’ tax policies, as a deliberate policy of this government which spends so much time advising us to eschew populist policies. This short-termism is at the root ofSingapore’s productivity problem. This is why our economy has grown so much without the majority of us getting richer.

In fact this message to eschew populism for pragmatism (which I have also seen sung in the chorus of one Opposition camp) is simply a direct repetition of the original PAP message that Singaporeans need to be toughened up. No iron rice bowl for us and a spur in our hinds is a cry which has travelled down in a direct line of descent from father to Holy Goh to son.  It is why I called my blog after the porcelain rice bowl, explaining that we need new economic ideas for new economic times.

But one thing we can be certain of. This is that when growth reverses and turns negative, as it probably will this year, will our leaders share in our pain? Will they have to give back part of the gratuitously excessive salaries that they were paid during the boom years? Why despite all the supposedly long-term thinking of our leaders, has no long-term compensation plan been put in place focusing on raising median real incomes rather than just raw economic growth? The Finance Minister promised to raise living standards by 30% by 2020. Is that really achievable given the skewed incentives?

There is apparently one rule for our leaders and another one for us. We must be “pragmatic” and understand the need to keep running huge surpluses and accumulating reserves in our two sovereign wealth funds. How much has the valuation of our overseas assets dropped in recent weeks? How much will we lose should markets drop another 20-40% as global recession looms? In 2010 all we heard from our state-controlled media was how well the managers had done in clawing back the losses from 2008, not any honest reckoning and holding to account of those responsible for the losses in the first place.

If we are all “pragmatic”, as the government would like, I am sure we will all be able to understand why it was not our government’s fault or the fault of the managers they appointed. Also, we will agree like the animals in George Orwell’s Animal Farm that we must tighten our belts and continue to scrimp and save to rebuild what has been lost, while never asking uncomfortable questions as to what exactly are the reserves or where they are invested. I don’t know about you but it grates on me every time they talk about the reserves as a sum that they the government have accumulated. It’s your tax dollar. You provided it. The government’s idea of pragmatism seems to be that we behave like children who can be easily bought off with a populist vote-buying budget giveaway of a thousand dollars each which induces amnesia about the pain we have suffered before.

We must be “pragmatic” and understand why our jobs should be taken away by expatriate workers who would be paid a fraction of what they can earn in Singapore in their home countries and who do not have to do National Service even if they come as students on scholarships paid for by our taxes.

We must be “pragmatic” and understand the necessity of our men to give up two years of their lives doing NS without anything approaching adequate economic compensation while new immigrants escape any contribution.

We have to be “pragmatic” and accept that we can never own the freehold of our HDB properties. Without home ownership there never will be a fat middle class. Your HDB unit’s price has soared out of our reach due to our government’s pursuit of economic growth through uncontrolled population growth.  Meanwhile we can be moved around like serfs and told where we can live. The extension of our HDB leases is dependent on government upgrading policies and the link between this and voting for the PAP was explicitly reinforced in the last election byPMLee.

Meanwhile it is “populist” to believe that we are entitled to policies that directly benefit us, such as universal free education and health coverage. Policies that are taken for granted in other countries with our level of income, even in Asian success stories likeJapan,South Korea andTaiwan. We are told that taxes will have to go up if we want these things. Even if taxes had to rise, which is debatable, we are not told that in fact the cost of replicating the same degree of insurance privately would be much more expensive and probably impossible for the ordinary Singaporean.

Life is an uncertain business and brings risks with it. Life in the PAP’s economy means no safety net to cushion to against those unexpected risks.  We’ve been tough and pragmatic for 5 decades now. As an economist once said, “In the long run we are all dead.”  It is time for Singaporeans to decide whether being “pragmatic”, in the PAP’s sense, means allowing ourselves to be taken for a ride!

*http://www.straitstimes.com/News/Home/Story/STIStory_701869.html

Recently the flow of economic news from all around the globe has been dire. The US kept its precious AAA rating and increased its debt ceiling but only by agreeing to a deficit cutting deal.  Meanwhile the US economy expanded by just 0.4% in the second quarter of this year.

At home our own Ministry of Trade and Industry announced on 14^th July 2011* that Singapore’s economy grew by just 0.5% in the second quarter year-on-year but actually fell by 7.8% on a seasonally-adjusted quarterly annualized rate. The recent deficit-cutting deal in the US and the pressures on the more indebted countries in the Euro zone to cut their deficits means that demand for Singapore exports is likely to weaken further. If our economy contracts in the third quarter, as seems highly likely, then we will have entered a double-dip recession. (And don’t say I didn’t warn you!)

It is depressing to see all these calls for deficit cuts when economies are so weak. It seems as though the lessons of the Great Depression have been forgotten and that we seem to have gone backward. Politicians in the US (including the President), the UK and Europe seem to believe that cutting deficits through  cutting government spending or raising taxes when their economies are growing far below their potential, is somehow going to restore business confidence. They feel these moves will spark an investment boom to replace the cut government demand.  But interest rates are near zero so government borrowing is not crowding out private sector investment, anyway. In fact we are close to what Keynes refers to as The Liquidity Trap. It is possible that quantitative easing on a greater scale can get the World economy out of that trap. Meanwhile unemployment in these economies is running at around 10% minimum so these economies are clearly performing well below their economic potential.

At the same time I have failed to understand the furore among the Tea Party Republicans at increasing the US debt ceiling and the accompanying threats by the ratings agencies to downgrade the US from its current AAA status. After all the US debt is all denominated in dollars and therefore in the last resort it can be repaid by the Federal Reserve printing more money.

“Hang on a minute!” some of you might say. “Won’t that result in the hyper-inflation and the rapid depreciation of the dollar? Surely China will punish the US by cutting its holdings of US Treasuries and allow the dollar to collapse?” I’ll answer by quoting the old adage that a borrower who owes the bank $1 is owned by the bank while a borrower who owes $1 million owns the bank. In fact any unilateral action by China would cause far more economic damage to China than it would the US as it would instantly devalue China’s massive reserves. Also if the dollar were to collapse it would cut off the US market as a source of demand for Chinese goods. China (and also Japan, Taiwan, South Korea, Singapore and Germany) relies on external demand as the source of growth for its economy and a big shortfall in external demand would rapidly transmit itself to recession in China.

As the continued survival of the Chinese Communist Party is highly leveraged to its growth rate (note the recent protests by Taxi drivers) China is likely to either rebalance its economy towards domestic sources of growth, which would be positive for the world economy, or keep buying US debt. In fact the only good thing about the deficit-cutting deals would be if they could force an adjustment in the chronic surplus countries more towards domestic demand to generate growth. This would remove a big drag on growth in the deficit countries.

So how is this relevant to Singapore’s situation? As I said above, Singapore’s economy, even more than China’s or Germany’s, is dependent on net exports for growth. In fact, in 2010 net exports of goods and services amounted to almost exactly one-third of the economy. The corollary of this is that savings are about 50% of GDP and consumption is about 41%, a level very similar to China’s. Vladimir Putin, the Russian President, recently described the US as a “parasitic” economy because of its big twin deficits (balance of payment and government). However I believe it is much more correct to say that economies like China’s and Singapore’s (and also Japan’s and Germany’s) are parasitic since their huge external surpluses are big drags on growth in the rest of the world.

The US has recently been calling for rebalancing by the world’s surplus economies directing some opprobrium at China over its surplus. If Singapore doesn’t attract this opprobrium it is not because our PAP economists have the answers but rather because we are currently simply too small to impact on the global level if we do not rebalance our economy. But the impact of a double dip recession will be felt by us on a national level. Singaporean businesses are likely to sack Singaporeans first and keep the cheapest labour in their work force.

The PAP’s desire to run big surpluses and keep accumulating savings and overseas assets rather than allow our citizens to enjoy a higher level of consumption and standard of living are symptomatic of the fact that our leaders are in thrall to outmoded theories that no longer make any economic sense. In particular the mercantilist theories of the 17^th century French economists like Colbert and Say that exports are good and imports bad or even the response of the Qianlong Emperor to the trade mission sent by George III**. So there is no pressure on the government to rebalance the economy at the global level. And no pressure on the national level either due to the lack of political pluralism. In fact amongst the opposition, there seems to be a complacency or reluctance (for the most part) in formulating a coherent, alternative macro-economic policy. Most Singaporean alternative voices would still not presume to question the economic expertise of the PAP at the macro level.

Singapore is more fortunate than the US in that it is easier for the government to offset any big slowdown in external demand by rebalancing the economy towards domestic consumption. But whilst in China taxi drivers riot there is still no hope here that outmoded economic policies will ever be overturned by popular pressure. In fact what is politics, if it is not public opinion shifting and parliament acting in response to that pressure? The failure of our economy and the oncoming recession will be a failure of our politics.

* http://www.singstat.gov.sg/news/news/advgdp2q2011.pdf

**http://www.history.ucsb.edu/faculty/marcuse/classes/2c/texts/1792QianlongLetterGeorgeIII.htm

A few nights ago I ran into Alex Au at the US Independence Day reception and at last had a chance, somewhat belatedly, to discuss his article which appeared on the 16^th May 2011. In particular I took exception to the diagram on the left and the description of the Reform Party as “libertarian.” His response was that he had done this to court controversy and because the RP had advocated free-market economic solutions for many of Singapore’s problems while the other Opposition parties took a much more unashamedly populist stance. This may be true in that we are the only party that is led by an economist. The RP is certainly “liberal” in the sense that we believe in democratic values and incline towards individualism rather than communitarianism. That does not make us libertarian.

Since the word is often bandied about in Singapore, usually pejoratively, I propose to start with a definition of libertarianism and some acerbic comments from Francis Fukuyama in his latest book** about the ideal libertarian state. Then I contrast this with the actual philosophy of the RP. Finally I will compare the RP with the other main parties in Singapore on the basis of their published manifestos.

The problem with any definition is that there are as many different types of libertarianism as there are shades of political thought. Wikipedia*** defines it as:

Libertarianism is a political philosophy that upholds individual liberty, especially freedom of expression and action.^[1] Libertarianism includes diverse beliefs and organizations, all advocating minimization of the state and sharing the goal of maximizing individual liberty and freedom.

While commonly associated with the right, there are also “left libertarians” who believe in individual freedom but support some form of income redistribution or social justice. Noam Chomsky would describe himself as a “libertarian socialist”. It would probably be fair to describe the founder of the Reform Party, JBJ, as being in many ways close to the left libertarian position, particularly in his support for the views of John Ruskin.

Francis Fukuyama rather amusingly exposes the inconsistencies of the right-wing libertarian position thus:

“Indeed, the kinds of minimal or no-government societies envisioned by dreamers of the Left and Right are not fantasies: they actually exist in the contemporary developing world. Many parts of sub-Saharan Africa are a libertarian’s paradise. The region as a whole is a low-tax utopia, with governments often unable to collect more than about 10% of GDP in taxes, compared to more than 30% in the US and 50% in parts of Europe. Rather than unleashing private entrepreneurship, this low rate of taxation means that basic public services like health, education…are starved of funding. The physical infrastructure on which a modern economy rests, like roads, court systems, and police, are missing. In Somalia, where a strong central government has not existed since the late 1980s, individuals may own not just assault rifles but also rocket-propelled grenades, antiaircraft missiles, and tanks. People are free to protect their families, and indeed are forced to do so.”

While the example is a bit of a straw man, in that even the most right-wing libertarian state would require an executive strong enough to enforce contracts and property rights, it shows that the Reform Party is definitely not libertarian in this sense of the term.

We have always described ourselves as liberal free-market Keynesian. While believing that a free market economy is normally the best form of economic organisation in terms of efficiency and providing incentives for growth and investment, there are notable cases of market failure. An example of this is the current situation the global economy finds itself in.  An overhang of debt from the housing bubble and the (in my view, misplaced) fear of increasing the debt burden has led many Western governments to focus on reducing debt rather than growing the economy. In this situation, my Keynesian economics training inclines me to the view that the government has a major role to play in getting the economy out of an unsatisfactory equilibrium of slow growth and high unemployment through deficit spending or quantitative easing designed to reduce the real burden of debt.

Also we believe that the state has a role to play in mitigating the effects of unequal endowments and levelling the playing field to provide genuine equality of opportunity. In our election manifesto we said we wanted to introduce free education for everyone including the disabled children who are now effectively excluded. We also wanted a minimum wage (or else much tighter curbs on foreign labour), universal health insurance, a basic old-age pension and income support for lower-income families with children, as opposed to the current Workfare system. However where we can, we wish to promote individual freedom, economic freedom being an integral part of that. Thus, our proposals to privatize large chunks of Singapore’s state-corporatist economy, introduce more competition or more effective regulation into the provision of essential services such as public transport, to allow HDB leaseholders to buy out their freeholds, to end the compulsory forced-savings scheme that is CPF, to give citizens a stake in our SWFs and to keep the burden of taxation low (which incidentally was a pledge in the 1994 WP Manifesto produced under JBJ’s leadership with my assistance) are all aimed at promoting economic freedom. At the same time our proposals to remove restrictions on freedom of expression and association, reduce the length of National Service and abolish many of the laws which have been used wrongly to curtail our fundamental liberties, such as the ISA and the Criminal Law (Temporary Provisions) Act, are aimed at enhancing individual freedom.

While there are elements that we have in common with some strands of libertarianism it is probably more correct to describe the Reform Party as being firmly in the mainstream of the Liberal tradition. We place a high priority on human rights and individual liberty. The SDP is similar in this regard but they have more of a redistributionist agenda and are less radical than the RP in wanting to free Singaporeans from the economic constraints and controls coupled with indirect state ownership of much of the economy.

The Workers’ Party manifesto has some good points to make in the area of constitutional reform and strengthening the rights of the individual against the executive but a lot of this pre-dates the present leadership and can be traced back to the 1994 manifesto which was considerably more daring. They call for a Freedom of Information Act in their 2011 manifesto but this is predated by a similar call in the RP manifesto we issued in 2009. In economic policy they have, if anything gone backward with calls for nationalization of the public transport network without understanding that the public transport system is still effectively nationalized despite the corporatization that has been the government’s fashion. If it is merely a call for lower transport fares to be subsidized by the taxpayer then that is likely to lead to both under-investment and inefficiency. I would prefer to see more competition where possible or else independent and intelligent regulation that controls the level of profit that can be earned by what is effectively a monopoly while at the same time rewarding efficiency gains and other performance targets.

The PAP is sometimes labelled as “libertarian” but I feel this is a misnomer. They do believe in a social Darwinism, particularly for those at the bottom of the income distribution, which is why they have introduced an open-door immigration policy without a social safety net. Taxes are low (though the lower income earners have to save a high proportion of their income or spend it on government-supplied housing through the CPF scheme) but the state controls much of the economy and owns most of the land. Civil liberties have a low priority and many of our constitutional rights have been abrogated. Fukuyama describes how the necessary conditions for economic growth were fulfilled by the imperial Chinese state in the form of “good enough” property rights (though still subject to arbitrary confiscation by the emperor) and a level of taxation that was well below the theoretical maximum. This was despite there being no rule of law or political accountability. However economic growth was held back by a fundamental complacency on the part of its inhabitants. In Singapore we have achieved something very similar to “good enough” property rights (though the bulk of the population live in flats with 99 year leaseholds whose renewal is dependent upon government goodwill and the government has acquired the bulk of Singapore’s land without paying anywhere close to market value). China and Singapore today exemplify this model of economic development which can be called “East Asian Authoritarian”. Historically the challenge for absolutist states was to avoid the re-emergence of patrimonialism and the replacement of meritocracy by a rent-seeking elite. In the absence of accountability and the rule of law past absolutist states were not able to prevent this and it is not at all clear how the new authoritarian models can avoid this in future.

In Singapore the interests of the government are only weakly aligned with those of the citizens. Interest in building a strong state as measured by GDP, the size of the reserves (including the SWFs), and increasing our population through the import of foreigners take precedence over the raising of living standards for the bulk of existing inhabitants. While the recent election may have made the government pay more lip service to the demands of native-born Singaporeans, it is not clear that much has changed. At the US reception I chatted briefly to an American energy policy analyst who said he had observed that Singapore’s aggressive recruitment of foreign talent in his area was far beyond the needs or capacity of the domestic economy at present. What amazes me is that foreigners continue to be surprised when they discover evidence that the government is not acting in the economic interests of its own citizens.

To conclude, the Reform Party is a Liberal rather than a Libertarian party. While the authoritarian model may continue to enjoy a few more years of success in the longer term it is hard to see how states lacking accountability and the rule of law can compete with those which have it. The Reform Party’s message of economic and political freedom is one that will be increasingly attractive to Singaporeans and will also prove to be the most successful at raising living standards.

*http://yawningbread.wordpress.com/2011/05/16/talk-at-the-post-museum-election-perspectives/

**The Origins of Political Power, Francis Fukuyama, Profile Books 2011.

***http://en.wikipedia.org/wiki/Libertarianism#cite_note-0

On Wednesday on behalf of the Reform Party I attended the Singapore Forum on Politics at NUS as one of the panellists. The other panellists were Dr. Chee of the SDP, Sylvia Lim of the WP and Michael Palmer of the PAP. The topic was “GE 2011: What’s at Stake for Singapore?”

In my opening remarks I mentioned the pervasive climate of fear which prevents Singaporeans from coming forward as Opposition party candidates and even from signing up as members. However I was promptly assailed by Michael Palmer who said this was rubbish. He pointed out to the large attendance and the fact that a forum was held as a sign that Singaporeans were able to debate and ask questions without fear. He specifically singled out the presence of the media including the foreign press as demonstrating how open Singapore was.

With only limited time I was not able to devote as much time as I would have liked to rebut Mr. Palmer’s assertions, so I would like to do so here in more detail. I said that no one in Singapore may be in danger of disappearing in the middle of the night and ending up with a bullet in the back of the head. However, even as recently as 1987, the ISA had been used to detain a group of people (the so-called Marxist conspirators) who were on the verge of joining the WP which was led by JBJ at the time. If this had not been done and they had been able to stand for election in 1988 Singapore history might have been very different. Since the ISA remains on the statute book we have no guarantee that it may not be used again at some future date.

However I was referring to a different kind of fear, one with which all Singaporeans are familiar. This is the fear that standing up as a candidate or even joining the Reform Party will lead to the loss of one’s home or livelihood. I brought up the crippling defamation suits which forced my father into bankruptcy and prevented him from standing from 2001 to 2007. Dr. Chee obviously has a similar story to tell. While Mr. Palmer may say that these were necessary to protect the reputations of the individuals involved, they have undoubtedly had a chilling effect on getting good people to come forward as candidates for Opposition parties. My late father, J. B. Jeyaretnam, was sued and bankrupted over an article in Tamil that he did not write which was published in the WP newspaper, the Hammer. During an election campaign, people are scared that there are so many variables they cannot control and that these may come back to haunt them.  Even the correspondent for the Economist mentioned to me afterwards how richly ironic he thought Mr. Palmer’s words about the press were given that the foreign press has been repeatedly sued for defamation. They have also been told that their circulation will be restricted unless they accord the government a right to have its responses to their articles printed in full.

Then there is the fear that one’s business or job prospects may be affected. I have lost track of the innumerable times people tell me that they do not want to join the Reform Party officially because this is not allowed by their company or their boss despite their constitutional right to membership of a political party. People join us for a few weeks on walkabouts and then drop out because they say their wives, girlfriends or other family members are worried. We have had several PSC scholars approach us and say they are interested in joining or standing as candidates before saying they have to quit due to family or spousal pressure. When the government controls so much of the economy it is more understandable why a large section of the population may feel this way, however misguidedly.

Even the language of political discourse appears to be coloured by this fear, with most commentators, both MSM and alternative media, insisting that we do not want full-blown democracy in Singapore with all its attendant ills. This may be partly a genuine concern but I feel too often it is there as just as an unnecessary acknowledgement of some imaginary OB marker.  The same is true of comments such as “We need more Opposition voices in Parliament”. Perhaps the thing that scares people most about the Reform Party is that we talk openly of wanting to form the government at some stage which many feel is a step too far. Mistakenly they believe that it is likely to bring down the government’s wrath on their heads.

Mr. Palmer’s comments demonstrate that he has lost touch with the ground. While it is true that a lot of things have changed even in the last ten years, undoubtedly the fear still remains a factor. The Reform Party and I have always been careful to tell people that their fears are groundless and that there will be no adverse consequences from exercising their constitutional rights.  But the government could and should do more if it is serious about making Singapore a global city as is their expressed ambition. They should:

• Abolish the ISA and replace it with modern anti-terrorism legislation along the lines advocated by the RP.
• Change the libel laws so as to allow a much wider interpretation of fair comment.
• Lift the restrictions on freedom of expression and association.
• Raise the status of opposition. Taking part in politics as an Opposition party member or candidate should be seen as something to be commended and not something to feel ashamed of. In a speech in Parliament in 1999,  JBJ quoted from a book by Andre Mathiot (The British Political System, Stanford University Press, 1958): “If I were asked to give a single criterion of the democratic Government, I would say it depended on the status of opposition.”

Without these changes any movement towards a genuine multi-party democracy is likely to be slow at best. While this may suit the ruling party, it is not good for Singapore.

In yesterday’s ST* it was announced that MM Lee had unveiled a five year master plan for Tanjong Pagar GRC and Radin Mas SMC. The imminent GE and the carving out of Radin Mas as a new SMC from Tanjong Pagar may possibly have had something to do with this.

But surely Singaporean voters are sophisticated enough now to realise that the money spent on upgrading their estates does not belong to the government and that such upgrading is a normal part of urban renewal that goes on in every country in the world? There is no reason to think that the Reform Party would not be able to make use of the same or different planners, architects and engineers to come up with at least as good a plan if it was in government or at least running Tanjong Pagar Town Council.

The unspoken implication may be that residents will not get the upgrading programme if they dare to exercise their democratic right to vote in an Opposition party candidate. After all it was not so long ago (in the 1990s in fact) that threats to delay or stop refurbishment of older HDB estates were used to try and stop Singaporeans voting for Opposition candidates. It is to be hoped that, if such threats are made, they will not work any longer given the increasing proportion of younger voters who have grown up with relatively unrestricted access to information about other freer and richer countries through the Internet. However there will undoubtedly be some subliminal effect on voters which might deter some of them from voting for us.

The details of the upgrading programme do not seem that impressive. Residents are entitled to ask the question why the lifts will not stop at every floor till 2014 and why handrails and ramps have not been installed earlier given the high proportion of elderly in Tanjong Pagar and Radin Mas. After all in most countries on Singapore’s level of per-capita income it is a legal requirement to provide access for disabled people to public buildings including public housing.

What is not revealed is how much of the upgrading will be paid for by a change in land density or re-zoning to allow new commercial developments in the area.  For instance, what was noticeable in the government’s recent announcement of an upgrading programme for Hougang was the fact that there was to be a new shopping centre, private residential developments and integrated transport links. The revenue from these new developments might presumably more than pay for the cost of upgrading yet this detail was not mentioned in the MSM.

In addition, if past precedent is followed, the residents themselves have to pay part of the cost of upgrading. Also the town council sinking fund pays for most of the cost of the LUP, or Lift Upgrading Programme.

So it is not clear how much of the cost will actually be footed by the government (meaning out of general taxation) and how much is financed by residents or self-financing.  Residents of older flats which are subject to the Selective Enbloc Redevelopment Scheme (SERS) may think they are getting a good deal as their old flats are replaced with new ones with approximately the same market value. However as there is normally a change in land density, involving the construction of much taller and bigger blocks packed more tightly together , the whole of the increase in the market value of the land may not be passed on to the leaseholder. In addition the new flats, though technically the same number of rooms, are much smaller than those built even fifteen or twenty years ago.

The Reform Party plans to allow HDB leaseholders to buy out their freeholds if this is technically possible so that they can sell their flats to the highest bidder and benefit from the full uplift in value just as those who own private property are allowed to do. We are confident that this will be of much greater economic benefit to homeowners than upgrading schemes that are largely self-financing. It will also be better than being effectively forced to relocate to new blocks at a location of the government’s choosing. Nothing could more clearly illustrate that HDB owners are merely long-term tenants than owners with full rights to their property.

However the truly astonishing part of the report is MM Lee’s assertion that:

“‘Eighty-five per cent are in HDB homes. We intend to keep the values of these homes up. They will never go down,’”

Does this mean that the government is guaranteeing that HDB flats will never fall in price? This seems an astonishing promise to make though it is perhaps less so in view of the fact that the state effectively owns 79% of the land and is by far the biggest homebuilder.  By squeezing the supply of new flats to a trickle over the last ten years while allowing a 25% increase in the population (all of whom have to be housed somewhere), the government have pushed up the HDB Resale Price Index by some 65% over the last ten years. These issues were discussed in my previous article, “A Bulge in the Pipeline”**.

Clearly the government intends to keep pumping more money in the form of subsidies into the housing sector, just as they have done recently by offering a Special Housing Grant to first-time buyers of up to $20,000 to those earning less than $1,500 per month.  This comes on top of up to $40,000 of subsidy which is already available. In the short term at least this will boost prices higher than they would be in the absence of the subsidy.

In addition it was already implicit in the Budget 2011 statement that the population would continue to rise. The Finance Minister spoke of economic growth of 3-5% per annum combined with productivity growth of 2-3% per annum (an ambitious target given Singapore’s poor track record).  This means that the labour force would have to grow up to 3% p.a. if participation rates remain unchanged.  This is the same rate that our population has risen over the last ten years and if correct means Singapore’s population will have to keep growing and not stop at 6.5 million which was the government’s original target.

These policies, together with the continuing monopolistic control over supply exerted by the HDB, may prevent property prices falling in the short term at least. It may even be that the government’s control over the property market has become much more effective than in the period from 1996 to 2002 when the HDB RPI fell by approximately 30%.

However it has to be questioned whether an indefinite continuation of the property price bubble will be good for Singapore and how long it can be sustained. With an increasing proportion of personal wealth tied up in housing, the bursting of the housing bubble will have severe consequences for the real economy.  The negative wealth effect and increase in the real value of debt will depress consumption and probably cause an extended period of negative or very low growth while the debt burden is reduced, just as has happened in the US and Europe.  While the low level of domestic consumption and high reliance on external demand as a source of growth may be an advantage in these circumstances, the effects of any severe fall-off in external demand could still be rapidly transmitted to housing prices particularly given the growing importance of the foreign population to sustaining these price levels. Even now the elevated level of prices for basic housing is of serious concern to those who are not fortunate enough to own a property yet.  Despite the oft-bandied statistic that 85% of Singaporeans “own” or live in an HDB flat this is probably about half the population. I would rather see some air being let out of the balloon now than it bursting with serious economic consequences at some point in the future.

MM Lee’s assertion that HDB prices will never go down would not receive serious attention if it was made about stock markets or other asset markets. Singaporeans should treat this with the same caution and not be sucked into believing that the laws of gravity can be indefinitely suspended just because the government says so. Such hubristic statements have historically been a good contrarian indicator.

*http://www.straitstimes.com/News/Home/Story/STIStory_647111.html

** http://sonofadud.com/2011/02/03/a-bulge-in-the-pipeline-or-how-to-create-a-housing-bubble/

In a recent ST article* headlined, “How households can tackle inflation”, the journalists state that:

“…MPs who spoke to The Straits Times for this special report said the key to battling inflation lies in each household becoming more aware of where its dollars are going, and then making temporary changes in lifestyle that help to cut down on costs.”

Then they go on to report that:

“Other MPs urged frugality – but not at the expense of nutrition. People can save money, for example, by cutting down on eating out.

‘On the ground, everybody is saying that prices have gone up,’ said Aljunied GRC MP Cynthia Phua. ‘(But) cooked food and uncooked – there’s a difference. Take advantage of lower prices for uncooked food.’”

Several thoughts spring to mind. Firstly, it is a distasteful spectacle that the government is urging frugality on ordinary people after engaging in an orgy of self-congratulation over supposedly record economic growth last year. After all part of ministers’ pay is directly linked to economic growth. We have just seen the President receive close to an additional $1million in compensation this year because of the booming economy and presumably this must be echoed by increases in the pay of government ministers. Secondly, how can we have record economic growth with real wages falling behind the rate of inflation?

In my recent article, “Should We Worry About Inflation”**, I pointed out that the main source of inflation was domestic given that the index of import prices in Singapore dollars was basically flat on the year. In 2009 the import price index fell by 8% yet inflation was still positive. Despite the government saying that the average CPI increase was only 2.8% for 2010 the index was 5.5% higher in January 2011 then it was in January 2010. As I pointed out in “About Your Landlord”***, published on 17^th February, the median monthly income from work for all resident households rose by only 3.1% in 2010 and thus the median resident household would have suffered a real pay cut of approximately 2.4%.

The culprit in this is the competition our workers face from the rest of Asia due to our government’s liberal immigration and foreign worker policy. The elastic supply of labour means that Singaporeans have little bargaining power and their wages have not gone up even with a supposedly booming economy. It is very common on walkabout for people to tell us how they used to have a regular job but can now only get contract employment with little job security and periods of unemployment between contracts. Despite the government’s generous subsidies for training courses of arguably dubious value, which serve to keep attendees from being counted as unemployed, the resident labour force’s participation rate is still not markedly different from that of the US or UK. This suggests that there is a lot of disguised unemployment or Singaporeans who are unwilling to work at the wage rates that the foreign workers are willing to accept.

While there is a cap on wages set by the elastic supply of foreign labour, there is no such cap for inputs in limited (economists would say inelastic) supply such as land and this is what is driving domestic inflation. We have had rapid economic growth fueled by generous tax breaks for foreign investment and cheap foreign labour from abroad without any rise in underlying productivity and a 25% rise in population over the last ten years. This has pushed up property prices and rents and undoubtedly been a big contributor to domestic inflation. However the CPI fails to reflect this in full because it uses what is called an imputed rent for owner-occupied housing instead of an index of mortgage servicing costs plus depreciation. Thus the CPI for housing only rose by 5.3% between January 2010 and January 2011 while the HDB resale price index was up by 14% between the fourth quarter of 2010 and the fourth quarter of 2009. So we are getting in all likelihood a serious understatement of the true inflation rate and an even more serious erosion of the purchasing power of Singaporean workers.

Another factor, also touched on in my article about inflation, is the pricing power enjoyed by the GLCs and statutory boards which on some estimates control over half of the domestic economy  and the resultant lack of any real competition in so sectors. This is true whether we look at public transport, power distribution, mobile and telecom services, television, newspapers, shopping malls, or housing for the bulk of the population. Ultimately the government is the major landowner, owning approximately 79% of the land in Singapore, and thus is the major beneficiary of the rise in land prices and rents, a subject touched on in my article “About Your Landlord”.

I am certainly not anti-growth or foreign investment, in fact very much the opposite. However I believe that, given Singapore’s limited ability to absorb further increases in population, economic growth should primarily take the form of raising the productivity of our own domestic workforce rather than being fuelled by the import of cheap labour from abroad. I would continue to provide incentives for companies to invest in productivity improvements while auditing the incentives already provided for effectiveness and, well, productivity. At the same time I would also restrict the flow of foreign workers either through higher levies or tighter quotas, while at the same time implementing a minimum wage. In my last article****, I pointed out how the government now seemed to be adopting what we have been saying since 2009 without giving the Reform Party any credit. While higher wage costs might lead to some domestic inflation in sectors that were shielded from competition or that were unable to raise productivity this could be dealt with by the introduction of more competition or greater regulatory powers. In any case higher real wages accompanied by the substitution of both labour-saving machinery and domestic labour for foreign labour would be better for most Singaporeans than the current erosion of real wages despite record economic growth.

The government has made much of its one-off “Growth and Share” package of $3.2 billion in supposedly helping Singaporeans combat the effects of rising inflation. In the Reform Party’s response to the Budget*****, we pointed out that in fact the surplus was of the order of $15 billion last year and thus much more could have been given back in the form of lower taxes and higher spending. In the first month of 2011 alone the government recorded a total surplus of $5 billion.

So my advice to the government is to stop patronizing us with exhortations to be frugal while congratulating itself on achieving record economic growth. Instead start adopting relevant performance targets rather than ones that are easy to hit and provide a misleading indicator of Singapore’s economic success as well as an excuse for excessive compensation.

*http://www.straitstimes.com/Singapore/Story/STIStory_645945.html

**http://sonofadud.com/2011/02/14/should-we-worry-about-inflation/

***http://sonofadud.com/2011/02/17/about-your-landlord/

****http://sonofadud.com/2011/03/17/a-case-of-the-tail-wagging-the-dog-or-how-the-rp-has-already-changed-government-policy/

*****http://www.thereformparty.net/about/press-releases/response-to-budget-2011/

Recently on Talking Point*  I mentioned SM Goh’s comments on 22^nd February in Marine Parade and how government policy had apparently been changed to reflect what the Reform Party had been saying since 2009. SM Goh talked about the need to rely on raising Singaporeans’ productivity and incomes rather than the import of cheap foreign labour. He said that companies that could not cope with the higher cost of labour by learning to use it more productively would have to close shop and set up in countries where labour was cheaper.

Now, in a speech** yesterday, Senior Minister Goh has been repeating what he said on the 22^nd. To quote,

“Singapore has to make changes to the way it grows its economy as the model of relying on cheap and plentiful foreign workers to boost output is not sustainable, “

and then later in the same speech:

“I would like to reiterate here that the government is determined to reduce the dependency on foreign labour and raise the productivity and incomes of Singaporeans”.

The troubling thing is that the government has shamelessly claimed the credit for this U-turn in policy rather than recognizing the Reform Party’s role in drawing attention to failed policies and pushing for change. It seems that a whole decade of policy mistakes (of growing GDP by boosting inputs of cheap foreign labour rather than by learning to use our own workforce more productively) can be wiped out in an instant as though it never happened. In the interval of course our population has grown by over 25% with effects that are obvious to everyone (crowded public transport, an HDB housing price bubble, stagnant real incomes, etc.).

In my response to the President’s Address as long ago as May 2009, I said that,

“…despite Singapore’s high growth rates between 2003 and 2007 this boom largely passed ordinary Singaporeans by. Instead it was evidenced by the growing numbers of foreign workers (which put pressure on the incomes of lower-skilled Singaporeans and led to falling productivity)…”

However this is not the first time that I have drawn attention to how SM Goh and the government have quietly adopted what the RP have been advocating. On the 25^th January 2010, in our press release entitled, “Work Smarter, Not Harder” ***, I said that:

“The Reform Party refers to the ST report dated 25th January 2010, “Work smarter, harder to sustain growth: SM” as well as the ST Online report of the same date, “Focus on productivity: PM”. We are delighted that the government has adopted one of the core messages of the Reform Party: that boosting economic growth artificially through a massive influx of foreign workers has done very little to improve the welfare of ordinary Singaporeans.”

I went on to say that:

“The Reform Party hails SM Goh’s statement.  It marks a watershed in Singapore whereby the public can see an opposition party highlighting problems, scrutinizing issues and putting forward policies that are then adopted by the government. This shows how credible the Reform Party is that our message is taken up by the government and repeated almost word for word.”

And then in our response to the Economic Strategies Committee report dated 2^nd February 2010****, I said that:

“…we were delighted that one of our core messages had been taken up by the Government.  This was that economic growth had to be driven by productivity growth and not as has happened over the last ten years largely through expansion of the foreign labour force and that we had to improve our dismal productivity record, We have been saying for over a year that the Government’s target should be focusing on raising the majority of Singaporeans’ living standards rather than just maximizing economic growth.”

I finished by saying that:

“It is also good that the government and the ESC have come round to the Reform Party’s view that their primary goal is to raise the living standards of Singaporeans. However there must be serious doubts about the government’s ability to deliver given that the track record in this regard of the last ten years has been so poor and whether anything more than lip service is being paid to weaning the economy off its dependence on cheap foreign labour.”

SM Goh’s recent speech and the Finance Minister’s statement in Budget 2011 that his goal was to raise productivity and the median incomes of Singaporeans by 30% over the next ten years have done nothing to reduce these doubts.

However what it does illustrate is the fact that, far from the Reform Party talking nonsense, as has been suggested by the government in the past about the Opposition in general, we are actually at the forefront of pointing out mistakes with current policies and driving changes in those policies to the benefit of Singaporeans. While we may still be far away after this election from our ultimate goal of forming the government, the electorate can see how much effect we are having already. This can only increase once we are in Parliament.

If it were ever possible to justify multi-million dollar salaries for our ministers, it becomes much harder when this government appears to be taking its policy cues from the Reform Party in so many areas.

Another example is Ms. Indranee Rajah’s call in Parliament on 2^nd March 2011***** for “‘a more targeted and focused strategy’ to help working, low-income families who typically live in rental flats and have two or more children.” Strangely this seems to mimic the Reform Party’s election pledge to provide child benefit or income support for low-income or working families with children****** and follows my statement on the same Talking Point show* that the Reform Party would introduce an income support scheme and help with child care for this group.

The message is clear- Vote Reform in the coming election if you want to see government policies that focus on improving the incomes and welfare of Singaporeans!

* http://www.youtube.com/watch?v=Ph3IUpA9EAA

**http://www.channelnewsasia.com/stories/singaporelocalnews/view/1116624/1/.html

*** http://www.thereformparty.net/en/our-platform/our-views/63-work-smarter-not-harder

****http://www.thereformparty.net/en/our-platform/our-views/66-the-reform-party-responds-to-the-economic-strategies-committee-report

***** http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_640602.html

****** http://votingrp.wordpress.com/about/

What’s up Doc? Or who needs a carrot when you own the farm?

In a report in the ST dated 5^th Feb 2011*, PM Lee is quoted as saying, ‘I think everybody will be hoping for bigger hongbao and I’m sure the Finance Minister will know what to do.’

I’m also sure the Finance Minister will know what to do.  The PM has told him to give the people pocket money, maybe an orange or two and he will obey. After all what’s a billion dollars or two in the context of a budget surplus of over 10% of GDP and a net asset position of hundreds of billions of dollars.

With elections around the corner, the incumbents are obviously confident that the electorate will be swayed by a dangling carrot on a stick and that the carrot will not only induce good night vision but also amnesia.

I hope through the articles on this blog to show you why you don’t need the carrot as you own the land on the farm in which it was grown. That land was tilled and fertilised with your toil and sweat.

As I pointed out in an article on 4th December 2010**, if interest and investment income is included, the total Government surplus for 2010 is likely to be over $30 billion. In fact surpluses of around 10% of GDP have been racked up regularly over the last ten years.  And this probably excludes the gains on Temasek and GIC investments as well as not counting the gain in value of the 79% of Singapore’s land ultimately owned by the SLA. In fact this year the government could afford to give a tax rebate or extra spending of $10,000 per Singaporean while not dipping into reserves. But they’d need a bigger red packet.

Next time your government talks about giving you something, remember that you own the farm. Our sovereign wealth funds have been built up by our people scrimping and saving and going without services that are taken for granted in other rich countries. You never received a proper explanation for how much money was lost in 2008 in Temasek and GIC. No heads rolled and you never found out why Chuck Goodyear resigned.  The farm land is surrounded with three lines of razor wire and KEEP OUT signs for Singaporeans. Time that we had a Freedom of Information Act, I think.

I have previously proposed privatizing Temasek and GIC and listing them on our stock exchange whereupon they would be required to be open and transparent about their performance. Shares would be distributed to all Singaporeans which you would be encouraged to hold for the long-term. After all their assets ultimately belong to you!

It is time to hire a new manager for your farm. One with your interests at heart.

*http://www.straitstimes.com/PrimeNews/Story/STIStory_631373.html

**http://votingrp.wordpress.com/2010/12/04/%E2%80%9Csingaporeans-to-gain-from-strong-government-revenue%E2%80%9D-the-rps-response/

Why cooling measures and subsidies offer no solutions to rising prices and declining fertility

The question I’m most asked by Journalists is, “What are the issues this coming election?” The answer I most often give is that they haven’t changed that much from the previous election. There is really only one key issue this coming election. It is housing, it is immigration, and it is the cost of living. They are one because they are all part of the same.

When you take a closer look at supply and demand as it relates to HDB housing it becomes clearer that the issues remain the same because the government is a behemoth incapable of reacting fast enough to changing circumstances that it is itself responsible for.  An analogy might be a brontosaurus with several primitive brains in different parts of the body so that there is no central coordination. Immigration and housing are specifically two sides of the same coin. In its simplest form we have too many people and not enough housing.* According to Singapore in Figures 2010 ** the stock of HDB flats rose by only about 11,000 units between 2004 and 2009. At the same time the Singapore resident population rose by 461,000 between 2000 and 2009 and the total population rose by nearly a million.

Another journalist asked me for my opinion on the statistic, widely disseminated around the web, that 85% of Singaporeans own HDB housing. That figure originated with a senior civil servant responding to The Reform Party’s proposals for easing our HDB woes. Crucially it was that 85% live in HDB housing not own it. I re-educated that journalist who corrected the mistake but the wider public don’t make the distinction and a myth is peddled.

At this moment the resources are not available for me to calculate the exact statistic but the number of HDB managed units at end 2009 was 888,143. If we divide this by a resident population of 3.7 million this comes down to roughly 25% ownership.  Then you need to factor in children and joint ownership and we don’t know what the actual percentage of that 888,000 is rental. The actual ownership percentage is probably below 50% of adults. So the majority of Singaporeans would benefit from lower prices as it would enable them to gain a foothold on the property market or move to a bigger property.

However falling property prices can have serious consequences for the economy if they lead to curtailed consumption and negative equity.  We therefore need to be cautious about the release of new land and new building so as not to cause too rapid an adjustment.

So who is responsible for the high prices that the government is failing to cool? Well, the government is directly responsible. The government is the owner of the bulk of the country’s land and could therefore be said to have a vested interest in keeping prices high and rising. The government is also the owner of the HDB and furthermore through CPF it is the provider of the bulk of the nation’s housing finance. The HDB is directly responsible for not having coordinated its policies with the other government ministries responsible for immigration. It has been too slow to react to the imbalance in supply. It is not as though they could claim that it is an honest mistake and they could not see it coming. They only need to wait for a bus or attempt to get on an MRT as I do every day, to see how crowded we are!

This imbalance between demand and supply has been exacerbated by the government’s previous decision to allow 100% of CPF ordinary account balances to be used for housing together with the provision of subsidies in the form of the Housing Grant and the Additional Housing Grant. In August 2010 the government announced a number of cooling measures for the property market.  They could not however, resist extending the Housing Grant to buyers of DBSS and EC who have a monthly income of up to $10,000PM. In the longer term as well as reviewing some of the subsidies to housing we should seek to reform CPF and give people more choice over their savings.

It is difficult to believe that the government’s policy architects could demonstrate such basic economic illiteracy by trying to control demand for an asset while at the same time subsidising its purchase. Allowing 100% of CPF to be used for housing is effectively a subsidy since CPF savings are not taxed. This is undoubtedly a contributing factor to the rise in prices

On the other hand as said previously, the government as the major land owner has a vested interest in seeing house prices rise. I would liken the government’s cooling measures to pressing on a hosepipe to flatten a bulge only to see it pop up somewhere else in the pipeline. In fact it’s worse than that, since at the same time the government is constantly pumping more water into the hosepipe thereby increasing the pressure by giving first-time buyers more money to buy HDB flats and by allowing in so many foreign workers.

Any projected benefit from these subsidies for these first-time buyers is illusory since prices of new and resale flats have risen much faster than the subsidy. While it must be questioned why the government allowed owners of what is supposed to be subsidised public housing to own private properties in the first place, as an economist I do not see how stopping this will affect the real as opposed to speculative demand for housing. It is the former that is driving housing price increases. This stems from the increase in the population and will be true whether people buy or rent. If they cannot buy they will be forced into the rental market which will push up rental yields and this will push up prices. There’s that hosepipe again! It is economically nonsensical to argue that the demand for HDB housing can be controlled by measures restricting HDB ownership while the ability to rent flats to foreigners has not been curtailed. We have seen our population rise by over 25% in the past ten years. While the supply tap was reduced to a trickle, the vast surge in the number of foreign workers undoubtedly pushed up prices since they have to live somewhere and thus pushed up rents. HDB owners would be able to arbitrage between high rental yields and low loan rates. The government’s measures do nothing to address this.

However some of the measures will make the situation worse for a whole section of the population. Reducing the LTV ratio will merely create pent-up demand and mean that young people have to wait longer to get a foothold on the housing ladder. I probably shouldn’t mention possible solutions to the problems that young people have as that has created a whole generation of politically aware youth who in previous elections were apathetic. We already have a birth rate that is so far below replacement levels that our population would halve within a lifetime if we did not have immigration.

The solutions to the housing issue are complex in isolation but more so being intertwined with other issues. You cannot look at HDB in isolation from the issue of immigration and manpower policies and CPF.  We have had over a million new people come to live in Singapore in the last ten years with very little increase in the stock of public housing so it is inevitable that prices have risen sharply. I have said that we need to slow the intake of foreign workers and concentrate on raising the productivity and incomes of Singaporean workers instead. At the same time we should increase the supply of housing by releasing more land and allowing more private sector competition with HDB.  And we need to question why foreign workers and foreign students are being housed in HDB stock.

The whole question of subsidies is moot anyway because we have no market in land.  With government owning such a big percentage of the Nation’s land and being by far the biggest housebuilder there is no such thing as a free market. As a liberal free market economist, I believe that greater competition leads to more consumer choice, better quality and lower prices.*** In the longer term we want to create a genuine free market in land by giving HDB owners the right to buy out the freeholds of their properties.

Because it is a monopolist the HDB has failed dismally to keep up with the increase in population and the inevitable trend towards smaller families in the same way that they have failed to meet the needs of young couples.  For a long time HDB insisted on phasing out the construction of three-room units and concentrating on four- and five-room units where the profit margins are higher. Clearly we need to return to building 3 room units in greater numbers. If these can be built at lower cost (through private sector competition and the release of more land), then they would enable first-time buyers to own their own flat at a younger age and hopefully have a positive impact on our falling birth rate. At the same time we need to increase the percentage available for renting while restricting the rental of smaller HDB flats to foreign workers. By increasing the rental supply and allowing existing owners to buy out their freeholds (whereupon they would be free to rent their flats to foreigners) we could over time peg the HDB back to being a provider of rental and low-cost housing to those on low incomes. We could lower the age at which single people can own HDB’s and we must push young couples with babies to the top of the queue.  We could also experiment with part-ownership part-rental schemes like those in other countries. Measures such as these will have an effect on young people giving them the stability and financial security they need which will have an impact on fertility rates.

So the gap between supply and demand looks more like an ever expanding unbridgeable gulf. The government measures come down to giving with one hand and taking away with the other. It is also no good pretending that what happens in one market (rentals) will not affect another (house prices).  An economist would say that buying and renting are almost perfect substitutes. Over a longer time period Singapore needs to return the role of public housing to providing housing for the population at the lower income levels.  There is no reason why at our relatively mature stage of development 85% of the population have to live in government-supplied housing. This is completely out of line with other advanced countries where the ratios are generally between 20-40%.

Will the affordability of HDB be a big enough issue to swing the electorate this election? We’ll just have to wait and see.

*This theme of how the rapid increase of the population driven by immigration and the foreign labour policy (combined with not enough babies) has not been in the interests of Singaporeans is one I will keep returning  to in future blogs.

**http://www.singstat.gov.sg/pubn/reference/sif2010.pdf

***In later blogs I will return to competition in the political arena where it is as important as it is in the business one. And I will demonstrate why Freedoms  are also a vital part of the equation in creating prosperity.