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

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

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

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

Crucially I said,

“Presently the countries that have run large current account deficits for many years, such as the US and many members of the Euro-zone, are acutely aware that the counterpart of their deficits is excessive saving in the surplus countries, mainly China but also Japan, Korea, Germany and of course Singapore. They know this prevents them from being able to achieve satisfactory levels of growth, output and employment.

The Euro-zone has already turned to China and asked the Chinese Government to buy more Euro-zone debt. This has allegedly infuriated many ordinary Chinese who complain about how poor they are compared with the average European. Their anger should be directed at their government which has held down consumption and domestic living standards to create a level of reserves far higher than necessary. This has allowed a situation in which they now find themselves held hostage to the debtor nations.

It is likely that our Government faces the same pressures from the EU to invest in bailing out the insolvent members of the Euro-zone.

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

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

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

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

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

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

As usual, this has all been decided and announced without telling Singaporeans first or debating it in Parliament. The first we got to hear about it was through the IMF announcement on April 20 just as the Spanish people only got to hear about their king’s elephant-hunting jaunts when he was injured.

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

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

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

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

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

Posted in Society

2 Comments

Tags: Austerity, eurozone, government, IMF, members of the euro, pap singapore, politics, Tharman

We must move up the Value Chain rather than give up on Manufacturing.

The release of the unemployment statistics two days ago brought home the folly of current policy.

http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_761247.html

While the government prided itself on creating 121 thousand jobs last year two-thirds of these went to foreigners. Manufacturing employment hardly grew while the bulk of job creation was in services and construction, where salaries and productivity are much lower than in manufacturing. The proportion of foreigners in the workforce edged up slightly to 37% of the total. This makes a mockery of the government’s avowed intention to restrict foreign workers to around a third of the workforce.

The figures for manufacturing need a close scrutiny. Policy proposals from some of the contestants in GE 2011 to phase out manufacturing would be a mistake if not disastrous. Rather than depending on cheap foreign labour, we need policies that move us up the value-chain, both in manufacturing and services. This is brought home by the latest statistics. These illustrate the absurdity of current government policies when two-thirds of jobs created last year went to foreigners and were in the service and construction sectors where average wage levels are much lower than in manufacturing.

Recently reading about the Republican primaries put me in mind of some of the more right-wing Tea Party candidates’ crazy ideas. One of the more notable themes has been attacking Obama’s bail-out of the auto industry in 2009 which prevented GM and Chrysler closing down and the loss practically of the whole US auto industry sector with hundreds of thousands of skilled high-paying jobs. Even a simple cost-benefit analysis of the losses in terms of lower taxes and higher welfare payments in the absence of the bailout would have outweighed the costs.

In addition a lot of research has gone into the positive externalities associated with clusters of particular industries in a specific geographic region and that the presence of complementary industries enhances entrepreneurship and start-up activity. If the companies had closed down then it is likely that there would have been a vicious circle of knock-on effects on related industries and the loss of a big part of the skill set to foreign competitors with the result being permanently lower incomes, employment and taxes. Sure there would have been new jobs created in other areas such as services but these would likely have been lower-paying.

If I was being sufficiently Machiavellian, the sheer stupidity of the objections might lead one to conclude that the Republicans advocating this strategy were Japanese, Korean or German agents. Obama’s recent advocacy of a strategy to reward companies manufacturing in the US and negate the advantages of transferring production to tax haven countries by imposing a minimum unitary tax are, besides being electioneering, a deliberate strategy to reverse the loss of high productivity jobs to countries which pursue a more active industrial policy.

In Singapore also there has been some debate about the proper role of manufacturing in the economy. During the GE one of the parties advocated the phasing out of manufacturing in Singapore and concentrating on services instead. The party also pointed out that the proportion of Singaporeans studying engineering is falling while claiming that most young Singaporeans prefer to work in the service industry. Again this is a failure of government policy not a reason for abandoning engineering as a discipline. Certainly remuneration levels for engineering careers compare favourably with other career areas. Chemical engineers in the US now command the highest starting salaries. Also the preference of young people for service jobs, if correct, is probably the result of the government’s policy of subsidizing low-tech manufacturing through cheap foreign labour which has resulted in wage levels that are unappealing. Engineers are also highly sought after in the financial sector.

One of the more ridiculous ideas involved giving $10 billion to manufacturers to phase out their operations here and relocate them to neighbouring countries. This is worse than the current tax write-offs given in the US for closing down factories that the Democrats have rightly targeted to correct the bias against domestic manufacturing. While we need to stop the subsidies given to low-tech labour-intensive manufacturing which is reliant on cheap foreign labour this is not a reason for give up on manufacturing altogether. We just need to make sure we move up the value chain into high-tech high value-added industries. While the government was rightly critical of the idea of phasing out manufacturing, they of course ignored the fact that the government’s strategy continues to favour low-tech industry by allowing ready access to cheap foreign labour.

The government’s policy has always been of growing GDP in the easiest possible manner while neglecting its primary duty of raising the incomes and living standards of Singaporeans. Even its biggest recent success, in luring a big chunk of global pharmaceutical manufacturing to Singapore through tax breaks and holidays appears opportunistic. It will be interesting to see if it can be sustained in the long-term given the moves in the US to neutralize attempts to lure domestic industry away through tax breaks.

The UK government has also proposed the use of tax incentives to lure domestic industry back to the UK. I wrote back in 2009 about the dangers of a zero-sum game which ended up benefitting no one but the multinational companies (http://theonlinecitizen.com/2009/05/us-tax-rule-changes-and-implications-for-singapore-the-prisoner%E2%80%99s-dilemma/)

The worrying sign is that despite the solemn promises to phase out foreign labour during GE 2011 the PAP government is going the other way. Just one example is the 26 new hotels slated to open by 2014 with 5,500 new rooms where the vast majority of the jobs will go to foreigners.

The inescapable conclusion is that we do not need this absurd over dependence on foreign labour to create prosperity for Singaporeans. We should not give up on manufacturing either, just ensure that we move up the value chain. It is true that modern manufacturing uses much less labour. Over the last ten years US manufacturing output has expanded by a third while the number of people employed has fallen by a third. However service industries are likely to see a similar “hollowing out” as advances in software permit rapid productivity gains. But do we need so many jobs? By reducing our dependence on foreign labour we could have fewer but higher productivity and higher paying jobs but a larger share for Singaporeans. In manufacturing we should aim to be like Germany rather than attempting to compete with China on labour costs.

The PM on Paying For Talent !

Jan 19

Posted by kjeyaretnam

Excessive Ministerial pay is not there to secure talent. If the government were interested in talent it would want to promote competition and encourage a market place of ideas.

This is what I said when interviewed by Today in 2010, http://sonofadud.com/about-ricebowl/about/interview-for-today-newspaper-in-2010-which-explains-a-little-bit-about-me/

“The PAP may be against the two-party system but it’s inevitable, as we have seen in Korea, Taiwan and Indonesia. The problem with the one-party system is not corruption – at least not in Singapore because the Government is not corrupt – but it leads to a society closed to new ideas, with too many “yes men”.

Nothing much has changed since that interview except maybe that women are proving to be the best “Yes Men” amongst the Ministerial ranks and we are realising that the key word in discussion of Ministerial pay is not “corrupt” but “obscene”. The PAP still takes steps to ensure that only the official point of view is heard. Betraying its Communist roots, the PAP is organised as an old-fashioned monopolist where high pay levels reflect the lack of competition. Like the cadre system or the nomenklatura system for the Stalinist and Brezhnev-era elite, the payment of economic rent is there to ensure loyalty and a cabinet of yes-men.

Yesterday the PM gave his rationale for our excessive Ministerial salaries. He asked several important questions,

Can a future PM continue to get the best and most committed people to serve as his ministers?

In fact, can we get the best possible future PM for Singapore?

How can our pay system support this important goal?

So far so good but of course for our dear PM these were just rhetorical questions. In fact he failed to answer them and instead side-stepped and answered some easier questions. That’s disappointing. For me one of the most interesting aspects of the Pay review commission has been the questions asked.GerardEestarted his presentation with the question,

What is Singapore?

Gerard answered his question by saying that Singapore is a rock and then used that as justification for the pay levels but the question is one that requires further discussion. Many Singaporeans would say that Singapore is a Nation of convenience for whoever wants to take advantage of our tax haven and secret banking facilities. A Nation built on a rock by the sweat of our brow for the convenience of others, who now reap our just rewards.

The Prime Minister answers his own rhetorical questions by going on to say that it was only by paying people well (obscenely well by the standards of what ordinary Singaporeans earn and by the pay of politicians in other countries with similar or higher living standards) that Singapore could get these people to come forward. There may be public-spirited people among us, PM Lee asked, “But will there be enough of them to produce a whole team of ministers, a whole Cabinet equal to the task and with the standards which we have come to expect?” (ST, 18^th January).

The problem is not the pay structure as a barrier or an enticement. Part of the obstacle to developing talent as I have said elsewhere is the cadre system.

I have also already written elsewhere (http://sonofadud.com/2012/01/05/a-committee-that-cannot-calculate-the-median-of-the-top-1000-is-either-deliberately-misleading-the-public-or-incompetent/) about how absurd it is to benchmark the pay of politicians against the median income (including stock options!) of the top 1,000 earners. Many of these people will be genuine wealth creators who have founded innovative companies or created new products or even whole new technologies. Imagine if President Obama was to say that his pay should be pegged to what Steve Jobs,Mark Zuckerberg or Larry Page earned in any year. I cannot say for certain what reception he would receive but I suspect that it would be universal derision.

A question I would like to see the PM answer is,

“How many of the top 1,000 earners are CEOs or top management of government-or NTUC-linked companies or civil servants?”

Since the government sets the salaries of those in the public sector we seem to have an inbuilt mechanism for rampant pay inflation of public-sector managers. The latter are already overpaid compared to their counterparts in the private sector (particularly when job security and pensions are taken into account).

In any case this government should not pretend that it wants talented people to step forward and enter politics. For fifty years they have taken the harshest steps to raise the barriers to entry to politics for Singaporeans and to ensure that those who dared to have different ideas paid an enormous financial and personal cost. In the past they detained people, often for longer than a murderer would receive. When this became difficult after the fall of Communism, they switched to using defamation suits to bankrupt their opponents. Whether justified or not, there is still a perception in most Singaporean’s minds, reinforced by the government’s stifling control over the domestic economy, that standing for an Opposition party or even being a member of one is the kiss of death to one’s career prospects.

In the realm of ideas, the Newspaper and Printing Presses Act and total control of the media ensure that views which do not accord with the ruling party or even the approved Opposition do not get aired. The same restrictions apply to debates and forums. Requirements that political parties register their websites and apply for annual newspaper licences reinforce this. Even in the new social media, the state-run media, aided by their monopoly profits elsewhere, have established a dominant presence and a well-funded and staffed clandestine internet brigade ensures that those who have dissenting views are subjected to the internet equivalent of being shouted down. While this would be fine if there was genuine freedom of expression the fact is that the right of reply is not established anywhere.

The government has never believed that competition is the best way to ensure that we do get the top talent. Even in the narrow field of electoral competition the government behaves like the convoy system in WWII. In order to cross open seas the smaller weaker vessels were put in the centre and surrounded by battleships and destroyers on the outside. The GRC system allows unelectable newbies, speaking with the voices of entitlement and privilege (Tin Pei Ling, Janil Puthucheary) to shelter beneath the big guns of Ministers and Ministers of State and pass untested into Parliament. Until the last election more than 50% of them could expect to do this without even the formality of an electoral contest. No wonder Grace protested.

I believe the PM is substituting the question of “How do I get the best people to come forward” which is difficult to answer with the easier question of,

“How do I get people to come forward who will be loyal yes-men (or women) and not have any views of their own?”

Perhaps the PM is not totally cynical and actually believes he is answering the first question when in fact he is answering the second. He is himself a victim of brainwashing and cannot see that he is confusingSingapore’s interests with those of the PAP. Knowing that loyalty rather than talent is the real objective of the pay system also helps to explain some of the puzzling remarks that have been made by people like Grace Fu. In business people generally want to be compensated for towing the company line and stifling their own creativity and originality. Giving Grace Fu the benefit of the doubt perhaps that is what she meant when she said that cutting the pay of ministers any further might induce her to rethink her commitment to politics. Or her comments may be indicative of cracks within the PAP. Was this a warning shot across the bows? A warning that she didn’t get into this for the good of the country and that if she is not even to be compensated adequately for her loss of privacy, (and the 1,400 negative Facebook comments) then don’t be too confident on her continued support in the future.

We must ask, would it be so bad if all the Chan Chun Sings and Tin Pei Lings of Singapore were forced to contest in a free and fair election, one candidate per ward, and the majority of them lost their seats. Well normally in a democracy that wouldn’t be a tragedy or a national disaster because equally talented people would be sitting across the hall in team B waiting to serve. It is the PAP’s 50 years of squashing alternative views that has brought us to the current situation.

So PM please drop the sanctimonious humbug about (obscenely) high pay being necessary to induce good people to come forward. If you are genuinely interested in the widest possible talent pool and the best people (whether in the PAP or an alternative government) then you would adopt the following steps (these are just a few of the many suggestions) before paying your ministers top salaries:

Abolish restrictions on freedom of expression
Dismantle the Newspaper and Printing presses Act
Abolish the ISA
Abolish the GRC system
Reform the defamation laws
Remove race from our IC cards
Raise the status and profile of the Opposition by creating the title of Leader of the Opposition and paying that person like a minister (as is the practice in the UK and other countries) Give Opposition parties working budgets and office space.
Broaden access and funding for scholarships but restrict the monetary component to students from lower-income groups while eliminating the requirement to be bonded. This would reduce “groupthink” while promoting equality of opportunity and hopefully lessening income inequality as well.
Support open debate and free thinking. Encourage and support a culture of diversity of views.

Only after that can we start to examine how our pay structure can support talent once it has been identified and nurtured. Then we can start looking at the big questions such as, What is Singapore? What do we want it to be?

Posted in The market

9 Comments

Tags: competition, government, Ministerial pay, Ministerial salaries, PAP., talent

Immigration is the Elephant in the Room

Dec 17

Posted by kjeyaretnam

Elephant in the Room

Yesterday the ST gave us a centre-page spread by two vice-presidents of the Economics Society discussing the rise in inequality in Singapore. The fact that one of them is the Chief Economist at GIC and the other is Director of Planning at Resorts World Sentosa might be a clue that we are not going to hear much that is radical from them. You might want to question what insight they will be able to give you into why your ricebowl doesn’t look like your neighbour’s rice bowl. After all someone from GIC is effectively a civil servant, while Resorts World Sentosa presumably wouldn’t like attention called to the fact that the euphemistically named ‘Integrated’ Resorts probably contribute in a small way to rising inequality.

The writers state that the government’s attempt to minimise the cost of social welfare by focusing only on those in the direst need has exacerbated inequality and led to a more divisive society. I use the word “focusing” somewhat ironically as many Singaporeans would say that the aim of government welfare policy is to ensure the eligibility criteria are so tough that everyone is excluded. In fact this is the crux of the PAP theory of your ricebowl that I like to examine in these pages. However, while the authors argue that an inclusive society is better from everyone’s viewpoint and that this is best achieved by universal social programmes, they make the mistake of assuming that the government is actually interested in inclusivity and fostering social cohesion. There are many who hold by outmoded theories of Darwinian competition (though strangely this belief vanishes when it comes to politics or areas of the economy that the government dominates). MM Lee’s famous words, about Singaporeans needing a spur in their side from new immigrants if they are not to become lazy and complacent, spring to mind.

This brings me on to the most surprising – or perhaps not so surprising if you consider the government connections – aspect of their article. They discuss the near stagnation in real median incomes of those in full time employment and absolute stagnation for those in the bottom 20^th percentile, even on the government’s own highly selective and possibly biased figures. The use of the base year of 2001 probably flatters what little growth there has been, as incomes declined from a high in 1998 and reached a low in 2001 after the Asian crisis and the end of the dot-com boom. The government’s figures also do not allow for changes in hours worked, which probably rose over this period. For a fuller discussion, please see my article, The Stagnant Society (http://sonofadud.com/2011/10/13/singapore-the-stagnant-society/) for a longer discussion.

However they fail to mention the elephant in the room, which is immigration policy or the lack thereof. Undoubtedly the government’s determination to allow our wages to be determined by those in the poorest economies in Asia has played a major part in depressing real wages, particularly for the lower-skilled workers. Not only was there very little restriction on foreign labour, and no restriction at all for those earning more than $2,500 a month, but there appears to have been lax enforcement of what rules there were and ample loopholes. This has been demonstrated by a recent case where an employer was jailed for putting phantom Singaporean workers on his payroll to allow him to bring in more foreign Work Permit holders.

In his book 23 Things They Don’t Tell You about Capitalism (http://www.guardian.co.uk/books/2010/aug/29/ha-joon-chang-23-things), the Cambridge development economist, Ha-Joon Chang, uses a comparison between the wages of a bus driver in Sweden and one in India. The Swedish bus driver earns around fifty times as much as the Indian bus driver yet it would be hard to say that he was fifty times as productive or skilful. In fact the Indian bus driver probably has the more stressful job or requires more skill, given the state of Indian roads and the density of traffic. The differential between the Swedish bus driver’s wage and the Indian’s is almost wholly attributable to immigration controls. Of course Swedish wages are high to start with because of their much higher productivity in the traded goods sector which is subject to competition. Employers in the non-tradeables sector then have to pay higher wages to compete for scarce labour. Without being able to bring in foreign labour they have little choice.

What we have in Singapore is a situation where the wages of those who can be replaced by cheap foreign labour have been held back or in many cases cut. Even those with higher-level skills have undoubtedly been held back by competition from third-world graduates from India, China and the Philippines, even Eastern Europe. Worryingly there are clear indications that advances in software and machine intelligence are starting to make redundant even highly-paid white-collar jobs in areas such as law and financial services that were hitherto relatively protected from foreign competition. But this government’s open door policy to foreign labour has been the main cause of rising inequality in Singapore.

Whether we have a minimum wage, or a cap on foreign labour (which amounts to the same thing), this is the Elephant in Room whose emissions are causing the inequality. Unfortunately, we risk the Elephant turning into a Raging Bull if the xenophobic ranting in cyberspace is anything to go by. What we need now, and urgently, is some serious and open and reasoned debate on the future of Singapore.

Posted in Society, The market

1 Comment

Tags: competition, economy, Elephant in the Room, foreign workers, GIC, government, immigration, Inequality, Kenneth Jeyaretnam, Minimum Wage, population, public transport, ricebowl, society, transparency

A Circular Argument by Massagos in Favour of Slave Labour

Dec 15

Posted by kjeyaretnam

Minister of State Zulkifli Massago’s was reported today(http://www.todayonline.com/Singapore/EDC111214-0000085/National-Servicemen-may-be-deployed-to-safeguard-rail-network–Masagos) as saying that , with the expansion of the MRT and the opening of 12 new Circle Line stations the Government was considering deploying National Servicemen on the front line to keep the nation’s public transport system safe.

This strikes me as totally inappropriate even though the use of National Servicemen as cheap labour has gone on for some time. When they are deployed in this kind of security role it frees our government and the transport companies from having to recruit more volunteer security personnel who would have to be paid a market wage for their services. Our NS men are paid a fraction of what they would earn in a free labour market. This is admittedly somewhat better now than what I got when I was in the army. I still have fond memories of withdrawing $60 salary for one month and being looked at with disgust by the female POSB clerk (no ATM machines in those distant 1970s days!).

In economic terms the deployment of NS men in public security roles amounts to a labour subsidy. There is a transfer of value from the NS men to the owners and operators of the transport network. Another indirect beneficiary, insofar as the provision of subsidised security services allows them to cut back on private security services, is the owner of the land above and next to the MRT stations and bus interchanges which in many cases will be the Singapore Land Authority or the government-linked property companies such as CapitaLand and CapitaMall. If the transport network was publicly owned then it could potentially be argued that this subsidy was returned to Singaporeans in the form of lower transport fares and/or taxes. However the transport companies and the property companies, with the exception of the SLA, are publicly listed. They may be controlled by the state directly, in the case of SMRT whose majority shareholder is Temasek. Or the government may exercise a shadowy control through the preponderance of ex-civil servants, Temasek directors and MPs on the board and the largest shareholder being an arm of NTUC. This is the case with ComfortDelgro. But they also have minority private shareholders. In a competitive market fares would fall by the full amount of the labour subsidy. However the public transport market is one of monopolistic competition. Part of the benefits of the labour subsidy, probably the major part, will go to the shareholders of the companies in the form of higher after-tax profits. So private shareholders benefit. It could be viewed as a form of regressive taxation since it transfers part of the value of the NS men’s output to well-off shareholders. Many of these shareholders are foreign and have not had to do NS. In addition in so far as the senior executives at SMRT and ComfortDelgro are able to pay themselves higher salaries as a result of higher profits due to the labour subsidy then this is another form of transfer from the less well-off to the better-off which would not happen in a free market.

Even in the case where the increased profits go to the government’s coffers, they are more likely to go into the reserves rather than being redistributed to Singaporeans in the form of higher spending or lower taxes. And as I have repeatedly pointed out, most recently in the article You’ll Be Dead before You Can Spend It (http://sonofadud.com/2011/11/29/youll-be-dead-before-you-can-spend-it-singaporeans-enter-the-20th-year-of-unnecessary-self-imposed-austerity/ ), we are unlikely to get to spend those reserves. They are likely to continue to be used for empire-building but ultimately lousy investments. Alternatively some mechanism will be found to redistribute them to the debtor countries. One extreme is outright default but a more probable scenario is some form of below-market rate of return recycling of our assets. This will take place through multilateral institutions but be orchestrated by the principal debtor countries who rightly feel aggrieved that their consumption and overvalued exchange rates have swelled the current account surpluses of countries like Singapore, Japan, China and Germany. I challenge the government to prove that it has exhausted all investments in Singapore that yield a higher rate of return, even using purely financial criteria.

Even if taxes are lower as a result of the forced labour of NS men the benefits also go to foreign workers and residents as well as women, who have not done NS. They also benefit the wealthier sections of the population given this government’s proclivity for cutting top tax rates while increasing indirect taxes such as GST. I am all in favour of low taxes but not where these are financed disproportionately by a subsidy from the less well-off.

This redistribution of the benefits from the providers of the subsidy is equally true if by some miracle the companies behave as though the market is competitive and return the subsidy to consumers in the form of lower fares. Again foreign workers, tourists, PRs , the lucky foreign students whom our government woos with scholarships and then exempts from NS, and Singaporean women benefit while not having to bear the cost of the subsidy.

One of the causes of the French revolution was resentment at the forced labour tax (the corvée) levied on the peasantry by the state. More recently countries like China were condemned by the West for using convict labour in a range of manufacturing industries. Not surprisingly this made them super-competitive in those areas. Both the Soviet and Nazi regimes benefited from the huge use of slave labour. When we deploy our NS men in roles in providing services to commercial companies we are doing the same albeit on a smaller scale. Even when our men are used purely for national defence, the savings from not having to pay a regular army leak to foreigners, new immigrants, foreign investors and women, all of whom do not have to bear the economic cost. That is why I have argued that NS needs to be reduced to one year immediately with a view to eventually phasing it out all together. In the meantime, or if this is viewed as undesirable on non-economic grounds, then those doing NS should be paid the full market value of their labour, either directly or indirectly in the form of lower taxes or free or subsidised medical care or further education. In the name of sexual equality women should have to do NS. And foreign workers, particularly those who enter on scholarships but are invited to stay on by our generous government, should do NS or pay higher taxes.

I remember when NS was first introduced, the late Dr. Goh Keng Swee, said that it would be seen as fair because whether you were the son of a millionaire or a hawker, you would not be able to escape. We have clearly moved a long way from those ideals! It is time to see that the burden is lifted or that those who benefit pay the full market values of the subsidy.

Posted in Budget

8 Comments

Tags: benefits, education, fare hikes, foreign students., foreign workers, government, medical care, Minister of State, National Servicemen, PR, reserves, salary, sexual equality, SMRT, subsidies, tax

Dear Santa, I don’t like the cadre and secret cabal I got last year. Next year I’d like some openness, competition and democracy instead.

Dec 12

Posted by kjeyaretnam

Recently the PAP held their first Party convention post election allowing us to scrutinise the cadre system and the iron grip on power that it provides for. AlexAuwrote about it in his blog (http://yawningbread.wordpress.com/2011/12/03/four-barriers-to-remaking-the-pap/) where he highlighted his opinion that the cadre system is one of four main reasons why the PAP would fail to learn any lessons from their setback in GE 2011. The rest of his reasons would be worthy of discussion in a separate article in their own right. However as we look back at 2011 I will concern myself with a closer look at the cadre system and how it affects your ricebowl.

It is of course not only the PAP who employs the cadre system. For the benefit of those who may be unfamiliar with the term, a cadre system is one in which the leadership of the Party selects certain members to be cadres. The cadres are then the only members who have voting rights and they elect the leadership. It is of course a completely closed system in which the leadership ensures its position by only selecting as cadres people who will be loyal to them. The cadre vote the leaders who select the cadre who vote the leaders who select ………………..and so on.

In her 1971 political science thesis, “Singapore’s People’s Action Party: Its History, Organisation and Leadership (Oxford University Press)”, Ms Pang Cheng Lian, who sits on the board of Temasek Cares, describes elections to the CEC by the cadres as a “closed system”, in which “the cardinals appoint the pope and the pope appoints the cardinals”. Most of us Singaporeans know this system is employed by the men in white. Sadly, as far as I am aware, every other political party in Singapore employs a variant of the cadre system. This includes the Workers Party, the SDP, the NSP and the SPP. I have no information about the other new parties, the Justice Party the USD (does anyone remember them? ) and the new parties still to come in 2012 but I believe it is safe to assume they all employ or will employ the same system.

Just as Alex believes the cadre system may explain why the PAP is incapable of learning new lessons so I believe that adherence to the cadre system may be partly responsible for the agonisingly slow progress of the Opposition parties and the dearth of new ideas or renewal. It is certainly the culprit behind the endemic Party hopping which discredits all Opposition equally and has nothing to do with renewal of ideas. Party hopping is the same old faces, with the same old ideas but with new titles. It would take a visionary to develop a party with a radically different structure. Or maybe a democracy veteran with no time left to lose who, looking back on his life’s work, realised that closed organisations can’t give birth to Open Societies. Yes, The Reform Party is the only political party in Singapore which is a democracy since it alone does not have a cadre system to protect the leadership and all members have voting rights.

The cadre system has its origins in the Marxist concept of the “dictatorship of the proletariat” and the “vanguard”. This meant that only a small elite group of individuals were fit to lead the Communist Party and the nation. The masses were not ready for democracy and it was better that they be led by those who knew best. The Communist ideal was one of eventual full democracy once the masses had been educated enough. Leninargued (Wikipedia, http://en.wikipedia.org/wiki/Vanguardism) the ideal vanguard party would be one where membership was completely open and its workings transparent, the “entire political arena is as open to the public view as is a theatre stage to the audience” (from What is to be Done?). He seems to be acknowledging the benefits of competition though cannot speak its name when he goes on to say that a party that supposedly implemented democracy to such an extent that “the general control (in the literal sense of the term) exercised over every act of a party man in the political field brings into existence an automatically operating mechanism which produces what in biology is called the “survival of the fittest”.” This party would be completely open to the public eye as it conducted its business which would mainly consist of educating the proletariat to remove the false consciousness that had been instilled in them.

The cadre system went on to be adopted by both the Kuomintang and the Chinese Communist Party and by many other Maoist revolutionary parties throughout the world. Lenin originally intended it to deal with the problems of controlling and maintaining the secrecy of the Bolshevik party which was seeking to overthrow the Czarist regime in Russia, in the face of infiltration by the Okhrana, the Czar’s secret police. Ironically the goal of preventing infiltration, this time by Communist agents, is the oft-cited justification given by the PAP leadership as to why the cadre system was introduced. If so it does not justify its retention today when there is no longer a Communist threat. Even if there were the ideal way of combating it would surely be through more democracy not less.

Of course the Communist roots of the PAP are not a secret. This is why the arbitrary arrest and detention of certain individuals on the grounds that they were Marxists and that they represented a secretive organisation is particularly ironic.

The fact that the PAP continue to maintain a cadre system shows how out-of-step they are with modern democratic parties and how little understanding they have of the benefits of competition and transparency and accountability. While they maintain a closed system which ensures that only people, who hold the leadership’s views, whether out of principle or self-interest, get to vote, it is difficult to see how any renewal can take place. Perhaps it is too much to expect the ordinary people of Singapore to understand the need for multi-million dollar salaries for ministers. They are afflicted with the false consciousness of a belief in democratic values and the equality of individuals. You need elite (the cadres) who are sufficiently intelligent not to fall prey to false consciousness to understand why servant leaders need millions of dollars as remuneration. Hopefully the review board will be able to explain it to us shortly.

However the other parties inSingaporeclearly feel the same way as the PAP that democracy is a dangerous idea and power should not be entrusted to the ordinary members. Or they merely aspire to be the PAP and adhere slavishly to their ideas and methods-PAP LITE, if you will. Whatever the motivation, all of them maintain some sort of cadre system. The argument often given for the necessity of this is that it leads to “stability”. This is just another facet of the argument that democracy leads to gridlock and that the people are too short-sighted or stupid to exercise power responsibly. Even if a so-called extreme faction managed to be elected to the leadership, like the AWARE situation, ultimately democracy ensures competition. If the new leadership fails to reflect the will of its members or is unsuccessful at winning electoral office then it can be replaced.

It is genuinely worrying that so much of the Opposition shares the same mindset as the PAP. This begs the question as to whether their leadership are genuinely interested in change or representation or whether it is merely power that they seek.

To recap on what I said earlier, the only party that does not have a cadre system is the Reform Party. The RP is thus the only genuinely democratic party. Instead of a closed system, the RP CEC is elected by the Party Conference which is made up of delegates. Everyone, provided they fulfil basic criterion, gets a vote. As a result the Party is the purest expression of the will of its members. The Party Conference promotes a free market in ideas as any member can put forward a motion. As it forces anyone running for office to be responsive to the views of the members, it represents the implementation at the Party level of the principles we are fighting for at the national level. We refer to this as Conference being Sovereign. It is clear that when JBJ set up the RP he wanted to have nothing to do with secretive cabals and backroom deals and start a party that would exemplify the virtues of democracy. He learnt from bitter experience, when he was ousted as SG of the WP, how dangerous an unrepresentative clique is. In a way a genuinely democratic party was his legacy to the nation and serves as a model of what we need to see at the national level.

Many are scared away from joining the RP because of the lack of a cadre system which they feel makes it inherently unstable. Certainly its first three years have not been an easy ride. But if democracy itself is something we seek and value then a truly democratic Party is a necessity. As the RP is not a good long term bet for ironclad power, it is less attractive as an option to those who are power hungry or egotists. Why go to all that trouble to infiltrate a party to make it less radical, less viable as an agent of change, when you may be voted out in 2 years time and the Party may simply revert to its former state? This is what we saw happen with Aware. A group of women cleverly saw that getting like minded members in the organisation in sufficient numbers was key to changing its identity. But ultimately Aware was strong enough and its original ideology and had been in existence long enough to shake off that challenge.

No doubt many initially joined RP in error not clearly realising the ramifications of the democratic nature of the constitution. What a shock it must have been to them to realise that Conference is Sovereign and yes, they would actually need to get a majority vote from ordinary members to change the constitution and bring in a cadre system. How much easier it was to simply do a deal for power and leadership elsewhere in exchange for sabotage. And how much more effective to do it in collaboration with the State media, ever hungry as they are for dirt.

But here is the surprising thing. RP as an organisation , as Aware did before them, similarly survived with its democratic nature intact and went on to field 11 candidates in GE 2011. So maybe democracy is not the greatest weakness of a political party but its greatest strength in the long term. Certainly many commentators like Alex are now seeing the cadre system as responsible for hampering progress within the PAP and its greatest obstacle going forward.

What next in 2012? Well the PAP cadres have concluded their convention and business goes on as usual within their closed circles. There has been a lot of talk of Opposition parties joining forces in a grand coalition as well as of new parties being set up. However the important question for voters should be whether any of the parties are genuinely democratic. I would not wish the RP to merge with another party for example, unless that party were also to adopt a democratic constitution and abandon the cadre system. My fervent wish for 2012 is that any new party set up will be Democratic and that through openness and with competition fostering progress we will go forwards as a Nation and not backwards. We need to change the old Singapore/PAP influenced Model so that we can have a better future. As always I am daring to imagine a new rice bowl for an advanced Asian nation.

Posted in Democracy

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Tags: Aware, cadre, China, Communist Party, competition, Czarist regime, dictatorship of the proletariat, false consciousness, government, iron rice bowl, JBJ, Kenneth Jeyaretnam, Kuomintang, Lenin, Marxist, NSP, Okhrana, opposition figures, PAP., proletariat, Reform Party, Singaporeans, SPP, transparency, Workers Party, WP

Comfort and City Cab. Two more pies with fingers in them.

The nature of our small metropolis, the costs of private vehicle ownership and other factors such as convenience for elderly and physically challenged users, means that Taxis must be viewed as part of our public transport network. It is therefore not surprising that most of us have been unhappy at the recent fare hikes and increases in surcharges announced by the largest taxi operator, Comfort and CityCab, which is owned by ComfortDelGro Corporation. The National Taxi Association (NTA)’s call for the other taxi companies to swiftly follow suit has furthermore appeared, to many, to smack of price-fixing. There have even been calls for the Competition Commission of Singapore to take action for anti-competitive behaviour.

However this is naive given the industry’s structure. Furthermore it plays into the government’s deliberate lack of transparency when it comes to admitting to the degree of ownership and control it exercises over the Singapore economy. The problem is the dominance and nature of the government linked entities. This is the elephant in the room and would be activists should complain about this rather than cry “price fixing”, before they pen letters to the Competition Commission.

Firstly, Comfort and CityCab between them have over 60% of the market for taxis. SMRT, a Temasek-controlled entity, has another 10-15% of the market. While ComfortDelgro is publicly listed with no single majority shareholder, the largest shareholder is the Singapore Labour Foundation, which is the investment arm of NTUC. Its board and management are a splendid example of the Japanese practice of “amakudai” or “descent from heaven”. Most of the board are ex-civil servants, former government scholars, or present or ex-MPs who have graduated here after careers with Temasek or one of its stable of companies. To quote Wikipedia, “The practice is increasingly viewed as corrupt and a drag on unfastening the ties between private sector and state which prevent economic and political reforms.”

With that combined level of market share the taxi market can be viewed as highly concentrated. Economists would call this monopolistic competition. SMRT and ComfortDelGro’s control of the taxi market is reinforced by and reinforces their monopoly of all other forms of public transport in Singapore. I have pointed this out numerous times, most recently on 23^rd November in “Another Round of Monopoly Anyone?” (http://sonofadud.com/2011/11/23/another-round-of-monopoly-anyone/). While there may be a high elasticity of substitution between different forms of public transport the elasticity between public transport as a whole and other forms of transport is considerably less. Commuters would face considerable “sunk costs” in switching to private transport and this is not available to any but the highest income groups. The monopolists are able to maximise profits across public transport as a whole and given that demand will be fairly inelastic have a fair ability to raise prices. The only constraint is the Public Transport Council which in the same way as the NTA is filled with government and company-friendly appointees and thus unlikely to be as tough in defence of consumers’ interests as it should be.

In this environment, it would not make any sense for the marginal operators, i.e. Transcab, Premier, SMART and the remaining Yellow Top taxis, to undercut them. If they do so, they would not gain much extra business and risk the dominant operators reducing their prices to drive them out of business. By setting their prices at the same level as the market leader, the industry as a whole maximises revenue and the revenue is shared out according to market share. In economic terms SMRT and Comfort and CityCab are price-makers and the others are price-takers. Without doing anything to break up the dominance of the two government-linked entities, it becomes irrelevant whether there is any overt price-fixing agreement or other evidence of collusion. The prices of taxi services will still end up at or close to the level a profit-maximising monopolist would set.

The problem therefore is the dominance of the two government linked entities. The monopoly rents are unlikely to accrue to the drivers who have to deal with a monopsonistic market (a limited number of buyers) for their services. Over time the taxi operators are likely to raise their rents and ensure that much of the revenues from higher fares are clawed back from the drivers who constitute an atomistic group without much bargaining power and a fairly elastic supply of new drivers. The industry body which is supposed to represent their interests, the NTA, cannot be said to be independent of the government or its companies since many are MPs or ex-MPs.

While consumers may complain about the fare increases, the fact remains that Singapore taxis are cheaper than in many other cities in the developed world, where often artificial barriers to entry are created. This will be less true after the latest fare hikes. In addition the system of surcharges, which are increased with the latest measures, is badly designed and only succeeds in creating shortages of cabs before and after the surcharge period and long queues of empty taxis during the peak periods.

I have already called for a far greater degree of competition in other areas of public transport, particularly in the provision of bus services. Where more competition is not possible, there should be stronger and more effective regulation, particularly of non-price areas such as frequency of service. With regard to taxis, the decision to phase out independent operators should be reversed provided they meet minimum safety and quality standards. We need to bring back Yellow Taxis and give them freedom to set their own fares and negotiate with their customers. This might eliminate the current demand-supply mismatch at different periods of the day.

Apart from the obvious high rates of return on investment from leasing taxis, perhaps the government was influenced by its desire to see that Singaporeans keep their noses to the grindstone (MM Lee’s “spur in their sides” philosophy or, “You have been given a precious porcelain rice bowl don’t break it!”). The government has always striven to ensure it captures most sources of economic rent.

The underlying monopoly is undoubtedly a more formidable challenge which can only be addressed at the ballot box but it needs to be addressed. Any call for a CCS investigation of possible “price-fixing” while the underlying monopoly goes unchallenged, is a charade and merely a self promotion exercise for those involved.

You’ll be dead before you can spend it! Singaporeans enter the 20th year of unnecessary, self -imposed austerity.

Nov 29

Posted by kjeyaretnam

Watching the Euro-zone unravel has so far almost been like a moral fable for Singaporeans. Be honest! Who out there isn’t feeling a sense of Schadenfreude? The original Greek or Irish problem on the periphery of Europe and investor flight from European sovereign debt has spread via Spain and Portugal, to Italy and even France, Austria, the Netherlands and Finland.

This moral fable could be said to illustrate the dangers of profligate governments who have bought electoral popularity with populist policies and high levels of welfare spending and are now paying the price. As an economist I would say that the only certain moral to this story is, ‘beware the folly of entering a currency union without a fiscal union’. The rest is open to debate.

In a desperate attempt to stave off default and unlock emergency funding from the ECB and latterly the IMF, those beleaguered states have agreed to scale back their generous social welfare programmes, increase existing taxes and impose new taxes. All of this results in an externally imposed, endless round of “austerity” budgets. As I write it is not only the financial axe that is being wielded. The Euro-zone governments are discussing a solution which will essentially involve a loss of political and economic sovereignty by the countries facing insolvency. This prompted one friend to say that the Germans, by having the most competitive exchange rate when entering the Euro (coupled with a high level of productivity and skilled labour) have achieved a mastery over Europe where Hitler failed.

However, the solution being imposed on the weaker economies would be likely to condemn them to years of lost output and slow growth as compared with higher levels of output and employment in the stronger countries. Without a true political union, which is unlikely to be acceptable to the richer Euro-zone countries such as Germany, it is difficult to see how the currency union can survive longer term.

According to the popular logic of the anti-populists such policies as free health care, free education and old age pensions, lead to a lazy workforce that demands uncompetitive levels of wages. Thankfully for us our wise government has never fallen for the easy route of giving the people what they want (or need or deserve). On the contrary they have ensured that Singaporeans have been kept on an austerity diet almost since independence. Pity the struggling European economies but don’t forget to look in your own backyard when you shed a tear.

We have very little welfare spending (except the ‘ give-aways’ at election time when the government throws around money away in an untargeted manner) and one of the lowest expenditures as a proportion of GDP in the developed world on education and health. Let me repeat that. One of the lowest public expenditures as a proportion of GDP in the developed world on education and health. As we know the expenditure in terms of private money coming from your own pocket is very high indeed with exam success being directly correlated to expenditure on tuition. In Singapore we are proud to have developed a world class system of ‘hire ‘education. As well as the private financial burden we have the devastating personal social costs of long term medication and care required for old age, cancer, chronic illness or disabilities both physical and mental.

Despite the government’s harping on how this has resulted in low taxes for median-income Singaporeans compared with Europeans, these income groups are not really any better off. Europeans generally receive free health care and completely free education -which is mostly compulsory up to the age of 16. (a vital child protection safeguard). Singaporeans have to pay for medical care with Medisave and Medishield and are often forced to top this up or go without treatment because of gaps in coverage or inadequate savings. We also work up to 50% longer hours to achieve living standards on a par with the less affluent Euro-zone countries.

The end result of this scrimping and saving is familiar to all. The Government has run huge and persistent surpluses as a proportion of GDP(between 5% and10% of GDP though in 2007 it was considerably higher than this) for over twenty years. This includes revenues and receipts from current and past reserves as well as revenues from land sales and capital receipts. I believe it is misleading to exclude these revenues and receipts from the Budget. The Government further disguises its exceedingly comfortable fiscal position by using an accounting convention of subtracting both current and development expenditure from current revenues. It then adds back only (at most) 50% of the revenues from the Sovereign Wealth Funds, Temasek and GIC. Our Opposition needs to demand a proper accounting

The high levels of government saving are partly responsible for a current account surplus of over 20% of GDP. Because the MAS intervenes to prevent the Singapore $ rising too far, this is reflected in the growing holdings of official reserves and the overseas assets held by our Sovereign Wealth Funds, Temasek and GIC. It is true that Singapore has avoided a situation where the Government has had to issue foreign currency debt and in fact has a substantial net asset position (particularly when its ownership of 80% of the land is included!). The benefit is that we have avoided the problems of the Euro-zone where the deficit countries are being forced to cut back on spending and raise taxes.

But is this a good thing and does it make our government fiscally wise? In a way that is like saying that a starving man has avoided having a starvation diet imposed on him by voluntarily deciding to impose it on himself first. Some of you will be acutely aware that those holding the food supplies make sure they themselves have a very rich diet. The wonder is that whilst they earn millions of dollars for cabinet roles you agree to tighten your belts, take on extra work, move dad into the corridor, rent out your rooms and die slowly without the dignity of care and medication. If you are still feeling smug bear this in mind. Even with cutbacks the countries embracing austerity programmes will still have almost free public health and education while Singaporeans do not.

There is really no justification for the continual accumulation of reserves and government surpluses once these have reached a level sufficient to provide for a serious crisis. Our Government passed this level some years back but continues to insist on its necessity. Meanwhile CPF holders are being forced to take unilateral changes in the terms on which they can get their money back. This is despite the low returns on CPF savings having been one of the major contributors to the growth in overseas assets. The present generation of Singaporeans has been robbed, supposedly to pay for a future generation of Singaporeans, despite accelerating technological change and productivity growth making all but certain that future generations will be much richer than the present one.

The big question is will we even benefit from our enormous overseas assets? I believe we are fooling ourselves if we think that by actually saving all this money we will get to spend it or that our children will. GIC, Temasek and MAS have yet to come clean on how much it has invested in Euro-zone sovereign debt and how much it stands to lose should there be a debt default in the worst case or just a restructuring. As I said before, there is no-one in Parliament willing or able to demand an account.

Presently the countries that have run large current account deficits for many years, such as the US and many members of the Euro-zone, are acutely aware that the counterpart of their deficits is excessive saving in the surplus countries, mainly China but also Japan, Korea, Germany and of course Singapore. They know this prevents them from being able to achieve satisfactory levels of growth, output and employment. The Euro-zone has already turned to China and asked the Chinese Government to buy more Euro-zone debt. This has allegedly infuriated many ordinary Chinese who complain about how poor they are compared with the average European. Their anger should be directed at their government which has held down consumption and domestic living standards to create a level of reserves far higher than necessary. This has allowed a situation in which they now find themselves held hostage to the debtor nations. It is likely that our Government faces the same pressures from the EU to invest in bailing out the insolvent members of the Euro-zone.

It would be far better if our reserves were spent on benefiting Singaporeans in the first place rather than hijacked by political considerations. That is why I have consistently called for a reduction in our general budget surplus, measured as widely as possible, to a much lower figure, say under 1% of GDP over the course of an economic cycle. The funds could be invested in basic improvements to Singaporeans’ health and education as well as cutting taxes.

I have also called for the privatization of Temasek and GIC with the distribution of shares to Singaporeans. If they are owned directly by the people then it will be more difficult for them to be held hostage to foreign political pressures.

Posted in Society

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Tags: accounts, China, defecits, economy, eurozone, GDP, GIC, government, Kenneth Jeyaretnam, markets, MAS, Medisave, Medishield, reserves, Singaporeans, Temasek

GIC, UBS and the Death Spiral of your CPF funds

Sep 23

Posted by kjeyaretnam

Kweku Adoboli the alleged rogue trader at UBS and Nick Leeson, the infamous rogue trader who brought down Barings, both have a strong Singaporean connection. Nick Leeson worked in Singapore while Kweku Adoboli worked for the bank whose largest shareholder is the Singapore government.

Singapore, through GIC, became the largest effective shareholder in UBS when it purchased a 9% stake of mandatory convertible notes in December 2007. The Singaporean government was responding to a call by UBS at the time for a bailout following the subprime crisis. In fact our generous bailout caused UBS which stood for Union Bank of Switzerland, to be given the nickname, “The United Bank of Singapore “in its home country

Kweku Adoboli appears to have lost the Swiss bank an estimated minimum of $2.3 billion. But his losses only represent a fraction of the total losses that GIC has made in UBS so far. UBS was trading at 50 Euros per share at the end of 2007 and just before the latest debacle it was trading around 11 Euros. It had therefore already lost around 80% of its value before he added a further 2% loss to its 2007 market valuation. For GIC it appears this 80% loss probably amounts to S$7-8 billion assuming that the currency purchase was unhedged at the time. That may not seem like a huge amount in the context of GIC’s rumored total assets but we don’t know what percentage it represents of GIC’s equity. As the bonds issued to CPF by GIC have to be repaid it’s conceivable that GIC could end up with negative equity.

Anyway as the largest stakeholder in UBS any loss chalked up to them is going to send shock waves through GIC. And as GIC’s assets are funded through borrowing in Singapore dollars from the CPF, your savings are directly linked to UBS’ fortunes. Furthermore this latest loss comes amid the start of a double dip recession. The rerun of the 2008 financial crisis looks potentially much more worrying this time around because governments appear to have given up on taking steps to offset it and can only repeat the mantra of fiscal austerity. With the latest announcement from the Fed ruling out a new round of quantitative easing, central bankers also appear to have given up on monetary policy.

The UBS losses have even provoked GRC into making a rare public statement resulting in a front page headline in the Financial Times on September 20^th.

“Singapore fund hits at UBS ‘lapses’. “

The FT article went on to further quote from GIC’s statement,

“[We] discussed the alleged fraudulent trading that led to the large financial loss for UBS. GIC expressed disappointment and concern at the lapses and urged UBS to take firm action to restore confidence in the bank”.

Fine words indeed but is it not a case of locking the stable door after the horse has bolted? Yes, GIC is now belatedly hitting out at UBS for its lack of controls and lapses but are they just creating a storm in a tea cup to cover up a disastrous investment decision? If GIC is angry with UBS then Singapore citizens should be furious with GIC. As CPF members we the Singaporean citizens should be demanding some answers and explanations from our government.

GIC’s attempt to avoid transparency over its decision to invest in UBS by pinning the losses on a rogue trader, an external event outside of their control, won’t pass muster anyway. In fact there were plenty of warning signs in the public arena that something was seriously amiss at UBS, long before Mr. Kweku Adoboli was uncovered.

In 2008/9 UBS was embroiled in a tax evasion scandal in the United States. The misconduct was so severe that UBS was faced with the loss of their banking license in the US. There are few sanctions harsher than that. The scandal centered on UBS’s wealth management division where employees had been helping US customers to evade taxes. One UBS whistleblower employee even testified to practices such as smuggling diamonds in empty toothpaste tubes! UBS finally kept their license by settling out of court and agreeing to pay US$780 million to the US government in April 2009.

Not long after this in November 2009 the UK’s Financial Services weighed in against UBS. The Authority fined UBS £8 million citing their “inadequate systems and controls” over 6 employees in the wealth management division who had been making unauthorized trades using customers’ money. UBS was also forced to pay out US$42 million to compensate its customers for the losses.

Now in 2011 we are told that GIC expresses “disappointment and concern at lapses”. Seriously guys, where have you been? As a minority stakeholder in a country that represses dissenting views I can do nothing more active than express disappointment. But in 2007 and again in 2010 GIC was the largest single shareholder in UBS and as the largest shareholder they had considerable clout. So the question should be why did GIC make no public effort to improve performance or risk controls over the last 4 years? Why did GIC not go public with their concerns before now as an activist hedge fund or asset manager would have done?

It may be that as a public entity they were sensitive to charges of political interference and the kind of backlash they saw when they bought Shin Corp in Thailand. If this is the case it simply strengthens the argument against having a sovereign wealth fund in the first place.

The real question is what were GIC doing investing in a deal whose implicit risk they appear not to have understood and via an instrument they shouldn’t have touched with a barge pole? Certainly if reports on Bloomberg are true then they made the decision to invest with unnecessary haste and little due diligence.

Mandatory convertible bonds are instruments which have to be converted into shares of the underlying equity on maturity. They are aptly known as “death spiral” bonds in the investment industry. This is because they represent an inevitable large dilution of the outstanding equity of the company issuing the bonds. The coupon may seem juicy but it stems from the fact that the investor has sold a put on the shares to the issuer. If the option was stripped out and sold separately it would undoubtedly look cheap at the price GIC sold it, particularly as UBS had inside information about the true state of the bank.

Ironically UBS knows about the risks of death spiral” bonds. They themselves lost a lot of money in 1997 from buying mandatory convertible bonds issued by Japanese banks. In this case the banks’ equity prices promptly traded down towards the mandatory conversion price, set roughly 50% below where the equity was trading prior to the issue. Had UBS learnt something from that experience? As far as I’m aware they only started to issue their own death spiral bonds after their fingers were burnt by the Japanese.

The only other major stakeholder in the UBS bonds at that time was an unnamed Middle Eastern investor in Abu Dhabi who bought a $2 billion stake. But then he probably had money to burn, literally, as he would be investing oil derived revenue and not the savings of his hard working citizens.

In any event the bail out by GIC didn’t change UBS’ fortunes. The losses were so severe that by 2008 they looked set to go bust until this time the Swiss government stepped in with an emergency rights issue in October of that year. Had they not done so GIC would have lost all their money. In 2009 the Swiss government sold its own stake, at a healthy profit I might add. Yes, the Swiss government was prudent enough to get out at the height of the market but GIC held on! I fear that MM Lee thinks he is Warren Buffet who famously holds positions for 30 years.

We can only speculate as to why MM Lee felt that we needed to use our pensions to bail out a foreign bank especially at a time when the industry was already reeling from the subprime crisis. At the time, as Chairman of GIC, he was quoted in a Bloomberg interview in April 2008 saying

“The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again. Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it.”

Clearly the salesmen’s patter got the better of the Chairman of GIC, Mr. Lee Kuan Yew, and of the investment committee at GIC when they took the decision to invest in December 2007. Or the GIC decision makers were so blinded by the thought of the enormous returns they were going to make that they were unable to look at the downside risks.

But GIC did have the benefit of hindsight and experience when they made their statement on September 20^th which continues with a chilling echo of MM Lees naïve views of 2008, “GIC’s view of UBS’s fundamental strength as a well capitalized bank with a strong private wealth management franchise remains unchanged,”

When GIC talks about a strong wealth management franchise they are singling UBS out as a brand consistently capable of making money through wealth management. I agree that smuggling diamonds out in toothpaste tubes is a strong way to generate wealth for your clients and if it weren’t illegal, I too would love a piece of that franchise.

It would be an interesting academic exercise to see what lessons both Temasek and GIC have learnt from the previous crisis, if the consequences were not so serious for Singaporeans. Judging by GIC’s statement above we must presume they have learnt very little.

The UBS debacle is an illustration of how the concentration of the power to make such large investment decisions in the hands of a few individuals is so dangerous. Particularly as there appears to be no accountability for those investment decisions later as there would be if Temasek or GIC were in the private sector. Let’s not forget that it is our money the managers are playing with. If this were a hedge fund or conventional asset manager that had performed poorly, then we, the ultimate owners of these assets, could take them away and give them to another manager. Unfortunately we do not have that option.

Tony Tan our (35%) elected President was deputy Chairman of GIC at that time so clearly there is a potential conflict of interest here and we should expect no efforts at improving transparency or oversight from that quarter. This is the reason why I have called for Temasek and GIC to be privatized and listed so that we can gain some much needed transparency and can become the majority shareholders in our own assets.

So to answer MM Lee’s questions, “Will there be another bank like UBS for wealth management?” Will there never be employees making unauthorized trades with clients’ money? Will there never be another rogue trader? I doubt it, we doubt it, that is why Singaporeans need greater control over their investments.

Posted in Budget

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Tags: accounts, bottom line, competition, CPF, defecits, economy, GIC, government, investments, markets, National interests, recession, reserves, Temasek, UBS

Should we worry about inflation?

Feb 14

Posted by kjeyaretnam

Recently there has been much concern over rising inflation in Singapore. Looking at the Consumer Price Index (CPI) the average figure for the year 2009-2010 was 2.8% (shown in blue). More alarming the CPI figure in December 2010 was up by 4.6% (shown in red) from December 2009. So inflation is clearly rising and furthermore the rate is accelerating. How much should you be concerned and is inflation the biggest problem we are facing in our economy?

Housing, transport and food were the main contributors to the rise in CPI. As they form a larger proportion of household expenditure for those on median incomes and below, the true rate of inflation for these income groups is much higher. As always the effects will be magnified even more for the bottom 20% of the income distribution. What really matters therefore is where you are on the income distribution.

The government line would be that this was beyond their control. They will say that inflation has been rampant everywhere in Asia and particularly in China and India (at least 5% and 10%p.a. respectively). No doubt the incumbents will blame poor harvests and extreme weather for the surge in food costs coupled with the leap in oil prices back above US$100 that has occurred as the world economy recovers.

However as usual this is to only tell half the story. That is why we must re-examine the contents of our rice bowl. Is it the surging economies of China, India and the rest of Asia cracking the porcelain of your bowl? Or is it domestic inflation caused by policy decisions of our own government? It is relatively simple to measure the contribution of external factors to inflation by looking at the index of import prices. Last year the Singapore dollar rose by 9% against the US$ (shown in red). This meant imports priced in US$ became cheaper when converted to S$. As a result the import price index in 2010 was up only 0.7% compared with 2009 (shown in blue). You need no further demonstration that it is in fact domestic factors which have played the major role in inflation. Further supporting this, in 2009, the import price index fell by 8% yet the CPI was still positive.

Therefore most of our inflation is being generated domestically.

In Singapore this government’s policies have allowed companies to bring in a virtually limitless supply of cheap labour from the rest of Asia thus ensuring that there is continuous downward pressure on real wages. This, together with low corporate taxes and generous subsidies for new foreign investment has been a recipe for rapid growth. However productivity growth over the last fifteen years has not kept pace. In fact it can only be described as abysmal.

In 1994 Paul Krugman, the Nobel Prize laureate, pointed out that there was little qualitative difference between the Singapore model and the Stalinist one of the 1930s Soviet Union and predicted that as Singapore ran out of labour inputs ( declining birth trend) its growth rate would fall sharply.

Our government mistakenly thought that had found an escape route from this trap. By opening the floodgates to foreign labour while having no floor on wages, it seems they thought the economy could grow indefinitely. At the same time Singapore’s population could expand without limit. In fact MM Lee recently came out to warn us all that if we wanted slower population growth through immigration we would have to accept lower GDP growth rates. Clearly the only solution the incumbents have for producing GDP growth is by increasing the importation of labour through immigration.

The result has been a big fall in the proportion of GDP going to wages and relentless upward pressure on the factor of production in (virtually) inelastic supply, namely land. This has suited the government just fine as it owns nearly 80% of the land and thus benefits from the rise in land prices.

Of course rising food prices globally play a big part in the rise in food costs locally. But the competition for land is undoubtedly playing a significant role in the rising cost of meals at food courts, hawker centres, supermarkets and wet markets as rents rise. I hear these complaints from stall holders continuously as I go about my walkabouts several times a week.

Another domestic factor contributing to rising inflation is government and GLC policies that favour the creation of oligopolies such as integrated food court operators. Make no mistake! GLCs are not in the private sector, they have virtual monopolies and no real competition to their power to pass on costs by putting up prices. The government’s ownership of most of the transport system, from the MRT to taxis, and the lack of an effective regulator, also means that the transport companies have been able to more than pass on the rise in energy costs stemming from higher oil prices. The result is further pressure on your wallet.

Here’s one for the students of economic history. Back in 1926 before he published his general theory, Keynes warned against a type of inflation that transfers income from workers to profits. Are we seeing that inflation here and now? The economy is overheating but the benefits are going to profits and not to working Singaporeans.

Certainly we can see this effect in the CPI index. The HDB resale price index has risen some 340% in the last twenty years while median nominal household income has risen by only just over 100%. Even though The Department of Statistics uses an archaic method of calculating housing costs the effects are still apparent.

With such an elastic supply of foreign labour it is no surprise that average nominal incomes have lagged behind inflation over the last three years and median real household incomes have essentially remained unchanged for nearly thirteen years. And despite years of strong economic growth consumption has fallen to just over 40% of GDP.

The incumbents will try to divert you with a bit of hype about fertility rates. (The downward trend in birth rates is for another article.) But this is merely an attempt to shift the blame on to you for not having enough babies so that our minsters to continue to support the current immigration policy.

Don’t let them scare you with those simple GDP figures either. I had already dispensed with that bogey in my previous articles. What we need from our GDP is quality not quantity. We need policies that achieve economic growth by raising the productivity of our inputs (workers) and not by just increasing the inputs themselves (importing foreign workers).

The lack of a raise in real median incomes, our appalling productivity figures and the strain on scarce resources like land should be more of a worry to you than inflation. Only by shifting focus and reducing the strain are we likely to get a slow-down in inflation accompanied by rising real wages. Your rice bowl will be all the happier for it.

Posted in The market

14 Comments

Tags: CPI, economy, elastic supply, fertility, foreign workers, GDP, GLC, government, income distribution, markets, monopoly, private sector, productivity

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