The Pressures of Excessive Do-Goodness

Even though this year's budget contains many giveaways, there are the predictable complaints that it has not done enough - not enough for the poor, not enough for the middle class, not enough for businesses. The responses from some office holders are also quite predictable. Singapore Angle has two rather good discussions about the budget debate (here and here).

There are always some good causes that the government should spend money on, but has not. There are always some arguments for the government to intervene in the market. There is always pressure for the government to do more. But let me pick on one specific episode in this post. The background to this post is as follows.

Hospital for the Rich

Parkway won the tender to build a hospital at a Novena site. Anyone who has been to the site will know that it is a rather small and narrow site. Parkway bid more than a billion dollars for the land and its share price actually dipped since analysts felt that the company has overpaid. The company later revealed that it had put in a high bid because it had wanted to build a A-class only private hospital. On the face of it, it was a fairly straightforward tendering process, but it prompted Dr Huang's criticism of Parkway's business plans and the tendering process (here).

I believe Dr Huang had written the letter with good intentions. However, good intention itself is hardly a sufficient condition for good public policies, or indeed, raison d'etre for government intervention. Before a policy-maker decides to intervene in the market, this is the number one question he has to answer: where is the market failure?*

Why the Government should not Intervene

A a healthcare provider in the marketplace, Parkway is in a better position than any bureaucrat to understand where the demand is. There is really no compelling reason for the government to dictate to a private company how many class-A or class-B wards it should have. Where does the state end and the market begins? Should the government ban luxury apartments since they are large and ostentatious? Should the government ban first-class air travel because only the rich can afford it? Enough of poor analogies already, I am sure you catch my drift.

Secondly, Novena area is beginning to feel like a prime location - the surrounding condominiums are easily trading above $1000 psf. To have class-C wards there is insane from the opportunity cost perspective**. Good healthcare can be provided to the lower-income group irrespective of location. There is really no need to build a class-C hospital smack in the middle of downtown to show that we are taking care of our poor. It is far better to locate class-C wards on cheaper sites in the heartlands, and also where the need is.

Thirdly, the use of the land is not free - Parkway is not pocketing private profits at the expense of the public. A billion dollars flow into state coffer as a result, money that can be transferred to the poor. If the land had come with strings to build a certain number of lower-class wards, Parkway would obviously have bid a lot less for the land. What is the outcome then? The consumer surplus at the high end market is not captured, and there can be no transfers to the lower-income group as a result. From this perspective, the restrictions proposed by Dr Huang - well intentioned as they are - would in fact be detrimental to the interest of the public.

Common Misery

I could go on and on to rebut the letter from Dr Huang but that is really not the intention of this post. We live in a market economy - despite its many shortcomings, the market economy has proven over the past two centuries to be able to generate the most amount of wealth for the greatest number of people. As Churchill once said, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries". We must not let our good intentions create policy misery for every one.

* Even if the government can pin down the source of market failure, it is still not a sufficient basis for intervention. The government must ensure that its actions do remedy the failure without imposing even more cost the society!

** TTSH and the CDC were built there before that area became expensive.

Is the Budget Inflationary?

Even before the budget was announced last Friday, it was widely anticipated to deal with the thorny issue of inflation. Inflation in Singapore has reached multi-year highs. One of the contributing factors has been the rise in food prices. The price hikes of food and commodities could certainly have caused hardship for some Singaporean families, and also increased economic anxiety for all.

The highlight of the budget however is the return of much of the $6.4 billion surplus in the form of various rebates. For example, individuals are given growth dividends and also a one off 20 per cent rebate on their income taxes (capped at $2000). Furthermore, there are various handouts - particularly to poorer families - which all in all erased much of the budget surpluses.

Aggregate Demand

To fight inflation, policy makers should be crimping aggregate demand through tighter monetary conditions, tighter fiscal policies, or a combination of both. However, instead of reducing aggregate demand through higher tax collections, the government is in fact increasing the purchasing power of tax payers through the various forms of rebates.

The increase in disposable incomes through the rebates and handouts is expansionary since it will lead to increase in aggregate demand. Seen from a demand-supply perspective, this might even translate to higher inflation. The budget can therefore even be construed as inflationary, which means that it could be doing the economy more harm than good.

Inflation in a Small Open Economy

To truly understand the impact of the budget on inflation, one must first appreciate that Singapore is a small and highly open economy. Added to this is a highly flexible workforce, including the use of foreign workers and talent.

The first implication is that much of Singapore's inflation is imported. For example, oil and commodity prices - which have risen a lot over the past few years - are also not within Singapore's control. Since we are a small economy, our demand will have a negligible impact on world prices. The second implication is that the aggregate supply of Singapore is in principle is highly elastic. Flexibility in the labour market lessens the impact of wage-driven inflation. The conjecture here is that price-wage inflation spiral is less likely to take hold in Singapore.

The overall implication is that the budget - even though it is expansionary - will probably not give rise to too much inflationary pressures because we are a small, open and highly flexible economy. From this perspective, the objective of the budget is to help Singaporeans cope with the effects of inflation rather than fight it.

Talking a Policy to Death

An Australian friend of mine once remarked - if the Singapore government wanted to do something, it would just announce the policy and get on with it. As Singaporeans would attest to, there is veracity in that statement. At its best, our government is often bold and decisive in implementing policies. The flipside of this boldness and decisiveness is that it will often be criticised for being authoritarian. But we should pause for a moment and reflect on the following question: if boldness and decisiveness are indeed virtues, where does it leave consultation and compromise?

The Importance of Consultation and Debate

Having lived in the UK for seven years, I fully understand the important role public consultation, discussion and debate play in a properly functioning democracy. If a policy affects the livelihoods or the fundamental rights of citizens, it is only right that its rationale be publicly aired and properly debated. There is no running away from the fact that public debate is the hallmark of an open and transparent government.

But as Master Ringisei wryly noted in his recent post, there is a difference between an "open" and "gaping" government. During my years in the UK, I also witnessed first hand how an open-ended discussion could also give exactly the wrong image of the government: one that lacked direction; unsure, dithering and equivocating; losing political capital without making any real policy progress. The end result can be depressing. When the debate is finally over, good policies become watered down and compromised to a point of doing more harm than good.

Compulsory Annuity

I have never made a secret of my enthusiasm for the compulsory annuity scheme (here and here). The economics are compelling: to have citizens pool risks into a national scheme that pays out a small but potentially crucial stipend to the advanced aged. The committee's recommendation is therefore a source of bafflement and disappointment. "Flexibility" and "Compulsory" are not exactly easy bed-fellows.

Emotionally, it does make a lot of sense to return the unconsumed part of the annuity. But it would mean two things. First, the insurance element across citizens would be eliminated, or at least greatly reduced. Second, it will mean that premiums will have to be considerably higher since the national fund would still have to pay out to the families. If everyone can collect (whether dead or alive) whatever he pays in, how does the fund reach a sustainable level of coverage against advanced old age without premiums being bitingly high? There is no escaping from the actuarial reality.

But of course I understand the difficulties faced by the committee - it must surely have tried hard to produce a formula that works while being palatable to citizens. But in trying to make the policy acceptable to everyone, we could well have reduced its effectiveness. After months of deliberation, we are back full circle. Either we make a hard choice or live with an inefficient compromise. It seems like in some cases at least, boldness and decisiveness do have a place above consultation and compromise.

Deadweight Loss of High Taxi Fare?

The issue of taxi pricing has been a subject of some debate recently. Before the recent changes to the fee structure, the perennial complaint was too few taxis (particularly during peak hours in the city). After the increase in the structured fare, there are many empty taxis around waiting for customers.

Nevertheless, many taxi drivers have reported that though the number of trips they make are down, it is made up for by higher fares, and that overall takings per day have remained roughly the same as before. The question here is whether this situation optimal?

Simple Demand and Supply

We can use a very simple demand and supply structure to answer this question. The caveat here is that some important and complicated factors - such as waiting times, differential demands at different times of the day, effects on congestion, market power - are ignored. The simple demand and supply diagram is presented below.

The market for taxis is subjected to two important forces - the fixed supply of taxis and the controlled price structure. As every economic student can tell, one can either set prices or quantities. It is never possible (in general) to set both prices and quantities and expect demand to be equal to supply (or market clearing).

The demand for taxi is the downward sloping line in the diagram. Suppose the supply of taxis is fixed at Qf. The price before recent changes is at Pl. Total revenue is given by the area O-Pl-F-Ql (simply price Pl times the constrained quantity Qf). At this price however, there is excess demand. Taxi prices are way too low and there aren't enough taxis to go around. This of course explains why you previously could never get a taxi when you needed one.

Recent prices changes have pushed the price to Ph. At this price, the total revenue for taxis becomes the area O-Ph-H-Qh. This area is drawn with the same size as before, which shows that taxi takings have remained unchanged after the price hike. Taxi drivers are not worse or better off than before since they now pick up fewer customers but get more per customer.

Deadweight Loss

But what is wrong with this equilibrium? Excess supply. At this high price, there are way too many empty taxis on the roads. This is a loss to society (jargon: deadweight loss). Empty taxis are plying the roads when they should be picking up customers. It is an inefficient outcome since precious resources (taxis) are using up precious road space but providing no value to potential customers who might want to use their services if only prices are more reasonable.

I stress however, that this is the benefit of hindsight. Given that fares had been fixed for a long period of time before recent changes, there was previously no telling how consumers would react. In other words, there was too little information on consumer demand. With the benefit of the new knowledge about consumer demand, we now know that current prices are set too high to clear the market, resulting in the inefficient use of resources.

Bring Prices Down

Obviously, we cannot return to the old price level of Pl since it will create the same excess demand as before. However, there are obvious benefits from lowering prices from Ph. Firstly, consumer surplus would increase since there will be more passengers filling the empty taxis. Secondly, if you look at diagram above, setting a price between Ph and Pl may actually increase the revenue of taxi drivers since the area characterised by price times quantity increases*.

Therefore if the situation of excess supply persists, taxi companies should consider bringing the price down.

* Except in the case where the demand curve is unit-elastic. Taxi takings will remain constant if that is the case but still, consumer surplus will increase.

The Christmas Fog

This is probably the last year I am in the UK. This Christmas, my wife Grace had planned to bring the family - including baby Elena - on a pilgrimage to Rome. She had booked the tickets and accommodation. More importantly, she had secured the tickets to the midnight Mass at St Peter's.

The big fog on the 23rd Dec however put paid to these carefully laid out plans. We were stuck for 7 hours at the Heathrow airport (including 4 hours in the plane sitting on the tarmac) before the flight was officially cancelled. So we find ourselves, back in our little apartment, just the three of us, eating a Marks and Spencer pre-prepared Christmas dinner.

Some flights managed to leave. Some friends travelling on another flight arrived in Rome and texted us last night when they were heading to the mass. We are naturally disappointed and frustrated, asking the inevitable question "Why us?" But during this important season for Christainity, we hold on tightly to our faith and trust that God has His reasons for this too.

Tony Blair's Conversion

Besides the big fog, one of the more interesting piece of news that emerged during this festive season was the conversion of former prime minister Tony Blair to Catholicism (and here). Of course, what religion he chooses is entirely a private matter, but such is his stature that his religious views have become national news. Most catholics welcomed his conversion, but there were some who were less generous even during this festive season.

Among them was a Conservative MP Ann Widdecombe (herself a Catholic), "If you look at Tony Blair's voting record in the House of Commons, he's gone against Church teaching on more than one occasion. On things, for example, like abortion," she said. "My question would be, 'has he changed his mind on that?'"

Not only on the issue of abortion had Tony Blair gone against the teaching of the Church. He supported stem cell research. He too supported civil unions for gay couples, and his government had passed an anti-discrimination legislation that granted gay couples equal rights to adoption despite the Church's loud protestations. Mr Blair famously said he was sick of "effing prelates getting involved in politics and pretending it was nothing to do with politics".

Separate Religion and Politics

Ms Widdecombe however glossed over perhaps what I thought was the most important point: many catholics support the separation of Church from politics. Even though I am personally aghast at the idea of abortion, I recognise that it is on balance better to keep abortion legal than to criminalise it and drive it underground. Likewise, though homosexuality is against the Church's teaching, many catholics are strongly against homophobia.

The Church is the guardian of Christian morality, it rightly has to take a public stand on many issues. But the prime minister has to care about the good of all citizens. Public policy should be made with public interest in mind, which includes the interest of atheists and agnostics, and not be pigeon-holed into the doctrines of any religious groups. Tony Blair should not have to apologise (not to us anyway) for policies that are against the Church's teaching.

The Post-Bureaucratic Age

When I first returned to London in late September for the new school term, the new Prime Minister Gordon Brown was still riding the crest of a wave of popular support. It was the so-called honeymoon period for the new office holder. Since then, he has become the subject of much political ridicule.

Brown's Troubles

First, Brown prepared for a surprise election to cash in on his popularity. Except that the surprise was how he “bottled it”, after it emerged that the Conservatives’ promise to cut inheritance tax made them popular with voters. The opposition leader David Cameron threw down the gauntlet and Brown blinked.

Second, there was the case of the government miscounting immigrants. What was more shocking was that it emerged that illegal immigrants were even contracted to work for the government security services such as the police. Brown’s car was in fact guarded by an illegal immigrant. Then came another shocking announcement that the personal data and bank account details of 25 million child support recipients were lost (including mine!). Last week, I received a letter from the British government to apologise. The letter said that they suspected, but could not confirm, that the data discs to be still within some government office. The government is now putting up a reward of 20,000 pounds for the missing discs, which in my opinion is ill-advised. Given how easily data can now be transferred, downloaded and uploaded, this reward simply creates for more temptation for mischief.

All these occurred while the economy was deteriorating, house prices falling, and the bailout of Northern Rock swelling with no resolution in sight. The bailout of Northern Rock is costing the British government almost 30 billion pounds (or 90 billion Singapore dollars). It is an astonishingly large number, which means that every man, woman and child in the UK has incurred a debt of 500 pounds to bail the bank. There is no guarantee that this loan to the bank will ever be repaid.

Finally, there was this political scandal where the Labour party and Labour ministers were found taking campaign contributions without properly declaring the source, thereby breaking the very laws they themselves wrote. Last week, the acting leader of the Liberals almost brought the roof of parliament down when he likened Gordon Brown to Mr Bean. According to the polls, Conservatives’ support rose to the highest level since Margaret Thatcher.

But do all these really constitute a sea change in British politics?

A New Philosophy?

The fact that the government is in a rut does not necessarily mean that the opposition is ready to govern, or that people would trust the opposition enough to vote for it. David Cameron has often been branded as a policy lightweight. However, Brown’s troubles have presented Cameron with an opportunity to shake off his timidity. In recent weeks, the Conservatives are announcing more policies, and a political and governing philosophy is gradually emerging.

Cameron calls it the Post-Bureaucratic Age (here, here and here). This is his indictment of the Labour government, "No longer committed to nationalisation of the economy, Labour instead devoted their energy to the nationalisation of our society. No social problem, no public service was considered immune to the magic touch of the master bureaucrats. Everything would be achieved through the benign intervention of a new army of technocrats, equipped with the latest in bureaucratic weaponry, initiatives, units, tsars, strategies, partnerships, pilot programmes, roll-outs, co-ordination and evaluation. At the head of this army of interventionism was the bureaucrat-in-chief, Gordon Brown."

My instinct is that Cameron is right. Blair, as the chief of New Labour, probably understands how the world, the economy and people's aspirations have changed while Brown doesn't.

The New Third Way

In style, what Cameron is now doing very much reminds people how Clinton and Blair wrapped themselves in the Third Way agenda to break out of the left vs right ideological logjam of that era. In short, David Cameron is styling himself to be Blair’s heir – constructing a political narrative to fundamentally change the relationship between the state and citizens. The government is essentially a network of bureaucracies, and bureaucracies do not improve people’s lives in the long run. While Brown wants more power to the state to help change your life, Cameron will cut back the state to let you change yours.

Though Cameron has yet to give enough policy substance to this ideology or done enough to convince the voters to trust him, I suggest that the political pendulum in Britain – after years of rising taxation and ever greater interference of government in daily lives – might just be ready for the turning. There is a good chance this chap Cameron will become the next British Prime Minister.

[This post was discussed with, and approved by Grace.]

The Price of Failure

I watched England knock themselves out of the European Championship last week - when they needed only a draw, on home ground, gifted the first goal to the visitors, a team that had already qualified. One could not have imagined a worst manner to lose. The head coach, Steve McClaren, must undoubtedly take much of the blame. If I were to discuss his ineptitude, I could easily go on for hours. But that is not the point here.

Mr McClaren defiantly refused to resign after the debacle when it was clearly the honorable thing for him to do. At least Kevin Keegan had the integrity to admit that he was not up to the job and resigned on his own accord. Instead, Mr McClaren waited for the FA to sack him the next morning, which was a foregone conclusion.

Where is the honour, Steve?

It was later revealed that Mr McClaren stood to receive 2.5 million pounds as compensation - or more than 7 million Singapore dollars for failing to get England past a supposedly easy qualifying group. The next morning at the press conference, a reporter questioned whether financial motivations were behind his refusal to step down. He denied it of course, what else could he have said? But his almost immediate purchase of a villa in the Carribean (reportedly costing 1.9 million pounds) spoke volumes of this man - one without honour. But McClaren was not an isolated case. Sven Goran Eriksson also received a large payout for his early termination of the contract, in the region of 6,500 pounds per day over a year for not working!

Golden Parachutes

Large as these payouts seem, they are truly peanuts compared to the Golden Parachutes in the financial sector. Merill Lynch's ex CEO received an astronomical US$160 million for getting the bank into the subprime mess. Citi's Charles Prince received a mere US$42 million but it was still too many zeros in my opinion. Never mind the large salaries society awards to superstar atheletes, movie celebrities or corporate movers and shakers. How on earth can people tolerate these kinds of payout for failing is something that truly escapes me.

The Measures of Inflation

Inflation in Singapore has gone up in recent quarters, prompting understandable anxiety amongst consumers. In the answer to a parliamentary question, the minister stated that consumers could choose cheaper alternatives to minimise the impact of rising prices. I shall not wade into the big debate whether it is a good enough or adequate answer, people have perhaps already made their minds up. But just to highlight some pertinent points concerning inflation measure since I have been reading some pretty inaccurate economics.

Suppose the price of pork goes up relative to fish, the rational utility maximising consumer will switch from pork to fish consumption. This is simply the substitution effect. But the basket of goods making up the Consumer Price Index (CPI) is often kept constant, and hence do not capture this substitution effect (Laspeyres Index). This is true therefore that this measure overstates the impact of price increase on the standard of living.

In other words, holding income constant, the standard of living does not fall as much as the increase in CPI suggests. The only case where the Laspeyres Index does not overstate actual inflation is when all goods in the basket have the same percentage price increase. In that case, there is no substitution effect since relative prices remain unchanged. Political considerations aside, the parliametary answer is essentially sound. Further reading can be found here.

Inflationary or Disinflationary?

Rising oil prices, falling US dollar, skyrocketing commodity prices all point to more inflation for the US economy, or do they? What about the effects of a slowing economy and falling house prices? Just a couple of years ago, the world was toasting to the Goldilocks US economy, growing without inflation, not too hot and not too cold. Now, it is a case of one foot hot and one foot cold, a real dilemma for central bankers.

Asymmetric Monetary Responses

The story went like this. The benign global economy transformed by the supply side revolution of China and other developing economies had brought great benefits in terms of output expansion. Interest rate stayed as low and for as long as they had been for a long time. Even though general consumer price inflation was low, asset prices like housing started to bubble over worldwide. The Greenspan doctrine was that it was too dangerous for central bankers to try to target asset prices, so they were left completely unchecked as the rest of the economy coasted along.

Suddenly there was the realisation that asset prices could no longer be sustained, and the bust came at a time when the world was beginning to face a supply side shortage. Commodity and consumer inflation started to rise, but assets began to deflate. It is easy to treat a patient with fever, give the medicine to bring the temperature down. It is equally easy to treat a patient with hypothermia, just warm him up. But what do you do to a patient with fever and hypothermia at different parts of the body at the same time? This is exactly Tinbergen's dilemma, how do you hit two targets with one arrow? You pray!

Cutting interest rates to support asset prices would risk sending inflation even higher. Not cutting would risk making the post-bubble financial turmoil worse. By December, we will know if Fed is indeed serious about the inflation fighting or is it really an emperor with no clothes. My personal assessment is that Fed will have to make more cuts, even if it strenuously denies it at the moment.

It is also here that the Greenspan doctrine ties itself to intellectual knots. To leave asset price rises unchecked, while opening the door for interest rate cuts and bailouts when asset prices fall is exactly the kind of policy asymmetry that leads the market into making one-sided bets. Revisionist talk this is not, many economists have long been arguing that monetary policies were too loose too long.

Risks for Rest of the World

As difficult a job as the one Bernanke is doing, we have to remember this. When Fed weighs in on its monetary policy stance, it cares only of the risks facing the US economy. Given how dependent the rest of the world is on the US, this is an extraordinary situation. By cutting interest rates and driving US dollar ever lower, it places severe strains on economies elsewhere. Those countries pegged to US dollar will face either higher inflation, or will have to abandon the peg altogether, both of which will lead to more financial turmoil.

The Euro and Pound are both soaring relative to the US dollar at a time their own economies are too entering the down cycle. Just yesterday, French President Sarkozy fired off a warning shot that US could not expect to devalue its way out of trouble of its own making, and implicitly threatened competitive devaluation. While he in reality did not have control over the ECB, he very much captured the mood over in Europe. The sense was that the European economies were at the short end of it all, being punished for someone elses' sins.

What we have seen in the past three months is probably only the beginning act of a period of economic turbulence.

Not a Short Downturn

Two months ago, I suggested that markets were overly exuberant after Fed's first rate cut, which if you recall sent US and local stock markets to record highs - as if the subprime problem never occurred. The market rallied, and for two months I was wondering if I was missing out on something. But the problems associated with the US housing market have not gone away. The US financial system and overall economy cannot return to good health before the housing market problems are worked off.

Property as a Collateral

Compared to other assets, housing property is very unique. A large section of the population own it, with most people taking out mortgages in the process, using the purchased property as the collateral. If you buy a $1 million house and borrow 80 per cent, your net worth is $200k. A 10 per cent increase house prices will increase your net worth by 50 per cent, while a 10 per cent fall in price has the opposite effect of minus 50 per cent.

Conversely, a 10 per cent decline in the stock market does not have the same macroeconomic ramification since not many people own shares directly. More pertinently, not many people borrow or leverage to buy shares.

The effect of using property as a collateral is that small changes in house prices can have a large impact on the net worth on many people, and its macroeconomic impact therefore significant. As the net worth of individuals falls, many activities in the economy are dragged down with it. For example, if an entrepreneur has taken out a loan against his property to fund his business (like many small businesses initially do), a housing downturn will have financial consequences for the business itself.

For most consumers, the wealth effect - and even the psychological impact of falling house prices - will lead many to cut back on consumption. The bad loans on the banks' books will force them to cut back on lending as well, hence the credit crunch.

Feedback

What compounds the problem is the feedback effect. The effect of more foreclosure is to send housing prices even lower, hitting the net worth of families with previously healthy financial balances. A LSE Professor Kiyotaki - now in Princeton - modelled this effect. Because of this feedback effects, the initial shock is propagated, resulting in dramatic, and prolonged, negative impact on the rest of the economy which is unlike stock market corrections. It is for the same reasons why Japan took so long to recover from the asset bubble. If you recall, Singapore's economy also took rather long to work of the excess of the last property bubble.

Alan Greenspan has repeatedly warned that the housing inventory in the US is still very large. There is still an estimated 9 months' worth of excess supply, not including those property put on fire-sale in the market. Overall, US housing prices have fallen only very little (average of about 5 per cent or so), and there is therefore a long way to go potentially. Some metropolitan areas in the US are expected to see at least a 20 per cent price decline. It is going to hit the families, banks and financial system hard.

On and off, we will no doubt get some good news to push the markets up a little but have no illusions about it: this US downturn will not be a short one.

Save the Generals, Save Burma

The moment the monks began openly defying the military regime in Myanmar, there was always going to be only one outcome - violent suppression. The fact that blood was spilled should not come as a surprise to anybody save the most idealistic and naive. The logic is perfectly simple - dictators who lose power often lose everything, and sometimes even end up in tribunals. Any rational person faced with this set of odds would always resort to violence to save himself.

A Heuristic Game Matrix

The above is a simple game matrix. On the left, we have the General, who has two courses of actions (Suppress, Not Suppress). On the top, we have the People, who can choose to (Revolt, Not Revolt). The payoffs are given in the 2x2 matrix, the number on the left denotes the General's payoff while the number on the right denotes the People's payoff. The payoffs applied here are very simple. If the General does not suppress (and his People do not revolt), his payoff is 100. Every time the General suppresses, he pays a political price and his payoff drops to 50. However, if the People revolt and the General does not suppress, he loses everything and gets 0. Whenever the General suppresses, the People's payoff becomes negative (bloodshed).

Clearly, the best outcome for the People is that they revolt, the General not suppress, and the revolution succeeds. In that case, the People gets 100. But is this a rational outcome? No, it cannot be. Faced with the outcome of losing everything when the People revolt, the General surely will suppress. Bloodshed is inevitable.

Rewarding the General

Can we ever find a way out of this logical jam so that the People can be better off? Yes, it is indeed possible but only if we come down from our moral high horse. Consider the next matrix.

There is only one number that I changed - in the lower left box where the General's payoff is changed from 0 to 75 (it has to be larger than 50). Immediately, the lower left box of (Not Suppress, Revolt) becomes established as a Nash equilibrium. When the People revolt, the General will choose not to suppress and get the payoff of 75, which is greater than the 50 he will get if he suppresses.

Logical Response

What does this simple analysis tell us? Short of a military intervention to carry out regime change, no amount of outside pressure or condemnation can ever help the Myanmese people. Sure, outside condemnation hurts but only as far as reducing their payoffs for the generals. But faced with the prospect of losing every thing should the revolt succeed, the only logical response is for them to suppress. The greater the threat, the more brutal the suppression.

Instead, the only way out is for the world to reach a settlement with the junta that rewards the generals for non-suppression. This may sound morally odious to those who believe that the generals should be punished for their crimes. But by cutting off the exit for the generals, we are in fact condemning the Myanmese people to more bloodshed. Herein lies the big moral dilemma. Should we reward the perpetrators of violence?

Swallow our Moral Indignation

Are there any historical precedents? Plenty. South Africa comes to mind first and foremost. Former white regime members were not tried for their crimes against the black people, there was merely the Truth and Reconciliation Tribunal where the whites were asked to confess their wrongdoings. Pinochet in Chile was made Senator-for-Life and continued controlling the armed forces even though the civilians were supposed to be in charge. Nearer to home, we have Marcos. As he was a key US ally during the Cold War, the US provided a safe haven for Marcos and his family to take their billions and comfortably retired to Hawaii.

Swallow our moral indignation, provide a safe haven for the generals with state protection, let them keep their billions, and guarantee that they never have to face any tribunals. To help the Myanmese people, we must consider rewarding the generals even if it is morally and politically difficult for us to do so.

A Simple Welfare Analysis of Borrowers and Savers

One of the missing piece in the discussion on CPF returns is the peg to HDB housing loan. This is an important point of consideration since any increase in CPF rates will have considerable welfare consequences on these net borrowers - people who took out a HDB loan which is larger than the available balances they have in their CPF accounts. I too was once a net borrower, when I first got married, emptied my OA, and took out a loan of almost $200K from HDB for my flat.

As we know, HDB loans are granted at a concessionary rate of 2.6 per cent, pegged at 0.1 per cent above ordinary accounts (before new changes are introduced). We do not need to know the details about the intra-government financial arrangements, but it suffices to note that for HDB to grant the loans, the money has got to come from somewhere.

I set out then to compare two sets of outcomes using highly simplified assumptions. These assumptions are meant to follow closely to how the current system operates, but I ignore some complicating rules where they occur (I will tell you where they are in the course of the post).

The Life Cycle of a Hypothetical Couple

A young couple starts working at age 25 with a combined income of $35k per annum. Every year, they get a wage increment of 2 per cent until they are 50, after which their wage stagnates. For simplicity, they are assumed to be continuously employed from 25 to 65 until they are retired. They save 33 per cent of their income and consume the rest. At age 30, they make a major decision of their lives to buy a HDB flat and in the process take out a 30-year $250k loan to finance that purchase. How would they fare with and without the CPF system?

With the CPF system, their savings (which is 33 per cent of income) is split between OA (which pays 2.5 per cent returns on net balances) and SMA (which pays 4 per cent). I ignore the changes in contribution rates for different age groups and contribution cap for convenience, and savings is split 65/35 between OA and SMA. The mortgage payment can only be deducted from the OA account. The interest on their mortgage is 2.6 per cent. The rules I applied here are a good approximate of how the current system functions.

Without the CPF system, they can invest their savings (again 33 per cent of their income). I posit several scenarios of long term returns (4 to 7 per cent). However, without the CPF system they can no longer borrow at 2.6 per cent for their property since the government can no longer supply that source of fund. The couple will have to borrow from the market at 4.5 per cent, which I believe is a fair estimate of long-term borrow cost. Of course, this parameter can be adjusted and the results re-evaluated in a sensitivity analysis.

Retirement Funds at Age 65

How would the couple fare under the two different systems at age 65? How much retirement funds would they have with the different systems? It turns out that the couple which starts out with $35k income is better off with the CPF system, mostly. Why is this so? In the earlier part of their life-cycle, they are net borrowers who take out a loan for their property. Since they have very little net balances in their OA account (because of mortgage deduction), any increase in CPF rates are not going to benefit them.

Conversely, they enjoy a 2.6 per cent interest rate on their property, which saves more than $3000 per year in mortgage payment each year over a 30-year period as compared to if they have to pay the assumed market rate of 4.5 per cent. Unless they are able to do very well with their investing their savings in the market, they are better off enjoying the concessionary housing rate that comes with the CPF scheme.

The High Income Couple

In the second spreadsheet, I change the couple's starting pay to $70k per annum. This is therefore a high income couple compared to the previous example. The high income couple is better off without the CPF system. Why? As they have high income, they become net savers much earlier in their life-cycle given the same loan they took out. As a result, the CPF accounts do not offer them a rate of return that matches the 4 - 7 per cent assumed to be offered by the market. They are better of without the CPF scheme - that is, to forego the concessionary loan rate and then be free to invest their savings in the market.

Winners and Losers

What does this whole exercise tell us? First, it confirms the simple microeconomics principle - borrowers lose when interest rate rises. On the other hand, the high income couple is mostly likely better off if their net savings is freed up to be invested in the market. The analysis between the two systems is sensitive to assumed rates of returns offered by the market, risks, income profiles and many other parameters. But within fairly reasonable estimates, the general result holds.

Second, if CPF has to increase its returns to members and at the same time passes on the cost of funds to other agencies including HDB, borrowers would have to fork out more for their mortgage. There is a real possibility of many poor families may end up net losers if that happens. The microeconomic consequences of pushing up CPF returns is therefore not clear cut. From whose perspective are we looking at when we say that CPF rates are too 'low', borrowers or savers? If indeed there is an element of welfare transfer, it is from the rich savers to the poor borrowers.

The fact that CPF has a net total balance of more than $120 billion may suggest to some that there are huge surplus savings. But remember, we have to knock off a couple of billions that belong to W Malaysians and not Singaporean households. And also that HDB obtains loan from the government at CPF rates in order to lend to purchasers (who borrow at 0.1 percentage point higher). How much does HDB 'owe' the government as a result of mortgage financing? $55 billion in total as of 2006. Let's assume all this is disbursed to borrowers. After accounting for all these, the net savings position falls significantly.

Furthermore, we are only talking about aggregate numbers and they mask the devils in the distributional details. How many net borrowing families are there? The number surely is not small. In fact, it is entirely possible that for every one rich net saver into the system, there are many more net borrowers. If that is indeed the case, and if rates of returns are pushed up, the number of losers will outnumber winners. Worse, the distribution will be in favour of the rich and against the poor.

It is really 'not so simple'.

CPF Reforms: Why Government's Critics Mostly Miss the Point

The major piece of CPF reform was supposed to be about the Compulsory Annuity Scheme (my views here and here). Nevertheless, the relationship between Government investment vehicles (namely GIC and Temasek) and CPF has received much of the attention instead. I was absolutely tickled with Chua Mui Hoong's quip, "The more you know, the more you realise you don't know."

Indeed, we do not have complete knowledge on how the government channels savings into the various investment vehicles. But the fundamental dissatisfaction with the CPF system is simple - the low returns relative to what the government reports on its investments. The bugbear is therefore the difference between the high investment returns of the government's investment vehicles (reported as 9.5 per cent for GIC and 18 per cent for Temasek) and low CPF interest rates.

The Famous Bank Analogy

When pressed on the difference, the Manpower Minister deflected the questions with the bank analogy - that depositors enjoy a fixed rate and cannot go to the bank to ask for higher returns. Not surprisingly, many bloggers disagree with this line of argument and continue to argue for CPF rates to be in some manner pegged to GIC or Temasek returns. Since some of these calls come from politicians, I shall refrain from making any explicit links here. My point is totally apolitical.

Why Returns are Not Low

My concern is strictly that of an economist. I maintain my stated view that CPF returns are not low on several accounts. First, it is risk-free, a position also reiterated by the government. Second, young Singaporeans also borrow at this preferential rate (0.1 percentage points above) to fund their housing purchase. Borrowers do benefit from this same cheap rate. Third, there are also other investment possibilities through CPFIS if a member is willing to tolerate higher risks and takes responsibilities for his own financial decisions. Fourth, property prices have seen a long run secular appreciation way in excess of 2.5 per cent. Those who borrowed at the cheap preferential rates would have made good excess returns, in addition to not having to pay rent.

Is a GIC Peg the Solution?

Let's just assume that there is one government investment vehicle, GIC. Let me then move on to address the pegging of CPF to GIC returns: Is this a good idea? Again, I am only concerned about the optimality of the institutional arrangement between CPF and GIC. I am therefore not addressing the socio-economic or even political consequence of the current relationship between GIC and CPF.

Let's take at face value that CPF board purchases government bonds that pay a 4 per cent return, risk-free, year on year. The government then, directly or through various channels, invests the proceeds which over the long run get 9 per cent returns. Is there an institutional arrangement that can somehow transfer these returns to the millions of CPF account holders?

A Principal-Agent Problem

The difficulty here lies in the principal-agent problem. Consider a simple example. The boss (principal) pays the worker a fixed wage for the worker (agent) to put in effort to maximise profits for the company, but the boss does not observe the amount of effort which the worker puts in. The optimal response of the worker is always to shirk since the boss cannot tell. Because of the asymmetry of information, this contractual arrangement results in suboptimal outcomes. The worker will never put in effort for the company.

The only way to overcome this is to make the worker the residual claimant or the profit owner. That is, the boss collects a fixed rent and leaves the rest of the profits to the worker. Since the worker now gains the benefits, he puts in effort and this arrangement results in optimal outcomes. The economic principle is simple: whoever controls the amount of unobservable effort must be made the final claimant of the rewards that come from this effort.

GIC and CPF: An Optimal Arrangement?

The institutional arrangement between CPF and GIC is therefore an optimal one. Here, the CPF Board, which is the custodian of people's savings, can be thought of as the principal. GIC, which invests the money, is the agent.

The optimal arrangement is therefore one that CPF receives a lower fixed amount while the GIC receives the higher excess. This point is further reinforced by the fact that the principal in this case is risk-averse. It therefore makes most economic sense for risk-averse citizens to get a fixed rate while allowing the government to bear the risk. To extend the argument a little, can CPF board demand a high fixed return, say 7 per cent, and leave GIC with the rest? Think about a real life principal-agent problem. If you pay the CEO with stock options that have very high strike price, the CEO simply takes on huge risks in order to have any chance of seeing the money, again to the detriment of the company. The principal-agent problem strikes again!

To peg CPF returns to GIC is therefore bad on several counts. First, it transfers investment risks to risk-averse citizens. Second, it potentially makes GIC behave sub-optimally. Worse, since investment assets are 'fungible' and returns not fully observable, it creates incentives for false-reporting. The agent will find ways to realise losses, postpone gains, and cook the accounts to reduce the payout to the principal.

In the end, the point is a simple one. The only way to make government watch over the country's money as best as it can is to let it behave as if it owns the money! Any other institutional arrangement will not achieve this optimality. Rather than increasing returns to CPF account holders, a GIC peg may become an institutional nightmare that creates more problems than it solves. The argument will run on.

Where Has the Exuberance Gone II?

Clearly, I spoke too soon. The exuberance is not gone from the market, it is in fact being stoked by the Fed ("Cheering Greets Fed Announcement"). I find myself to be a rather curious situation. I personally want a significant interest rate cut because it will be good for my portfolio, but I am against it in principle. I am probably not the only one feeling really mixed here. Even as the markets record the highest one-day jump in years, 2/3 of Financial Times readers are against the half-point cut.

Poor Growth or Poor Policies?

Over the past decade, the Fed has given the impression that it fears economic slowdowns more than it fears bad policies - a willingness to stomach all kinds of economic imbalances to promote growth. In 1998, it cut interest rates and organised a bailout on LTCM. In 2001, it slashed interest rates aggressively to contain the fallout from dot-com bubble.

Listen to what the Fed actually said - "Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

The disruption in the financial markets stemmed from the burst of the US housing bubble, a real problem created by excessively low interest rates and excessively high liquidity. Yet, in a reverse of logic, we are now hearing the Fed say that the interest rate cut is necessary to prevent the financial markets from hurting the real economy.

Whatever the problem, the solution is always the same: interest rate cut (the so-called Greenspan Put). It does not matter what the root of the problem is, such as excess liquidity in the housing sector. The Fed solution is always the same - more liquidity to ease a problem created by excess liquidity.

I am neither monetary economist nor central banker. But a Fed that has lost its stomach to take an economic slowdown is increasingly one that the markets have no respect for.

Where Has the Exuberance Gone?

Even though it is only September, June seems like such a long time ago. Back then, markets were on record highs every where, Dow crossed 14000 and STI almost reached 3700. Three months later, not only has the exburance evaporated, confidence in the global financial system has taken a serious hit.

Locally, a lot of hot air has also escaped from the property sector. People who were busy talking prices up three months ago are now talking about a correction. With the uncertainty, illiquid assets like property would be the first to see their ask-bid margin widen. Some units in my neighbourhood have slashed their asking prices by 15 per cent since August but are still left on the market unsold. Many sellers continue to ask for optimistically high prices given the illusion of a bullish market when you flip the ads, but the reality is that the number of transactions have fallen.

The global credit crunch, triggered by the subprime crisis, has produced the first bank run on Northern Rock in the UK. The case is interesting, and grave, for several reasons. Northern Rock did not have any known losses to the US housing market, its credit simply dried up due to events elsewhere. Most analysts continue to reckon the bank to be a viable business but the nature of bank run is always about confidence, rather than solvency. Though Northern Rock is a relatively small bank, the wider implications are already beginning to be felt. The UK housing market boom is now on wobbly legs. Forecasters are already saying that the financial and housing market turmoil could hit the UK economy in 2008 and 2009 by as much as 1 percentage point (which is significant for a mature economy like the UK).

A US recession (some would say long overdue) is also an increasing possibility. Stock markets actually rallied in the past month or so since that Friday, hoping for Fed to "ride to the rescue". The markets again got ahead of itself, STI crossed 3500 again as if the subprime crisis never happened. But as events in the UK show, confidence is clearly fragile. Any interest rate cut by the US carries risks of stagflation, unwinding of the Yen carry trade, and a further fall in the US dollar that will hurt export-dependent Asian economies. Meanwhile, Greenspan goes around hawking his own book as if determined to talk the economy down (more consultancy fees Alan?) and as if none of this has anything to do with him.

Where is the silver lining in all these? For years now we have been hearing about the great Asian growth story of China and India. Many analysts continue to believe that Asia will be stong enough to weather any US downturn. The next 12 months would be interesting. There is a good chance that this hypothesis would be put to the test.

Insurance Misunderstood

In 2005, Liverpool reached the finals of the Champions League (European Cup) for the first time in 21 years. Liverpool was clearly underdog to the stylish AC Milan. Big underdog. A lot was riding on that one match - Liverpool was 5th in the league that year, which meant they would not qualify for the competition the next season if they didn't win. Their captain, Steven Gerrard, would probably have gone to Chelski if that happened. These were terrible prospects for a Liverpool supporter like myself.

Should I Bet on My Team?

The question was: Should a Liverpool supporter bet on Liverpool or AC Milan? (do answer or make a guess before you read on).

Suppose I was risk-averse and that I placed a bet with AC Milan. If AC Milan won, I would be compensated monetarily instead by winning the bet. If Liverpool won, the amount I placed on the bet would be lost, but it would hardly matter since the joy of seeing my team win would be great. Effectively, placing a bet against my favourite team Liverpool (and on AC Milan) became an insurance policy for me. On the other hand, placing a bet on Liverpool would have exposed me to more risk since I could potentially suffer the double agony of losing both game and bet.

What appears counter-intuitive to the lay person becomes perfectly rational for a trained economist - betting against your favourite team is the route to greater happiness! It sometimes comes as a surprise to me how few people understand this principle. Even when I pose this question to a class of economics undergraduates, 80 per cent would get it wrong despite hours of lectures and classes on insurance.

History would show that I didn't win my bet on AC Milan in 2005, but did it imply that I "lost"?

The Outcome You Do Not Want

The simple example provides an important lesson - always bet on the outcome you do not want for insurance. You buy a car insurance so that you can receive compensation when you get into an accident. If you "win" the bet with the car insurance company, you would have been involved in an accident already - clearly an outcome you do not want! When you "win", you have in fact already lost.

Therefore, my bet on AC Milan was actually one I would rather not win. Likewise, I would rather pay for healthcare insurance and never have to claim it. When it comes to insurance, it is not a good thing in general to "win" against the house (insurance provider)! The notion that we should buy insurance and try to win against the house is simply preposterous.

Purchasing an insurance guards the individual against downsides. For the risk-averse individual, the insurance offers a peace of mind which improves his welfare regardless whether the payout is claimed or not. A car insurance gives me the peace of mind to drive on the roads - knowing that my financial losses are covered. I buy because I am risk-averse. Whether I get a payout or not in the end - surprise surprise - is actually a moot point.

All Can Be Better Off

Let me turn to the longevity insurance proposed by the government (my writeup here). Many bloggers believe that if an individual does not live till 85 to get the payout, he would have "lost" the bet against the house and be worse off as a result of having paid the premium all those years. I hope by now the reader can see that this is an unsound understanding of insurance. Insurance is not a zero-sum game, one does not lose just because he is not getting the payout.

The idea of an insurance policy is that with a small payment, an individual can guard himself against desperate outcomes, thereby offering a peace of mind if he is risk-averse. The longevity insurance allows people to smooth consumption over their natural lives and not worry about money running out at 85. When risk-averse people pool their risks together, it is possible that everyone gains regardless of who gets the payout in the end.

To sum up, don't worry about kicking the bucket at 84. Living till 85 and collecting the payout does not mean you have "won" either. If you are desperate for $250 at age 85, it means your money has already run dry - hardly an outcome you want.

A Right Step Towards Risk Pooling

A couple of months ago, I suggested here (not wholly originally) that the major problem of the CPF system was not that returns were low, but the lack of risk-pooling to guard against "longevity risk".

First on the issue of returns. Based on the sketchy information that has been brought to the public in the two days since N-Day rally, CPF returns would indeed be boosted by giving members a higher "expected" rate that would fluctuate according to market conditions. Obviously, higher expected returns would be accompanied by some risk. The interesting question is - if an individual is more risk averse, can he opt for a fixed 4% interest instead?

The bolder proposal being discussed is the "longevity insurance" - citizens contributing towards a national pot, from which senior citizens aged 85 and above would be paid from. The idea of this is simple enough but it represents a key shift for it is the first time a form of national insurance for retirement (either cross sectionally or inter-generationally) is introduced. When my mother-in-law (a youngish 52) heard the proposal as it rolled out at the 10 o'clock news, her first reaction was, "Why should I be paying for others above 85". As Singaporeans are brought up with the idea that CPF account belongs to the individual, it may be difficult to accept that setting aside a small fraction into a common pot for insurance is in fact beneficial to every one.

From an economic point of view, the proposed policy is indeed a right step forward - and a very smart one in fact. First, the scheme is likely to be mandatory. Otherwise, since an individual is most aware of his own health status, only those who think they can outlive 85 will participate in the scheme (averse selection) making it less sustainable. Some critics however argue that mandatory participation would in fact disadvantage the poor since they have a lower life expectancy and the scheme would be actuarially unfair to them. But my sense is that this problem is small compared to old age destitution when retirement funds run out.

Second, notice that the pay out age of 85 is also set above the average life expectancy. Suppose a worker stops working at 65, he would have to live on his own retirement funds for another 20 years before he could dip his finger into the common pot. In other words, the worker would still have to save up for his own retirement (of 20 years at least) before the insurance element kicks in.

In economic parlance, the 20 years is the "excess" - like how we often have to pay for the first $500 of damage when we file a car insurance claim. The purpose of this "excess" is to reduce the moral hazard problem that always occurs with insurance. Because he still have to worry about 20 years of his retirement, the worker still has strong incentives to build up his personal retirement account even though he is insured past 85.

As expected, the loss of control of a portion of retirement fund has given rise to some unease ("coerced annuity"). Rather than seeing it as coercion, a better way would be to understand the true nature of this proposal, which is essentially a social safety net for the advanced old. But the nature of having a social safety net is as such - there must be contributions by all to support and sustain this safety net. In principle therefore, building in some element of risk-pooling into our CPF system is the right step forward. The proposal also cleverly reduces the moral hazard problem. The government should be given some credit for creative thinking.

Market Hazards

Like Lucky, I have spent most of my last three weeks tracking the subprime crisis, the market and my portfolio. Blogging comes second to watching my housing and retirement funds. Perhaps I would write something about the economics of it some other day when things are calmer. When the market is in this mood, there is really not much point in talking about fundamentals. Even as I tried to offload stocks over the past weeks to stem the losses, my portfolio kept shrinking. I am not losing sleep yet, but it doesn't feel good.

This morning, the STI fell below 3000 points, a decline of nearly 5 per cent at one point. I searched and asked around for the 'trigger' - what new information came into market to trigger this morning's selloff. Apparently, there was none. One analyst said that the market was very frightened, but it was not entirely sure what it was frightened off. A friend of mine working in the finance industry told me that we were in the "tail chasing dog" territory. The sharp fall was trying to find a reason to justify itself !

Indeed, as I look at the balance sheets of some of the blue chip companies, their profits, the cash they hold, there simply isn't any credit or liquidity crunch of any sort. But I remember a quote, "The market can stay irrational longer than you can stay solvent." Nevertheless, the market cannot stay irrational forever. Looking at the valuations of some of these companies, it would be irrational of me not to put money in. So even though my trading screen was flushed with a sea of red, with trembling hands and a pounding heart, I clicked some buy buttons this afternoon.

[Latest: STI rallied from nearly 180 down to close with negative 20. US Fed has cut lending rate to banks.]

As the day closes, it appears that world markets might have just dodged a bullet today. But be warned, there would surely be more bullets to come. Like Lucky says, we are going through an interesting but terrifying time. My personal take is that one should never aim to eliminate all financial risks and forego all potential returns. Having a clear head about personal finances, staying invested and learning to cope with risks would be a better strategy.

Learning to Tie the Policy Hands

In this post, I argue, using the current red-hot property sector as an example, how too much policy discretion over the economic cycle may actually compromise long-term objectives. Some "tying of hands" or credible commitment on the part of policy-makers can sometimes be better for the economy. The full article can be found on Singapore Angle.

The Economics of Foreign Talent / Workers

This post was first written by Aaron Ng, who posed a really difficult question: whether immigration of skilled workers (talent) lowered the wages of native skilled workers. The same question could also be asked for unskilled workers, whether the influx of unskilled workers depressed the wages of the low-skill, low-income groups.

As we know, immigration is a hot-potato issue that has burnt the fingers of politicians every where from US, Europe to Singapore. The use of economic models are not particularly instructive here because different model settings provide dramatically different answers. At the risk of losing some readers, it is actually a good exercise to try to acquaint with some basic (and not so basic) economic concepts that can help us understand the labour market impact of immigration.

Neoclassical Theories

First, let's try to answer this question with neoclassical theories. By this, we are saying that markets are competitive, work without frictions and in addition, absent of any non-tradable goods. In this setting, all workers are paid the marginal value of the product they are producing.

In a small open economy like Singapore, a large part of what we produce are traded internationally. The influx of workers regardless of types will have no impact on wages (this may come as a surprise to non-economists). The logic is elegantly simple in fact. If more skilled workers enter Singapore, the economy shifts towards the production of goods with more skill content. If more unskilled workers enter Singapore, the economy shifts towards low skilled goods. Since the final prices of goods determine wages, and that Singapore has no influence on these prices internationally, wages are completely unaffected by whichever goods Singapore produces. Immigration has no impact on native wages (this was actually a final year exam question at the LSE recently, the famous Rybczynski Theorem).

For a large country, the effects can be dramatically different since which sector that country specialises in will obviously change international prices or terms of trade. The downward pressure on blue-collar wages here could have nothing to do with immigration. Rather, it is probably because a large producer (like China) has entered that market thereby lowering prices and wages (think electronics) everywhere. Conversely, whatever China demands, prices go up. Mining, pretty much a blue-collar type of industry, is doing really well in Australia precisely because of this China effect.

Depart from the neoclassical setting however, the effects of immigration can be completely different or even messy. Suppose not all goods produced are tradable internationally. There are some goods or services that are inherently non-tradable (think Balassa-Samuelson). If cheap foreign labour enters these non internationally traded markets, price will fall, and so will wages there. Similarly, if a segment of the economy has been protected from foreign competition, the natives there will be earning economic rent. The influx of foreign talent or firms into that sector will obviously reduce that rent and incomes of natives there (think lawyers, doctors etc). These groups surely would resist letting foreign talent or firms into their sector.

Bargaining Power

Lucky Tan suggests that the availability of foreign workers have made firms reluctant to hire native Singaporeans, depressing their wages. Again, this is entirely rationalisable economically. For example, the search and matching class of models (pioneered by a LSE professor Pissarides) tells us just that. When workers and firms meet, both sides have to agree on the wage rate before they enter into a productive relationship. Relative bargaining power will then determine how this economic surplus is split. Reducing workers' bargaining power, which presumably the availability of foreign worker does, will lead to lower wages.

Let me be quick to add that the rise of various emerging economies have also reduced Singapore's bargaining power. Transnational capital, footloose by definition, goes where returns is highest. Before China and India, Singapore was one of the few investment friendly places in Asia. The game has changed dramatically since. In the US for example, labour's share of GDP has fallen in recent years while capital's share has risen. Many commentators are quick to attribute the erosion of labour's bargining power to globalisation.

New Economic Geography

Let me finish this post with a positive spin - immigration can actually increase wages of natives. This is in fact a key prediction of new economic geography models. Firms (under suitable assumptions) have incentives to cluster and agglomerate, and immigration can be part of this agglomeration process. And where they do concentrate, they drive up productivity through various mechanisms. Because of the positive externality that they derive from clustering at certain locations, no firm then have an incentive to leave since they become far less productive elsewhere. When that happens, the location becomes sticky, commanding higher rent and wages. My favourite example is London obviously.

Two Handed Economist

President Harry S. Truman once said in exasperation that he wanted an economist who was one-handed because his economic advisors would typically give him economic advice stating, "On the one hand….And on the other...." This is even more true when it comes to the economic effects of immigration as different economic settings give rather different conclusions. But being a two-handed economist is no bad thing here. It is a sign of intellectual humility to recognise the complexities of the world and not make one-dimensional arguments.

The Lone Tree Hill Incident at Lim Chu Kang

This post has nothing to do with economics. It is about 2LT Lee's letter that skipped the chain of command, weaved into a story about my one major regret. This incident happened more than a decade ago, but I have carried the burden of a blemished conscience ever since.

It was a night in March 1996, my battalion was carrying out a routine exercise in Lim Chu Kang in preparation for the battalion proficiency test. My company was two months away from ORD, and that test would be our last exercise. Armed with a scholarship, I was eagerly looking to ORD and going overseas. In my battalion, there was this young scholar captain who was transferred from another unit. His aloofness also made it easy for others to gang up on him. Because of his lack of experience in our formation, he was only given a platoon commander's job rather than the OC appointment which a captain would usually be accorded with. I suspect other captains, OCs themselves, viewed this scholar with a mixture of contempt (since he transferred from a supposedly less tough unit) and career-envy (he was scholar-tracked, so to speak).

That fateful March night, my S3 asked that he became the point platoon to guide the battalion to the objective, which was the the so-called "lone-tree hill" in Lim Chu Kang. It was a very specific instruction that all officers understood. But in the middle of the battalion movement, my company commander - who was always out to impress - broke away from the battalion movement in order to find a shortcut to the target. Platoon commanders, including myself, tried to dissuade him since we would be going against S3's explicit instructions. But my OC was not to be moved. Our company broke off from the rest of the battalion, and went on a needless 3 km full combat order run just to show that we could reach the objective faster.

When the point platoon finally arrived twenty minutes later, that scholar captain was naturally surprised to see an entire company already at the RV point. He hadn't even realised that my company had broken contact from the rear. Understandably, he confronted my OC straightaway and the two, who never really liked each other, almost came to blows. The rest of the company, including the junior officers like myself, stood there not sure quite what to make of it.

Gradually, other companies arrived. What happened then was a blur - lots of shouting and shoving around to separate the two captains who by then were too steeped in the argument to back down. The rest of battalion just watched. S3 arrived and demanded to know that the commotion was about. My OC, in cahoot with other OCs there, turned around and accused the young captain of showing disrespect, and physically threatening a "senior" officer. Having not been a witness to that incident, S3 had to take the OCs words and reported the matter. Within a couple of days, the scholar captain was relieved of command and became a project officer. He did not take part in the battalion proficiency test, and his career became stunted as a result. The last I heard, he gave up on his army career.

At that time, I was very tempted to shoot an email to my formation chief and commanding officer to explain what happened - how my company commander pointedly violated commands to set up the scholar captain. The email was drafted, many versions, but all saved in my PC. I never did muster the courage to send, preferring to save myself from all the hassle. None of the other junior officers spoke up, they all probably made the same calculation like myself to ORD in peace than to end up in all kinds of trouble with the authorities. But I suspect they too carried the burden of not speaking up, for every time we met up, we would inevitably talk about the "lone-tree incident". I often wished I had the wisdom then to do the right thing. If I meet that captain on the streets again, I would apologise to him. This post, if he is reading, is just that - a belated apology from me for not speaking up all those years ago.

Whether 2LT Lee acted in cunning self-interest, in stupidity, naivety, or only because of his privileged background was largely irrelevant. Speaking up was the right thing to do. The rest were just details.

[Endnote: One of my army friends emailed me and mentioned that he met that captain recently, working in the insurance industry. My OC? I have been informed that he has since been promoted to battalion and then bridgade commmander. How would events have turned out if only one junior officer there spoke up? I often look back and wonder.]

Property Prices Spiraling Out of Reach? And Pitfalls of Property Price Index

Here I am back in Singapore. The effect of the property boom is clearly evident from the numerous construction sites and cranes dotting around downtown areas. The news media reports property market news almost every day. The classified ads screams at you - "Buy now before prices go up!", "Sure En Bloc, it's a matter of time!", "Don't miss the last chance for district 10!" - property agents appealing to both the greed and fear in you. Greed to make a pile from the current boom. And fear that your dream home will forever escape you if you do not act now. The latest URA data showed that property prices rose almost 8 per cent in the second quarter, on the back of a 6 per cent increase in the first.

But let's play a simple number game here. Imagine there are 100 units of property at Bishan, and another 100 units at Newton. They are of the same size, and they have the same starting price. Now, suppose that 10 units of Bishan units are transacted, all suffering a 10 per cent loss, while 10 units of Newton units are transacted with 10 per cent gain. What does the property price index show? If the property price index is based on the volume of transactions, it will show no movement. The gain in Newton is cancelled out by the loss in Bishan.

Now let's rewind and start again. There are 10 units transacted in Bishan, with a 10 per cent loss on each unit. But there are now 20 units transacted in Newton, all with 10 per cent rise. Look and behold. Weighted by the transaction volume, the index trends up, because Newton is now given more weight than Bishan. Come another quarter, if there are even more transactions in Newton, the price index will show even more upward increase, never mind the fact that all Newton units are selling only 10 per cent more - exactly the same as the first scenario. Before you know it, every one watching the price index becomes convinced that prices are shooting up and we have a frenzy in the making. And as they transact, their higher purchase price enters into the weighted index, further fuelling the impression that overall prices are rising.

Here, I thank an anonymous reader for pointing out to me URA's methods, which is something of a hybrid. Based on recorded transactions, the median for a location and housing type is picked. These then enter into the overall index using a value weight. Suppose again Bishan and Newton units are all sold at the same price initially. The transacted price for Bishan then falls 10 per cent, and the transacted price for Newton rises 10 per cent. Weighted by the moving value of the transactions, Newton will have a larger influence on the future direction of the index because it now has a higher value than Bishan. Again, there is a feedback effect where areas with rising prices are given an increasing weight in the index.

Of course, it is never easy to construct a summary statistic that can fully capture the overall price trends. This is even more so since housing property is highly heterogeneous (different) in locations, types and so many other attributes. It is often difficult to interpret the index given the thicket of statistical manipulation that is employed to create it.

But since the idea of this index is to reflect in some sense the affordability of housing space in Singapore, perhaps a good way is to use gross floor area as the weights - that is, Bishan and Newton be given the appropriate weights that reflect their total living space - thereby stripping away any components that might be endogenous in nature. Maybe this might give the lay person a much clearer picture just how affordable housing space in Singapore is.

The HDB Lottery?

[This post was written on 21 June, but was accidentally deleted. It is reproduced here but some comments were lost].

How much does a good unblocked view in a good location add to the value of a property? A lot apparently. As every one probably knows by now, a flat in Tiong Bahru has just been sold for $720K, way above valuation, and double of what the owner paid 7 years ago. It came on the back of another headline catching sale of $672K, another HDB flat in the same area. As noted in the news article, the profit of $350K alone is enough to get the owner a flat in many other estates. The two sales have put those point blocks in Tiong Bahru in the spotlight.

Interestingly, I once visited a friend who lived in one of those blocks. Unfortunately, he did not have an unblocked view. In fact, situated on a lower floor and facing the busy Tiong Bahru Road, I found his flat rather too hot and noisy. The air certainly wasn't that fresh with so many double decker buses running a few floors below. I do not suppose it will fetch nearly the same price in the open market.New HDB flats in mature estates like Tiong Bahru, Toa Payoh, Bukit Merah have always been in high demand. They are much nearer to the city, near to all the amenities and the happenings in town. Here is a situation that the economist in me finds rather curious.

In a normal market, when demand outstrips supply, one would expect the price to move upwards to restore the equilibrium. But when HDB sells its flats, that is apparently not the case. Demand for flats in mature estates often outstrips supply. Rather than adjusting the list price upwards, balloting is usually carried out to determine which lucky applicants get to buy those flats.

That is not even the end of the role of Lady Luck. The lucky ones who are drawn to choose first have the chance of snapping up choice units - high floors, unblocked views, away from afternoon sun. Though HDB charges more for higher floors, the difference between the list price is far smaller than the difference in open market prices. For flats on the same floor, there is hardly any difference between superior facing (say view of city skyline) and so-so facing (say facing another block).

Effectively, the flat selection process becomes a "double-lottery". Those who are balloted to buy and choose first effectively become double winners - getting a choice unit in a choice estate. They pay more certainly, but not nearly as much as the premium the open market places on their flats. Those who did not win the ballot will have to settle for units in Jurong West (facing industrial estates), Punggol (facing the nice sungei) or Sembawang (facing Johor) where I used to live. There is often little potential for capital gains. After counting for interest and renovation cost, I just about broke even when I sold my flat last year. A friend of mine used to joke that Sembawang was the place where even the birds did not want to lay eggs. Oh well, at the very least, a flat in Sembawang is not even worth the $350K capital gain that lucky person enjoyed (you can verify from HDB website).

But it really begs the question, why doesn't HDB operate like a normal firm and use prices to equilibrate demand and supply rather than to depend on Lady Luck? In other words, have sharper price differences between the high floors (particularly those with great views) and low floors, and also between mature and outlying estates? In short, those who desire the great views and convenience, and who are able to afford, should be made to pay for it. By charging those choice units more means that the flat buyers will have to fork out more, thereby reducing the lottery gain (one could also see it as reducing consumer surplus) when they sell in the open market in a few years' time.

Now at this point, some of you will recognise that hey - that sounds like a monopoly exercising market power and practising price discrimination. One could interpret it that way for a simple understanding though it is not strictly so since flats on different floors are clearly not the same. However, since HDB is the only supplier of those blocks with those great views, it most definitely has pricing power to charge each unit as high as the reservation price - the maximum amount a potential flat buyer is willing to pay. This of course is price discrimination.

The word "discrimination" is slightly unfortunate here since it sometimes gives the wrong impression of the actual impact of a monopolist. Practicing price discrimination needs not be a bad thing from the economic point of view so long as it is done for benign reasons. It can even increase total welfare for the country. How so? By extracting the surplus from those who value the great views and convenience (who are paying higher price), HDB can then provide a transfer to those who can less afford to pay, that is, using the extra revenue to reduce the price of other flats to below their cost to help the poorer consumers. This cross subsidy might allow more or better flats to be built for those with less ability to pay, or be used to provide public goods like disabled access, linkways, gardens etc which because of the free-riding problem are usually under-provided. Of course, the subsidised flats will not come with a great view.

So which is a better way - charging willing and able first-time buyers top dollar for the view and convenience in order to cross-subsidise the financially less able buyers, or using a ballot system to decide who walks away with a windfall. It is interesting food for thought, isn't it?

Some Further Discussion on University Admission

Comments over university admissions are still coming in even though I posted the discussion (with an ensuing debate with Mr Wang) one week ago, probably due to the references from Lucky Tan's site. After the initial outburst, I think the quality of discussion has improved.

There is a thread on university education as a signalling device model (due to Spencer), and some discussion on whether polytechnics should be converted to universities (originated from Jimmy Mun). I have also provided some further explanation on the difference between vertical and horizontal differentiation in education, a la Michael Porter, borrowing from some industrial organisation concepts.

Finally, I am flagging a paper I read sometime ago "The Weakening Position of University Graduates in Singapore's Labour Market" by Stephen J Appold (you can google it). The author of the paper discusses some underlying income trends which he sees as evidence that Singapore is producing too many graduates without enough differentiation. I do not agree with some of the things he says and some of his interpretations, but there are some interesting points there.

The discussion may help you gain further insights on the pros and cons of further extending university education for Singaporeans from today's level. Even if it does not change your mind on this issue, it will most certainly help you gain a deeper understanding.

Putting Singaporeans First

Five years ago, if someone were to suggest to me that Singaporeans should always come first, whether with regard to housing, healthcare or education, I would have agreed readily. But as you can tell from my recent posts, I have become more skeptical about these "Put Singaporeans First" instincts.

Back in the 1980s, faced with competitive pressures from Japan, there was also a 'Buy America' campaign. Today, 'Buy America' is probably targeted at cheap Chinese imports. But to those of us who are beginning to understand how inter-connected the world is, such efforts are looking increasingly futile, and are in fact detrimental to the people they are supposed to benefit. It became somewhat of a joke when it latter transpired that many made in America products in fact had foreign components.

Looking beyond goods and services, globalisation has also resulted in greater movement of people from their countries of birth. Immigration and emigration are on the rise everywhere. I mentioned before that 1 in 10 British nationals actually live overseas even as Britain experiences large scale immigration.

Singapore, being a global city-state, is not immune to these forces. I dare say that on the whole, we have benefitted greatly from it. We have many non-citizens (permanent residents, permit holders) working here for large parts of their lives. Many are becoming as Singaporean as you or I. Similarly, there are many Singaporeans working, studying, living overseas for an extended period of time. I am a Singaporean, but I do receive some British welfare benefits because I am studying here.

With the influx of non-locally born students or working professionals to Singapore, competitive pressure inevitably arises - as is reflected in rising rents, house prices, transport congestion or university places. Faced with competitive pressure, the natural instinct is to adopt a 'Put Singaporeans First' mentality. There are also those in Britain demanding that welfare for foreigners be cut, and that British citizens should come first.

Why should we worry about putting citizens before every one else? Firstly, it has become increasingly difficult to meaningfully categorise people into citizens and non-citizens based on the passports they hold, and conduct redistribution policies that way. For example, many permanent residents have lived in and contributed to Singapore for decades. Many have Singaporean spouses and Singaporean children.

Secondly, even if we give the Singaporean priority to everything, healthcare, university education and what not, he or she could easily emigrate to another country after consuming all the benefits (ah big beautiful house and nice lifestyle in Australia). Being open and free means that citizens can easily pack up and leave. The fact that one has to be a Singaporean citizen at the point of consuming taxpayer-funded benefits does not guarantee that it will be taxpayers' money well-spent. Who is a taxpayer? Foreigners who work here pay taxes too, GST if not income taxes.

Though it has become a cliche to say that the world has become more open and borders more porous, we still have not really accepted this at the emotional level. Many of you will no doubt disagree with me on this and believe that we citizens should always come first. But I hope to convince you at least that old comfortable assumptions we have will not always hold today.

Protection for Singaporeans?

A letter to the ST Forum over the weekend called for university places to be reserved for Singaporeans. I suspect by Singaporeans, the writer Mr Ong meant Singapore citizens only (not including permanent residents).

Globalisation has created winners as well as losers, relatively if not absolutely speaking. Being a small country market, Singapore has much to gain being part of the global economy. There is no denying of the benefits economic openness has brought to Singapore. Where there is disagreement, it is about how we can as a society manage the effects of being open.

Faced with competition, there is always a danger that political pressure for protectionism will mount. First, it begins with some price discrimination for public service, charging non-citizens more for education and healthcare like what we are already doing. The next natural step will be absolute quantity controls, such as reserving education places (or jobs) for Singaporean citizens like Mr Ong suggested.

Very soon, even that will not be enough - 'Old' citizens will not be too happy with the 'New' citizens in their midst. Surely the newly naturalised citizens do not deserve same privileges generations of Singaporeans have worked hard for? What's next then? Ah, one has to be a twenty-fifth generation son-of-the-soil before special privileges are conferred.

Though I had previously disagreed with Aaron Ng on more than one occasion, I have to compliment him this time for writing something as sensible as his latest post. He has clearly spotted the danger in Mr Ong's arguments. While the instinct to protect Singaporeans from competition is highly understandable, it is plainly silly to imagine that Singaporeans will be well-served with a dose of such protectionism no matter how well-meaning it sounds.

Endnote: There is also a discussion on this topic over at Mr Wang, which I have posted some further comments. I have also reproduced my last comment on Mr Wang's blog below.


Mr Wang and All,

Can't possibly respond to every comment. I would just reiterate my point. First, let's separate the issue of scholarships for foreign students and reserving university places for Singaporeans. The former is about whether it is beneficial for us or simply wasteful of taxpayers money. The latter is about whether we should institutionalise positive discrimination (for want of a better term) for Singaporeans (however defined).

Like I said, university access has already expanded greatly for Singaporeans over the past 2 decades. We have a high proportion of graduates (around 25 per cent of each cohort if I am not wrong). I can hardly imagine a situation where further expansion of university access will not diminish the average quality of intake. Sure, some As students may not get the course of their choice, but remember, A level grades have been inflated a lot over the past decade.

If the current level of access is still not good enough, and we choose to impose further quantity controls by reserving places for Singaporeans, it is the beginning of the slippery slope towards protectionism for Singaporeans. Where does one stop?

The end result is that the market will begin to discount the degrees of local university graduates, inferencing (probably correctly) that a significant proportion of them earned their degrees only because of the institutionalised protectionism. What happens next? Eager parents will fork out even more money to send their kids overseas, even if they have local access. Why? Because they will need to separate themselves from the local graduates, whose degrees will be under a cloud of suspicion that they are not nearly good enough. Who lose? Singaporeans in the end.

I understand that this is an emotional issue, but I hope at least some of you can see my point.


Regards


On a personal note, over at Mr Wang's site, some bloggers are beginning to suggest that I come from a selfish perspective, trying to argue against greater university access for my country men. Some are even suggesting that I am not thinking straight. But consider this. If I were selfish, wouldn't I argue for greater protectionism for Singaporeans for local university entry, knowing full well and safe in the knowledge that I already have an overseas degree? Wouldn't I want to restrict the number of bright kids from overseas coming to Singapore? Go figure.

I am not arguing against greater university access. I am making a simple point that however appealing protectionism initially looks, it has a strange way of turning around and hurting the people it is supposed to protect.

On Citizens, Permanent Residents and Bumiputrification

I have wanted to write something about this for some time already, and my previous post serves as a convenient lead-in.

Three Reflections

Of the many national day rallies I have watched over the years, there is one that will be forever etched in my mind. It is the one when the then Prime Minister Goh suggested that Singaporeans who chose to leave were quitters, barely moments after praising Jing Junhong for winning us the Commonwealth gold medal and chiding Singaporeans for not accepting her as one of our own. Some amongst the audience must have turned to look at Jing. The camera too was trained on Jing's face, and the whole of Singapore watched. It was a moment of supreme irony, of contradiction, and of the tension that was globalisation. I think it was a TV moment that ranked up there with MM Lee's tearful interview after Singapore was ejected from Malaysia.

Two weeks ago, I was having my usual Wednesday coffee with some faculty members and colleagues. A lady researcher from Italy proclaimed that she was really proud to be an Italian when we were on the topic of football. A Swiss faculty member, Fred, replied in jest, "That is the stupidest thing I have ever heard. How could you be proud of something which you practically have no choice in?" Fred was right of course. Had the Italian lady been born English, she would have had nothing but football heartaches instead of two world cup victories in her lifetime.

My father was an economic immigrant from China. He had never wanted to make Singapore his permanent home. He arrived to a colony sometime in the late 1950s, but on the stroke of midnight 9 Aug 1965, he was suddenly a citizen of Singapore. Like many other Singaporeans, he found himself an accidental citizen of an accidental country. I, by default, became a Singaporean. If my father had gone to America instead of Singapore, his children would have been Americans.

Reduction of PR Benefits

Childcare subsidies for PRs being phased out over 2 years - Straitstimes 9 May 2007

Hospital subsidies for PRs to be revised from Oct 2007 - CNA 10 Dec 2006

Learning to make a distinction; PRs, foreigners to pay up to 80 per cent more in school fees over next two years - Today 6 Dec 2006


Levelling the Playing Field?

Much has been written, particularly in blogosphere, on the economic competition immigrants pose for locals. Three separate policy announcements on childcare, healthcare and education, but the overall thrust is the same. The Government, probably responding to popular pressure, is trying to show that it will put Singaporeans first.

The euphemism we often hear is that these policies are designed to 'level the playing field', which of course rest on the presumption that Singaporeans are economically disadvantaged compared to immigrants. Or it could be some assumption that citizens should always be treated better as a "legitimate sense of entitlement". Considering how accidental citizenship often is, the natural sense of entitlement is hardly a product of rational thought. Furthermore, as Wang points out, the fact that PRs do not get to vote sits badly with the principle of no taxation without representation. Not only do we not allow them to vote, we are now reducing the benefits they enjoy, even as they pay the same income tax, GST and COEs as the rest of us.

Let me now address the bugbear that is national service since so much has been written about the sacrifice Singaporean males make. We Singaporean males do national service because we are born Singaporeans by the chance of nature, and we basically have no choice about it. Some get on with it and with life, others perpetually turn it into an issue. If the government will to allow male Singaporeans the choice of reducing their benefits to the level of PRs in return for not having to serve, I think enlistment into SAF will drop by half. Besides, the female half of the citizenry do not have to make this national service 'sacrifice'. Are they then second-tier citizens? Who is balancing the equation or levelling the field there? It is an exercise in futility trying to always keep a benefit and sacrifice scorecard.

Softly Softly we Bumiputrify

When one looks at the various changes, it is just a couple of hundred dollars worth of benefits here and there between citizens and PRs. If national service is indeed such a big sacrifice as it is made out to be, we would be fools to think that a couple of dollars worth of subsidies can level the playing field. The difference is probably also too marginal, thankfully, to make Singapore less attractive to would-be immigrants.

Unlike Singaporeans born here, PRs choose to be in Singapore, their being here are not accidents of birth. Jing had to take up Singapore citizenship in order to represent us. Many PRs however continue to remain citizens of their own countries because of family ties, residual loyalty, and of nostalgia - perfectly understandable reasons, the same reasons why many Singaporeans choose to keep their Singapore passports even though they reside overseas. There is really no need to push PRs into taking up Singapore citizenship as many are already as Singaporean as you or I, having studied and lived here for years. A pink IC is no proof of loyalty to Singapore. Conversely, if many PRs became citizens just to advantage themselves with a few more hundred dollars of benefits, we should be very concerned indeed.

Though these changes are mostly cosmetic, an unhelpful precedent has nonetheless been set. Symbolic as they are, these new measures are acts of discrimination against permanent residents, which are aimed at placating locals who feel threatened by the perceived economic advantage of immigrants. The original bumiputra policy also began this way. If it is politically necessary to have these symbolic differences, so be it. But let's have the good sense to guard against any further bumiputrification of our socio-economic policies. We either welcome immigrants or we keep them out. Only an insecure nation discriminates against them.

The Taste of Welfare

Two months ago, I mentioned on this blog that my daughter Elena was born without any out of pocket expenses, courtesy of Britain's NHS. It was not immediately apparent to me then that the delivery and hospitalisation were only the beginning of a long list of benefits our family would receive.

In the weeks after Elena's birth, we were visited at home by a midwife named Estry from the hospital once every 2-3 days, for a total 5 visits, to check on Elena's development and also that mother was coping. There is also a drop-in clinic where we could turn up every week for the midwives to check on Elena's progress. There is even a baby massage class every Monday.

Two weeks ago, Elena developed a scaly condition on the face and around the neck. It was diagnosed by the doctor to be baby eczema. Once prescribed by the NHS doctor, child medication is completely free in the UK until age 16. This week, Elena underwent two rounds of immunisation, again completely free of expenses.

Healthcare is not the only form of welfare benefit we are receiving. Soon after we were discharged from hospital, we were provided with an application form to the Child Benefits Office. We received a letter this week from the office that child benefit for Elena has been approved. Child benefit is not some kind of tax credit, it is not means-tested, but outright cash for every child. Eighteen pounds a week (around S$54) would be credited into our account and it would be backdated to the week Elena was born. It is not a huge sum of money, but it is certainly enough for milk and diapers.

As Singaporeans, Grace and I feel are not used to receiving state benefits. We are constantly surprised that Britain's welfare benefits extend even to non-citizens. Unlike citizens who grow up in a welfare state, we will probably never learn to see these benefits as a right. The experience is therefore novel enough for us to feel a deep sense of gratitude every time we receive benefits.

And a Row over Housing

Last week, a British minister Margaret Hodge suggested that Britons should be given priority to public housing over immigrants - a "legitimate sense of entitlement". What sounded like sensible policy (and a vote winner?) was anything but, considering mainstream British political attitudes. Cabinet colleagues and labour party bigwigs almost immediately launched scathing attacks on Ms Hodge. Housing should be allocated on the "basis of need" and not some kind of criteria that favoured one group over another. To the extent that humanitarian concerns override political consideration, Britain is indeed Blair's "special country".

If someone were to suggest in Singapore that Singaporeans should be given priority on housing or healthcare, I wonder what would the response of the Singaporean public be? How many of us would support such a policy on the basis of it being a citizen's birth right, national service sacrifices and so on? How many of us would actually support a policy that treats immigrants the same? The answer to this question will say a lot of us as a people.

Farewell Prime Minister Blair

"I have been very lucky and very blessed. This country is a blessed nation. The British are special, the world knows it, in our innermost thoughts, we know it. This is the greatest nation on Earth. It has been an honour to serve it." - Tony Blair.

He was a special politician, very special. How many could utter these words after 10 years in power without sounding trite or cheesy?

Back in 1997, I was a young student studying in London when Labour swept into power with this youngish looking prime minister - very good looking, very fresh, but not many back then knew what a Labour government, or indeed the prime minister, would be like. In the past decade, I have spent six years in the UK - three of which were when Blair first came to power, and three of which were in his last term. I witnessed first hand how the British society was transformed during his time in office. The prime minister, if nothing else, has been a great political performer.

Britain, under Mr Blair, continued on its economic revival first started under the Tories. Many scholars today agree that Britain has Margaret Thatcher's reforms to thank for. While Mr Blair harped on social justice, he had mostly maintained Tory-like economic policies. Taxes went up a little to fund public services, but generous tax shelters were offered. There were 5 billionaires with he first came to power, there are 68 today (converted to USD, it will be even more) - many are foreigners attracted by the generous tax regime.

Britain continued its hands-off attitude when foreigners bought their companies - such as making loud noises when MG Rover had to close down, but mostly adhering to free market principles. BAE wanted to quit Airbus, thereby threatening the jobs located in Britain, no problem. Spain taking over its airports, go ahead. The truest test of a country being global is when foreigners are allowed to buy national icons, and when foreigners are allowed to compete for jobs. It is a test Britain passed with flying colours, further entrenching capital, talent and industry on its shores.

"Look at our economy - at ease with globalisation, London the world's financial centre. Visit our great cities and compare them with 10 years ago. No country attracts overseas investment like we do."

But this was not why Blair was so good. Tories would have arguably continued on economic management with a globalised outlook. Thatcherism however left the society divided, suspicious of the fruits of economic growth, and pissed off with itself. Mr Blair accomplished something Mrs Thatcher never managed - he reached into the hearts and minds of the British people and made them comfortable with economic progress, and above all, with themselves.

How did Mr Blair manage what the Tories couldn't? Primarily by mixing economic hard-headedness with persistent rhetoric for social compassion. I use the word "rhetoric" because even his own supporters would agree that he under-delivered on many of his promises on social justice. Nevertheless, by constantly espousing high ideals - whether it was the Commission for Africa, climate change, intervention in Kosovo and Sierra Leone, and later tragically in Iraq - he injected into the nation a sense of moral purpose that Mrs Thatcher never did, simply by appealing to the better instincts of people. Thatcherism is the steel and spine of Britain, but Blairism is its heart and soul.

Take for example Africa. By constantly reminding the world of its obligation to the wretched continent, he reminded the British people of social justice in its widest sense - it is not enough that you care for your fellow country men, you have to care for your fellow men. His words, mere words, were enough to help Britain, despite its problems, see past itself. Without these high ideals, the British society would have been more fractured by the income, race, religious and political divides.

"This is a country today that, for all its faults, for all the myriad of unresolved problems and fresh challenges, is comfortable in the 21st Century, at home in its own skin, able not just to be proud of its past but confident of its future."

Of course, high hopes often lead to disappointment. Even his own supporters were disappointed that he achieved less than what he promised, and Mr Blair himself admitted as much. It showed the measure of the man (and the cunning of a great politician) when he asked the British people to forgive him for the missed expectations.

"I give my thanks to you, the British people, for the times I have succeeded, and my apologies to you for the times I have fallen short."

Mr Blair's critics are many. But here, I suggest they miss an important point. His politics gave the British people a sense of hope and mission, measured from which they might be disappointed, but without which their national life would surely have been poorer. And I, a bystander, was lucky to have watched this great political performer in action.

Retirement and Housing

Lucky Tan usually has some rather wild analysis and last week's post is no exception. The causation implied by the post is clear: (i) Govt forces Singaporeans to save in CPF; (ii) Govt allows Singaporeans to buy property using CPF; (iii) Singaporeans have no choice but to work longer since they do not have enough funds in their CPF accounts to support retirement.

This is obviously a seductive theory: simple enough to understand and conspiratorial enough to appeal. Not enough for retirement, blame government policies (again)! Despite his flawed reasoning, Lucky was essentially right on the point - many Singaporeans sit on a highly valued housing property but otherwise do not have enough cash for retirement. Though there are ways to monetise the asset to fund retirement consumption, the problem is in fact more than just that.

Before I continue, I will digress a little here. My uncle is a taxi driver who has worked hard all his life, lived frugally, and saved assiduously for his retirement. Looking at his bank account, you would hardly have guessed that he is a humble taxi driver. Already nearing retirement age, he nonetheless continues to work hard to the extent of taking the physically taxing night shift. I once asked him why didn't he retire since he had already built up a substantial retirement account. In the end, the answer was as simple as it was illuminating, "Don't know when I will die."

The Retirement Conundrum

In one short sentence, he has summed up the retirement conundrum. Two days ago, this story was reported in the British media. A man was suing the NHS because the hospital had informed him that he was dying. Like a rational economic agent, he then went on a spending spree and consumed all his savings, only to be told later that the original diagnosis was a mistake! This comi-tragic story again illustrates the same simple point.

As my uncle wisely points out, no one has perfect foresight when it comes to preparing for death. Unless the budget constraint is incredibly lax, this obviously makes any financial decisions concerning retirement tricky. It is not a matter of how much asset or cash one has, but how much is enough against an unknown future?

In a state pension system, the individual is effectively insured against his own longevity. Once retired, a person simply collects state pension until he drops. The current working generation pays the taxes to support the retirees. The question becomes one of actuarial sustainability of this form of inter-generational transfer but it is no longer the problem of individual retirees.

Lack of Insurance

The nature of CPF - individual accounts - transfers the risk to individual retirees. If one knows the time of death, perfect foresight will make financial planning so simple: reach retirement age, cash in on the property asset, and spread consumption until the last day. It is therefore incorrect to blame the lack of retirement funds on CPF liberalisation for property purchases. Of course, those who entered the market during the bubble years would have suffered losses but there would always winners and losers in investment. Barring episodes of price correction, property prices have mostly risen over the past few decades effectively boosting retirement returns. Not allowing CPF for property purchases would in fact deny individuals an avenue for investment.

However, as many academics have rightly pointed out, the major shortcoming of the CPF system is the lack of insurance for the individual against his longevity. There is always the risk that the individual outlives his retirement cash, and this may to a large extent explain why many retirees like my uncle take the "kiasu" approach and continue to do some work to supplement post-retirement income. Not because they are hard up for cash per se, but because they need to guard against an unexpectedly long life. It is a little ironic to think that medical science has increased the life expectancy of people only for them to run the risk of old age destitution.

While the risk is mitigated by working past retirement age, it will never really go away. Retirement can be postponed for some years, but sooner or later work has to stop for one reason or another. The current working assumption is that the family will effectively become the insurance when the retirement cash runs out. By and large, I imagine this assumption to hold for most retirees. But with families getting smaller and more individuals remaining single, it will be more difficult to assume this in the future. To solve the retirement conundrum, it is this part of the CPF policy that needs re-thinking rather than the housing bit.

The Spirit of Mambo Jumbo

You know what I am talking about - Mambo Jumbo nights at Zouk. It had been many years since I last went Mamboeing, but yes, I would not be ashamed to admit that I used to enjoy it. But sometime in the late 1990s, I realised that I was looking too old the part compared to the other clubbers there and I told myself then that it was time to move on. Also, even as the familiarity offered comfort, I had become increasingly bored with retro music. It was the same songs every Wednesday, so much so that specially co-ordinated moves were used for specific songs.

The longevity of Mambo nights is truly amazing. At least, people of my generation can claim that we actually lived through the 80s, and much of the fun of Mambo nights was to go dance to the tunes we grew up with. Yet, my generation moved on but the clubbers at Mambo remained as youthful as ever, people who were clearly babies when the present day aunties of Bananarama were strutting their stuff. The success of Mambo also led other clubs to use retro music. It was like, as one of my friends noted, the 80s arrived at Singapore and never left.

Well, Singapore politics has seen its massive Mambo injection in recent weeks. MM Lee is again leading the charge on almost everything - public sector pay hikes, extradition treaty with Indonesia, population issues and even the debate on homosexuals - strutting around like the political colossus which he is, and making the political weather that the rest of us, including blogosphere, are only reacting to. In its peculiar way, MM Lee's "tell-it-as-I-think" style is reassuringly familiar. I think the Alpha-S union of Singapore Airlines will soon get a big dose of Mambo reality if the pilots remain intransigent over the pay issue. But one could again be forgiven for thinking that the 80s never left Singapore.

On this note, I leave you with the lyrics of the very first MTV I watched - Pet Shop Boy's "Rent" released in 1987. Has it really been 20 years?

You dress me up, I'm your puppet
You buy me things, I love it
You bring me food, I need it
You give me love, I feed it

And look at the two of us in sympathy
With everything we see
I never want anything, it's easy
You buy whatever I need

But look at my hopes, look at my dreams
The currency we've spent
I love you, oh, you pay my rent

Fiscal Finagling or Journalistic Bollocking?

Last week, the article Fiscal Finagling supposedly highlighted some "structural weakness" of Singapore's growth and argued that it "augurs ill" for Singapore's long tem prospect. Lucky Tan set me up with a few questions on what myself as a student think about these issues.

Old Wine in Recycled Bottles

First of all, I would like to point out that many of the points raised in the article are not in fact new. In one guise or another, many of these criticisms have been levelled at Singapore for decades. Fifteen years ago, Alwyn Young who is now at LSE, famously made many similar arguments in a respected economic journal (QJE) - how Singapore over-invested to boost growth with little efficiency gains. That then prompted Paul Krugman to liken Singapore to the Soviet Union.

It is a time honoured tradition for academics and journalists alike to criticise Singapore's high rate of savings and investment. When the economy is routinely growing at 7 per cent, what else can you say to generate headlines? More good news is hardly the correct strategy! The important thing for readers is therefore to have a balanced perspective and not get carried away by any arguments.

The starting point for any discussion about growth should be the recognition that there is a lot we do not know. Countries are by definition different (jargon: heterogeneous) and growth theories are an inexact science. History, culture, institutions, geography, natural resources - no two countries are exactly the same in these dimensions - are only some of the determinants that explain the differences in income levels between countries. In many cross-country analyses, Singapore often stands out as a statistical outlier even as researchers fit all kinds of regressions to explain growth.

Global Time Bombs

Turning more specifically to Singapore's fiscal stance, in particular to the question whether our system of old age provision is adequate, it is useful to take a global snapshot. The UK is just waking up to a pension crisis. A combination of ageing, over-optimistic forecasts, and bad fiscal policies mean that many companies are no longer able to pay their retired employees the promised pensions. In Europe, many governments already have public debts more than 100 per cent of GDP and like the UK, have unfunded pension systems with open ended obligations. With ageing population, one just have to wonder who is going to service and repay these debts, let alone meet the future liabilities.

Cross over to fast growing China. Despite the phenomenal growth rates, China is in fact one country that is ageing faster than it is getting rich due to the one child policy. When China shifts, it does so with astronomical numbers - what is going to happen when many hundreds of millions chinese retire in 20 years' time? The biggest time bomb, at least in absolute terms, is the US. Greenspan and Bernanke repeatedly warned of a Social Security crisis that was beginning to unfold as baby boomers retired. US public debt is already US$8 trillion by some estimates not even accounting for social security liabilities. Do Americans feel secure about their social security cheques?

These are not Singapore government propaganda, these are facts. Compared to these global time bombs, our problems if indeed there are, would at best be considered small fart. If Singapore's high savings paradigm points to a "bleak" future as some critics suggest, what would they say about a high consumption, low savings, high-deficit high-debt model? Are these structurally sound as opposed to Singapore's structurally weak development model?

Enough to Retire?

If you ask me, Singapore's fiscal position is in rude health. There is however an important caveat: The fact that the system as a whole saves enough and is on a financially strong footing does not mean every citizen is. If an individual has not saved enough, or has over-withdrawn for property and made losses, or has made bad investment decisions, old age retirement provision can become a big personal problem. Does the CPF ensure that every one can retire with a huge stash of retirement fund? Probably not. Can CPF as a system meet its future obligations? A highly likely yes. There is no contradiction between the two positions.

The author Shawn Crispin however made no distinction between the financial health of the system and the financial health of the individual, and instead rather naively suggested that CPF would face a "fiscal crisis" because of withdrawals for housing and medical needs.

Hidden Taxes or Crouching Subsidies?

Lucky is not the first to claim that CPF returns are too low, it has been discussed extensively. I have even heard of the term "Financial Repression" - to describe how the government forces the citizens to save at absurdly low interest rates, which is yet another hidden tax. To be honest, I have always been rather bemused by this allegation. Here's why.

We get a 'lowly' 2.5 - 4.0 per cent (OA, SA and Medisave) but people forget this is a RISK-FREE rate. Adjusted for zero risk, are the returns still low? Also, CPF contributions are not taxable and this creates a tax shelter which boosts overall returns. As I recall, financial institutions were offering a meagre 1 per cent or even less for fixed deposits over the past few years.

Furthermore, whether interest rate is too high or too low from a personal welfare point of view obviously depends on whether one is a borrower or saver. When I applied for the HDB loan for my flat a couple of years ago, I wanted to liquidate my savings to pay for the flat and borrow as little as possible (for some reason, I am irrationally debt-averse). Short of saying it outright, the HDB counter officer pretty much implied that I was stupid not to want the maximum loan since it was so cheap at 2.6 per cent interest, pegged 0.1 per cent above OA rate. His advice was that even if I had the money, I should take the maximum loan and invest my cash elsewhere.

That was obviously sound advice. My investment has given me, let's just say, significantly higher returns than the 2.6 per cent interest I paid. Which financial institution offers only a 0.1 percentage point spread between saving and borrowing? When we complain that CPF rates are too low, are we forgetting the flip side of the coin - that many of us are in fact borrowers at the early part of our life cycles, in which case low interest rate is a good thing!

But of course, net of housing and other uses, there is still a large balance held in CPF accounts. If one is still not satisfied with the 2.5 per cent for OA, there are always alternative investment available but how many Singaporeans are financially savvy enough to manage the associated risks? Many people who invested and burnt their fingers in fact blamed the government for liberalising CPF for investment purposes. How on earth is it possible for the government to guarantee high returns to citizens without someone having to bear the risks? There is really no free lunch here.

Double-Dealing Accusations?

I am not suggesting that Singapore's saving or fiscal systems are in any way perfect. One can indeed make a honest intellectual case that Singapore's national saving rate is too high, such that any future benefit from today's savings is outweighed by the cost of today's consumption foregone. However, to provide a proper analysis or critique, one has to exercise some intellectual discipline.

To on one hand accuse Singapore of building up too much savings and on the other claim that there is "lingering concerns about the financial health of the CPF" or that it is facing a "fiscal crisis" is a bit like double-dealing, using the ace of spade twice. If it is indeed true that Singapore saves too much nationally relatively to some estimates of its future needs, then there should not be any concerns about the financial health of its key retirement fund.

The author, perhaps rather too conveniently, also made no reference to Singapore's sovereign rating. It would be very odd indeed for the ratings to be AAA if there were any doubts about the government's ability to meet future obligations of its key retirement fund. These are just some thoughts on the article, and I leave you to decide whether there is more fiscal finagling or journalistic bollocking.

Expected Career Income Hypothesis

If you feel that many of the arguments about public sector pay have been reused and rehashed, this post can hopefully offer an antidote. One of the recurring themes in many posts concerns the issue of moral authority. KTM (and many others) basically argued that the increase in pay would cause office holders to lose moral authority and many readers undoubtedly would agree. It is not that I disagree that there might be a moral dimension to the issue but as an economist, I am naturally circumspect about framing a political economy problem, which the pay hike essentially is, around morality and ethics*. This is not an issue about life and death. Consider therefore an alternative perspective.

Diminishing Outside Option

Preventing the loss of senior public service talent to the private sector is one of the key arguments put forward to justify the pay increase. Actually, it is difficult to buy this logic for it is not at all clear if senior civil servants indeed have a lot of outside market value. However, allow me to turn this logic on its head and instead suggest that we should increase their pay because they have NO or few private sector alternatives!

In this current boom, my friends in the financial sector hop from one job to another, always getting another hefty pay increase in the process. Industry knowledge, networks, and experience are easily portable from one job to the next, thereby enhancing the so-called outside option of the individual - yesterday he was a UBS analyst, today he is a Morgan Stanley vice-president etc, tomorrow who knows. But you get the point.

Turning to the public sector, many jobs in the civil service are critical to the nation but in truth have very little marketable value. Furthermore, young returning scholars (loosely though not exclusively defined as talent here) do not always have the luxury of deciding the positions they get posted to. Imagine the years of experience chalked up in Mindef, MICA or Community Development etc. It is not that that the work is unimportant but how much of it would truly add to the resume for a private sector job application?

After serving 6 to 8 year bonds, many scholars in fact find that outside options are pretty much closed. If you recall, it was only recently that the media highlighted the fact that many private sector firms had a rather dim view of ex-scholars from the civil service. The likely loss of outside options weighs heavily on the minds on bonded scholars. If there is indeed a sacrifice, it is not because of present pay but the reduction in the set of realistic future career alternatives. Worse still, this foregone opportunity is the highest for the most able thereby resulting in an adverse selection problem which I will elaborate on later.

Many bloggers might well be correct to point out that many senior civil servants would not command such a high salary in the private sector. However, I suggest that this argument ignores the fact the lack of private sector alternatives may be precisely due to their earlier commitment to the civil service. For the sake of argument, let's push the logic further still: if they do not have realistic private sector alternatives, why bother to increase their pay in line with the private sector? Here, the justification becomes a little more subtle.

The Role of Expectations: Expected Career Income Hypothesis

Expectations about the future play a crucial role in affecting the decisions made today (the logic is similar to the Permanent Income Hypothesis). Why do accountants, lawyers, auditors, consultants endure years of all-work-no-play lifestyles? Can it just be attributed to the couple of hundreds or even thousands of dollars more they receive? Many people in these professions will readily show you how their pay is in fact quite low on a per hour basis.

Quite simply, it is the anticipation of the huge economic reward when they become partners that drives these people. Forward looking agents care not only about the present but also form rational expectations about the future which then affect their course of action today. How senior civil servants are remunerated when they have few alternatives (ex-post) therefore anchors the expectations of young Singaporeans who are making the career decisions (ex-ante) on whether to take up a scholarship, to join the civil service, or to go to the private sector.

A Credible Commitment to Prevent a Lemon Market

There may be specific disagreements about the benchmark - whether it is representative enough, whether it is set too high, whether it has suitably adjusted for the relative security of public sector careers. All these are valid concerns, but it would be difficult to settle on a formula that pleases every one.

Another important issue emerges here: adverse selection (or the famous Lemon problem). A big public-private sector pay gap results in a bad selection process whereby good officers self-select to exit the public sector since, as I mentioned earlier, the cost of opportunity foregone is the highest for them. The larger point about the pay benchmarking, particularly when it is carried out in face of public opposition, is that it serves as a highly credible signal that Government will not allow public sector pay to lag too far behind the private sector. It anchors the expectations of present and future civil servants.

A Process of Self-Revelation

This goes a long way in ameliorating the adverse selection problem. One does not have to increase the pay of junior civil servants to attract or retain them. In fact, increasing junior civil servants' pay may not reduce the information asymmetry. Talent is a hard to observe attribute, the individual in question knows much better what his outside options truly are. The increase in senior civil servants' pay therefore provides strong incentives for the good officers to self-select to remain in the civil service since they know that they can (in expectation) beat their peers in the long run and reach the senior positions (jargon: self-revelation process).

If you pay a bunch of bananas, there is no guarantee you will get a 300 pound gorilla. But if you pay peanuts, you will surely get monkeys (or Akerlof's Lemons so to speak). Worse of all, paying peanuts may turn gorillas you have into monkeys (this is the non-shirking or efficiency wage argument if you care to follow further).

I am of course not qualified to say how much is enough, but it is clear that the public-private sector pay gap will almost certainly have long term consequences. The pay hike may not change the career calculus of today's senior civil servants. Through rational expectations however, it will affect the decisions of younger civil servants making career decisions today.


* PM has just stated his decision to donate the increment to charity. Has it therefore increased his moral authority?

Britain's Shining

This should be an uplifting post to distract the Singaporean blogosphere from the hoo-ha over pay increase for political leaders and civil servants. I was already in some kind of twilight zone when I wrote this post, caught between sleep deprivation of the past 48 hours and the adrenalin still rushing inside. But I was certain that this story was worth another few minutes of my sleep, and it would not be the same if I had waited another day to post this.

A Surprise and Lots of Anxiety

Sometime on Tuesday afternoon, in the middle of a conference in Nottingham University, I received a phone call from my wife Grace in London that the hospital was expecting an early delivery of our first child (a girl) due to some complications. Needless to say, I rushed to the train station to catch the first train back to London. As I had bought a restricted ticket to save on travelling cost, I was not supposed to be on this particular train, and a heavy fine was in fact waiting for me as the train pulled out from Nottingham station. But when I explained to the conductor that my wife was about to give birth in London, all she did was to smile at me and say, congratulations.

National Health Service

To spare the unnecessary details, Grace was checked into St Mary's hospital near Paddington. For those of you who do not already know, the National Health Service (NHS) in Britain is a taxpayer funded health service that provides healthcare free of charge. It is a colossal institution which employs, according to Wikipedia, 1.3 million people thereby making it the fourth largest employer in the world.

As an economist, I can only imagine the kind of waste, fraud, moral hazard and incentive problems that would naturally arise when any good or service, let alone one that is as important and yet ridden with information asymmetry as healthcare, is delivered free.

Every year, NHS lunges from crisis to crisis despite sucking up a vast amount of taxpayers' money. As we were waiting for the delivery, Grace and I had the chance to chat with a young English trainee doctor Hannah. This young doctor was obviously savvy enough to understand that NHS policies presented great financial stress for her country, but she was adamant that the ideal of universal healthcare provision was one that was worth fighting for.

Bleeding Heart Socialism

Take away my economist hat for the moment. As a patient and father-to-be, I begin to realise how wonderful a country Britain is. For all the problems facing Britain over the years, they have steadfastly held on to this uncompromising bleeding heart principle that everyone in this country should receive free healthcare as a fundamental human right. Since this is an unalienable human right, NHS coverage therefore extends even to all foreigners in this country. It is a case of principle over financial considerations to the point of what appears to be fiscal foolishness.

Grace and I are but foreigners in this country - we are neither citizens or permanent residents. We have no long term stake in this country. Yet, we were provided with what was in our opinion the best treatment money could not buy - a bunch of dedicated professionals* working to ensure the safe delivery of our child without us ever having to worry about the cost. As even the most complicated procedures would be free, it relieved us from any financial worries. In the time we have been in Britain, NHS has always taken care of us.

A Singaporean girl Elena Thia was born on the 28 March 2200 hours (British daylight saving time) at St Mary's hospital. Elena was truly born free, courtesy of Britain's generosity. For that, our small family would always remain grateful to this country.

*As far as I can remember: Two midwives, an English and an Ethopian. Anesthetists from India and Hong Kong. Doctors from Malaysia, Greece and UK. Nurses from Ghana. Talk about globalisation!

I am going to bed now . . .

Trivial Updates:

(1) Incidentally, the doctor who delivered Elena (pronounced as eh-LAYN-ah) was from Greece, her name - Eleni. They both share the same root name, which is Helen.

(2) Elena's birth was recorded at 2153 hours (DST), 28 March 2007. If she were born in Singapore, she would have the same birthday as her grandmother 29 March since Singapore is 7 hours ahead. Weight was 2480 grams. Go buy 4-D?

(3) Elena was registered as Elena Paul Thia on the 2 April 2007 at Westminster Council House at Marylebone. Paul is the name of the granddaddy (Grace's father).

Reaction to Reactions to SM's Comments

When SM Goh made the remark about Singapore losing its top talent, there was the same predictable (over) reaction. Molly said we had sprung a leak. Aaron went about his favourite "we are not taking care of Singaporeans" lament. And worse, he seemed to imply that people were leaving because the government did not "take care" of them. The arguments were confused as much as they were confusing.

It is important to listen to what SM actually said objectively and rationally, instead of jumping to all the (wrong) conclusions and brandishing all kinds of pet theories. What SM said was that we were losing top talent - top talent are mobile and skilled people who have options galore. Is it therefore plausible to argue that these people are leaving because the government has not taken care of them? So, what kind of "care" are other governments providing that is so attractive to our talented Singaporeans? Is there a case to be made to give our top 0.5 per cent even more privileges to dissuade them from leaving?

The suggestion that fewer Singaporeans will leave when we have a generous welfare state is even more preposterous (this by the way is not an argument about welfare). If this argument was true, these very talented Singaporeans, the top 0.5 per cent, were going to New York and London with the intention of collecting more unemployment benefits. How convincing is this? As far as I can tell, those who really need social welfare might find re-settling to a western welfare state a rather difficult proposition.

Competition for Talent

Instead of meandering around for reasons that do not exist, why not just recognise the fact and stick to the simplest and most likely explanation. Talented and mobile people choose to work and live wherever they want, wherever that is most fulfilling and wherever the reward is the highest - the global cities like London and New York where a world of opportunities beckons. This is the whole idea behind cumulative causation - the best people move to locations where they can find the best jobs, and the best firms move to the locations where they can find the best people. Advantage begets advantage and soon enough, alpha locations emerge.

In a flattened world, it is not just Singapore that is laying out the red carpet. Every country competes to attract talent. The universities in UK/US provide generous scholarships and research grants to attract foreign students. Countries are copying one another in implementing high-skilled migration programmes to attract skilled professionals. As their operations become ever more globalised, multi-national companies post staff all across the globe with generous expatriation benefits - company paid housing, childcare and children education at international schools.

The net result is that the choices and opportunities for skilled professionals, including Singaporeans, have expanded tremendously over the past few years. Given the opportunities, people simply move to wherever best suits their lifestyle and career goals at different stages of their lives. It is not about quitting or staying anymore, it about being a global citizen in a flat world.

The Meaning of Being Global

The link between state welfare and emigration is a spurious one. The UK has a fairly generous welfare state, but 5.5 million Britons (10 per cent of its citizens) are living abroad. Many are young professionals seeking to enrich their experiences elsewhere, many are retirees trying to stretch their savings or live in sunnier places. The Foreign Office even had to warn Britons not to expect welfare to be so generous abroad. But overall, the population in UK continues to rise because of immigration.

To keep the best talent, Singaporeans included, Singapore has to competitive in providing the kind of opportunities, exposure and reward they get elsewhere. This it can only do by firmly plugging itself into the global economy. We cannot hope to fix the leak or will there be a need to. It is part of the process that some will come, some will stay, and some will leave. There is also a recognition that some talent churn may in fact be a healthy thing. This is one area where I think official thinking is ahead of many bloggers.

Some will be left behind

"As globalisation causes dispersion of activity, some countries will experience rapid growth while others will be left behind" - Anthony Venables.

Finally, the abridged version of Venables' article has been released. It is highly readable, written for the non-economist and does provide a good overview of the stakes in the development game. There is a longer version, presented to the Bank of Kansas in Jackson Hole, that provides further elaboration.

The Job Fallacy and the Job Hyperbole

The idea that there is a fixed and limited number of jobs to go around, that when someone else gets a job there is one less opening for me, must be one of the biggest economic fallacies. Jobs are not like land, there is no fixed supply of it. Unlike what the Luddites believed, not even improving technology could destroy jobs. Even as technology makes some jobs redundant (such as the effects of computerisation), it creates jobs elsewhere (to write the software), jobs that are better paying and brainier to improve the standard of living. The same also applies to immigration - a job going to the foreigner would be one less to the local. Not only is it an economic fallacy, it sometimes breeds grievous xenophobia.

Equally, there is also a job hyperbole - that if there are more jobs created than there are workers, every one must be fine. Indeed, the economy may be booming with many new jobs created. But if you are stuck with the wrong skill set, your predicament is like "water water everywhere but not a drop to drink." While others feast, you are facing a famine. Even in an economic boom, different sectors adjust differently, structural unemployment is still possible. If you had taken the wise decision to read law five years ago, prospects are really bright as you start out in your career. If you had studied life sciences, you would be lucky to wash test-tubes.

I often give this advice to students - apply the theory of comparative advantage in making career choices. This is the king of kings when it comes to economic theories, the unchallenged and undisputed piece of economic wisdom for the last 200 years. Though it is used to explain international trade, it applies to career choices as well. The idea is that to maximise welfare, a country should produce what it is relatively good at, not necessarily what it is best at. The same applies to career choice - do not what you are best at, but do what you are relatively good at, compared to your peers.

So identify areas of Singapore's comparative advantage, and also your own relative strengths (take a long hard look at yourself), before making any decision on skill specialisation, a decision that is most likely irreversible. This will help prevent you from falling into the job fallacy, or be caught by the job hyperbole.

[Endnote: Also, seek to understand whether the sector has 'deep' comparative advantage (hard to dislodge), or only fleeting advantage (other countries can catch up easily). Furthermore, if one enters a sector with high wages due to protection, one also has to prepare for the day it is liberalised.]

Immigration and Happiness - what is the link?

I recently suggested that from the perspective of economic geography, attracting more immigrants and foreign talent to Singapore is a good thing. All of us will benefit in one way or another. Many Singaporeans suffering from competition with foreign talent will no doubt disagree with me. Yet, it is difficult to see just how much job competition immigration poses - the labour market has been tight in the past few years, wages are rising, and the resident unemployment rate, which stands at 3.6 per cent, is not particularly high considering a part of it might simply be attributed to job frictions.

Keeping Up with the Jones

In another discussion on Singaporeangle, I actually made the following claim: Singaporeans are unhappy with foreign talent because they feel that their own socio-economic standing may be threatened. This is not a wholly original idea. Professor Lord Layard, another LSE luminary, has spent years finding out what are the factors that actually make people happy. It turns out that research after research suggest that people's happiness is derived from relative, not from absolute income. In other words, people compare and benchmark themselves against one another.

A Singaporean student used to top his class, but more bright students from all over the world begin to arrive at his school. He gets the chance to work and learn from these new students, but alas, his class position has fallen quite a few notches. He no longer wins prizes at quizzes. The teacher has also diverted her attention to the brighter students. Even though his overall experience is enriched, he feels poorer and less happy. He begins to suspect whether he would be better off if all these new arrivals had never come at all.

Trickling Down, Slowly

The Department of Statistics recently published this highly interesting report. Table 4 really captured my attention. We have known for some time of the growing income divide, which many people have attributed to globalisation. What was most interesting about Table 4 was that it showed the trickle down effect in two distinct dimensions. First, the people in the upper deciles saw greater increases in their income. Second, they also saw their incomes increase earlier in the economic cycle. It takes the people in the lower deciles 3-4 years into the economic expansion before they begin to feel the positive effects.

Socio-Economic Tradeoff

Herein lies the dilemma. What happens in the classroom is a microcosm of what is happening in Singapore. The sensible immigration policy is to try to attract people with skills, that is, not those at the lower deciles. However, no matter where one puts the entry cutoff level, some native Singaporeans will inevitably be below this cutoff. Their relative position in society is eroded in the process. The more foreign talent we attract to drive our economic growth, the faster the erosion of social standing for the lower deciles. Of course, the higher you are in the social hierarchy, the less threatened you are (as suggested by Table 4). In fact, a large pool of immigrants may actually improve your relative position. Our happiness or emotional response towards immigrants is therefore a highly primitive one.

On one hand, we clamour for greater access to foreign domestic help and the reduction of the maid levy. Some estimates put the number of maids in Singapore at 150,000 (that is 1 in every 30 persons on this small island, close to the population of Ang Mo Kio) but no one seems unduly concerned. Having someone else do the housework is the ultimate middle class status symbol in Singapore.

On the other hand, we feel deeply resentful when the CEO/CFO job goes to a foreign guy, when our jobs become less secure as a result of foreign talent immigration, or when their children compete with ours in school for prizes and scholarships.

Not that any of these are surprising. No matter how well one disguises the various arguments against immigration, I suspect the emotional trigger postulated by Lord Layard is at work deep down inside all of us - we like immigration only when it improves our relative position in society, doesn't matter if we are all better in absolute terms.

Globalisation and Inequality Between Nations

However, there is one missing piece in Lord Layard's analysis - the effects of globalisation. Without the foreign students, the Singaporean boy would continue to top his class. But those bright foreign students will simply go elsewhere if Singapore does not welcome them. And from wherever they are located, they will continue to compete with Singaporean students in one way or another within the same global marketplace. Firms simply move to places with easy access to factors of production, and in the process create an agglomeration force that make them stick to that location.

Globalisation therefore not only has the potential to increase inequality within nations, it also has the potential to increase inequality between nations as research by the spatial economists show. Shutting out or placing too much constraints on the entry of talent may preserve the relative socio-economic positions of Singaporeans, but it would also make it difficult for Singapore to maintain its position in the league of nations.

This also highlights an intricate tradeoff between the policy maker and the average Singaporean. The policy maker rightly cares about the league of nations. The heartlander only cares about the league of neighbours. To get the average Singaporean to focus on the big league and not the small one will be a key challenge.

Getting Darker? The Immigration Debate

Discussing immigration often brings out the worst in people. In an ironic way, this is entirely consistent with the behaviour of Homo Economicus, the rational self-interested man. Since he cares only about his own well-being, economic science therefore finds it perfectly reasonable that he should react strongly to any threat to his livelihood or lifestyle – which immigration is perceived to be.

Wayne Soon wrote a thoughtful article that argued for the issue of immigration be settled through research – I gathered by which he meant for policy to be based on rational and substantial research into the impact of immigration. If there are indeed methods and data to support research, this is without doubt a good way forward. My fear, however, is that no amount of research or evidence can really 'settle' this issue.

This situation is analogous to the trade debate. All mainstream theories point to the fact that freer trade will always bring about overall welfare gain for the country. But the theories also acknowledge trade will create winners and losers. Similarly, while most objective research in the US/UK points to the overall benefits of immigration, there are also some segments of society that will lose out economically. This fact alone is enough to ensure that no matter how much science one puts into formulating immigration policy, it will always end up a political dance.

Watching the immigration debate in the UK gives a first-hand experience on how complicated this dance can become. In the last election, the Tories proposed an annual immigration cap ('controlled immigration' as they termed it). The Labour party duly rubbished that and extolled the benefits of immigration, and at the same time painted their opponents as a party of xenophobes. Nevertheless, when the new states (Bulgaria, Romania) entered the EU, the Labour government fearing a popular backlash, slapped restrictions on their free entry and promised to lift these only in the future. The Tories, under the new leadership, has since ditched the 'controlled immigration' line to soften their image. But this opened a gap for right-wing extremists who plied on immigration fears to hammer the Tories at local elections. Even the Tories are not right-wing enough as far as some citizens are concerned. This Financial Times article shows why. In the US, things are not much better as both parties appear fractured within themselves on how to deal with the illegal Mexicans. Immigration continues to be one of the most divisive issues confronting the main political parties.

In Singapore, the mainstream media has definitely discussed the issue in a balanced manner - pointing to the benefits of immigration while also raising the concerns of some citizens - probably only because it is state controlled. However, a dark thread is definitely emerging in some blogs: some bloggers make the claim that the ruling party is embracing immigration to dilute or even overwhelm the political power of native Singaporeans. Here are some examples I have picked from various blogs.


"VOTE VOTE VOTE VOTE VOTE.....I'm rich and you are not. I voted to keep it that way. You were too chicken to do anything. Right now we are turning so many foreign workers into citizens. In 3 years time, these foreign workers will VOTE the PAP in again. Hahahahaha....I win. You dumb Singaporeans lose AGAIN! hahahahahahah..... "

"But who cares, I suppose there are plenty of China nationals who are perfectly willing to take our places, and the economic machine will trundle on. Current residents don’t matter as long as they can be easily replaced by other units of economic productivity."

"In recent years most ordinary Singaporeans express frustration with GDP growth because it only means higher cost of living for them. They have to learn to see the bigger picture, with a bigger population, corporations especially the GLCs will have fatter profits - that to the PAP govt can only be a good thing. What do you expect the govt to do when its companies cannot grow profits because Singaporeans are unable afford more of their services, import people who can....better still, make them Singaporeans and dilute away the poverty problem. "

"The reason is simple: We are desperate for more Singaporeans -- as opposed to PRs. We need Singaporeans who love the PAP style of government, who vote for PAP and who can fill in those semi-sensitive positions in the defence and various ministries and stats board and GLCs!And what better way to brainwash them than when they are young and impressionable and when we can teach them National Education and the 5 core values via compulsory civics education lesson in primary and secondary school and teach them "the singapore story" through school outings to the Discovery Center (the one in Jurong)?"

"When it comes to elections, these foreigners will of course vote for PAP. After all, all they know is that the government has rolled out the red carpet with open arms at the painful expense of the locals for them."

Whether this is the tip of the iceberg or not, here we have a uniquely Singaporean phenomenon. As if the debate over immigration is not complicated enough, there are some early troubling signs that some Singaporeans are beginning to project their unhappiness with government policies onto immigrants, who are seen as the government's allied constituents. However nasty the immigration debate sometimes becomes here in the UK, there is at least no suggestion whatsoever that immigrants are ganging up with any particular party to marginalise the citizens.

Some of the remarks almost insult the intelligence of immigrants, as if they will become undiscerning PAP voters once they join Singapore. It is too too easy to mix unhappiness with government policies with fear and prejudices against immigrants, as the above quotes suggest. This is highly counter-productive and makes it ever less likely for the society to form some sort of a consensus on how to move forward on this issue. Thankfully, most bloggers remain commendably balanced in their views when discussing the issue of immigration. This is a sense of decency we could all do well to uphold.

The Rise of Nations

This is not a real post, but a description of a computer game that I had spent hundreds of hours playing. Actually, I was so drained after writing the piece on Economic Geography that I had decided to stop writing for a while. But then I saw this post Wurk Wurk that described what seemed to be an interesting game -Warcraft. Praise be due first, Xenoboy is one of the best writers in the Singaporean cyberspace, his prose is so beautiful that it sometimes brings a tear to my eye. I don't know whether Singaporean life is quite so dark, or it is just Xenoboy's morose style of writing.

Anyway, on the topic of computer strategy games, my game of choice is Rise of Nations. I don’t think it is too dissimilar to Warcraft (I have never played the latter, so pardon my ignorance). Like most of these strategy games, the basic idea is to build an economy in order to support an army, which then allows you to expand your territory or defend against invaders.

Instead of peons, there are only citizens in Rise of Nations. One builds the citizens, and they can be employed to farm, mine, collect wood, oil and the various resources needed to build an economy. When there is nothing to do, the citizens will just go into idle mode and sit around. Citizens are not quite so helpless. When the invaders arrive, one can garrison the citizens into forts, from which they will shoot at the enemies around them. Or, one can turn them into militia and fight off the invaders, although they are understandably not as powerful as the regular army.

The second version of the game is called Thrones and Patriots. In this version, you will have to choose your system of government. Each type of governance will give a particular advantage. A despotic government is good in building military units; socialism allows you to assimilate conquered territories faster; capitalism allows you to collect resources much faster; and democracy is best for technological advancement. You choose the type of government depending on the strategy you wish to employ.

But one has to be careful with the choice of government though, it also depends on the characteristics of your opponents. If your enemy is the Mongols for example, be warned that they usually employ the ‘rush’ strategy – attack you very early on in the game, and try to overwhelm you quickly. If you sit back and take your time to build your economy, you can get caught by the Mongol horde and it will soon be game over – “Your nation has been defeated”, damned! But if your opponents are the more peaceable sort, you do have the luxury of time to do more technology upgrades, have more social advancement, and then try to beat your opponents economically.

Admittedly, this game is a little old already. But it is still good fun. Before I forget, in all these strategy games, remember to save every now and then. You can always go back to the previous point if any thing bad happens in the game.

Tipping Point – the Lessons of Economic Geography

This is an overly ambitious post, to tackle a broad range of subjects that had been discussed in Singaporean cyberspace over the past couple of weeks (population, budget, income inequality etc). It would be near impossible to present detailed arguments within each topic, so there will be gaps in some arguments that are left unplugged. The reward that comes from running this risk is being able to see the various arguments in totality, within a single post, and allowing them to be strung around the single theme of economic geography. This post is also my reflection to a recent article by Prof Anthony Venables, who has had a career analysing spatial economics at the LSE.

A Barely Noticed Seismic Shift

Back in 2001, Singapore was in her worst recession. As the factories relocate to China, the whole country was paralyzed with fear. How could we compete against the behemoth? The statistics were frightening - more than a billion consumers, millions of skilled graduates each year with quality to match, at a fraction of our cost. Fast forward to 2006, and Singapore's job creation and stock market were at record highs. What happened? Good policies? CPF cuts? The effect of casinos? Luck? Perhaps.

For me, the single most important shift came almost imperceptibly – a seismic change in the mindset towards seeing Singapore as a global city. This was the all important change in semantics; I only began to appreciate the effect belatedly. When it became clear that we were not fighting sure-to-lose battles against the whole of China or India, but competing against other global cities, the intellectual vision started shifting. As the intellectual vision changed, the fear lifted, and one began to see the options and tradeoffs in ever greater clarity. Do we want to become a gambling society or country? No. But can the casinos help us become a global city? Yes, so it is the correct decision to have them and manage the risks. What was previously an ‘over my dead body’ decision became a no-brainer yes overnight.

The Perils of Being Small

But global cities like New York, London, Tokyo, Shanghai and Hong Kong are all big, thick and dense. A 4-million city is more likely to be an also-ran city. KTM recently wrote about the perils of 6.5 million people in Singapore. Some of the perils, like congestion and environmental stress are real enough. However, the lack of jobs to go around is not one of them. Notwithstanding the demographic argument, there is a greater danger to being small.

Professor Venables sums up the stakes in this game: Concentration of people and firms is good for productivity. Who benefits most from this concentration? The intuitive answer is that since the rich are getting richer, they must be the biggest beneficiaries.

Scratch beneath the surface of this argument and one soon realises that local immobile factors benefit most (obvious once you understand that mobile factors can seek higher returns elsewhere). Singaporeans therefore, particularly those who do not have the option of moving away, gain most from growing the size of an economy that exploits the productivity gains arising from concentration. Fear not when foreigners come to Singapore. Start worrying when they stop coming!

Those 2 percentage points

The denser the network, the higher its productivity. The fact that advantage begets more advantage has important ramifications for policy. What is a 2 percentage point shift from direct to indirect taxation? Not much, if the world is static. But in a dynamic world, a little shift may make all that difference. Prof Venables writes, “whichever country gets slightly ahead will have higher productivity and become the more attractive location for further investment, while the other country will fall behind . . . small initial differences will generate large differences in outcomes.”

It may first be one firm that moves to Singapore. But in coming here, it adds more jobs, incentivises more local workers to train, and encourages foreign talent to come. More firms then come, to access the thicker labour market, and further reinforce the initial small change. Economic theorists call this ‘cumulative causation’, but the idea is in fact a simple one: snowballing effect. Past the tipping point, it becomes an avalanche.

Progress is not without price or pain. Some will find this adjustment difficult. One immobile factor – land – will become too expensive for some locals to bear. As native Londoners worry about being priced out of the property market, Singaporeans look with bleary eyes as high-end condominiums spiral out of reach. The condos used to be objects of aspiration, now they feel like another universe. The rising prices of flats, road use, car taxes, rent, and many components of living costs reflect this space premium. Singaporeans are fed, up with progress, so said Mr Brown. But was he right?

If indeed advantage feeds on itself, slowing down becomes a non-option. If Singapore stops growing, the snowball forms elsewhere. While society should definitely care for its poorest, it should not be paralyzed from moving forward. Remember, when investment stops coming, it is the immobile local factors that suffer most – the highly mobile professionals or the rich will just pack and go to where the party is. We end up hurting those we are trying to help.

A Sticky Situation

EPL fans cannot fail to notice that it is often the newly promoted teams that are relegated soon afterwards. It is always the same four teams that qualify for the Champions League. Again, in a world where advantage feeds on itself, this is not a coincidence, nor should it come as a surprise. The longer a team stays in EPL, or the more it plays in CL, the more TV money and experience it amasses. Soon enough, it becomes quite impossible to dislodge the top teams. Globalisation amplifies this, since the top dogs are getting an ever larger pile of TV money from a growing global audience. Fact of life: Advantage can stick.

Likewise, London has become stickier than ever as a global financial centre, almost impossible to dislodge in the foreseeable future. LSE and LBS charge students an arm and a leg for the privilege to be here. Every one puts up with congestion, poor infrastructure and high rent. But you cannot afford not to be here because every one else is. It is also for the same reasons why Singapore has so far failed to dislodge the US even after pouring billions into bio-sciences. Once the avalanche occurs along a certain path, it is difficult to shove the snow to the other side of the mountain.

Which industries should Singapore try to tip? Where are the tipping points? It is hard to know for certain. Prof Venables acknowledges, “The role of pro-active industrial policy remains intensely controversial.” This was clearly attested to by the public salvos over Singapore’s life sciences effort only very recently.

While Singapore may not yet be a life sciences hub, we are certainly succeeding in other areas. Are the casinos the catalyst? Is it the tax cut? Is it the foreign talent policy? The effect of each by itself may not be exactly quantifiable, or statistically meaningful to GDP growth. But clearly, the more decisions Singapore gets right, the more likely it will trigger the snowball effect. Globalisation has made Derek Wee’s and everyone else’s lives, tougher and more unpredictable. But it also has the potential to entrench Singapore’s location advantage if the correct decisions are made now. If Singapore can forge ahead into the league of global cities, the advantage gained will also stick for some time to come. This is the valuable lesson of economic geography.

Careful with the Gini

It now stands at 0.472 – which is roughly the same as the US at 0.469. But take this number with a pinch of salt, it has some serious drawbacks.

(a) Singapore is a country but it is also a financial centre, there should therefore be no surprise at the greater income disparity. The City of London recently paid out record bonus, and a Hyde Park apartment recently sold for S$250 million, no typo here. On the other hand, London also has some of the most deprived neighbourhoods. When you mix bankers with workers into the calculation, is there any surprise at the Gini outcome? Global city, global disparity. If one could compute the Gini for London or New York, my guess is that it would show far greater income disparity than their respective national averages.

(b) Non-income redistribution is not effectively factored into the calculations. HDB, healthcare, and education policies for example can lead to sizeable fiscal transfers between income groups – since the higher income group pays more taxes but uses proportionately less government services. Social provision of key services matter as much as income differences.

(c) Gini is a snapshot of the income disparity today. It says nothing about social mobility, which I argue has far more important social consequences.

Income differences are essentially market outcomes. Insofar as society is not destablised by the income differences, there is no right and wrong about it unless one prescribes a certain political view. However, there is a real market failure if good people become less productive or fail to fulfil their potential because they are weighed down by their parents’ circumstances. I am therefore arguing that we should care less about present income disparity than whether the next generation of the lower income group becomes trapped there. The more long-term concern is that Singapore may have become a less mobile society compared to a generation ago.

Ninjas and Samurais on the Internet

It was in feudal Japan where the samurai was elevated to the status of the most esteemed warrior. It was also feudal Japan that gave the modern world the stereotype of the ninja, the dark, masked, silent assassin. Where the Samurai fought under the strict warrior code, the ninja was effective but only by stealth and trickery.

With a broad brush stroke, one can classify Singaporean bloggers into samurais and ninjas. Mr Brown (Lee Kin Mun) is clearly a samurai. He has made his views and identity known, battered but unbowed. You can disagree with the man’s views, but you cannot question his honour. There are unfortunately too many ninjas out in cyberspace - anonymous bloggers with views that can be attributed to nobody. Almost stranger than fiction, the mainstream media even reported that PAP was also employing ninja tactics in cyberspace to counter the anti-establishment views. Since Mr Brown has already identified himself, he is certainly standing on solid moral grounds to protest at the double standards.

Xenoboy, probably a ninja himself, recently posted his reaction Deep Throat. His theory was that PAP was using anonymous bloggers to infiltrate the internet community, to plant doubts and prevent dissenters from coalescing around a single view. And more to the point, coalescing around his pessimistic view that Singaporeans were miserable, and that their misery was compounded by a system that failed them. Rather ironically, here we have a ninja complaining about the other side using ninja tactics. More importantly, just exactly how the public could find a focal point in the Singaporean cyberspace of bloggers without names is beyond me. One couldn't even ascertain if the person behind the pseudonym was a Singaporean, a foreigner, a real blogger or a spy. Or it could well be one man writing on twenty different blogs to fan anti-establishment views. Who is out there, how many exactly are there, all unknown unknowns. Ninjas.

Just as I wonder how society can properly interact with a population behind veils, I also find it difficult to imagine how proper discourse can take place when every one takes on a hidden identity. The content and message of the blog are obviously important, but the identity of the blogger is no less so, for with it frames the entire context - background, history, credibility, vested interest.

Signing your name to your views is like making a small investment into social trust, a bona fide token that shows you believe others will match you in openly stating their views, honest people speaking honestly, nailing the colours to the mast if you like. It is therefore a pity that even as bloggers claim they are pushing for a more open society, they are doing so behind hidden identities. A proper democratic discourse needs faces, real views attached to real people, not the Mr Pseudonym vs Miss Anonymous variety. More ninjas cannot be good for debate or civil society.

Economic nationalism is very much alive

Only last week, allegations of Singapore spying in Thailand surfaced. It resulted in a heated debate with my Thai friends, including Pong, whom I had introduced a couple of months ago. Pong, no surprise, clearly believed that Temasek and Singapore acted in bad faith. If you are following Thailand's press like The Nation or Bangkok Post, you will have known about the Singapore bashing that is taking place. Pong sent me this article, written by an Australian Professor Des Ball. I have no idea what kind of academic he is but his article feels inflammatory. I obviously have no idea whether what he says is true.

Seething with a sense of injustice, the Thais are not in a mood to be reasonable. Amongst other things, Pong also accused Singapore of trying to help Thaksin launch a counter-coup. For what I asked? For recovering the investment he replied. I had to control myself and refrain from telling him that USD2 billion was peanuts to Singapore. Nevertheless, here is my response to Pong:

(1) From the beginning, Thailand should have had a regulator to scrutinise any deals deemed to involve national security. Thailand, should have blocked the deal if it was deemed to be bad for national security. Clearly, Thai laws and institutions, which were arguably policy-corrupted by the previous government, failed to block the deal. However, this government is now trying to remedy the situation ex-post. Whether Temasek acted in bad faith or not, this ex-post changing of the rules would be bad for Thailand's credibility. What is US2 billion to Singapore in relation to the reserves? It hurt no one more than the Thais themselves if their government acted in such frivolous fashion, rushing to introduce capital controls and amending the Foreign Business Act.

(2) All military have to secure their own communication, command and control. Singapore, and many other countries like UK (I guess Thailand too), rely on GPS which is run by US. The Pentagon therefore in principle can know where each and every one of our military units are the moment they turn on their GPS systems [last statement pointed as inaccurate]. US also has the power to switch off the system, rendering equipment that depends on GPS useless. Rather than blaming a foreign operator, find ways to ensure that operational capabilities are not compromised.

(3) The person who wrote the article is an Australian, probably a defence expert. He probably spoke from the defence perspective without considering the economics. Moreover, the fact that he is an Australian talking about national interest makes his article especially grating (for me at least). Australia, despite signing the FTA with Singapore, has repeatedly blocked Singapore Airlines' use of their airports to fly to the US, and therefore failed to live up to their treaty commitment. This decision has always been justified by the figleaf of national interest. Recently, in a bizarre turn of logic, they even agree to sell their flag carrier Qantas to a US private equity firm - what national interest?

In hindsight, the Temasek-Shincorp deal is one that should not have gone ahead. However, what Thailand needs now is to fix the institutions and laws where they are found wanting without changing the rules ex-post for those deals already done. "National interest" is just a thinly disguised code for "economic nationalism". Many of the recent policies by the military installed government feel like the latter.

It is now even more disturbing that the row over the takeover has escalated into spying allegations. I do not know whether the spying story is true but one can still be objective without full information. Solid evidence of Thaksin's wrongdoing has not been uncovered. The botched capital control clearly harmed confidence. Investigation into the Bangkok bombing is increasingly befuddled. The coup is already 4 months old but a return to normal politics still seems so far away. The military installed government therefore has huge incentive to direct attention towards a foreign bogeyman rather than examine the multiple failures of their institutions. All in all, these developments represent a big step backwards for Thailand. The sad thing for me is that millions of Thais like Pong, engulfed by the nationalistic tide, would probably fail to realise this.

The Emotions and Economic Arguments of HDB Pricing

HDB pricing is an emotional issue - the true level of subsidy has been a subject of endless debate. Lucky Tan, ever the reactionary, has already come up with some clever arguments. If you have not already seen it, there is also a long essay circulating around the internet which devotes a long tirade against HDB pricing policy. From the economic perspective, many of the arguments thrown up are in fact scandalously off the mark. Without prejudice or fear, I hope this post can set some concepts straight.

(a) Ownership of an asset

Its not in dispute that many Singaporeans families are still in fact servicing their mortgage. That said, the idea that you do not own the property (or you have become a serf) just because it is under some mortgage is completely false.

What is ownership? Ownership is a right (an option) that gives residual control to the holder of this right. This control has an economic value. My property cost $200k, say 100 per cent mortgaged. Should the value of the property rise to $250k, I can sell it for a $50k profits. Even though the property is 100 per cent mortgaged to the bank, it does not make the decisions concerning the asset unless I default. It also does not participate in any upside gain. Singaporeans freely buy and sell their HDB assets (within regulations of course) - sometimes at losses when the market is down, but mostly with profits which go towards upgrading to private property. This is the essence of ownership that distinguishes it from tenancy.

(b) HDB is charging monopolist prices

This is a clever argument. The fact that HDB flats constitute 80-90 per cent of the market seems to provide some credence to this argument. But consider the evidence.

The accepted economic wisdom is that a monopolist will charge higher and sell lesser. If HDB is a profit maximising monopolist (as claimed by some bloggers), it has the incentive to price higher, and choose not to serve the poorer segment of the market (say, like Kwek Leng Beng if he could). HDB in fact sells a lot and serves the entire market. It is a rather silly monopolist if it were one. Second, though HDB is a large builder, it is in fact not a large seller when one looks at the available pool of sellers in the open market. Third, many buyers of HDB flats are in fact PRs, who presumably could have bought properties in other countries if HDB flats are not value for money due to monopolist pricing.

While it cannot be dismissed outright, the body of evidence therefore does not lend much support to the monopolist pricing argument.

(c) Land cost matters

Why does St Regis sell for $3000 psf while a suburban condo sells for $500 psf? Undeniably, St Regis is more luxurious but does the cost of building alone account for the price difference? Intuitively, the answer is no. The same quality condo in Sembawang cannot sell for the same amount as one in Orchard Road. Location matters. And for the same reason, it is entirely superfluous to compare the prices of houses in Johor Bahru and Singapore. Even if they cost the same to build, they will sell for very different prices in the market.

(d) Only relative price matters - most important

Many Singaporeans have used the back of envelope calculation and convinced themselves that they are not in fact receiving a subsidy from HDB. The above mentioned writer documented (based on tendered contractor price) that building cost is $50k per flat. This implied a $150k profit for HDB. This back of envelope calculation, while intuitively appealing, is completely wrong from an economic standpoint. I will explain why.

When one talks about the economy or economic management - particularly about an investment item as big as housing property - one must consider the overall price effect (jargon: general equilibrium and not partial equilibrium). I had earlier written about the importance of relative prices in the GST episode, but understandably, this is one principle that non-economists will find hard to grasp.

Relative prices direct the use of scarce resources. It does not matter if a car is $1000 and a house is $2000, or if a car is $2000 and a house is $4000. You can always reprint or rebase your money in whichever denomination you deem fit. What matter is the relative price between cars and houses - that houses are 2 times as dear as cars - and that resources used will reflect this. This is why HDB should price its flats according to market price incorporating land price - and base its subsidy from the market price benchmark.

Imagine what happens if HDB prices its new flats on building cost only (and not land cost). The price of HDB flats will suddenly be relatively cheaper to any other goods that require production space (commercial activities, industrial production etc). Overnight, HDB housing - even though it uses an enormous amount of precious land - becomes entirely free of land use cost while every other good and service is not. Can you imagine the staggering resource distortion this will cause? Free of land cost, HDB flat will drop to say $50 psf (extending the earlier example of $50k per flat and 1000 square feet). At this price, every one will demand HDB to build them a HDB palace for it is relatively way too cheap compared to other goods and services in the market. There will not be much land for any thing else.

Back of envelope calculations, without considering the overall effect on the economy, is not the way to properly analyse HDB pricing.

Transparency

Having said all that I have said, I do think that some of the issues raised are valid, in particular the need for more transparency with regards to cost, pricing and subsidy. Perhaps things will improve in the future.

Three Points Down and Three Points Up

There is a well known problem in economics - the problem of time inconsistency. We all know that the policy maker always has the incentive to deviate from the announced policy (ex-post cheating) if he could get away with it. And because we citizens understand this incentive to cheat, we never believe what the policy maker says. We build in the expectation (ex-ante) that cheating will occur. In the end, every one is worse off for it because we cannot credibly commit to a stable policy that will benefit us in the long term.

The classic example is inflation expectations, something we already learnt from economics textbook. But there is an equally compelling local illustration to the problem of time inconsistency - employers' CPF contribution rate.

How often have we told ourselves that the CPF contribution rate is a blunt instrument? How many times have we convinced ourselves that CPF rate should be geared only towards meeting the (long term) retirement needs? How many times have we said that it should not be used for short term economic management?

Yet, how many times have we cheated? I used 'we' because we the citizens often abet the process. When the economy was down and potential CPF cut loomed, we often gave reason so and so (like those mentioned above) why CPF policy should not be adjusted so indiscriminately. But when the economy went up, we could not help but demand an increase in the contribution rate, an extra bite at the cherry. However much we professed it was not good policy to use CPF rate this way, it always ended being a cyclical policy tool.

The temptation to cheat is so palpable - it is like giving a child sitting an exam the model answers and then asking him not to use it, fat chance. So here we go again. The talk is that CPF is to be restored to 16 per cent.

Pinch me, I am making so much money!

For a newspaper often derided for being not much more than an official mouthpiece of the government, one would imagine Straitstimes to be a little more sensitive about reporting. Or perhaps it was because the newspaper had been mouthcuffed so much that there was really nothing much else to report. Or perhaps there just weren't many newsworthy events during the weekend.

Having just arrived home on Saturday, and having suffered a night of fitful sleep due to the jetlag, I was looking forward to Sunday Times to catch some local news. My fresh newspaper arrived at the doorstep and I eagerly read it over breakfast. What made 'news'? Young Super Earners. It first featured an investment banker Mr Yeo Soen Ming from London Business School who was reported to have made more than US$500,000 in the past year. Turn over the page, there were another three young high earners - Janice, Joao and Chris.

Bravo to them.

But it certainly was not 'news' material in my opinion. Even if it was somehow in the interest of the public to know about these high earners, it was still a terrible piece of reporting.

To the informed reader, this piece of reporting was superficial and condescending. The central message was not how each career choice could be satisfying in its own way. It was about money, money, money. For good measure, there was even a box item on page 3 - "How to Land a Job in Investment Banking". It was as if the reporter felt others could actually benefit from the five short lines of advice - which, by the way, could have applied to any other jobs!

To the lay person, this was nothing but more evidence of the great income divide - young brash professionals at around age 30 making more in a year than what others would in a lifetime. And it would obviously grate many to hear how these high earners were so full of themselves. Yeo Soen Ming, 34, said "If you are at this level and don't make around US$500,000 this year, it would be quite sad."

If you have followed my previous posts, you will know I am not against high income earners. I can accept that market outcomes are unequal. My wife is doing her MBA, also at the London Business School incidentally, for the same reason of wanting a give a further boost to her career. It is not ignoble to aim for higher pay. Perhaps the reporter made more of what these high earners actually said (you know, reporters are often guilty of this). But it bordered on bad taste to go on national newspaper to announce to the world how much money you make.

In the same weekend, it was revealed that the CEO of Morgan Stanley received US$40 million. I searched the internet for 20 minutes and could not find a single comment from him on his pay. When you have truly arrived, there would be no need to announce it.

The Perception and Reality of Income Gap - Take a Long Term View

Discussing income inequality is often emotional. Whether one thinks income inequality by itself is a problem or not often depends on convictions, it is sometimes akin to discussing religion. Reasonable people sometimes become unreasonable - rhetoric and political positioning become more important than facts and good policies.

The Economist not too long ago had this rather interesting article "Snakes and Ladders" (27 May 2006).

[Start of excerpt] Europeans deplore the idea that people may remain mired in poverty, and they have large welfare programmes . . resent the sight of rich families staying at the top for generations . . impose high taxes to redistribute wealth and income . . [Research] confirms that if one compares the incomes of children with those of their parents . . . Nordic countries emerge as far more mobile than America . . Around three-quarters of sons born into the poorest fifth of the population in Nordic countries in the late 1950s had moved out of that category . . In contrast, only just over half of American men born at the bottom later moved up. . In other words, Nordic countries have almost completely snapped the link between the earnings of parents and children at and near the bottom. Britain is more like the Nordics than like America: some 70% of its poorest sons escaped from poverty within a generation. That is not at all true of America. Redistributive fiscal policies cannot be all there is to it. The other part of the explanation seems to be their superior education systems. Education has long been recognised as the most important single trigger of social mobility and all four Nordic countries do unusually well in the school-appraisal system developed by the OECD. That in turn may explain why the bigger continental European countries, notably France, Germany, Italy, are not as mobile as Nordic ones. [End of excerpt].

The interesting point is that US is perceived to be a highly mobile society, when it is actually not. Furthermore, a 2006 Pew Research Centre study polled that 84% of Americans were either "very happy" (34%) or "pretty happy" (50%). Clearly, there is no right or wrong when it comes to discussing whether income gap is by itself a problem. It is only one attribute out of many that affects happiness and welfare of citizens.

Moreover, how significant it is as a factor depends on how obsessed one is with it - is the glass half full of half empty? A remarkable 84% of Americans are pretty happy with life, what income divide? Perception alters reality. The same study concluded that Britain actually did better than the US in terms providing social mobility but obsession with class was still very much a British trait. Continental Europe, despite its generous welfare, is not quite as socially mobile. Without good education system, welfare traps people into social stratas.

Let me finish this blog by recalling a conversation with a British friend. When he visited me a couple of years ago, he was affronted by the sight of domestic maids doing menial work for Singaporeans. I had to explain to him that even though the maids earned lowly wages compared to Singaporeans, it meant a lot to them back home and could actually provide their families a decent way out of poverty. Social justice needs a time dimension. Focusing on the present income gap ignores the time dimension to social justice. So what if the Gini coefficient looks bad? It says nothing about how socially mobile a family is over a period of time. It can take more than a decade before the effects of policies (like education) can be felt. To answer any question about social mobility, one needs good longtitudinal data, not cross sectional income differences.

Income gap is not itself a problem, but the lack of social mobility or social stratification is. Good people become trapped by the circumstances of their parents. This is the real market failure. Moreover, creating the perception of social mobility is equally important. Therefore, providing good education opportunities - particularly for children of the poorest quintile - is key to fostering real and perceived social mobility in Singapore.

Take a long term view when it comes to social justice. Worry less about the income gap, but build a consensus on how to make Singapore society more socially mobile. Let's make sure the cream can rise to the top.

Goodbye Sentosa

I am quite excited about the Sentosa IR. Who would have thought that Palau Mati will become a world class resort? As much as possible, I have tried to look at the presentations done by the IR bidders posted online. But no, I have nothing to do with the selection process, so there is no more information than what is already known to the public.

The Eighth Wonder project looks fantastic on paper with so many wow factors - the Deepak Chopra Spa, the Pele stadium, W Hotel which includes Vera Wang wedding studios, all with fantastic architecture, and not to forget Harry's Island. Kerzner's bid looks a little incongruous - another you either love it or hate it centrepiece that looks like a Lotus leaf or used tissue paper depending on who you asked (another of those Esplanade reaction). Its overall plan does not have a coherent feel to it (robbotanical gardens anyone?). Despite being the favourite, Genting has the most underwhelming bid. Creative juices are clearly lacking. Some of the planned buildings look like Palace of the Golden Horses in Kuala Lumpur, feels a little cheap. Moreover, Universal Studios does sound a tad tired. In a straight fight, I very much doubt Genting's chances.

But this is not a straight fight. Ignoring finance and politics, product differentiation and geography are perhaps the key considerations. We are already going to have an IR downtown with impressive city architecture and facilities catering to one segment of the market. To achieve product differentiation, the Sentosa IR should be different, no? The selection process for the Sentosa IR is therefore not divorced from the Marina Bay decision.

Together, both must cover as much of the potential market as possible and provide the highest joint value proposition. The geography - the sea, the beach and the greenery - of Sentosa also makes it difficult to have these 'wow' architecture without destroying the feel of the place. There is of course also the slight concern that should Genting lose, its Star Cruise could play spoiler and cannibalise the market. It is on these counts that I think Genting is the sensible choice, even though I don't particularly like its plans. Eighth Wonder is an emotional second favourite for me. Kerzner's bid feels too 'neither here nor there' to win.

Anyway, Grace and I are determined to visit Sentosa this December on our home visit. Very soon, it will be unrecognisable.

Offshoring is not to Blame (and Hi-Tech may not be Enough)

One of the best thing about studying at the LSE is the frequency which the school receives visiting economists from all over the world. Singapore universities do invite renowned economists – including Nobel Prize winners – to give public lectures (at no small expense I would imagine). I have attended some of these. My impression was that big established names usually meant that the ideas were sometimes already old. By the time a Nobel Prize winner comes to town to give a lecture, you probably have seen his (no female winners yet) ideas in many textbooks.

Assistant Professor Esteban Rossi-Hansberg is not a Nobel Prize winner, but a rising star whose best is still probably ahead of him. He visited LSE in the past week, and presented a paper “A Simple Theory of Offshoring”. The mathematics was elegant, but it was the economic conclusion that took the breath away. Despite widely held beliefs, offshoring was not to blame for the falling wages of lower-skilled workers in the US. In fact, Esteban showed it was possible that offshoring actually increased the wage of low skilled workers. How? It did so by increasing the efficiency of firms (reducing their costs) and allowing these firms to produce more, thereby increasing the wages of even the lower-skilled home workers.

Of course, this is not to deny that wages have fallen for lower skilled workers in the US. The increase in the supply of lower-skilled labour (think East Europe, China, India) means that the prices of goods produced by them will fall. Even without offshoring, the cheaper imports will ensure the decline of lower-skilled wages. The stunning point was that offshoring actually boosted US lower-skilled wages, compared to a baseline had offshoring not been allowed, by inreasing the efficiency of US firms.

What are the lessons here? Placing artificial restrictions or constraints on domestic firms, however well intentioned, cannot possibly improve the lot of lower-skilled workers. In fact, it may not even be an issue of high or low skills. So long the skill that you have is similar to those that are embedded in say, Chinese imports, your wage is likely to fall (see The China Effect by LSE).

Take the DVD player – it is really difficult for me an economist to conclude that it is a low-tech equipment. Most of us do not have the faintest idea how this piece of equipment works. But it hardly matters in economics. A worker or engineer skilled in producing DVD players in Singapore will always feel the wage pressure because the Chinese are making it. This explains the insecurity of even supposedly well qualified production engineers, let alone the production workers.

How then to help our lower income workers? Skill upgrading may not be enough. You upgrade, others also upgrade. You run hard, but you are actually standing still. More skill differentiation may be necessary. The ex-Chief Economist Tan Kong Yam said – take advantage of our weather, grow frogs, because the Chinese love frog legs and import a lot of them. High-tech growing frogs is not, but I think you can see his point.

The Economics of GST - Robbing Peter to pay Peter?

A blog claims that increasing GST to fund social programmes is like robbing Peter to pay Peter (http://aaron-ng.info/blog/robbing-peter-to-pay-peter.html). Some of my friends also expressed how the stated intent of the GST increase - to help the poor - sounded like oxymoronic spin.

I feel compelled to say something, from the standpoint of my profession. In reference to the above mentioned blog, the robbing Peter example is incorrect. In a nutshell, the economics of the tax is sound.

The policy maker has to raise tax to finance the necessary expenditure. What is the best way to do it? The best tax is one that does not distort the price signals. The classic one is the lump sum tax. Once the tax is levied as a lump sum, there is no impact on the relative prices between goods at all. Margaret Thatcher tried this with the Poll Tax (every one was to pay a fixed sum) back in 1989. Good economics, but bad politics. People were simply aghast with the idea that every one had to pay the same amount. It led to widespread riots and eventually brought down the her government.

So no Poll Tax. What about others? Income taxes have a negative effect on work incentives, which explains why other countries are cutting, not raising, it.

What about consumption taxes? If the consumption tax is levied across all goods, it does not change relative prices. Prices of all goods increase by the same percentage. So if you are clamouring for exemptions for the poor (such as on food, medical items etc etc), you may be well intentioned, but are in fact introducing changes to relative prices as a result of the tax.

An undergraduate economics student will know that this creates what is known as a excess burden - which is a loss to society. Why? Because the relative prices are distorted by the uneven application of the tax, people over consume those goods that are exempted and under consume those that are not. It becomes a resource distortion to the economy - resources are not allocated to the goods most highly valued, but by the favouritism of the tax.

But of course, at this point, many of you would jump up and say - wait a minute, isn't consumption tax levied on all goods regressive, since the poor spends proportionately more on consumption? Yes and no. Indeed, every one (including, but not only, the poor) will be worse off in terms of welfare with the increase in GST. The trick however is to compensate the poor an amount no smaller than the loss they suffer (economic jargon: compensating variation). The key therefore is how much the Government compensates the poor in terms of income packages elsewhere. The whole package has to be taken into account.

But does this make sense financially, taxing and giving back? GST will affect all of us, but the compensating package will only be for those who need it (however defined). Since the policy maker is not giving every one compensation, it therefore makes sense financially for him. He can either choose to compensate the poor more, or spend on other programmes. He is robbing every one, including Prosperous Peter and Poor Paul. He then gives Paul an amount no smaller than what he takes from him. Peter gets nothing. The policy maker might even have some left for himself.

Explaining the economics is easy, it is rational and it is scientific. But I can understand how dealing with the emotions of the tax increase will be much more difficult. Margaret Thatcher will know.

The Slave that the Emperor Cannot Slay (A scene from the movie Gladiator)

Commodus (Emperor) : Rise, rise.
[Maximus (Gladiator) stands up, clenching an arrow head in his right hand]

Commodus: Your fame is well deserved, Spaniard. I don't think there's ever been a gladiator to match you. . . Why doesn't the hero reveal himself and tell us all your real name? You do have a name.

Maximus: My name is Gladiator.
[turns away from Commodus]

Commodus: How dare you show your back to me! Slave, you will remove your helmet and tell me your name.

Maximus: [removes helmet and turns around to face Commodus] My name is Maximus Decimus Meridius, commander of the Armies of the North, General of the Felix Legions, loyal servant to the true emperor, Marcus Aurelius. Father to a murdered son, husband to a murdered wife. And I will have my vengeance, in this life or the next.

[Commodus trembles in disbelief. Praetorians point their spears at the gladiators while the Collosseum crowd chants for them to live. Commodus shakes his head and motions the crowd for silence but the crowds shout "Live! Live! Live! . . ." He then raises his fist and reluctantly gives the thumbs-up signal. Maximus takes a bow, and walks away, to the cries of acclaimation "Maximus! Maximus! Maximus! . . ."]

All the power of an Emperor is not great enough to allow him to take the life of a gladiator. Even the tyrant is but a slave of public opinion.

Excuse Me, are you an Elite? The Brutal Truth behind the Hazing of Wee Shu Min

Elite bashing has reached fever pitch in Singaporean blogosphere. There are nasty blogs, pictures, cartoon, and even a mean animation of the 18 year old girl caught in the middle of all this. Singaporean bloggers are falling over each other in the who can be more creatively mean stake.

Those who mock Miss Wee so vindictively for lack of empathy fail to see that their behaviour towards - may I say again - an 18 year old teenager reeks of hypocrisy. We all said rude or stupid things when we were 18. Where is the empathy here? Elitism may be a real issue in Singapore, but what sense is there in bashing an 18 year old?

I tried hard to make sense of all these and came to the conclusion that people were merely using Miss Wee as an excuse to vent. In one single person, Singaporeans have found the perfect target to unleash all their grievances (perceived or real) against the elite of Singapore. The issue of elitism was never properly discussed in any of these blogs, which were dishing out what I can only described as mob justice. But the issue concerning elitism in Singapore is real, here are some of my observations and thoughts.

The elite are to blame for globalisation

Globalisation is a difficult process. The increased competition and job insecurity is all so real for so many Singaporeans. But those who somehow blame the elite, particularly the Government elite for failing to protect them from competition, are completely mistaken.

In every society, an elite class inevitably emerges, even in communist countries. But would we Singaporeans rather shut ourselves from globalisation and see an oligarchic, rent seeking elite emerge in a static economy? The force of globalisation, and the competition it unleashes, is the best restrain on local elite. Nothing destroys economic rents like competition does. We need only compare the finance and law sectors. One is liberalised, with intense competition between local and foreign players, and increased opportunities for all and benefits for the consumers. The other is still dominated by the same few big local firms, collectively exercising monosony power in the market.

If you want to break up the cozy elitism in Singapore, embrace globalisation, not reject it. A new elite will of course emerge, but it will be one more creative, competitive and ultimately constrained by the very forces that create them.

Elite schools are bad

I also detect an angst against elite school. The fact that Miss Wee is a humanities scholar from a top college in Singapore lends to the impression that elite schools are a problem in breeding uncaring, elitist attitudes.

It is natural that many students from good schools go on to form the elite in the country. But RJC is not Eaton. There is a big difference between an elite school and a school for the elite (or their children). In the UK, there are private schools for the elite costing more than ten thousand pounds per school year.

I know of no school in Singapore costing anywhere near the amount. Even independent schools are not entirely devolved from the state. As long as admission to an elite school is down to results, it would be a cause for celebration if we have more of them.

Civil Service is elite

It is disturbing also to hear the frequency which the word elite is used with civil servants. I am assuming that people who link the two are in fact referring to scholars in civil service rather than civil servants in general. Bashing Government leaders is of high risk in Singapore. The alternative? Take out the civil servants who every one loves to hate. Everyone can appreciate a joke against the stone face, bumbling civil servant. But this is again completely wrong. Unhappiness with Government policies should not be taken out on civil servants.

Furthermore, public organisations - taken broadly to include the civil service, armed forces, statutory boards, and GLCs - must have given hundreds of scholarships each year. Cumulatively, there must be thousands of past and present scholars in Singapore. By this measure, the elite in Singapore must be rather big and pretty inclusive indeed. Scholarships is also a damned good social leveller, judging by the disproportionate number of taxi drivers' children who are awarded with scholarships.

When you have an elite that is so numerous, it is more blase than special.

Definition of elite expanding

Finally, the power of competition unleashed by the internet is creating a new class of elite. Mr Brown, Singapore's most famous blogger, can be considered an elite by this measure. Everyone in Singapore knows him, has heard from him, and has seen what he wrote. When I last looked up my alma matar The Chinese High School on Wikipedia, Mr Brown was listed as one of the famous alumni of the school alongside late President Ong Teng Cheong and the Chief Justice of China!

Seen from this perspective, the recent hazing of Miss Wee by the blogging luminaries in Singapore is nothing but a elite versus elite contest. Though the new elite disguise themselves as non-elite underdogs, their public influence is increasingly clear for all to see. They are clearly articulate, can definitely write well, but somehow always employ exaggerated Singlish to highlight their non-eliteness, condescending perhaps?

These new opinion shapers are taking on the established elite, and often winning in terms of leading public opinion though not necessarily the arguments. Which websites do you think are more popular? Political parties (I mentioned political parties to disabuse anyone of the notion that I might be referring to PAP only) or Mr Brown / Talkingcock.com? This of course brings me back to my original point, nothing breaks up the elite structure like competition. We should embrace it.

The Hypocrisy of Moral Indignation

It was my army buddy Kevin who texted me from Singapore to inform me of this story. Grace and I almost flipped when we read how a teenage blogger Miss Wee Shu Min was given counselling for 'elitist' remarks.

I can certainly understand how Miss Wee's remarks could have come across as insensitive. Government should help older workers. There are both moral and economic arguments for it. The older generation of workers did not have as many education opportunities compared to the younger generation. They are therefore less equipped to cope with the effects of globalisation. Having been part of the nation building generation, there is a good moral case why they should be given extra help so as not to be left behind as the country progresses. In terms of political economy, it is also not desirable to have an underclass because a social fracture would make it even harder for the country to integrate into the global economy. The benefits of globalisation must be shared to keep society cohesive.

In economic jargon, even though globalisation creates winners and losers, a pareto improvement can be achieved by distributing some gains from the winners to the losers. Of course, how to do it without distorting incentives or creating dependency is the tricky part. With a little more education in economics and life's hard lessons, I am sure Miss Wee will come around.

However, the level of moral indignation aimed at the teenager beggars belief. I can't even decide for which of the following reasons I find most perturbing about the whole episode - Is it the oppressive political correctness that prevents anyone from giving their frank opinions? Is it the fact that people cannot deal with sarcasm? Is it the pettiness in people that makes them take issue with a youngster, and thus themselves behaving like insecure teenagers? Is it the disgust that even a blog on the internet has to be silenced? All in all, this is a warped form of censorship.

But there is a silver lining. Grace and I are impressed with Miss Wee for daring to state her views, and very eloquently as well. As the chinese saying goes, the waves behind push those waves in front. It is heartwarming to see the spunk in the new generation of young Singaporeans. Government should help older workers. But it is youngsters like Miss Wee Singapore needs.

[endnote: Just as I finished this blog, I saw this indignant letter published on ST

Oct 26, 2006 'Insensitive' blogger also lacked humility, empathy

I REFER to the report, 'Teen blogger counselled for her 'elitist' remarks' (ST, Oct 24).

I believe Miss Wee Shu Min has drawn enough criticism for her insensitive and offensive remarks. Hopefully, she will learn from this saga and move on.

The public should spare her further personal insults and allow her to concentrate on her exams, bearing in mind that she is just an 18-year-old with a major examination coming up.

What I am dismayed about is how her father, MP Wee Siew Kim, appears to agree with her opinion and sided with her when he said: 'She wrote in a private blog and I feel that her privacy has been violated.'

If Mr Wee feels that his daughter's privacy had been violated, is he implying that the Government was wrong to punish bloggers who posted racist comments on their supposedly 'private' blogs that were viewable by anyone with just a click of a button? I should think not. One should always be responsible and conscious of his choice of words, be it in an essay or a blog.

In the article, Mr Wee also stated that '(Miss Wee's) basic point is reasonable' and 'some people cannot take the brutal truth'.

I have read Mr Derek Wee's commentary and I feel that he is not the unmotivated or whiny, discontented worker that he was portrayed to be.

Mr Wee was merely airing his fears about how older workers are finding it difficult to cope with today's competitive and practical reality.

At no point did he state that he was dissatisfied with his job and I believe he will 'get on with the challenges in life'.

It seems that Mr Wee Siew Kim endorsed his daughter's 'elitist' remarks and that her only mistake was insensitivity.

The issue at hand is not merely about insensitivity; it also involves values like humility and empathy.

If Mr Wee's only concern for his daughter is about being politically correct, then I am afraid he is missing out on something fundamental.

Hopefully, Miss Wee will learn from this episode about humility and empathy as well.

Yang Sixiang ]

What a sanctimonious piece! First, he asked every one else to move on from the 'saga'. Why on earth is he writing this letter to the ST Forum in the first place? So he gets his say, but others should not. Second, Miss Wee made no racist remarks and is no bigot. He draws a totally unnecessary comparison between the racists blogs and Miss Wee's. Third, he wants to be the moral police and patrol the internet for those who lack the values (empathy, humility) he deems necessary?

Moral indignation is jealousy with a halo.
H. G. Wells

The Unveiling of a Debate

Something really interesting happened in Britain in the past week - political correctness was blown apart. First, a cabinet minister Jack Straw said that he would ask veiled Muslim ladies visiting him at his 'meet the people' session to remove their veils, and that veils impede on developing inter-community relationship. Incidentally, a slight majority of people polled agreed with Mr Straw.

In the same week, a junior minister asked for a veiled Muslim teacher to be sacked as he did not think she could teach effectively with the veil on. Interestingly, it later transpired that she had not worn a veil when she was interviewed for the job, thereby raising the suggestion that there was duplicity on her part to turn the veil into a political issue.

http://news.bbc.co.uk/1/hi/england/bradford/6050392.stm

There was another eye catching incident when a Muslim cab driver refused to serve a blind person with a guide dog because his religion forbade him to go near dogs, which are considered unclean animals.

http://www.mirror.co.uk/news/tm_headline=taxi-driver-in-ban-on-guide-dog-&method=full&objectid=17888060&siteid=94762-name_page.html

The Conservative shadow secretary for home affairs later added that he felt that Muslims in UK were creating a voluntary 'apartheid', by choosing to live so distinctively apart from the rest of the communities.

http://news.bbc.co.uk/1/hi/uk/6052232.stm

It is very rare for mainstream politicians in the UK to talk about race and religion so openly - besides the usual platitudes. Too much tensions had been swept under the carpet for the sake of racial tolerance some might say. But there was certainly a shift in the mood in the past few weeks, particularly after the Pope's speech. More politicians in the UK are beginning to question the traditional 'do nothing' approach towards race and religious issues. Suddenly, it seems that every politician is getting into the race and religion debate.

The Pope and MM Lee

What do the Pope and MM Lee have in common (besides wearing white)? They both gave their frank opinions recently (with much veracity in my humble opinion), created firestorms of controversy, and then had to issue apologies. MM Lee's apologies is carried on the BBC news website.

http://news.bbc.co.uk/1/hi/world/asia-pacific/5401376.stm

With the globalisation of news media, a word spoken at a corner the world can create a big ripple effect elsewhere. Instead of promoting more genuine dialogue, the age of global media is bringing about an environment of ultra-sensitivity and political correctness. It is almost impossible to say anything meaningful on difficult issues confronting the world without causing offense to some group or another.

But why the offense and the anger if there were no truth in what was said, one wonders.

" Check Bill " - say it with a Thai accent (เช็กบิล)

Thailand's coup was a blue sky lightning jolt - not an event many saw coming. Today, I met a Thai PhD student (let's just call him Pong, not his real name). He was elated with the military takeover back home. "Check Bill" he said, which in Thai colloquial meant payback time.

For months now, Pong had been lamenting about the Thaksin government. Allegations against Thaksin are fairly well-documented, so there is no need to discuss them here. Pong could scarcely contain his joy that the military or the military-imposed government might re-nationalise the assets sold to Temasek. Though I was never too comfortable with the deal based on what I had read, I nevertheless registered my protest that the deal was legal. If you read the news articles, Temasek is still maintaining that it has done nothing wrong.

Pong's rejoinder was that even if the deal were perfectly legal, Temasek (and by implication the Singapore government) acted in bad faith since it was well aware that the deal benefited Thaksin personally a lot more than the Thai people. I could not find a counter argument against this line of reasoning, not one that I could convince myself enough to say anyway.

Pong was very much in touch with his people back home. He told me that the coup went so successfully only because Thaksin was over-confident. For months now, the coup plotters had lured Thaksin into a sense of security by allowing the prime minister to get away with just about any thing. It was this sense of security that blinded him. If he was struck by a blue sky lightning, it was only because he saw only the sunny side of things.

Temasek now faces the possibility of being also a victim of this blue sky lightning. How could a venerable Singapore institution like Temasek commit such a strategic blunder? Not only is the investment under the cloud of uncertainty, the goodwill between Singapore and Thailand will now be put on the line.

Again, it was down to blindness. Temasek was so blindly convinced of its commercial logic that it probably chose to ignore the geo-political risk of the Shin Corp deal. Thaksin was so assured of his power that he was blind to the opposition to the deal. Both parties happily chose to look at the bright big picture.

If the assets were indeed re-nationalised, it would also be " Check Bill " for Temasek to the tune of USD1.9 billion.

A Singaporean's Experience with the NHS (and a reunion with an old friend)

The one truly amazing experience for any Singaporean who lives in the UK (besides the fact that it is 3 sing dollar to a pound!) is the National Health Service (NHS). NHS is a public funded healthcare service. As long as you are a legal resident in UK - citizen, permanent resident, student, working permit - and a valid address, you can register with your local service provider and all healthcare is free, free, free.

This was the topic of conversation when I met up with an old army friend Dennis Chan, who came over to London with his family a couple of weeks ago. To any Singaporean grown up with the notion that nothing is free, the first visit to the NHS is a thought-provoking experience.

Grace had the unfortunate experience of requiring a surgery last summer. We were checked into a single room, waited for a day, had the surgery done, stayed overnight, and walked away the next morning without paying a single penny. We left the hospital truly grateful that in our hour of medical distress, money was not an issue with the NHS.

Perhaps with his young child, Dennis was indeed making good use of the NHS. I could sense his glee when he said that his whole family was receiving free healthcare. He even went as far as to say that there was a lot of "humanity" in the NHS system, as it treated people with "dignity". Powerful sentiments for someone who settled in London for only two months.

Of course, the money has to come from somewhere, and you don't have to be an economist to know that. Tax rates in UK are indeed much higher compared to Singapore. Even though I am an economist and a pragmatic Singaporean, I do also feel that there is something noble about NHS - to provide healthcare to all as a matter of human right without regard for ability to pay. It may be economically foolish to provide any thing for free, since it would certainly lead to over-consumption and even abuse. Grace and I have also had horrible experience with the NHS as well - long wait, frustrating bureauracy, over-stretched and over-stressed staff. But whatever the difficulties, NHS has always tried to meet our demands without requiring us to pay for anything.

It is in the light of NHS that I sometimes feel that our Government lacks a certain nobility in its policies, and is often too calculating with its own citizens. In the end, noble aims are often foolish. But it is perhaps this sense of nobility that gives some meaning to life. For whatever the deficiencies of NHS, I dare say it makes the British feel better about themselves as a nation.

A Reactionary Force

A friend recently introduced me to this blog http://singaporemind.blogspot.com. I don't know whether to laugh or to cry when I see views like this. Is Lucky Tan but Chee Soon Juan in disguise?

The Big Link Up

DPM Wong asked, "hello hello can you hear me?" Awkward seconds later, the lady from New York replied yes. And that kicked off the video conferencing that linked up Singaporeans gathered in New York, London, Berlin, Bangkok, Beijing and Shanghai using the www.overseassingaporean.sg portal (you might have heard this announced in NDR speech). It was noon in London, evening in the Far East, and seven in the morning in New York (those poor buggers, wondered what time they had to be up).

DPM was in Shanghai, where my sister Annette was. The link was poor, often with seconds of delay in the transmission. It was soon obvious that a proper conversation was not possible. A Singaporean working for Google was exasperated that the organisers could not get a "simple technology" right. But never mind, the occasion was convivial enough. DPM promised to get the portal fixed as soon as possible.

I thought fixing the portal would be the easy bit. Getting the Overseas Singaporean Unit (OSU) to accomplish its stated mission would be more difficult. Looking at the Singaporeans gathered at the London launch, they were the usual so and so - senior managers of Singapore banks and companies, GLC expatriates, posted staff of Government and Statutory Boards - people already very much plugged into the Singapore system, the "pa see buay chow" band. The hard part would be to get true Singaporean overseas path-breakers, the guys who struck out away from the usual careers back in Singapore, the guys who went overseas to try something different, and doing things that no one back home even recognised yet.

Understandably, OSU is made part of PMO to reflect its importance in national building. However, being part of the PMO might have given the unit too much of an official sheen that might compromise its objective. I mean, would people really want to blog and exchange information on a Government run portal? Would you be freely expressive on a Government website run by civil servants? Building overseas Singaporean networks is one of those endeavors that are probably best done by the civil society and non or quasi-official organisations (like the British Council). In the end, OSU might attract only Singaporeans of a certain stripe.

The one thing the organisers got right though was the food. Gorgeous laksa, char quay teow, oh lua (fried oysters) were served. Annette texted me to asked if I was still there, but Grace and I were by then too busy with the food already. I texted back, "yes but eating". Nothing can move overseas Singaporeans as quickly as the prospect of real authentic Singaporean food. Thankfully for Grace and myself, this the organisers clearly understood.

Au revoir

Today is my second last day with the Singapore Tourism Board. Colleagues and friends ask how I feel about the prospect of leaving the only company that I have ever worked for...without a job. The answer is Simply Great!

Tourism is a strange industry. It attracts happy people with bright outlooks, chatty and passionate people, confident and beautiful people, and some say, a disproportionate number of lovely gay people. They have all come into my life and shaped it is ways I never imagined possible. Needless to say, they greatly transformed my otherwise gloomy and cynical nature. So while I am still no happy-go-lucky type, if you wait around a little, there are usually spots of sunny spells, just like the London weather.

Of course, the downside of having been in the services industry is that one inadvertantly becomes its greatest critic. I now find myself constantly holding up the wine glass against the light to check for unwashed lipstick stains, I comb through my hotel pillows for any stray strands of foreign hair and check that all the table settlings are aligned to the diner's view at every restaurant. One loses a natural appreciation for service cos the standards are now too high.

Working for a Singapore entity has also bizarrely increased my negligible sense of patriotism. There is a natural disdain for the competitive destinations, an inexplicable pride of being Singaporean. Right now, I cannot contemplate ever working for a Malaysian or Thai tourism company, for example. I would feel like I have betrayed my country or something. How very odd.



Finally, the overwhelming feeling is thankfully, immense satisfaction. I have not only learned a lot about an industry, acquired skills, but I have made so many lovely friends, from Mark and his kiddy brood and "never-offend-me-or-you-would-rather-die" Richard, to my first ever bosses, Elaine and Joycelyn, bouncy HM, sweetie Jas, glam Rhoda and many many others. Cliche as it might be, these friends represent my most important achievement in my career thus far...though of course, I didn't write that down in my MBA applications.

The End of the Affair

The picture you see on the left is Grace (right) with some of her staff at London's famous Four Seasons Restaurant, some would say with the best roast duck in the universe. The occasion was Grace's farewell party for this week marked her last at STB.

Earlier in the month, Grace completed her 6-year bond with the organisation. Her relationship with STB of course started earlier, back in 1996 when she was awarded the scholarships. I am not sure how other Singapore organisations treat their bondees. The end of Grace's bond came without fanfare, not a letter of appreciation, not a word of thanks, no one remembered. The 7th anniversary (remember, 6 full years of service) just sailed by like any other day. The scholarship kicked off with a high but ended in a whimper. The only person to whom that last day of bond has any meaning is the bond-server and no one else. Or have you been serving a bond for so long that you are no longer sure when it ends?

Many of our friends on a 6-year bonds should have completed around this time of the year. But there are still a few unlucky ones with 8-year bonds. Anyway, if any one of you bondees reading this post was given a special treat by your organisation on the day you completed your bond, I will like to know. These organisations deserve be congratulated for good HR practice. But for Grace, it does not matter now. Her bond affair is over. Next week, she heads off to a brand new life as an MBA student.

"Your tickets are now sent for procession. . ."

"The system cannot one . . ."

If I were not a Singaporean, I could scarcely imagine how these sentences could have made any sense. But I am a Singaporean, and frighteningly, I understood exactly what the customer service operator meant. You see, I was booking the air tickets through Zuji for Grace and myself to return to Singapore for the Christmas holidays. As Zuji was only the travel agent, they could not confirm and issue the tickets, and had to send them to the airline to 'process'. Which explained the fact that my tickets were sent for 'procession'. I then asked to be waitlisted on other flights, but of course, "the system cannot one . . . "

As a graduate economics teacher, I would sometimes be given exam marking assignments. Recently, I marked a batch of exam scripts from the Far East. I could always tell if a script was from Singapore (or perhaps Malaysia). Some of the sentences went,

" . . This equilibrium got price competition, that equilibrium don't have but got quantity competition . . . "

" . . By right cannot, but by left 'can' . . . . "

Yes, the student who wrote the second one even put 'can' in inverted commas to emphasise the fact 'can' did not really mean that it was acceptable. As I read through some of the scripts, they felt like some Ah Bengs talking economics in a neighbourhood coffeeshop. It was in truth too grating even for a Singaporean marker.

How did Singaporeans end up with English like this? I am not a linguistic or anthropology expert and hence do not know the answer. But as far as I can remember, we have always spoken in this manner. As the Speak Good English debate and campaign rage on, I like many Singaporeans, am also torn between the need to speak good English and the romantic desire to preserve the local (my) identity.

Singaporeans Non Grata

9 August - Singapore National Day, the day I posted my thoughts on my very first blog.

Last weekend, STB (with Tiger Beer) held the very first Chilli Crab Festival in London. Judging by the turnout, it was a tremendous success. The only hiccup was that the caterer ran out of crabs before the end of the event. Demand had greatly outstripped supply.

Though it was a promotional event aimed at the British public, Singaporeans would often take opportunities like these to meet up. While I was helping my wife (organiser) set up the STB counter, a couple of early birds chinese ladies came over and ambushed me into a conversation. The only thing we had in common was that we were from Singapore. As I was busy with the setting up, a conversation with some seniorly ladies was not something I had ordered.

They quickly caught my attention though as they claimed themselves to be ex-Singaporeans kicked out of the country by the Government, words spoken with part anguish and part anger. My first thought was - Political Dissidents! - you know, we hear there are quite a few hanging around in UK, US or Australia.

So I started taking some interest in what they had to say. Political dissidents they were not. Their stories were more down to earth, more mundane, and in some ways more heart-wrenching. There was nothing political or subversive about the lives they chose. The ladies were really ordinary Singaporean girls who married British husbands decades ago and came to Britain with their husbands. Practical consideration then dictated that they take up British citizenships (no need to keep applying for UK visa) and they lost Singapore citizenships as a result.

One of the ladies I met lived in the UK for the past 40 years. She never lost her attachment to Singapore. She came to the event to help Singapore's specially flown over celebrity chef prepare the cooking demonstration. Despite her years, she put in a hard day's work to help promote Singapore. She said that she had appealed many times to the authorities - even "spoke to Hsien Loong" - to let her regain her Singapore citizenship but all without avail. She was, in her words, forced to choose between her family and country.

For years, we have heard so much about globalisation and it has become such a cliche to say that we live in a global village. But globalisation truly began to sink in when 8 months ago my baby sister brought home an ang moh (a Dutch) and they recently announced their engagement. Globalisation means that the entire stayer vs quitter debate is moot. Perhaps it is time we look into ways to expand the Singapore franchise abroad instead of being too kiasu about who gets to be citizen and who not.