Perspective Unlimited

Wednesday, November 29, 2006

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.

Saturday, November 25, 2006

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.

Tuesday, November 14, 2006

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.

Saturday, November 11, 2006

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.