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.