20th February 2013
In this article, I will discuss
specifically on the impact of the rent-seeking behaviour by the
government and how this is the key reason for our low productivity
growth. This also explains why the government had to resort to
increasing the population instead, because they couldn’t effectively
improve productivity, by large part due to their rent-seeking behaviour,
which reduces impetus for innovation. I will also the white paper in
this context, and the reasons and timing for the release of the white
To put it simply, in terms of the management of the economy, the role of the government should be two-fold:
1) Enact minimal laws and regulations
to create an environment for businesses which is conducive for the ease
of business exchanges, so that this will attract businesses to
Singapore, and to also encourage them to invest and innovate, whilst
2) Enact policies to protect the
people’s social rights and prevent businesses from unfairly treating
them, whilst businesses aim to maximise their profits. So, a government
should enact laws such as anti-discrimination laws, for example.
At the same time, the government should
regulate as minimally as possible, so that it doesn’t make businesses
feel constricted. Otherwise, businesses will not find Singapore an
attractive place to invest. Over-regulation might also reduce
businesses’ willingness to innovate and develop new ways of working.
The Problem of the Singapore Government’s Business Interests
On the issue of Singapore, why has this become a problem?
1) First, our government is also in the
business of profit-making activities. By some estimates, the government
owns 60% of the economy. By right, what this means is that the
government will do its best not to regulate the economy, so that it
doesn’t impede on its own profit-maximisation activities. This is true
in that the government is thus interested in keeping corporate tax rates
low and is thus resistant to implementing a minimum wage or to increase
employer’s CPF contributions back to 20%.
2) Not only that, because of the
government’s ownership of the economy and this large ownership, the
government, in effect, becomes a monopoly. Thus this reduces incentive
for the government-company to innovate and do things differently since
even as there is competition, the government controls the competition.
Companies who want to invest in Singapore have to abide by the rules set
out by the government, which thus means that they are less likely to
challenge the government’s control over Singapore companies and will
work around these barriers. This might explain why our broadband speeds
for example, continue to fall behind other countries in the region, such
as South Korea and Hong Kong. Because the telecommunications companies
are owned by the government, and because there is a lack of competition,
there is no incentive for the government to increase broadband speeds.
3) Most importantly, the government is
also in the business of collecting rents from businesses. This, in
itself, isn’t a problem because as a responsible government, the
government needs to diversify its income sources, and so through taxes,
CPF contributions, from housing and COE premiums. And for the
businesses, this will be from corporate taxes and rents. We know that
for Singaporeans, because of the government’s diversification of income
sources, we are paying more to the government from different channels.
Not only that, we are paying increasingly more over the past few years,
as can be seen from the lower CPF withdrawals, and the much higher
housing prices and CPF premiums. But what had not been discussed
adequately is the impact of the government’s rent-seeking behaviour on
As mentioned, the government is also in
the business of running the business and because it owns a large part
of the Singapore economy, it also acts as a monopoly in some sense.
Businesses which want to invest in Singapore needs to play by the
government’s rules, by virtue of the fact that the government is, well,
the government. And thus in the event that rules are not favourable
towards businesses, the hands of the businesses are tied.
How Does the Government’s Practices Affect Businesses
Then, the question is, why would
businesses then want to invest in Singapore? Fortunately, for now,
businesses are still coming in because of a sound legal and regulatory
framework, which provides a business environment which is relatively
non-corrupt and which protects businesses from unfair practices. The
logic is that it should encourage innovation.
Now, where rents become too high for
companies, this means that companies would have to close or move out
from Singapore. The main businesses which will be affected are the small
and medium-sized enterprises (SMEs) because of low cash-flow. However,
big businesses are less likely to find high rents a problem because they
would have more capital. As a paper by
Murphy, Shleifer and Vishny featured on Harvard’s website had said,
“public rent-seeking in particular may afflict innovative activity the
most and hence sharply reduce the rate of economic growth.” Now, the
government obviously knows this and the government knows that at the
rate it is marking up its rental, mainly big businesses will be able to
sustain themselves in Singapore, and which is why the government’s key
focus is on attracting big businesses and multi-national companies
(MNCs) to Singapore.
For MNCs, it isn’t a problem for them
to want to invest in innovation, because they should have the capital.
However, it would be a problem for SMEs, because they don’t. So, for
SMEs who continue to want to stay in Singapore, they are unlikely to
want or are able to innovate, and thus productivity is unlikely to
improve for them. So, herein lies the problem of the rent-seeking
behaviour of the government. It prevents SMEs from wanting to innovate,
and productivity will stay stagnate, or drop. Not only that, because
these businesses feel squeezed by the high rentals, they are unlikely to
pay their workers fair wages as they would want to depress their
worker’s wages as much as possible, to reap higher profits. At the same
time, they would also want to import cheaper labour to do so.
Low Rental Causes Productivity And Wages to Remain Low
So, this explains Singapore’s issue of
chronic low and dropping productivity. It also explains Singapore’s
chronic problem of low wages. Where does the problem come from? The
government’s rent seeking behaviour, that’s where. Does the government
knows this? I bet it does. Which then begs the question – why did they
want to peg the increase in wages to the increase in productivity when
they would know that productivity is unlikely to rise in their planned
scenario, and thus wages are unlikely to rise as well. Then, why? Well,
the government isn’t interested in reducing rents, because it will eat
into their revenue, and thus this proposal of pegging wages to
productivity. Then, you might say, maybe the government wants more
revenue so that it can spend more on the people. I don’t buy this
because first, if so, why would the government do this pegging and
causes wages to continue to remain low? Second, if indeed the increased
revenue is for the people, where is it? It’s not coming back, and at the
same time, people are taking less out of their CPF. So clearly, the
government is in this to increase the revenue and profits, but for who?
Bringing In More Workers to Resolve Low Productivity Growth
But back to the problem – and so
because the government isn’t able to raise productivity, because of
their refusal to reduce rent, the other solution for their equation is
thus to increase the number of workers, to increase economic output and
grow the economy. And that’s why there’s the Singapore Population White
Paper 2013. As said, the whole problem arises because of the
government’s rent-seeking behaviour and their underlying profit-making
Which means by the government’s
economic activities, by their size of it and by the way they could
monopolise it, it has created competition against the very companies
that the government wants to grow and attract into Singapore. Now, this
is very dangerous. If the government doesn’t have the interests of the
people at heart, they can continue to have a workforce here because it’s
not like people are so mobile that they can all decide to leave. But if
the government becomes disinterested in taking care of businesses,
whilst protecting their own business interests, businesses will feel
marginalised and will leave. And it’s easier for businesses to leave, at
least for the big ones, because there are many other financial and
economic centres in the world.
This is not forgetting the other softer
aspects of our society, which also creates impediments for businesses.
Right now, it’s really mainly our legal and regulatory framework that’s
keeping businesses here. If you look at our workers, at least for the
lower paid workers, they feel that they are not paid an adequate
renumeration for their job. This reduces their motivation and interest
in innovating or in being productive. There is many research to support
this. Also, for the middle income earners, they feel that they are also
unequally treated because of the high income inequality. This also has
adverse effects on their willingness to work productively. I’ve also
mentioned because that our workforce aren’t the most innovative because
our education system has created a workforce which as many has observed,
is good at maintenance work, but not innovation. So you can see, our
Singaporean workforce feels highly disempowered and unmotivated. Why
then are businesses still willing to come? This is also why the
government has such an open door policy towards having foreigners come
to Singapore to work.
Increasing the number of foreign
workers into Singapore is the government’s solutions to first,
increasing our economic growth, and second, to compensate for a
workforce which which is unmotivated and less innovative. But as said
before, this is a very lazy way to resolve the problem, as as the
Worker’s Party had said, a “half-hearted” attempt.
But you need to understand, it’s not
because the government is unwilling to take time to seriously resolve
the issue. They simply do not want to because this means that they need
to reduce rent, and thus essentially means that they will earn less
Positive Effects of Reducing Rental for Businesses
If you ask me, what the government is
trying to do is that they are trying to milk rental as long as they can,
and in fact, milk their other sources of income (from the people as
well) for as long as they can. They want to do this so that they can
accumulate as much wealth as they can, before they embark on their next
step, which they know would be to have to restructure the economy, and
then to to reduce rents. Perhaps the government intends to continue with
their current course for another 3 years or maybe 5 or 8, or 20, but it
looks like they’ve miscalculated the balance and thus they would need
to revisit when they want to transit into the next stage of our economic
development now, rather than later.
As explained, once the government
reduces rental, this will give businesses some breathing space, which
will allow them to decide if they want to invest in technology to
enhance productivity. Also, as mentioned at the start of this article,
the government should regulate as minimally as possible, so that
businesses will not feel stifled by the regulations. So, the problem of
low wages can theoretically be resolved without having to implement a
minimum wage, if the government reduces rental for businesses. This will
then free up some money, which the businesses might then use to
increase the wages of workers, so that they will be more motivated to
innovate as well, and to increase productivity. So, the effect of
reducing rental, as one of the key pillars of restructuring our economy,
can have very positive outcomes. It can create a more dynamic economy
an workforce and will definitely be more sustainable than simply
increasing the number of workers, who will feel stifled and uninspired
to work in a crowded and lowly-paid environment.
Like I’ve discussed many times, can
this be done? Can the government reduce rental? Can the government
restructure the economy? Well, they can. It’s a question of whether they
want to, whether their vested interests will allow them to, and whether
they will be committed to do so, and not simply pay lip service to it.
Now, with the current decisions that
the government is making, it will bring Singapore towards an undesirable
direction. Already, companies are feeling the squeeze and the only
thing that is really keeping them here is because Singapore is still the
4th largest financial centre in the world, so they can continue to
interact with the other major businesses which are here. Also, our sound
legal and regulatory environment is also what is keeping them here.
Right now, our government is making use of our natural central location
and institutionalised systems to keep businesses here. But there’s
really nothing else to keep them here, because they can always move to
the other top financial centres, say South Korea or the cities of
Canada. And if they continue to want to stay in the region, they can
also consider moving to Kuala Lumpur, which is moving up as a financial
Back to the White Paper: Why Did the Government Release it?
Which is why it’s very worrying that
the government doesn’t want to change its course. Do you know why the
government had wanted to release the Population White Paper? They know
that businesses are unhappy, and so, if they show businesses that there
are plans to increase the number of workers, they can buy more time to
continue to charge businesses high rental, for another 10, 20 years.
This is why they had released the white paper. The government knows that
it can push the endorsement of the paper through easily in parliament,
and pacify companies. The government is willing to sacrifice the people,
at the expense of companies, so that they can continue to grow their
What Does the White Paper Have to Do With Aim-AHTC and the By-Election?
What they didn’t count on was the
people’s displeasure and uprising. It was a series of poor
miscalculations. In early January, the government knew that they had to
call for a by-election soon, because they needed to. They had already
planned to release the white paper anyway, and then to release Budget
2013 anyway. This means that for the whole of February, they wouldn’t be
able to hold a by-election. They most probably have other announcements
for March and April, possibly on the Our National Conversation, which
they are now conducting. What this means is that they have no other
suitable time of holding a by-election, except at end of January.
But the two things that they didn’t
count on was first, they called for a by-election right after the
Aim-AHTC episode, where the distrust that Singaporeans have towards PAP
was going down. Second, they didn’t realise that the anger that
Singaporeans have towards their mismanagement of Singapore was so great
that it would have such a negative effect on their losing the
by-election. And then again, it is very bad timing when they decide to
release the white paper, right after the euphoria came with
Singaporeans’ vindication at the by-election. Singaporeans got really
pissed off that the government had to ruin their celebrations.
And this why PM Lee said on Chinese New
Year’s eve that the government will looking into how to manage the
announcement of the white paper better in future. They had calculated
many things wrongly and they had timed many things wrongly. The problem
that has occurred is that the government had made their plans very early
on, possibly last year for the announcements of the white paper and
budget. As someone had commented, they needed to announce the white
paper first, to secure its endorsement, so that they can then proceed
with releasing the budget based on the endorsement. But as mentioned
above, the Aim-AHTC incident was not part of the plan. Also, they most
probably would have wanted to call for the by-election by end-December
but the Aim-AHTC incident didn’t allow them to, so they had no choice
but to wait it out. Finally, they simply didn’t have a choice by early
January as the Aim-AHTC dragged on and because of their refusal to come
clean, it looked like there was going to be no end to it, and which is
why they had to announce that a review of the town councils would be
down, to diffuse the situation, so that they could then immediately call
for the by-election. So, it’s really a matter of timing. Their had
compressed everything together, because of unexpected circumstances and
because they had miscalculated. They simply pushed themselves into a
corner and had no choice but to announce the review of the town
councils, the by-election and the release of the white paper
back-to-back. Most importantly, they had been very rigid. And the reason
why they are rigid is because PAP has taken it for granted that they
can determine the pace of things, but no longer.
Also, to be clear that even as PM Lee
said that they would look into how to manage the announcement better,
this isn’t the real problem. If they sincerely believes this is the
problem, this shows that they continue to be deluded. The inherent
problem is their profit-making fundamentals which has prevented them
from finding the real solutions.
The other thing that worked against
their favour is this – because they want to control mainstream media so
much and because they want to sway public opinion so much, they became
the victims of their own perpetration. They were deceived by their own
media and the stories that they’ve created of themselves, and they
sincerely believed that people weren’t as angry as they actually were,
and they sincerely believed that they were going to win the by-election.
So, together with rigid planning,
severely bad timing and miscalculations of on-ground sentiments, driven
by their control and self-deception of mainstream media, the situation
spiralled out of control, and out of their hands, back into the hands of
the people. Yay!
What’s the Solution?
Actually, this whole episode which
began all the way from late last year shows that PAP needs to open up.
They need to, because it’s for their own good as well. As much as they
want political survival, the situation that they’ve created is also what
has messed up for them. They simply do not know how to handle their
control anymore. So, they need to open up so that they can have a more
accurate understanding of Singaporeans, and be able to read them
properly, and anticipate their reactions better. This will then mean
that they would be better able to predict responses to the release of
white papers, and also gain more support, if need be.
The current problems are self-inflicted
and can be resolved, all if PAP is willing to be truly honest,
non-corrupt and open. A quick note that as much as PAP believes that
it’s non-corrupt, the very structures that they’ve created and tie
themselves to means that they are inadvertently allowing their own
people to benefit, and whether this is intended or not, has created
Finally, back to the issue of their
rent-seeking behaviour, PAP simply has to reduce their want for wealth
generation and to remember the basic principles of governance – to first
protect the people and take care of their welfare. Once they remember
that, they will know to do the right thing.
But if they don’t, well, there’s the next general election. And we will then do the right thing for them.
Article by Roy on his blog The Heart Truths.