Tuesday, April 12, 2011

Hard truths you won’t read about elsewhere, Part II

The current policies in Singapore have questionable sustainability, and their origins derive from misplaced incentives. As long as the incentive structures remain, we can expect new policies to be equally unsustainable.

For the longest time, strong economic growth has been the paramount policy objective. Yet, for a government so single-mindedly focused on economic growth, and so well-compensated for thinking about it, the PAP’s policies are remarkably unimaginative, loaded with undesirable side-effects, and in many cases, one-shot wonders.

In decades past, we followed a foreign direct investment and growth by exports economic model that was successful beyond our wildest dreams. This strategy has been replicated in economies such as Japan, Taiwan, South Korea and now China. China is the FDI elephant in the room, squeezing just about everybody out. Indeed, the FDI and export-driven model is unsustainable for just China alone; the world is too small to accommodate a mercantilist economy of China’s heft without severe global imbalances building up.

In response, the PAP has employed strategies such as massive immigration, casinos and a policy of keeping wages low. Our race up the value chain to secure higher value-added work is falling flat. Don’t ask about productivity increases.

We are bumping up against limits on every one of these policies. How high can the population go before our infrastructure simply breaks down? What destabilizing effects will continued massive immigration have on the social fabric in Singapore?

Are casinos worth the social problems they cause? And won’t their benefits melt away as more casinos spring up in neighbouring countries to capitalize on the gaming market? Are these transient benefits worth the permanent side-effects?

What about keeping wages low? Doesn’t that run counter to the aspiration of a better life for Singaporeans? And how low can they in fact go, compared to countries with rock-bottom costs like China?

And what of the high inflation period that we are entering into now? How will people with low wages survive in such an environment? What will low wages do to income inequality? A widening income gap already causes all sorts of problems. Do we really want it to be wider than it already is?

It is not just the PAP’s economic policies that are unsustainable.

The CPF scheme has morphed over the years beyond all recognition. It simply will not be sufficient to fund retirement for most people; retirement is going to be a dim possibility for many Singapore citizens. And the PAP’s stop-gap measure is CPF Life, which I have previously stated is simply a means to transfer the burden of longevity risk solely onto the shoulders of the individual. Perhaps it is time to call the CPF scheme what it really is, a cheap source of financing for the government.

The HDB 99 year leasehold problem has been commented on by another blogger. I personally do not think this is a *very* serious problem (for too many reasons to be elaborated here), but there is no question that that is also not a sustainable state of affairs.

Worse than being unsustainable, many policies work at cross-purposes to each other, such as immigration to boost GDP growth and family-friendly policies aimed at increasing the fertility rate.

The manifestation of policy schizophrenia is a reflection of the system’s misplaced incentives, placing GDP growth on a pedestal far above all else. As commenter Ponder Stibbons had previously remarked in my “Policy Schizophrenia” post, it is difficult to discriminate between policies genuinely designed to improve the quality of life for Singaporeans, from policies which improve the quality of life only as an incidental benefit. The main objective of many policies remains GDP growth.

After all, our politicians are incentivized to target this, much as Wall Street banksters game the system for short term gains.

As long as our incentive structures in government remain the same, government policies will continue to be unsustainable, with frequent stop-gap measures such as CPF Life and raising the retirement age, which brings me to Hard Truth #3:

Policy-making in Singapore is indifferent to its ill-effects on large swathes of the population, much less to individuals. “Singaporeans” is an abstraction used to justify policy-making. In reality, individuals do not figure in the calculus at all.

Description forthcoming in the next post.

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