RENT SEEKING BEHAVIOUR OF THE PAP GOVERNMENT IS DETRIMENTAL TO THE ECONOMY

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 paper.

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 earning profits.

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 companies.

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 objectives.

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 profits.

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 centre quickly.

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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 wealth.

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 unfair practices.

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.