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Who Deserves Our Wealth?

whodeservesourwealthBaby621I am very pleased that Jeremy has set out in writing his reasons why he disagrees with my proposal for the privatization of Temasek and GIC and the distribution of shares to Singaporeans.   I hope we will see more of his ideas on this subject or anyone else’s for that matter. Unfortunately Jeremy’s disagreement seems to stem from a basic misconception and a failure to grasp what the process of privatization and public listing of a previously nationalized  asset entails. As he has misunderstood the process much of what he has written makes little sense.

Before we get into that mess let’s start with areas of common agreement. Happily we both agree that there needs to be more transparency. However Jeremy seems to accept the government’s own figures for its budget surplus which I most definitely do not.  Our government’s budget figures are not set out in the format described as  ‘best practice’ for governments by the IMF and in general use by advanced democracies worldwide.  As a result our budget contains discrepancies which makes it impossible (even for me) to decipher and gauge true values. I first alerted Singaporeans to these discrepancies in 2012 here.

Jeremy also agrees with me that one possible way to achieve transparency without privatization and public listing and distribution of shares is the Norwegian model, where the SWF is required to achieve an extremely high level of transparency and is responsible to Parliament for its performance each year. I’ll come onto Norway later because Jeremy gets mixed up by that as well.

Jeremy worries that $6 billion a year of extra spending is being unduly profligate and talks about finding savings in the defence budget to pay for it. This is despite my pointing out that the true surplus in 2012 was at least $36 billion.  I also pointed out that even the Net Investment Returns Contribution of $7 billion which is supposed to be allocated to current spending, in fact went straight back into the reserves.  The savings to be made in the defence budget are miniscule compared to the surpluses and the amount MOF likes to give away to other nations.  In any case I contend that we should be increasing our spending on defence in line with the rest of Asia not reducing it.

I was completely confused by Jeremy’s contentions that privatization (allowing public listing and trading in the shares of our SWFs) would not bring about transparency and accountability and wondered why he brings up the global financial crisis of 2008 as having some relevance to my proposals.  I do not see how this is an argument that listing the shares of our SWFs will lead to less transparency.  Also why would Jeremy would have brought up MERS as an example?  MERS (which stands for Mortgage Electronic Registry Service),  is an electronic registry operated by a privately held company (MERSCORP, Inc.) designed to track ownership rights and mortgage loans in the United States. Since this is a privately held company it is not listed on a public stock exchange.
Could it be that Jeremy simply didn’t know what is meant by the term ‘privatization’ when proposing  that we allowing public listing and trading in the shares of our SWFs.  As his arguments make no sense I am guessing that Jeremy has confused the process of ‘privatization’ with privately owned  or he may here be thinking of private equity buy outs. Jeremy is fiercely refuting a proposal that was never posited in the first place.

I don’t see how he could have made this mistake.  I even give Warren Buffet’s publicly listed company, Berkshire Hathaway as an example of how transparency is a spur to better performance in my original article.

After mixing up private and publicly listed and so forth Jeremy says that transparency did not prevent the global crisis of 2008.  Here Jeremy is correct. But did I say transparency would somehow prevent financial crises?  No, I make no claims for transparency by itself. I do not say that it will prevent future financial crises.  The cause of that crisis was indeed not a lack of transparency. If anything there was too much data, as Nate Silver makes clear in his excellent book, “The Signal and the Noise”. The problem lay in the interpretation of that data and the conflicts of interest to which certain key institutions like rating agencies were prone. These examples of willful blindness to the fallacies in the analyses by ratings firms were then compounded by the mistakes of policy makers, at least in the initial stages, which almost brought the global financial system to its knees.

There is no argument to be made that a public listing will not bring about a much greater level of transparency. Of course it will.

How about accountability? At present there is very little information available to judge the performance of our SWFs. We do not even know what the real level of assets is. What we do know is that historically there is a strong statistical correlation between the level of secrecy in an organization and the likelihood of mismanagement or fraud.

Privatization and the disclosures that would be necessary if the SWFs were listed would make it much easier to identify underperforming management. It would provide a spur in the side of management, to use LKY’s favoured term. Accountability is like everything else- we have to demand it.

By listing Temasek holdings and GIC, shareholders would be able to vote against the re-election of the board or individual directors at the company’s annual meeting if they felt that the company was underperforming. It is notable that no heads rolled after both Temasek and GIC lost a significant percentage of their value, even though they claimed to have recovered their losses remarkably quickly.

Having to publish regular audited accounts would also allow a spotlight to be shone on the way the management of these companies value their positions.  I believe that Singaporeans want to know how the PM’s wife is doing and to be able to move her on if her and her team’s performance is subpar.

Of course just as transparency doesn’t guarantee good governance so even a public listing might not prevent fraud altogether. UBS, in which GIC invested so much and lost most of its investment, is a good example. On balance, if our assets are being squandered and lost through poor investment decisions then I would rather know than not.

Nevertheless a system that allows the government and the managers of the SWFs to transfer assets into the fund at grossly undervalued levels, see “Has Temasek Found A Cure for Balding?”, is one where one should be suspicious of the performance claims by management. Notwithstanding the fact that the current CEO of Temasek got her job purely on merit, as our State-controlled media frequently remind us, privatization would also ensure a separation between management of our SWFs and the government, which is necessary to fulfill any standard good governance requirements.

Jeremy agrees with me on Norway but after that his ideas fall down because he has failed to grasp the fundamental difference between Norway’s situation and that of Singapore. The Norwegian fund has been built up by taxes and royalties on the earnings from the exploitation of the country’s gas and oil reserves. As these are exhaustible resources that, by definition, cannot be replaced, there is a strong argument that they should be represented on the nation’s balance sheet as an asset.  They belong not just to the current generation of Norwegians but also to future generations. As they are used up, they should be replaced by financial or real assets such as infrastructure investment. The current generation should only be able to draw on the income from those assets.

Singapore is a different case entirely. The assets of our SWFs represent forgone consumption by present and past generations of Singaporeans. There were no resources that were used up to earn those assets only sacrifice and austerity by Singaporeans past and present.  In other words, the sweat of your grandfather’s brow, people being denied medical treatment that is freely available in most other advanced countries and our old people, the disabled and those in single parent households having to live in hardship. I could go on but I have made the point repeatedly that our people live in wholly unnecessary austerity to accumulate surpluses that will never be spent even if they are not frittered away through poor investments.

There is no obligation to pass on these assets to future generations and it should be up to individuals to make their own decisions as to how much they want to leave (in economics we call this their intergenerational time preference function).

One can say with certainty that with productivity growth averaging at least 2% per annum in advanced countries like the US (though maybe only half that in Singapore due to the PAP government’s preference for cheap foreign labour over automation) that future generations as a whole will definitely be much richer than current generations. Likely technological advances may raise this productivity growth by several orders of magnitude.

Thus it is difficult to make a case as to why the state needs to maintain a reserve beyond what is needed for genuine emergencies or to defend the currency. At the moment the MAS has to hold down the Singapore dollar to prevent our currency appreciating too far and making our economy even more uncompetitive, so arguably it does not need to hold excess reserves.  In a succinct and admirably clear article (see here) Andy Wong also supports the contention that the reserves are much bigger than they need to be. Furthermore it has not been explained to us why we need to go on accumulating assets at the same rate nor why the PAP government is so anxious to keep postponing the CPF withdrawal age and the minimum sum.

We can think of Singapore as being like an enormous hedge fund, though apparently with only subpar returns. A few government functions are added on, though one day a future government might want to divorce itself from the people entirely and just keep the assets! As a hedge fund, it is in an admirable situation compared to the rest of the industry. This is because it can coerce its investors into keeping their money in the fund and make withdrawals more and more difficult.  I am sure a lot of real hedge fund managers would like a similar situation.

This brings us of course to a further reason why the current situation is so unfair to the present generation of Singaporeans.  If there were no immigration then future generations would be the descendants of Singapore citizens today and one could argue that to retain a substantial pool of assets in the state’s hands for the benefit of future generations at least had some merit. As an economic liberal who believes in individual choice, I would still prefer those decisions to be made by the individual.

However, the PAP government seems determined to dilute the current generation’s stake in the SWFs by enfranchising millions of new citizens. It has been suggested that the underlying reason behind this is to maintain its grip on power. While it still has control over the people’s assets it has an enormous carrot to use to induce foreigners to become citizens and to bribe them once they do so.  We can already see that happening in a limited way with the foreign scholarship programmes that our SWFs have set up.

Thus, while I would support some form of progressivity in the distribution of shares to try and ensure that more of the assets go to those at the bottom of the wealth distribution in an effort to promote genuine equality of opportunity, as opposed to the present fake meritocracy, I do not see any rational argument why the bulk of the assets need to be held back by the state as Jeremy advocates. His self-confessed collectivist bent is not radically different from the PAP’s and does not represent genuine reform. Despite saying he wants more transparency he seems to favour keeping the status quo. While he may feel that readers may be impressed by his knowledge of simultaneous equations from O Level Maths, it does not really buttress his arguments which have shaky theoretical underpinnings and some serious fundamental errors.
Nevertheless it is great that he has come forward to provide a rationale and hopefully we can have more reasoned debate in the future.  As Jeremy is an SDP policy author, the more common ground we can establish now the better.


  1. Jeremy, or the workers party has been quite disappointing as an opposition. Although they have done their fair share of speaking in parliament, we have yet to see them come out and make a stand on certain issues that is close to the heart of Singaporeans. They have chosen the “safe” option of only appearing in parliament and nowhere else.

    It is clear that they are lacking in terms of intellectual capacity when it comes to economic matters or passion in standing up against the misguided policies of Pap.

    So Kenneth, thank you for your in depth analysis and thoughtful write up. MANY THANKS!!


  2. You say that the Norwegian SWF is funded by oil and gas (one day they will run out) and therefore the revenue is considered as capital receipts and not ordinary revenue. By the same argument our URA land sales which forms the bulk of the re-stated budget surplus of $36 billion is also capital receipts since one day we will run out of land to sell. Do you think we should be like Hong Kong where I believe land sales are taken into the budget as ordinary revenue?


  3. Hi KJ, love to read your articles, but with respect to your newest posts I hope that you could stop, for want of a better word, arguing with Jeremy. You have both agreed to disagree, and sniping at each other back and forth is unbecoming, especially in this period of crisis where the opposition should stand united. Again, love your articles, they’re insightful. Thanks and regards.


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