Skip to content

Dismantling the Apparatus of State Capitalism


BenChongThe last post  was a piece by another author,  Benedict Chong countering my proposal that Temasek and GIC be floated, publicly listed and a stake distributed in some form to Singaporeans and posing some interesting questions.  I appreciate that even though he has a, ‘Vote PAP ‘ badge on his Facebook page Benedict is coming at this from an economic angle  and not a political one. As I have also received a lot of questions about this proposal  I will answer Benedict in full  here and hope that everyone benefits. I believe Ben’s arguments can be summarised as follows:

BC: There will no change in relative wealth as a result of the distribution.

Therefore there will be no net benefit to those who receive the additional wealth since everyone receives the same amount.

Singaporeans would therefore be better off if they never receive any ownership stake in our SWFs.

KJ: “There will be no change in relative wealth” I do not see how Ben arrives at this conclusion, which is mathematically nonsensical.  By definition adding a fixed absolute amount equally to both sides must lower the ratio between two numbers, i.e.:

(yx+1)/(x+1)<y

where x is the lower number and y is the ratio between the numbers before the addition of an additional fixed amount.

We can see this if we imagine a scenario in which the top 10% have average assets of $1,000,000 and those in the bottom 10% have average assets of $50,000. Currently the ratio between the average assets of the top 10% and the bottom 20% is 20:1. After the distribution those in the top 10% will have average assets of $1,100,000 and those in the bottom 10% $150,000. The ratio is now 7.33 as compared to 20:1 so the income gap is considerably reduced.

In any case my intention was not redistribution but to ensure that those with very few assets currently had access to additional resources that could provide a potentially life-changing opportunity. I did go on to say that the distribution probably should be progressive so that those at the bottom of the wealth distribution received relatively more shares. I was not concerned with the relative wealth distribution so much as with absolute levels of wealth for those at the bottom. This example in fact serves to define my socio-economic philosophy as a whole and why I say that I am not a socialist. I believe in creating greater equality of opportunity. I am more concerned with raising up the level of those at the bottom of the income distribution than with levelling down from the top.  The original intentions of the  philosopher  Rawls also propagate this view.

In any case my intention was not redistribution but to ensure that those with very few assets currently had access to additional resources that could provide a potentially life-changing opportunity. I did go on to say that the distribution probably should be progressive so that those at the bottom of the wealth distribution received relatively more shares. I was not concerned with the relative wealth distribution so much as with absolute levels of wealth for those at the bottom. This example in fact serves to define my socio-economic philosophy as a whole and why I say that I am not a socialist. I believe in creating greater equality of opportunity. I am more concerned with raising up the level of those at the bottom of the income distribution than with levelling down from the top.  The original intentions of the  philosopher  Rawls also propagate this view.

“There will be no net benefit to those who receive the additional wealth as everyone receives the same amount”.  I also fail to see how this follows even if everyone received the same amount.  Assume that part of the gain would be used to finance consumption or to diversify into investments in other assets or education. Only if all the additional expenditure went on goods and services whose supply was completely inelastic would prices rise by the full amount of the additional expenditure.

To take the most obvious example of an asset in inelastic supply, we might see property prices rise as a result of the additional wealth in the hands of Singaporeans but this would also benefit the less well off particularly if Singaporeans were given the freeholds of their HDB flats as I have also proposed. It  could  also be counterbalanced by moves to abolish current subsidies to investment in property such as allowing CPF to be used for property purchases.

In any case (see last but one paragraph) I have suggested that it would be better for the distribution to be progressive.  Those with less wealth would benefit more. Even if equal amounts were distributed the marginal utility of that wealth would be much greater for the less well off than for those who already were wealthy.

BC: Issuing  new shares will cause the  overall monetary base to rise substantially resulting in one of two damaging scenarios.

Inflation as Singaporeans spend the money from the sale of their shares.

Or  share prices will plunge and there will be a rush for the exit with those who sell their shares first benefiting most

 This will be a demonstration of the failure of democracy.

“The monetary base will rise substantially as a result of the issue of the new shares leading to inflation”.    I can see where BC’s concern arises but as I mentioned in the original article, macroeconomic policies may have to be fine-tuned to  offset some of the extra demand created by the household sector’s probable desire to hold a lower level of assets and thus ease the economy’s adjustment to a new stock-flow equilibrium.  “Of course if and when shares in our SWFs are allocated to citizens there may be a period of adjustment during which the government would have to run a bigger budget surplus to offset additional spending by the private sector as it adjusts its stock of financial assets to the desired level rather than the artificially high one imposed by government.”

The new shares will be distributed free to Singaporeans. That is just a change in holdings of wealth between the government and the private sector. The assets side of the government’s balance sheet goes down while the household sector’s goes up. Anyone wanting to buy these shares from initial holders will have to use cash that will have to come from selling other assets or existing cash holdings. Therefore assets will move from the public to the private sector but there will be no overall rise in the level of assets.

 The MAS could also tighten monetary policy by allowing the Singapore dollar to appreciate in response to hot money inflows rather than providing an offsetting supply of local currency. However this would risk making our tradable goods sector uncompetitive

“Alternatively share prices will plunge hurting those who are unable to sell their shares fast enough”.  Since foreigners should be allowed to buy the shares it is difficult to see why they would be undervalued. In fact they may trade at a premium to book value if investors believe that the management team are undervaluing assets or able to add value over and above that of the underlying assets themselves. As part of the flotation process the investment banks involved would prepare prospectuses and provide a valuation range for the shares and other banks and brokerage firms would issue reports valuing the underlying assets.

One way of providing a more transparent and simpler method of valuation would be if shares in the domestic listed companies in Temasek’s portfolio were to be unbundled and distributed directly. The international and private equity arm could then be floated as a separate company. Far from leading to a price plunge, the share prices of these domestic companies may rise because of the emergence of a potential takeover premium which was previously not there. In addition the additional weight that these companies would take in global indices (because of the increased free float) would result in buying by funds that have to passively mimic the relevant indices. This is likely to be a source of share price appreciation in the short run.

To ensure that there is not too much selling pressure on the shares there could be a lock up or vesting period before successive tranches of shares could be sold. If markets are rational the expected additional selling will already be incorporated in the share price and a lock up should make no difference.

This will demonstrate the failure of democracy Ben uses the phrase “so much for democracy” to describe how he thinks the scheme I propose will end up hurting those who are unable to sell their shares fast enough. I have already explained why this is unlikely to happen. However Ben’s comment does betray where he is coming from. It is similar to the PAP’s thinking that only an elite should be entrusted with running the country and that the common people would only squander any assets given to them, no matter that austerity policies were responsible for building them up in the first place. In addition increased social safety nets would only lead to citizens bingeing on welfare. At the limit Ben is saying that Singaporeans would be better off never getting to enjoy the fruits of their labour.

BC: KJ has been irresponsible in advocating that future governments should run a balanced budget or even a deficit. This is extremely irresponsible given the example of the Eurozone or the US.

Benedict has misrepresented my position here. I have said that currently we have an excessive level of assets held by the government and accumulated through years of unnecessary austerity. Once we have decided what the appropriate level of government reserves should be to cope with potential additional expenditure then the balance should be returned to the people, particularly to the generations that underwent austerity to build up that level of assets. In macroeconomic terms it is just as irresponsible and a drag on growth to run budget surpluses as it is to run budget deficits.

Some other comments have said that revenues from land should be excluded from the distribution. However land is not an exhaustible resource and this land bank has been accumulated by the PAP government basically through expropriation from the citizenry in a manner that was inequitable because it was arbitrary in its application. There is no reason for the government to own 80% of the land and the revenues from past land sales can be distributed back to the  people.

In future, fiscal policy should be aimed at macroeconomic stabilization rather than accumulating as high a level of reserves as possible. A future government should aim to balance the budget at a high level of economic activity and employment. Substantial surpluses should be returned to the citizens in the form of higher spending or lower taxes.

I am grateful to Benedict for bringing up some  questions which gives me the opportunity to provide  clarification.

BC: What happens if those former SWFs meet insolvency issues in the future? Should the government backstop them or let them fail, keeping note of their huge presence in the markets?
KJ: This is similar to whether these newly privatized companies should continue to enjoy a government guarantee. Obviously they should stand entirely on their own feet and not benefit from any government subsidies or guarantees so that they compete on equal terms with the private sector. Given their monopolies in certain key domestic sectors it would also need a more powerful competition regulator to assess whether the underlying companies should be broken up prior to privatization to prevent exploitation of the local consumer.

If they subsequently ran into financial difficulties and threatened to collapse a decision would have to be taken by the government then as to whether to rescue them. However unless their insolvency was likely to cause massive economic losses or systemic collapse, e.g. due to a banking failure, it is difficult to see why the government should step in.

BC: Is the securities market in Singapore liquid enough to sustain such a listing?
KJ: Yes of course for such  a large cap stock (or stocks) that would be widely followed. Any liquidity problems would be more likely because the stock was small cap or not widely held so that the free float was small. This would not be a problem here. In addition it would probably have a secondary listing in NY or London. A large part of Temasek’s assets consist of stakes in other listed companies so in determining the total addition to market cap of SGX resulting from the flotation of Temasek and GIC for the purposes of index calculations one would have to eliminate any double counting first. As I said earlier the additional free float will result in more liquidity not less and the buying that would be required by index tracking funds would boost share prices in the short term at least.

BC: Will the government regulate the company or allow is to determine its own risk profile?
KJAs I stated above the company or companies will be in the private sector so it will be up to management to determine its risk profile. Regulation or divestment of stakes will be required in the case of monopolies or near monopolies that currently Temasek possesses in several key areas of the economy. 

BC: Who will lead the former SWFs? A government appointee or member of the general public? Since they will now be public listed companies the boards of the companies will choose the management. Ultimately shareholders will decide if the management is performing in line with the market’s expectations since they will have the right to dismiss the management at the AGM. The threat of the share price falling making the company vulnerable to a takeover offer is likely to provide enough of a spur in the sides of management to make them perform or for the board to dismiss them pretty quickly. This would be the best case of our leaders being forced to practise what they preach. Pay incentives for management would be transparent unlike the case at the moment and shareholders would have the power to ensure that they were aligned with their interests.

BC:Should the incumbent government issue a set of guidance, directives or risk parameters to the company?
KJ: In areas where there are existing monopolies there would obviously have to be regulation or divestment with concrete steps taken to ensure a much greater degree of competition to the benefit of the consumer.  It also may be necessary to subsidise the provision of essential public services, like public transport, where the companies are unable to capture the consumer surplus. However any such subsidies would be transparent and arms-length rather than hidden as at present.

Also since Temasek’s assets comprise controlling stakes in most of Singapore’s largest companies it would also be desirable to have the possibility of referring acquisitions of these companies by foreign corporations referred to a Committee on Foreign Investment with the presumption that acquisitions by state-owned or controlled companies would be illegal.

Finally,  it is good to see that this proposal has already caused a lot of debate. I believe I have demonstrated that the problems Ben has raised are either based on a misconception or else are easy to deal with. My main objective initially is to ensure that we get transparency and accountability by going for a public listing with all the disclosure requirements that entails. This will hopefully accelerate the dismantling of government monopolies in several key areas of the domestic economy.

However the next question was how to allocate the shares that the government holds. Since the government does not have a revenue problem raising money through a share sale, is not an issue. By distributing shares free to Singaporeans we not only ensure that our people receive the fruits of years of austerity and that the assets that have been built up by these policies are explicitly managed for their benefit with management being held directly accountable for poor performance. We also ensure that all of our citizens have significant assets without which any true equality of opportunity would be impossible.

Last but not least we dismantle the apparatus of state capitalism that has served the interests of an authoritarian government and its cronies for so long and been a vital factor in maintaining their hold on power. This is perhaps the most important reason for distributing shares and giving ownership directly to the people.

Last but not least we dismantle the apparatus of state capitalism that has served the interests of an authoritarian government and its cronies for so long and been a vital factor in maintaining their hold on power. This is perhaps the most important reason for distributing shares and giving ownership directly to the people.

2 Comments »

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: