Lessons from 40 years of policymaking in S’pore

Source: Wikipedia

The following are excerpts from yesterday’s address by former senior civil servant NGIAM TONG DOW to the Economic Society of Singapore

THIS is the first time I am addressing a group of fellow economists. As individuals, economists are among some of the nicest people in the world.

But as a tribe, most of us are arrogant. From sunrise to sunset, economists always think they are right and every other Gentile is wrong. But when the sun sets and darkness descends on an economy, economists are as much at a loss as anybody else unschooled in the dismal science.

How has this come about? Economists from Adam Smith to Keynes, and Friedman, are forever searching for the holy grail of equilibrium, just as statesmen strive to receive the mandate of heaven. As a career Singapore civil servant, I am somewhere in between. So when you hear me holding forth on public policy issues today, I hope you will forgive some intellectual arrogance on my part. But at least you know where I am coming from. And tell me if I am dead wrong.

Stop-At-Two Population Policy

At a time when Singapore is not even replacing itself, it is difficult to recall that the population growth rate in the early 1960s was over 4 per cent. The rate of birth was 3.6 per cent. From today’s perspective, it seems to be a golden age. At the time, it was a nightmare. Our stop-at-two family planning policy has to be seen in this context. In a matter of two decades, our population growth rate trended towards 2 per cent, and soon fell below. This occurred in the mid-1970s when we achieved full employment . . . While our demographers were tracking the statistics, they failed to think out of the box. Given abundant job opportunities, married women chose paid employment outside the home to having more babies and domestic chores. Worse, single women chose careers to marriage. Even as the birth rates were falling, the Ministry of Health and the Family Planning Board continued to fly on the policy auto-pilot of penalising the third order of birth.

Critical Population Size: Asking the Right Questions?

Even when the EDB was scrambling for every job in the international market place, those of us who were at the frontline of job creation realised we did not have the critical mass to be an industrial nation. Our population was around 3 million. What then was the magic figure? 4 million, 5 million, 6 million? Our physical planners in the URA pored over their maps to determine the optimum size of population that Singapore can accommodate. But were we asking the right questions? If size alone counts, then countries like China and India would have dominated the world, as indeed they now can by opening up their societies and economies. What then are the options for small states like Singapore?

Global Knowledge-Based Economies

As competition in the global economy moves from a resource base of land, labour and capital, to a knowledge-driven race in education, technology, skills and organisation, sheer population size is no longer decisive – if it ever was. What counts is the average level of academic education of the bulk of the population.

A former president of the Matsushita Corporation of Japan told me when he met me as chairman of the Economic Development Board (EDB) in the 1970s that Japan was strong in manufacturing because the average level of schooling of the population then was senior high, roughly the equivalent of A levels in Singapore. He also made the point that what counts is a high massive plateau of people with a high average level of education.

High peaks of academic achievement by our President Scholars, modern-day imperial scholars, are of course a matter of pride not only to their families, but also the country. Mr Yamashita’s deeper point to me was that an education system should not be totally dedicated to producing imperial scholars. It is better for the country to achieve high national averages. He preferred massive plateaus to high solitary peaks. I believe that Singapore has to resolve this conflict in our national psyche. When does meritocracy end and elitism begin?

In a knowledge-based world of global competition, sheer numbers alone are not enough. What counts is the quality of the numbers. I venture to suggest that the average level of education of Singaporeans should be at least A or polytechnic levels. All PR applicants should be better. Their role is to help raise our average, not just to add to our numbers.

Public Finance: an Inverted Pyramid

In most countries, the public finance structure is a normal pyramid where the broad-base 90 per cent of the population support the poorest 10 per cent. Singapore is an exception. We are an inverted pyramid where the ablest 10 per cent support the other 90 per cent. Ten per cent of the population pay all the income taxes. They also pay the bulk of dividend taxes, tax on interest, property and estate. The net balances in the CPF accounts are saved by this group.

Public finance in Singapore is like a top spinning. So long as the momentum is at an annual GDP growth rate of 8 per cent or better, the social compact prevails. But when the growth rate is halved to 4 per cent or less, social fissures will appear. There are some signs of unease even now. The upper middle class which do not enjoy public housing subsidies or conservancy rebates are increasingly frustrated by what they view as populist schemes, such as the ERS share schemes. Cars, housing and education of children are more expensive than even in the capital cities of developed countries.

GST: Sticky Prices

When personal income tax rates are dropped, the GST goes up by 1%+1%, bringing about a general rise in the retail price index. We have to remember that prices are sticky downwards. And as we have to give more rebates to the poor to offset the GST increase, the revenue impact is at best neutral. It was in fact slightly negative when we first introduced GST in 1996 at a rate of 3 per cent. I hope my guess at the arithmetic is wrong.

Surely, at a time when we are just about to recover from a severe economic recession, the government ought to cut its own expenditure to make up for the loss of revenue from an income tax cut. In real life, the best time to cut income tax is when an economy is booming. A lower rate of tax from an expanding economy will yield higher revenue. In a recession, a lower rate of tax can only lead to even lower revenue. To reduce taxes and hope that the economy will expand is in my view an exercise in futility.


Under former Monetary Authority of Singapore chairman Goh Keng Swee, and to this day, the MAS’ instinct was always for a strong Singapore dollar to the point that it became a badge of honour. The raison d’etre was a strong currency kept imported inflation at bay.

By the early 1980s, Singapore’s competitiveness in the international markets was rapidly eroded by what Tan Kong Yam, who became the chief economist of the Ministry of Trade and Industry (MTI), called the twin blades (as in a pair of scissors) of high wages and an overvalued (strong) currency. Dr Goh would not give way on the exchange rate, and (former economic adviser to the government) Albert Winsemius and myself would not budge on our wage adjustment policy.

The policy tug-of-war between MAS and MTI was resolved when the government accepted the recommendation of the first 1986 Economic Review Committee to cut employers’ CPF contribution by 16 per cent. CPF was slashed from 46 per cent to 30 per cent. Currently, it is at 33 per cent.

Sacred Cows and Bitter Medicine: the CPF

In 1986, the full burden of economic adjustment fell on labour. The CPF cut of 16 per cent was in effect a wage cut. Our people swallowed bitter medicine in one gulp. Within two years, the economy recovered.

The CPF cut in 1986 was bold and decisive. It would have been of lasting value if it had been a permanent cut, a basic structural adjustment. Instead, it was adjusted upwards from 10 to 16 per cent for employers. The current cut of 3 per cent is even more tentative. We have by not facing up to our loss in competitiveness (wage increases exceeding productivity increases for far too long) introduced too much uncertainty into the decision-making process for foreign investors. Investors are prepared to adjust to market pressures, but they will not accept government-mandated wage cost increases.

I believe the Ministry of Finance (MOF) is still studying what should be the optimum CPF rate. Let me suggest that my former ministry adopt what Dr Goh would approve as a robust approach in policy making. I propose that the CPF rate be fixed permanently at 20 per cent for employees’ contribution and 10 per cent for employers’. Saving 20 per cent of one’s monthly salary to pay the housing loan mortgage is not an unreasonable arrangement. HDB’s calculation of affordability will be less optimistic and more concrete. The tendency to overbuild will be curbed.

The Singapore Dollar Peg

Productivity increases in Singapore have long lagged wage increases. This time around, the adjustment must fall on all Singaporeans, not just labour. The other blade of the policy scissors, the exchange rate, has to be used.

The MAS under Dr Goh has pegged the Singapore dollar exchange rate to a weighted basket of currencies. But in the real world, nearly everybody trades in the US dollar. Two of our major trading partners – China, including Hongkong, and Malaysia (and one can even argue a case for Japan) – have pegged their currencies to the US dollar. Instead of fine-tuning exchange rate fluctuations, the weighted basket of currencies approach, it would be better in my view to simply peg the Singapore dollar to the US dollar, just as Malaysia and China have done.

Spending Our Reserves

From time to time, when times are hard, there are calls in our Parliament to spend our reserves to ‘tide us over’. The MAS should educate the people to understand that our reserves are our best guarantee for a stable, fully convertible currency. Without such a currency, we will not be able to import anything. Unlike the Americans, we are just too minuscule for anyone to give us any long-term credit.

Our real reserves are the budget surpluses and net CPF balances accumulated over the years. Any reserves over this hard core are just temporary funds parked with our banks because the depositors expect the Singapore dollar to appreciate, or our interest rates are attractive, or both. MAS, in my view, should not just look at the gross official reserves, but the net hard core – that is, what really belongs to us and over which we have control.

Land and Transport Policy: the MRT

Very few of us will know that the USSR government offered to build Singapore an MRT in the mid 1960s. According to Howe Yoon Chong, who was Permanent Secretary (National Development) then, we could have had the MRT system built for less than $1 billion if we had accepted the Russian offer. When Singapore decided to build the MRT in the late 1970s, it would cost us $5 billion.

Rail and Bus

Having one – that is, SMRT – as the sole rail operator in Singapore, or two to include SBS-ComfortDelGro for the North-East line, is not the right question to ask. As Dr Goh would have insisted, the competitive test is between rail and bus operations.

The root of the problem, as Lim Leong Geok told me some years later, is that after the epic battle to build the first MRT line, it became too easy to go on to build the second, the third line. Dr Goh is no longer around to scrutinise the case for rail systems. The administration just flew on auto-pilot. Because of their kiasu mindset, they made an uneven playing field more so.

The Public Transport Council (PTC), just as the National Wages Council, should take a sabbatical. As Hon Sui Sen would have said, government should learn to leave well enough alone. Let buses compete with rail freely.

Land Policy

Housing 85 per cent of the population in 900,000 flats is no mean achievement by the HDB. Few know that the cornerstone of our vast low-cost housing programmes is the Land Acquisition Act. The Act allows the State to acquire private land for public purpose at pre-development prices. Dr Goh asked me, then a young officer, to draft the Cabinet memorandum proposing that the compensation to be paid for land acquired exclude its potential value.

We saw no reason why landlords should benefit from public infrastructural investment in roads, drainage, sewerage, power and water pipelines, etc. We would pay only the market value of raw land before public development. Our policy discouraged land speculation. The development charge imposed for change of use falls within the same concept. In effect, the State creamed off about half the potential value.

Sadly, the clarity of thought shown by Dr Goh in pricing land was lacking in more recent years. Relying on the concept of opportunity cost, the Chief Valuer, at the behest of either the Ministry of National Development or the MTI (I am not sure which), valued land with Raffles Place land as the benchmark. The assumption is that every square metre of land in any part of Singapore has the potential to be Raffles Place.

Port of Singapore Authority (PSA) & Tanjong Pelepas

As a result, PSA priced itself out of the market for transshipment. Unwittingly, we gave Tanjong Pelepas the window of opportunity. One of the main causes of Singapore’s loss of competitiveness in recent years is our perverse land pricing policy. What did it achieve? It was no more than a muddle-headed book-keeping exercise. MOF paid out subsidies to MCDS and EDB, which were returned to MOF as land revenue. In one mistaken manoeuvre, the overall land price shot up and Singapore lost part of its competitiveness.

Asset Enhancement

Those of us who grew up after the war in the 1950s will recall the festering urban slums of Chinatown and the mosquito-ridden kampongs of Toa Payoh. So, when our families moved into high-rise HDB flats from the mid-1960s onwards, it was like paradise on earth. EDB worked in tandem with HDB. EDB found the jobs, and HDB built flats at the rate of one flat every 36 minutes. It was a winning combination underpinning the electoral success of the PAP government at every general election since. Mr Howe Yoon Chong, the first CEO of HDB, once startled his ministerial colleagues by proposing that we close down the HDB as it had by then housed some 80 per cent of the people. He thought that we should leave it to the private sector to build for the other 20 per cent. Old habits, particularly success, die hard.

So from providing a first home for a family, we went on to give them a second bite of the cherry by giving a second loan to upgrade from a 3- to a 4- or 5-room flat. As property prices were rising in the 1980s, there was good cheer all round. HDB thought they had an endless queue for new flats and went into overdrive. But the party had to end. The Asian financial crisis in the mid-1990s led to a sharp and sudden fall in demand, particularly those who were hoping to make money by upgrading. The queue disappeared, and HDB was left with unsold flats which total some 17,000. HDB would have gone bankrupt years ago if it had been a private company. But as a statutory board, it was kept afloat by MOF, which picked up the tab.


With falling demand for new flats, HDB was asked to embark on what is now known as the interim and main upgrading programme – the IUP and the MUP. When first conceived, the clear intention was for the lessee to pay 50 per cent of the cost, with the other 50 per cent from the government. As it turned out, to secure the 75 per cent majority to vote for upgrading, the lessee share was reduced from 50 per cent to nearer 20 per cent.

It was our kiasu way of obtaining the mandate to upgrade. Even then, in one or two recent polls, HDB could not secure the 75 per cent majority to proceed. The reason was simply that the increase in the resale value of the flat after upgrading has, of late, been less than the cost of upgrading.

SingTel Shares

The dividend yield from discounted SingTel shares bought by CPF members in the IPO has been less than 2.5 per cent, which is the minimum paid by CPF on members’ balances. There was no secondary market for SingTel shares after listing because the share was priced at the margin of $3.60. There was nothing left on the table for anyone except the government shareholder. While the laudable intention of the issue was to enhance the asset value of the ordinary CPF member, the market taught everyone a hard lesson. There was no free lunch.

As CPF chairman, I had urged MOF to pay CPF members the government long-term bond rate of about 4 per cent at the time, instead of promoting unit trusts for them to invest in. The CPF minnow would surely be swallowed by the shark in the unequal market place. What pains me most is, having invested in the market, the CPF member has nothing left to pay his HDB mortgage when he loses his job.

Famous Last Words

I would just end by paraphrasing Lord Keynes, who said that even the wisest statesman is often the slave of some defunct philosopher. In plain English, the politician is often misled by the economist. So, for those of us who profess to be professional economists, heavy is our responsibility. So in the spirit that I began with, I would urge my fellow economists to accept that sometimes we can be grievously wrong.