Tag Archives: Central Planning

Ten billion in Singapore? Who is being extreme Professor Ng?

I read recently the report on TRE of a speech given by Professor Ng Yew Kwang in support of the government’s hugely unpopular economic and population policies. Surprisingly for a professor of economics his arguments were extremely weak and practically un-hinged from reality. To see an intellectual of such supposed standing resort to ludicrous anecdotes and analogies in support of government policies that are harmful and unsustainable was shocking. In fact his arguments were so poor that he incited the ire of many TRE readers who were ferocious in their criticism and ultimately inspired the professor to respond. Unfortunately the professor’s response was just as disappointing and so I would like to point out what I see as the main flaws with his reasoning.

First of all the professor makes the classic mistake of dividing the world into two groups – those who understand him and those who do not. Of course to those who understand are delivered thanks whereas those who do not are described as extreme and emotional. The professor in his ivory tower presumably does not countenance the hypothesis that he may in fact be incorrect in any respect – a very unscientific and dull-headed position to take.

The professor in his reasoning seems to enjoy reminding readers of the Singapore of the 1960s. So, who is being extreme? Comparing today with the period a few short years after independence is practically the most extreme position one could take – the only more outlandish points of view would be to either indulge in time travel to the future, or rewind to the days colonialism. By making the most extreme comparison possible the professor, who is educated enough to know better, undermines the credibility of his argument.

Next up, as an economist, the professor must understand the importance of data and statistics. In spite of this, he launches straight into anecdotal evidence in support of the efficiency of Singapore’s transport system. You see, apparently, there was this time (once) where the professor just missed catching a bus, but by the power of Lee Hsien Loong and 5.3 million helping hands, SMRT were able to provide for another bus to arrive “less than 1 or 2 minutes” later. Are we supposed to be impressed? Is this story, which the professor would have trouble citing in Wikipedia, never mind an academic journal, supposed to convince us of the benefits of a higher population?

To be fair, the professor attempts in his reply to back pedal from some of his more ludicrous original claims – what originally was “we should also think, if each person pays the same tax, same amount to spend on the road, if we half the number of people, then the width of the road will probably also be halved” becomes “Of course, the widths of roads in Singapore will not be halved overnight if half of the people disappear overnight”. But the point is still massively unconvincing. Apparently we are supposed to look at long-term trends. Then what is the long-term trend? If not overnight, then how many years would it take for the roads to shrink by half? Will the government gather up all the saved space and put it to more productive use, like house building? Of course not, in fact the professor tries to wriggle out of the argument with his assumption that tax and spending have to rise and fall in tandem with population, and, most tellingly of all he says “facilities should be expanded in the long run”.

This is the key point – that “facilities should be expanded”, but the government have completely and utterly failed to expand infrastructure or engage in house building on the necessary scale to support their unsustainable policies. We can help the professor to understand the point by providing a more coherent and less extreme comparison than the one he makes with the 1960s. In 2003 Singapore’s population was 4.1 million, today it is over 5.3 million – an increase of almost 30% in ten years. Is ten years enough of a long-term window for the professor’s theories to bear fruit? If I go back to the Singapore of 2003 will I be able to observe roads that are 30% less wide? I am no economist, but I can tell you the answer to this question is no. I think if you measure Geylang Road, Tanjong Katong Road, Haig Road, Joo Chiat Road or any other road you care to mention, I am sure you will find the size has not changed in a uniform fashion in line with population and available spending. And this is after ten years. In another ten years, with the population white paper having been passed by parliament, the situation will surely have only got worse. How long does the professor want us to wait?

Let us look at the MRT as well. Ten years ago, if you take the train from Eunos to Tanjong Pagar in the morning rush hour, I think the experience will not be too bad. Even five years ago it still seemed manageable. But now it is practically unbearable. Has the width of the MRT increased by 30% in the meantime – of course not! The argument is ridiculous. There may be a few more trains running with higher frequency, but it is clearly not enough. There is even an extra line – the circle line – but it is hardly an option for people who rely on any of the other lines or are not willing to move to TPL’s constituency to take advantage of it. So again, the population driving investment theory is completely unsustainable.

In fact, the professor knows his argument is unsustainable – he even admits it. “However, up to certain limits, the law of diminishing returns due to the limited land size is more than offset by … ” It should be obvious that I do not need to finish the professor’s quote, his argument is dead in the water with his admission that there is a limit beyond which population driving investment does not more than offset the benefits. Singapore is beyond this limit. Far far far beyond. This much is obvious to anyone and it is the reason thousands of Singaporeans attended the historic protest at Hong Lim park recently. The professor tries to steer us away from this line of thinking with another extreme piece of logic, that is “we cannot put 10 to the power of 10 people into the island of Singapore”. Of course not! That would be ten billion, and there aren’t even that many people in the world! 6.9 million may seem perfectly managable by comparison, but only because the words out of the professor’s mouth are so unhinged from reality. To read this point being made by someone who accused his critics of being extreme is unbelievable!

There are other points the professor makes which are somewhat dubious – his statement that “local Singaporeans benefit as a whole money wise” from increasing cost of housing and lower wages being the most obvious one, but I have to give up eventually. Suffice to say the professor, who should (and presumably does) know better, makes all sorts of ridiculous arguments in favour of the PAP’s deranged and unsustainable economic policies. That his arguments do not stand up to his own assumptions and caveats – as well as the fact that he makes the same errors – even more so – than those he attributes to his critics is particularly telling. All this makes his argument completely uncompelling and I urge Singaporeans to reject it.

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Shortage Economy in Singapore’s Housing Market

Singaporeans queued for up to two nights after rumours spread that the Housing and Development Board was planning to make flats available for sale

Singaporeans queued for up to two nights after rumours spread that the Housing and Development Board was planning to make flats available for sale

I would like to introduce you to a famous economist, János Kornai. He pioneered thinking and research on economic behaviour of communist governments that engaged in central planning – particularly in eastern Europe. One of the defining feature of such economies was shortages of everyday household products including food. Growing up in Hungary János had first hand experience of such shortages – queuing in shops was common. Kornai’s breakthrough idea was essentially that shortages were not just a failure of central planning in the sense that planning could be improved with better insights or more careful analysis, rather he showed that shortages were an inherent result of attempting central planning itself. Prices and wages were fixed by the state and producers were typically also state-owned monopolies, allocated some fixed quantity of goods to produce. With a guaranteed market and no competition, companies had no incentive to produce products tailored to the needs of customers. There were no bonuses or profits to be gained by selling more products or opening new markets. If the government production order was for ten thousand shirts, then ten thousand shirts would (usually) be produced. If the fashion was for blue shirts, but red shirts were easier or cheaper to produce, red shirts would inevitably be produced and factory owners would be paid regardless. A shortage of blue shirts would inevitably develop, and customers would ultimately be faced with a few unsatisfactory choices – either try to wait and queue up for a blue shirt, buy a red shirt instead, or go with no shirt at all.

At this point let us take a time out. First of all, I am not an economist. Second of all, Singapore doesn’t have food shortages or people queuing up for bread – in fact Singapore is hardly comparable to communist Eastern Europe at all. But there are a few curious similarities. One thing that caught my eye in the Wikipedia article on Shortage Economies [5] was the statement that queues were not just limited to everyday essentials. Even people wanting to buy cars and houses had to queue – in the Eastern Block the waiting time for a government apartment was measured in years. Up to thirty years in Poland, six to eight in Czechoslovakia and a mere three to four years in East Germany.

Anyone who remembers the Singapore Housing and Development Board (HDB) “walk in selection” debacle of 2007 knows what is coming next – until relatively recently Singapore did literally have people queueing up for the chance to buy a house. In early February of that year, a rumour started that HDB would soon be releasing a block of flats for sale in desirable locations. Almost immediately a queue started to develop outside the HDB office in Toa Payoh – but the pent-up demand for housing was so great that things quickly turned ugly.

A 26-year-old professional, who gave his name only as Dave, said he and his fiancée had taken urgent leave to join the queue.

He said: ‘Most people were satisfied with the organiser. Since no one was taking charge, it was good that someone tried to make sure there was no queue-jumping.

Said one man: ‘There was more than one queue and a group thought that theirs was the ‘official’ queue. So they started behaving like gangsters.’

‘People were shoving and pushing. We don’t want trouble. We just want a flat,’ said Ms Tan X M, 25, a housewife.
Unofficial queue list sparks evening ruckus at HDB – The New Paper – February 03, 2007[1]

To clarify momentarily, while the story above mentions people queuing for a few days, the reality is that the backlog for housing in Singapore is, just like in communist eastern Europe, measured in years. It was only at the moment that houses were rumoured to be released into the market that the people who had been waiting for years actually formed a queue. Since 2007 the system has changed – while there are no longer physical queues, overall waiting times are just as long. A story from early 2013 about young couples breaking off their engagements because they had initially rushed into marriage in a bid to be eligible to join the electronic queue for housing was particularly moving.

You could put it like this – the third party was HDB. I feel like I was forced to decide to get married early because if I waited until I was, say, 30 and ready to settle down, to wait another three to four years to get a BTO flat would leave me no time to start a family.
Janice

“I was so scared I couldn’t breathe, but I knew I had to do us both a favour and call it off. Before the course, I was so caught up in his ‘idea’ of getting a flat – everyone was saying how difficult it was to get a good unit, horror stories about a five year wait stuck in bad rentals, I just got carried away, I guess.”
Marianne
Runaway brides in Singapore – Yahoo – January 2 2013[2]

Even more recently, from February 2013, we have a story of families in subsidised rental flats being required by the state to pair up and share accommodation with other families.

“HDB told The Straits Times it had capped the number of occupants in a three-room flat at eight, and in a four-room flat at 10”
Families paired in rental flats see benefits – The Straits Times – 18 February 2013[3]

So the presence of multi-year waiting times for housing in Singapore is very much a reality. But what of the central planning angle? Kornai’s key insight remember was that central planning inherently causes shortages. In Singapore housing is very much planned by the government. In its simplest form this is reflected by 85% of citizens living in government built flats. The government owns and supplies the land to HDB – a statutory board under the Ministry of National Development – and the number and types of houses to build is very much government policy.

National Development Minister Khaw Boon Wan has announced measures to build more Housing Development Board (HDB) flats and at a faster pace in Singapore.

Minister Khaw said that he has ordered the HDB to ramp up capacity and to bring forward projects scheduled for early next year to this year.

He also directed the HDB to sustain the new pace of building, suggesting that at least another 25,000 flats would be built for next year or a total of 50,000 flats over a two-year period.
HDB ordered to ramp up building of flats – Yahoo – 28 May 2011[4]

So the two key pieces of János Kornai’s shortage economy puzzle are in place in the Singapore housing market, we have the central planning and we have the shortages, just as in communist eastern Europe. This is obviously concerning – it means that the struggle Singaporean’s face in getting a flat are inherent to the planning system and not just a function of incompetent government that can be fixed by replacing one minister with a better one. But first let us take a slightly broader look at shortage economies. It could just be a co-incidence that Singapore has these features, so it seems wise to take a step back and look at what else Kornai said.

The common results of these shortages for consumers are forced substitutions between goods which are imperfect substitutes and forced savings as consumers are unable to fully utilize their current purchasing power. The institutional outcomes involve the so-called soft budget constraint, in which production units under a planned economy form expectations of always being bailed out by central authorities, paternalistic behaviour on the part of the planners who blame the shortages on the fact that consumers demand “wrong things”, and in macroeconomic terms, repressed inflation resulting from pent-up demand.
emphasis Added [5]

This paragraph, from Wikipedia, contains many insights into the Singapore housing market and wider economy. Forced substitutions refers to the case where someone wishing to buy a HDB but cannot, may have to rent privately, purchase from the resale market or accept some other alternative. The point about forced savings is probably only interesting to conspiracy theorists who fear CPF insolvency and may like to point out that preventing people from withdrawing to purchase a house helps to keep CPF balances in the black. The argument about soft budget constraints is quite complex, and I may have misunderstood it myself, but imagine a government-owned company tasked with implementing government policy, if the policy suddenly becomes harder to implement, the company finds itself in a position where it can negotiate for a larger budget to implement the policy. Since the government generally only judges the success of the company on how able it is to support the implementation of policy, it tends to suit both parties to over rather than under-allocate resources. So state companies tend to grow in size and become bloated and inefficient. In this instance the parallels with government handouts to bus operators are more obvious than in the housing market, but the point is still interesting. The most telling point however for Singaporeans is likely to be the one about “paternalistic behaviour” on the part of the planners who “blame the shortages on the fact that consumers demand ‘wrong things'” I imagine this is hard to believe for people outside planned economies, but in fact this is exactly what we see in Singapore. How often does a government minister come out to manage our expectations, or tell us we are being “too choosy”. The final point is about inflation being repressed under a centrally planned economy with shortages. This is presumably a side effect of people being forced to save and wait rather than spending now, so while it may be interesting to note that Singapore struggles with high inflation and further that the situation may be worse without pent-up demand for housing, this is more a symptom rather than a cause.

János Kornai had plenty of other observations to make on shortage economies which I will only touch on briefly. He noted that companies tended to become unproductive and bloated and suffered persistent shortages of labour – these are all results of the “soft budget constraint” wherein state enterprises are continually able to benefit from government handouts to smooth the path to effectively implementing policy. It is instructive to note that low productivity and on going labour shortages are exactly what we see in the Singapore economy today, so I think it’s not unreasonable to suggest that the shortage economies of eastern Europe appear, at least in part, to be replicated in Singapore.

[1] http://finance.groups.yahoo.com/group/RealEdge/message/2655
[2] http://sg.entertainment.yahoo.com/blogs/singapore-showbiz/runaway-brides-singapore-janice-story-part-1-035439074.html
[3] http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={173429169-16181-3188832401}
[4] http://sg.news.yahoo.com/blogs/singaporescene/hdb-ordered-ramp-building-flats-071846737.html
[5] http://en.wikipedia.org/wiki/Shortage_economy

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