SimState: The Myth Of Free-Market Singapore

When looking for case studies of free market societies throughout history Singapore, a polity built from scratch in 1965, is an oft-cited example of how enlightened political leadership can stand back and let the market build a prosperous community for all. But was Singapore really guided by free market thinking at the executive political level? And should the free market in Singapore get the praise (or the blame) for subsequent economic developments? In consulting the autobiography of Lee Kuan Yew, Singapore’s first and longest-serving executive politician, an autobiography which covers the life and career of both Lee and the modern country of Singapore itself, the answer seems to carry a bit of nuance.

Chapter 1 Going It Alone

Singapore was a former British colony and military base/trading depot. It had no “hinterland” economy. It was dependent upon British military subsidies, the bases on the island costing nearly GBP$100M and losing these subsidies early on was a major fear of Lee’s.

Lee’s Top 3 Concerns after independence:

1. Get international and UN recognition
2. Defense against Malaysian encroachment
3. “how to make a living for our people”

Chapter 2 Building An Army from Scratch

Rebuilding the military was a jobs program and an opportunity to create loyal party adherents and factional interest groups. Utilized conscription to build national unity and, modeled on Israeli military, be able to field a large fighting force in a short amount of time.

One official lamented that, “The Spartan approach to life does not come about naturally in a community that lives by buying and selling.” [The need for a military was to protect the political system from foreign dominance, not the commercial system.] “we were building up our defense forces to protect our fledging state.”

“Those who enlisted in the SAF as a full-time career would be guaranteed hobs in the government, statutory boards, or the private sector when they left full-time service to go into the reserves.”

Perceived and actual political threats from Malaysia and Indonesia and a desire to racially and ideologically unify the Singaporean citizenry and re-educate Chinese cultural norms led LKY to build SAF w/ Israeli training and partnerships with “Western democracies” for practice

Chapter 3 Britain Pulls Out

Contribution of British bases to the economy of Singapore in 1966, 20% of GDP.

LKY referred to by a British official “as good a left-wing and democratic socialist as any in this room” and “the government of Singapore… is the only democratic socialist government… in Southeast Asia” and “his housing programme… defies challenge in anything that has been done in the most advanced social democratic communities.”

Later, LKY “attended a Socialist International conference in Stockholm to keep in touch with British and European socialist party leaders.”

Singaporean government lost lots of money on the devaluation of the British pound, in which many of their reserves were held, and feared the departure of British troops in mainland Asia would shake investor confidence, particularly investors in Hong Kong, resulting in a desire to have an arms buildup for credible defense.

Chapter 4 Surviving Without a Hinterland

Recommendations of Dutch economist Dr. Albert Winsemius in 1965:

• common market agreement with Malaysia
• resumption of barter trade with Indonesia
• seek favorable entry for Singapore-manufactured goods into US, UK, Australia and New Zealand

Sent trade delegation to Africa to try to drum up business but failed. Fears of unemployment since 1959 led to desire to industrialize. Formed Singapore Tourist Promotion Board to try to address unemployment.

To promote industrialization, “we protected locally assembled cars, refrigerators, air conditioners, radios, television sets and tape-recorders, in the hope that they would later be partly manufactured locally. We encouraged our own businesspeople who set up small factories to manufacture vegetable oils, cosmetics, mosquito coils, hair cream, joss paper and even mothballs!

Spent “vast sums” on infrastructure only to find the “Jurong industrial estate” mostly empty. Formed an Economic Development Board which got into JVs to recycle paper products with a businessman with no manufacturing experience, as well as ceramics without technical know-how. Also JVed with a Japanese shipbuilder but it did not prove profitable versus ship-repair, which was labor intensive.

“I was convinced our people must never have an aid-dependent mentality” yet formed the Bases Economic Conversion Department whose job was “to retrain and redeploy redundant workers, take possession of land and other assets the British were vacating, put them to the best use, and negotiate mitigatory aid.” Resulted in 1968 agreement for GBP$50M aid package to be spent on British goods and services, 25% being grants and 75% being loans.

Generated S$4-5M in annual USN ship repair business for the Singaporean government. The Singaporean government formed private entities to manage shipyards which later transformed into public companies.

Sought to “leapfrog” regional economies to become trading partner with developed world (America, Europe, Japan) to attract manufacturers to export to developed countries.

Formed Development Bank of Singapore, “DBS helped finance our entrepreneurs who needed venture capital because our established banks had no experience outside trade financing and were too conservative and reluctant to lend to would-be manufacturers”, ie, subsidized a top-down manufacturing-centric policy.

Keng Swee, first chairman of the Economic Development Board, “every time he drove by a school and saw hundreds of children streaming out, he felt downhearted, wondering how to find jobs for them when they left school.”

“The government played a key role in attracting foreign investments; we built the infrastructure and provided well-planned industrial estates, equity participation in industries, fiscal incentives and export promotion. We established good labor relations and sound macroeconomic policies, the fundamentals that enable private enterprise to operate successfully.”

Also, by end of 1970 had “issued 390 pioneer certificates giving investors tax-free status for up to five years, extended to 10 years for those issued after 1975”

“During this period, China was in the mad throes of Mao’s Culturual Revolution. Most investors thought Taiwan and Hong Kong too close to China and headed for Singapore.”

“By the late 1970s we had left our old problems of unemployment and lack of investments behind us. The new problem was how to improve the quality of the new investments and with it the education and skill levels of our workers.”

“After several years the EDB finally convinced Rollei, the German camera manufactuer, to relocate in Singapore. High German wages had made them uncompetitive.”

“We left most of the picking of winners to the MNCs that brought them to Singapore. A few, such as ship-repairing, oil-refining and petro-chemicals, and banking and finance, were picked by the EDB or Sui Sen, our minister of finance, or myself personally. Our ministry of trade and industry believed there could be breakthroughs in biotechnology, computer products, specialty chemicals and telecommunications equipment and services. When we were unsure how new research and development would turn out, we spread out bets.”

“Our job was to plan the broad economic objectives and the target periods within which to achieve them.”

“We did not have a group of ready-made entrepreneurs such as Hong Kong gained in the Chinese industrialists and bankers who came fleeing from Shanghai, Canton and other cities when the Communists took over. Had we waited for our traders to learn to be industrialists we would have starved.”

“The government took the lead by starting new industries such as steel mills (National Iron and Steel Mills) and service industries such as a shipping line, Neptune Orient Lines (NOL), and an airline, Singapore Airlines (SIA).”

Development Bank of Singapore, Insurance Corporation of Singapore, Singapore Petroleum Company; Chartered Industries of Singapore (CIS), a mint and a factory for small ammunition. Pg 67, conversion of “successful” public monopolies into private companies.

With economic consultation from a Dutch academic, Singapore embarked on economic experimentation which involved at various times a combination of tariffs and no tariffs, tax concessions for new MNCs, extensive investment in infrastructure and at times direct government investment in “from scratch” national industries, which despite being successful and profitable were mysteriously privatized at points. The Singaporean government benefitted from political tailwinds created by economic chaos in other parts of the world, but also attracted FDI by pledging not to interfere in business affairs for those relocating to Singapore (1973 oil crisis being a good example).

Chapter 5 Creating a Financial Center

To become a world financial center, Singapore’s government realized it needed to lift foreign exchange control restrictions on all currency transactions between Singapore and territories outside the sterling area.

“I had decided in 1965… that Singapore should not have a central bank that could issue currency and create money. We were determined not to allow our currency to lose its value against the strong currencies of the big nations… so we retained our currency board which issued Singapore dollars only when backed by its equivalent value in foreign exhcange. The MAS has all the powers of a central bank except the authority to issue currency notes.”

Why did Singapore need its own currency if it had no plans to expand its issuance?

“We attracted international financial institutions by abolishing withholding tax on interest income earned by nonresident depositors. All Asian dollar deposits were exempted from statutory liquidity and reserve requirements.”

“The foundations for our financial center were the rule of law, an independent judiciary, and a stable, competent and honest government that pursued sound macroeconomic policies, with budget surpluses almost every year. This led to a strong and stable Singapore dollar, with exchange rates that dampened imported inflation.”

“To meet the competition from international banks, the MAS encouraged the four largest local banks (known as the “Big Four”) to acquire and merge with the smaller local banks to become bigger and stronger.”

1985 “The SES [Stock Exchange of Singapore] was closed for three days while MAS officials… worked around the clock with the Big Four banks to arrange an emergency “lifeboat” fund of S$180 million to rescue the stockbrokers.”

Government of Singapore Investment Corporation formed to manage the Central Provident Fund, Singapore’s pension scheme.

“For over three decades, I had supported Koh Beng Seng on restricting the access of foreign banks to the local market. Now I believed the time had come for the tough international players to force our Big Four to upgrade their services or lose market share… the MAS liberalized access to the domestic banking sector by allowing qualifying foreign full banks to open more branches and ATMs. It lifted limits on foreign ownership of local bank shares.”

Singapore sought to be a global financial center, becoming a key chronological link in the chain between markets in SF, Tokyo and Zurich. Singapore went without a central bank but did establish a “monetary authority” and currency board similar to HK. Special rules and taxes were established to attract foreign financial capital, but a primary attractor was stability in an unstable region. The government managed a pension scheme and sovereign wealth fund which somehow earned above market returns with a conservative stance. The banking sector was partially deregulated and globalized after a period of productive controls.

Chapter 6 Winning Over the Unions

“I started my political life fighting for the unions as their legal adviser and negotiator.”

“I owed my position as prime minister largely to the trade union movement.”

“We banned all strikes in certain essential services”

Britain’s withdrawal of military announcement in 1968 led to Employment Act, Industrial Relations (Amendment) Act and Trade Unions Act amendment, “These laws spelled out minimum employment conditions and placed limits on retrenchment benefits, overtime bonuses, and fringe benefits. They set out uniform provisions for rest days, public holidays, working days, annual leave, maternity leave and sick leave. They restored to management the right to hire and fire, to promote and transfer, functions the unions had encroached upon during the years of industrial strife… we made it illegal for a trade union to take strike or industrial action without a secret ballot.”

1972, sets up National Wages Council “with representatives from unions, management and government”

“The NTUC [National Trade Union Council] expanded into health services, child care, a broadcasting station, a seaside resort hotel for workers called Pasir Ris Resort, and a country club, the Orchid Country Club with a golf course by Seletar reservoir. It also developed quality condimuniums its members could buy… To make them affordable, the government provided state land at nominal prices.”

LKY’s political career began as a union consultant and advocate. But when he came to power, he threatened unions with treason if they striked. A series of reforms were put in place which reduced union power and enhanced company/management power, but it all takes place within a system of “managed relations” where the government is a “stakeholder”. For some reason, the national union organization has made conglomerated investments in semi-private for-profit businesses and co-ops aimed at worker welfare, which the government has helped subsidize.

Chapter 7 A Fair, Not Welfare, Society

“We believed in socialism, in fair shares for all. Later we learned that personal motivation and personal rewards were essential for a productive economy. However, because people are unequal in their abilities, if performance and rewards are determined by the marketplace, there will be a few big winners, many medium winners and a considerable number of losers. That would make for social tensions because a society’s sense of fairness is offended.” [set this up as the leading quote for the essay?]

“A competitive, winner-takes-all society, like colonial Hong Kong in the 1960s, would not be acceptable in Singapore. A colonial government did not have to face elections every five years; the Singapore government did. To even out the extreme results of free-market competition, we had to redistrivute the national income through subidies on things that improved the earning power of citizens, such as education. Housing and public health were also obviously desirable. But finding the correct solutions for personal medical care, pensions, or retirement benefits was not easy. We decided each matter in a pragmatic way, always mindful of possible abuse and waste. If we over-re-distributed by higher taxation, the high performers would cease to strive. Our difficulty was to strike the right balance.”

CPF policies imposed a total savings rate of 50 percent of wages.

“I further amended the law to give the government the power to acquire land for public purposes at its value on a date fixed at 30 November 1973. I saw no reason why private landowners should profit from an increase in land value brought about by economic development and the infrastructure paid for with public funds.”

On the development of HDB and resettling of farmers and squatters: “Compressing 30 years into a few pages makes it all appear simple and straightforward. There were enormous problems, especially in the early stages when we resettled farmers and others from almost rent-free wooden squatter huts with no water, power or modern sanitation, and therefore no utility bills, into high-rise dwellings with all these amenities but also a monthly bill to pay. It was a wrenching experience for them in personal, social and economics terms.”

“As incomes increased, fewer patients chose the lower-cost wards, which had the highest government subsidies, and opted for wards with more comfort but lower subsidies. We considered but rejected a means test to determine which wards patients were entitled to use; it would have been difficult to implement. Instead we encouraed people to upgrade to the ward they could afford by making clear differences in comfort between different types of wards. It was in effect a self-administed means test.” so is the market!

“Government expenditure has averaged 20 percent of GDP, compared to an average of 33 percent in the G7 economies. On the other hand, our development expenditure has consistently been much higher than that of the G7 countries.”

“Our aim is to have partial or total cost recovery for goods and services provided by the state. This checks overconsumption of subsidized public services and reduces distrotions in the allocation of resources.”

The Singapore government was dominated by one party, PAP, for its modern history. They very openly bought botes with their welfare programs. But they sought to make many of these programs less generous to ensure their solvency. The government forced high rates of saving on workers which it deployed to finance infrastructure spending and welfare housing. Lower tax rates compared to other developed countries helped Singapore remain competitive. LKY is very clearly NOT a fan of the free market in this chapter.

Chapter 8 The Communists Self-Destruct

On fighting Malayan National Liberation Front/communist guerrillas: “Could we have defeated them if we had allowed them habeas corpus and abjured the powers of detention without trial? I doubt it.”

Singapore had two major political factions, the Communists and the PAP. After a series of political blunders and internal turmoil, the communists formally exited the electoral scene leaving the PAP to run unopposed for 30 years, allowing them long and consistent control over policy-making. They used “ends justify the means” and subverted sound legal principles to obstruct and detain communists.

Chapter 9 Straddling the Middle Ground

“while overall sentiment and mood do matter, the crucial factors are institutional and organizational networks to muster support… in our HDB new towns, there is a network that leads from the RCs to the MCs and CCCs on to the prime minister’s office…”

“The PAP had countered the opposition’s ‘by-election’ strategy with the electoral carrot that priority for upgrading of public housing in a constituency would be in accord with the strength of voter support for the PAP in that constituency.”

The PAP faced no serious political opposition and turned to various patronage and vote-buying schemes to solidify support. It seems the HDB housing projects also allowed the PAP to corral supporters and have a physically defensivle political communications network. Many political opponents made claims of corruption only to be sued, sometimes into bankruptcy, by LKY. The few times his own PAP members were charged with libel, they settled out of court. LKY employes specious reasoning to defend this authoritarian legal approach on the grounds that to let the charges go unmolested would threaten his political power– he has a pure, unviolated record of ethics in a region known for corruption!

Chapter 10 Nurturing and Attracting Talent

“Traditional methods of choosing marriage partners had been ruptured by universal education: The government had to provide alternatives to the family matchmakers of old.”

“I gave special income tax concessions to married women”

Stop-at-Two policy of the 1960s “Without that policy, family planning might never have brought population growth down, and we would not have solved our unemployment and schooling problems.”

“Difficulties over our talent pool were aggravated when the rich Western countries changed their policies on Asian immigration… [the US] decided to accept Asian immigrants, reversing more than a century of its whites-only policy.”

The Singapore government was obsessed with population management, first trying to limit births on Malthusian grounds, then trying to promote the marriage and childraising of educated parents on the grounds of skewing the IQ or “talent” pool. Many subsidies Singapore granted to educate its citizenry was “leaked” as people immigrated to other countries to pursue opportunity, partly in response to changing immigration policies elsewhere (such as the US in the 1960s). Now it has taken to liberalizing immigration for high IQ emigres, especially those with jobs, to try to increase the “talent pool.”

Chapter 11 Many Tongues, One Language

LKY enforced language laws on the population in a desire to achieve social harmony and globally integrated economic progress. He encountered much popular resistance but believes these policies proved prescient given global events. It also allowed for a more homogenized culture.

Chapter 12 Keeping the Government Clean

“Human ingenuity is infinite when translating power and discretion into personal gain.”

Singapore got high marks for honesty of government in a region where corruption is an ingrained part of culture. LKY attributes this cultural success to the ideological rigor, invasive investigative authority given to the anti-corruption bureaus and the willingess of government to pay high salaries to public servants to attract them away from the private sector [distortion]. But who watched the anti-corruption officers to ensure they weren’t on the take? And why would this be a corruption issue if government didn’t have the power over the economy? LKY again admits that the PAP bought political favors with public resources by engaging in welfare spending once in office.

Chatper 13 Greening Singapore

“Hundreds, eventually thousands, of pirate taxis clogged our streets and destroyed bus services… only after 1971, when we had created many jobs, were we able to enforce the law and reclaim the streets.”

“It was immensely better that we competed to be the greenest and cleanest in Asia. I can think of many areas where competition could be harmful, even deadly.”

“We phased out the rearing of over 900,000 pigs on 8,000 farms because pig waste polluted our streams.”

“After we had persuaded and won over a majority, we legislated to punish the willful minority… if this is a ‘nanny state’, I am proud to have fostered one.”

Much in the vogue in the 1970s, LKY got swept up in environmentalism and made it a major policy priority to “green” Singapore; this included building public utility infrastructure to control waste and pollution, but also involved “nudge” legislation to change or ban cultural habits deemed offensive or a nuisance. Agricultural practices were changed as were retail practices (pirate taxis, street hawkers). LKY put great emphasis on the “morale” of greening and its affect on visiting dignitaries and VIPs. There is no discussion of the cost of these programs or whether there were alternative approaches to accomplishing the stated goals: he embraced charges of “nanny statism.”

Chapter 14 Managing the Media

“Our journalists are exposed to and influenced by the reporting stytles and political attitudes of the American media, always skeptical and cynical of authority. The Chinese and Malay press do not model themselves on newspapers in the West. Their cultural practice is for constructive support of policies they agree with, and criticism in measured terms when they do not.”

“My early experiences in Singapore and Malaya shaped my views about the claim of the press to be the defender of truth and freedom of speech. The freedom of the press was the freedom of its owners to advance their personal and class interests.”

“That was exactly what we had the right to do, to seek a mandate to deal firmly with foreign, in this case colonial, interests in the press. It was our declared policy that newspapers should not be owned by foreigners.”

“I needed the media ‘to reinforce, not to undermine, the cultural values and social attitudes being inculcated in our schools and universities. The mass media can create a mood in which people become keen to acquire the knowledge, skills and disciplines of advanced countries. Without these, we can never hope to raise the standards of living of our people… Freedom of the press, freedom of the news media, must be subordinated to the overriding needs of Singapore, and to the primacy of purpose of an elected government.'”

“A few years later, in 1977, we passed laws to prohibit any person or his or her nominee from holding more than 3 percent of the ordinary shares of a newspaper, and created a special category of shares called management shares. The minister had the authority to decide which shareholders would have management shares.”

“We decided in 1986 to enact a law to restrict the sale or distribution of foreign publications that had engaged in the domestic politics of Singapore.”

Freedom of the press is clearly not a cherished ideal in Singapore, in so far as PAP-controlled government is concerned. The law allows various forms of censorship used to control “foreign influence” of the press but there is no discussion of whether this was also used to control domestic press.

Chapter 15 Conductor of an Orchestra

LKY built a national airline, but insisted it make a profit. He engaged in enormous airport building projects without explanation for why they were necessary. He used the unions to pressure foreign politicians. LKY banned jury trials in Singapore, he appointed lawyers, many friends from his school days, to many important ministries related to commerce. He regulated the housing system and enforced desegregation quotas which he knew depressed the capitalization of the housing stock and went against the ethnic groups’ desires to segregate. Is this multi-cultural harmony, based on edict?

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http://www.slate.com/articles/arts/culturebox/2003/08/cult_of_personalism.html

At one point, he brags that Uganda has more female hotel managers than any other country in Africa. “We have got four managers, and another two assistant managers.” This is a strange thing for the president of an entire country to worry about—but Amin seems to feel that he has to worry about it: Only if he controls everything, and only if he can keep the country in line, will Uganda prosper. Success, Amin seems to believe, is a matter of will and of heeding his good advice. People just need to work harder—women need to get up at “about 5 o’clock in the morning”—and love their leaders. If something’s wrong, then, it’s because a citizen has personally failed, not because the system is screwed up. Amin had no ideology. (“We are not following any policy at all,” he says at one point.) Like so many Third World tyrants, he was not a fascist or a Communist. His idea of the world was purely personalistic. He was an Amin-ist.

[similar to the # of car competition between LKY and indonesian leader; also, the rejection of ideology by LKY, following his own intuition]

Review – Crazy Rich Asians

Crazy Rich Asians

by Kevin Kwan, published 2014

On its surface, Crazy Rich Asians is a sordid story of dysfunction and social positioning within mega-wealthy sorta-nobility Chinese families originating in Singapore. It’s full of flashy outfits and the shocking shopping trips that put them in the characters wardrobes; over-the-top square footage and fully-furnished living arrangements in a part of the world known for nearly inhumane density and some of the highest real estate prices in the world; petty gossip like only those with too much time and money on their hands can engage in; oh, and wonderful, wonderful sounding food. For those reasons, it’s an entertaining read.

But just below the surface (not too far, mind you… these issues are philosophically auxiliary as far as I can tell, not intentionally contemplative like a work of classic literature) lie a series of family-planning and wealth-planning puzzles for the observant reader to consider. In no particular order, and with very minor spoilers, these puzzles are explored more below.

The first puzzle has to do with identity. When one of the main characters finds out that the early story of their family’s history is a fabrication, they are thrown into psychological turmoil and shock, their sense of self seemingly obliterated in a moments revelation. It begs the question “Who are you?” One answer is, you are your history, a series of factual contexts and accumulated decisions made up to any point in time at which you exist. Another answer is, you are whatever you believe you are– if you can convince yourself you are, than you are. This question is important for a few reasons. The first is that the way our brains function on a psychological level may require us to have certain beliefs about ourselves to maintain psychological integrity and thus enable us for other modes of action in the external world. We may be able to “constantly reinvent ourselves”, but only within a narrow band of experience or possibility, beyond that we are driven at a hardware level into anxiety and distress. Another reason this question is important is because it sheds light on how arbitrary our identities can be. If we can operate quite competently and confidently with a certain view of ourselves and our role in the world, even if this viewpoint is built on falsehoods, it suggests that what is important in terms of forming an identity is consistency of story, not accuracy. If someone can convince you you are the rightful king, maybe you are. If you come from a noble family but you’re told you’re a lout, maybe you will be. Where does one find “self” in all of this?

Related to this puzzle is parental relationships and the question, “Do you really want to know everything about your parents?” Each one of us is born into a world our parents have already been living for some time. We don’t know all the choices and ideas they had prior to our arrival and often we receive a filtered list of such information sporadically throughout our lives. We don’t have the ability to query our parents’ true thinking at any given moment and without becoming paranoid and running background checks or doing some sleuthing on them, we’re mostly in a position to accept what they tell us about themselves unless we receive some kind of alarmingly contradictory information that would lead us to question it. Similar to finding out your life might have been a lie, do we want to know who our parents really are? We presume they share the good about themselves with us, do we really want to hear about more of their foibles?

The second puzzle is about intergenerational wealth building. The narrative focuses on Singaporean Chinese families of stupendous wealth. Most of this wealth seems to be owned and controlled by surviving matriarchs whose heyday was the 1930s and 1940s (Gen1). The descendants (Gen2) and their children (Gen 3) appear to be idlers. Sure, some of them have “jobs” and other preoccupations, but none of them have to work and none seem to be contributing anything productive to the family wealth, which appears to be managed professionally by outsiders.

Why don’t rich families prepare future generations to manage their wealth responsibly? When the matriarch dies, what will keep the professional managers loyal, and what will give the surviving descendants the ability to manage these obligations without undue risk? Money is clearly important to these families, as they could give it away or have less of it but they don’t. But there doesn’t appear to be a meaningful attempt to teach the succeeding generations how to contribute to its growth and management.

Related to this is the question of what is the value of fantastic wealth? Although they think of themselves quite highly, the families depicted don’t seem to be better at much of anything that doesn’t involve buying things. In terms of character they have the same flaws and struggles as everyone else. If this wealth can’t make you a better person, or, put another way, you don’t use it to enable greater self-actualization, of what use is it? Ironically, wealth in this story is depicted as not creating conditions by which those who possess it can elevate themselves, but simultaneously it explores the ways wealth changes a person in terms of tastes and behaviors. Here we see not how a person’s values change, but the ways in which their ability to express those values do. If you don’t use it to become a better version of yourself, and you don’t learn how to manage and control it, what logical benefits does wealth offer you?

The final puzzle of the story is the puzzle of permanent capital. As none of the major characters and their families seem to contribute to the generation of their wealth, and none seem capable of doing so, where the wealth comes from and how it manages to persist, especially as it is being consumed at such enormous rates, is a bit of a mystery. Of course, in this story we can only see the families whose wealth has persisted across multiple generations despite all of the above-mentioned conditions and despite the changes in social and economic circumstances over decades. What we can not see are the families whose wealth ran aground over this period, because they won’t factor into a narrative about those who have great wealth except as a tale of warning which never seems to be told. It is amateurish and perhaps speaks to the intelligence or values of the intended reader but the author never provides even a small hint as to where the wealth comes from (oh sure, some new money families introduced here and there are the Such and Suchs of plastics, or the So and Sos of tech).

Though friends with government officials and even extant royalty, the primary families are disclaimed as not being of purely aristocratic extraction or otherwise connected directly to a government-based wealth extraction mechanism. But from where else could such voluminous and seemingly interminable wealth emanate from, especially without influence or concern of the family? If such a source exists in the market (a contradiction in terms at the very least), how is it undiscovered by other market participants and thus immune to competitive factors? How is it financed?

In studying great exceptions there is an honest temptation to find some kind of exploitable rule. But I think it’s ultimately a fool’s errand, because you’re essentially looking at a highly improbable stack of luck and trying to figure out how to emulate something that is amazing that it even exists at all.

Review – From Third World To First: The Singapore Story

From Third World to First: The Singapore Story, 1965-2000

by Lee Kuan Yew, published 2000

Extended Introduction

This book has two parts (well, really, three, but the third part is about 20 pages and isn’t as significant as the other two parts), the first of which is about how Lee Kuan Yew describes the building of political institutions and the development of the economy of Singapore under the leadership of himself and his People’s Action Party over almost four decades, the second of which is a country-by-country exploration of Singapore’s foreign relations or what might best be called the exercise of Lee Kuan Yew’s political power abroad. I have an essay planned which will cover the first part of the book separately, focusing on the economic development of Singapore “from Third World to First” and the related political issues with specific emphasis on the myth of Singapore as an example of free market economics at work. Confusingly for some readers, I will argue both that according to Lee Kuan Yew himself Singapore was not a free market and was not intended to be one, and that despite this most of the credit for Singapore’s amazing economic development over the forty year period observed still belongs to the workings of the free market and not to intelligent central planning and wise stewardship of the economy by protectionist politicians.

Therefore, this review will only cover part of the book, but a still substantial one (pg. 225-660) and one which touches upon enough issues that will be raised in the upcoming essay that the reader should be able to get most of the story. I also plan in this review to meander quite a bit and talk about the things I found most interesting or meaningful, rather than summarizing the themes. I took extensive notes on the used copy I bought, annotating almost every other page. There’s a lot to chew on here and I probably won’t cover it all even between this review and the later essay, but might come back to it and comment on individual issues as my thoughts or interest allow. For those who are so inclined, you may wish to read some personal observations and experiences I had during a recent trip to Singapore, as well as some of the comments I made about Singapore’s history and political story, by reading the earlier posts tagged about Singapore. They may add meaningful context.

The Role of International Affairs in Little Singapore

Imagine I described to you a tiny, natural resourceless island nation situated strategically along a major shipping lane, whose historical role was one of trade entrepot and for whom fluid commercial volumes with every people and country possible were key to its economic survival. What kind of foreign policy would you imagine such a country would conduct? Do you imagine it’d have a standing army, or rely on the goodwill of other nations for its existence? What do you think it’s chief executive would spend most of his time doing and where would he most frequently be found?

According to LKY’s memoirs, though a small country dependent upon trade and commerce, Singapore nonetheless had a big role to play in international politics and was not above taking hostile stances even toward other southeast Asian nations (and even looked on approvingly at various wars in the Middle East!). Establishing a robust Singapore Armed Forces was one of the first priorities of LKY when independence was gained in 1965, reportedly to ward off threats from Malaysia and even Indonesia. And during my reading, I lost count of the number of times various chapters and paragraphs began with LKY meeting with other political and academic elites outside of Singapore.

Rather than adopting a strict foreign policy of peace and goodwill towards all nations, LKY comes across as almost bloodthirsty in his description of Singapore’s role in the Vietnam War, describing American intervention as good and necessary, claiming the Vietnamese regime deserved to be “punished”, first in a cross-border skirmish with China and then by continuing sanctions and non-normalized trade and diplomatic relations between Vietnam and Singapore even a decade after the conflict ended and even going so far as to throw his lot in with the Khmer Rouge to counterbalance the Vietnamese puppet government in Cambodia, describing the decision as one arrived at after having “no choice”! If choice doesn’t play a role in designing policy, what need have we of great leaders like LKY?

And then there is Singapore’s role as arms merchant at various times in various conflicts…

And why was it so important to LKY to get agreements with other countries to host SAF detachments for training in unusual environments? Though we are told that the SAF was created to defend tiny Singapore, the desire to train in environments alien to the tiny tropical island seem to lead logically to one place– interventionism. I doubt LKY planned to militarily dominate the globe, but surely he hoped to have his forces participate in struggles that had nothing to do with the direct defense of the island.

While many of the political tours were related to commitments imposed by being part of the British Commonwealth and its former colonial possessions, there seem to be just too many instances of LKY as a global jetsetter to excuse. Why was this man hobnobbing seemingly everywhere but Singapore?

I don’t know what the meaningful difference is between a currency board and a central bank, but assuming there is one, LKY said that Singapore did not have a central bank because,

a central bank is an easy way out for a finance minister who likes to juggle [his figures] when he has a deficit in his budget. I do not think we should put such a temptation before the finance minister in Singapore.

And yet, we witness numerous examples throughout the book, including episodes in Indonesia, Malaysia, Thailand and the Asian Financial Crisis during which Singapore attempts to “defend” the value of other countries’ exchange rates through currency intervention in Singapore. Why? What excuse could their possibly be for this behavior other than trying to be a “player” in world affairs?

But it’s not all baffling. The book has its charming moments, too, including many glimpses into how world political figures really think and what they say about their regimes and records of governance behind the scenes. Take, for instance, this phallic competition between Indonesia’s Sukarno and Lee Kuan Yew:

[Sukarno] asked, “How big is your population?” “One and a half million,” I replied. He had 100 million. “How many cars do you have?” “About 10,000,” I said. Jakarta had 50,000. I was puzzled but readily conceded that he occupied first place in Southeast Asia in terms of size.

Or, the behavior of Indian officials in the face of new golf balls:

It was a gradual slide in quality of a once elite service [Indian Civil Service], now caught up in the throes of a social and economic revolution which had reduced living standards… they could not buy good (i.e., imported) golf balls because their import was forbidden… Our high commission had advised me to bring several boxes of golf balls to distribute to the committee members of the club. It was depressing to see top brass and civil servants breaking up the packages and taking fistfuls of golf balls to stuff into their golf bags.

Indeed, golf balls were so precious that caddies would dash into any house or rough to find them. Once, at the former Bombay Royal Golf Course in 1965, I sliced my ball into a squatter area [what is a squatter area doing within driving distance of a Royal Golf Course?] and heard the loud clatter as it fell on a zinc roof. My caddie dashed off, I thought to find out who was hurt. But no– a little boy emerged with the golf ball, not to complain of injury but to bargain over the price of the ball.

We also learn of the need to be street-wise when dealing with foreign communist dictatorships looking to play a little development scam on a credulous leader:

In February 1994, I signed the Suzhou Agreement with Vice Premier Li Lanqing in Beijing, witnessed by Premier Li Peng and Prime Minister Goh… the essence of the project was to transfer our knowledge of how to plan, build and administer a comprehensive industrial, commercial and residential park that could attract high-quality foreign investors… Instead of giving SIP their full attention and cooperation as was promised, they used their association with Singapore to promote their own industrial estate, Suzhou New District (SND), undercutting SIP in land and infrastructure costs, which they controlled… It was a chastening experience… For the Suzhou authorities, a signed agreement is an expression of serious and sincere intent, but one that is not necessarily comprehensive and can be altered or reinterpreted with changing circumstances… China has an immensely complex government.

But LKY was something of a shakedown scam artist himself as Singapore was seen as a “developing” but not “developed” economy for some time. After catching some American personnel spying in Singapore,

I told the British commissioner, Lord Selkirk, that we would release these men and their stupidity would not be made public if the Americans gave a hundred million U.S. dollars to the Singapore government for economic development. They offered US$1 million, not to the Singapore government, but to the PAP [LKY’s political party]– an unbelievable insult.

He engineered something similar with Japan,

The only important business I raised with Prime Minister Hayato Ikeda was the “blood debt”, a request for compensation for their wartime atrocities… We eventually settled this “blood debt” after independence, in October 1966, for $50 million [serious money for small Singapore when the dollar was worth something!], half in grants and half in loans. I wanted to establish good relations to encourage their industrialists to invest in Singapore.

American race-baiters like Jesse Jackson and Al Sharpton couldn’t have worked a better deal with calls for reparation that would just end up in their own pockets! He even tried the same scam on different terms with the Japanese at a later date, this time playing “Godfather” over a shipping lane:

To get the Japanese to help us, for example, in investing in a petrochemical plant, we had to remind them that their ships passing through the Straits of Malacca would have problems with toll collectors if Singapore were to join the other littoral states, Indonesia and Malaysia.

“Nice open sea lane you got there, it would be a shame if something happened to it,” said in a thick, Germanic Robber Baron accent. The shakedown later continued with “soft loan” subsidies available only to developing nations:

I protested to Fukuda that his officials had spoken of Singapore not as a developing country but as an industrialized one not entitled to soft loans from Japan… We would lose our General Scheme of Preferences (GSP) [like affirmative action for international trading partners who are non-developed countries] and other advantages before we could compete on equal terms.

“Soft loans” are a form of fraud where one entity makes loans to another entity that they never intend to be repaid and usually forgive entirely. It is an outstanding source of graft, especially in corrupt political regimes where outright bribery is outlawed by the lender nation’s laws.

When he isn’t reflecting on his own actions, LKY proves to be a biting and incisive critic and a truthful observer of laws and conditions in other people’s countries. Here he is on the European Economic Community, the predecessor to the EU:

With the other commissioners, I discussed how to avoid manufacturing those products that EEC countries would find sensitive because of persistent high unemployment. I discovered to my dismay that the list was unlimited. Any member country with any influence on Brussels, feeling the slightest pain, could appeal to Brussels for protection and would invariably get it.

This brief anecdote proves three things simultaneously– (1) contrary to propaganda, the EU is a protectionist trading bloc, not a free trading society, (2) there appears to be no nation on Earth that is led by politicians who understand the benefits of free trade, even unilateral free trade and (3) not even trade-dependent Singapore is able to gain a competitive advantage by being a true free trader because it was led by a Keynesian planner-mindset politician-in-chief, LKY, who had his own worries about managing unemployment in his country to risk upsetting bureaucrats in Brussels! Now that is global political power projection for you!!

Here’s another honest and insightful observation from LKY, this time about a faux pas made by an inept American president:

When I was leaving, he gave me a green leather-bound copy of his campaign autobiography [aw gee, what a nice gift, a hastily produced, ghost-written volume of propaganda], Why Not the Best? He had already inscribed it, “To my good friend Lee Kuan Yew. Jimmy Carter.” I was flattered but surprised by my elevation to “good friend” even before he had met me. This must have been a standard practice during his election campaign.

It makes you wonder if Jimmy Cahtah even bothered to sign it himself. If you’re going to piss off a foreign leader on a cheap gesture, spare no expense!

The book is rife with such charming episodes, I could fill the blog up with them. Instead, it’s worth saying something about Lee Kuan Yew’s somewhat confusing and arbitrary arguments for polylogist legal theorizing and the explanations he gave for the success of Singapore’s economic and national development since 1965.

As a polylogist, LKY is a skeptic of the idea of simply importing “progressive” legal principles from one population to another:

the are fundamental differences between East Asian Confucian and Western liberal societies. Confucian societies believe that the individual exists in the context of the family, extended family, friends and wider society, and that the government cannot and should not take over the role of the family. Many in the West believe that the government is capable of fulfilling the obligations of the family when it fails, as with single mothers… freedom could only exist in an orderly state, not when there was contention or anarchy. In Eastern societies, the main objective is to have a well-ordered society so that everyone can enjoy freedom to the maximum [even better if they’re ruled by people like LKY!]… Democracy works where the people have that culture of accommodation and tolerance which makes a minority accept the majority’s right to have its way until the next election, and wait patiently and peacefully for its turn to become the government by persuading more voters to support its views.

And yet, he encouraged China to join as a member of the law-abiding community of nations! How can China, whose authoritarian legal system is ostensibly appropriate for the culture and values of the Chinese, join the law-abiding international community whose laws and customs are foreign and antagonistic to the culture and values of the Chinese? One potential solution is that there exist in every society a set of elite individuals who are not beholden to local political bigotry and historical traditions but can instead transcend them and tap into a more universal logic. But if they can do this for their countries at an international level, why can’t they do this at the “local” level of their domestic politics?

This seems to present some problems for the polylogist approach of LKY, although I think there’s a perfectly simple, but embarrassingly revealing, answer that has something to do with the reality of power and how and why it is exercised in any society which the thoughtful reader can probably surmise with a bit of their own consideration.

I am not a polylogist. I believe there is one, universal human logic that all mature, physically functioning adult minds can understand and employ in their own thinking and communications. That being said, I think LKY is absolutely correct that it is absurd to believe one can foist political principles that were developed over hundreds or thousands of years of combined cultural history onto a population that has never utilized them before, such as using military Keynesianism to deploy democracy in Afghanistan and Iraq, particularly when in so doing the existing political arrangements and power structures are rapidly collapsed or, worse, ignored as if they’re unimpactful.

But more importantly, I think it is naive to expect any political principle, foreign or domestic, to work miracles. For example, believing the process of revealing voter preferences through democratic elections can somehow obviate the need for working within the confines of economic scarcity. Or, to use another example, instituting a vicious socialist dictatorship which doesn’t give a damn about anyone’s preferences, and expecting it to spit out the highest standard of living in the world for its people. So, there is some truth to what LKY is saying on this subject, just not much how he said it.

And how did LKY explain Singapore’s success?

the basic principles that have helped us progress: social cohesion through sharing the benefits of progress, equal opportunities for all, and meritocracy, with the best man or woman for the job, especially as leaders in government

I’d call this a bit of self-aggrandizing delusion. When LKY says “sharing the benefits of progress”, he means that he doesn’t believe the outcomes in a market society are anything but random (he makes this claim in an early section of the book), and that the wealth should be spread around by politicians through things like government housing projects and forced savings accounts. Of course, getting to hand out welfare goodies after an election is a good strategy for winning future elections– some might call this building “social cohesion” to a particular party’s cause, such as LKY’s People’s Action Party.

Similarly, it is pure fudge to claim that you provided equal opportunities for all while running a meritocracy. A meritocracy implies an inequality of opportunity– opportunity goes to those who show merit, having performed well with other opportunities. To give everyone equality of opportunity is not just wasteful, it’s impossible. Does everyone in Singapore have an equal opportunity to be Prime Minister like LKY, or just those who control a well-oiled electoral wealth redistribution machine like the PAP? The double fudge is insisting that government leaders themselves are examples of this meritocracy. Nobody wants to lose their subsidized housing for questioning the merits of their political leaders!

That being said, I don’t think LKY played NO part in the Singapore success story. There is something to be said for a stable political regime with predictable laws and regulations over a 40+ year period, especially one which tended more toward laissez-faire than most. And clearly, looking around the neighborhood (Malaysia, Indonesia, Vietnam, Cambodia… China) Singapore could’ve had worse political management than it experienced. I just think that the credit due is negative– it’s what LKY and his team didn’t do, that made Singapore great, not what they did do. That, and what they didn’t do relative to what the more eager regimes in neighboring jurisdictions did do over the time period observed. With racial tension in Malaysia, military government in Indonesia, socialist science experiments in India, a devastating civil war in Vietnam and the Great Leap Forward and Cultural Revolution in China, you didn’t have to be all that fast to win this footrace.

By just not getting out of bed and ordering an atrocity each day, LKY virtually guaranteed the investment, development and progress would come to his tiny island nation unimpeded for decades, just like it did. But since there’s no way to run a truly controlled experiment here, there’s no way to know for sure what might’ve happened under a different set of policies, so ultimately it’s Lee Kuan Yew’s word against mine.

Review – Asian Godfathers

Asian Godfathers: Money and Power in Hong Kong and Southeast Asia

by Joe Studwell, published 2007

Studwell’s “Asian Godfathers” examines the economic development of Hong Kong, Singapore, Malaysia, Thailand, Indonesia and the Phillipines, which are “linked by powerful, unifying themes… similar historical legacies and a very particular relationship between political and economic power.” In so doing, it helps the reader understand curious facts such as how,

a small region that, concurrently, could not boast a single non-state corporation among the global top 500 [but] none the less accounted for a third of the wealthiest two dozen people on the planet.

The narrative of southeast Asia is that it is rapidly privatizing after a narrow-miss with communism and concentrated state-owned enterprise intervention throughout the 1950s, 1960s and 1970s post-war period and this explains some of the fantastic personal fortunes of various “business families” in the area. But if these supposedly privatized economies can’t boast globally competitive businesses, how are these people managing to get so rich?

The three minor inquiries of this major inquiry are (pg. xii):

1. why have secretive tycoons come to rule the economies of southeast Asia?
2. what have they contributed to the region’s overall economic development?
3. why are they still so powerful when the depth and potency of the Asian Financial Crisis — an event to whose origins they were central — appeared, to many observers, to be likely to emasculate them? (It did not.)

In searching for answers, the book explores several key themes (pg. xiii):

• historical; the southeast Asian economy is the product of a relationship between political and economic power that developed in the colonial era and was sustained, with a different cast of characters, in the post-colonial era
• mechanical; a political elite grants to members of an economic elite monopoly concessions, normally in domestic service industries, that enable the latter to extract enormous amounts of wealth, without a requirement to generate the technological capabilities, branded corporations and productivity gains that drive sustainable economic development
• political; it was expedient for new indigenous political leaderships to nurture their own dependent class of, typically, non-indigenous tycoons who could siphon off economic rents, give a share to their political masters and not pose a threat to political power
• economic; instead, growth came from a combination of small-scale entrepreneurs, many concentrated and around manufacturing, and a policy of renting out the local labor force to efficient multinational exporters
• crisis; these arrangements seemed to work acceptably well until the July 1997 onset of the financial crisis
• repetition; most of the institutional failings revealed by the crisis have not been tackled in the decades since the crisis broke and it remains unclear whether they will be [there could be another crash, as a result]

The introduction to “Asian Godfathers” is outstanding. It is one of the best, most coherent summaries of the major arguments of a comprehensive work such as this that I have come across, so it is worth quoting extensively from it before outlining and commenting on the rest of the book.

First, why is the book called “Asian Godfathers” (pg. xiv)?

The use of the term godfather in this book aims to reflect the traditions of paternalism, male power, aloofness and mystique that are absolutely part of the Asian tycoon story… a very romanticized myth…has grown up around southeast Asia’s tycoons [along with] sub-myths about race, culture, genetics, entrepreneurialism… the entire grounding of economic progress in the region since the end of colonialism.

The Asian tycoons are not just characters in the book, they are characters in real life and they have worked hard to consciously develop their public character themselves. And with regards to character, it is interesting to note that,

Most of Asia’s godfathers are ethnic Chinese.

This would seem to fit into the “historical” theme, as during the colonial period many of the ennobled members of the business community were part of the Chinese diaspora throughout southeast Asia and their relationships with indigenous and colonial governments were similar to the roles and functions which exist today between political and economic elites in the region due to the seeming “special” status a racial or ethnic outsider can obtain in such scenarios.

That being said, Studwell objectively rejects the idea that there is a “culture-centered explanation” for the success of (mostly) Chinese tycoons in southeast Asia, founded on three points:

1. notions of a cultural imperative ignore historical context; arbitrary decisions made by former colonial powers have led to present-day coincidences, such as the high percentage of “subcontinental ancestry” individuals serving as lawyers and judges in Singapore or Malaysia
2. the Chinese are non-homogeneous and the Chinese in southeast Asia are typical of the Chinese race in general; Chinese emigres were a self-selected group willing to take significant risks for chances at a brighter future, and they emigrated from geographically, culturally and linguistically different regions around China at different periods of time
3. the Chinese emigration generally can not be conflated with the godfather phenomenon; while overseas Chinese enjoy above-average incomes in some places, there are also large populations of emigre Chinese who live in poverty similar to the indigenous populations

So does this mean culture and race mean nothing in explaining southeast Asian economic outcomes? Not quite. (pg. xix)

This book argues that these individuals are above all the economic products of the political environment in which they operate and that it is this same political environment that is preventing the region from achieving sustained economic progress. In a worst-case scenario, southeast Asia may be headed towards Latin America-style stagnation and inequality.

So, again, how do these people get so rich? Essentially, they are “asset traders”, trading assets from one political system (Asia) to another (the Western world/global market economy) and they get paid for arbitraging between the two in the form of rents.

Asian godfathers exploit political inefficiency for gain… their companies’ performance in terms of productivity typically lags behind that of the overall economies in which they operate… it is the smaller scale local businesses and the hard work and thrift of ordinary southeast Asians that have driven development.

Interestingly, this is the same argument that was made about the Chinese communist party in control of coastal trading cities and the inland rural entrepreneurs who were driving economic change in China that was put forth in “[amazon text=Capitalism With Chinese Characteristics&asin=0521898102]”. The state-connected actors get all the credit for “producing” measurable trade activity that their political obstructions necessitate, and the contribution of thrifty commercial operators in the domestic economy which are harder to measure and observe go without note despite being at the root of the phenomenon of “third world development” in these regions.

This is one of the central myths shattered by this book– that the mega-wealthy businessmen of southeast Asia are bootstrapped entrepreneurs operating in competitive markets and that Hong Kong and Singapore have grown because they are liberal, free market economies in a world of state intervention and control. The truth is almost exactly the opposite, with the individuals topping the “rich list” representing a group of crony capitalist concessionaires par excellence, and Hong Kong and Singapore in particular representing what happens when you channel large volumes of cash flow through controlled banking and finance regimes, regardless of wider economic or social principles.

This political economic arrangement is not new, and it is not even just colonial. As Studwell argues, it starts with migration pre-dating European control of the region and it relies upon an ancient

racial division of labor in which locals were the political entrepreneurs– focused on the maintenance of political power against indigenous rivals and, later, in partnership with European and American colonists — and outsiders who became economic, and as a corollary bureaucratic, entrepreneurs.

In a sense, there’s really nothing unique or extraordinary about these arrangements. From the dawn of time some groups in society have sought political control over others, which is to say, they seek to live at the expense of the productive people in society. The ancient trade economy resulted in migrant businessmen who proved to be capable administrators not only of their own affairs but also as hired tax farmers and local bureaucrats for the indigenous rulers. Over time, these two groups came more and more to rely upon one another, the businessmen on the rulers for explicit monopoly concessions in return for loyal service, and the rulers on the businessmen for a class of people who could actually get their hands dirty with revenue generation for the state while serving as convenient scapegoats or distractions for the frustrations of the local populace concerning their rule, when need be.

These political arrangements always result in poverty, suffering and gross economic inefficiency. In the case of countries where the governments overtly monopolize or nationalistically control real enterprises, there is the perennial problem of an artificially low supply resulting in artificially high prices. Combined with foreign trade controls which prevent competitive global exports from arriving in their markets, you have the set up for an extremely lucrative arrangement for these “godfather” types who bridge the gap between the inefficient, politically-controlled domestic markets and the efficient, competitive global market. The success of the “trade nations” of Hong Kong and Singapore, then, can be explained by political interference in the nearby local economies, not the absence of such interference in their own:

What is important about Hong Kong and Singapore is that they are archetypal city states — ‘port city states’ would be more precise. Since colonial inception they have offered tariff-free trade (with few or no questions asked about what is being traded) and have been places to park money (with few or no questions asked about where the money came from)… Hong Kong and Singapore perform a simple economic trick: they arbitrage the relative economic inefficiency of their hinterlands… For as long as surrounding countries have imposed tariffs or quotas on trade in their efforts to fund government, Hong Kong and Singapore have profited from circumventing those restrictions.

In the case of Hong Kong and Singapore, “Hong Kong’s immediate hinterland is Southern China… Singapore’s dominant hinterland… has long been Indonesia.” When was the last time you saw China or Indonesia show up on a list of globally competitive economies?

The reason Hong Kong and Singapore are such large financial centers, in particular, is that

Ethnic outsider tycoons who have profited from business concessions in surrounding countries have always sought to keep the funds offshore, fearing — with good reason — that they may one day be the victims of political change.

Perhaps overlooked by some,

Singapore… increased account secrecy provisions and changed trust laws in a manner designed to attract the kind of money Switzerland had dealt in… foreign private banks almost doubled between 2000 and 2006

And meanwhile, “to sustain its economy, Singapore is building casinos to attract corruption money from China.”

In conclusion, rather than proving the efficacy of free markets (which Hong Kong and Singapore largely do not have in terms of domestic industries), instead the experience of these island countries serves to prove

That a city state with a strategic deep water port in a region that has relatively higher levels of mismanagement, corruption and political uncertainty will prosper with little reference to official economic philosophy.

But what about the “godfathers” themselves? Surely they are talented businessmen in their own right despite the relatively uncompetitive markets in which they thrive?

Whether it is as a sop to the political class to help fool the local populace that it has options and opportunity, or it is a sop to their own egos to glory in a sense of achievement and capability that has not been earned, the godfathers’ public personas are men of meager means who rose through the ranks in short order to become industrial and financial titans in their adopted countries while the reality is that most came from already successful families with existing political connections that they enhanced, or, to the extent they were “penniless” before their rise, they certainly didn’t do it through hard work and sweat equity of their own but happened to be in the right place at the right time and got control of an early government concession which became the rocket engine to the top. Many godfathers of the present generation were war-time smugglers, gambling operators or even cooperators with occupying forces as southeast Asia changed hands back and forth during World War II. As Studwell observes,

whether Hong Kong has been ruled by British colonialism, Japanese imperialism or Chinese communism, it has always been managed through the same group of people.

According to one local observer and member of the monied class, “In one generation it is very difficult [to rise from rags to riches ] because it is not an open society.” And according to a local scholar, “I have yet to find a businessman who started as a coolie.” As such, the godfathers have a notorious reputation when it comes to expensive entertainment vices and

the rumors are legion and suggest a form of gambling that echoes that of Middle Eastern potentates — vast sums of money blown away by people who do not know its real value because they have not really earned it.

Nor are their social habits those of the hard-working middle-class bourgeoisie who cherish being part of their communities and maintaining stable, monogamous relationships with supportive spouses. Says one observer, “None of these people has social friends. They fuck a girl, shake off their horniness and then it’s back to work.” It appears to be the life of an addict and by another’s estimation, “If they don’t have a woman a day they can’t function.” The Asian godfathers are more Bill Clinton than Bill Gates, it seems.

Another important aspect of the godfather character is secrecy. While private businessmen are often protective of their trade secrets, customer relationships, technological know-how and tactical elements of their strategy, this is a different form of caginess. Says Studwell, “Most deals involve some element of government licensing or concession, things that both parties prefer to keep private.” The godfathers get special advantages from the government which, if known, ruin their reputations as self-made men, and the governments themselves want the mystique maintained so as to confuse the masses as to how they are controlled (and how they benefit by their arrangements with these business stars.)

And that secrecy is extremely valuable because

At the heart of the average godfather’s empire is a concession or license that gives rise to a monopoly or oligopoly activity… this non-competitive core cash flow, the river of molten gold that will keep him going through good times and bad

allows the godfathers to build their empires, and survive the inevitable setbacks and speed wobbles as uncompetitive pseudo-entrepreneurs jump head first into a bevy of unfamiliar industries and businesses and try to swim without the floaty wings of government assistance.

Though there are many such arrangements detailed in the book, the explanation of Hong Kong land development patterns on page 68 is worth quoting at length as a kind of summary of how these special arrangements serve to entrench a group of large scale crony capitalists:

The British administration set the scene for real estate oligopoly because it chose to depend heavily on land sales — all land was deemed “Crown land” until sold — to fund its budget. As Hong Kong grew in the post-Second Word War era, the government auctioned off development land in ever more expensive chunks: US$1 billion a pop for large plots by the mid 1990s. Anyone who acquired land in the secondary market that was not designated for building — agricultural acreage in the New Territories was targeted by the tycoon families behind Sun Hung Kai and Henderson in the 1970s and 1980s — had to pay a hefty upfront conversion premium before construction could begin. The effect was to rule out small players and persons without good connections to the large British banks. A government-commissioned 1996 report by Hong Kong’s Consumer Council found that three-quarters of new private residential housing was supplied by only ten developers between 1991 and 1994, and 55 per cent came from the four biggest developers. A separate look at profitability considered thirteen large residential developments. Margins were extraordinary, especially where conversion fees had been set by private tender on large lots of agricultural land. In such cases, the lowest return the Consumer Council found — as a percentage of total estimated development costs, including land — was 77 per cent. The highest was 364 per cent.

For everyone else in Hong Kong, the outsize cost of housing relative to all other living expenses is a constant complaint.

Middle class Hong Kongers, meanwhile, paid low nominal taxes but some of the world’s highest rents, or mortgage repayments, and apartment management fees equivalent to 13-15 per cent of rents.

Interestingly, Hong Kong locals see this as inevitable, not as a necessary outcome of a crony land development and ownership system, but as the necessary outcome of living on a small island! The argument is that there is only so much land, and they aren’t making more (nevermind landfill projects like the airport, ports, etc.)– somehow competition serves to lower prices in every other area of business but in Hong Kong real estate, no matter how tall you build the buildings, supply never improves and prices keep going up. They’re totally bought in on the godfather propaganda.

The whole system seems outrageous to an outsider, as Studwell describes

a graft-seeking culture among indigenous politicians. “They’re broke every week… feed your mouth, feed your prick. That is how they think.”

Yet,

while the south-east Asian system is corrupt, it is more efficient than ones that pertain in socitieies where the holders of power also seek to be exploiters of business rents.

Here he is referring to places like Africa and parts of the Middle East, but the metaphor could also be apt in looking historically at feudal Europe versus bourgeoisie Europe, where one of the primary political trends was the reduction of large landed estates into ever smaller, privately owned parcels controlled by individual land owners or small businessmen.

So, if the godfathers are not business geniuses, what are they and how do they manage to get anything done across their humongous and complicated business holdings? According to Studwell,

their activities are more like those of supercharged chairmen: setting strategy, deal making, hobnobbing, but ultimately leaving others to execute the substance as well as the detail of what they put in train

and it is their gweilo, or running dogs, who are the real business men in their organizations. Yet, even then these individuals are not as much businessmen as they are “enforcers”, with the top enforcer being more akin to “‘the chief slave’. This is the first person called when the godfather wants something done.” And these gweilo, like the godfathers themselves, are rarely members of the local populace but are instead drawn from “a globally traded management cadre” who graduate from top universities and can be found running large enterprises around the world.

The final piece of the puzzle is the godfathers’ relationship with capital markets. The first thing to note is that every godfather has his own affiliated bank, for example, “By the mid 1990s every major business [in Indonesia], and many lesser ones, had a captive bank.” Interestingly, even “different factions of the military had banks”! With control of a bank, godfathers can tap into cheap capital pools and then hand off social problems to the government in the event of a crisis such as the Asian Financial Crisis of 1997.

And while massive, cheap leverage is the favored form of financial fuel, the godfathers have also found unique ways to employ their legerdemain in the equity markets via that ever-so-wonderful technique of arbitrage. In fact, this explains the puzzling question of “why, despite heady economic growth, have long-term stock market returns in south-east Asia been so poor?” For example, Studwell notes that “Between the beginning of 1993 and the end of 2006, dollar returns in Thailand and the Philippines were actually negative; their stock markets destroyed capital.”

The answer is simple: “buying equities in south-east Asia is fundamentally about buying into the godfather business model”. And the godfather model contains the implicit query

why work hard to increase a company’s stock price and pay dividends when all the capital you need is available at a real interest rate close to zero per cent from a bank whose board you control?

From this standpoint, then, it should come as no surprise that

the eight largest conglomerates in the region exercise effective control over a quarter of all listed companies, while the top twenty-two conglomerates control one-third of listed vehicles.

What is, perhaps, surprising is how the godfathers have managed to profit even from running their listed companies into the ground. This was one of the most fascinating reveals in the book:

The game here was for tycoons to sell low-grade property assets into new corporate entities, back-load the debt repayments of the purchaser and list them with the story that dividends in year one would be a guide to future earnings.

The money used to finance this arrangement is often provided by their bank. And when the publicly-listed corporate structures verge on insolvency, the godfather’s private companies offer to repurchase the assets at pennies on the dollar. It is an outstanding bait-and-switch which allows them to swipe millions (billions?) along the way formerly belonging to “dumb money” mutual funds. In many instances of these IPO-to-privatize shenanigans “the boss himself would own only about 10 per cent of what he was selling, a powerful signal that the asset was overpriced.”

The 1990s leading up to the Asian Financial Crisis represented a kind of Golden Era of banking charlatanry for the godfathers where “Hong Kong, for instance, had negative real interest rates from the end of 1990 to the start of 1995”, which allowed for such inanities that “K. S. Lo, the real estate tycoon and elder brother of Vincent Lo, [telling a CSLA analyst] he would buy any property in Hong Kong sight unseen.” If that kind of anecdote isn’t revealing of the reality of the free market, competitive real estate economy in Hong Kong, nothing is.

Studwell has produced an outstanding and deeply-researched resource in “Asian Godfathers.” While my review focused on Hong Kong and Singapore, which are of particular interest to me personally, there is just as much detail here about Malaysia, Indonesia, Thailand and the Phillipines, as well as a variety of throwaway lines that come out of the mouths of the main characters and those forced to bask in their wake alike that are just too funny not to chuckle about. The great detail with which Studwell describes the machinations of the godfathers and the mass of damning evidence he provides that they not only do not operate in free economies but only exist because of the nature of southeast Asian government manipulation of regional economies is deeply satisfying to this reader and I am sure it will be refreshing to other curious minds as well.

This book is not a classic that can be read again and again with new insights about the human condition to appreciate every time, but it is an outstanding treatment in its specific area that I would strongly recommend to anybody curious to know more about southeast Asian political economy in general, and how crony capitalism works specifically, not just in these economies but around the globe because the formula is similar, if not identical. There are only so many ways to rip people off and it turns out it doesn’t require too much creativity. I plan to purchase and read a copy of Studwell’s How Asia Works in the future.

Singapore Cabbie Anecdote

I had a conversation with our cabbie on the way to the airport in Singapore that was worth memorializing. It’s one man’s perspective so the anecdote must be put in that context, but it’s still interesting.

Our cabbie told us that rents for nice 1 and 2BR apartments on the outskirts of town run S$3500+, and the same apartments in the CBD are closer to S$5000+. He said many foreign manual laborers were earning S$1-1500/mo ten years ago and make about the same now.

Foreign expats who come to take corporate jobs are often on contract and sign up to make S$10-12,000/mo by his estimate. While they could choose to live outside the city and save money, many live in the CBD and obviously rent consumes a substantial portion of their income each month. As a result many feel that Singapore doesn’t offer the opportunity they imagined and look to leave when their contract ends.

He said that if he didn’t have a wife and kids, he’d be looking to move to Australia, New Zealand or another economy like that as he thinks the job and living standard opportunities are better. But he thinks it’s too hard to do it if you’re not single and flexible. I thought this was interesting because to me it says a lot about a place if people want to immigrate in or emigrate out.

I asked about the press. He said the press was completely controlled by the government and they painted an often comical picture of reality compared to alternative views people can now freely access on social media. He said they don’t seem to understand how that has put the truth to their lies but nonetheless it is not a free press.

He said that the different races mostly get along, and there are no ethnic political parties, they’re all mixed, but he said it wasn’t so simple as everyone getting along with everyone else and there is definitely some stigma toward the darker skinned manual laborers from India and similar areas.

He said life is not bad in Singapore, but it just isn’t quite like the official story and a lot of people are beginning to struggle to get by and can’t manage to save, and the government doesn’t seem to have a good plan for managing this.

The Singapore Success Story

At the National Museum of Singapore, we learned about the islands history from the time of the Melaka Empire to European colonialism, Japanese occupation and finally independence. The story goes that because Singapore was an island country with no natural resources to speak of, it needed visionary guidance from the “Founding Fathers” (this is actually what they’re referred to as here) of the People’s Action Party led by Lee Kuan Yew and his English and American educated Peranakan technocrats to develop it’s economy and provide all the people with a first world standard of living.

I find this myth fascinating, mostly because everyone believes it, but also because of two related observations:

In mainland China right around the time Singapore was struggling for independence and then climbing to first world status, the idea of economic guidance by benevolent central planners was being tried and failing miserably. There, the excuse was that China had been exploited by a series of colonial and external players not to mention left purposefully backwards by the Qing rulers so a strong central government was needed to push a modernization effort.

Why did this fail in China but succeed wonderfully in Singapore?

Here’s my other observation. The town where I come from is not economically self-sufficient and is also on the ocean. We too do not have an abundance of natural resources and must trade with others to survive.

But no one used that as an excuse for establishing sovereignty or central planning by a one-party state.

So what makes us different if a lack of abundant natural resources is not the issue?

The best US bank for travel in Asia? Citibank.

I opened a Citibank account when I moved to New York back in 2004. It seemed like a good option for ATM access in the city, but I came to regret my choice when I moved to Dallas and then back to California. Citi was not everywhere and was often difficult to come by– luckily I was never a big cash user, preferring to use my credit card for monthly cash management. Still, it was inconvenient and I often thought of switching to BofA or another major branch when I enviously spied these locations much closer to home and work whenever I went.

In fact, today I do most of my banking with Chase. Their bank branch expansion has been nothing short of explosive over the last few years and they’re now everywhere. In addition, they seem to have the most advanced ATMs which can read and deposit checks directly with OCR technology and an app that can also handle check deposits under $2000. I realize other banks (such as Capital One) offer similar technologies and I think maybe Citi and BofA have ATMs that are as capable now as well but my point is that Chase seems to offer the best overall package, domestically.

However, in the three Asian cities we’ve visited, Citibank has been hands down the best option.

Now, I keep a decent balance with Citi so I get their Citigold service. This means I am entitled to ATM fee reimbursement at non-Citi ATMs and I get their best forex exchange rate with no forex fees. When we traveled to South America three years ago, I pulled cash from local ATMs (I don’t remember spotting a Citi there, maybe in Santiago or BA but I don’t remember) and never had to go to a money exchange like Travelex. The rest of the time I just ran my debit card when it was an option and I got the same benefit– pay for the meal, ticket, whatever, at the best exchange rate with no fees.

In the three cities we’ve visited so far, Taipei, Hong Kong and Singapore, I’ve found a Citi ATM within two or three blocks of our AirBNB as well as around the city while walking. Even better, in Hong Kong and Singapore I found Citi ATMs in the baggage claim area of the terminals so I had cash for cabs, airport trams, etc. immediately upon arrival. I probably could’ve found one in Taipei as well but didn’t bother checking as we were being picked up by relatives and I planned to exchange money with them.

My Citi MasterCard debit card has been accepted anywhere the merchant offers credit card payment services, which has been just about everywhere but local food stands and some cabs.

I haven’t seen one other major US bank ATM or branch office here– no Chase, no BofA, no Wells Fargo. However, there are a TON of local/regional banks, it is actually amazing how unconsolidated the banks in Asia appear to be even with dominant local giants such as Standard Chartered and HSBC. This is something I read about in “[amazon text=Asian Godfathers&asin=0802143911]” by Joe Studwell. Asia in general is kind of overbanked because every crony capitalist wants his own bank to play financial games with his holding companies.

As I don’t have any substantial BitCoin holdings I didn’t explore how using BitCoin might work out here but my suspicion right now is that it doesn’t make it any easier or cheaper.

For a “globalized” world such as the one we live in, with so many people traveling for work and pleasure, isn’t it amazing we don’t have one, market derived currency of choice?

The Asia AirBNB host profile

Here’s a quick observation that may or may not be generalizable.

All three of our AirBNB hosts have been women. One appears to be somewhat artistic or design oriented (based on her clothing and reading materials on her shelves) but the other two appear to be masters-level students or graduates with professional careers in finance or banking.

All three, obviously, speak English and have fairly well traveled, “international” attitudes about culture and values by looking at various objects and keep sakes in their apartments. They all have TVs with satellite type cable service. They all have very modern, Ikea-like living spaces (could be selection bias on our part though).

The last two hosts have had copies of novels from the “50 shades” series on their bookshelves, along with serious business and philosophical matter likely for school.

They’re all been young, likely early to mid 30s.

By way of comparison, in South America we stayed at a hostel run by a business, a hostel run by a middle-aged couple, a BNB run by a middle aged couple, an apartment run by a late middle aged man and an apartment owned by a young man whose family are the investors. I believe the last two in Argentina were AirBNB and we mightve made the rest of the arrangements directly via the enterprises’ websites.

And we are going to stay at a young man’s AirBNB here in Singapore but found out last minute that his building owner wouldn’t renew his permission letter letting him run the AirBNB legally.