June 5, 2006
May 11, 2006
Asia’s growing inequality challenge
Guy De Jonquieres
9 May 2006
From 1970 until the 1990s, Asia’s “tiger” economies achieved a historic, arguably unrivalled, feat: combining ultra-rapid growth with sustained reductions in income inequality. As the World Bank observed at the time, the result was a virtuous circle that reinforced expansion by spreading its benefits widely and evenly.
No longer. Although fast growth is today the near-universal mantra among Asian governments, the link with social equity has steadily weakened. A World Bank survey finds income inequality in eight east Asian countries increased by 45 per cent overall between 1990 and 2002. Admittedly, the pattern is heavily skewed by a steep deterioration in China. But only in Thailand, which has long had some of Asia’s biggest disparities, did they narrow much.
Of course, inequality indices are only crude gauges and widening income gaps are not always bad news: the rich getting richer need not make the poor poorer. However, in much of Asia, noises from the street tell a more troubling story. In China, disgruntled citizens staged 87,000 protests last year. In India, the rise of Maoist rebels in backward districts is causing political tremors in Delhi. Thailand’s political crisis is rooted in economic polarisation between Bangkok and rural areas. Even in Singapore, greater inequality is sparking growing public complaints.
There are many reasons why Asia’s old virtuous circle has broken. The 1997 economic crisis is one. Another is slower increases in productivity and incomes in agriculture, still Asia’s biggest employer, than in manufacturing and services. In China, gaping regional disparities and mass closures of state enterprises have compounded the problem.
But as the Asian Development Bank points out in a new book, one trend is increasingly common across the region: failure to create enough jobs to absorb a fast-expanding labour force. Between 1996 and 2003, unemployment rates rose in all but three of 18 Asian developing economies. Under-employment is more serious still. The ADB says 500m people, 29 per cent of the labour force, are under-employed or jobless and 500m more earn Dollars 2 a day or less.
No wonder Asian governments – many of which have staked their often shaky legitimacy on promises of steadily rising living standards for all – are growing nervous and turning to re-distributive policies, aimed particularly at the rural poor.
To date, such initiatives have commonly suffered from a variety of flaws: some are inadequately funded; some have ample money, but are targeted at the wrong things; or the money is, quite simply, squandered.
China and India offer mirror-image case studies. Beijing’s answer to rural unrest, its much-ballyhooed New Socialist Countryside policy, involves meagre additional spending. Yet China splurges money on wasteful showpiece infrastructure projects, such as empty motorways to nowhere, that yield paltry or negative returns.
India’s new rural guaranteed wage scheme, on the other hand, looks extravagant, given the country’s large fiscal deficit. Yet the infrastructure spending needed to stimulate job-creating private investment has long been starved of funds and hobbled by bureaucratic inertia.
In neither country are enough resources being devoted to education and rural healthcare and establishing at least basic social security and pension systems. These are needed, not only to pacify today’s have-nots, but to build a stable foundation for longer-term economic development.
But getting the priorities right and throwing enough money at them is only the start. More important still is to ensure it is properly spent. That requires responsive institutions and manpower with the skills and experience needed to implement state programmes and deliver public services efficiently.
It also means cleaning up the corruption that plagues so much of Asian public life. China’s rural protests have been triggered as much by the rapacious greed of ruthless Communist party officials as by scarce jobs and poor living standards. India, meanwhile, ranks lower even than China in Transparency International’s corruption perceptions index and five large east Asian nations do worse still.
Rajiv Gandhi famously remarked that only 15 per cent of state funds intended for India’s poor ever reached them. That dismal record is far from unique. In the days when Asian economies’ performance lifted all boats more or less together, their rulers could get away with incompetence and dishonesty. But the fraying link between growth and equity is straining public tolerance – and changing the political game.
Market-oriented reforms, necessary though they are, cannot solve problems that, by definition, call for an active role by the state. The state’s efficacy, and Asian governments’ popular legitimacy, now face a stiff challenge. The growing rumblings of public discontent across the region are a foretaste of what may await them if they fail the test.
Temasek: The Perils of Being Singaporean
May 2006 Far Eastern Economic Review
By Salil Tripathi
Singapore’s political leaders are not used to seeing their effigies burned, at home or abroad. And yet that is precisely what happened in March this year. Activists in Thailand, demanding the resignation of then Prime Minister Thaksin Shinawatra, targeted Singapore after the city-state’s state-owned investment vehicle—Temasek Holdings—paid $3.7 billion for Shin Corp, Mr. Thaksin’s telecommunications and media firm.
That investment set off a political maelstrom. Demonstrators were angry not only because Mr. Thaksin—legally—paid no tax on his gains ($1.9 billion), but also because a foreign company would now own a significant stake in the Thai telecom infrastructure. Sondhi Limthongkul, the maverick media tycoon and one of the leaders of the anti-Thaksin campaign, described the investment as “economic imperialism.” Appearing baffled, Singapore said Temasek operated independently on strictly commercial grounds and that its government had nothing to do with Temasek’s operations, but the demonstrators in Bangkok did not believe it.
In contrast, around the same time, Temasek acquired the late Khoo Teck Puat’s 11.55% stake (reportedly worth $4 billion) in Standard Chartered Bank in the United Kingdom, which has significant Asian operations. There will be regulatory scrutiny in London, but investors—and even Standard Chartered’s management—welcomed Temasek as a long-term investor.
These experiences parallel what has happened to Singapore Airlines (SIA), one of the jewels in Temasek’s crown. In the 1990s, Temasek made several vain attempts to launch an airline (on its own and in partnership with the Tata group) in India. Despite apparent political support from New Delhi, opposition from domestic competitors and some politicians prevailed, and the plan did not take off. Again, in contrast, SIA’s investment of nearly $1 billion for a 49% stake in Virgin Atlantic, the British carrier, went ahead without any protests. If anything, some analysts felt that SIA paid too much.
Singapore decided long ago that it must outrun its neighbors in order to offset its own lack of natural resources. This is why it went against the prevailing wisdom of other newly decolonized countries and chose to run an outwardly oriented economy. It shunned import substitution and reduced tariffs, inviting multinationals to set up shop.
Essentially, Singapore decided to leapfrog over the region and plug into the global economy by becoming a vital middleman—not one who adds costs, but one who adds value. By running an efficient port, an excellent airline, a busy airport, and an active shipyard, it benefited from the global economy. Multinationals used it as their base in the region. Over the next few decades, Singapore was well on its way to complete its journey from the Third World to the First, as Singapore’s founding father, Lee Kuan Yew, puts it in his autobiography.
As a tiny island state with a population of just over four million, it was inevitable that Singapore would run out of domestic investment opportunities. Going regional, therefore, became imperative. And that’s where politics kicked in. For the neighbors, Singapore is not only a Chinese island in a Malay sea, but a well capitalized, prosperous neighbor with a much larger per capita income, and a huge nominal GDP (bigger than all the Association of Southeast Asian Nations countries except Indonesia and Thailand).
Singapore has technologically advanced armed forces and a large defense budget. It is politically close to Australia and the United States, and it is seen as sympathetic to China’s emergence. It should therefore not surprise anyone that Thailand and India on one hand, and the United Kingdom on the other, would view Temasek’s—or its subsidiaries’—investments differently.
The contrasting responses are indicative of how Singapore is perceived in the region and beyond. In Europe and America, Singapore is known for its growth-oriented economy, a model of efficiency. In Southeast Asia and its environs, it is viewed as a formidable force which punches above its weight. Its governance model of state capitalism has meant that its political, bureaucratic and corporate worlds often seem inextricable.
Temasek officials assert that it is not “a government-directed policy agency,” and that “Temasek-linked companies receive no favors from the government.” The companies make their own investment and business decisions based on their best interests, they often say.
But Temasek is still owned by Singapore’s finance ministry, and it began as an investment vehicle to mobilize resources and capital for Singapore’s leading government-linked companies (GLCs)—DBS Bank, Singapore Telecom, Keppel, SembCorp, SIA, Port of Singapore Authority (PSA), and others. Many have an outstanding record: SIA is not only profitable but outperforms global airlines in passenger satisfaction surveys. PSA also enjoys healthy margins.
However, critics note that some of the companies are natural monopolies, or that they operate in a protected market. And Singapore’s GLCs are part of an intricate web through which the government exercises its authority over the way the country’s resources and wealth are generated, allocated and managed, job opportunities created and contracts awarded.
With opportunities limited in Singapore and a portfolio of $65 billion, conventional wisdom has it that in order to improve its returns, Temasek should increase its overseas exposure. Currently, some 51% of its portfolio is invested overseas, with 18% in Australia, 9% in other Asean countries, and 9% in China and East Asia. Temasek’s net profit last year was $4.8 billion on group revenue of $43.4 billion and an asset base of $125.5 billion.
However, when Temasek invests in the region, its neighbors do not see it as an Asian conglomerate, but as an arm of Singapore, Inc. That perception has nothing to do with how efficient some Temasek companies are and everything to do with their concern that a small, powerful state is seeking control of strategic sectors of their economies.
In Singapore’s case, the neighbors’ concerns increase because in their eyes Temasek is not any other prominent company, but it is perceived as being close to the Singaporean ruling class. Its CEO, Ho Ching, is the wife of Prime Minister Lee Hsien Loong, who is the son of Minister Mentor Lee Kuan Yew. The prime minister’s younger brother, Lee Hsien Yang, runs Singapore Telecom, in which Temasek has a large stake.
Whenever critics have commented on the Lee family’s dominance in Singapore, the republic has reacted promptly, saying that the Lees are an exceptional family and cannot be discriminated against merely because they are related to one another. Also, the government adds, being a small nation, Singapore’s talent pool is limited.
Beyond that apprehension, Singapore’s neighbors are also concerned that its dominance in their economies would prevent them from moving up the value chain. They do not want to become Singapore’s satellites. According to Mukul Asher, professor of public policy at the National University of Singapore: “It is an entrenched perception in the region that when dealing with Singapore companies, you are not dealing with just a commercial entity, but with a wealthy and resourceful state.”
Indeed, Singapore loses no opportunity to snap up assets, opportunities and resources in the region. At home, it offers good jobs that attract people (from South and Southeast Asia, to meet labor shortages at all levels); it runs a well regulated financial center that lures wealth (many of the region’s wealthy individuals park their riches in Singapore, safely beyond the prying eyes of their home-country tax authorities); and it ensures a stable polity that draws property buyers (particularly ethnic Chinese Indonesians). None of this excites its neighbors, who see their talent and wealth migrate to Singapore.
Yet Temasek has built a respectable overseas portfolio, which includes stakes in ICICI Bank and Mahindra and Mahindra in India, as well as stakes in China Construction Bank and COSCO Holdings in mainland China, and in Indonesia’s Bank Danamon and Hana Bank in South Korea. Temasek’s overseas exposure has grown indirectly as well, as its companies are also active abroad: Singapore Telecom owns nearly a third of Indonesia’s leading cellphone operator, Telekomunikasi Selular (Telkomsel) and another Temasek affiliate, ST Telemedia, has a sizeable stake in Indosat—a stake which raised concerns about Singapore dominating Indonesia’s telecom infrastructure.
Following similar logic, India did not approve st Telemedia’s entry into mobile operator Idea Cellular, because SingTel already has a stake in Bharti Televentures, a rival. Meanwhile, Korea turned down DBS Bank’s bid for Korea Exchange Bank, because under Korean regulations, Temasek (as DBS’s parent) is considered a nonbanking group. Likewise, Temasek could not increase its stake in ICICI Bank because another state-owned Singaporean entity, the Government of Singapore Investment Corp. (GIC) also has a stake in that bank, and if Temasek were permitted to increase its stake, Singaporean interests in ICICI Bank would have gone beyond 10%, the limit Indian regulations allow. Temasek has not been able to convince Indian regulators that it is independent from GIC or the Singapore government.
Many of the executives of Singapore’s GLCs, including Temasek, have spent a large part of their careers as civil servants. Bureaucracy anywhere is designed to be risk-averse; its management ethos is not wired to produce the kind of returns that markets sit up and notice. As risk avoidance becomes a priority, executives take comfort by tying up with parastatals, or large corporations run by well-connected tycoons. Changing that aspect would require a change in the mindset of Singapore’s establishment.
When Temasek published its first financial report in 2004, Standard and Poor’s said that its investment strategy had produced “inferior” returns over the five previous years when compared with similar companies. A 2004 study said that Temasek’s major listed companies had yielded a return of only 1.7% annually since their listings. Low returns was a matter raised in the Singapore Parliament as well.
But such criticism misses the broader point. Temasek’s mission statement is to create and maximize long-term shareholder value. But Singapore’s broader strategic objectives may not necessarily require Temasek to do so. Instead of challenging the notion that Temasek is a branch of the Singaporean government, Singapore should recognize how that relationship it is perceived in the region and attempt to improve its image. That would cause less heartburn, and Singapore, Inc. will be able to pursue deals more readily, even if it means ceding the regional field to competitors.
Mr. Tripathi, a former Singapore correspondent of the REVIEW, is a writer based in London.
April 5, 2006
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Singapore Entrepreneurs: Finding the Golden Path: Can Singapore be a Silicon Valley?
Can Singapore be truly become a Silicon Valley within the next decade? To begin, a few interesting indicators have emerged as to why we should ask this question now. First and foremost, is the increasing entrepreneurial activity that has emerged from the Global Entrepreneurship Monitor 2005 report. The figure clearly shows that the entrepreneurial mindset is slowly distilled down to the younger generation, because they contribute most to that statistic. The city of Singapore is becoming more and more cosmopolitan. If you bother to look around, you will find one in ten people who are foreigners from other countries. Furthermore, the government has recently looking at forming a board for small & medium enterprises, studying the feasibility of a stock exchange similar to AIM in the London Stock Exchange and provided S$13.75B worth of funds into science and technology.
Voilà! In view, a humble vaudevillian veteran, cast vicariously as
both victim and villain by the vicissitudes of Fate. This visage, no
mere veneer of vanity, is it vestige of the vox populi, now vacant,
vanished, as the once vital voice of the verisimilitude now venerates
what they once vilified. However, this valorous visitation of a
by-gone vexation, stands vivified, and has vowed to vanquish these
venal and virulent vermin vanguarding vice and vouchsafing the
violently vicious and voracious violation of volition. The only
verdict is vengeance; a vendetta, held as a votive, not in vain, for
the value and veracity of such shall one day vindicate the vigilant
and the virtuous. Verily, this vichyssoise of verbiage veers most
verbose vis-à-vis an introduction, and so it is my very good honor to
meet you and you may call me V.