Singapore on the back of an envelope: Ngiam Tong Dow

Business Times 11 Dec 07;

Ngiam Tong Dow, a former senior civil servant who served in various ministries including as permanent secretary in the Finance Ministry, is known for his insight and wit. As usual, his talk to the NUS Economics Alumni Annual Dinner last week sparkled. In this first of a two-part excerpt from that speech, he talks about economic policy-making.

WHEN I joined the Singapore Administrative Service in 1959, all of us had read the humanities at university. George Bogaars, Head of Civil Service, read history. The two heads who came after, Howe Yoon Chong and Sim Kee Boon, read economics. Pang Tee Pow, who succeeded Mr Bogaars as Permanent Secretary (Defence), also read economics. Three out of the four heavyweights in the service then were from the economics department.

Our most outstanding alumni are Singapore's first two prime ministers: Minister Mentor Lee Kuan Yew and Senior Minister Goh Chok Tong; and Singapore's first Finance Minister, Deputy Prime Minister Goh Keng Swee. Across the causeway, Tun Abdul Razak, Malaysia's second prime minister, also read economics, as did Tan Siew Sin, Malaysia's second finance minister.

As economics alumni, we can say with some pride that the founding political and administrative leadership of Singapore and Malaysia came largely from our department. It can be said that they received what can be considered a modern classical education - a 'PPE' education, in philosophy, politics and economics. The question is whether such an education can equip us to lead and develop our countries.

First, let me disavow any claim that economics is a profession in the traditional sense that doctors, lawyers, accountants and architects are professionals. Professional colleagues in the medical, legal, accounting and architectural services have to be registered to practise their professions. Registration gives the public some assurance that they have a threshold level of competency to practise their discipline. This exclusive right carries with it personal liability. They can be sued personally for negligence and deregistered for serious breaches.

Economists, on the other hand, cannot be sued for negligence. There is no threshold level of competence to practise economics. A BSc is as good as a PhD. Indeed, some of the best stock analysts have never heard of Adam Smith, or his book The Wealth of Nations, or abstract ideas such as the 'invisible hand'.

Though economists cannot be sued, they can be sacked. Even then, it depends on where you work. In the mid-1960s, I attended an economics seminar in Baguio in the Philippines sponsored by IBM. The chief economist of IBM, Dr Grove, had worked in the Federal Reserve Bank. He was asked the difference in the accountability of the Fed chairman and the IBM chief economist.

As IBM's chief economist, he would be invited by Tom Watson, founder of the company, to lunch once a quarter. He would be asked by Mr Watson to brief him on the state of the economy. Dr Grove had to make a forecast of the number of mainframes that IBM can expect to sell in the next quarter. At each quarterly lunch, actual sales would be matched against forecasts. Dr Grove told us that whatever ego he had as an economist was completely dissipated by the actual sales numbers.

Forecasts soon forgotten

At the Fed, highly paid central bank economists would draw deeply on their pipes and pronounce with gravitas what interest rates are likely to be. They would even forecast what the gross domestic product (GDP) growth rate would be for the calendar year. Central bank forecasts of interest, exchange and GDP growth rates are soon forgotten. They make for good headlines in the morning newspaper only the day after. Unlike IBM economists, Fed economists are not held accountable for the central forecasts they make. Mr Watson had no time for Fed economics, or economists. Woe betide his chief economist if the sales forecasts were way off the mark.

As a policy outsider, it is interesting to note that the Monetary Authority of Singapore (MAS) eschews the interest rate as a policy instrument. Instead, the MAS focuses on the exchange rate as the key instrument of monetary policy. The MAS intervenes directly in the foreign exchange markets, buying or selling the Singapore dollar against a basket of currencies, predominantly the US dollar. While such a policy may be effective against disruptive short-term inflows of foreign currencies, I question whether it is adequate as a long-term policy instrument.

All of us learn in Economics 101 that the underlying bedrock for growth is total factor productivity. In comparing GDP growth rates, we need to differentiate between expansion and growth. The economy expands when the labour force increases.

Singapore's GDP has expanded largely on infusions of foreign labour. Secular long-term growth can only be sustained if Singapore's productivity increases. Our productivity performance has been mediocre. MAS's catchphrase in its half-yearly review is that it will allow a modest appreciation of the Singapore dollar over time. Such a policy stance is realistic only if there is steady increase in our productivity growth. The central economic challenge for Singapore is therefore raising productivity. At its core, productivity is a mix of efficiency and effectiveness. The key ministry in the present phase of our economic growth is the Ministry of Education, not the Economic Development Board (EDB) or the Ministry of Finance.

Under the strong intellectual leadership of our first Finance Minister, Goh Keng Swee, the Ministry of Finance practised what became known as a robust brand of economics. Dr Goh established Singapore's Bird Park in Jurong before the Zoo at Mandai because, as he points out, birdseed cost considerably less than meat for the tigers and the lions at the zoo.

The Ministry of Finance also rejected flood alleviation works at the Bukit Timah Canal. As it flooded only three or four times a year, it was too costly to enable motorists to arrive home in time for dinner. We would rather give a schoolboy 50 cents bus fare to go to the beach to swim rather than have a swimming pool built at Tanjong Pagar. The cost per swim would be much higher than the bus fare.

But such a robust approach can also turn out to be myopic. In the early years, the lift at some Housing Board (HDB) blocks only stopped on alternate floors. As the lift shaft went through all floors, the savings - if any - were marginal. Retrofitting of such lifts under HDB's current lift upgrading programme is costing much more.

In public administration, the economic tool I found most useful was cost-benefit analysis. Its simplicity is disarming. In evaluating the host of projects submitted by operating ministries in the annual budget exercise, the Ministry of Finance simply totes up the capital and operating costs of the project and compare the costs with the benefits on the other side of the ledger. The devil is in the details.

For instance, should we add indirect cost such as damage to the environment on the cost side? An environmental project that reduces pollution is clearly of benefit to the community. The problem is, how do we value clean air? Does its value lie in protecting the population against a high incidence of asthma? Should not the asthma sufferer pay for clean air?

In the very public debate on the proposed MRT in the mid-1970s, Dr Goh agreed that a mass rapid transit system would add to the employment capacity of the central business district. Assuming that the MRT can bring an additional 250,000 workers into the city each morning during peak hours, the capital cost alone to have each additional worker arrive on time for work would be $200,000, as the whole system would cost us $5 billion to build. He asked whether an all-bus system would be cheaper and less risky to undertake as the bus fleets can expand incrementally bus by bus. It was a disruptive piece of reasoning. Those in the opposing camp argued that a rail-based system would open up almost every corner of Singapore. With access to rapid mass rail transport, new towns can be developed in every region of Singapore: north, south, east, west. The development potential would increase and land values would rise, yielding more property taxes which can finance the capital cost of the rail system. Economists call such benefits external economies. External economies generated by a less land-intensive rail-based mass rapid transit system far outweighs its high capital cost.

The alternative would have been an all-bus mass transit system. There is simply no land to build or expand roads to accommodate the thousands of buses which would be on the road each day during the morning and evening peaks. The outcome would have been severe congestion and gridlock. Congestion pricing would reach heights which would provoke a political backlash. There would also be the external diseconomy of petrol fumes and pollution. Finally, a rail-based transit system provides a strong physical backbone for integration of all transport modes, whether private cars, taxis, buses, vans or lorries.

The great MRT debate of the 1970s is an outstanding example of cost benefit analysis in public decision-making. But not all public policies are amenable to straight cost-benefit analysis. For instance, can we apply cost-benefit analysis in the Great Marriage debate of the 1980s to produce the desired outcome of more intellectually compatible marriages and birth of intelligent babies? It was a piece of social engineering that did not succeed. My guess is that it failed because there was too much cost-benefit analysis. The government targeted the purse more than the heart. Winning hearts is not about cost-benefit analysis.

Cost-benefit analysis can be done either on the back of a used envelope or in the bowels of super-computers. When I was appointed permanent secretary (Budget) in 1987, Dr Goh asked to see me. I thought that he wanted a bigger budget allocation for his ministry. I was dead wrong. He told me simply that as permanent secretary (Budget), I would continue to make mistakes. Only this time, I would be making them in the bowels of super-computers instead of the backs of used envelopes, which was what I did when I was his young adjutant. This was the best piece of financial advice I believe a minister can give to a newly minted permanent secretary.

In the early days, a $1 million project proposal would be put through the meat grinder by the Finance Ministry using paper and pencil. In fact, Dr Goh told us, the young finance 'aristocrats', that we should just reject out of hand any and every spending proposal received the first time. If the supplicant ministry persists, only on the third try, we would give them half of what they wanted.

Super-computer help

These days, any project proposal less than $100 million is not considered respectable. Worse, we need to have super-computers to crunch out the numbers. But I wonder whether decisions made by super-computers are any sounder than those made the old fashioned way, based on calculations on the back of used envelopes? If our basic thinking is unsound, no super-computer can help us.

Super-computers produce effortlessly reams of statistics. Though statistics help to buttress our conclusions, Dr Goh, an outstanding statistician himself, told me that all statistics have to be subjected to reality checks. In the early 1960s, I accompanied the Minister to attend an Economic Commission for Asia & the Far East (ECAFE) meeting in Bangkok. After dinner, the minister insisted on an evening walk.

After sweating up and down the hot and dusty pavements of the street in front of our hotel, I plucked up enough courage to ask Dr Goh what was the purpose of the exercise. He told me that he wanted to see whether the shops were well stocked. As they were, he was satisfied that the economic statistics put up by the Bank of Thailand, headed then by Puey Umpakorn, his London School of Economics (LSE) college mate, were credible. By Dr Goh's compass, all statistics have to be checked against reality. Particularly GDP estimates. More so in Singapore when civil service annual bonuses are tied to GDP growth rates.

Another lesson I learnt in statistics was from Albert Winsemius, our economic adviser in the 1960s and 1970s. One figure that he watched like a hawk was our unemployment rate. In the early days, we did not have the resources to do labour force surveys on a regular basis. Instead, he asked us to subscribe to The Straits Times to be delivered to him by airmail in the Hague where he lived.

When I asked him what he found so interesting in The Straits Times which was, after all, a parochial Singapore newspaper, he said that he did not read The Straits Times for world news. As our economic adviser, he was more interested in the density of the jobs vacancies columns. He got his young grandson to plot the changes. He told me that the chart his grandson produced told him far more about the state of the Singapore economy than all the economic statistics I dutifully sent him each month. So, back of the envelope calculations can sometimes be more useful than calculations by a super-computer.

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