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Archive for the ‘Singapore’ Category

There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this question. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

The authors analyze this data.

The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.

The article concludes by asking why some nations converge and others don’t.

Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?

I’ll offer my answer to this question, though it doesn’t require any special insight.

Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.

And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.

Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?

Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?

The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.

Heck, they all rank among the world’s top-18 nations for economic freedom.

Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.

But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.

The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.

Here’s a video tutorial.

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

* Botswana vs. other African nations

Gee, it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!

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I’ve written about the success of Hong Kong (particularly when compared to nations such as Cuba, France, and China), but haven’t paid as much attention to Singapore.

But it’s time to correct that oversight. I’m motivated to write about Singapore because of a story that reveals one of the unique features of that jurisdiction: The bureaucracy gets monetarily rewarded if the economy prospers.

Here are some passages from a Bloomberg report.

In Singapore, civil-servant bonuses rise and fall with the economy’s performance… The nation…links civil servants’ bonuses to how well the $298 billion economy does. …Civil servants are typically paid a variable incentive twice a year, on top of a fixed one-month bonus. The mid-year payment was skipped in 2009, when the economy contracted during the global recession. …“Singapore may be one of the few countries that explicitly pegs bonuses to growth,” said Vishnu Varathan, an economist in Singapore at Mizuho Bank Ltd.

Wow. Think of what that might mean if applied in the United States. Would we get as many crazy growth-sapping regulations from bureaucracies such as the EPA, IRS, and EEOC if the paper pushers knew they would lose bonuses?

To be honest, I’m not actually sure that this system makes much difference in Singapore or, if it does work there, whether it would work the same way in the United States (where bureaucrats seem to get bonuses based on bad behavior!).

But one thing we can say with certainty is that Singapore is an economic success story.

Look at the rankings for per-capita gross national income from the World Bank. You’ll notice a few trends, such as it’s good to be a tax haven (Monaco, Liechtenstein, Bermuda, Switzerland, Luxembourg, Isle of Man, etc) or to have a lot of oil (Qatar, Kuwait, Norway, UAE, etc).

But you’ll also notice that Singapore is one of the world’s most prosperous jurisdictions, regardless of which methodology is used.

So why is Singapore so rich?

Well, there aren’t many natural resources other than ocean access, so the only reasonable explanation is that the country has good economic policy.

And if you look at the latest data from Economic Freedom of the World, you’ll see that Singapore ranks second for economic liberty.

I’m particularly impressed by the nation’s fiscal policy. The corporate tax rate is just 17 percent and the top tax rate for households is only 20 percent. In other words, there’s no Obama-Hollande class warfare against successful taxpayers.

Equally important, the burden of government spending is very small by world standards, averaging less than 20 percent of economic output since 1990 according to the IMF.

And the one time government spending climbed significantly about 20 percent of GDP (during the Asian financial crisis), the government then did a remarkable job of implementing the Golden Rule of spending restraint.

Singapore’s fiscal discipline between 1998 and 2003 was particularly impressive as spending was cut (genuine cuts, not the make-believe cuts you find in Washington) by an average of 9 percent each year.

But the statistic that matters most is that the burden of government spending dropped to 12 percent of GDP by 2007, a reduction of almost 16 percentage points (even larger than Sweden’s budget cutting between 1992 and 2001).

Government spending in Singapore has since 2007 slowly climbed back to about 18 percent of economic output, but that’s still quite good by modern standards (though much larger than government was in America back in the 1800s and early 1900s).

Let’s close by preemptively dealing with the statist argument that relatively small government somehow prevents the provision of genuine public goods.

Earlier this month, I shared some remarkable data from a study published by the European Central Bank. That research showed that “countries with small public sectors report the ‘best’ economic performance” and also receive the highest scores for providing public goods in a cost-efficient manner (referred to as “public sector efficiency”).

Looking at country groups, “small” governments post the highest efficiency amongst industrialised countries. Differences are considerable as “small” governments on average post a 40 percent higher scores than “big” governments. …This illustrates that the size of government may be too large in many industrialised countries, with declining marginal products being rather prevalent.

But as part of that post, I groused that the researchers were only looking at OECD member nations. Yet none of those countries have small public sectors.

I can’t help but wonder what the results would have been if Hong Kong and Singapore also were added to the mix. After all, I don’t consider the United States to have a “small” government. Same for Japan, Switzerland, and Australia. Those are simply nations where government isn’t as big and bloated as it is in France, Italy, Sweden, and Greece.

Well, I’m happy to report that I found another study from the European Central Bank that broadens the net to include some nations from Asia, Eastern Europe, and Latin America.

Singapore was one of the nations in the study and you won’t be surprised to learn that it received the highest score for “public sector efficiency.” But not merely the highest score, Singapore’s 2.39 was dramatically higher than the scores in the earlier study for the nations that supposedly had “small” governments (even though the actual burden of government spending in those countries is almost two times larger than it is in Singapore).

So what’s the bottom line?

The first ECB study clearly concluded that “small” government is more efficient and productive than either “medium” government or “big” government.

Based on the second ECB study, we can conclude that it’s even better if government is…well, I guess we’ll have to use the term “smaller than small.”

So congratulations to Singapore for readjusting the rankings. Now if we can find a jurisdiction where government consumes just 5 percent of GDP, we’ll be able to complete the research and finally figure out the “correct” size of government.

P.S. As I noted back in 2009, Singapore is a multi-ethnic (like Bermuda) and multi-religious society, yet diversity isn’t a problem when government doesn’t practice favoritism.

P.P.S. By the way, I’m not claiming Singapore is an ideal society. It is only #39 in a ranking of total freedom, which includes measures of personal liberty. And Singapore’s version of privatized Social Security is far from perfect since government controls the investment of private savings. In other words, Singapore isn’t libertarian Nirvana. But it is reaping the rewards of being more pro-market than almost all other nations.

P.P.P.S. If you read this far, you deserve a reward. Here are a couple of Thanksgiving-themed cartoons.

We’ll start with Henry Payne’s look at another example of Obama governing by “executive order.”

And here’s Rick McKee’s contribution. But since I’m not partisan, I’ll simply say that McKee has identified the first member of the Moocher Hall of Fame.

P.P.P.P.S. At this time last year, there were a bunch of great Thanksgiving-themed cartoons about the Obamacare disaster.

P.P.P.P.P.S. And if you want some serious Thanksgiving-themed policy analysis, I strongly recommend this video on how the Pilgrims were saved by property rights.

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Singapore has been in the news because one of the Facebook billionaires has decided to re-domicile to that low-tax jurisdictions.

Some American politicians reacted by blaming the victim and are urging tax policies that are disturbingly similar to those adopted by totalitarian regimes such as the Soviet Union and Nazi Germany.

Maybe they should go on one of their fancy junkets instead and take a visit to Hong Kong and Singapore. Even with first-class airfare and 5-star hotels, taxpayers might wind up benefiting if lawmakers actually paid attention to the policies that enable these jurisdictions to grow so fast.

They would learn (hopefully!) some of what was just reported in the Wall Street Journal.

Facebook  co-founder Eduardo Saverin’s recent decision to give up his U.S. citizenship in favor of long-term residence in Singapore has drawn fresh attention to the appeal of residing and investing in the wealthy city-state and other parts of Asia, where tax burdens are significantly lighter than in many Western countries. …Some 100 Americans opted out of U.S. citizenship in Singapore last year, almost double the 58 that did so in 2009, according to data from the U.S. Embassy in Singapore. …The increase of Americans choosing to renounce their citizenship comes amid heated tax debates in the U.S. Many businesses and high-income individuals are worried…[about]…tax increases in future years.

It’s not just that America is moving in the wrong direction. That’s important, but it’s also noteworthy that some jurisdictions have good policy, and Hong Kong and Singapore are always at the top of those lists.

The Asian financial hubs of Singapore and Hong Kong, on the other hand, have kept personal and corporate taxes among the lowest in the world to attract more foreign investment. Top individual income-tax rates are 20% in Singapore and 17% in Hong Kong, compared with 35% at the federal level in the U.S., according to an Ernst & Young report. The two Asian financial centers have also been praised by experts for having simpler taxation systems than the U.S. and other countries. …The tax codes are also more transparent so that many people don’t require a consultant or adviser.

Keep in mind that Hong Kong and Singapore also avoid double taxation, so there’s nothing remotely close to the punitive tax laws that America has for interest, dividends, capital gains, and inheritances.

One reason they have good tax policy is that the burden of government spending is relatively modest, usually less than 20 percent of economic output (maybe their politicians have heard of the Rahn Curve!).

No wonder some Americans are shifting economic activity to these pro-growth jurisdictions.

“The U.S. used to be a moderate tax jurisdiction compared with other countries and it used to be at the forefront of development,” said Lora Wilkinson, senior tax consultant at U.S. Tax Advisory International, a Singapore-based tax services firm that specializes in U.S. taxation laws. Now “it seems to be lagging behind countries like Singapore in creating policies to attract business.” She said she gets at least one query per week from Americans who are interested in renouncing their citizenship in favor of becoming Singaporeans. …Asian countries offer a business climate and lifestyle that many find attractive: “America is no longer the Holy Grail.”

That last quote really irks me. I have a knee-jerk patriotic strain, so I want America to be special for reasons above and beyond my support for good economic policy.

But the laws of economics do not share my sentimentality. So long as Hong Kong and Singapore have better policy, they will grow faster.

To get an idea of what this means, let’s look at some historical data from 1950-2008 on per-capita GDP from Angus Maddison’s database. As you can see, Hong Kong and Singapore used to be quite poor compared to the United States. But free markets, small government, and low taxes have paid dividends and both jurisdictions erased the gap.

Wow, America used to be 4 times richer, and that huge gap disappeared in just 60 years. But now let’s look at the most recent data from the World Bank, showing Gross National Income for 2010.

It’s not the same data source, so the numbers aren’t directly comparable, but the 2010 data shows that the United States has now fallen behind both Hong Kong and Singapore.

These charts should worry us. Not because it’s bad for Hong Kong and Singapore to become rich. That’s very good news.

Instead, these charts are worrisome because trend lines are important. Here’s one final chart showing how long it takes for a nation to double economic output at varying growth rates.

As you can see, it’s much better to be like Hong Kong and Singapore, which have been growing, on average, by more than 5 percent annually.

Unfortunately, the United States has not been growing as fast as Hong Kong and Singapore. Indeed, last year I shared some data from a Nobel Prize winner, which showed that America may have suffered a permanent loss in economic output because of the statist policies of Bush and Obama.

What makes this so frustrating is that we know the policies that are needed to boost growth. But those reforms would mean less power for the political class, so we face an uphill battle.

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The latest issue of the World Economic Forum’s Global Competitiveness Report contains some rather damning information about government incompetence in the United States.

America ranks only 68th in the “Wastefulness of Government Spending” category (page 373) and 49th in the “Burden of Government Regulation” category (page 374).

Singapore, by contrast, ranks first in both of those categories. So is anyone surprised, then, by this chart showing that Singapore’s economy grew rapidly between 1950 and 2008?

Indeed, the World Bank’s 2010 data shows that Singapore has surpassed the United Stated, with per-capita GDP of $54,700 compared to $47,020 in America.

But the point of this post isn’t to decide whether Singapore is richer than the United States. Instead, the moral of the story is that small government and free markets are a recipe for strong growth and rising levels of prosperity.

By the way, the Global Competitiveness Report relies on survey data to prepare its rankings, so I’m a bit skeptical of the findings. American politicians are experts at wasting money and imposing senseless red tape, to be sure, but is America really worse than Ghana and Azerbaijan?

That being said, perceptions are important. And since the overall burden of government has rapidly climbed during the Bush-Obama  years, low scores of some kind are deserved.

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I’m in Singapore for two days to help fight the Organization for Economic Cooperation and Development, a statist international bureaucracy based in Paris. The OECD has something called a global tax forum, the purpose of which is to harass so-called tax haven in hopes of coercing them into acting as tax collectors for Europe’s decrepit welfare states. Here’s the executive summary from the memo I wrote, which warns low-tax jurisdictions that the OECD may push even harder to undermine fiscal sovereignty because of fears that a GOP takeover of Congress will make it more difficult to push for tax harmonization policies in the future.

The Paris-based Organization for Economic Cooperation and Development has an ongoing project to prop up Europe’s inefficient welfare states by attacking tax competition in hopes of enabling governments to impose heavier tax burdens. This project received a boost when the Obama Administration joined forces with countries such as France and Germany, but the tide is now turning against high-tax nations – particularly as more people understand that such an approach inevitably leads to Greek-style fiscal collapse. Looming political changes in the United States will further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially wary of schemes to rush through new anti-tax competition initiatives at the Singapore Global Forum.

The good news is that nothing dramatic took place on the first day of the two-day conference. the OECD continued to bully low-tax jurisdictions to sign information-sharing agreements and the low-tax jurisdictions kept asking for double-taxation agreements so they could get some benefit in exchange for weakening their human rights/financial privacy laws. The OECD and high-tax nations have been ignoring these requests for a two-way street, thus continuing their bad-faith behavior.

For more information on this issue, here’s a link to my video on tax competition, and here are a handful of TV appearances where I discuss the issue. This is a challenging issue to debate, so I’d welcome feedback on which arguments you think are most effective.

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After being in 1st place in 2007 and 2008, America dropped behind Switzerland in the World Economic Forum’s Global Competitiveness Report in 2009. The 2010 ranking was just released, and the United States has tumbled two more spots to 4th place, behind Switzerland, Sweden, and Singapore. I’m not a complete fan of the World Economic Forum’s methodology (the Economic Freedom of the World rankings are the best measure of sound economic policy), but it’s almost surely a bad sign when a country moves down in the rankings.  The timing of the fall will lead some to blame Barack Obama, and I certainly agree that his policies are making America less competitive, but Bush also deserves blame for increasing the burden of government and compromising America’s economic vitality. Here’s a blurb from the Associated Press.
The U.S. has slipped down the ranks of competitive economies, falling behind Sweden and Singapore due to huge deficits and pessimism about government, a global economic group said Thursday. Switzerland retained the top spot for the second year in the annual ranking by the Geneva-based World Economic Forum. It combines economic data and a survey of more than 13,500 business executives. Sweden moved up to second place while Singapore stayed at No. 3. The United States was in second place last year after falling from No. 1 in 2008.

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Got back yesterday from a quick trip to Singapore (though anything that involves 18 hours in a plane – one way – is not exactly quick). I don’t really have any profound personal observations about the country since I spent every spare moment working on a healthcare paper and never left my hotel, but this was my third or fourth trip so I can make two big-picture observations.

1. Small government works – Singapore is not a truly laissez-faire nation since government consumes more than 20 percent of GDP and there is a back-door form of industrial policy thanks to government control of the allocation of the money generated by private saving for retirement and health care. But it still is one of the world’s most free-market jurisdictions according to Economic Freedom of the World and the Index of Economic Freedom. It started as a poor jurisdiction and is now a rich one. The tax code is progressive, but the top tax rate is just 20 percent, so people are not punished for creating wealth.

2. Diversity works when government does not create hostility and resentment – Singapore is one of the most ethnically diverse places in the world. The population is comprised of Chinese, Malays, Indians, and Whites. To my knowledge, there are no significant racial or ethnic problems. Everyone is too busy making money and government doesn’t create resentments by favoring one group over the other. Seems like other nations could learn something.

Last but not least, a general gripe about government. Why is there a requirement, at least in some airports, to go through security when arriving on one flight before going on another? After flying 7 hours from Singapore to Tokyo (which, of course, required going through security), I then had to shuffle for 30 minutes in a line to get my laptop X-rayed again. Did the bureaucrats think I somehow acquired a bomb on the flight? This happens, for reasons that are not clear, at a few other airports. Does anyone know why, other than to provide jobs for more bureaucrats?

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