By Benedict Chong
“The government solution to a problem is usually as bad as the problem.” - Milton Friedman
We have seen earlier that the lack of transparency in our sovereign wealth funds (SWFs) has led to an erosion of trust among citizens. The problem, however, is not entirely social; it is also economical. We also need to examine Singapore SWFs' in relation to Singapore's free-market ideal.
With deep pockets and the implicit backing of the government of Singapore, SWFs as entities are able to move markets both domestic and global. But should state-owned organisations still exist in a purportedly free market?
While GIC prides itself in having a large diversified global portfolio, 31% of Temasek’s portfolio comprise of stakeholdings in local corporations. A cursory glance over any major companies’ annual report would present Temasek Holdings or a Temasek-linked company as one of the top 20 largest shareholders.
The presence of such a deeply-pocketed shareholder may result in strategic and business malinvestment as SWFs brings along a false sense of security into the company. Credit ratings of such companies would be artificially enhanced, resulting in a prolonging of mistakes instead of forcing painful yet necessary restructuring through the will of free markets.
To give a couple of examples, a certain shipping line operates with perpetual overcapacity while a train company only started replacing track sleepers after an extended period of time and breakdowns.
The presence of Temasek and GIC in the local economy means that persistent government assurances that the state does not interfere in business decisions should be met with quick disbelief. Even if such interventions were not explicit, they are almost certainly implicit with majority ownership. Precedence would imply that no GLEs (Government-linked enterprises) would ever be left alone should financial disaster strike. Our SWFs would step in as sugar daddies offering public monies compensating for mistakes made.
Arguments for and against SWFs
There are numerous reasons and purported advantages ascribed to SWFs. An argument given by the Singapore government most recently was that SWFs allow the state to draw money from it in the event of an economic crisis or national disaster. This is analogous to any individual drawing down on his savings deposit to fund his living expenses in the event of unforeseen circumstances.
But if the state is merely saving up for national contingencies, is there a need for an SWF? Any textbook definition of an SWF would be one along of the lines of it being a state entity dedicated to growing the value of a given reserve. But is it the responsibility and prerogative of government to enhance its reserves indefinitely? And for what purpose?
Another possible argument favouring SWFs is that their presence boosts Singapore’s status as a financial hub. The operational existence of two huge asset funds locally was deemed necessary to provide the impetus for foreign fund managers to set up operations within the country.
However, there is little evidence to prove that offshore funds are being drawn into Singapore due to the presence of our SWFs. The hot monies that these funds bear typically enter countries with open and vibrant economies. For instance, Hong Kong is a financial centre yet operates no SWFs like Singapore’s. Hence, this establishes that SWFs play no role in drawing overseas funds.
In addition, how many “hubs” can Singapore realistically have? We are already being promoted as an educational hub, tourism hub, financial hub and trading hub, amongst other hubs. Is this really necessary or is the state pouring taxpayer’s money into diversification just for its sake? The defence for diversification is that should one sector weaken, others will prop up the economy in a selfless act of chivalry.
Unfortunately, such a rosy scenario has been invalidated and negated by the Financial Crisis of 2007. It is a well-documented myth. The near collapse of the financial sector brought down with it most other sectors. All contemporary economic sectors are henceforth proven to be intricately intertwined and diversification to reduce the risk of total collapse is but a pipe dream pursued by the state as a reason to interfere in the economy.
The true nature of SWFs
Every state has a strong tendency to interfere in the economy, potentially making decisions resulting in economic crises, blaming the free market for all their troubles and then declaring that such calamities make state intervention and direction more necessary than ever. But such statements do not absolve governments from any blame, unless we can be certain that every company is free from state links – which is definitely not the case for SWFs.
SWFs, despite all the mythical and imagined advantages it supposedly offer, are tools for intervention in the economy. Any state organisation backed with an indirect power to tax will receive unfair advantages in the credit markets relative to private institutions. Is Singapore still a fair, free and entrepreneurial market, then? So long as the SWFs exist, it is not.
In fact, far from promoting a free market, SWF's would in all likelihood encourage crony capitalism, which is defined as a capitalist system based on close relationships between businessmen and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favouritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.
In Singapore, we read of specific sectors being given tax breaks for development. We see former scholar generals given leading posts in government-linked enterprises. We look up the list of the top 10 richest individuals in Singapore and see property developers and bankers with links to state tenders and charters filling the spaces.
With this system of implicit contracts between the state and large corporations, can Singapore still consider itself as economically free as stated by Fraser Institute and Heritage Foundation/Wall Street Journal in their reports?
Of course, the intentions of the government may have been good. But the road to hell is paved with good intentions. Attempting to assume that government can hold itself accountable and manageable will be akin to leaving a kid alone in the candy store. It just cannot happen. It is in the nature of unregulated government to expand its reach indefinitely.
For whatever advantages that Singapore's SWFs were supposed to provide our nation, we see how its conflict with our supposedly free-market economy has done more harm than good. Questioning the need for SWFs, then, goes beyond what they can or cannot do for our pension funds. Indeed, it has become a question of the level of harm they have done to our economy.