Singapore’s future as a financial centre: Part III

Chee Soon Juan

In Part I of this article, I talked about how Singapore came to establish itself as a tax haven and money-laundering hub. Part II discussed how we were increasingly coming under the spotlight of the international community for indulging in such activity. This third and final installment examines whether foreign funds parked here have benefited Singaporeans and why we should discontinue the practice of being an offshore secrecy centre as an economic strategy.

But why should Singaporeans care? Isn’t it good that we have become fabulously rich from all the money pouring in to our banks? Clean money, dirty money, it’s still money. We get to use it and that’s all that matters.

Unfortunately, that’s not all that matters. Building our nation up as a secretive tax haven is neither good politics nor good economics. The strategy is, at best, risky and, at worst, downright dangerous for Singaporeans both on the domestic and international fronts.

Second class citizens

Let’s start with the domestic scene. From an economic standpoint, does becoming an offshore banking centre really benefit Singaporeans? We see the ultra-luxurious property at Sentosa Cove, the Bentleys and Maseratis zooming around on our streets, and immediately think that Singaporeans are more than a fortunate lot.

Not quite. Such trappings are built for and owned by overseas financial magnates whom the PAP Government so desperately craves. But while these super-rich foreigners live it up here Singaporeans, especially those in the lower income bracket, see their fortunes go in the other direction.

For all the hoopla about our economic prowess, we have an income disparity that is akin to those of Third World countries: Our Gini coefficient among employed households, a measure of income inequality, has been rising through the years. Its figure of 48.5 is between developing countries like Argentina (49) and Ecuador (46), and almost double that of European countries like Sweden, Denmark and Germany. It is even higher that those of Japan, South Korea and Taiwan (non tax haven Asian economies) which have Ginis around the mid-30 mark.

This chasm between the rich and poor in Singapore exacerbated in the last few 10 years – the period when the assets coming in to the country from overseas skyrocketed (see graph).

Between 1998 and 2003, the average household monthly income of the poorest 20 percent of the population decreased by nearly 15 percent while the richest 20 percent increased by 11.7 percent. In that same period, while the average wage dropped for the poorest 40 percent of households, their expenditure continued to outstrip their income.

Indeed expatriates love Singapore, ranking our country “one of the least stressful places in the region.” In fact, the quality of life is so good that in 2007 foreign businesspeople found Singapore the best place in the world to live.

Locals, on the other hand, find the city one of the most stressful places o live in. As a result, among the various Asian societies, Singaporeans are most likely to have suffered depression, stress, and fatigue. Another study showed that job-related stresses continue to be the biggest problems for working Singaporeans. Because of the system, an increasing number of adult Singaporeans are driven to seek the help of mental professionals due to financial woes. Marriages are also being torn apart because of economic pressures at home. This subject is discussed in greater detail in A Nation Cheated.

The stark difference in lifestyles between the wealthy expatriate and the indigent Singaporean is perhaps best characterised by Carol John and Madhupati Singhania. Ms John, a Singaporean housewife, struggles on $700 a month. She goes to bed at night in a one-room flat with her three young children sleeping on thin mattresses on the floor.

“I can’t save anything, it’s so difficult for me,” John says in a report by Reuters. “We don’t benefit at all from the economy. As far as I know, my husband’s pay hasn’t gone up.”

Contrast this with Mr Singhania was attracted to Singapore’s grandiose living standards for foreigners. He bought a luxury yacht costing him $435,000. He wants to buy a bigger one for $1.3 million.

“You’ve got everything you want in Singapore,” he says, “you want to buy a fast car, you want to buy a big boat, you want to buy an aeroplane, whatever you need, you can get in this country.”

Who really benefits?

But why be so concerned about rich people putting money into Singapore, a reader of this website asked? Can anyone who puts money into our pockets for safekeeping harm us? The simplest answer is yes.

Click image to enlarge With the explosion of foreign funds in Singapore came inflation. Many will remember how property values skyrocketed earlier this year. Rental, both for office as well as residential space, doubled overnight in some areas. And with restrictions on foreigners purchasing property scaled back, property sale prices also ballooned.

The escalation of property prices increased inflationary pressures. The Consumer Price Index hit 6.3 percent in the recent past, a record high in more than a quarter of a century, wiping out gains made in income increase of about 3 percent. Of course other factors, such as oil prices, contributed to the increase in prices but there is no gainsaying that the influx of wealthy foreigners played a major hand in adding to inflationary woes.

What about jobs? Doesn’t increased wealth mean more jobs for Singaporeans? Yes and no. More jobs are created when foreign funds come in but many of these jobs don’t go to Singaporeans. In 2007, more than 60 percent of the jobs created went to foreigners. As of that year, one in three workers in Singapore were not Singaporeans.

Other repercussions are less obvious. Take the recent F1 grand prix held here for example. There was never a doubt for whom the event was catered. With tickets going for as much as $1,000 and more (luxury suites were priced at $8,000), the average Singaporean was decidedly not the target spectator. And yet Singaporeans were stuck with the bill. The three-day racing extravaganza cost US$105 million to host and the Government committed us to paying 60% of this amount — for the next five grand prixs. Retail businesses that were caught within the cordoned-off racing circuit suffered severe losses in revenue and were asking for compensation from the authorities. Hotels on the circuit front were under-booked.

“The only person who walked away from the race with a smile was Bernie Ecclestone,” a correspondent told me recently. “It’s just not a money-making enterprise for anyone except its owner.”

Ethics-shmethics. Money is money

It is silly to bring in the issue of morality and ethics in business, some say. The name of the game is to get rich and namby-pamby notions like morality and ethics have no place in such an important the race. Tax haven money or no, it is still funds that we desperately need.

In the first place, Singapore does not need such funds to survive. We want them to make ourselves glamourous. Needs and wants are two different things.

In the second place, ethics has everything to do with the business. The misery that retail investors are suffering over the toxic minibonds that became worthless overnight when Lehman Brothers went bankrupt is a good reminder that morality plays a large part in how we run financial systems. It was the avarice of bankers that led to the collapse of the financial system as we know it. If it needs to be said again, greed and unethical practices are not good motivators of wealth-making. Yet, these are what Singapore’s financial system has come to depend on as we get deeper into becoming a tax haven and financial laundromat.

Of course the PAP policymakers are all for turning Singapore into an offshore banking centre; they benefit mammothly from the strategy. By encouraging money to be parked in Singapore, banks here engorge themselves with money. Top bankers reap the dividends and pay themselves huge salaries and bonuses. By pegging their salaries to the biggest earners in the country, PAP ministers strike the mother lode. In 2007, the ministers upped their salaries by 85 percent.

Neglecting other sectors

While becoming a top financial centre may be good for the eilte, both local and foreign, it does little in terms of creating jobs in the numbers that would significantly benefit the people.

The Government made the decision to turn Singapore into a tax haven because it was the easy thing to do. All it needed was some skilfull rewriting of the law and a handsome advertising campaign to lure big, and often dirty, money to our banks of which the Government itself owns a goodly portion. The Wall Street Journal reported that that Prime Minister Lee Hsien Loong “has personally overseen the city-state’s private-banking push.”

As a result, the number of private banks operating in Singapore nearly doubled from 20 to 35 between 2000 and 2005. Credit Suisse moved its international private-banking sector to Singapore from Zurich. A banker said that Singapore “will be the fastest growing offshore private-banking centre in the next five years.”

Of course the alternative economic strategy, as discussed below, is not politically viable, at least not for the PAP. Fostering dynamism and creativity means having to open up the political space which the PAP is loathe to do. The combination of making money on Easy Street while remaining solidly authoritarian was an opportunity too delicious to pass up.

In the meantime, however, the other sectors of our economy continue to languish. Our non-oil domestic exports which account for about 70 percent of gross domestic product plunged in the second half of the year. Exports, led by electronics and pharmaceuticals, fell 15 percent in October while industrial production dropped 13 percent. We continue to find it hard to compete in the manufacturing sector because we have become too expensive and, at the same time, lack the innovative know-how to come up with new products and services that the world will buy.

International politics

Quite aside from ethical considerations, indulging in offshore secrecy funds is not good politics. When the international community starts putting on the pressure on Singapore to stop its practice, as it is already doing, what do we fall back on as a game-plan for our economy?

Angel Gurría

Angel Gurría

To be sure, tax evaders don’t only come from wealthy countries. Developing economies are also suffering from the drain of tax dollars to secretive financial jurisdictions like Singapore. Mr Angel Gurria, Secretary-General of the OECD,
commented that: “Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid. If taxes on assets hidden by tax dodgers were collected in their owners’ jurisdictions, billions of dollars could become available for financing development.”

Relations with Indonesia, for instance, continue to be rankled by allegations that Singapore harbours tax fugitives and wealthy businessmen who made away with billions of dollars during the financial chaos when Suharto was toppled. The latest accusation (see the post following this one) is that money embezzled from a state account has found its way into a bank in Singapore.

But while rich nations are able to fund programs to address the problems of tax havens, poor countries don’t have the same resources. As a consequence, global poverty becomes even more entrenched. The world’s opinion makers are beginning to see that poverty on such a scale is a threat to international stability and security. Power-mongering ideologues and terrorists feed on such economic deprivation to cause mayhem. World leaders are awakening to the reality that urgent action is needed to remedy the imbalance.

Add this to the breakdown of the financial system in the US, fueled by the unbridled greed of bankers and brokers in Wall Street, the international mood against tax havens is taking an ominous turn. There is wide recognition that something must be done to rein in a financial system gone wild, and tackling the problem of tax havens is one of them.

Jeffrey Owens, director of the Centre for Tax Policy Administration at the OECD, pointed out that all offshore secrecy centres will face more pressure from industrialised nations as the growing financial crisis forces governments to look for lost tax monies.

Prime Minister Lee Hsien Loong has, rather belatedly, acknowledged that the US may start
exerting pressure on Singapore to stop its tax haven act.

Not only are industrialised nations putting the squeeze on jurisdictions that thrive on banking secrecy, poorer nations are also wanting to see such practices eradicated. So the question before us in Singapore is: Do we thumb our noses at the broader world community and continue to rake in the dollars regardless of how much damage we are inflicting diplomatically? If we are going to maintain our stance, are we heading for a head-on collision with other major economies? Unless we are assured that we will come out on top in such a fight, we may want to seriously re-evaluate our position as a tax haven.

In other words, is the PAP’s strategy of making us a “financial centre” a viable one?

The alternative

But what do we do if we cannot continue to get our hands on easy money from tax evaders and money-launderers? How do we remain viable as an economy?

Simple. We do what hard-working, smart, and honest people do.

First, we need to reduce the cost of doing business in Singapore. Our land prices, dictated by the Government, have made it prohibitively expensive for businesses, especially for the locals.

Taxes and levies are another scourge. Whether it is the ERP, GST, foreign workers levy, road tax, radio and TV licence fees, the PAP is squeezing the lifeblood out of people and businesses. Take, for example, the foreign-workers levy. The Government should do away with the tax but ensure that a portion of the amount saved by employers go towards increasing the workers’ wages. This way, employer and employee benefit.

We also need to democratise our political economy. This means that Singaporeans must be allowed to become the drivers of economic growth rather than the Government. Private enterprise, and not the GLCs, must lead our economy. If Singapore develops politically and its citizens find their rightful place in society, we will have the foundations of a system that is free and enterprising, one that will stimulate the entrepreneurial mind.

Depending on wealth as an offshore secrecy centre is both economically risky and politically untenable. The benefits from such an arrangement overwhelmingly go to a select few and not average Singaporeans. Let us get back to basics and make our money by working hard. And if we have the good fortune of becoming rich, let it be through our industry and enterprise. Depending on immoral earnings is not the way forward.

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