The coming challenge to Singapore Inc.
Far Eastern Economic Review
By Garry Rodan
SINGAPORE�S vast array of government-linked companies (GLCs) has enabled it to manage the process of globalization with remarkable stability and effectiveness. Indeed, it�s fair to say the city-state is a rare contemporary case of successful state capitalism. Increasingly, however, the economics and politics of the GLCs� gatekeeper role have started to conflict. And as GLCs internationalize and the city-state�s markets are exposed to more intense market pressures, tensions will continue to rise.
Nowhere is this more evident than in mounting friction over corporate governance of the GLCs. Unprecedented critical interest from international business in GLC activities has led to a closer analysis of how local rules and regulations are administered. Whether or not these pressures will lead to a fundamental transformation in the state capitalist model nobody knows. It is clear, however, that reconciling the economic and political pre-eminence of the GLCs is the most pressing challenge for the government of the new Prime Minister Lee Hsien Loong.
The driving forces behind governance scrutiny involve pragmatic international business interests, which often rhetorically appeal to the concept of a level economic playing field. However, the issues at stake are intrinsically political.
The GLCs, together with a long list of statutory bodies and the Government of Singapore Investment Corporation (GIC) that invests more than $100 billion of national reserves, form a complex network of power relations. This network is essential to the ruling People�s Action Party�s social control and political dominance. These institutions provide the Party with the resources for social engineering, as well as for political reward and punishment. The GLCs have tremendous influence over all Singaporeans� personal savings, housing, job opportunities and business contracts.
The Singapore government responded to the 1997 financial crisis by aggressively embracing the rhetoric of good governance and transparency. The intention was to highlight the distinction between Singapore�s system and the crony capitalism and rent-seeking practices found elsewhere in the region. But this endorsement of global best practice is now bringing unintended consequences.
Rhetoric was quickly followed by improvements to corporate accountability and disclosures, as well as more transparent macroeconomic data. At the time, the reforms largely bypassed the state sector, especially among the many GLCs which are not publicly listed companies. This divergence between rhetoric and practice did not escape international attention. The International Monetary Fund called for more transparent fiscal and monetary frameworks. Then in April of this year it raised concerns about the scope for conflicts of interest inherent in such a concentration of public decision-making power.
The criticism of the Singapore government�s governance gathered momentum following the appointment in 2002 of Ho Ching, the wife of Singapore�s current Prime Minister Lee, as executive director of Temasek Holdings, the state-owned investment company. Last October�s move by Temasek to issue its first public annual report in its 30-year history is the latest attempt to respond.
Temasek presides over more than $107 billion in assets and an investment portfolio of around $53 billion, and has long dominated the commanding heights of the domestic economy. Yet, in the government�s eyes, neither its importance to the Singapore economy nor the fact that it invests public money warranted routine, detailed public reporting and strategic statements. Temasek�s 2004 report is a positive move in this direction, but there is still a long way to go.
The reasons for increased governance scrutiny go beyond the Asian crisis; there is also a structural basis. International manufacturing capital has been either indifferent to, or actually supportive of, the role of GLCs in recent decades. However, many in the expanding financial, high technology and service sectors see it differently. They want to prise open more of the domestic economy than their manufacturing counterparts did, bringing them into greater conflict with governance regimes and transparency shortfalls protecting the interests of GLCs.
Pressure for greater access to telecommunications, banking and other markets has gone hand in hand with mounting criticism of governance. Singapore�s ongoing economic transformation assures continued critical focus on the GLCs in these sectors. Foreign companies and their home governments want to be sure unorthodox governance arrangements in Singapore are not giving the GLCs an unfair competitive advantage.
Economic downturns also gave rise to doubts about the role of GLCs. During the Asian crisis, Singapore�s GDP growth plummeted to just 0.4% in 1998 from an impressive 8.4% in 1997. The immediate policy response included a fuller embrace of economic deregulation and liberalization. The initial economic recovery was dramatic, with Singapore enjoying 10.3% growth in 2000. However, in the following year, the economy shrank by 2% in the worst recession since independence in 1965. The acute export dependence on the U.S. economy by the electronics sector that underwrote the sharp recovery set the economy back just as rapidly.
In this context, a range of private-sector interests�including those within brokerage firms and other investment houses�argued not only for even more substantive liberalization and deregulation, but for reforms specifically to curtail the economic reach of the state. The government began to promote private entrepreneurship, including a target of investing S$62 billion of national pension contributions deposited with the Central Provident Fund.
Up to a point, the government has been responsive here, parcelling out portions of the CPF to private fund managers. However, it is reluctant to surrender fundamental control over the CPF because through it a range of social policies are enacted. Indeed, the government increasingly deploys the CPF to foster self-funded health, educational and social security investments.
Concern about the politicization of the GLCs has also escalated in recent years. Symptomatic of this was a document entitled �Why it might be difficult for the government to withdraw from business,� widely circulated in 2002 by email to international journalists.
It provided an in-depth listing of the extensive involvement in GLCs by present and former cabinet ministers and their relatives; active and retired senior military personnel; and serving and former members of the PAP. This included some 50 senior government officials holding �key appointments� while still in government. There were no allegations of corruption, but the clear inference was that a host of material and political interests are so deeply intermeshed in the GLCs that separating them would mean challenging the interests of the entire ruling elite.
The government did not refute the accuracy of the document�s contents. However, in the same year its Economic Review Committee, set up to chart future economic directions, declared that all GLCs be run on �strict commercial principles and be subject to the discipline of the market.�
This concession came about not because of domestic pressure, however, but to allay concern in the international business community. One manifestation of this was the protracted international negotiations leading to the United States-Singapore Free Trade Agreement. Washington sought to have this principle embedded in reforms as a way to increase access for American companies to the domestic market for banking, insurance and other professional services. It was a means to an end.
This is the sort of pragmatic politics the PAP government can respond to. After all, a gradual opening up of sectors where GLCs are established is unlikely to see a loss of their dominance any time soon. And now that GLCs are setting their sights abroad, there is a bigger picture to bear in mind. According to one private economist, Singapore�s external economy could be valued at five times the gross domestic product by 2020.
The reluctance of GLCs to release information in recent years has made it clear that the government doesn�t buy philosophical arguments about the public�s right to information. However, it has come to understand that promotion of the local bond market necessitates some degree of opening up, at least to rating agencies. It has also been sensitive to claims that the GLCs� lack of transparency conceals poor rates of shareholder return.
This probably explains why the GIC produced a commemorative 20th anniversary publication in 2001 revealing the first detailed information about the successes and failures of past investments. Chaired by Lee Kuan Yew, the GIC was so secretive that even the composition of its board wasn�t public until the same year.
On the eve of Temasek�s historic first annual report, Standard & Poor�s contended that Singapore�s investment strategy�largely in the hands of Temasek and the GIC�had produced �markedly inferior� returns (between 1.7% and 4%) in the last five years as compared to those achieved by comparable institutions in Hong Kong. Temasek�s report responded by pointing to a string of adverse factors in the last 10 years that held returns down, including the Asian financial crisis and the impacts of SARS and the 9/11 attacks in the US. It also declared that over the last 30 years Temasek has delivered a �robust� total shareholder return of 18%.
Temasek�s disclosure hasn�t stopped criticism about its performance and the methodology of reporting, but it has led to highly favorable ratings from Standard & Poor�s and Moody�s for financial stability�ratings that will assist the local bond market. Meanwhile, the opaqueness of the GIC is now even starker by comparison.
Resistance to further opening up at the GIC is likely to be more resolute. Prime Minister Lee has previously rejected calls to publish details on the GIC�s investments on the grounds that it would reveal information useful to currency speculators. Lee Kuan Yew has also declared, �It is not in the people�s interest, in the nation�s interest, to detail our assets and their yearly returns.�
Despite such resistance, the Singapore government�s responses to sustained challenges over GLCs and related governance regimes have been continually evolving. Indeed, it will likely continue to make concessions to its critics�however reluctantly. Yet a key consideration behind Singapore�s governance regimes is the protection of the PAP�s political and economic control. The PAP may be prepared to explore new instruments for achieving this, but the objective itself is immutable. This difficult but not impossible challenge will define the new phase in Singapore�s state capitalism.
Mr Rodan is director of the Asia Research Centre at Murdoch University in Perth and the author of Transparency and Authoritarian Rule in Southeast Asia (Routledge 2004).
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