Saturday, June 11, 2011

MIT Professor criticizes Singapore government's dominance in economy

Straits Times, Feb 12, 2010 (source)

HOW far should the Government extend its long arm into the private sector?

The Economic Strategies Committee last week proposed that the Government, aided by private sector fund managers, invest up to $1.5 billion in Singapore-based enterprises to help them grow and even take a stake in them.

The idea raised few eyebrows here but would have caused renowned political economist Huang Yasheng (personal website) to do a double-take.

To the Beijing-born Massachusetts Institute of Technology (MIT) professor, who was in town recently to address the Civil Service College, state-linked enterprise models are a sure-fire way to stifle the economy in the long run.

Known for his critical view of China's bias towards state-linked enterprises at the expense of its home-grown businesses, he expressed the same scepticism about how far state intervention can help private enterprise here.

Singapore should 'rethink' the 'Temasek model', he says, referring to the state investment company Temasek Holdings, which has major stakes in large local corporations such as telecommunications player SingTel and developer CapitaLand.

'The private sector is the best way to grow the economy. It has the most productive, most innovative and entrepreneurial culture. The state-owned enterprise system doesn't give you that.'

He acknowledges that Singapore has 'the most streamlined state management model' worldwide among the countries which adopt this method, but it has milked this system for all it is worth.

'You are already hitting the wall,' he warns. Retaining this strategy could mean sacrificing future growth that is possible only through a bigger, more dynamic private sector.

When governments get involved in venture financing, they risk getting tangled in a whole host of issues. Few taxpayers, he reckons, can stomach the inherent risks of funding technology start-ups.

'Nine out of 10 investment projects fail. Does the government have such a high tolerance for risk? It's taxpayers' money, right? I don't think, politically, it's legitimate for the government to keep investing in failing individuals and failing projects. How do you defend these decisions?'

Those who fund these start-ups need to understand that risk-taking is part and parcel of the whole process.

'But does the average Singaporean understand that?'

Even if a project does succeed, other thorny issues crop up.

'The entrepreneur gets a disproportionate share of the benefits. Why should I, as a taxpayer, fund these projects? What do I get? There's a basic illogic to the government being involved in venture financing, at a political level and operational level.'

In most other countries, government funding typically goes into basic research without direct commercial applications.

'Maybe a better way is for the government to fund more basic research and then allow universities, private equity firms, venture capital firms and rich individuals to take care of the rest.'

That is because even when the state sector is well managed, it is not as innovative as the private sector, he says.

'From a technological development point of view, you need a bigger private sector to compete, to come up with new products, processes and technologies, to better compete with India and China.'

The case for private entrepreneurship is strong even when applied to these two Asian giants. In a 2006 Financial Times article, he compared the two economies, concluding that India was achieving a high level of economic growth with just a fraction of what China was receiving in foreign direct investment.

The difference boiled down to the level of support for local entrepreneurs.

'An economic litmus test is not whether a country can attract a lot of foreign direct investment, but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy-handed political intervention. In this regard, India has done a better job than China,' he wrote.

The trouble with civil servants leading the charge, he says, is that creative thinking is often in short supply.

'Civil service culture is about discipline. It's about execution. It's about efficiency. Entrepreneurial culture is about challenging the authorities, questioning the existing ways of doing businesses, moving away from the routines and norms. It's about the unconventional, rebellious and diverse. These values are almost polar opposites.'

He stops himself for a moment. 'I want to be very clear, Singapore has one of the best civil services in the whole world, and that's a very precious asset. The issue is, whether you want the civil service to play such a big role (in enterprise) or not.'

State-linked enterprises, he acknowledges, served Singapore very well before the rise of cheap labour in China and India, when growing the economy required merely ramping up production through higher efficiency. But today, the challenge is constant innovation.

'You can increase scale economy with government funding. But when it comes to new products, processes and technologies, it's very different. It's not just about money, it's culture.'

But growing up in the big shadow of state intervention has dwarfed the entrepreneurial culture here, he says. The 'orderly' environment here dulls the incentive to think out of the box. 'Everything is very well organised. Entrepreneurship typically happens in a more chaotic environment,' he observes.

Even Singapore's 'top-down' education system gets in the way.

'While producing excellent maths scores, it is not producing diversity in ideas and unconventional ways of solving problems,' he notes.

The new game is not about high averages, but outliers. Nor is it about size, but nimbleness.

He scoffs at the widely held view here that local firms are too small to compete outside Singapore without help from the government or government-linked firms.

'This idea that size gives you advantage is an extraordinarily strange view. Was Microsoft a big company in 1975? Was Google a big company in 1998?

'The key thing is whether or not you can grow, and how you grow. If government support is behind the growth of a company, that means the company has not survived the competition test. It may fail in a different environment.

Worse still, 'if the government support is strong, it dilutes the incentive to innovate'.

A small company, he says, can be 'extremely competitive' by occupying a strategic niche.

'Academic research shows overwhelmingly it is the small companies that create new technologies and new products. Big companies are innovative only when they acquire small companies.'

Hence, the critical question for Singapore is whether its big firms have enough small companies to acquire.

To help smaller players flourish, he believes local entrepreneurs should have easier access to private funds. The Central Provident Fund system, he points out, is worth a relook. While it builds up retirement nest eggs by enforcing savings that can run up to about 40 per cent of an employee's total wage, it also channels away a sizeable sum from the hands of potential entrepreneurs to government investments.

Putting some of these funds back in the hands of more nimble local entrepreneurs could be Singapore's best bet to stay ahead in this fast moving global economy. Failing to exploit the potential of its private sector could mean the country, once labelled an 'Asian Tiger' for its sparkling growth rates, might go down in history as an economic has-been, he says.

'I think Singapore has done a remarkable job in the last 50 years. The logic of its system is very powerful. But the issue now is that we have a very different environment.

'And the ultimate success of a system depends on its ability to adapt to new situations,' he adds.

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