Tuesday, May 01, 2012

Labour Day - Detrimental Effect of Rent Seeking Economy

I was thinking of taking a break from writing Labour Day message for this year but something inside me give me that urge to write on Rent-Seeking Economy. This is a topic which I have in mind for a long time since last GE2011.

What is a "Rent-Seeking Economy"? This is actually a technical economic term which any economic student would study in their university. In the simplest form, economic output (which we call GDP nowadays) is the result of the input of labour, capital and raw material. However, capital in modern days' term, is split into smaller units like funds, technology, land, and such. Whatever is produced could be termed as Value Add which could then, distributed to labour as wages, interests return for capital funding (Profits )as well as rent for land use.

Rent-Seeking behaviour may not only refer to maximizing rental return for land. It has developed into greater theory of how money was used to buy influence on government to redistribute wealth to their favor without creating new value or wealth in terms of value add via production of products and services as a whole. You may read more about Rent Seeking behaviour from Wikipedia.

Excessive Rent-seeking activities will result in the disproportionate distribution of value add to rent (land lords) vs wage (Labour) vs management (guild form of label). The label "Talent" put on management or political leaders is similar to the rent-seeking behaviour of medieval guilds. In fact, organized groups in Legal services as well as Medical practice are considered as rent-seeking organizations as well.

Rent-seeking behaviour may include legalized monopolies which exert influence on government to provide them special treatments and concessions. The recent extortion of $2Billion for bus companies and $0.9 Billion for MRT repair are examples of rent-seeking behaviour.

What has Rent-Seeking behaviour to do with Labour Day? The following is a quote from Adam Smith:

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...."
 Heavily skewed "property investment" which resulted into bubble prices and rent is a kind of rent-seeking behaviour. The only bigger value it has contributed is the initial construction phase as well as the minimum maintenance which it provides along time. 

We must recognize the fact that PAP's economic policy is ultra-capitalist in nature. It has steered towards Rent-Seeking behaviour which will seriously skewed distribution of value-add towards land lords (which are mostly under government or GLC's control). The introduction of Casino into our economy is also a rent-seeking in nature: i.e. lease land to Casino operators at very high prices, increasing rent of Hotel rooms etc but Casinos do not create "values" or "wealth" as a whole when you are just winning wealth from another person.

The end result of such rent-seeking behaviour is the continuous suppression of wages and exploitation of labour while giving excessively higher return to capital and land rent. It will end up with PAP only talking about the "ills" of increasing wages for Labour, stressing about "productivity growth" for Labour while ignoring the fact that rent has been increasing at rapid rate without corresponding "productivity growth" in them.

It will end up with PAP talking about danger of "inflation" if wages are increased for Labour while ignoring the fact that increasing rent by GLC-controlled properties would increase inflation as well. 

COE is a kind of rent-seeking tool as well. i.e. it seek rent for each vehicle's usage of road infrastructure. The erratic increase in COE would also affect inflation as well. 

Rent-seeking behaviour would favor capitalists which seek super-normal profits for their investment by suppressing wages. In the end, we will have uncontrolled input of labour from foreign countries to suppress wages so that these companies would be willing to pay slightly higher rent for land use. On the other hand, it benefits the largest land lords (which happens to be government and its GLCs) most, on the expense of suppressed wages. HDB could sell new HDB prices at record prices, GLCs like Capitaland and other REITS could charge exorbitant rents with the excuse of "higher traffic flow".... etc. One must note that they didn't create this "extra value" of higher population but rather, its the government's lax foreign labour policy which created such situation. This is also why income disparity widen so wide between the top and the bottom percentile.

We will also end up with financial system skewed towards excessive financial engineering which ended up with no real value creation but just a matter of shifting risks and wealth around. This is also how Minibond saga comes about.

Rent-seeking economy would slowly cripple real economic growth of the country, or even end up with social instability. More funds in this economy will channel into property as well as financial speculation while lesser funds are used for creating values via enterprises. REITS will continue their rent-seeking behaviour to extort unrealistic growth in their profitability through unrealistic increase in rents to retailers. This is also why we are seeing less and less smaller retailers run by smaller enterprises. 

In ancient medieval age, rent-seeking economies normally end up with farmer revolts. Most of the feudal states in ancient times were stable even though political freedom and social mobility was restricted. However, when rent-seeking activities took root and land lords started to extort exorbitant rents, income and wealth disparity started to widen to unreasonable stage. Most of the time, such rent-seeking economies would end up with farmer revolts, Kings and Emperors might just be overthrown eventually. Thus Prof Lim Chong Yah is right in saying that Singapore's gini-coefficient is reaching a dangerous state that social stability may be compromised if it continues left unchecked. Japan's decline from a economic power house is the fine example of how rent-seeking economy would destroy a country, even though Japan has went through political changes but it was still unable to walk out of economic gloom for the past decades.

There are people who have asked the valid questions, if PAP keeps insisting that productivity must grow before wages are increased for labour, then why are ministers' salaries aren't pegged to productivity growth? Most of the time, growth in top management of any companies are not pegged to productivity growth as well. One of the most effective way to detect income disparity and rent-seeking behaviour is to compare to GDP growth with wage growth over the decades. GDP as we know, is the growth in value add by the economy. If wage growth is slower than GDP, it would mean that value add has been disproportionately distributed to profits and rent as compared to wages. This is not surprising because rents for REITS could be adjusted at super high rate way above GDP growth rate. But why hasn't PAP spoken out against such high-increase in rents which further suppressed wages? The simple reason is that PAP government has vested interests in keeping rent and property prices high. i.e. it is the BIGGEST landlord in Singapore!

 In short, if workers are to depend on PAP to fight for their right share of economic growth, it is like expecting the tiger to save the deers. Unfortunately, PAP has monopolized power and influence on the Labour Unions here in Singapore. 

What we could do is to provide the necessary information and explanation on the ills of Ultra-capitalistic economic model which leads to Rent-Seeking Economy like Japan, so that more Singaporeans would understand where PAP is leading us to.  Unionists should exert more pressure and regain bargaining power in negotiating for a fairer wage for the workers. Don't be fooled by the talks on how wage will increase inflation and how wage increase should follow productivity growth. There will be little productive growth as long as PAP keeps on allowing enormous number of foreign workers into Singapore. 

Professor Lim Chong Yah has asked for a drastic increase in wages for workers of lower segment as a "shock measure". But I think this would only work if a minimum wage is imposed across the board on both local and foreign workers so that there isn't any big incentive for employers to switch to foreign workers when Singaporeans' wages are increased. 

It would be interesting if someone could get data comparison between GDP growth vs Wage increase over the decades. You will realize that how bad the situation is and how income and wealth gaps have been widen throughout the decades with PAP government siding on the wealthy and powerful due to their rent-seeking economic policies.

For this Labour Day, I would call upon all Singapore workers to take a good look at what PAP government has installed for us and what direction has it dictated for our future. Rent-seeking economy which favours the rich and powerful, making this land into the wonder lands of the world richest people will not create value for our workers. There will be little wealth created for sharing with our workers in such rent-seeking economy. We need to make sure that a fair wage is given to our workers for their honest hard work. We need to make sure that our workers have a fair share of our economic growth. We have to make sure that Singaporeans are not discouraged nor deterred by the high rent. We need to make sure that we will give PAP government enough pressure to correct the disproportionate increase in rent instead of keep suppressing our wages by means of excessive Foreign Labour inputs and ill-logic which disregard the declining share of economic fruits by our workers. 

Last but not least, Happy Labour Day to All.

Goh Meng Seng



market2garden said...
This comment has been removed by the author.
Anonymous said...

Too true. The PAP has become a class of its own, and its brother, the Civil Service, is another class of its own. Both work together to carry out each other's work to extract whatever they can from us.

Anonymous said...

One of your best articles

market2garden said...


What's your major / minor field of study other than Economics for first 3-year BA before proceeding to Hons Year BSocSc.
Just curious.

market2garden / op2torch / clarinet2concerto

Goh Meng Seng said...

Hi Market2garden,

Very few people ask me this question. :)

My two majors are Economics and Statistics with a minor in Philosophy.

Goh Meng Seng

Admin said...


Very few people ask me this question. :)

My two majors are Economics and Statistics with Philosophy as minor.

Goh Meng Seng

clarinet2concerto said...

Philosophy minor ...
Then you will more or less appreciation the following:
Excerpts: ... This is all to explain how Plato and Aristotle can be very impressive and yet naive and mistaken. It was impressive even to ask the questions they did. That doesn't mean they always came up with good answers ... In particular, they don't seem to have fully grasped what I earlier called the central fact of philosophy: that words break if you push them too far ...
"Much to the surprise of the builders of the first digital computers," Rod Brooks wrote, "programs written for them usually did not work." ...

market2garden / clarinet2concerto / op2torch