The underlying cause of Little India Riot

I have given my comment to Chinese Asia Week (亚洲周刊) on the underlying cause of Little India Riot just a couple of days after it happened. It was published almost in complete with regard to what I have said to the journalist. They get more angry when New York Times and Washington Times picked up the story.

Apparently what I have said in this report has caused great unhappiness to PAP ministers and that is the main reason for the VIP harassment I get at the immigration when I flew back to Singapore in mid-January. Apart of that, PAP ministers have responded to my comments on my Facebook by visiting the dormitory when I criticised them of not understanding the ground before they made comments about there is no problem of  low wage and poor accommodation for our migrant workers. Of course the minister later visited a BETTER dormitory instead of those make shift container-dormitory.

The Manpower Minister, during the parliamentary sitting, then proclaimed that there is no modern slavery in Singapore, criticising people like me for spreading untruth.He put up "facts" or "statistics" and such to make his point.

Let me run through briefly what I thought were interesting:

1) This is no ordinary riot. In most riots happening in the world, especially those "spontaneous" ones, rioters will attack all kinds of things, private properties, looting shops, overturning private cars and burn it. But WHY in this Little India Riot those rioters only focus on police cars, ambulances and SCDF vehicles? They did not attack or loot those shops around the area.

2) The rioters didn't attack any policeman or uniformed personnel at all.Why would they overturn the vehicles and burn them but not attack these people?

3) They are NOT exactly DRUNK. When the riot police moved in, ALL the rioters ran away! There were no resistance nor attack on these riot police at all! The people they have arrested are those who are too drunk to move, least riot in any ways, in the aftermath. These people cannot even understand what the police wanted them to do due to communication problems. They were arrested and initially charged for rioting but of course, it does not take a genius to realize that this is totally absurd. Thus, the charge was modified to "failure to disperse" when ordered by police. This is the main reason why PAP Ministers have erroneously concluded that alcohol is the main reason of the riot at the very first instance.

4) PAP government started to deport all "suspects" even though they set up a Committee Of Inquiry. But wait, how would the Committee of Inquiry find out any Truth when all these IMPORTANT participants are deported? Who are they supposed to interview or question to find out the real underlying reasons of this riot?

This is really a REAL CIRCUS of chaos of PAP's rule. PAP Ministers should learn from ancient Qing Emperor Kang Xi: the most untrustworthy things in this world, is "reports" from officials. （最不可信的是奏折！）If you want to know the truth, don't ever attend dialogue or talk organized by the people below. You should just walk up to some foreign workers on the street IN RANDOM and ask them about their situation. This is what I have done always. Talk to REAL PEOPLE, not STAGED People.

Those reports and statistics done by the people below, most of the time, will try to fit into what they want you to hear or the line for you to take. No Modern Slavery in Singapore? Think again.

1) Government Workers' Levy is a form of extortion of hard labour of these migrant workers. The government may think that these levies are targeted at the employers but the truth is, the employers will just take off from the total cost of employing these foreign labour to pay for these levies. Thus, the truth is, just like the ancient slavery system in the feudal system, PAP government is just benefiting from these migrant workers' hard labour just like that.This is a form of true exploitation by the PAP government on migrant workers' hard labour.

2) PAP ministers claimed that these migrant workers are "reasonably paid". But just read this report from  Asiaone They are paid only S$1.50 per hour for their job! The worst part is, MOM backed off from enhancing the rule that all payroll must be made with a proper salary slip! How difficult for employers in this modern age to issue salary slip? The truth is, most of the time, these employers just under pay their migrant workers!

3) No complain doesn't mean no problem. As mentioned in this report, most migrant workers do not complain or even go into strike due to bad treatment or pay irregularities for fear of being deported immediately. PAP government is the main culprit of deporting them immediately at the first sight of trouble, how could they trust this system of slavery?

4) There is no minimum wage system for these migrant workers but higher and higher workers' levies imposed on them. It basically means that PAP government is not interested in setting up a fair employment system for these migrant workers but only interested in benefiting from their labour through workers' levy! It is absurd to say that it would be extra administrative work and cost for the employers if they were to issue salary slip when they are already doing all the administrative work to pay the government workers levies!

PAP government has to face up to the reality of this monster system of Modern Slavery they have created to unfairly profiteering from these migrant workers. What they should do is to minimize the workers' levies and instead, set a fair minimum wage for ALL construction workers, both for these migrant workers and for those Singaporeans who want to work in this industry.

It is no coincidence that these foreign workers are venting their anger against the establishment via their "proxies" on the ground where police cars and all other vehicles which represent the ruling system. PAP government can continue to be angry of me for telling the truth and shaming them in the public international sphere and I will just call a spade a spade. Scrap this system of Modern Slavery!

Goh Meng Seng

The Asiaone report:

Some foreign workers say that on pay day, they are passed cash stuffed in envelopes and the amounts are occasionally far less than what they are owed. Mandating electronic transfers of salary could help overcome this problem. The main reason workers do not complain is that doing so can cost them their job.

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Radha Basu

The Straits Times

Tuesday, Feb 11, 2014

For a year, Bangladeshi construction worker Hossain Iqbel worked seven days a week fitting pipes underground on Jurong Island.

His basic wages - at $1.50 an hour or around $280 a month - were a third of the $800 he had been promised when he left home.

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He did not complain at first, despite having proof of his low wages - unlike many other employers of foreign workers, his issued payslips.

He held back because he had borrowed heavily to pay for recruitment fees and did not want to be repatriated.

Eventually, he lodged a complaint days before his contract was due to end, fearing he might be sent home without his dues being settled.

Acting Manpower Minister Tan Chuan-Jin told Parliament last month that migrant workers were generally treated well by employers, and a 2011 survey of 3,000 work permit holders showed that nine in 10 were satisfied.

Complaints to the ministry about work-related abuses are also low. It helped 7,000 foreign workers last year - less than 1 per cent of the 700,000 work permit holders here.

But these numbers may not reflect the true picture on the ground.

While covering foreign worker issues, I have been told time and again by workers and their advocates that despite grave abuses, many workers will not complain so long as the power balance between employer and employee remains skewed in the employer's favour. Some policies need tweaking to level the playing field.

First, the ministry could compel all big and medium-sized companies to issue itemised payslips, clearly showing basic and overtime pay, hours worked and deductions, if any. Itemisation is important. I have seen hastily scrawled figures on the backs of used envelopes that currently pass as "payslips". This needs to change.

A move to mandate payslips was deferred for all companies recently, after feedback that small and medium-sized enterprises needed more time to implement proper payroll systems.

An ongoing survey by workers' group Transient Workers Count Too (TWC2) shows that one in 10 claimed they were underpaid or not paid at all in the previous month. That could translate into tens of thousands of workers at any given time.

Itemised payslips - together with electronic payments - would give workers proof of being underpaid and empower them to complain.

Some workers say that on pay day, they are passed cash stuffed in envelopes and the amounts are occasionally far less than what they are owed.

Mandating electronic transfers of salary could help overcome this problem. The ministry says some workers may prefer the convenience of cash payments.

This could be easily catered for by having an opt-out feature.

But the main reason workers do not complain is that doing so can cost them their job.

The employer can unilaterally cancel the work permit and send the worker home once the complaint is resolved and dues are paid.

For workers who still have debts to repay, complaining is the last option.

A survey of 104 Bangladeshi workers showed that each paid an average of $6,500 to get here and it took up to 17months to repay their loans. Anyone sent home within his first year returns to big debts.

TWC2 advocates have suggested that a worker who leaves his job - whether he is sacked or resigns - should be allowed 60 days to remain in Singapore and find another.

A worker who feels unfairly treated or abused will more readily speak up and complain, if he is assured that he is not at risk of being packed off home.

Such a move could also help raise workers' wages and hurt the bad eggs, such as Mr Iqbel's employer, who profit by undercutting more ethical competitors who know it is morally wrong to pay a manual worker $1.50 an hour.

Employers' interests could be protected by proscribing mass resignations, to prevent large-scale poaching by competitors.

Significantly, Singapore allows foreign maids to transfer to another employer in case of disputes with an existing employer.

Also, as part of a little-known scheme, the Manpower Ministry already allows work permit holders to change jobs on a case-by-case basis.

It is unclear how many have been allowed to do so, but there were two cases recently of workers being given 14 days to look for a job after their permits were cancelled when their employer defaulted on levy payments.

Finally, there is the matter of wages.

In the absence of publicly available surveys of foreign workers' wages, it is hard to know how many workers earn as little as Mr Iqbel.

The Sunday Times understands that the Bangladeshi and 14 of his compatriots were each owed an average of $9,500 in wages.

They eventually opted to settle privately with their employer and left Singapore.

Thanks in part to tireless negotiations by unions, the Government recently announced that it would introduce new laws to ensure that local cleaners would get at least $1,000 in wages. More productive and skilled workers can earn more.

Even as we applaud the move, it is time to discuss how blue-collar wages can be pulled up in the construction and marine sector too, where, as Mr Iqbel's example shows, workers might be earning less than a third of what a cleaner gets, despite back-breaking manual labour.

Singaporeans have long clutched the moral fig leaf that it is okay to pay these foreigners a pittance because they spend the bulk of their salaries in their home countries, where the costs of living are far lower. Besides, they come willingly - and conventional wisdom has it that if they don't like what they get, they can leave.

Such attitudes must change. Working hard at vital jobs that most locals will never deign to do, migrant workers have played a key part in Singapore's economic success and deserve better - and fairer - returns.

It is time to evaluate whether it's right to pay anyone $1.50 an hour for hard work - just because it's legal and we can.

- See more at: http://business.asiaone.com/news/150-hour-just-too-little-anyone/page/0/3#sthash.7A8qFKGo.dpuf

Proposed Structure for GIC and Temasek - Eric Tan

In opposition field,  there are not many people who are well verse in economics as well as banking and finance theories. Even fewer are well verse in the issue of good practices in corporate governance.

Former WP CEC member, Mr Eric Tan, who stood in East Coast GRC in GE2011 is one of the rare gem. Although I have known Eric for almost a decade, but I have never really seen his real strength until I read his following article. I only knew Eric as a banker, a well respected banker in his field. He was not exactly a ground person when I first know him but he has put in his very best effort in the run up to GE2006 in doing his ground work in East Coast GRC. 

He has evolved since then and he led his East Coast Team to achieve a respectable result in GE2011. It is really unfortunate that Eric was not granted by his party to take on the NCMP position. Although Gerald Giam is younger than Eric but age also comes with more experiences. This is especially so when it is apparent that Eric has the important knowledge of economics and finance which will fill the important gap which other opposition members could not cope with. With all due respect, Gerald Giam lacks the depth in both economics and finance. Even though Chen Show Mao is reportedly an Economics graduate but so far, we have not heard anything substantial from him on economic issues. 

I met Eric recently to chat about current affairs and politics. We happened to touch on the topic of good governance and management of our country's reserves. He told me that he has written an article way back in 2008/9 on how our country's reserves should be managed, right after the Minibond saga and the financial turmoil in which, GIC and Temasek Holdings have suffered hefty losses back then.  Unfortunately, Workers Party CEC didn't approve his article for publishing in their newspaper, Hammer. He told me the gist of his article and I got more interested in his perspective. I have asked him to send me the whole article and after reading it, I find it worthwhile to seek his permission to publish his article on my blog. 

I may not agree 100% of his view here (eg. I advocate Temasek Holdings to diminish its dominance in Singapore economy by retreating from domestic investments because this constitutes a serious conflict of interests between Government and itself) but I feel that it would be a good start for public discourse on how our country's reserves should be managed in a more accountable and transparent way. 

Here is his whole article:

EXECUTIVE SUMMARY

Temasek has disclosed S$58 billion losses in their portfolio and GIC is rumoured to have lost US$ 50 billion. How can we improve the system to manage the funds better?

This paper discusses the events which have led us to the current situation and proposes changes to the system for the better.

I propose major changes to improve the system by making it more transparent and there must be public disclosures on the size and performance of the funds. Firstly the government must be transparent about governance structure and reporting lines for accountability. They must disclose clearly about who proposes the investments, who makes the investment decisions, which government entities are the ultimate owners of the funds and what the organisational structure is. Secondly there must be transparency on the investment objectives such as the purpose of the investment, the time horizon, what are the rules governing allocations or withdrawals from the funds. Thirdly there must be transparency on the investment strategy including how the investments are split between asset classes, the size of the funds and returns. I believe that transparency is a very forceful disciplining mechanism to ensure accountability. The loss and returns of this fund should be public knowledge. Since, if the managers of the funds do a bad job then the public can relate to it. It is good for any business to be transparent and this principle should extend to the managers of our reserves.

Finally, I propose that how we use the returns from the funds must be debated in Parliament during the budget debates. This is a major departure from the current situation where the public is kept in the dark about the size of the reserves and the returns generated from it. If the public is no longer in the dark, there will be more scrutiny on the amount and the uses of public funds. No one actually knows how much we have in our reserves, but some analyst estimate it at $ 500 billion. If this is the case, than our reserves should generate returns which will cover most of the country’s budget expenses. For example, following the average historical return of 11.9% per annum, as disclosed by Temasek and GIC we would have S$59 billion worth of returns. Such an amount can cover most of the 2009 estimated budget. Imagine no GST, free medical and school fees, cheaper utilities and lower public transportation fares.            

DISCUSSION

The headlines reported that Temasek lost S$58 billion and GIC is rumoured to have lost US$50 billion. The government for the first time draws S$4.9 billion from the reserves. We are currently in an awkward situation where we need to draw from the reserves at a time when our reserves are down in value. Such a measure alone is cause of serious debate and questioning about how Singapore handles our reserves.

The first question is how we ended up in this predicament. We do not actually know how we did, due to the general lack of accountability and transparency in our government when it comes to our reserves

.

At the end of the day, the government is accountable to us and Temasek to them, which makes Temasek indirectly accountable to us. Yet, we do not know who in the government Temasek is accountable to?  Are they accountable to the Civil Service or to a political appointee such as the Minister of Finance?

In GIC‘s case there is transparency on their reporting lines to the government. However it does not clearly define who in the Cabinet is responsible for GIC. They mentioned in their website that the Ministry of Finance represents the government in dealing with GIC and it sets out the investment parameters. It goes further to say the government neither directs nor interferes in the company’s investment decision. Where is the ownership?

GIC disclose the long term return achieved by the fund but does not disclose the size of their funds even though it is owned by the people. The reasons given were to prevent speculators from attacking the Sing Dollar in case they know the size of the fund. The Chairman mentioned in an interview with the Asian Wall Street Journal that if the people knew how much money they have then they will apply pressure on the government to spend it.

The closest we came to some accountability from an elected leader was the disclosure of the Temasek loss from a Senior Minister of State. However there was no apology or recognition of a mistake. There was no discussion of any corrective action or an action plan going forward. We often hear from the government that Temasek is a private company and they are not involved in the investment decisions. Is this acceptable?

The government’s defence is that while Temasek’s portfolio was down 31%, it does not compare badly with MSCI World Index which was down 40%. Is that explanation good enough for us? Is that index a fair or accurate comparison?

What does a loss of S$58 billion means to Singaporeans? It means no GST for 9 years, no need to collect personal income tax for 10 years, no need for students to pay school or university or poly fees for 1,300 years.

 

I do not propose a witch hunt looking for who is responsible for the losses. But can we learn from this experience to prevent it from happening again?

The first task in our quest for a better system is to clearly define who in the government is in charge and accountable for the performance of the reserves.

The next thing to do is to define the risk profile of the investments. Should the Ministry of Finance propose to Parliament and debate the proposal?  In this way it is transparent to the public and the public can give their comments.

I believe the best solution to prevent this situation from happening again is more openness and transparency. Lack of transparency was the root cause of our problem.

PROPOSAL

Temasek and GIC roles

In the past the roles of GIC and Temasek were clear. GIC invested our reserves outside Singapore for financial returns and perform a quasi central bank function in aiding MAS to defend the Sing Dollar when necessary.  Temasek was a holding company for share ownership in GLCs. They are not involved in the running of the companies and they also do not actively trade in the shares of these companies.GIC only invest in assets or companies outside of Singapore.Temasek invest mostly in Singapore with the rare exception of investing abroad only in support of the local companies or GLCs in their overseas ventures.

Seven years ago Temasek made a structural change in their corporate mission. In addition to their holding company function, they set up a fund management arm to actively manage the portfolio. In short they have transformed themselves into an asset management company like a hedge or mutual fund. They employed investment bankers and raised funds in the market through a bond issue. They also issued an annual report. They invested in several high profile deals and is perceived in the market as a significant participant in the global capital markets.

The difference between GIC and Temasek became less apparent after Temasek’s transformation. One view is that GIC takes long term structural positions while Temasek capitalise on shorter term opportunities and will trade the portfolio for financial gains whenever the opportunity arises.

Break up the funds into three tranches

I propose to break up the Temasek funds into holding company type ownership and mutual fund type investments. The holding company ownership type is defined as shares held in companies for historical or strategic reasons where Temasek does not actively trade the shares for investment gains. These include our ownership in all the GLCs in Singapore such as the likes of SIA, DBS, Singtel, SP Power, Capital Land, Keppel Corporation etc. The other tranche covers all the recent investments which are non strategic to Singapore. In this manner we separate the companies which Temasek had started years ago for strategic or national purposes from those which were invested for financial gains. We can assess the performance of Temasek as a fund manager more clearly as they would not enjoy the benefit of investment decisions made long before the transformation of Temasek. Also for the holding company function, divestment or investment decisions should be made by the respective Ministries they fall under. This can be done in consultation with the Cabinet. For example decisions to divest or invest in more shares in Keppel Corp should be initiated by MTI and likewise for ST Engineering it should be initiated by Mindef. We can then have clear goals and measures for the mutual fund or fund management performance of Temasek.

For GIC we should separate the Central Bank function of defending the Sing Dollar from their fund management function of generating long returns for the country. Since they are performing a Central Bank function the size of the fund they have should be secret. In fact they have mentioned several times that due to their Central Bank function they cannot be transparent.

I propose we decide how much of the GIC funds are needed to defend the Sing Dollar currency and roll it into the MAS. This tranche should be invested in AAA securities with the objective of preserving capital to be deployed to defend our currency. They therefore need not be transparent as the asset class which they are invested in is low risk.

We then separate the remainder of GIC funds for investment purposes with the objective to maximise returns. This tranche can be transparent as it is not used for Central Bank purposes. In fact they should be transparent as they will be assuming more risks to maximise returns.

I propose combine the two tranches of Temasek and GIC funds which are meant for investing for financial gains into one major fund with a clear objective of maximising profits. This fund must be transparent as they are set up purely for financial gains. The transparency will act as a check to the fund managers in the risks they undertake for the fund. Transparency also implies accountability as the public has taken ownership in defining the parameters.

Let us call this fund The WP Fund.

The WP Fund

The Fund must only invest outside Singapore for diversification purposes and also we separated the ownership of the GLCs into a separate fund which has different investment objectives where financial returns are secondary.

The Fund reports to the Ministry of Finance and the Minister of Finance must be the Chairman of the Board for direct accountability purposes. The Minister must decide and disclose the governance structure such as who is making investment decisions and what the Board must do. The Minister is responsible to ensure that the fund operates within the investment parameters approved by Parliament and for its performance. For major issues or investment decisions we leave it to his judgement whether he should discuss with the Cabinet only or consult Parliament. The Minister of Finance is directly accountable to the Prime Minister. 

The Ministry of Finance proposes the investment guidelines, risk parameters and strategy annually to Parliament. The risk parameters can be for example the composition between equities and bonds. These guidelines must be tabled and debated in Parliament and approved by Parliament. This can be part of the Budget Debate or tabled separately.

For example, in the case of the Norwegian Government Pension Fund, it began with the investment guideline of 40% equities and 60 % bonds but later they went to their Parliament to amend it to 60 % equities and 40 % bonds. The decision was fully debated in public.

The Ministry of Finance within the investment guidelines sets the benchmarks used to assess the performance of the Fund. Actual performance is measured against these benchmarks and performance differences are explained in the Fund’s reports. The frequency of such reports to the MoF can be determined by the Minister of Finance. However the Fund must issue quarterly reports to the public.

The CEO of the Fund must be a Singaporean but the other senior members of the management can be foreigners. The CEO must reflect the values and aspirations of our country and hence he or she must be a Singaporean. A Singaporean must take ownership of the funds but we can draw expertise from the world

The Auditor General must audit the accounts of the Fund to determine the performance as a check and balance .The AG can work with independent international institutions such as global custodian banks to assess the performance of the Fund. The Auditor General with respect to this function must report to the President and CPA for accountability purposes.

Finally Parliament will debate and decide on the use of the annual returns from the Fund as proposed by the Minister of Finance as part of the Budget. The MoF can determine how much of the returns they intend to use for the budget while the rest can be reinvested in the Fund. The PM in consultation with the Minister of Finance need to seek the President’s approval if the government intends to draw from the principal amount of the Fund. The Fund will continue to receive capital injections from our current account and budget surpluses and national savings as they do today. 

Suggested Investment Guidelines

We should study the Norwegian Government Pension Fund model for investment guidelines and operational functions. Some suggested guidelines based on this model are as follows:

Equity portion: 40 %

Bonds portion: 45%

Direct Real Estate portion: 10%

Private Equity portion: 5%

Maximum ownership in any one company: 3%

The Norwegian Government Pension Fund does not take strategic stakes or large direct equity stakes in foreign companies as if these companies are confronted with financial difficulties the Norwegian government may come under pressure to find solutions to their problems.

No leveraging through borrowings

No derivatives.

CONLUSION

We are aware that with more transparency there will be less flexibility for the fund to invest in close end deals but the benefits in terms of public scrutiny out weights this disadvantage.

I took in most of the existing GIC governance model which had worked well in the past. However I added the crucial elements of personal accountability from the Minister of Finance and public disclosures of the performance of the fund.

I may not have all the answers to the problem but I hope this proposal will give us the framework for a solution. I am open to any suggested changes which make sense.   

 

FREQUENTLY RAISED ISSUES AND RESPONSES

I: If we have a foreigner as the CEO then governments of countries which we wish to invest in will be more open to our investments as they may not view us as a sovereign fund.

R: This is not quite correct as the governments can see through that the foreign CEO will not totally be in charge as he is an outsider. In fact they take a negative view as they may perceive Temasek’s foreigner CEO as window dressing.

I: If we only kept our reserves in safe asset classes like cash and bonds then we cannot generate the returns which our reserves had enjoyed to date.

R: That remark is not quite correct as it assumes that the riskier assets certainly always generate better returns than cash or bonds all the time. It also gives the impression that you are not aware of the risk you are undertaking. The market conditions today reflect the high risks one undertakes when one invests in equities.

I: On many occasions, people who have been entrusted with funds belonging to other people, delegate their responsibility to fund managers with the misguided impression that they can rely on the expertise of fund managers.

R: The buck stops with the person whom the owners of funds have entrusted. When she decides not to invest the funds in bank deposits she becomes a fund manager. Fund managers are like tools she can use to achieve his investment objectives. They provide advice and offer their skills but the person entrusted has to decide on the investment strategy and asset classes. The fund managers often times look after their own interests first and their agenda is not aligned with the owners of the funds as evidenced so clearly in the financial markets today.

I: Some citizens have the mistaken notion that these funds are not theirs but belong to the government. Their view is that though the people provided the seed capital many years ago the government grew the funds and therefore the profits are theirs not the people. .

R: This is wrong as the government is the people and the money belongs to us the citizens. Some citizens feel this way because they do not see any direct benefits from these funds. Let me correct that misguided thinking to show how we can directly benefit from these funds. The total size of both funds is not known as GIC does not disclose the size of their fund. However international analyst estimated the combined funds to be around S$450 billion. GIC disclosed that they achieved 5.8% over a twenty year period and Temasek disclosed that their total shareholder return is 18% over a thirty year period. If we take the average return on both funds as 11.9% then the dollar value return on our funds is estimated to be S$53.6 billion which is close to the total government revenues in the 2009 Budget. This means we can have cheaper public transport, no need for GST, free medical care and educational fees etc…

I: When faced with losses in GIC and Temasek, we are told that they take a long term time horizon in their investments and eventually the funds will show profits.

R: “In the long run we are all dead” says Keynes the great economist. If that was the case then we do not need to employ highly paid talent to manage the funds. In the long run any one can make money. It requires great skills to determine the timing of the markets, you need to have the instincts as well intellectual capacity to digest all the information and make the investment decision. You need to know when to convert all into cash or to cut loss.

Eric Tan Heng Chong

Prevention of Housing Bubbles - German's Model

I have mentioned on my Facebook many times that the "IDEAL" model for housing is from Germany. It manages the supply, rental as well as resale market of property in the direction to discourage property speculation and thus, formation of housing bubbles.

It may be counter intuitive to many Asians but by doing so, it prevented excessive speculation and funds being sucked into property market so that such funds can find alternative MORE PRODUCTIVE use in REAL creation of products and services. It will also cultivate a vigilant culture whereby people understand that wealth and income can only be made through pure hard work and real productivity growth, not via "rent-seeking" nor  "short cut to instant wealth".

There are many more finer details of the German's model on how they tax heavily on excessive gain from property sales and such. But let's look at the following article from Forbes.

Goh Meng Seng

When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different. In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller’s number because he had previously promised  to renovate the property and had failed to follow through.

As Locke, a retired historian, points out, the Goerlitz authorities’ attitude is a striking illustration of how differently the German economy is run. Rather than keep their noses out of the economy, German officials glory in their power to influence market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

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Goerlitz: picturesque — and tightly controlled. (Photo credit: chrisbulle)

Although conventional wisdom in the English-speaking world holds that bureaucratic intervention in prices makes for subpar outcomes, the fact is that the German economy is by any standards one of the world’s most successful. Just how successful is apparent in, for instance, international trade. At $238 billion in 2012, Germany’s current account surplus was the world’s largest. On a per-capita basis it was nearly 15 times China’s and was achieved while German workers were paid some of the world’s highest wages. Meanwhile German GDP growth has been among the highest of major economies in the last ten years and unemployment has been consistently among the lowest.

On Wiles’s figures, German house prices in 2012 represented a 10 percentdecrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period.

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date count of the number of residents in each area.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Meanwhile demand for owner occupation is curbed by German regulation. German banks, for instance, are rarely permitted to lend more than 80 percent of the value of a property, thus a would-be home buyer first needs to accumulate a deposit of at least 20 percent. To cap it all, ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

How does all this contribute to Germany’s economic growth? Locke, a prominent critic of America’s latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany’s managed housing market helps smooth the availability of labor. And by virtually eliminating  bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.

In the  German system moreover,  house-builders  rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.

Locke is the co-author, with J.C. Spender, of Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance, a book I highly recommend.