Bienvenido “Nonoy” Oplas Jr.
The author is the President of Minimal Government Thinkers, a free market think tank based in the Philippines. He is also a member of the Advisory Council on Price Regulation, under the Philippines’ Department of Health, writes a weekly column for the online magazine The Lobbyist and is the author of the recently-Published book, Health Choices and Responsibilities.
People living off a landfill
There are many indicators and definitions of what constitutes good or bad governance in a particular country; for example, the global corruption perception index and rankings alluding to the ease of doing business with and within that country. For this NAR project and contribution, this brief paper will provide another definition without necessarily saying that all other indicators like those mentioned above are not useful or important. This par1ticular definition offered by this paper is:
Conversely, it can be defined that Bad Governance = More Public Debt. So, why did this paper choose this particular, narrower (but not necessarily shallower) definition of governance? For the simple reason that being in perennial debt means that a person, a corporation, or a government is continually living beyond its means, i.e. they spend more than their income, and do so on a regular basis. For governments, that means doling out increased amounts of welfare, subsidies and entitlements even if domestic revenues are not enough.
The annual difference of this “living beyond its means” phenomenon for governments is called a budget deficit, meaning revenues are lower than expenditures. The deficit is financed by borrowings, foreign and domestic. The accumulation of such government borrowings constitute public debt.
Incurring debt is understandable in cases of emergencies. Say a family member is terribly sick and requires expensive treatment, or in cases of important investments, private or public, which are supposed to enable the debtor to become more productive over the long term and not only be able to pay back the debt but have surplus resources later.
Let us review first the data for Europe and North America. Then compare the numbers with those in Asia-Pacific.
General Government Gross Debt (Percent of GDP): Europe and North America
(Ranking is based on 2010 data)
Source: IMF, World Economic Outlook 2011 Database, www.imf.org. Figures highlighted in red are IMF projections.
It does not look good that those rich countries that provide huge funds to the UN and the big foreign aid bodies like the World Bank (WB), International Monetary Fund (IMF) and Asian Development Bank (ADB) are themselves heavily indebted. The money that they contribute for those multilateral institutions for lending to poorer countries or countries in deep fiscal crisis, in effect, are also borrowed money.
Having sustained high public debt that persists and increases over the decades, is nothing but fiscal irresponsibility of the governments of those countries spanning various administrations and leadership.
Take note also that the trend from 2009 to 2011 espouses a rising public debt, except in Switzerland and Sweden. This culture of indebtedness, along with policies leading to excessive spending and borrowing, has acquired its own momentum. This constitutes bad governance as current resources are being siphoned off to pay for the excesses and wastes of the past.
The implication of succumbing to high public debt relative to GDP size is that interest expense rises as a result. Money that could be used for various social services is diverted to paying off the debt. However, this may not be a big problem for Singapore and Japan since interest rates there are very low; besides, many banks and lenders are government-owned and controlled banks and other financial institutions. This ensures that the bulk of government interest expense also goes back to the government one way or another.
We now turn to Asia-Pacific countries; East Asia and South Asia in particular. Singapore and Hong Kong, which both have small populations but are considered the tiger economies of the continent, are highlighted. It is interesting to make a comparison between these two economies because while both compete almost neck to neck in various international studies and surveys on economic freedom or economic competitiveness index every year, their level of public debt is extremely disparate.
General Government Gross Debt (Percent of GDP): East and South Asia + Australia-New Zealand
(Ranking is based on 2010 data)
| Country | 2000 | 2009 | 2010 | 2011 | |
| 1. | Japan | 142.1 | 216.3 | 220.3 | 229.1 |
| 2. | Singapore | 81.2 | 105.0 | 97.2 | 93.7 |
| 3. | India | 71.4 | 71.1 | 69.2 | 68.2 |
| 4. | Laos | n/a | 62.1 | 60.5 | 57.6 |
| 5. | Pakistan | 83.0 | 57.3 | 56.8 | 54.1 |
| 6. | Malaysia | 35.3 | 55.4 | 54.2 | 55.1 |
| 7. | Vietnam | n/a | 51.2 | 52.8 | |
| 8. | Philippines | 62.1 | 49.2 | 47.3 | 47.0 |
| 9. | Thailand | 57.8 | 45.2 | 44.1 | 43.7 |
| 10. | Myanmar | 109.2 | 44.5 | 43.0 | 46.0 |
| 11. | Taiwan | 25.4 | 39.9 | 39.7 | 37.9 |
| 12. | Nepal | 59.7 | 39.4 | 35.5 | 33.1 |
| 13. | New Zealand | 31.4 | 26.1 | 31.6 | 35.8 |
| 14. | South Korea | 16.7 | 32.6 | 30.9 | 28.8 |
| 15. | Cambodia | 35.4 | 28.7 | 30.3 | 30.4 |
| 16. | Indonesia | 95.1 | 28.6 | 26.9 | 25.4 |
| 17. | Australia | 19.3 | 17.6 | 22.3 | 24.1 |
| 18. | China | 16.4 | 17.7 | 17.7 | 17.1 |
| 19. | Hong Kong | n/a | 3.3 | 4.8 | 4.5 |
Source: IMF, World Economic Outlook 2011 Database, www.imf.org Figures highlighted in red are IMF projections.
Unlike in the Europe-North America instance of rising trend in debt/GDP ratio, the case is different in Asia-Pacific. The ratio is declining except for in Japan, Myanmar, New Zealand, Cambodia and Australia (rising trend), and Malaysia and Vietnam (flat trend).
Take note of Singapore’s public debt last year – 97.2 percent of GDP versus Hong Kong’s minuscule 4.8 percent of GDP. And while the trend in Singapore is towards a declining rate in the coming years, still the ratio is high, projected at 88 percent of GDP by 2013.
Singapore seems to be following the Japanese “model” of high public debt and more welfare, although most of its debt was borrowed locally (ie, domestic debt). Hong Kong and China adhere to similar models of low public debt and fast economic growth.
Paying off high public debt with more current and future taxation is bad governance. It is squeezing more money and resources from the pockets and savings of the more industrious and more efficient individuals and private enterprises in the economy, in order to sustain the profligate ways of the government bureaucracies and the political class, as well as the bottomless demand for welfare by some government-dependent sectors of the economy.
Governments most definitely have plenty of assets and properties; for example, several dozens, if not hundreds (or thousands), of government-owned and controlled corporations (GOCCs) and government financial institutions (GFIs) including banks.
They also tend to own vast tracts of land including huge military camps, in both urban and rural areas. Privatization of such GOCCs, GFIs, public lands and portions of military camps can significantly reduce and ultimately retire the burdensome public debt. It can also spare taxpayers of more forcible transfer of money from their pockets to the government coffers.
Unfortunately, privatisation seems to be a far-out solution in the minds of most public administrators in many countries. That constitutes another round of bad governance and fiscal irresponsibility.
It is important that advocates of individual liberty and free market should stand their ground and fight endless efforts by the political class to continue expanding governments, the latter of which results in ever-rising public debt and in turn will then require more taxes and forcible contributions today and tomorrow.
—
This article is part of the New Asia Republic Editorial Series “Global Perspectives on Good Governance” under Special Projects. The series features the views of people who hold political office, those working in NGOs, military brass, academics and the man on the street from all over the world to shed light on what constitutes good governance and interpretations of the idea based on the unique socio-political and historical culture of any given country/state.
I think this has been brought up before in the blogosphere – most of us suspect that the bulk of the debt comes in the forms of the special bonds the Ministry of Finance creates to sell to the Central Provident Fund.
I suspect for a more accurate picture, you will have to consider the size of our national reserves together with this public debt.
Add that special relationship between CPF and HDB… frankly, the complexity of the whole thing staggers me.
The Singapore govt. has high debt because the law requires the Central Provident Fund Board (CPFB) to invest the savings in non-marketable Singapore Government Securities (i.e. government bonds). The funds accrued from the sale of those bonds are then used to invest in Temasek Holdings.The Singapore govt. has NO net public debt.
Like most governments, the Singapore govt. issues public debt to develop the bond market and control the liquidity in it, as part of its monetary policy.
In general, public debt is needed to store the private sector’s financial wealth. If the public sector holds net debt, it also means that the *financial* wealth of the private sector is positive. In other words, you can’t have the public and private sector with net savings simultaneously.
This is public finance 101…
Dear Fox,
Does that mean that Laos has a huge private sector and is also doing very well??
Or perhaps if something happens to Singaporeans and they all decide to migrate, renounce their citizenship and take back their CPF money that the SG govt will end up like Greece or Portugal???
Someone must be running a surplus to be able to lend the money to the Laotian govt. Quite likely that it is the IMF but I am not sure. Laos has an unemployment of 2.5 percent so it can’t be doing too badly.
You can’t have the government and the non-governmental sector running surpluses simultaneously. That is arithmetically impossible.
Also, the SG govt. simply invests its funds from the SGS in equities. The SGS is indirectly backed by the value of these equities (as well as the ability of the SG govt. to impose taxes).
Contrary to popular belief, it is not desirable for the government to run persistent surpluses. In the long run, it leads to the depletion of private sector savings as more tax revenue is extracted than necessary. In Singapore, a substantial portion of the govt’s revenue from its investment income which ultimately is the income it gets from investing your CPF money. For it to derive a large investment income, it has to shortchange CPF holders by offering low returns (and hence depleting CPF value). Had it simply returned the entire quantum of its returns to CPF holders, then the govt. could have incurred a deficit but with CPF savings increased.
Yes, detractors are keen to highlight Singapore’s so-called “high” public debt. Even Mahathir’s lap-dog Matthias Chang thought he discovered Singapore’s Achilles Heel. The fact is that Singapore’s high public debt is largely attributed to SGSs issued to CPF. The CIA World Factbook made it a point to put a footnote for Singapore’s public debt.
/// Public debt:
102.4% of GDP (2010 est.)
country comparison to the world: 9
110% of GDP (2009 est.)
note: for Singapore, public debt consists largely of Singapore Government Securities (SGS) issued to assist the Central Provident Fund (CPF), which administers Singapore’s defined contribution pension fund; special issues of SGS are held by the CPF, and are non-tradeable; the government has not borrowed to finance deficit expenditures since the 1980s. ///
https://www.cia.gov/library/publications/the-world-factbook/geos/sn.html
Thanks all to the comments. The focus of my article is about public debt of many Asian economies, in relation to the public debt of rich economies of Europe and North America. I briefly mentioned Singapore and Hong Kong but the paper is not meant to be an analysis of public debt of the Singapore government. I have little expertise to jump on that subject yet. But I did mention that privatization of certain government assets, from government corporations, banks, military camps, public land, etc., to finance certain fiscal deficiencies, whether the budget deficit or a pension fund.
It is true that both the government and the corporate/non-government sectors cannot have a surplus at the same time. One has to be a net debtor, the other a net lender. But it would help if the public sector is not heavily indebted, so that the surplus and net savings of the private sector in that economy can finance more private borrowings, both in the domestic and the world economies.
It is good that HK is showing the way — very small public debt as the HK government is busy with privatization of public lands and other assets. The hypocrisy of many governments, both rich and poor alike, to keep borrowing to finance their persistent deficit and high public debt stock, while they have lots of public assets that tend to add to the debt, like the forever-losing government corporations and banks, should be exposed. This angle allows us to stick to the original theme of the NAR on “global perspectives on good governance.” Thank you.
“But it would help if the public sector is not heavily indebted, so that the surplus and net savings of the private sector in that economy can finance more private borrowings, both in the domestic and the world economies.”
I doubt the notion that private borrowing is limited by public sector debt. The corporate debt sector is much more developed in Europe and North America than in Asia. The ability of firms to borrow money is really more limited by the policy of its home country on capital market.
In the Philippines and other poorer economies, huge public borrowings to finance the budget deficit and pay maturing debts have an upward effect on local interest rates and the behavior of institutional lenders like banks. It may not be very obvious in developed economies like the US and Europe because of their developed capital markets, but there should be some effects. For instance, instead of a potential interest rates of just 0.6 percent, it is 0.7 percent or higher.
In addition, debt ratings of corporations based in economies with unstable public finance condition are lower than comparable corporations based in economies with more stable public finance levels. And we go back to the management, or control of huge public debt as an indicator of the quality of governance in many countries, which is the theme of this NAR special series.
“In the Philippines and other poorer economies, huge public borrowings to finance the budget deficit and pay maturing debts have an upward effect on local interest rates and the behavior of institutional lenders like banks.”
Can you share with us the source of this assertion? I’ve tried scholar google and couldn’t find any papers that assert that public debt has anything to do with local interest rates in poorer economies.
First, its basic theory in the supply-demand of credit. More borrowings means more demand for credit, demand curve shifts to the right. If supply curve does not adjust rightwards too, meaning an increase in supply of credit, mainly from foreign savings to augment domestic savings, the price of credit, interest rates, goes up. That’s Econ 11 or basic Econ.
About some literatures, try this WB literature, http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/D4773C1117006DB285256BD4006635A2. How high public debt has destabilizing effect especially on credit worthiness of an economy.
Nonoy,
“How high public debt has destabilizing effect especially on credit worthiness of an economy.”
Guess the AAA status of Singapore given by Moodys, S&P, and Fitch are all mistakes?
http://www.businessinsider.com/the-last-aaa-countries-2011-8#safe-aaa-rating-7
This article seems to be the result of someone who does not understand public finance trying to write as one. Nice try…….
Hi Tan Ah Beng,
I think you are testing the limits of our patience here. This is your 4th count of slamming writers. I am sure you are able to pen your thoughts gentlemanly without resorting to such demeaning remarks. The next time you commit a similar offence, we will implement a temporary ban on your IP address.
I will treat all the writers with tender loving care in the future.
The writer evidently has no idea what he’s going on about, and has not sufficiently understood Singapore’s fiscal policy. How can this president of ‘Minimal Government Thinkers’ even claim to be able to preach his message of small government if he can’t even get his facts straight? The research is sloppy, and the writer hasn’t bothered to understand what’s going on. Like most people on the internet, Mr. Oplas thinks looking at Wikipedia constitutes sufficient knowledge to allow one to make an informed contribution.
Hi DLWJ,
This article isn’t about Singapore.
I just saw the comments from “DLWJ” and “anon”. Yes, that article of mine six months ago was NOT about Singapore, it’s about public debt. Please read the title again. I also did not cite or mention wikipedia and out of nowhere it popped out of DLWJ’s comment. Non-Singapore-centric readers would appreciate the data presented even if they may not appreciate the viewpoints I presented, especially with what’s going on in the public debt of the US and many European economies now. But some Singapore-centric readers may be disappointed because I did not sing Halleluiah to the economy’s public finance situation.