Lee Kuan Yew’s Momentous Life

Lee Kuan YewThe recent passing of Lee Kuan Yew (Sep 16, 1923 – March 23, 2015) is a most appropriate occasion for evaluating his legacy.

Upon Great Britain’s withdrawal from Singapore in 1959, the People’s Action Party (PAP) won a landslide victory, during the May elections of the same year. Thereby, Singapore became an internally self-governing state within the Commonwealth, with Lee Kuan Yew as the country’s first Prime Minister.

The withdrawal of the British from Singapore was nearly catastrophic for the island’s bewildered inhabitants. The main economic engine of the city had been the British naval base. Its loss left a gigantic gap which was very difficult to fill (an impossibility, in the short run). The hardships and problems that this caused were dreadful.

No longer being able to depend on the island’s mainstay, the economy entered a severe period of contraction, a depression. Along with the British, many traders and merchants left the island. Basically, most of the population that stayed were highly illiterate, untrained workers; and they were all jobless! Ethnic problems were not minor, and poverty was rampant. Under such adverse circumstances, Singapore applied for admission to the Malayan Federation. Admission to this group was so difficult that it took almost four years to be obtained.

Singapore was part of the Malayan Federation for a very brief period, from 1963 to 1965. In the latter year, Lee Kuan Yew, the head of government, rejected a law that provided excessive economic privileges for Malays on the island. The federation’s reaction was blunt: Singapore was expelled. With great doubt, fear, and misgivings, Singapore proclaimed its independence on August 9, 1965, with a highly uncertain future, considering the country’s small size and the lack of any natural or organizational resources.

At that time, Singapore and its population faced a very difficult and truly chaotic situation. Singapore was virtually bankrupt, small, very poor, demoralized, disjointed: a nation astray. As if this were not enough, it had widespread corruption at all levels of society. In addition, the island was heavily contaminated and had an inadequate supply of fresh water.

As quickly as possible, Lee proceeded to establish order and discipline so as to give direction to this tiny, new nation. Less than two months after it was founded (in a truly fast-track process), Singapore was admitted into the UN, on September 21, 1965. Two years later, Singapore founded the Association of Southeast Asian Nations (ASEAN), along with three other nations.

Emulating the Swiss, Lee proclaimed a policy of neutrality and nonalignment. In this way, he immunized the new nation, at least in part, from many potential political pressures and commitments (Communism as a big and menacing threat at that time).

Lee made English the mandatory language, with the second language to be chosen depending on ethnic background, the three main ones being Mandarin, Malay, and Tamil. Lee’s efforts to improve public education were also drastic and very successful. To eliminate corruption, Lee gave special attributions to the Corrupt Practices Investigation Agency, which had great power to make arrests and to investigate bank accounts and tax returns. He also provided great impetus to the punitive practice of public flogging for certain crimes; for instance, considering the unseemly habit of frequent spitting in public, severe penalties were imposed. Thus in search of order and prosperity, Singapore became a zero-tolerance nation of Spartan laws. Lee also pushed for paying public officials at market levels to minimize corruption temptations and to demand better results of their efforts.

So, the transformation of Singapore from an extremely poor and strayed tiny nation to become an influential nation, and one of the wealthiest countries on earth (on a per capita basis), under the leadership of the same person (Lee Kuan Yew) in just 25 years is truly remarkable, with very few precedents (Hong Kong being the other case. See Sir John James Cowperthwaite and Hong Kong’s Domino Effect.). Singapore’s wealth is based on knowledge, organization and hard work.

Lee Kuan Yew showed a remarkable ability to make the best out of adversity. He did not choose Singapore to be independent. Quite the contrary, as previously mentioned. However, once Singapore was expelled from the Malayan Federation in 1965, Lee didn’t waste any time to pursue much higher goals.

He was the ultimate pragmatist. He abided by the old saying “If life hands you lemons… make lemonade”. Nonetheless, his ability to learn from others, quickly and well, was truly extraordinary. In most likelihood Lee must have drawn inspiration from the then nascent Hong Kong economic miracle, despite lacking a background in economics or finance (he was a lawyer educated in Great Britain).

Like all human efforts, Lee Kuan Yew’s life had some flaws, like his inclination towards nepotism and probably an excessive hard hand on political opponents. Nonetheless, on the average, Lee Kuan Yew’s successes by far outweighed his human failures. Despite the astonishing success of Singapore under his direct leadership and afterwards, and his long stay commanding the government, he was not a kleptocrat. Granted, in many respects Singapore under his rule was practically a dictatorship. Yet, a benevolent and extremely successful one.  His passion for excellence was unrivalled.

It is reasonable to state that Hong Kong and Singapore were a seminal experience that greatly influenced the destiny not only of the other two Asian Tigers, South Korea and Taiwan, but also of mainland China, among others. The world owes a lot to these tiny jurisdictions who have shown how excellence can be achieved coming from far behind.

As exposed in GLOBALIZATION, my book, those four nations have done an extraordinary service to the rest of humanity by providing the blue print  to transit successfully from rags to riches in a relatively short period. In fact, this great development both, inspired and guided  me into looking for a systematic, scalable way to replicate the Singapore experience in other extremely poor countries. As a subproduct, a very fresh, powerful, and badly needed source of extra growth for the world as a whole can be achieved (See TGP).

Russia: from Rags to Riches and Back

sad broken matryoshkaIt was only three years ago that the prevailing expectations of the Russian economy and where it was headed over the next years was favorable (or even very favorable). The evolution of Russia from the ashes of the USSR to a seemingly fairly solid direction towards a market economy and its increasing role in the international community had only a little over two decades. Granted, nothing is perfect. Nonetheless, that expectation was indeed widespread and had some reasonable foundations behind it.

Moreover, Russia was not alone at that. The then popular acronym of BRICs was widely used, to refer to a very evident accelerated development of Brazil, Russia, India and China. The expectation was that, given enough time, the sizeable critical mass of those four nations, coupled with an economic growth rate well above the average of the developed nations, would propel them to an increasing level of world influence.

What a difference a few years can make. Among the four BRICs,  both Russia and Brazil have experienced a huge reversal of fortune.

How can such a dramatic turn have occurred to Russia in just a few years?

The core of the answer to the previous question lies in the extremely poor-governance system Russia has. For practical purposes, Russia is a fully underdeveloped nation in this regard, not far from many struggling nations in the world. There is no significant checks-and-balances system in place. As a result, Vladimir Putin (or whoever happens to be in power, as long as the system isn’t significantly upgraded) operates with an almost total freedom with null or very poor supervision of its congress. Unfortunately, and as it is now very evident, Putin’s administration wasn’t really involved in a meaningful agenda of elevating Russia’s competitiveness when compared with the rest of the world. Russia has essentially been living of the relatively high income provided by the then high oil prices, supplemented with foreign debt.

Very sadly, the Russian economy is not functional. It needs drastic and very carefully implemented changes. Instead, Putin has embarked on a self-destructive campaign of territorial expansion, destroying along the way the relatively good atmosphere with the rest of the world before things deteriorated so rapidly, with no end-in-sight.

What are the lessons to be learned?

Ignorance of how the free markets and the world as a whole work, coupled with utter disdain for good and effective governance are a recipe for disaster.

The way the world functions is far from perfect. However, there is a lot of suffering, famine, wars, and hard work of many generations before us that have taken the world to where it is today. Hostility and military aggressiveness are not, at all, a sensible solution to anything.

Any well-thought, good-intentioned initiative to improve the world should be very welcome. Yet, respect and coordination among nations is imperative in order to truly gain any significant global and self-sustainable benefit. Today’s Russia is exactly at the opposite end, the wrong side of history. Let us hope for a substantial and not so distant change towards a virtuous cycle. Not only does Russia need it badly, but the whole world would benefit enormously with a sincere and passionate change towards constructive attitudes among nations.

Competitiveness Among Nations: Conclusions (Part Three)

“The worst evils which mankind has ever had to endure were inflicted by bad governments”

—— Ludwig von Mises

 

(…Continued from Part Two)

All over the world, the current political system has made most governments fall into complacency and allow a great deal of free-riding from probably the majority of elected officers. That’s why gridlock has resulted as a virtually inevitable outcome. Within that environment, serious, profound, virtuous structural change is almost impossible to implement.

Given that the bureaucracy and the establishment at large are experts in blocking change, the required strategy demands leadership, guts and plenty of skill.

History unmistakably shows that every single effort to mess with the markets is doomed for failure. That is the major reason behind the strepitous collapse of communism. Central planning is no match for free markets. History has unequivocally shown that.

However imperfect free markets are, as any human process, mankind has not developed a better system for high employment, growth, and prosperity.

Politicians should stop playing God. Whenever free markets can set the direction and the pace, mankind should follow.

quote-the-great-virtue-of-free-enterprise-is-that-it-forces-existing-businesses-to-meet-the-test-of-the-milton-friedman-342888

The indispensable role that freedom plays in any human endeavor was extremely clear in Milton Friedman’s mind; hence, the superb title of one of his many books: Free to Choose.

Fair game is open borders: the ability to move freely, in and out of any country as they please  (for people, corporations, and capital). Any other approach is suboptimal, and quite costly to society. The feudal mentality, insulation and protectionism have caused too much damage to mankind.

A big irony of all this is that, despite the deplorable standing of the US when compared against the most competitive nations on earth on the tax burden subject, the US still manages to have a rather excellent overall standing (see Part Two of this series). Two comments in that regard:

  • Small nations like Singapore, New Zealand, and Switzerland, among others, are performing substantially better in the tax area, a foremost aspect of overall competitiveness. If things do not change substantially for the better in the US in the near future, it will only be a matter of time before some nasty spillover effects materialize. That is the way the economy functions.
  • If the US truly desires to maintain —or even better, improve— its competitiveness, it should better start right away, before things get uglier and more difficult to reverse.

Competition, a fundamental pillar of the free market system, is a superb and most effective checks-and-balance mechanism. Yes, competition very often is painful to be observed. Fortunately, the benefits far outweigh the costs associated with it. Governments should not be exempt from the market discipline.

Free-riding in governments must end. Policymakers have a most natural and disgusting tendency to avoid though decision making. Though decision making is the raison d’être  of government existence, in the first place.

Society must end its complacency on how government goes about doing business. The approach taken by the Obama administration concerning the tax diversion issue is a formidable example of how not to do things.

Not utilizing appropriately the price mechanism is extremely costly to society. The major reason behind the collapse of Communism and all centrally-planned economies is precisely that. Instead of following market signals (supply & demand) they tried to rely in the judgement of government officers who dictated who produced what, at what price it should be sold at and so on.

Whenever feasible, the market mechanism should be highly regarded and followed with the strictest discipline possible. Governments should not be an exception; quite the contrary, governments should set the example.

The cost of inappropriately allocating resources from society due to government meddling is humongous.

The misalignment of interest between policymakers and society is quite frequently grotesque. In the tax diversion issue it is a most evident reality. What policymakers want to protect and preserve in this issue, by not taking the bull by the horns, is a most illegitimate bunch of vested interests —at the expense of the electorate—. Policymakers are well aware that if they reacted appropriately, a great deal of questionable government programs will have to be severely reengineered, diminished and, in some cases, altogether cancelled.

It is evident that we, as a global society, still have a lot to learn about the virtues of free markets. Once that learning process is sufficiently advanced, there won’t be any room for false solutions to great opportunities for collective improvement in employment and the standard of living. The abnormally heavy tax burden in the US —and in so many other countries around the world— suffocates the global economy. There is no mystery or false debate about it. It’s as simple as that. Taxes must exist, yet within reason and particularly observing competitiveness with other nations. That checks-and-balances system is worth gold. We shouldn’t mess with it.

Society has to react and force governments to do their homework and sensible tough decision making, looking for the common good, not to protect illegitimate vested interests of minority groups.

Competitiveness Among Nations: Government Downsizing (Part Two)

…Continued from Part One of the series.

The challenge, and the great opportunity that the redomiciliation of corporations for tax purposes offers resides in responding to the market mechanism in an open, sincere and straightforward manner.

Ignoring the strong signals the market mechanism sends does not do any lasting good to anyone. Quite the opposite!

The table in this link provides provides a very powerful content. As it can be seen, in the World Bank’s general ranking of Doing Business 2013, the US is placed in a very high overall position, 4th, only behind Singapore (1st), Hong Kong (2nd), and New Zealand (3rd). That is a laudable accomplishment.

Likewise, the US’ overall standing in the Global Competitiveness Report 2013 of the World Economic Forum is also a very commendable 7th place —ranking 5th the previous year—, very much aligned with the Doing Business Survey already mentioned.

However, when analyzing the Paying Taxes sub-ranking of the Doing Business Report (8th column to the left of the table (click here), the findings are quite worrisome, since the US is placed in a very poor position, 64th, ironically tied with Russia. The distance between ranking #4 in the overall standing and #64 in the tax area couldn’t be more dramatic, a huge misalignment. Naturally, the logical aim is to look for realignment in this most crucial aspect by improving in the tax area not by deteriorating the overall standing.

In a recent speech in the West Coast, President Obama stated “You don’t get to pick which tax rate you pay” also mentioning that US companies that were redomiciling themselves to lower tax countries were “Technically renouncing their U.S citizenship”.

Obama was perfectly right in the second remark, yet a rather irrelevant point (please refer to Chapter 5 of my book, GLOBALIZATION,  “The Dysfunctional Traditional Nationality Concept”), and utterly wrong in the first one. In fact, globalization provides an extraordinary opportunity for the  rationalization of resources, across the whole spectrum and the globe, taxes included. Hence, contrary to Obama’s opinion, corporations have the right to choose and change when deemed convenient, the country where their legal residence will be.

Multinational organizations, by the mere reason of being so, already have been taking (fair) advantage of that condition. To expect a global corporation to behave like a local one is completely out of reason. Granted, global corporations ought to comply with all local laws and regulations in each and every country and jurisdiction they operate; that’s implicit. The core point is where to draw the line between local and global.

Appealing to blind nationalism does not make much sense. Economic principles must prevail at all times. No sensible local (or global) regulation should be aimed at trying to overrule economic principles; otherwise, the corporation’s profitability will be threatened and, at the extreme, even self-sustainability. That, in turn, would hurt the earning power of the citizens whose country is transgressing elementary economic principles (more on this here).

The wellbeing of a nation has to rely on the wellbeing of its citizens, including corporations (corporate citizens); it cannot be any other way. Simply put, the nation is the overall aggregate of many components; citizens and corporations happen to be the major ones.

Insulation and protectionism are terrible malaisses. They have never conducted to prosperity; quite the contrary. (read our article, Does protectionism Protect?)

The very essence of the market mechanism is to send signals to economic (and political, in this instance) actors so they can adjust —hopefully quickly and well— to new realities. At the core of this lie the concepts of limits and discipline —or their lack thereof. In summary, what are the true limits of taxation that governments have?

Undoubtedly, a difficult question to answer. However, and most fortunately, there is a perspective where a reply can be made with full confidence of correctness: the market itself sets the limits of taxation; that is to say, the rest of the world is a most legitimate and valid benchmark.

In this regard, there shouldn’t be any fundamental difference with the business world. The price mechanism —supply and demand— set the guiding lights for market participants. Governments are not and should not be an exception.

From this focus, companies that have moved away from the US to different jurisdictions with substantially lower overall tax rates have done so as an utmost logical response to preserve their economic interests. There is nothing wrong in that behavior, since it’s a very rational way of acting.

The right signal that mature, well-intentioned politicians should get from this trend is that the US has already gone overboard in the taxation area.

It’s time for the US to lower its overall tax structure to regain competitiveness among other nations in this extremely important area. Deregulation will also be of great help towards this end.

cut-spendingFrom another angle, how can nations like Ireland, Singapore, Switzerland, and Canada, just to name a few, not only survive but thrive with a tax structure substantially below the US’s. The answer to this is very simple: by providing a more effective way of doing business to its citizens (individual and corporate), and by having a more efficient management of their public finances, and of their overall tax structure (compared to the US’). It is as simple as that.

Sports provide a very valid and illustrative example of what we are talking about. The beating the German football team gave to Brazil’s in the World Cup Final back in July, was a superb manifestation of the significant superiority of Germany’s team over Brazil’s. Naturally, there are plenty of lessons to learn from this (read Globalization and the Olympics). There is no benefit in trying to hide the truth. Brazil’s team used to be almost unbeatable in its home-turf. Not anymore. If Brasil aims to regain its former global soccer preeminence, it has to adjust, learn, and command new techniques and procedures.

Likewise, countries that are performing poorly against the rest of the world in an specific area  should make the necessary changes to reverse their bad ways, and reposition themselves regaining lost ground.

Ideally, politics shouldn’t be substantially different … but they have been, up to now.

That’s represents a monumental opportunity for improvement in the wellbeing of the citizens of any nation flagrantly losing its competitive advantage, like the US has been doing in the tax area.

Just as every consumer has the inalienable right to choose which cable/internet provider best fits its economic needs, every corporation has the same right to choose where it is more cost efficient to hire personnel, to invest, and yes, also to pay its taxes.

Doing it otherwise, would be exactly the same thing as dictating to consumers which cable/internet provider to compulsory select and/or which toothpaste brand (and company behind it) must be used. A complete non-sense, only partially understandable when considering that successfully overcoming feudal and protectionist instincts and practices has been very difficult for mankind (read more here).

Ignoring market signals —at any level, including the transnational and global one— is as absurd, and foolish, as a person ignoring strong and recurring headaches, trying to solve them only with aspirin. At the individual level, strong and recurring headaches more often than not will imply a severe health imbalance requiring a deeper medical examination.

The US Congress should bite the bullet and go after a profound and sensible reengineering and restructuring of its finances, particularly its costs. If all this is appropriately conceived and executed, it will inexorably mean a drastic reduction of the size of government. Most fortunately, the benefits are humongously higher than the costs implicit in this utmost challenge currently facing the US.

Unfortunately, gridlock and hesitancy are two characteristics usually present in most governments. We all are well aware of the colossal costs they inflict upon society. In the US’ case, the costs of gridlocks are in the hundreds of billions a year, and hundreds of thousands of lost jobs.

The lack in tax competitiveness of the US should be a top priority of its Congress and President. If society does not exert the right pressure to correct this, the consequences will continue to be increasingly damaging to the US economy and its society.

The world should not continue to approach global challenges with mostly local solutions. All too often, local rigidities and dysfunctionalities get in the way of otherwise fair and constructive global processes.

Sound finances are a fundamental pillar of any prosperous nation. In turn, the tax system lies at the hearth of solid finances. When excessive tax rates are at work, the harmful spillover effect to the economy is inescapable. If out of control, consequences can be devastating.

Virtuous cycles can be reached if taxes are sufficient to finance government work. However, when checks and balances are insufficient and ultimately dysfunctional, a pernicious cycle begins to develop.

Judging by the relocation of some prominent US corporations to offshore countries, that pernicious cycle is already in progress in the US. It is both, the responsibility of the executive and the legislative powers to stop and reverse this trend.

Ironically, corporations that are relocating to lower tax jurisdictions, as a side effect, are rendering a most valuable service to their country of origin, by implicitly denouncing the US’ dangerous lack of competitiveness in its tax system.

Part Three of series coming next week.

Integration Vs. Separation

Global-Systems-IntegrationMuch was written in recent weeks and months about Scotland’s separationist movement. Most fortunately, the outcome of last week’s referendum on the subject is that Scotland will remain part of the UK, not becoming an independent nation.

In no way do I intend to be disrespectful to the large minority of Scots that voted for independence. Not at all. My position in this type of issue is based on what works better for the majority in the long run. I am a profoundly political person, in the Aristotelian way: looking for the common good. I am not a partisan person. I have never belonged to any particular affiliation and I try to be, as much as I can, a pragmatist.

Thus, at the end of the day, what really matters is the result of a well done cost/analysis of a possible separation. Indeed, it is hard (if possible at all) to run across any solid, comprehensive case where the benefit of separation of any region within a country far outweighs the associated costs. A notable exception to this would be any instance where civil rights are not fully respected, as was the case of the former USSR satellite countries that as soon as they had a chance when the USSR imploded, they didn’t hesitate to go towards the independence route. That certainly is not the case of Scotland, Catalonia, and many more jurisdictions that are part of a democratic developed nation.

The September 18th referendum on the possibility of Scotland becoming an independent nation must be seen as a wake-up call for the world at large about the risks inherent in separationist movements in different parts of the world, particularly in developed nations.

From my perspective, the major reason against any separationist movement is that the traditional nationality concept is increasingly becoming an anachronism, given its many limitations and inconveniences. As I explain in chapter 5 (Globalization’s Reach and Implications) of my book GLOBALIZATION:

“In many ways the traditional citizenship concept is outdated and obsolete due to the instantaneousness of modern communications and the globalization of the products and services markets. It is no longer functional, and therefore a new approach is needed.

Naturally, all the essential elements related to citizenship are basically immutable. Culture is the most essential element of citizenship, with multiple subdivisions and ramifications, like local art. Specific items essential to the nature of citizenship are language, history, geography, customs, cuisine, music, literature, proverbs, and so on. These concepts are so deeply rooted in the collective psyche that no human power can disrupt them. The cultural and artistic aspects of a nation’s collective are so strong that they cannot be manipulated or modified immediately. However, they are modified—to a degree—in an evolutionary manner, naturally and slowly. Additionally, cultural boundaries do not allow much room for more than gradual marginal changes.

Citizenship’s formal elements are those that basically no longer make sense: borders and currencies…

With the current needs and opportunities the world presents us, it has become consistently clear that our individual and collective mindsets must change into that of a global citizen. This means incorporating our own culture and upbringing into a broader mind frame, that of the global citizen.”

Most regrettably, mankind’s history has been characterized by a myriad of grievances, wars, deaths, misery, territorial annexation by military force, and so on. Theres is no exception to this. However, if constructive and practical thinking is utilized, the cost/benefit of trying to turn the clock backwards in history, trying to restate a past situation, is overwhelmingly tilted towards the cost side. The benefits to be reaped by any possibility of independence are washed away by the multiple costs associated with it, particularly when the independence movement is related to a region with a rather small population —with insufficient economies of scale. That is the case of Scotland and Catalonia, among many others.

In addition to the previous point, from the moral and spiritual perspective, past grievances and offenses must be forgiven. Otherwise, the seeds for perpetual conflict are in place everywhere in the world (i.e., the Arab/Israeli conflict, which has been going on for over two millennials).

However imperfect the current democratic system is (and boy, it truly is!), there does not seem to be a better way to settle differences than through negotiation, and free vote, just as it happened in Scotland. Undoubtedly, the perfect balance won’t be ever achieved, among other things because it is a moving target.

Plenty of mirages and delusions behind most separationist movements surface once a careful analysis is made. The economy, the world, and even psychology do behave in a certain given way. Experience and history unequivocally show it. Hence, a personal perspective, if is not rooted in reality is doomed to failure. The different separationist movements in different parts of  the world are not rooted in a clear understanding of how society and the economy work. Not coincidentally most separationist movements have a profound resemblance to the relatively recent vote in Switzerland whereby severe restrictions to the inflow and long-stay residence of foreigners is going to be limited (see related Post, Does Protectionism Protect?).

Throughout history, Scotland has produced very bright people. Among them, Adam Smith, deservedly known as the father of economics. The big irony being that in the land where the father of economics was born, lived, and died (224 years ago), a significant part of the population does not have a clue about the great findings their brilliant countryman made over two centuries ago. If they did, they would be addressing their cultural and identity efforts in a more constructive direction and manner.

Most certainly society requires a profound structural change. However, the great virtuous change inevitably requires as a prerequisite the preservation and fortifying of the many strengths the current system has, and a very well-calibrated effort to revamp and remove only the major weaknesses. The old adage “If it ain’t broke don’t fix it” must be carefully observed at all times.

The most harmonious way to progress is through teamwork, with collective efforts towards the common good. Unity is a must.

Mankind has struggled a lot to get where it is today, far from the cavemen we used to be thousands of years ago. We all should strive for unity not for divisionism.

Granted, the world is far from perfect. However, it is rather naive to expect a sort of magical solution to most (if not all) challenges by dividing already established nations. That is a misguided effort and objective. Most of the time, separationism is an on-balance value destructive proposition.

Unity within and among nations is a major strength. The myriad of imperfections within the system must be overcome, within the system, not severely impairing or destroying it.

Mankind’s collective knowledge on globalization, integration, and free markets —among other subjects— is a work in progress, and thus with plenty of catching up to do. Nonetheless, when dealing with the integration Vs separation of nations it is already unequivocally clear what works, what doesn’t work, and why. Hence, it is truly sorrowful to still see some separationist movements trying to materialize naive and impractical dreams and aspirations with the wrong approach.

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