Jan 8, 2008
Get set for means test
THE likely shape of means testing in public hospitals, as sketched by the Health Minister yesterday, will be reassuring to most. Patients will be free to choose the subsidised ward class, with no ban placed on the well-off for, say, stays in C class which is subsidised at 80 per cent. A prohibition could divert resources more efficiently to the needy, but it cannot be defended on grounds of equity and fairness. Income will almost certainly be the sole criterion to test means, not patients' property category and liquid assets such as deposit savings and portfolio investments. This is being practical. A convoluted system of including all asset classes will be hard to administer, besides incurring the risk of encouraging fraudulent behaviour.
But Minister Khaw Boon Wan made no mention of the five-day rule, floated last year as a probable cutoff after which means testing will be triggered. This is not so good news, but sensible. Discharge of patients should be made on clinical considerations, not financial cost to the patient or cost to the hospital in that demand for subsidised beds frequently exceeds supply. In any case, the Health Ministry will continually build more subsidised facilities and of a better quality than is available now. The most pleasing aspect of the likely implementation model is the possibility that retirees, besides the long-term unemployed, will not be subject to any other measure of the means test. They will enjoy full subsidy of whichever ward class they choose. This is just, a necessary concession in an ageing society. The retired elderly are the most vulnerable in health, and their dread of medical bills will grow with advancing years. As for the complaint that the wealthy can access subsidies like the needy and the poor, the fact is that the rich elderly sick are more likely to choose treatment in private hospitals.
Two exogenous features arise from Mr Khaw's preview. First, the 'poorest' of middle-income earners who are barely able to make ends meet - the squeezed group with families which earns moderate income, pays taxes and receives no welfare benefits - will expect fair treatment when the quantum of subsidies relative to income is decided. Mr Khaw's assurance that the present profile of B2 and C patients fits the target beneficiaries is not to be taken as a static situation. Second, Singaporeans should consider private hospitalisation insurance to supplement MediShield and employer-provided cover. This is the appropriate response to the coming of the means-test age, the better to prepare for the grey years. Those with spare income would even want to take out disability or critical illness plans to protect themselves against prolonged loss of employment income.
Jan 8, 2008
Sharing limited health-care resources fairly
Health Minister Khaw Boon Wan explained the need for means testing in a speech at Changi General Hospital yesterday
THE health-care challenge, for Singapore and the rest of the world, is a classic case of demand perpetually exceeding supply. Indeed, health- care demand is effectively bottomless. This is because all patients will prefer the best senior consultant to look after them, even if their condition is routine and can be competently handled by others.
Given a choice, patients here in Changi General Hospital (CGH) will want Professor Low Cheng Ooi or Professor Fock Kwong Min to look after them. Those with sports injuries will want to be treated by Dr Ben Tan, never mind if it is only a minor injury.
But there is a limit to how many patients each senior doctor can serve. Unfortunately we have not yet figured out a way to clone these doctors!
This phenomenon is not unique to health care. For instance, the demand for subsidised public housing, whether for purchase or rental, also exceeds supply and we need to distribute it in a fair manner.
HDB way
THE Housing and Development Board provides a range of housing options from one- room rental flats to five-room home ownership flats. While all are subsidised, there are different degrees of subsidy.
For example, three-room flats are smaller than five- room flats but are more heavily subsidised proportionally, as they aim to benefit the lower-income group. Lower-income flat buyers also receive additional housing subsidy through the Additional CPF Housing Grant.
To make sure the smaller flats are allocated to those most in need, applicants are assessed carefully on their financial situation. Specifically, those buying subsidised three- room flats need to satisfy a more stringent income ceiling of $3,000 per month, compared to a higher income ceiling of $8,000 for subsidised five-room flats.
This way, we ensure lower-income Singaporeans do not get crowded out by those who can afford larger HDB flats or private properties. Occasionally, some three-room flat owners also buy Mercedes -Benzes, and then we get complaints from their neighbours that we should not have allowed such luxury-car owners access to three-room flats.
I should clarify that there is no income ceiling for the purchase of resale HDB flats since there is no government subsidy involved, but this may not be clear to those who complain of three-room flat owners driving expensive cars.
The fact that there are such complaints shows that Singaporeans accept the HDB method of sharing limited public housing resources and consider it to be fair. They are therefore upset when they see some people seemingly 'getting around the system'.
MOH way
FOR subsidised hospital services, the Ministry of Health (MOH) has taken a different approach. Like HDB, public hospitals also provide a range of options, from Class C to Class A. While clinical care in all wards is of a high standard, there are distinct differences between the classes.
First, the creature comforts of the ward accommodation are different. Class C has no air-conditioning and offers a very basic level of privacy.
Second, competent doctors are assigned to treat the Class C patients through a roster system, while Class A patients can choose their doctors.
Third, while all emergency patients are immediately attended to regardless of ward class, non-emergency referrals of subsidised patients to specialists generally face a longer waiting time than those for private patients.
But, unlike HDB, patients are free to choose the class of ward, regardless of their financial status. They are charged according to their choice. A patient earning say $10,000 per month can choose Class C and be warded next to another earning $1,000 per month, but both will be subsidised by 80 per cent.
The MOH approach is not without merit. Patients welcome the freedom to choose. Hospital costs are high and patients who require prolonged hospitalisation, especially in ICUs (intensive care units), or the chronic sick who need frequent hospitalisation, do worry about their ability to pay.
Middle-income Singaporeans, for example, are concerned whether any kind of financial assessment may block their access to Class C wards and cause them severe financial hardship should they develop a major complication. Their concerns are valid, and I am well aware of them.
Not sustainable
THE MOH way is, however, not without problems.
First, there is a question of fairness. Last year, health subsidies for Singaporeans exceeded $1.5 billion. While this is not a small sum and we will continue to increase the quantum, it is not unlimited.
A high-income patient occupying a Class C bed does prevent another low-income patient from using that service. When a Class C or B2 ward is full, the high-income patient can easily afford an alternative ward, but a low-income patient faced with such a situation does not have such a choice. An unduly overcrowded Class C or B2 ward thus comes at the expense of the low-income patients.
Second, there is rising expectation of better services from all patients, rich or poor. The MOH approach is based on there being distinct differences in ward accommodation between the subsidised and private wards. The differences used to be stark. For example, Class C ward was 40-bedded, with little privacy.
But as we rebuild public hospitals, we are significantly narrowing the differences between these wards. Class C wards in CGH are 10-bedded and much more comfortable than those in the old Toa Payoh Hospital.
And we would like to continue to raise the standard of physical facilities in the subsidised wards. For example, Class C and B2 patients share communal toilets outside the ward. This is a common complaint from the patients and their relatives.
For the new Khoo Teck Puat Hospital (KTPH), we have decided to move the toilets into the wards. I am sure this will be greatly welcomed by the patients. But in so doing, Class B2 and Class C wards in KTPH will be as comfortable as Class B1, except for the absence of air-conditioning. Indeed, many elderly patients do not regard air-conditioning as a plus.
With such marginal difference in ward facilities, even though fees for Class B1 are more than double those for Class B2 and four times those in Class C, we expect many patients who would normally choose Class B1 to now choose Class B2 or C. This will further reduce the lower- income patients' access to B2 and C facilities.
We have already observed this development in the polyclinics. Over the years, we have significantly improved the polyclinics. Modern polyclinics are much better equipped and organised than many neighbourhood GPs.
We have also increased the number of polyclinic doctors and nurses to cut down waiting times by patients. But these improvements in service standards do not have lasting effect. As soon as we reduce waiting times, even more patients who used to visit GPs are drawn into polyclinics, for better care at much reduced fees.
By improving facilities and service standards primarily for the benefit of lower-income patients, we have inadvertently driven up patient numbers all over again, and we are then back to the same problem of over-crowding and long waiting times.
Economists' way
ECONOMISTS are familiar with this phenomenon of demand exceeding supply, and have studied options on how to solve the allocation problem. There are two ways to distribute limited supply: either raise the price until supply equals demand, or let the queue mechanism sort out the distribution. Those who can afford private treatment but cannot afford to wait will leave the queue and go elsewhere.
We know some subsidised patients are unhappy with long waiting times. Our priority is to make sure the waiting times for the various conditions do not compromise patient care from a clinical point of view. Patients who need to be seen fairly quickly will be seen early. But beyond that, subsidised patients will need to endure some waiting.
MOH would very much like to improve care for subsidised patients, whether in polyclinics or in hospitals. But if significant improvement results in us drawing in patients who can well afford private treatment, our efforts will be nullified.
A third way
WE NEED a third way to share the limited health-care resources among competing demands. The question is how to do so fairly.
The extreme cases are easily addressed. All emergency cases should be treated immediately by the most competent doctors available. A patient's ability to pay should not be a barrier to life-saving services.
On the other extreme, demand for frills and cosmetic services can be left to the market, leaving patients to choose the providers based on their preference and what they are prepared to pay. Many Singaporeans, for example, seem happy to fork out thousands of dollars for non-medically necessary Lasik services provided by private operators.
Between these extremes lie a wide range of health-care services to address differing needs and ability to pay. For example, the use of generic medicine helps to keep health-care costs low but without compromising the outcome. Hence our policy is to only prescribe generic drugs for subsidised patients where generics are available. This is the right thing to do, but in the private wards we do allow brand-name drugs for patients who are prepared to pay for them.
With higher expectations, subsidised patients are increasingly demanding a higher level of care, including access to non-standard drugs based on their perceptions of what they need. With economic growth and rising standards of living, we can afford better treatments. We would like to extend such benefits to subsidised patients too. But we must do so in a way which does not unwittingly draw in patients who would have chosen the private wards.
The most logical way to address this contradiction is to apply the principle that higher-income patients should co- pay more for the same treatment than lower-income patients, if they choose to be treated in the subsidised wards. The former should get less subsidy than the latter. That is a fair and practical way to share limited health- care resources.
The lower-income patients will not be affected by this approach, but I know middle-income patients are particularly worried. While the principle is easy to explain, the implementation details worry a lot of people. We have studied this issue for some time and will continue to discuss the details with unionists, fellow MPs and the public. I am confident I can find a way of doing this which is fair to all and which does not impose unnecessary burdens on patients.
I think a fair way of doing this must fulfil five criteria:
First, patients must retain the freedom to choose. Rich or poor, they must be able to choose, say, a Class B2 ward if they wish. Anybody can choose to be admitted to a subsidised ward.
Second, all patients in Class C and B2 will be subsidised, but to different degrees. Higher-income patients will be subsidised less than lower-income patients, but their bills will remain affordable. For example, a better-off patient in Class B2 will still get higher subsidy than if he opts for Class B1, and should find his bill affordable.
Third, given the acute nature of hospitalisation, we need a simple way to make an assessment. The way it is done in nursing homes, whereby the entire family's income is ascertained, cannot be applied. We need a different approach. For example, we may base it on the patient's individual eligibility. Furthermore, any assessment of the patient's financial status should preferably be automated, based on objective evidence, such as wages as declared to Iras (Inland Revenue Authority of Singapore) or CPF Board.
Fourth, we will be sensitive to the circumstances of retirees and others who are not working. Without any income, they are particularly fearful that any chronic disease may wipe out their past savings. If we use their housing type to assess their eligibility, we may deliberately set the threshold at a sufficiently high level.
Fifth, no patient should be denied treatment because he cannot afford it. We will be flexible in implementation so that, at the margins, we will always give patients the benefit of the doubt. All needy citizens will remain protected by Medifund, the ultimate safety net for patients.
The implementation details will need to be fleshed out, but I feel confident we can work out a way to allocate health-care subsidies fairly to all segments of the population. Currently the profile of patients in Class C and Class B2 largely reflects our intended target beneficiaries of these wards. What this means is that a majority of Singaporeans should continue to receive the same level of subsidies as they do today and will not be affected.
Nevertheless, we need to put the system in place now, so that as we pump in more resources to upgrade the subsidised wards, we do not unwittingly cannibalise the private wards and services at the expense of the low-income patients. Our objective is to safeguard our current high standard of public hospitals and to ensure that all patients who need the care continue to receive it in a timely manner.
I hope to get your support for this proposal.
--------------------------------------------------------------------------------
REST ASSURED
No patient should be denied treatment because he cannot afford it. We will be flexible in implementation so that, at the margins, we will always give patients the benefit of the doubt. All needy citizens will remain protected by Medifund, the ultimate safety net for patients.
Thursday, January 10, 2008
CHINA'S ONE-CHILD RULE - 7 Jan
CHINA'S ONE-CHILD RULE
Communist Party expels 500 for defying policy
BEIJING - THE authorities in central China have expelled 500 people from the Communist Party for defying the country's one-child policy, state media said yesterday.
In Hubei province, 93,084 people breached the policy last year, including 1,678 officials, the Xinhua news agency said, citing the provincial family planning commission.
Among the offenders, 500 were expelled from the Communist Party, 395 were dismissed from their posts and seven national and local lawmakers lost their political status.
No information was given as to the punishments meted out to the more than 90,000 other people.
China has been trying to crack down on officials and the wealthy who ignore its strict family planning laws. Being expelled from the party is a very serious punishment.
Under a policy implemented in the late 1970s, most urban couples are limited to one child and rural families to two to control population growth and conserve natural resources.
China's 1.3 billion people account for 20 per cent of the world's total. The government has pledged to keep the population under 1.36 billion in 2010, and under 1.45 billion in 2020.
But rising incomes mean some newly rich - such as businessmen and entertainment stars - can afford to break the rules and pay the resulting fines.
'More party members, celebrities and well-off people are violating the policies in recent years, which has undermined social equality,' Mr Yang Youwang, director of Hubei's family planning commission, was quoted as saying by Xinhua.
ASSOCIATED PRESS, REUTERS
Communist Party expels 500 for defying policy
BEIJING - THE authorities in central China have expelled 500 people from the Communist Party for defying the country's one-child policy, state media said yesterday.
In Hubei province, 93,084 people breached the policy last year, including 1,678 officials, the Xinhua news agency said, citing the provincial family planning commission.
Among the offenders, 500 were expelled from the Communist Party, 395 were dismissed from their posts and seven national and local lawmakers lost their political status.
No information was given as to the punishments meted out to the more than 90,000 other people.
China has been trying to crack down on officials and the wealthy who ignore its strict family planning laws. Being expelled from the party is a very serious punishment.
Under a policy implemented in the late 1970s, most urban couples are limited to one child and rural families to two to control population growth and conserve natural resources.
China's 1.3 billion people account for 20 per cent of the world's total. The government has pledged to keep the population under 1.36 billion in 2010, and under 1.45 billion in 2020.
But rising incomes mean some newly rich - such as businessmen and entertainment stars - can afford to break the rules and pay the resulting fines.
'More party members, celebrities and well-off people are violating the policies in recent years, which has undermined social equality,' Mr Yang Youwang, director of Hubei's family planning commission, was quoted as saying by Xinhua.
ASSOCIATED PRESS, REUTERS
Spoils of war 0 7 Jan
MILITARY OPERATIONS
Spoils of war
By Robert Karniol, Defence Writer
PHOTO: REUTERS
A COVERT US programme involving the disposal of military equipment captured from Iraqi forces during the 1990-1991 Gulf War appears to have been broader in scope than originally thought, suggesting that similar activities may remain pervasive.
The Washington Post revealed in October 1991 that Afghan guerillas were deploying tanks, artillery, mortars and other equipment captured in the Gulf War to support a major offensive against Gardez, a government-held garrison in eastern Afghanistan. Mujahideen officials said the material had been supplied by the United States, Pakistan and Saudi Arabia.
The report had few details of the covert programme, reflecting uncertainty over the methodology and the amount of material involved. But it did provide some political context to the arrangement.
'The shipments of captured Iraqi equipment were authorised (in 1991), when the US and other supporters of the mujahideen were pursuing a two-track policy of backing diplomatic efforts to find a peaceful solution to the 12- year-old Afghan war while at the same time maintaining military pressure on Kabul's Soviet-backed government,' the article stated.
Beyond the glare of interest in the high-profile Afghan conflict, former Iraqi military equipment was later provided to several other recipients.
Bangladesh quietly obtained 40 tanks from captured Iraqi stocks in 1993, together with an unknown number of armoured personnel carriers (APCs). The former were mainly a mix of T-54/55 and Type 59 main battle tanks.
'We were last on the list,' a Bangladeshi source said.
The source identified the other recipients as Egypt, Pakistan and Syria. A retired senior US State Department official subsequently confirmed these four allocations while adding Saudi Arabia to the list.
The five countries named were all members of the 35-nation US-led coalition which came together under United Nations authorisation to liberate Kuwait from Iraqi occupation. Pakistan and Saudi Arabia appear to have used the Iraqi kit to support their allies in Afghanistan, while Bangladesh integrated the equipment it received with its own arsenal. It is not known what Egypt and Syria did with their windfall allocations.
But two of these countries, Pakistan and Syria, were subject to US arms sanctions.
US sanctions on Pakistan were based on the 1985 Pressler Amendment, which banned most US military and economic aid if the US president was unable to determine annually that Pakistan did not have nuclear arms.
This determination was withheld for the first time in 1990. Sanctions against Damascus were based on Syria's inclusion from 1979 on the US State Department's list of State Sponsors of Terrorism, and were firmed up under the 1989 Anti-Terrorism and Arms Export Control Act.
These constraints suggest it would have been domestically unlawful for the US administration to provide the two countries with captured Iraqi equipment. However, a point raised by the Bangladeshi source suggests how this may have been bypassed.
Asked who gave the tanks and APCs to Dhaka, he said they were a gift from the government of Kuwait. The basis for Kuwait's claim of ownership remains unclear.
The Straits Times was unable to query the government of Kuwait on this point, and an attempt several years ago to discuss the issue with then Iraqi leader Saddam Hussein proved unsuccessful. A request for related documents to the US Central Intelligence Agency (CIA) under the Freedom of Information Act (FOIA) elicited a hazy response that seems to confirm the programme's existence without providing any further insight.
'We located material that we determined is currently and properly classified and must be withheld in its entirety on the basis of FOIA exemptions (b) (1) and (b) (3),' the CIA stated in a letter from its Information and Privacy Coordinator.
'We also located US government material that CIA did not originate (and) we referred this material to its originating agency for review as it appears to be relevant to your request. That agency will respond to you directly.'
This unnamed agency never did respond. Similarly, the US Department of Defence did not answer a separate query on whether any war material captured from Iraq during the current conflict there has been distributed to any third party or provided to another US agency for such purpose.
Washington discreetly maintains an extensive structure focused on obtaining foreign military equipment.
'All the services have programmes directed at the acquisition of foreign material, and there are also some private 'contractors' involved,' said a retired US military officer who was directly involved in such efforts.
'The Defence Intelligence Agency (under the Defence Department) has its own section, the Foreign Material Office, whose activities are mainly overt although there are also covert programmes. The 'dark side' (CIA) has a parallel office but I can't remember the name, and if I did I probably couldn't tell you.
'The main purpose of these offices is in intelligence acquisition. Some of the equipment, once exploited, I assume went to Opfor (opposition forces) training centres.
'In theory, the information obtained is made available to all branches of the military. There were Defence Department coordination conferences in which we discussed what was being collected and what we wanted to collect.'
This system is operated under some sort of oversight process, whose workings are unclear. 'On one occasion we had to give something back because someone deemed that the item had not been 'correctly' obtained,' the former military source said.
Others suggested this system of oversight does not appear to include a requirement for the issuance of end-user certificates, making spoils of war ideal for covert transfer to a third party. End-user certificates are a formal control mechanism used by countries to ensure that legitimately exported military equipment is used for its stated purpose.
The US Defence Department never responded to a query on whether the transfer of captured war material requires an end-user certificate.
Regardless of this reticence, the use of captured war material for political benefit is not unique to the US. A French source said Paris did much the same with Soviet military kit captured from Libyan forces fighting in Chad in the 1980s, covertly transferring some of this equipment to friendly forces in Africa.
But there is a subtle difference between the French and US programmes: France was fighting independently in Chad, whereas US forces were in Iraq as part of a military coalition. Presumably, under the latter circumstances, the disposal of captured war material would be subject to a form of collective decision.
Clearly, this was not the case in the Gulf War. And this raises intriguing questions about future coalition-type military operations.
rkarniol@gmail.com
Spoils of war
By Robert Karniol, Defence Writer
PHOTO: REUTERS
A COVERT US programme involving the disposal of military equipment captured from Iraqi forces during the 1990-1991 Gulf War appears to have been broader in scope than originally thought, suggesting that similar activities may remain pervasive.
The Washington Post revealed in October 1991 that Afghan guerillas were deploying tanks, artillery, mortars and other equipment captured in the Gulf War to support a major offensive against Gardez, a government-held garrison in eastern Afghanistan. Mujahideen officials said the material had been supplied by the United States, Pakistan and Saudi Arabia.
The report had few details of the covert programme, reflecting uncertainty over the methodology and the amount of material involved. But it did provide some political context to the arrangement.
'The shipments of captured Iraqi equipment were authorised (in 1991), when the US and other supporters of the mujahideen were pursuing a two-track policy of backing diplomatic efforts to find a peaceful solution to the 12- year-old Afghan war while at the same time maintaining military pressure on Kabul's Soviet-backed government,' the article stated.
Beyond the glare of interest in the high-profile Afghan conflict, former Iraqi military equipment was later provided to several other recipients.
Bangladesh quietly obtained 40 tanks from captured Iraqi stocks in 1993, together with an unknown number of armoured personnel carriers (APCs). The former were mainly a mix of T-54/55 and Type 59 main battle tanks.
'We were last on the list,' a Bangladeshi source said.
The source identified the other recipients as Egypt, Pakistan and Syria. A retired senior US State Department official subsequently confirmed these four allocations while adding Saudi Arabia to the list.
The five countries named were all members of the 35-nation US-led coalition which came together under United Nations authorisation to liberate Kuwait from Iraqi occupation. Pakistan and Saudi Arabia appear to have used the Iraqi kit to support their allies in Afghanistan, while Bangladesh integrated the equipment it received with its own arsenal. It is not known what Egypt and Syria did with their windfall allocations.
But two of these countries, Pakistan and Syria, were subject to US arms sanctions.
US sanctions on Pakistan were based on the 1985 Pressler Amendment, which banned most US military and economic aid if the US president was unable to determine annually that Pakistan did not have nuclear arms.
This determination was withheld for the first time in 1990. Sanctions against Damascus were based on Syria's inclusion from 1979 on the US State Department's list of State Sponsors of Terrorism, and were firmed up under the 1989 Anti-Terrorism and Arms Export Control Act.
These constraints suggest it would have been domestically unlawful for the US administration to provide the two countries with captured Iraqi equipment. However, a point raised by the Bangladeshi source suggests how this may have been bypassed.
Asked who gave the tanks and APCs to Dhaka, he said they were a gift from the government of Kuwait. The basis for Kuwait's claim of ownership remains unclear.
The Straits Times was unable to query the government of Kuwait on this point, and an attempt several years ago to discuss the issue with then Iraqi leader Saddam Hussein proved unsuccessful. A request for related documents to the US Central Intelligence Agency (CIA) under the Freedom of Information Act (FOIA) elicited a hazy response that seems to confirm the programme's existence without providing any further insight.
'We located material that we determined is currently and properly classified and must be withheld in its entirety on the basis of FOIA exemptions (b) (1) and (b) (3),' the CIA stated in a letter from its Information and Privacy Coordinator.
'We also located US government material that CIA did not originate (and) we referred this material to its originating agency for review as it appears to be relevant to your request. That agency will respond to you directly.'
This unnamed agency never did respond. Similarly, the US Department of Defence did not answer a separate query on whether any war material captured from Iraq during the current conflict there has been distributed to any third party or provided to another US agency for such purpose.
Washington discreetly maintains an extensive structure focused on obtaining foreign military equipment.
'All the services have programmes directed at the acquisition of foreign material, and there are also some private 'contractors' involved,' said a retired US military officer who was directly involved in such efforts.
'The Defence Intelligence Agency (under the Defence Department) has its own section, the Foreign Material Office, whose activities are mainly overt although there are also covert programmes. The 'dark side' (CIA) has a parallel office but I can't remember the name, and if I did I probably couldn't tell you.
'The main purpose of these offices is in intelligence acquisition. Some of the equipment, once exploited, I assume went to Opfor (opposition forces) training centres.
'In theory, the information obtained is made available to all branches of the military. There were Defence Department coordination conferences in which we discussed what was being collected and what we wanted to collect.'
This system is operated under some sort of oversight process, whose workings are unclear. 'On one occasion we had to give something back because someone deemed that the item had not been 'correctly' obtained,' the former military source said.
Others suggested this system of oversight does not appear to include a requirement for the issuance of end-user certificates, making spoils of war ideal for covert transfer to a third party. End-user certificates are a formal control mechanism used by countries to ensure that legitimately exported military equipment is used for its stated purpose.
The US Defence Department never responded to a query on whether the transfer of captured war material requires an end-user certificate.
Regardless of this reticence, the use of captured war material for political benefit is not unique to the US. A French source said Paris did much the same with Soviet military kit captured from Libyan forces fighting in Chad in the 1980s, covertly transferring some of this equipment to friendly forces in Africa.
But there is a subtle difference between the French and US programmes: France was fighting independently in Chad, whereas US forces were in Iraq as part of a military coalition. Presumably, under the latter circumstances, the disposal of captured war material would be subject to a form of collective decision.
Clearly, this was not the case in the Gulf War. And this raises intriguing questions about future coalition-type military operations.
rkarniol@gmail.com
Majority of S'poreans won't have to pay more with means testing
Jan 7, 2008
Majority of S'poreans won't have to pay more with means testing
By Salma Khalik, Health Correspondent
HEALTH Minister Khaw Boon Wan on Monday answered one major question over means testing at public hospitals: Will Singaporeans have to pay more?
Not the majority of those who currently opt for the heavily subsidised C and B2 class wards, he said.
His message would likely bring cheer to Singaporeans worried that means testing would mean higher medical costs for them.
He also promised that people would still be free to choose their preferred ward class. The difference is that the rich will get a lower subsidy for that class than the poor.
Determining the level of subsidy will also be made easy, possibly even automated, if based on salaries declared in tax or CPF returns.
The type of housing one lives in could be considered in determining subsidies for retirees, housewives, children and the unemployed.
But here too, Mr Khaw has promised to be generous, with possibly all HDB residents and those living in lower-end private housing continuing to enjoy current subsidy rates.
Mr Khaw said a deadline had not been set for implementing means testing but its introduction is inevitable.
It will enable the government to provide better care for the poor in future, without also attracting the well-off to compete for scarce resources.
'We do not begrudge lower-income patients the improvements in service which we can now better afford,' the minister said.
But, he added: 'If significant improvement results in us drawing in patients who can well afford private treatment, our efforts will be nullified.'
A high-income patient occupying a Class C bed does deprive a low-income patient - who has no alternative - of using that service.
Currently, 9 per cent of C class patients and 13 per cent of B2 patients are from families who are in the income bracket of the top 20 per cent.
Last year, the ministry spent $1.5 billion in health subsidies. This amount will go up over the years, but there is a limit. Means testing is needed as a 'a fair and pragmatic way to allocate limited healthcare resources,' he explained.
Addressing the fears of the middle-income group that means testing would drive up costs considerably, Mr Khaw promised to err on the side of generosity.
At a briefing of health-care professionals at Changi General Hospital on Monday, he said these were valid concerns which would be taken into account in the planning.
He is aware that frequent hospitalisation for the chronic sick, prolonged hospitalisation or major complications can cause 'severe financial hardship'.
On Monday, he gave the same assurance he has given on previous occasions: 'We will be flexible in implementation so that at the margins, we will always give patients the benefit of the doubt.'
In the short term, he said, the 'majority of Singaporeans should continue to receive the same level of subsidies as they do today and will not be affected.'
Feedback over the next few months will help determine the income cut-off point, and how much subsidy to give richer patients. The first public dialogue will be held on Sunday with about 500 participants from the People's Association.
In the same way that MediShield reforms were introduced after much public discussion, Mr Khaw said he preferred to have all concerns ironed out before pressing ahead with the scheme.
Read the full report in Tuesday's edition of The Straits Times.
Majority of S'poreans won't have to pay more with means testing
By Salma Khalik, Health Correspondent
HEALTH Minister Khaw Boon Wan on Monday answered one major question over means testing at public hospitals: Will Singaporeans have to pay more?
Not the majority of those who currently opt for the heavily subsidised C and B2 class wards, he said.
His message would likely bring cheer to Singaporeans worried that means testing would mean higher medical costs for them.
He also promised that people would still be free to choose their preferred ward class. The difference is that the rich will get a lower subsidy for that class than the poor.
Determining the level of subsidy will also be made easy, possibly even automated, if based on salaries declared in tax or CPF returns.
The type of housing one lives in could be considered in determining subsidies for retirees, housewives, children and the unemployed.
But here too, Mr Khaw has promised to be generous, with possibly all HDB residents and those living in lower-end private housing continuing to enjoy current subsidy rates.
Mr Khaw said a deadline had not been set for implementing means testing but its introduction is inevitable.
It will enable the government to provide better care for the poor in future, without also attracting the well-off to compete for scarce resources.
'We do not begrudge lower-income patients the improvements in service which we can now better afford,' the minister said.
But, he added: 'If significant improvement results in us drawing in patients who can well afford private treatment, our efforts will be nullified.'
A high-income patient occupying a Class C bed does deprive a low-income patient - who has no alternative - of using that service.
Currently, 9 per cent of C class patients and 13 per cent of B2 patients are from families who are in the income bracket of the top 20 per cent.
Last year, the ministry spent $1.5 billion in health subsidies. This amount will go up over the years, but there is a limit. Means testing is needed as a 'a fair and pragmatic way to allocate limited healthcare resources,' he explained.
Addressing the fears of the middle-income group that means testing would drive up costs considerably, Mr Khaw promised to err on the side of generosity.
At a briefing of health-care professionals at Changi General Hospital on Monday, he said these were valid concerns which would be taken into account in the planning.
He is aware that frequent hospitalisation for the chronic sick, prolonged hospitalisation or major complications can cause 'severe financial hardship'.
On Monday, he gave the same assurance he has given on previous occasions: 'We will be flexible in implementation so that at the margins, we will always give patients the benefit of the doubt.'
In the short term, he said, the 'majority of Singaporeans should continue to receive the same level of subsidies as they do today and will not be affected.'
Feedback over the next few months will help determine the income cut-off point, and how much subsidy to give richer patients. The first public dialogue will be held on Sunday with about 500 participants from the People's Association.
In the same way that MediShield reforms were introduced after much public discussion, Mr Khaw said he preferred to have all concerns ironed out before pressing ahead with the scheme.
Read the full report in Tuesday's edition of The Straits Times.
SWF
THE ARGUMENT FOR SWFs - 4 Jan 2008
A force for financial stability
By Janadas Devan
IN 1913, after the British Royal Navy had converted its fleet from coal to oil, the First Lord of the Admiralty, Winston Churchill, made an investment on behalf of the British government. He never had much business sense - accounts gave him headaches, he admitted - but he had very fine strategic instincts.
On the lookout for assured oil supplies within the British sphere of influence, he zeroed in on Persia, now Iran. There he established the Anglo- Persian Oil Company with an initial capital outlay of £2.2 million. The Anglo-Persian Oil Company is now none other than BP or British Petroleum, one of the world's largest and most successful companies. The British government has hardly made a more spectacularly profitable investment since.
How would what Churchill did in 1913 differ from what the Chinese government is doing today, making strategic investments in energy companies throughout the world? On a smaller but no less significant scale, how would what Singapore's GIC and Temasek do, investing on behalf of the Singapore Government, differ from Churchill's grand coup in Persia?
There is really no difference - other than that Churchill was British, White and Western, and Chinese and Singaporeans are not. The British government in 1913 did not make investments through a so-called 'sovereign wealth fund' (SWF), but that is a minor detail. Governments have long made such investments; these investments have long been strategic in nature; Arab and Asian governments were hardly the first in the field.
Indeed, though most of the world's three-dozen odd SWFs today are Arab or Asian, they did not invent the vehicle. As both Mr Benoit Coeure of the French Treasury and Mr Philipp Hildebrand of the Swiss National Bank have noted in recent papers, the world's first SWF was founded in 1816 - France's Caisse des Dep�ts et Consignations, which still exists.
In the contemporary era, Americans were among the first to establish an SWF - the Alaska Permanent Reserve Fund, founded in 1976, five years before the Government of Singapore Investment Corporation (GIC) was set up. GIC's founders, Minister Mentor Lee Kuan Yew and former deputy prime minister Goh Keng Swee, were bold and audacious - they could not have known in 1981 that Singapore would continue to accumulate reserves in the following decades - but they did not invent SWFs.
So what is all the fuss about? Are SWFs really a threat to free markets, vehicles for the 'cross-border nationalisation' of private companies, as some media commentaries have made them out to seem? Are they so threatening as to need monitoring and regulation?
SWFs have indeed grown in the past decade, largely because of rising oil prices and America's burgeoning current account deficit, 'which currently absorbs about 60 per cent of the world's aggregate current account surpluses', according to Mr Hildebrand. By definition, China, Japan, Singapore and the other surplus countries cannot accumulate net financial claims on foreigners if the United States - as well as the United Kingdom, France and other countries - did not simultaneously accumulate net financial deficits.
The International Monetary Fund (IMF) estimates that the combined assets of SWFs today total between US$1.9 trillion (S$2.7 trillion) and US$2.9 trillion. Arab sovereign funds command more than 50 per cent of these assets and those from Asia only 27 per cent. A recent Morgan Stanley study forecast that SWFs would grow to US$12 trillion by 2015.
That is indeed a large sum. But as Mr Hildebrand points out, 'such simplistic linear forecasts (of SWF growth) will likely prove to have been flawed'. They assume oil prices will remain high and that Asian countries will continue to amass surpluses at the current rate.
More to the point, as large as SWFs have become, they pale in comparison to other players in international markets. Insurance companies, for instance, hold US$18.5 trillion in assets, mutual funds US$19.3 trillion and pension funds US$21.6 trillion.
Indeed, SWFs account for just 1.3 per cent of the estimated US$190 trillion in total global financial assets. That may be a greater sum than the assets of hedge funds, but only seemingly so. As GIC deputy chairman and executive director Tony Tan pointed out recently, because hedge funds operate with substantial leverage, they effectively control larger assets than SWFs.
And though they trade far more actively than SWFs - with destabilising effects sometimes, as we discovered during the 1997-1998 Asian financial crisis - the US government has consistently refused to regulate hedge funds.
In contrast, as US Deputy Treasury Secretary Robert Kimmitt acknowledged in the last issue of Foreign Affairs: 'SWFs are in principle long-term investors, which typically do not deviate from their strategic asset allocations in the face of short-term volatility. They are not highly leveraged, and it is difficult to see how they could be forced by regulatory capital requirements or sudden investor withdrawals to liquidate their positions quickly. In this context, SWFs may be considered a force for financial stability.'
The on-going sub-prime mortgage crisis in the US, during which SWFs have pumped more than US$60 billion into Western financial institutions, proves Mr Kimmitt's point.
There are good reasons for drawing up guidelines for SWFs, as the IMF and the World Bank have been tasked to do by April this year. Better disclosure in the interest of transparency, better internal governance and risk- management practices, clearer investment objectives - these would be in the interest not only of recipient countries but also of the SWFs themselves, which are ultimately owned by citizens.
There can be no objection to guidelines that 'encourage SWFs to operate according to commercial principles with a long-term objective, free from political consideration', as Dr Tan put it. In addition, to prevent a backlash, it may well be prudent if SWFs refrained from taking controlling stakes in iconic First World companies.
What would be tragic is if SWFs - either because of an exaggerated view of their power or a false picture of their activities - gave rise to financial protectionism in developed countries. Both recipient as well as originating countries of sovereign funds will suffer if this were to happen.
SWFs, after all, are now a source of capital flows from what used to be the periphery to what used to be the centre. What was fine in 1913, when the flow went in the opposite direction, cannot not be fine now. Just as parts of the periphery suffered when they restricted such flows before, the centre will too if it did the same.
janadas@sph.com.sg
A force for financial stability
By Janadas Devan
IN 1913, after the British Royal Navy had converted its fleet from coal to oil, the First Lord of the Admiralty, Winston Churchill, made an investment on behalf of the British government. He never had much business sense - accounts gave him headaches, he admitted - but he had very fine strategic instincts.
On the lookout for assured oil supplies within the British sphere of influence, he zeroed in on Persia, now Iran. There he established the Anglo- Persian Oil Company with an initial capital outlay of £2.2 million. The Anglo-Persian Oil Company is now none other than BP or British Petroleum, one of the world's largest and most successful companies. The British government has hardly made a more spectacularly profitable investment since.
How would what Churchill did in 1913 differ from what the Chinese government is doing today, making strategic investments in energy companies throughout the world? On a smaller but no less significant scale, how would what Singapore's GIC and Temasek do, investing on behalf of the Singapore Government, differ from Churchill's grand coup in Persia?
There is really no difference - other than that Churchill was British, White and Western, and Chinese and Singaporeans are not. The British government in 1913 did not make investments through a so-called 'sovereign wealth fund' (SWF), but that is a minor detail. Governments have long made such investments; these investments have long been strategic in nature; Arab and Asian governments were hardly the first in the field.
Indeed, though most of the world's three-dozen odd SWFs today are Arab or Asian, they did not invent the vehicle. As both Mr Benoit Coeure of the French Treasury and Mr Philipp Hildebrand of the Swiss National Bank have noted in recent papers, the world's first SWF was founded in 1816 - France's Caisse des Dep�ts et Consignations, which still exists.
In the contemporary era, Americans were among the first to establish an SWF - the Alaska Permanent Reserve Fund, founded in 1976, five years before the Government of Singapore Investment Corporation (GIC) was set up. GIC's founders, Minister Mentor Lee Kuan Yew and former deputy prime minister Goh Keng Swee, were bold and audacious - they could not have known in 1981 that Singapore would continue to accumulate reserves in the following decades - but they did not invent SWFs.
So what is all the fuss about? Are SWFs really a threat to free markets, vehicles for the 'cross-border nationalisation' of private companies, as some media commentaries have made them out to seem? Are they so threatening as to need monitoring and regulation?
SWFs have indeed grown in the past decade, largely because of rising oil prices and America's burgeoning current account deficit, 'which currently absorbs about 60 per cent of the world's aggregate current account surpluses', according to Mr Hildebrand. By definition, China, Japan, Singapore and the other surplus countries cannot accumulate net financial claims on foreigners if the United States - as well as the United Kingdom, France and other countries - did not simultaneously accumulate net financial deficits.
The International Monetary Fund (IMF) estimates that the combined assets of SWFs today total between US$1.9 trillion (S$2.7 trillion) and US$2.9 trillion. Arab sovereign funds command more than 50 per cent of these assets and those from Asia only 27 per cent. A recent Morgan Stanley study forecast that SWFs would grow to US$12 trillion by 2015.
That is indeed a large sum. But as Mr Hildebrand points out, 'such simplistic linear forecasts (of SWF growth) will likely prove to have been flawed'. They assume oil prices will remain high and that Asian countries will continue to amass surpluses at the current rate.
More to the point, as large as SWFs have become, they pale in comparison to other players in international markets. Insurance companies, for instance, hold US$18.5 trillion in assets, mutual funds US$19.3 trillion and pension funds US$21.6 trillion.
Indeed, SWFs account for just 1.3 per cent of the estimated US$190 trillion in total global financial assets. That may be a greater sum than the assets of hedge funds, but only seemingly so. As GIC deputy chairman and executive director Tony Tan pointed out recently, because hedge funds operate with substantial leverage, they effectively control larger assets than SWFs.
And though they trade far more actively than SWFs - with destabilising effects sometimes, as we discovered during the 1997-1998 Asian financial crisis - the US government has consistently refused to regulate hedge funds.
In contrast, as US Deputy Treasury Secretary Robert Kimmitt acknowledged in the last issue of Foreign Affairs: 'SWFs are in principle long-term investors, which typically do not deviate from their strategic asset allocations in the face of short-term volatility. They are not highly leveraged, and it is difficult to see how they could be forced by regulatory capital requirements or sudden investor withdrawals to liquidate their positions quickly. In this context, SWFs may be considered a force for financial stability.'
The on-going sub-prime mortgage crisis in the US, during which SWFs have pumped more than US$60 billion into Western financial institutions, proves Mr Kimmitt's point.
There are good reasons for drawing up guidelines for SWFs, as the IMF and the World Bank have been tasked to do by April this year. Better disclosure in the interest of transparency, better internal governance and risk- management practices, clearer investment objectives - these would be in the interest not only of recipient countries but also of the SWFs themselves, which are ultimately owned by citizens.
There can be no objection to guidelines that 'encourage SWFs to operate according to commercial principles with a long-term objective, free from political consideration', as Dr Tan put it. In addition, to prevent a backlash, it may well be prudent if SWFs refrained from taking controlling stakes in iconic First World companies.
What would be tragic is if SWFs - either because of an exaggerated view of their power or a false picture of their activities - gave rise to financial protectionism in developed countries. Both recipient as well as originating countries of sovereign funds will suffer if this were to happen.
SWFs, after all, are now a source of capital flows from what used to be the periphery to what used to be the centre. What was fine in 1913, when the flow went in the opposite direction, cannot not be fine now. Just as parts of the periphery suffered when they restricted such flows before, the centre will too if it did the same.
janadas@sph.com.sg
Innovation sparks
Jan 4, 2008
ECONOMIC PROSPERITY
Innovation's bright sparks
By Lam Chuan Leong, For The Straits Times
INNOVATION is now accepted by economists as essential to economic growth. But how does innovation drive markets and vice-versa? What conditions favour innovation?
Innovation consists of two phases: a generative phase and an extrapolative phase.
Because extrapolative innovation is about increasing order and knowledge, I shall refer to it as O-type innovation. O-type innovation is at the heart of most initiatives undertaken by businesses and governments. It uses expert knowledge and processes to identify and solve problems. For example, what the customer needs.
O-type innovation needs a constant supply of new ideas. This is the role of generative innovation. I call the introduction of these ideas V-type innovation to stress their role in increasing variety.
V-type innovation requires an ability to take advantage of unexpected opportunities, and relies on the ability to 'connect' existing ideas that have not previously been linked. These are characteristics usually associated with entrepreneurship.
V-type innovation may be compared to a furnace that supplies the energy to power the O-type, or extrapolative, phase of innovation. These two types work in tandem to create the 'Innovation Cycle', which is the engine of long- term economic growth.
Four factors favour V-type innovation:
1. Free Flow and Spread of Information
First, the free flow and diffusion of information. This is critical to both types of innovation. Without the knowledge of previous generations, even geniuses would have to re-invent the wheel.
Historically, economic growth and prosperity are strongest during those periods when there is a surge of new ideas and inventions brought about by V-type innovation. For example, the growth cycles following the invention of the steam engine, the motor car, electricity and the railroads.
This idea is consistent with neo-classical growth theory, which suggests that technical progress is the key to long-term growth. In other words, it allows us to escape the tyranny of diminishing returns from the traditional inputs of labour and capital.
2. Make it Easy - Free Market Entry and Exit
Second, free market entry and exit. Economies that make it easy for people to start new businesses have a better chance to produce innovation. This is especially so for radically new ideas, which rarely find rapid acceptance. Inventors must find a way to develop a prototype. So it is important that innovators can set up businesses easily to commercialise their ideas.
India claims to have a market- based system, but suffers a lower rate of growth because it has an onerous licensing regime that makes it difficult to set up a business. China did not allow for private business startups during its central planning days. In such circumstances, V-type innovation was not possible. Only O-type innovation - which takes advantage of existing processes to solve problems - was possible.
Besides the ease of market entry, other market characteristics that assist innovation include:
3. The Large Market
Breadth and size: Larger markets tend to have more people willing to use new technologies, thus helping to build up a critical mass of demand for the new product to be commercially viable.
A lack of market distortions, arising from restrictions and control either by governments or from monopolistic practices.
4. Rule of Law and Openess
Transparency and the rule of law: This is especially true with respect to property rights, including intellectual property rights.
Capital markets able to limit, transfer or spread risks: The invention of the limited liability company in particular is crucial because it limits the risks involved in commercialising an invention.
The third factor favouring V-type innovation is a suitable 'selection system'. The free market as we know it today does a good job as a 'selection system'. It is certainly better than a system in which innovations are selected by a planning committee.
With a panel of independent experts, there is always the danger that expert opinion will fail to re-cognise the potential of a new idea. History is full of such mistaken prognoses.
Free market selection can be described as an ex-poste system. New products and services are introduced. They compete with one another and the market chooses the winner. Submitting a novel idea to a panel, however, is an example of ex-ante selection because the choice is made before the production stage is reached.
The broader, deeper, more developed and diversified a market is, the greater the chance that the innovation will take root. It is not surprising that so many radically new innovations take place in the United States, which is the largest and most varied consumer market in the world.
Advanced capital markets tend to do a good job because they use ex-poste selection. Venture capital funds that seek emergent innovations and are prepared to take higher risks play a bridging role. But traditional loan financing from banks is less conducive to V-type innovation because it relies on ex-ante selection, in this case the banker responsible for approving the loan.
Finally, the reward system. Having used time and resources to develop an innovation, the innovator expects a financial return. The economy must provide the means to reward him. This is only possible if assets and intellectual property are protected.
Taxation affects rewards. Overly high income taxation has the effect of expropriating the innovator's return. A tax regime that is non-transparent or often changed raises the risk that the innovator will not be rewarded.
Singapore's case
SINGAPORE scores well in all the areas except in market size. With rare exceptions (mainly on social grounds), information and knowledge flow freely. Foreign companies are able to bring in their technology, skills and people without restriction. Companies can be established easily and at low cost. Both legislation and government policy prevent the development of restrictive market practices.
The selection system is based on a free market. Property rights are enforced, and stability of that protection is ensured. There are no confiscatory tax policies or arbitrary changes in tax laws.
But the economy does not have the size, breadth or depth of markets (physical and financial) to sustain a high rate of V-type innovation. The introduction of totally new ideas is a function of diversity, which is proportional to size. Improved education, skills and knowledge can multiply the effectiveness of O-type innovation, but do little for V-type innovation.
That explains why the state has intervened by giving grants to companies and research centres. This is a good move, but the danger of ex-ante planning, even with the best of intentions, is real.
This state intervention is probably why Singapore's economy is classified as a form of state-guided capitalism in the book Good Capitalism, Bad Capitalism, by William J. Baumol, Robert E. Litan, Carl J. Schramm (Yale University Press, 2007).
This book describes four types of capitalism: state-guided, oligarchic, big-firm and entrepreneurial. The authors argue that entrepreneurial capitalism is best for long-term growth.
State-guided capitalism is not necessarily optimal for sustained high growth, particularly when the country already has a fairly advanced level of development.
Why then does Singapore exhibit such high rates of growth? Is it because the time-frame of measurement is too short? Or are there extenuating circumstances?
In theory, the Singapore economy should show lower growth because it lacks a large, sophisticated market and does not have sufficient size to sustain the Innovation Cycle by itself. But Singapore's economy is not limited to its political boundaries.
This was recognised even in the early 1960s. Singapore was founded as an entrepot to serve the region. The initial economic strategy was to become part of the Malaysian market. When this failed, Singapore did what could now be considered an example of brilliant V-type innovation.
It opened up its economy, welcomed MNCs, and leap-frogged the region by becoming plugged into the global economy and in particular the US economy. This approach was certainly contrary to the conventional economic wisdom of the 1960s.
By plugging into the global economy, Singapore has become part of a larger system. Its growth is powered by an innovation cycle that operates on a transnational basis, even though some of the benefits are diluted as a result of being thousands of miles from the product and financial markets of the developed countries.
The importance of being close to large, diverse markets is underlined by Mr Bill Gates' comment that Microsoft intends to set up research centres only in places with a population of a billion or more, that is, China, India and Europe.
Becoming part of this global cycle of innovation means more than just engaging in trade. It involves actively encouraging foreign companies to bring their technology (O-type innovation) and research activities (V-type innovation) to Singapore. In doing so, they bring with them their knowledge and access to markets.
These companies thus perform the task of bridging the innovation cycle in the Singapore economy with that of other markets. They act like 'transport agents' in this innovation and information exchange in addition to their production and trading activities.
The huge importing power of the American market has given rise to the saying that when the US economy sneezes, the rest of the world catches a cold. But it is not just that importing power that matters. The US provides large, sophisticated markets that allow the innovation cycle to work. The process of free trade and cross-border investments spreads the resulting innovation and production gains to other countries.
Conversely, innovation is needed to drive and sustain economic growth and hence markets. This then is the symbiotic relationship between markets and innovation.
Innovation needs markets as much as markets need innovation. Since innovation is so crucial to long economic growth and is so symbiotically linked to markets, it behoves policymakers to re-examine their own markets and investment policies when formulating economic policy.
The writer is chairman of the Competition Commission of Singapore. This article is extracted from a paper to be presented at a Nanyang Technological University seminar in March.
ECONOMIC PROSPERITY
Innovation's bright sparks
By Lam Chuan Leong, For The Straits Times
INNOVATION is now accepted by economists as essential to economic growth. But how does innovation drive markets and vice-versa? What conditions favour innovation?
Innovation consists of two phases: a generative phase and an extrapolative phase.
Because extrapolative innovation is about increasing order and knowledge, I shall refer to it as O-type innovation. O-type innovation is at the heart of most initiatives undertaken by businesses and governments. It uses expert knowledge and processes to identify and solve problems. For example, what the customer needs.
O-type innovation needs a constant supply of new ideas. This is the role of generative innovation. I call the introduction of these ideas V-type innovation to stress their role in increasing variety.
V-type innovation requires an ability to take advantage of unexpected opportunities, and relies on the ability to 'connect' existing ideas that have not previously been linked. These are characteristics usually associated with entrepreneurship.
V-type innovation may be compared to a furnace that supplies the energy to power the O-type, or extrapolative, phase of innovation. These two types work in tandem to create the 'Innovation Cycle', which is the engine of long- term economic growth.
Four factors favour V-type innovation:
1. Free Flow and Spread of Information
First, the free flow and diffusion of information. This is critical to both types of innovation. Without the knowledge of previous generations, even geniuses would have to re-invent the wheel.
Historically, economic growth and prosperity are strongest during those periods when there is a surge of new ideas and inventions brought about by V-type innovation. For example, the growth cycles following the invention of the steam engine, the motor car, electricity and the railroads.
This idea is consistent with neo-classical growth theory, which suggests that technical progress is the key to long-term growth. In other words, it allows us to escape the tyranny of diminishing returns from the traditional inputs of labour and capital.
2. Make it Easy - Free Market Entry and Exit
Second, free market entry and exit. Economies that make it easy for people to start new businesses have a better chance to produce innovation. This is especially so for radically new ideas, which rarely find rapid acceptance. Inventors must find a way to develop a prototype. So it is important that innovators can set up businesses easily to commercialise their ideas.
India claims to have a market- based system, but suffers a lower rate of growth because it has an onerous licensing regime that makes it difficult to set up a business. China did not allow for private business startups during its central planning days. In such circumstances, V-type innovation was not possible. Only O-type innovation - which takes advantage of existing processes to solve problems - was possible.
Besides the ease of market entry, other market characteristics that assist innovation include:
3. The Large Market
Breadth and size: Larger markets tend to have more people willing to use new technologies, thus helping to build up a critical mass of demand for the new product to be commercially viable.
A lack of market distortions, arising from restrictions and control either by governments or from monopolistic practices.
4. Rule of Law and Openess
Transparency and the rule of law: This is especially true with respect to property rights, including intellectual property rights.
Capital markets able to limit, transfer or spread risks: The invention of the limited liability company in particular is crucial because it limits the risks involved in commercialising an invention.
The third factor favouring V-type innovation is a suitable 'selection system'. The free market as we know it today does a good job as a 'selection system'. It is certainly better than a system in which innovations are selected by a planning committee.
With a panel of independent experts, there is always the danger that expert opinion will fail to re-cognise the potential of a new idea. History is full of such mistaken prognoses.
Free market selection can be described as an ex-poste system. New products and services are introduced. They compete with one another and the market chooses the winner. Submitting a novel idea to a panel, however, is an example of ex-ante selection because the choice is made before the production stage is reached.
The broader, deeper, more developed and diversified a market is, the greater the chance that the innovation will take root. It is not surprising that so many radically new innovations take place in the United States, which is the largest and most varied consumer market in the world.
Advanced capital markets tend to do a good job because they use ex-poste selection. Venture capital funds that seek emergent innovations and are prepared to take higher risks play a bridging role. But traditional loan financing from banks is less conducive to V-type innovation because it relies on ex-ante selection, in this case the banker responsible for approving the loan.
Finally, the reward system. Having used time and resources to develop an innovation, the innovator expects a financial return. The economy must provide the means to reward him. This is only possible if assets and intellectual property are protected.
Taxation affects rewards. Overly high income taxation has the effect of expropriating the innovator's return. A tax regime that is non-transparent or often changed raises the risk that the innovator will not be rewarded.
Singapore's case
SINGAPORE scores well in all the areas except in market size. With rare exceptions (mainly on social grounds), information and knowledge flow freely. Foreign companies are able to bring in their technology, skills and people without restriction. Companies can be established easily and at low cost. Both legislation and government policy prevent the development of restrictive market practices.
The selection system is based on a free market. Property rights are enforced, and stability of that protection is ensured. There are no confiscatory tax policies or arbitrary changes in tax laws.
But the economy does not have the size, breadth or depth of markets (physical and financial) to sustain a high rate of V-type innovation. The introduction of totally new ideas is a function of diversity, which is proportional to size. Improved education, skills and knowledge can multiply the effectiveness of O-type innovation, but do little for V-type innovation.
That explains why the state has intervened by giving grants to companies and research centres. This is a good move, but the danger of ex-ante planning, even with the best of intentions, is real.
This state intervention is probably why Singapore's economy is classified as a form of state-guided capitalism in the book Good Capitalism, Bad Capitalism, by William J. Baumol, Robert E. Litan, Carl J. Schramm (Yale University Press, 2007).
This book describes four types of capitalism: state-guided, oligarchic, big-firm and entrepreneurial. The authors argue that entrepreneurial capitalism is best for long-term growth.
State-guided capitalism is not necessarily optimal for sustained high growth, particularly when the country already has a fairly advanced level of development.
Why then does Singapore exhibit such high rates of growth? Is it because the time-frame of measurement is too short? Or are there extenuating circumstances?
In theory, the Singapore economy should show lower growth because it lacks a large, sophisticated market and does not have sufficient size to sustain the Innovation Cycle by itself. But Singapore's economy is not limited to its political boundaries.
This was recognised even in the early 1960s. Singapore was founded as an entrepot to serve the region. The initial economic strategy was to become part of the Malaysian market. When this failed, Singapore did what could now be considered an example of brilliant V-type innovation.
It opened up its economy, welcomed MNCs, and leap-frogged the region by becoming plugged into the global economy and in particular the US economy. This approach was certainly contrary to the conventional economic wisdom of the 1960s.
By plugging into the global economy, Singapore has become part of a larger system. Its growth is powered by an innovation cycle that operates on a transnational basis, even though some of the benefits are diluted as a result of being thousands of miles from the product and financial markets of the developed countries.
The importance of being close to large, diverse markets is underlined by Mr Bill Gates' comment that Microsoft intends to set up research centres only in places with a population of a billion or more, that is, China, India and Europe.
Becoming part of this global cycle of innovation means more than just engaging in trade. It involves actively encouraging foreign companies to bring their technology (O-type innovation) and research activities (V-type innovation) to Singapore. In doing so, they bring with them their knowledge and access to markets.
These companies thus perform the task of bridging the innovation cycle in the Singapore economy with that of other markets. They act like 'transport agents' in this innovation and information exchange in addition to their production and trading activities.
The huge importing power of the American market has given rise to the saying that when the US economy sneezes, the rest of the world catches a cold. But it is not just that importing power that matters. The US provides large, sophisticated markets that allow the innovation cycle to work. The process of free trade and cross-border investments spreads the resulting innovation and production gains to other countries.
Conversely, innovation is needed to drive and sustain economic growth and hence markets. This then is the symbiotic relationship between markets and innovation.
Innovation needs markets as much as markets need innovation. Since innovation is so crucial to long economic growth and is so symbiotically linked to markets, it behoves policymakers to re-examine their own markets and investment policies when formulating economic policy.
The writer is chairman of the Competition Commission of Singapore. This article is extracted from a paper to be presented at a Nanyang Technological University seminar in March.
Jan 4 Blood is thicker than water
POLITICS
Blood is thicker than water
By Sunanda K. Datta-Ray, For The Straits Times
ACROSS BORDERS: Malaysian police firing water cannon at ethnic Indian protesters in Kuala Lumpur last November. The protest later prompted Indian Prime Minister Manmohan Singh to express his concern over the welfare of the minority community. -- PHOTO: AP
IT IS not widely known that on March 12, 1992, Datuk Seri Abdullah Badawi, then Malaysia's foreign minister, summoned Myanmar's envoy in Kuala Lumpur 'to express concern over Myanmar's treatment of the Rohingya minority'.
The same day, Indonesia's then foreign minister Ali Alatas said the situation in Myanmar was 'threatening the stability of the region'.
A brief examination of the Rohingya position is necessary before considering the implications of those gestures that may have set a precedent for Indian Prime Minister Manmohan Singh's expression of concern over Malaysia's own ethnic Indian minority.
Myanmar's 800,000 Rohingyas have complained of repression since 1978, when the army launched Operation Nagamin (Dragon King) aimed at 'scrutinising each individual living in the state, designating citizens and foreigners in accordance with the law and taking actions against foreigners who have filtered into the country illegally'.
About 200,000 Rohingyas fled to Bangladesh and a further quarter of a million followed in 1992. The Rohingyas are of Bengali stock, from the Chittagong region of what is now Bangladesh, who moved to Myanmar's Arakan district before South Asia came under British rule.
They could not go to Malaysia or Indonesia, which share no land borders with Myanmar. Nor are the Rohingyas ethnically connected to the Malay race in either country, as they are to Bangladeshis. There was thus no risk of Myanmar's troubles spreading to Malaysia or Indonesia. Being contiguous with Myanmar's Arakan Hills, Bangladesh saw this as a very real fear.
AGAINST THE FLOW
History shows that diplomatic propriety is frequently at odds with instinct and human obligations.
Why then were Datuk Seri Badawi and Mr Alatas so concerned about a remote people? The only explanation seems to lie in a shared religion. The Rohingyas being Muslim, like the bulk of Malaysians and Indonesians, the two foreign ministers felt entitled to express interest.
By that token, the government of any Muslim country can respond to anything involving Muslims anywhere on earth. This is English metaphysical poet John Donne's no-man-is-anisland ideal trimmed to only the Muslim segment of it.
It's forgotten today that Nationalist China propounded a similar principle. Its citizenship law based on the lex sanguini theory of an indivisible and indissoluble Sinic nationality held that though seas and frontiers separated the Chinese of China, its offshore islands and the diaspora, they were 'essentially one people with a shared heritage, the Chinese civilisation'.
That made Hong Kong and Macau the Second China, and Nanyang, the region of the southern seas where Singapore is located, the Third. One of several differences between the People's Action Party and the Barisan Socialis in Singapore was that while the former categorically rejected the Third China thesis, the latter viewed it with some sympathy.
Nationalist China's law had an amusing sequel when the British retaliated by requiring all ethnic Chinese refugees in India during World War II to register under the Registration of Foreigners Act. When Tan Chin Tuan of the Oversea-Chinese Banking Corporation refused, the enraged British police officer in charge of security in Kolkata barked 'purple with rage' that all Chinese were shoemakers, restaurateurs and black-marketeers!
The situation was saved through the intervention of another Briton whom Tan had known in Singapore as a commercial artist but whose Cathay Building office was a front for the Special Operations Executive charged with sabotage missions behind enemy lines.
Though Communist China repudiated its predecessor's citizenship law, it protested when, during the 1962 Himalayan war, a resident of Kolkata's Chinatown was manhandled on a bus.
History shows that diplomatic propriety is frequently at odds with instinct and human obligations. Politicians are also people, belonging to particular races and religions.
Blood is thicker than water.
The writer is visiting senior research fellow at the Institute of Southeast Asian Studies. This is a personal comment.
Copyright: Sunanda K. Datta-Ray
Blood is thicker than water
By Sunanda K. Datta-Ray, For The Straits Times
ACROSS BORDERS: Malaysian police firing water cannon at ethnic Indian protesters in Kuala Lumpur last November. The protest later prompted Indian Prime Minister Manmohan Singh to express his concern over the welfare of the minority community. -- PHOTO: AP
IT IS not widely known that on March 12, 1992, Datuk Seri Abdullah Badawi, then Malaysia's foreign minister, summoned Myanmar's envoy in Kuala Lumpur 'to express concern over Myanmar's treatment of the Rohingya minority'.
The same day, Indonesia's then foreign minister Ali Alatas said the situation in Myanmar was 'threatening the stability of the region'.
A brief examination of the Rohingya position is necessary before considering the implications of those gestures that may have set a precedent for Indian Prime Minister Manmohan Singh's expression of concern over Malaysia's own ethnic Indian minority.
Myanmar's 800,000 Rohingyas have complained of repression since 1978, when the army launched Operation Nagamin (Dragon King) aimed at 'scrutinising each individual living in the state, designating citizens and foreigners in accordance with the law and taking actions against foreigners who have filtered into the country illegally'.
About 200,000 Rohingyas fled to Bangladesh and a further quarter of a million followed in 1992. The Rohingyas are of Bengali stock, from the Chittagong region of what is now Bangladesh, who moved to Myanmar's Arakan district before South Asia came under British rule.
They could not go to Malaysia or Indonesia, which share no land borders with Myanmar. Nor are the Rohingyas ethnically connected to the Malay race in either country, as they are to Bangladeshis. There was thus no risk of Myanmar's troubles spreading to Malaysia or Indonesia. Being contiguous with Myanmar's Arakan Hills, Bangladesh saw this as a very real fear.
AGAINST THE FLOW
History shows that diplomatic propriety is frequently at odds with instinct and human obligations.
Why then were Datuk Seri Badawi and Mr Alatas so concerned about a remote people? The only explanation seems to lie in a shared religion. The Rohingyas being Muslim, like the bulk of Malaysians and Indonesians, the two foreign ministers felt entitled to express interest.
By that token, the government of any Muslim country can respond to anything involving Muslims anywhere on earth. This is English metaphysical poet John Donne's no-man-is-anisland ideal trimmed to only the Muslim segment of it.
It's forgotten today that Nationalist China propounded a similar principle. Its citizenship law based on the lex sanguini theory of an indivisible and indissoluble Sinic nationality held that though seas and frontiers separated the Chinese of China, its offshore islands and the diaspora, they were 'essentially one people with a shared heritage, the Chinese civilisation'.
That made Hong Kong and Macau the Second China, and Nanyang, the region of the southern seas where Singapore is located, the Third. One of several differences between the People's Action Party and the Barisan Socialis in Singapore was that while the former categorically rejected the Third China thesis, the latter viewed it with some sympathy.
Nationalist China's law had an amusing sequel when the British retaliated by requiring all ethnic Chinese refugees in India during World War II to register under the Registration of Foreigners Act. When Tan Chin Tuan of the Oversea-Chinese Banking Corporation refused, the enraged British police officer in charge of security in Kolkata barked 'purple with rage' that all Chinese were shoemakers, restaurateurs and black-marketeers!
The situation was saved through the intervention of another Briton whom Tan had known in Singapore as a commercial artist but whose Cathay Building office was a front for the Special Operations Executive charged with sabotage missions behind enemy lines.
Though Communist China repudiated its predecessor's citizenship law, it protested when, during the 1962 Himalayan war, a resident of Kolkata's Chinatown was manhandled on a bus.
History shows that diplomatic propriety is frequently at odds with instinct and human obligations. Politicians are also people, belonging to particular races and religions.
Blood is thicker than water.
The writer is visiting senior research fellow at the Institute of Southeast Asian Studies. This is a personal comment.
Copyright: Sunanda K. Datta-Ray
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