An Echelon Media Company
Thursday September 21st, 2023

Why Singapore chose a currency board over a central bank

From a speech by Goh Keng Swee, former Finance Minister of Singapore

When the sun never set on the British Empire, the currencies of the British Colonies were issued under the CBS. This provided for 100 per cent backing of the note issue in overseas reserves, namely Sterling deposits in London.

This allowed the automatic conversion of the local currency into the British pound.

The CBS served both sides reasonably well.

Since the 19th century up to about 1929, the pound Sterling was the pre-eminent world currency. Colonies had stable currencies, meaning that the rampant inflation observed today in many ex-colonies did not occur.

The British enjoyed substantial inflows of capital from their Empire and this helped to make London the world’s leading financial centre. To be fair to the British, it should be said that the independent Dominions — Australian, Canada, South Africa and New Zealand — also kept their overseas reserves in London at that time when they were free to keep them elsewhere.

In the post-War years, rapid decolonisation took place. In every instance, the newly independent state established a Central Bank with note-issuing powers.

The requirement of 100 per cent backing in overseas assets was abolished. Singapore stood out as the sole exception.

Retaining the Currency Board

We retained the CBS and when the Monetary Authority of Singapore (MAS) was set up in 1970, it performed all the functions of a Central Bank except for note-issuing powers.

How and why did we preserve such a strange anachronism in this age of electronic finance?

The decision to proceed along these exceptional lines was a collective decision of the Cabinet. Each member reached this decision in this own way and I will explain mine.

When I as studying economics at Raffles College in pre-war days, the Keynesian revolution broke out with the publication of John Keynes’ — The General Theory of Employment, Interest and Money.

Today, critics, including Sir John Hicks, are agreed that it was badly written work and made for difficult reading. I can attest to the latter.

As an undergraduate, I read the book from cover to cover no fewer than three times, some chapters even more. What puzzled me most was that Keynes measured variables and aggregates, such as National Income and Money Supply, in terms of what he called “Wage Units”. I asked my professor what this meant and why Keynes did this, but could not get a satisfactory reply. Nor did the literature of the day prove more helpful.

Years later, the truth dawned on me. The Keynesian remedy for curing unemployment — the burning issue of the day left behind by the Great Depression years — involved serious risk of inflation.

Of course Keynes knew this. The remedy recommended took the form of expansion of bank credit through Central Bank policies to finance government expenditure. The extra spending will create additional demand for goods and services, thereby reducing unemployment.

But if economic variables are measured in wage units, inflation would be factored out as wages will rise in keeping with price increases. If variables such as the consumer price index or interest and aggregates like Money Supply were measured in wage units, their increases would be reduced to the extent to which wages rise.

Balance of payments trouble from Keynesian Stimulus

There is a further difficulty to contend with. The Keynesian system is a closed one, that is, it takes no account of foreign trade.

This is admissible in theory, but in practice, since all modern states engage in foreign trade, a Keynesian stimulus will lead eventually to balance of payments deficits if government do not exercise restraint in time.

A part of the increased incomes people receive will be spent on imports and when exports do not increase in proportion a trade deficit will occur.

In the immediate post-war years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States, Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) polices.

However by the mid 1960s, certain stubborn difficulties appeared and refused to go away. In Britain, this took the form of balance of payment troubles which led to the devaluation of the pound in November 1967.

America experienced troubles in a different form. Because all major world currencies fixed their par values in terms of the US dollar and the US dollar was pegged to gold at US$35 per ounce, America could not devalue the dollar except by raising the price of gold.

This the government was unwilling to do for political reasons. Eventually, what happened was an increase in inflationary pressure in the US and a decline in confidence over the convertibility of the US dollar at US $ 35 per ounce because of increased US dollar balances accumulated overseas as a result of trade deficits.

In the end, gold convertibility of the US dollar was suspended in August 1971 and, shortly thereafter, the regime of floating currencies came into being. World currencies continue to float till this day.

My Cabinet colleagues took careful note of these dramatic events as they unfolded on the world’s financial scene. None of us believed that Keynesian economic policies could serve as Singapore’s guide to economic well-being.

Printing money is a disaster for small open economies

Our economy was and is both small and open. Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster.

There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles.

Another contributing factor was the world outlook of my colleagues — the old guard as they are now called. We all grew up under difficult conditions and did not believe anybody owed Singapore a living.

The way to a better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work place. Diligence, education and skills will create wealth, not Central Bank credit.

Hence, we were not impressed by claims — excessive as they turned out to be — that government could bring about prosperity through spending. It did not surprise us that the Anglo-Saxon countries which adopted such policies got into trouble.

We also noted that the Germans and Japanese did not believe they could “spend their way to prosperity”, as the phrase went. Like Singaporeans, they set store on diligence, education and skills.

Against this background of leadership thinking, it is hardly surprising that the CBS was preserved with its legal requirement to back the currency note issue with at least 100 per cent of overseas assets.

Actually, these assets stand at 110 per cent because it is only after this level has been reached that the earnings of overseas assets can be transferred to the government’s Consolidated Account.

Cabinet’s collective purpose in retaining the CBS was threefold.

Strong currency is best defence against inflation

First, to inform the financial world that our objective was to maintain a strong convertible Singaporean Dollar. This remains the best protection against inflation.

When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down.

The second purpose was to inform our citizens that if they wanted more and better services, they must pay for these through taxes and fees. There is no free lunch here.

Third, we wanted to indicate to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore. A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.

It is also not surprising that when the Monetary Authority of Singapore (MAS) was set up, the Chairman was by law the Finance Minister. World Bank experts advised us against this since the Chairman should be an independent person with sufficient authority to resist a Finance Minister’s request for money to finance a budget deficit.

The World Bank believed that putting the Finance Minister in charge would be like asking a cat to look after fish. But Singapore has always worked on the principle that government expenditure on education, defence, social and economic services, etc, must be paid for out of government revenues — taxes and fees.

It is the Finance Minister’s prime duty to balance the budget and, if possible, accumulate a surplus for a rainy day.

Successive Finance Minister have been doing just this. They do not need an independent Central Bank Governor to persuade them not to run budget deficits. The World Bank’s anxieties were misplaced.

What would happen if a future government, returned by a complacent electorate, were to do what the World Bank feared?

Democratically elected governments the world over are exposed to the temptation of winning votes though promising better and cheaper services and at the same time lower taxes.

Central Banks bring misery to poor countries

This has happened not only in rich countries but also in poor developing countries. Rich countries have the resources to get by for a few years by borrowing on the international markets, but in poor countries, punishment comes quickly in a cruel way — high rates of inflation, economic decline and political instability.

These three factors reinforce each other in a way which makes escape from misery difficult.

In Singapore, an irresponsible government does not need a Central Bank to finance lavish spending as a means to win popularity.

We have substantial overseas reserves which can serve this purpose. However the recent constitutional amendment contains a provision for an elected president to block this dangerous method of vote catching.

But if the electorate misled by soft-headed opinion makers, persists in wanting the good life without working for it, constitutional safeguards cannot stop foolish behaviour for all times.

What will happen if the electorate chooses this option is that after a brief period of high living, Singapore will spiral downwards and eventually become another miserable developing country.

In conclusion, I want to correct any impression this article may have given that I think poorly of Keynes as an economist. I do not.

He is the greatest economist the world has produced this century. He introduced a new way of looking at an economic system, in a different way from the classical greats such as Adam Smith, David Ricardo and Alfred Marshall.

The classicals saw the systems as one consisting of producers and consumers, each making his own decision as a producer or a consumer. They studied how a free market harmonises their interests.

 

Keynes looked at how the system functions as whole. Keynes gave birth to a discipline we now call macro-economics.

Another Cambridge economist, Richard Stone, worked out a method whereby the macro-system can be divided into sectors and sub-sectors, examined how these sectors were related to each other and explained how their transactions could be measured.

His landmark world led to the establishment of the United National System of National Accounting. This is the way modern states estimate the level and composition of their annual Gross National Products (GNPs).

The combination of Keynesian theory (now better understood and the lessons of the 1960s) and National Accounting give governments a practical way of evaluating economic performance.

In this way, modern states are able to manage their economies much better than they did in the pre-War years.

The Great Depression which started in 1929 was the result of grave mismanagement by governments and Central Banks of Europe and America. It was in response to the wrong policies of that period that Keynes created his new system of economic analysis.

If one has to fault Keynes on any point, it would be the title of his book. This should have been — The Special Theory of Employment, Interest and Money.

His prescriptions were intended to address the special circumstances created by the Great Depression. By calling it a General Theory, he led lesser minds than his into believing that his prescriptions could be applied under all circumstances, with unhappy consequences, as we have noted.

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Sri Lanka’s 2022 EPF returns falls to lowest, single digit in near two decades – CB data

ECONOMYNEXT – The 2022 annual average return on Sri Lanka’s largest contributory pension scheme, the Employees’ Provident Fund (EPF), has fallen to its lowest in nearly two decades, Central Bank data showed.

The annual average return in the last year fell to 9.52 percent from the previous year’s 11.40 percent, a central bank response to a Right to Information (RTI) request showed.

Returns on EPF has raised concerns among contributors after the government decided to include EPF investments in the government treasury bonds under the domestic debt optimization (DDO) process.

Last year’s lower return has been recorded despite market interest rates being more than 30 percent towards the end of the year. In contrast, the fund has given a double digit return in 2020 when the market interest rates hovered in single digits.

Analysts have predicted the returns to be further low with the central bank opting for the government’s DDO option.

A central bank analysis on DDO showed the return on EPF could fall to as low as 6.79 percent if the DDO option was not chosen within the next 12 years as against 8.02 percent if opted for DDO.

Trade unions and some politically motivated fractions opposed the government move to include the EPF investments under the DDO. However, parliament approved the move early this month.

According to the data made available from 2005, the central bank, which is the custodian of the EPF, has given the highest return of 16.03 percent in 2009.

The island nation’s largest pension fund has almost 21-million member accounts including 18.3 million non-contributing accounts due to some members having multiple number of accounts.

The 3.38 trillion-rupee ($10.6 billion) worth fund as of end 2022 is managed by the central bank, including its investment decisions.

As of end 2022, the central bank has invested 3.23 trillion rupees or 95.7 percent of the total EPF in government securities, while 84.1 billion rupees has been invested in listed companies in the Colombo Stock Exchange, the central bank said quoting the EPF audited financial statement. (Colombo/September 21/2023)

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Malaysia to support Sri Lanka’s bid to join RCEP

ECONOMYNEXT – Malaysia has agreed to support Sri Lanka’s application to become a member of the Regional Comprehensive Economic Partnership (RCEP), a major regional trade agreement.

The RCEP is a free trade agreement among the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.

President Ranil Wickremesinghe met the Malaysian Prime Minister Anwar Ibrahim during bilateral discussions on the sidelines of the United Nations General Assembly in New York yesterday (20).

During the meeting, the Malaysian Prime Minister expressed a strong desire to bolster economic ties between the two nations, according to a president’s media division statement.

He emphasized Malaysia’s eagerness to facilitate increased investments from Malaysian companies in Sri Lanka.

Ibrahim also expressed positivity towards Sri Lanka’s request to commence negotiations for a free trade agreement (FTA) between the two countries, which could potentially open up new avenues for trade and economic cooperation.

Wickremesinghe is in a drive to bolster international ties and integrate the country with the global economy.

So far this week he met with the leaders of Bangladesh, Nepal, Malaysia, Iran, South Korea, as well as representatives from global bodies such as the World Bank, International Monetary Fund, USAID, Meta, the Commonwealth, and attended other forums.

Sri Lanka aims to expand its economic reach first within South Asia and then extend further.
Data shows that Sri Lanka has been able to boost exports with FTAs.

Over the past two decades Sri Lanka’s exports have not grown as much as competitors.

Economists involved in trade have pointed out that Sri Lanka should make joining the RCEP a priority instead of trying to negotiate multiple smaller deals for which it does not have the bandwidth in government, or the technical resources to do multiple trade agreements. (Colombo/Sep21/2023)

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Is Tibet Prepared for a Post-Dalai Lama Era?

ECONOMYNEXT – Tibetans have shaped and sustained their lives for more than 60 years under the leadership of the 14th Dalai Lama. The spiritual leader turned 88 in July, and as his longevity is discussed amongst his followers, there is also concern about Tibet’s future without his physical presence.

In 2011, the Dalai Lama divested himself of all political authority, yet, as the architect of democratic governance, he continues to remain a larger-than-life figure for Tibetans.

Along with that come other challenges; safeguarding the democratic system he initiated, engaging younger generations in the cause for Tibet’s freedom, protecting the country’s environment, the influence of external forces and the possible geopolitical fallout of India’s continued support of the Tibetan cause.
Ever since the Lhasa uprising of 1959, and the setting up of a government in exile in Dharamsala, India, the first Tibetan Constitution introduced by the Dalai Lama in 1963 has undergone many changes.

In 1991 the Supreme Justice Commission was added to the other two pillars of democracy, the Legislature and the Executive. Along with that, an Independent Audit Commission, an Independent Public Service Commission and an Independent Election Commission were set up, and women were assigned two seats in the Legislature. The current operational body of the Tibetan government in exile is known as the Central Tibetan Administration (CTA).

The debate on Tibet’s sovereignty, which fell under the control of the Chinese in 1951, is ongoing, with the Chinese government terming it the “Peaceful Liberation of Tibet’ and the CTA and Tibetan diaspora referring to it as the “Chinese invasion of Tibet.”

Despite the reforms and the Dalai Lama divesting himself of all political power the spiritual leader exerts considerable influence and therefore there is still, a heavy dependence on him, notes MP Youdon Aukatsang. Speaking at a webinar titled “Tibetan Democracy in Exile’ organised by the Friedrich Naumann Foundation for Freedom, South Asia, on September 15, Ms Aukatsang pointed to a recent constitutional crisis which was finally resolved following the Dalai Lama’s intervention. “Tibetans must take full responsibility for political matters as envisaged by His Holiness the Dalai Lama,” she said.

There is also the challenge of dealing with the internal dissent amongst Tibetans, which she claimed is spearheaded by China.

The webinar moderated by Ms Tenzin Peldon, the Director and Editor-in-Chief of Voice of Tibet, included Ven Geshe Lhakdor, Director, Tibetan Library and Archives and honorary Professor, University of British Columbia, Gondo Dhondup, President of the Tibetan Youth Congress and Sujeet Kumar, an Indian parliamentarian and the Convenor of the All Party Indian Parliamentary Forum for Tibet.

The current Sikyong, Tibet’s political leader Penpa Tsering and Dr Jurgen Murtens, a member of the German Bundestag also addressed the webinar.

The democratic model, Aukatsang states is successful, yet it is a work in progress. The current make up of the Tibetan Parliament in Exile (TPiE) has 45 members representing the three provinces of U-Tsang, Do-med and Do-tod, the four schools of Tibetan Buddhism as well as the traditional Bon faith, Europe, North America and Australasia. It is headed by the Speaker and the Deputy Speaker.

Aukatsang would like to see a modification in the composition with more representation from the diaspora, and less from the provinces to better reflect the changing demography. She also proposes an increase in the number of members of the Standing Committee from 11 to 15 and calls for the establishment of a dispute resolution mechanism rather than the direct impeachment process, which is the current practice.

Though the 1991 reforms made way for women’s representation in the TPiE, (currently 10 ministers and the Deputy Speaker are women), Aukatsang is hopeful there would be “more meaningful engagement of women in leadership roles,” for, as she points out, they are the custodians of Tibetan culture and language. Women have also distinguished themselves as founders of several non-governmental organisations and in the field of education.

Her sentiments were reflected by the Sikyong, Penpa Tsering when he said that unless the administration is ready to adapt to demographic and social realities, its relevancy will be challenged.

When the Buddha was on his deathbed, and his followers were fearful of being on their own, the Buddha had advised that the focus should be on his teachings and not his physical presence. Likewise, says Ven Geshe Lhakdor, Tibetans must continue to abide by the teachings of the Dalai Lama, and not worry about his absence. When Tibetans were prohibited from displaying photos of the Dalai Lama, they hung up empty picture frames, he said, aware that the Dalai Lama remains within them.

Ven Geshe Lhakdor also advocates a separation of Church and State, pointing out that clergy must involve themselves in the spiritual upliftment of society, rather than in politics. The idea of the religious ruling a country is outdated, he points out, adding that once clergy get into a “political mindset” they are unable to send out good signals to the people. He adds that their responsibility is to safeguard culture and harmony and be role models.

The principles of democracy are a reflection of Buddhist teaching the Venerable noted, pointing out its time to extricate oneself from a tribal mentality. The focus must be on a long-term, robust vision, rather than quick fixes. He also believes that Tibetans must safeguard themselves from internal fragmentation, even more than external threats.

One unique feature of the administration is that it is free of corruption, the Venerable notes, despite being surrounded by corrupt systems.

Even though Jawaharlal Nehru, the first Prime Minister of independent India, sought and had the cooperation of all Chief Ministers to offer refuge to Tibetans in 1959, MP Sujeet Kumar is of the opinion that the current Indian Parliament is rather diffident in openly rooting for Tibet against China.

While acknowledging that Indian parliamentarians have huge constituencies and are busy, he is hopeful his colleagues would take more interest in Tibet and her issues.

Tibetans alone have the right to decide on the Dalai Lama’s successor, says Kumar, and India must back that. India should also rally the support of other nations to help Tibet charter her own course in a post-Dalai Lama scenario.

Kumar would like to see more Tibetan youth become part of India’s trillion-dollar digital industry.
He is concerned, however, at the lack of enthusiasm amongst the youth to use social media to fight disinformation being circulated about Tibet.

Acknowledging that youth could be more engaged in social media to fight disinformation, Gondo Dhondup says all Tibetans are “born to be activists” and to the cause, even though it is difficult to envisage a freedom movement without the Dalai Lama.

Youth are the agents of change, and Tibet’s future citizens, therefore they must stay informed. The TYC organises leadership training, and Tibetans, even those scattered around the globe must take advantage of the programmes, Dhondup says.

While calling on India to introduce a national policy on Tibet, Dhondup cautions that India’s waterways that originate in Tibet are under threat. The rivers are either “diverted or polluted” affecting downstream villagers, and India must ensure her water security, Dhondup explains.

The recently concluded G20 summit was themed “One Earth, One Family, One Future”, and that gives India an opportunity to be more vocal about the environment, he says.

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