'Govt actively intervenes in many areas': SM Lee on how Singapore uses market forces to achieve public policy objectives

The Government "actively intervenes" in many areas of society, like housing and healthcare, to achieve its public policy objectives, said Senior Minister Lee Hsien Loong.

However, in doing so, it is also mindful of economic laws, market forces and incentives, he wrote in an an essay published in the Singapore Economic Review Journal on March 31.

"This way we work with, rather than against, human nature. The better we understand these powerful forces and the more we use them in designing and implementing policies, the more effectively we will achieve our goals," he said in his essay titled Microeconomics in Public Policy: A Practitioner's View.

SM Lee added that the Government has found three rules-of-thumb useful: firstly, when designing and implementing policies, use economic principles and market forces; secondly, when allocating a scarce resource, just price it; and thirdly, when providing assistance to beneficiaries, cash or cash-like is better.

"Because Singapore has done this systematically and extensively, we run a smaller government than most. The outcome, whether in terms of growth, equity, social stability or quality of public services, confirms that this is a viable way to achieve not only the economic, but also the social and political goals of the nation," he wrote.

Economic principals, market forces in public housing 

In his essay, SM Lee cited public housing as one example of Singapore taking a more "market-oriented approach", yet one that is "not a purist laissez-faire model".

Noting that around 80 per cent of Singaporeans live in public housing and 90 per cent of citizens own their own homes, SM Lee said that this would never have been achieved had the Government not intervened "on a massive scale" — to acquire large swathes of private land; plan and build public housing; enact elaborate rules and sales conditions to govern how to allocate these flats; and institute systems and policies to make public housing affordable and pervasive home ownership a reality.

Yet in implementing the public housing programme, the Government recognised economic principles and used market mechanisms to achieve the overall political and social goals of universal home ownership and good quality, affordable public housing for Singaporeans, he added.

For instance, HDB was set up as a statutory board to build and sell flats, instead of through a government ministry or department. 

HDB buys land from the state at fair market value, recognising its scare value which should be costed into flats, and thereby creating the right price signals and incentives for HDB to make full and optimal use of the land, he pointed out. 

HDB also tenders out most projects to private sector architects and construction firms, allowing it to use the flexibility, efficiency and innovation inherent in the private sector. 

To achieve social objectives, HDB imposes restrictions and conditions on buyers.

As for pricing, flats are sold at discount to market value by policy, Lee pointed out. And not all flats of the same type have identical value. HDB has to take this market reality into account and price each flat accordingly, he added.

Once the minimum occupation period is up, owners can buy and sell their flats on a secondary resale market, at prices set by willing buyers and sellers, with some restrictions and interventions to maintain key social objectives. 

"This approach creates a diversified but interlinked national housing market, ranging from flats bought directly from the HDB at a market discount, to resale HDB flats transacted on the secondary market at market prices but subject to HDB rules, to private property bought and sold more freely," SM Lee wrote.

"This spectrum gives owners the flexibility to upgrade or downgrade their homes in the course of their lives and enables them to realize the true market value of the flats, while maintaining key social objectives," he added.

Pricing to allocate scare resources

In his essay, SM Lee also wrote about how the Government uses pricing to allocate scarce resources, rather than deciding who needs them most.

This ensures the resource goes to those who really value it the most, rather than just those who merely say so.

One example he cited is the Certificates of Entitlement (COEs) to control the size of the vehicle population in Singapore.

SM Lee said an argument can be made that the right to own a vehicle should be allocated based on an assessment of one's needs.

"The problem is that there are many different needs, each important to that individual. It is very hard for the Government to decide which should warrant special consideration — such decisions are inherently subjective," he added.

By allocating COEs through an auction, it goes to those who derive the most value out of it.

Cash-like assistance

In his essay, SM Lee also defended the Government opting to disburse cash-like vouchers, instead of cash, to help households cushion the cost of living.

Vouchers that are used by clicking an app retain the psychological link with the purpose of the assistance, while cash will be "co-mingled" with the beneficiaries' other money.

"They may not remember or even realise that they have received the assistance, especially if it is credited automatically and silently into their bank accounts," he said.

This principal has been applied to U-Save rebates, GST vouchers and CDC vouchers, he noted. 

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chingshijie@asiaone.com

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