HONG KONG - What do you call a country that takes 35% of salaries to finance a
state investment fund run by the prime minister's wife? Where the government
controls companies responsible for 60% of gross domestic product and 85% of its
citizens live in public housing? And a country with stringent restrictions on
the media and public information, limits on freedom of expression and assembly,
and courts that help perpetuate the domination of the only ruling party the
country has ever known?
You call it the second-freest economy on Earth if you're the Heritage
Foundation and Wall Street Journal. The country described above is Singapore,
runner-up to Hong Kong for the
17th consecutive year in the US conservative icons' joint Index of Economic
Freedom for 2011, released last week. Singapore's ranking may seem like
something from Fantasyland - science fiction writer William Gibson famously
called Singapore "Disneyland with a death penalty" - but the Heritage
Foundation insists it's grounded in cold, hard facts.
According to the Heritage website, "Economic freedom is the fundamental right
of every human to control his or her own labor and property. In an economically
free society, individuals are free to work, produce, consume, and invest in any
way they please, with that freedom both protected by the state and
unconstrained by the state. In economically free societies, governments allow
labor, capital and goods to move freely, and refrain from coercion or
constraint of liberty beyond the extent necessary to protect and maintain
Size matters most
"That doesn't seem unreasonable, but how you translate that concept into an
index is where the ambiguities come in," competition economist Gustavo
Bamberger said. "In practice, it seems like the index, to a substantial extent,
equates the size of government to the degree of economic freedom: that is,
small government equals high degree of freedom. That implies that government
intervention generally means less freedom, which isn't obvious. The idea that
unregulated markets always result in more economic freedom is, in my view,
ideology, not economics."
Anthony Kim, the Heritage Foundation's point man for compiling the index,
disagreed. "Our index is strongly based on statistical data and facts from
internationally recognized data sources. There is only very limited room for
subjective judgments. Our index is distinctively different from many other
indices that heavily rely on subjective or narrowly defined survey questions
among the selected pool of experts."
The index is compiled by combining scores of 10 sub-indices in categories of
Business Freedom, Trade Freedom, Fiscal Freedom, Government Spending, Monetary
Freedom, Investment Freedom, Property Rights, Freedom from Corruption, Labor
Scores for each category are derived using a variety of methods, in some cases
taken directly from other indices - Freedom from Corruption uses Transparency
International's Corruption Perceptions Index (one of those "other indices that
heavily rely on subjective or narrowly defined survey questions among the
selected pool of experts") - or are calculated based on data from governments
or international institutions.
Other scores are based on Heritage evaluators' observations of policies and
practices, from how long it takes to start a business to the government's role
in the financial markets on a zero to 100 scale. Ratings in the 10 categories
are averaged to the overall economic freedom rating. Singapore scores 87.2,
despite its myriad examples of government control.
Kim, a policy analyst in Heritage's Center for International Trade and
Economics, said, "Due to the points you mentioned [above], Singapore's scores
for financial freedom and investment freedom are the two lowest in the
country's 10 economic freedoms. Compared to other top-freest economies in the
2011 index, indeed, Singapore receives relatively lower ratings in these two
freedoms. However, in other areas such as trade, regulations, tax rates, rule
of law, and monetary stability, Singapore is very competitive and well grounded
for vibrant economic activity."
Bamberger, who testifies in the US and internationally on regulatory issues,
sees a fundamental fallacy in the index. "It's far from obvious that each of
the 'freedoms' are equally important."
Moreover, the index doesn't distinguish between limits on freedoms that apply
equally to everyone in the market, such as inflation rates, and those that only
impact certain segments, such as business freedom, which applies only to
opening and closing a business. "Clearly, some categories are much more
important from a firm's perspective than a consumer's," Bamberger said.
View from the top
There's no question that the index filters its findings through a particular
lens. The Labor Freedom category rates the difficulty of hiring and firing
workers, legally mandated notice period and mandatory severance pay, with less
as more, and doesn't count the right to organize or bargain collectively.
That's because it's looking at the issue from the perspective of employers, not
employees, similar to assessing freedom of expression issues from a censor's
Rather than calling the rankings an index of economic freedom, "'Openness to
rich outsiders' is more accurate", risk analyst Aaron Brown said. "Freedom for
individuals within the country is another matter entirely, difficult to
reconcile with freedom for outsiders. It's like the dilemma that encouraging
tourism frequently inconveniences locals."
Brown, author of The Poker Face of Wall Street and the forthcoming Red-blooded
Risk Management, said, "The United States clearly has the most economic
freedom for its citizens of any large country in the world, where freedom means
not only absence of restrictions but plentiful and flexible access to capital,
labor and other inputs. But the US imposes all kinds of restrictions on
non-resident foreigners and meddles with trade and all kinds of other things
all over the world."
The Heritage/WSJ analysis doesn't mention Singapore's requirement that 35% of
wages - generally 20% from workers, 15% from employers - be deposited into the
Central Provident Fund for retirement and medical needs. Those deposits go to
Singapore government investment funds that buy shares in domestic and overseas
businesses; the funds include Temasek Holdings, whose chief executive is Ho
Ching, the wife of Prime Minister Lee Hsien Loong and daughter-in-law of
Singapore's founding father, Lee Kuan Yew.
Elephant in the data
More bizarrely, the index doesn't explicitly measure state ownership of
businesses, except in the financial sector. Government ownership gets mentioned
in Singapore's ratings on Investment Freedom, Financial Freedom and Government
Spending, where Singapore scores a stellar 91.3. Yet government ownership is a
crucial factor in any economy, often with far-reaching effects. "Why does a
government control companies unless it wants them to behave differently than
private companies?" economist Bamberger said.
"I probably would not invest in a company that the Singapore government
controlled," said Michel Levin, founder of shareholder rights advocate The
Activist Investor. "The government portfolio manager - really some sort of
minister somewhere - determines who sits on the company's board of directors
and therefore who the key executives are. The key is that they make those
decisions based on what's best for the Singapore government, not necessarily
what's best for independent investors."
Economic freedom in Singapore is "as good or better than the US by the
customary measures", according to Levin, who lived in Singapore while working
for an international consulting firm.
"But Singapore suffers from a sort of caste system, where it's difficult to
advance very far up the economic ladder if you don't have the right
connections. It's somewhat worse than Western economies, specifically the US -
here [in the US] you can become wealthy just through having and working a good
business idea, but there you'll need to know someone. Probably a vestige of
their colonial past, colored by East Asian business practices that value
relationships over ideas."
It may be that the index smiles on Singapore because the institutions behind it
favor places that are all about business, not politics. Levin offers an
alternative explanation. "Heritage and WSJ get all wistful when they look at
how Singapore has become an economic powerhouse, a giant among pygmies, really,
in the region, but don't really see how the local politics may have in fact
limited what Singapore can achieve. Their authoritarian style helped them
emerge from the poverty of World War II, but may limit them now in attracting
creative types that drive future economic growth.
"Friends ask me what Singapore is like and I call it 'Cuba with money': same
politics and climate, with very different economies," Levin said. They also
have surprisingly similar levels of freedom, depending on how you choose to
Former broadcast news producer Muhammad Cohen told America's story to the
world as a US diplomat and is author of
Hong Kong On Air,
a novel set during the 1997 handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow
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