Was Singapore built on Lee Kuan Yew's pragmatism mixed with money illusion?

I recommend reading From Third World to First, a book by Lee Kuan Yew, Prime Minister of Singapore during its first three decades of independence.

It is insightful to read the reflections of someone so intimately involved in creating new public institutions from scratch, creating a new nation and identity, and all the tinkering and trial and error that went on for decades to get the country functioning.

The overwhelming feeling I get from reading his memoir is that pragmatism is the highest value when building new institutions. His was a do-what-works philosophy. Which is what you need when you have a plan for where your country is going.

Sadly, I think that when you don’t have a plan, it doesn’t matter what works. You can indulge in rent-seeking and political game-playing, and none of it matters because no one is expecting much.

I want to share some excerpts from the book that contain insights I found useful and are still relevant to many policy debates, starting with the book’s biggest economic lesson for me.

Money illusion

In the early chapters, it quickly became clear that Lee Kuan Yew suffered from money illusion. And it seems that he was effective because most people also believed the same illusion.

Money illusion is where people think in terms of nominal prices and in doing so misread the true economic situation. When it comes to the public sector, a version of this is often called fiscal illusion, whereby the institutional structure of the tax system and the labelling or naming conventions hide the true economics.

For example, in Singapore, public programs in health, education, retirement and housing, are funded directly or indirectly via the Central Provident Fund (CPF). This fund shares some similarities with Australia’s compulsory superannuation scheme, but the funds in Singapore are used for a huge variety of services, like housing, healthcare and education.

The CPF is an enormous non-tax compulsory payment scheme of 37% of income for the provision of such services. If we called these contributions “taxes” and called the CPF the “Treasury”, and left all its functions unchanged, then it would operate much like many of the tax-funded public programs common in much of the world.

I’ve argued before that taxes to pay for retirement can be rebadged as compulsory insurance without changing the fundamental function of the system—why not take advantage of fiscal illusion? People seem to think compulsory non-tax insurance-type payments are totally fine, while compulsory insurance-like payments called taxes are very bad.

Not only did Lee Kuan Yew believe in the money illusion, but so did the Singapore citizenry. A life lesson for me has been that nearly everyone does, as responses to my tweets about money and fiscal illusion often reveal.

Political expedience means not trying to change people nor teaching them to see through these illusions. Instead, it means crafting institutions that work when everyone believes them.

Here’s a snippet that shows the power of the money illusion when it came to raising the rate of non-tax compulsory payments from wages to the CPF in the 1970s and 80s.

Every year, the National Wages Council recommended an increase in wages based on the previous year's economic growth. Once workers got used to a higher take-home pay, I knew they would resist any increase in their CPF contribution that would reduce their spendable money. So, almost yearly I increased the rate of CPF contributions, but such that there was still a net increase in take-home pay. It was painless for the workers and kept inflation down. This was only made possible by high growth year after year.

And because the government fulfilled its promise of fair shares for workers through the ownership of their homes, industrial peace prevailed.

From 1955 to 1968, the CPF contribution had remained unchanged.

I raised it in stages from 5 percent to a maximum of 25 percent in 1984, making a total savings rate of 50 percent of wages. This was later reduced to 40 percent. The minister for labor was usually most anxious to have the worker's take-home pay increased and would urge me to put less into the CPF. I regularly overruled him. I was determined to avoid placing the burden of the present generation's welfare costs onto the next generation.

Imagine trying to increase income tax rates from 5 per cent to 25 per cent and bargaining with unions using the argument: “Don’t worry, there is still a net increase in your take-home pay.”

When it is a non-tax compulsory payment, well now, that’s a different story.

The illusion is far more widespread than I ever realised. Many international organisations and tax experts explain how Singapore is a low-tax nation, despite their economic training. It is true that in Singapore some things are lightly taxed. But have you heard about their 60% stamp duty on foreign buyers of real estate?

Those who do look through the money and fiscal illusions see the great big tax regime for what it is:

…once Lee Kuan Yew and the PAP had consolidated their power over trade unions, and had suppressed political opposition, both the CPF and other taxes diverted a large share of national income into government savings.
…
Before independence, employees and employers together contributed only 10 percent of the payroll in the covered sectors. By 1984-1985 this taxation had peaked at 50 percent of the paycheck of a middle-aged worker. It has since stabilized at about 38 percent of the paycheck for such a worker.

This tweet thread is worth a quick read on the matter.

Source: https://x.com/alnickmnathan/status/1615983793785171970?s=20

Another element of the money and fiscal illusion is the idea of “intergenerational burdens.” Lee Kuan Yew wrote that he had to increase taxes on workers today to reduce the burden on workers in the future. But this is another illusion.

Politically, I now realise that we must operate in a world where most people, including many experts, share illusions about money and taxation. If people hate taxes, don’t raise taxes. If people don’t mind paying into a fund, then have a fund instead.

Pragmatism

Not only does Lee Kuan Yew operate pragmatically in a world of widespread economic illusions, but this pragmatism extends to addressing other deep human tendencies and practical matters. He capitalises on internal personal motivations, individual rewards and markets where possible, while at other times he tries to change people’s internal motivations and beliefs through control of education, housing and the press.

Here he is accepting people and their internal motivations as they are.

We believed in socialism, in fair shares for all. Later we learned that personal motivation and personal rewards were essential for a productive economy. However, because people are unequal in their abilities, if performance and rewards are determined by the marketplace, there will be a few big winners, many medium winners, and a considerable number of losers.

That would make for social tensions because a society's sense of fairness is offended

A competitive, winner-takes-all society, like colonial Hong Kong in the 1960s, would not be acceptable in Singapore.

Just as in Australia, where Prime Minister Rober Menzies sought political buying by fostering “little capitalists” through homeownership after WWII, buy-in to the Singapore project was needed after its independence.

I had seen how voters in capital cities always tended to vote against the government of the day and was determined that our householders should become home owners, otherwise we would not have political stability. My other important motive was to give all parents whose sons would have to do national service a stake in the Singapore their sons had to defend. If the soldier's family did not own their home, he would soon conclude he would be fighting to protect the properties of the wealthy. I believed this sense of ownership was vital for our new society which had no deep roots in a common historical experience.

Who will defend the country if so few own property. Will mothers send their sons to war to protect the property of the wealthy.

So it was that national service and national housing all began as a way to nurture those humans and their illusions towards a common purpose and build national trust.

But this also required a clamping down on political enemies and threats to stability. Numerous times he writes that “we had to arrest” some political enemy or another, and be especially heavy-handed with the press.

One time it was the editor of a Chinese language newspaper who just “had to be” arrested for attacking the government which was, at the time, trying to make English the main language in schools.

Toward the end of 1970, the major Chinese paper, Nanyang Siang Pau, turned rabidly pro-communist and pro-Chinese language and culture. It mounted an attack on the government, accusing it of trying to suppress Chinese language, education, and culture, and portraying me as the oppressor in a government of "pseudo foreigners who forget their ancestors." We had to arrest Lee Mau Seng, the general manager, Sham-suddin Tung Tao Chang, the editor in chief, and Ly Singko, the senior editorial writer, for glamorizing communism and stirring up chauvinistic sentiments over Chinese language and culture.

I’m slowly learning that national identities, if they are not forged through conflict against a common enemy, are forged via ruthless enforcement.

There are two other ways I noticed this pragmatism about working with people’s motivations as they are.

First, the chapter on Japan is interesting for its admiration of the culture of efficiency that Yew sees as a by-product of the culture of life-long relationships between companies and employees and the ability to continually be promoted and learn and refine skills.

Rather than people moving from place to place, loyalty is rewarded financially, but also skills accumulated in organisations where those at the top know a lot about every single job below them.

Here, he expresses how he wants to replicate a system that works in a culture where loyalty is already a powerful motivator.

The second place I notice this pragmatism is when comes to healthcare. But now, it is competition and market incentives that seem to motivate. Yew wanted public hospitals to compete with private ones and required that some medical services would not be covered by national insurance to avoid unnecessary use.

We allowed the use of Medisave for private hospital fees, subject to price limits for various procedures. This competition put pressure on government hospitals to improve their service quality. But we disallowed the use of Medisave for visits to outpatient clinics or private GPs. We believed more people would see a doctor unnecessarily for minor ailments if they could pay from Medisave than if they had to pay from their monthly budget.

The juggle between crafting institutions that work with people’s current motivations and beliefs, and also changing the motivations and beliefs inside people’s heads is a constant theme.

For example, Lee Kuan Yew was very keen to motivate marriage and education. Marriage is incentivised by requiring applications for public housing only as a married heterosexual couple. Racial quotas on housing projects were also enacted to force change in the minds of residents about the social status of other races.

The well-known tension between higher-educated women and birth rates was also thought to be a problem. To that end, Yew

…arranged matchmaking cruises for university graduates, and gave women graduates priority housing, in an attempt to increase the number of educated Singaporeans in the next generation.

Sure, it sounds a little like eugenics. But that’s the puzzle with the whole Singapore experience, and I think with nation-building in general.

Some beliefs are deep and cannot be changed, whether that is money illusion, loyalty, or responding to personal financial rewards. These must be utilised directly by national institutions. However, some beliefs are incompatible with economic success, such as inter-group status competition, and the decline of family units. These must be modified via cultural efforts, the media, and education.

Knowing which approach works where needs pragmatism and a plan to know whether things are working.

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