Steve H. Hanke
Reporting of the historic Singapore Summit between President Donald J. Trump and Supreme Leader Kim Jong-un has been fascinating. The lead story in Pyongyang has been on the Supreme Leader’s Singapore walk around, and his desire to learn about economic development from the Singapore Strategy. In the western press, however, Pyongyang’s lead story is nowhere to be found.
Kim Jong-un is clearly onto something. As anyone watching telecasts from Singapore during the past few days could observe, Singapore appears to be very prosperous. And it is. Measured by per capita income, Singaporeans are some of the richest people in the world. The economy is capitalist, and capitalist on steroids. That’s why Singapore has shot up from the depths of the Third World, at its founding, to the upper reaches of the First World, today.
Singapore gained its independence in 1965, when it was, in effect, thrown out of Malaysia. At that time, Singapore was backward and poor — a barren speck on the map in a dangerous part of the world. If that wasn’t enough, it was experiencing race riots, which came close to igniting a civil war. Singapore’s per-capita income in 1965, adjusted for inflation, was roughly equivalent to that of poor countries like Albania, Angola, Armenia, Guyana, Kosovo, and Mongolia, today.
But, at its founding, Singapore had a leader, Lee Kuan Yew. He had clear ideas about how to modernize the country — a strategy which I have dubbed the “Singapore Strategy.” This strategy contained the following elements:
The first element was stable money. Singapore started with a currency board system — a simple, transparent, rule-driven monetary regime. Currency boards operate on autopilot, with automatic adjustments keeping the system in balance. Accordingly, currency boards deliver discipline to the spheres of money, banking, and fiscal affairs. For Singapore, the currency board provided stable prices and free convertibility of the Singaporean dollar, which was fully backed by foreign reserves and gold, at a fixed exchange rate. This established confidence and attracted foreign investment.
The second element was that Lee Kuan Yew ruled out passing the begging bowl. Singapore refused to accept foreign aid of any kind. This is a far cry from many developing countries, where, when you pick up the paper, all you see are politicians and bureaucrats trying to secure foreign aid from someone, be it an NGO, a foreign government, or an international financial institution, like the World Bank. By contrast, signs reading “no foreign aid” were hung figuratively outside every government office in Singapore.
The third element was that Singapore strived to have first-world, competitive private enterprises. This was accomplished via light taxation and light regulation, coupled with completely open and free trade — in short, policies that enabled Singapore to become one of the Asian Tigers.
The fourth element in the Singapore Strategy was an emphasis on personal security, public order, and the protection of private property.
The fifth, and final, element in the Singapore Strategy was a “small,” transparent government — a minimalist government that avoided complexity and “red tape”.
To execute the strategy with precision, Singapore appoints only first-class civil servants and pays them first-class wages. Today, for example, the Singaporean Finance Minister’s annual salary is 1.3 million dollars (USD). In exchange for these high salaries, the Singapore Strategy demands that the government runs a tight ship, with no waste or corruption. By embracing Lee Kuan Yew’s Singapore Strategy of stable money, no foreign aid, first-world competition, law and order, and a government that is free of waste and corruption, Singapore has transformed itself from a poor, barren speck to a global financial center.
It should come as no surprise that Singapore today is one of the freest, most flexible, and prosperous economies in the world. Kim Jong-un clearly has his eye on a winning strategy. Maybe the Supreme Leader is a bit more clever than most western observers give him credit for.Steve Hanke is a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.
President Trump’s ideas on trade often seem paradoxical.
At the weekend G-7 summit, he floated both abolition of all tariffs worldwide and banning trade with certain countries entirely over the course of just 24 hours. His recent announcement of the removal of exemptions from steel and aluminum tariffs for the European Union, Canada and Mexico was justified on “national security” grounds. Yet reminded that these countries are military allies of the United States, the president retreated to suggesting the tariffs were retaliation for current EU and Canadian trade barriers to U.S. products.
Two theories of the president’s approach are consistent with these interventions. The optimistic case for free traders says that Trump is threatening tariffs and using the presidential bully pulpit to try to open up highly protected foreign sectors, and ushering a new era of global free trade. The pessimistic case says the president and his close team are protectionists at heart, and use the veneer of arguments about reciprocity to cover up their true intentions.
Rather than seeing free trade as a means of promoting mutually beneficial exchange between buyers and sellers, the president thinks of trade as a zero-sum game that sees nations “winning” if they export more than they import.
Sadly, most available evidence now points toward the latter. Over the last three decades there has been a slow but steady liberalization of markets, with tariff rates among advanced economies falling, in large part due to painstaking multilateral negotiations and trade deals. According to World Bank data, the weighted mean applied tariff rate for the U.S. and EU are near identical at 1.6%, and even lower in Canada at 0.8%. Mexico is higher at 4.4%, but given this has tumbled from 15.5% just 15 years ago, and many goods are traded tariff-free with the U.S. due to Nafta, focusing on these countries seems an odd place to start if your aim is a freer global trading environment.
That is not to say that there are not egregiously overprotected markets in the EU and Canada. All countries seem to have some well-organized vested interests who resist this pull toward open competition. President Trump is correct that the Canadian dairy sector uses a “supply management” system incorporating tariff rates of up to near 300% on dairy products for imports beyond quotas. These do raise prices for Canadian consumers and discourage importation of American produce. The European Union likewise imposes much higher tariffs on American car imports than vice versa (10% vs. 2.5%), though the U.S. imposes higher tariffs than the EU on trucks. The world as a whole would be better off if these restraints were gone entirely. But reversing the progress made because of unusually high tariffs in certain sectors is misguided.
If the president were a free trader at heart, one might imagine he would celebrate the overall progress, and push to go further. He would practice what he preaches, taking on his own domestically protected sectors, as in sugar, where federal interventions, tariffs and production quotas raise the American sugar price to almost double the world price. At the very least, he would argue his steel and aluminum tariffs were merely a necessary evil to compel broader liberalization overseas.
Yet this is not the argument the president or his key advisers make. When it comes to the aluminum and steel tariffs, for example, Trump adviser Peter Navarro has claimed, rather dubiously, they have encouraged a new aluminum mill in Kentucky and restarted steelmaking facilities in Illinois. He appears indifferent or willing to ignore the impact raising the price of a key input will have for the 6.5 million workers in industries that consume steel, instead claiming they are “pro-worker”. This is not the line an administration would take if they saw steel and aluminum tariffs as a damaging short-term pill to swallow to compel a more liberal trading environment in future.
Indeed, everything from Trump’s obsession with economically meaningless bilateral trade deficits, to his constant focus on producers, rather than consumers, suggests that “exports good, imports bad” represents Trump’s worldview. Rather than seeing free trade as a means of promoting mutually beneficial exchange between buyers and sellers, the president thinks of trade as a zero-sum game that sees nations “winning” if they export more than they import.
The danger with this thinking now is that nationalism begets nationalism. A world in which the U.S. president seeks to bully other countries to lower particular tariffs in certain areas but offers up no firm proposals to take on its own highly protected sectors is a world in which EU countries and Canada feel unfairly singled out, and retaliate in kind. Focusing on individual, politically sensitive foreign sectors (troublesome as they are) risks unwinding the true progress that has been made over many decades.
Economists will carefully explain to all sides that higher tariffs harm domestic economies by generating investment-deterring uncertainty, raising prices for consumers, and undermining overall efficiency (as producers are insulated from global competition and face higher input prices). But the president seems indifferent to their protestations, instead offering his biggest contradiction of all: that tariffs will be good for the U.S. today, but that the abolition of tariffs will be good for the economy in future.Ryan Bourne occupies the R. Evan Scharf chair for the Public Understanding of Economics at the Centre for Economic Studies at the Cato Institute.
Jeremy Corbyn has had another brainwave.
The Labour leader wants to make it illegal for businesses to “pocket” tips and optional service charges.
Some restaurants and hospitality firms currently collectivise what we add to our bills or give to waiters and waitresses. They might directly pool tips to redistribute them through a common fund system or add them to general revenues.
For Corbyn, these actions amount to theft.
“It is not right that workers have their tips stolen by bosses,” Corbyn said. The next Labour government will ensure that “workers keep 100 per cent of their hard-earned tips”.
Imposing strait-jacket regulation across a variety of businesses is the order of the day.
Let’s leave aside the fact that workers would keep far from 100 per cent, given the high taxes likely under a Corbyn administration.
Unfortunately, the Labour leader is not alone. He is making the same mistakes as then business secretary Sajid Javid made when discussing this subject: first, assuming that social expectations about where tips go can harmlessly be enshrined in legislation; second, failing to differentiate between the flow of cash and the overall economic impact.
In fact, imposing a one-size-fits-all “tip must go to worker” regulation could adversely affect businesses and workers alike, given the different nature of restaurant models and how managers use tipping to adjust total compensation.
Restaurant-specific tipping practices can be an important way to deal with risk, manage staff morale, and ensure that customers get a good service. Though less important generally in Britain than in the US, basic tipping can play an important economic function.
Consider the set-up that Corbyn has in mind, in which, say, a single waiter or waitress serves a set of tables exclusively.
The purpose of tips here is to be a form of risk-sharing for the restaurant, particularly if it is not easy to observe the behaviour and competence of wait-staff.
Tips lower the underlying hourly wage a restaurant might need to offer to attract staff (lowering fixed costs), and total remuneration for a worker becomes linked to customer satisfaction. This averts the need for workplace performance assessments and controversial wage negotiations for each and every staff member.
However, even this simple example (to say nothing of larger, more complicated restaurant set-ups) highlights reasons why it might make sense to deal with tips differently.
In very small restaurants or established chains, where behaviour is observed or customer expectations simple, it could make more sense to adjust overall pay rates and put any tips into general revenue toward that. If the work is relatively homogenous, staff might resent a tipping “lottery”, where lucky workers benefit from generous tippers and other wait-staff who work just as hard do not.
It can therefore make sense for restaurants to centralise this pot for distribution, or see it as general revenue, for the restaurant as a whole.
That is exactly what lots of restaurants do, distributing tips through formulae in many cases.
This amounts to some centralised assessment of what components of the customer experience generate the extra revenue, which is subsequently used to set a system to reward good performance, individually or collectively.
Think about it: when you go for dinner, do you really just tip based on the likeability or performance of your waiter? Or do you also take into consideration whether the manager was accommodating with your table preference, the food was good and prepared in a timely manner, the server spilled food over you, and the restaurant had your favourite dessert available?
It’s pretty obvious that lots of these things are outside the gift of the waiter or waitress. A strict version of Corbyn’s proposal would simply make it more difficult for firms to find imaginative ways to incentivise staff, and could in some cases work out as less fair than the system he is criticising.
No doubt firms would adjust in other ways: underlying pay rates and consumer prices would be tinkered with. But as Labour is also proposing a significant national living wage hike, many restaurants would have to cope with both higher fixed costs and less control of potential income.
In fact, this whole proposal speaks volumes about Labour’s economic ideology in general.
Nefarious restaurant owners (for which we can read business bosses in general) are regarded as having the market power and desire to screw over their workers at every available opportunity, while any perceived injustice can supposedly be corrected without harm by central diktat.
Imposing strait-jacket regulation across a variety of businesses is the order of the day. No thought is given to how this might affect norms and conventions that businesses adopt to solve their own challenges and balance the needs and desires of staff, customers, and managers.
It starts with restaurants, and ends with the whole economy.Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.