On Pay For Performance

Ministerial salaries in Singapore are a bit on the high side. In a just world where everything fit, that fact would imply that Singapore is prospering (check: more or less) and the people are extremely pleased with government services, the business environment, their standard of living and the direction the country is taking. On the latter count(s), it would take tremendous sampling bias to check those off today. Thus, there appears to be a remuneration mismatch which I will attempt to delve into.

In this opinion piece, I will discuss the basis of ministerial remuneration and pay for performance. I will talk about the inadequacy of using GDP growth as an indicator and show, by example, how one may easily develop better indicators. My intent is to contribute to the discourse on how we may more precisely reward good performance on the part of our ministers and provide incentives for good policy making.

The Basis for Remuneration
The nation's leadership must be properly remunerated for the time they put in to policy making and for the associated burden of responsibility. Remuneration for this base-load of effort would be partially covered by the non-variable component of their salaries. In addition to this, the nation's leadership should also be rewarded (or punished) for facilitating good (or poor) social, economic, security or foreign relations outcomes. This position is very much in line with what the ruling PAP government has argued in explaining the justifications behind their salaries. While I agree with the idea of pay for performance, I feel it has not been properly implemented.

On Performance Evaluation
What is good performance for government and how can it be evaluated? Presently, GDP growth is used as an indicator that determines a significant portion of ministers’ (and senior civil servants’) bonuses. By and large, it is agreeable that this is insufficient to cover the gamut of areas where government has a significant impact.

In addition to the above, a significant portion of ministerial bonuses is confidential and known only to the Prime Minister and the minister in question. We shall assume that the Prime Minister is privy to the efforts that each minister puts in and is qualified to judge the quality and effectiveness of the initiatives put in place by each minister. Behind this appears to be the assumption that the body politic is not qualified to properly judge these and their input could have a distorting effect on rewarding the deserving and punishing the blundering. This is only partially correct.

Before elaborating on why, let me enumerate on the major components of performance: (i) the standard of living of the body politic, (ii) the delivery and effectiveness of government services, (iii) the state of the business environment, (iv) economic and geopolitical security, (v) the direction of the country and (vi) the effort put in by individual ministers.

I believe that it would also be agreeable that while the body politic are able to evaluate (i) thru (iii), they are not equipped with the information and knowledge to evaluate (iv) thru (vi). Conversely, the Prime Minster is far less qualified than the body politic to evaluate (i) and (ii). The Prime Minister may also be less qualified than the average business owner to evaluate many aspects of (iii).

While we might conclude that the Prime Minister and selected advisors should be the ones to evaluate (iv) thru (vi), and to some extent, (iii), we might also conclude that there are gaps in the evaluation of (i) thru (iii). Furthermore, it is (i), (ii) and aspects of (iii) that the body politic care most about and are most qualified to evaluate. As it is impractical to award ministerial bonuses by referendum, proxy indicators must be used to measure these effects that arise indirectly from the actions of our ministers. These proxy indicators must also be formulated such that the body politic would agree that they measure the aforementioned elements of performance.

On GDP Growth as an Indicator
GDP growth has little relation to (iv) thru (vi), it is also only weakly correlated with (i) and (iii). However, it would appear that GDP growth is, in some sense, being used as a catch-all to evaluate the changes in standards of living, the state of the business environment and even the quality of government services. Supporting the truth of this hunch is the fact that a substantial portion of ministerial (and civil service) bonuses depend on the level of GDP growth. If this does, in fact, reflect reality, then there is a problem.

I would like to, first, justify the inadequacy of GDP growth as an indicator by quickly explaining why GDP is only weakly correlated with (i). There can be many economic outcomes (states) in which GDP growth can be high but large segments of the population experience decreasing standards of living. It is the existence of these outcomes and the likelihood of their occurrence (we have been experiencing these outcomes in recent years) that justifies the contention that GDP is only weakly correlated with (i).

(Note: A more precise mathematical statement on the inadequacy of GDP growth as an indicator could be made along the above lines. In addition, except for effects arising from the regulation of businesses and promotion of competition, it is difficult to relate GDP growth to (ii). Also, it would take more effort and business /economic reasoning to explain why GDP growth is ineffective as an indicator for (iii).)

Proposing a Better Indicator
More effective indicators can be easily developed. As an exercise, consider using real household income growth to build one. We will use a weighted sum of average real household income growth of various segments of the population. For example: 0.5 times the average growth of the lower 50% plus 0.5 times that of the upper 50%. Extending that logic, consider measuring at finer granularities such as 10% segments of households or even 1% segments. For weights, we adopt the "democratic option" of equal weight being given to each individual regardless of income level, which is consistent with our electoral system. Let us call this indicator "Aggregate Real Household Income Growth" (ARHIG) and suppose that ten equally weighted 10% segments are used.

This indicator is consistent with findings in behavioral psychology where percentage growth is what matters and not absolute growth. In addition, prospect theory, which has been empirically verified in a wide range of activities involving expressions of preference, informs us that losses loom larger than gains, which suggests that percentage income contraction should be weighed more heavily than growth. Naturally, the difference in weight between growth and contraction should be determined by a proper survey.

Clearly, ARHIG and similar indicators correlates far better with standard of living. In fact, one could reasonably argue for a causal relation. Furthermore, income growth at all levels may be a better measure of the quality of the business environment as it measures the benefits derived by all elements of the economic hierarchy. I have not thought about this in sufficiently detail and thus can only make a conjecture. On top of all this, ARHIG is eminently easy to explain to the body politic.

As the this section indicates, it is possible to build indicators that are more relevant to ministerial remuneration. I believe in this short section, I have convincingly argued that the ARHIG that we have sketched out is superior to GDP growth as an indicator for standard of living. Competent government economists should have proposed something like this at several points, and if it was, I wonder why it was rejected each time.

Admittedly, we have worked on an indicator for the aspect of performance that is easiest to measure. With more work, one could describe an indicator for (ii) and (iii), though my sense is that a survey of sorts would be needed, necessitating a (secret) sampling process.

Summing Up
In this unexpectedly long opinion piece, we have discussed the basis of remuneration and the measurement of the various aspects of performance. I have explained why GDP growth is a poor indicator for improvements in the general standard of living. To show that it is not difficult to build more relevant measures, "Aggregate Real Household Income Growth" (ARHIG) was presented as a simple indicator that more directly measures improvements in the general standard of living. The fact that such indicators are not used do not square with the fact that many Ivy League and Oxbridge educated economists are working in government ministries. Without good indicators, "pay for performance" does not mean anything. Thus, the failure to use better indicators should be explained. In so far as the ruling party is correct that rewarding good performance is a vital ingredient for good government, the lack of good indicators of performance is harmful and is a problem that should be addressed with haste.

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Afternote: I've computed ARHIG for 2001 thru 2010 using data from SingStat, though it is annoying to reproduce them on a blog. (So I shall be lazy and not do so.)

There is one interesting tidbit though, real household income growth over 10 years has generally not been too shabby except for the lowest earning 10% of households. They experience a -6.55% contraction in real household income. (The 11-20% decile has 10%, the 41-50% and 51-60% have about 23%, and the 91-100% have 34.85%.)

However noting that SingStat's income data excludes government transfers, such as WorkFare, we see that measures are being taken to close the gap. In fact, a quick look at the Workfare Income Supplement numbers reveals that that WorkFare would result in real household income growth over 10 years for the lowest 10% of households of around 5% to 8%.

On the flip side, these (few) numbers do not provide a clear picture as only households with at least one working member are counted. Ideally, unemployed households should also be accounted for.

Afternote 2: This article was also published on New Asia Republic.

A Route to Value Creation: Cut Out Unnecessary Middle Men

Rentals for food stalls in Singapore are high. This comes as no surprise when rental to stall holders is done by real estate companies who have won government tenders to run a food centres. To quote an article reposted at the HardwareZone forum: (I can't find the original.)

Recall the fiasco last year, after the Housing Board put up a tender for a market and food centre to be wholly operated by a private operator in Sengkang. This was a pilot project following calls from HDB flat dwellers for wet markets and hawker centres to be built. Renaissance Properties, a subsidiary of foodcourt chain Kopitiam, beat 24 others with the highest bid to build and run the centre at $500,100 a month. That bid, however, translated into rents as high as $6,000 per stall, which is more than double the average rent for a stall in an NEA-run centre. As a result, stallholders charged about 30 per cent more for their cooked food than stalls elsewhere. Residents complained, or stayed away. Business was poor and some stalls were forced to close. ... Throughout, hawker stall rents have been kept moderately low, as an incentive for hawkers to price their food affordably. About 42 per cent of stallholders in NEA-run centres pay subsidised rent of between $160 and $320 per month. These are either hawkers who were relocated from street stalls, or their immediate family members. The other stalls are tendered out for between $300 and $4,900 per month. This rental is based on a valuer's assessment, taking into account stall size, location and the prevailing economic climate.

The contrast is stark. Before delving into the underlying economics, consider the following exchange that occurred in Parliament last year. In March 2010, then Hougang MP Low Thia Khiang argued in Parliament that competitive bidding for land to build these centres might result in high prices for consumers. Then Senior Minister of State for National Development Grace Fu disagreed. She said that private operators need to ensure that what is sold is affordable and relevant to the needs of residents, and that it would be presumptuous to say that a market which is operated by a private operator would lead to high prices.

With respect to her station, she is wrong. Basic undergraduate level economics would inform one that the commercial operator would attempt to raise rents as high as possible while making the rental transaction feasible with respect to the stallholder's participation constraint. Stallholders will participate in the rental transaction as long as they are able to make a living at the store and will raise prices if necessary to do so. This contention can be supported empirically. Kopitiam is known to attempt to estimate revenues of their tenants and raise rentals for the stalls that are doing well. It would be unsurprising if other landlords do the same.

(Naturally, if a stallholder expects to be able to make a better living at another location with a different rental, he will. However, when NEA-run stalls are not available, stallholders have to turn to commercial landlords, who have no incentive to lower rentals as they know the market can sustain their asking price. )

High rentals and raising rentals for successful stalls are a mechanism landlords use to transfer the economic value generated by stallholders to them. This strikes me as unfair. Without commenting further on equity between landlord and stallholder, I'd like to point the reader to the obvious negative externality that the economics leads to: higher prices, which reduce value for Singaporeans. The fact of the matter is, both theory and empirical evidence point to private profit seeking operators causing higher prices. The onus is thus on SMOS Fu to show that they do not.

On a more general note, this highlights a more general problem where the government enables middlemen to extract economic value from the primary value generators while generating little value themselves. In certain areas, middlemen do generate value. For instance, linking borrowers to savers is an economically valuable role performed by banks.

The government's justification for outsourcing tasks like management of food centres is that it does not want public service manpower performing non-core tasks. The government should bear in mind that this should not be done at the expense of value for the public.

It is axiomatic that commercial entities will not take on projects if good profits cannot be made. This profit has to come from somewhere. The government should keep this in mind when divesting operations. Where middlemen are unnecessary they should be cut out, otherwise they will extract value from the end-user (the public). In such cases, the public service does the people no service. Presently, value can be recaptured for the public (and value generators) by rolling back divestments that destroy value for Singaporeans.

Economic Data Should Be Revealed to All

I refer to two recent Straits Times articles "Academics call for more detailed, regular data sharing" (25 Oct 2011) and "Two areas where information gaps can be plugged" (25 Oct 2011). I largely agree with the positions taken by academics on availability of data collected by government agencies.

However, one of the articles hints that some academics have been lobbying for economic information to be revealed to them without public release. One of the above articles reported that an economist has urged the Central Provident Board to "trust Singaporean academics not to reveal data at the micro level". I believe such selective revelation to be wrong.

I take exception to the implicit contention that academic economists should receive raw economic data from the government while taxpayers and business owners who actually finance the collection of that data are kept in the dark. More tangibly, such data has commercial value and should be revealed to all so as to avoid granting unfair potential commercial advantages to a few parties, current and former government employees included.

It may also be noted that private sales of the results of analyses of the data may take place that do not violate the letter of any agreement to not reveal raw data. In fact, to the numerically savvy, this can be done in a manner such that it becomes relatively easy to "invert" for a good partial picture of the raw data. (The technical term would be to deconvolve aggregated results.)

Furthermore, selective revelation poses the further problem of selecting from the number of academics assessed to be competent enough to produce useful analyses those that are "trustworthy".

All data should be released so all businesses and analysts can benefit from it to the extent of their capability to analyse. This is the fair option, and the Singapore economy will be richer off for it.

On Singapore's Long Term Economic Viability: Tertiary Education in Science and Engineering

(This rant was published in edited form at New Asia Republic on 4th Nov 2011.)

The key to the long term economic viability of Singapore is not government prescience in selection of the next big thing. Rather, the "key driver" will be the quality of education our young receive. A series of knowledgeable and well-educated cohorts will be able to identify opportunities and innovate to grasp those opportunities. I would like to focus on science and engineering graduates as these are the necessary "skilled inputs" required for a healthy high-value-added economy.

It is disappointing that the quality of output from our universities is not exactly up to scratch. Most are not capable of independent application of what they have learnt or should have learnt in school. Few are willing to learn new/subsidiary skills and even fewer have the breadth and depth of knowledge to make their learning process efficient.

Many will disagree with me. Most will be part of the group I am referring to. Sadly, many employers will probably agree with me. In addition, I believe that a number of local university professors will agree with me. I did my undergraduate studies at NUS and one of my professors told me, some time ago, that "the quality of Singapore engineering has fallen." (He presently holds a high appointment in the school, and naming him may do him a big disservice.) From my previous interactions with university professors and people who assess potential hires for technical ability, most do not expect much from fresh graduates and seem pleasantly surprised when a one exhibits knowledge and demonstrates capability.

I wouldn't blame the faculty. The incentives present in society rewards middlemen who have constructed a system where they oversea financial flows and take a fraction of the financial flux as a cut. As such, many who choose to read science and engineering look to a career in financial intermediation, "connecting financial supply to demand". Intermediaries are useful to have -- money itself, which makes transactions convenient, is an intermediary. However, with the arguably incorrect reward system, the rush into finance is impoverishing the world due to the fall in creation of real economic value. Furthermore, textbook supply and demand does not work due to monopoly effects: there is basically one financial system (... and this should change so the free market can kick in). With that background, many science and engineering students primarily seek only to obtain a paper qualification that indicates some quantitative training and at the same time gives them license to apply for a technology job. What this causes is a lack of interest in coursework and eventual lack of knowledge retained after graduation.

Many engineering graduates lack the confidence or ability to do engineering. Most of those who do take up engineering jobs take on sales roles or roles that previously would have been done by non-graduate technicians. The booming of the financial services industry has been a boon to many who take on sales jobs and work on basic quantitative analysis. Most do not even know how to properly price a financial derivative and end up selling products that they themselves do not understand. (Insurance policies are in essence financial derivatives too.)

(In fact, I have even met "scholars", including those who studied overseas, who cannot describe even in a cursory manner what they did in their final year projects not 5 years ago. Can one reasonably forget work that one recently spent a year or half a year on? This hints at a larger problem in new and upcoming members of the workforce.)

This is a sorry state of affairs and does not bode well for long term economic viability. Without going into what I see as consequences of this, I would like to propose a measure to ameliorate this. I believe that local universities should raise the bar substantially and only allow students who have demonstrated a good level of proficiency to pass courses (and hence, graduate). Universities should not be afraid of failing students who are not yet competent in their coursework.

Why do this? I believe that in science and engineering, most of the value is created by those who have at least some threshold level of knowledge and capability. I do not refer to "the talented tenth" or any notion that hints at a top X%, what I mean is that some approximate level of knowledge and capability that generates network effects of knowledge, making the individuals within which such a dynamic exists proficient value generators. Now, rising waters lifts all boats, but does not leave all intact. Competency levels will be raised, but some will not be able to graduate. That is fine, in my opinion, those people would not have made good scientists or engineers anyway and would definitely have trouble on their own in the job market.

What may not be easy to predict is whether even more would like to pursue quantitative finance (as opposed to sales roles) as a career given the raised capability levels. I do not think I can address this issue here.

In the short term, the value of a science/engineering degree will be raised, and new graduates will be able to find good jobs more easily with employers having greater confidence in the technical competency of job applicants. Graduates will also have been equipped with a good level of knowledge and facility with that knowledge to confidently do their work effectively and pursue new knowledge when the need arises.

On the flip side, this will cause a dip in the number of science and engineering graduates with those who are unwilling or unable to handle the rigour. However, I would argue that the number of engineering graduates should be raised not by lowering standards, but rather through the force of personal aspiration on the part of students. We should not play with our nation's long term economic viability to raise a KPI in the short term.

Operationally, this will demand a greater focus on teaching in universities, meaning more staff will be needed and changes in remuneration policy will be required rigorously assessed projects are not practical from the standpoint of manpower, a shift to high stakes examinations will take place. While the benefits of high stakes examinations is debatable at the primary and secondary levels are debatable, sound reasons exist for institutionalizing them at the tertiary level. To argue by example, building a bridge is a high stakes project, and the skills that go towards building that bridge should be rigorously ensured. If these skills are not demonstrated through (rigorously assessed) project work, challenging examinations will have to serve as a proxy.

Notably, with high stakes examinations, professors will be hit more often with the "annoyance" of students griping about grades. I would argue that greater transparency in marking would be a solution. By allowing students access to their marked papers and the marking guide, fewer frivolous requests for review will take place. (Papers could be scanned and the images made available to students.) Furthermore, releasing marked transcripts and revealing marking guides might turn out to be a useful post examination review with high pedagogical value.

I believe that raising standards at local universities will be necessary for long term economic viability. This will involve potentially expensive operational changes, but the net effects will be well worth our while. What I am certain about is, we cannot continue this way or future Singapore will be largely populated by port workers servicing ships making brief refuelling stopovers.

The Proper Role of Business

Business is the expression of the productive urges of individuals expressing their skills and capabilities, and seeking, in a sense, to be valued by others. In this sense, business is intricately bound up with self-hood is an important part of life and being alive.

Problems arise, however, when business is perverted so as to subordinate life for the sake of profit, robbing the many through cunning schemes.

As such, we should always remember that business is and should always remain a vehicle for self-actualization. Selves should never be consumed for the sake of business. For a nation to forget this, pain will necessarily follow. With luck, there will be regret and there will be learning. I, however, will not be keeping my fingers crossed.

On Producing High Value While Tolerating Low Quality,

Just a short statement on this matter. I've noted that HDB has been telling citizens that they have to tolerate things such as noise (due to bad sound proofing) while residents of other developed nations have well defined regulations on sound proofing. To make a sweeping statement, albeit with broad truth, this reflects the larger picture where the government admonishes Singaporeans to be cheaper, better and faster, while telling them to bear with teething problems of administering the country.

I do not think it is possible for all Singaporeans to aspire to high productivity while enduring unsatisfactory responses from government representatives.

Naturally, there is one way to go: Better, faster gahmen!

Ramblings on Self-Radicalization

The ruling party and the state-controlled media has more or less issued a blanket condemnation of critical voices online as "noise". In addition to making the claim that these voices have little to offer, they have also said that some of the individuals get their information from a limited pool of sources and end up "self-radicalizing". Having been previously used to refer to those who have perpetrated or planned to perpetrate lone wolf terrorist acts, this term has taken on a very negative conotation.

In a way, this as an attempt to draw an artificial dividing line between "us reasonable people" and "those who would promulgate senseless chatter" that is wasteful and should be "considered harmful". I'd like to ramble a little about this so called "self-radicalization" and consider why it may be the appropriate reaction of reasonable people.

When one hears of famine in Africa and children dying, one feels sad. When one hears that many innocents were killed in a terror attack, one feels angry. When one is told of how one's social/ethnic group has been systematically marginalized by those in power, one gets very angry. Information often supplies the motive force for one to take action. This information may be unbiased or biased. Whatever the case, if it is taken to be a good reflection of reality and resonates with the recipient, that individual may be driven to action. This is a fact of life, and applies to all but the most apathetic.

Perhaps this is why people leave well-paying jobs to serve the underprivilleged; this is why people volunteer to support social causes; this is why positive action happens. (The flip side to this exists and should be acknowledged.)

Naturally, news and direct observations about the state of Singapore naturally touches Singaporeans; Information about the way the ruling party and its associates behaves would necessarily have resonance with Singaporeans. When people feel that something is wrong, they are driven to say something. Inarticulate as such a statement might be, there is probably something behind it. If it is backed by action, it is all the more certain that something is behind it.

Since disenchantment and jadedness sets in when good intentions are thwarted and denigrated, the prevalence of the jaded Singaporean can be easily explained.

So the question for the labellers to ask themselves is, why are people being, in their words, "self-radicalized". Simply tossing out a label is cheap and somewhat dishonest. When people are driven to action, something important and salient to them probably underlies that action. The only responsible thing to do is to find out what drives such action, and address it in good faith. Anything less is not acceptable.

Some Ramblings on Privacy and Security

Telecom companies have access to a lot of information on us and our activities. Given a cellular phone connected to a telco's network, that telco is able to store a time series of approximate locations of that phone. By appropriate computational post-processing, this time series can be made even more accurate.

Power companies, too, are able to monitor power usage in our homes, and by trying to solve an appropriate inverse problem, are able to estimate what is going on. This might entail what appliances are present, and what kinds of activities occur at what time.

The question is, what do we, as a society deem to be reasonable use of that information. In some manner of speaking, we are willing to trade some privacy for security. On one hand, there will be little opposition to the use of cellular phone tracking to pin point the location of terrorists en route to commiting a planned attack. On the other hand, the sale of such information to commercial entities for marketing purposes will be frowned upon by society at large.

Legal and regulatory lines have been drawn, so I will not go into those. However, in the wild west of the global network, one concern is the security of such information. Nefarious parties may get access to such information and use it for their profit. Even more sinisterly, unethical elements in telcos may collude with such nefarious parties to open backdoors to stored data and hence sell private information through a criminal front while hiding the breach.

Storage should be avoided to protect privacy. However, storage is necessary to identify possible terrorists through data mining. It is thus thoroughly annoying that telemarkets turn out to be the proxy elements of terrorists, causing daily disruptions costing millions in lost productivity daily. Once again, the terrorists win.