The Bear’s Lair: Lee Kuan Yew’s discipline is needed but unavailable today.

Lee Kuan Yew, who died last week, led Singapore from an impoverished tropical island when he took over in 1959 to a country with a GDP per capita 50% higher than the United States’ today. Obituaries have been divided into two camps: those praising the economic progress Singapore has made and those decrying the elements of authoritarianism in Lee’s approach. Yet in the difficult circumstances of Singapore one would probably have been impossible without the other. Alas, if we search for a new leader with Lee’s discipline and self-discipline, we are unlikely to find him.

It must be remembered that Lee started as a man of the left, in alliance with the Singapore Communist Party. He came to power with the first stage of Singapore independence in 1959, took full control after Singapore’s 1965 break with Malaysia and stayed in power until 1990, exerting a considerable direct influence on his successors until his final retirement in 2011 – his intellectual influence lasted until his death and will doubtless persist in Singapore for decades or even centuries into the future.

Much of Lee’s success lay in devising a method of providing the state pensions and medical care demanded by the left without the usual result of creating a giant Ponzi scheme that inexorably expanded the public sector and led to bankruptcy. In Singapore, some 20% of a worker’s wages are withheld into the Singapore Provident Fund, which is kept to build up a reserve of some $30,000 to meet medical expenses, as well as a system of catastrophic medical insurance. Only when a worker’s holdings have reached this level, sufficient to fund all but the most dire medical emergency, does the fund become a savings fund which can be used to fund his retirement or withdrawn for the down-payment on a house.

William Beveridge, the intellectual inspiration for the British welfare state and the National Health Service and a man definitively of the moderate left, would have very much approved of Singapore’s health and pension system. His Beveridge Report of 1942 sought to create a similar social safety net, and he would have loved the elegant scheme by which Singapore provides such a safety net without burdening the tax system excessively. Effectively the Singapore system involves only modest wealth transfer, mostly from the middle class to the working poor; it thereby avoids the huge incentives to tax evasion and disincentives to entrepreneurship at the top provided by British 98% marginal income tax rates or U.S. 91% rates that were popular in the early part of Lee’s tenure of power.

The Singapore system also has the benefit of being actuarially sound. Pensions are fully funded in advance and all but the poorest or sickest pay for their own medical care. In this respect Lee was a visionary; he saw the problems inherent in Western welfare systems 40-50 years ago, when U.S. and British systems were benefiting from the positive cash flow derived from people putting money into the system for decades before they retired or got sick.

Lee’s determination to prevent Singapore’s health and welfare systems from burdening the general fisc is admirable by any standard. His health system also has the advantage of preserving the maximum possible market incentives, as people spend their own money on healthcare, even if the cash spent derives from a trust fund. Singapore thus obtains excellent healthcare for 4.7% of GDP, according to World Bank data for 2012, a huge saving even compared to the supposedly parsimonious Britain’s 9.4% of GDP, let alone the bloated United States’ 17.9% of GDP.

Lee’s self-discipline was exercised in other areas also. Singapore is one of the least corrupt countries on earth, a huge change from its pretty gamey reputation when Lee came to power. Having been educated in 1940s Britain, he took back to Singapore a 1940s British disapproval of ostentatious displays of wealth, which served him in very good stead during his period in power. He realized the truth early on, that a Konrad Adenauer, remaining in his modest home in Rhőndorf while leading a major industrial nation for 14 years in the direction he wanted, was likely to be both far happier and far more effective than a billionaire dictator like Mobutu Sese Seko. This is a truth that has apparently been lost; one only has to see the odious displays of wealth of the Blairs or the Clintons to realize that the moral authority brought by a leader with a modest lifestyle has totally vanished. You must remember that the young Lee supported Labour, then personified by the modest pipe-smoking Clement Attlee not the spendthrift Winston Churchill.

Lee’s discipline famously extended to Singapore society as a whole, not just himself. In his early years, he stamped out spitting on the streets, a bad local habit that was correctly thought to spread disease. Later he remained a man of 1940s England in his advocacy of corporal punishment, in Singapore’s case usually administered with a rattan cane. A notorious case involving a recalcitrant American teenager from a wealthy family in 1994 divided the world community, but really it should not have done – who among us does not think that the great majority of American teenagers would be greatly improved by a few strokes from a rattan, properly administered!

In the economic sphere, Lee pursued a strongly free-market policy that at the same time opposed crony capitalism and made sure that state purchasing, for example, was carried out without excessive influence by special interests. As a result, rather than a few very rich but corrupt groups, as seemed likely to emerge from Singapore’s poverty, Singapore instead developed a vibrant corporate sector, and became an entrepot not only for trade but for financial and other services from the region. In particular, the island’s position as a bastion of private wealth management seems likely to intensify; the combination of high integrity, low business taxes and
a fiercely independent local government is especially attractive to wealthy people fleeing the corruption and political envy endemic in most overtaxed Western societies.

There were downsides of course. Lee never really came to accept that a free press is itself a form of discipline, shining a bright light on corrupt or lazy governments. In particular, attempting to close down the local edition of the Wall Street Journal, rather than just accepting its mostly silly criticisms, was an error of judgement that did far more damage to Singapore’s reputation than any press campaign could have achieved.

It would also have behooved Lee to accept that even the best government cannot and should not last forever. The course taken by his successors, of liberalizing the society, relaxing the strict discipline, encouraging immigration and raising taxes, thought likely to preserve the People’s Action Party in power, is in practice likely to achieve the opposite. Eventually the PAP will lose an election to the opposition, and then Singapore will become just like any other sloppy Western democracy, with two left-of-center parties seeking to pursue short-termist policies to buy votes.

It would have been much better for Lee’s successors to maintain the full rigor of Lee’s discipline, keeping taxes down, refusing to allow the entry of casinos, and ensuring that Lee’s admirable social programs were not allowed to bloat into excessive cost and inefficiency. That way, economic growth would have been maintained at a rapid pace rather than slowing as it has, and when the inevitable opposition election victory occurred, the Singapore populace would remain aware that they could return to a life of self-discipline and rapidly growing wealth whenever they grew tired of sloppy Western social democracy. The danger for a Singapore is not the end of a political party’s rule, but the end of the principles that made Singapore successful. By maintaining the principles and sacrificing their unbroken rule, Lee’s successors could have maximized the long-term welfare of Singapore and its people.

For us in the West, Lee’s lessons are useful but gloomy. Neither Britain nor the United States have had a government with Lee’s level of commitment and discipline since Lord Liverpool retired in 1827 (though Calvin Coolidge’s America, with Andrew Mellon at Treasury, came pretty close.) If a Lee appeared among us, or even a Konrad Adenauer, Germany’s great post-war leader, it is very unlikely indeed that they could get elected – and indeed as Lee himself would have admitted, two Presidential terms is far too short a period to make the fundamental changes necessary.

Still, when our social security and healthcare systems collapse and we have to build new ones, we at least have an excellent, actuarially sound model in the Singapore Provident Fund.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)