Albert Winsemius and The Practice of Economics in Singapore

Professor Euston Quah is a prominent Singaporean economist and the Albert Winsemius Chair Professor of Economics at Nanyang Technological University (NTU), where he also serves as Head of the Economics Division.

Known for his work in cost-benefit analysis, environmental economics, and policy economics, he has advised various government agencies and chaired national committees in Singapore.

His research often bridges economic theory with practical policymaking, particularly in areas such as sustainability, public infrastructure, and regulatory impact.

TIMESTAMPS:
00:00 Introduction
01:30 Who Is Albert Winsemius?
05:55 How Albert Winsemius Made Singapore Better
20:35 The Art of Economic Advising
27:56 Market Failures and State Intervention
30:12 Intellectual Tradition of Economics in Singapore
31:06 Singapore's Entrance Into An Uncertain World
34:27 Why Cost-Benefit Analysis
42:22 How To Appraise Costs & Benefits
45:37 Limitations of Cost-Benefit Analysis
51:54 How Valuation Works
54:08 Why Sensitivity Analysis
1:00:09 Advice for Graduates Entering the Workforce

Keith 00:00:45

Today, I have the pleasure of speaking with Professor Euston Quah. Professor Quah is the Albert Winsemius Professor of Economics at the Nanyang Technological University. He's one of Singapore's most respected and notable economists. He has written many books, and the one that I have to recommend is this book, Albert Winsemius and Singapore, together with his co-authors Luke Udasov and Zack Lee. They go deep into how Albert Winsemius contributed to the economic progress of Singapore, helping us transform from a third-world economy to a first-world economy in less than two decades. I hope you enjoy my conversation with Professor Euston Quah.

Since you're the Albert Winsemius Chair at NTU, I have to ask you questions about him.

Who Is Albert Winsemius? (01:30)

Keith 00:01:29

Maybe take me back to our early days as an emerging economy coming out of Malaysia. We needed this Dutchman's help, and for some reason he chose Singapore. Why did Albert Winsemius come to Singapore?

Professor Quah 00:01:50

The story of Albert Winsemius is not fully known. People know he's a Dutch economist who helped Singapore at that time, but beyond that, his story stops there. I think Singapore was a backwater place at that time, lots of unemployment, a poor country. This happened just before the merger with Malaysia and subsequent separation.

Dr. Goh Keng Swee met Albert Winsemius in Europe, and so did Mr. Hon Sui Sen before. They were looking for economists from maybe the United Nations Development Programme to help Singapore to set up Singapore's future industrialisation program, development program. The approach was taken to get someone from United Nations Development Programme, and Albert Winsemius happened to be free at that time, and so he came.

But mind you, Albert Winsemius had a lot of experience actually with development aspects, growth of a country. I don't know how many people would know that during World War II, for example, in which Holland was a conquered territory by Nazi Germany, he served also as a price controller for food items. After the war, he was actually appointed by the government to serve as a Director General of the Ministry of Economic Affairs, which means managing a lot of things related to development aspects. So he came with that kind of expertise and experience, and I think we are fortunate to have him in the first place as a part of this delegation leader that came in 1960 and 1961.

Keith 00:03:56

So what was the advice that he gave to the leaders back then? I knew there was a huge push for the post-independent Singapore to adopt an EDB back then, and that was one of his key advice.

Professor Quah 00:04:11

I think we must appreciate the fact that it's not a one-man show, so it's not like Albert Winsemius is doing everything. It's actually a synergy of ideas with the pioneer leaders, especially the founding Prime Minister, as well as Dr. Goh Keng Swee, who was known today as the architect of Singapore's modern economy.

Dr. Goh had great ideas, and the three of them worked together and he acts like a sounding board to these ideas. He also lends an external accreditation of some of these ideas, and I think that works very well. I think no adviser can succeed without the support from the leaders of a country, and I think he was fortunate also to get this listening ear from the pioneer leaders. The pioneer leaders were also fortunate that the ideas that they had seemed to synchronise, seemed to be well regarded also by Albert Winsemius. So the whole thing worked.

Keith 00:05:14

So what ideas did the three of them kind of cook up or develop?

How Albert Winsemius Made Singapore Better (05:55)

Professor Quah 00:05:19

I said at the beginning there was high unemployment, one estimate was 15 to 30% unemployment. Can you imagine 15 to 30% unemployment? Lots of unskilled labour. Singapore only depended on basically two things, which is entrepôt trade, which had been doing since 100 years ago, and also a commercial port. That's it, services. I think the first thing that came to mind is how to move Singapore in a sense that not just pure development but also how to find work for the unemployed.

The first thing I think Albert has talked about to the pioneering leaders, which they fully agreed, of course, is that in order for development to take place smoothly, there must be political stability. So he observed during the time there was a lot of riots, all kinds of demonstrations. There were on the streets, and he basically felt that we must get this sorted out before we can talk more about development. No development will take place with all these leftist, ultra-leftist ideas out on the streets and inciting people. Also, there were a lot of communist elements at that time which infiltrated trade unions. So all these things must be sorted out, and I think the leaders, of course, recognised this and happily worked with Albert Winsemius on how to get these things sorted out.

Of course, the other thing is he's a very pragmatic person, must appreciate Albert Winsemius, even though he's an economist, he's not an academic economist per se. So he's not bound to any specific ideas on the theories of economic development of the time. So what works for him is he looks at models all over the world. He sees countries of the world, which countries succeed, why they succeed, and he was very eclectic in his approach in that sense. So I think that is what really made him different from perhaps other economic advisers which are more stickler for the existing theories of the time. So whatever works, he takes. Whatever doesn't work, he does not care whether they are sound economic theory or not. So I think that's a good strength of Albert Winsemius which he brought to Singapore.

Besides from this political stability in the streets, he was also thinking about setting up a manufacturing base. At that time, as I said, Singapore is entrepôt trade and services trade, and also looking at commercial port. But he wanted beyond that, and he thinks that for industrialisation program, you need a strong manufacturing base to begin with. And for that, you need workers, you need a lot of workers, and also trained workers. At that time, Singapore didn't have a lot of trained workers.

So the other pragmatic thing he wanted to do was to get our universities and polytechnics to think about providing the training of skilled workers rather than just pure academic concerns. So that's pragmatic by itself. And then he focused on also things like shipbuilding. This is another pragmatic aspect. Shipbuilding and repairs and also breaking up of ships. And that's quite amazing because why ship-breaking? Well, he thought that, and I think rightly so, that's one way to employ a lot of workers. We had massive unemployment at that time, so get these workers to work in the shipyards. And then he talked about recycling. In ship-breaking, you recycle the steel parts. And so he thought all these steel parts could be recycled for use at that time for the National Iron and Steel Mills in Jurong, and also, in fact, some of the steels are then also repurposed for our public housing estates. So that's quite remarkable. People would think about all these things. So that's another aspect that he did which is quite pragmatic.

The other thing I think he did which is pragmatic also is that many countries of the world at that time, especially the less developed countries who were colonised in the past, they were very keen and obsessed with removing any traces of colonialism. That may mean, for example, relabelling the street names and road names, and also getting rid of any structures that have colonial leanings. So Albert Winsemius began by persuading the government at that time, our government, that we should keep the Stamford Raffles statue. You may think it's nothing, but it's a signal, it's a messaging signal to people, to other countries in the world that Singapore is comfortable with its past and we don't bear any grudges and we are open for business, and that would attract, he thinks, and rightly so, the Western powers with their know-how, their investment opportunity to come to Singapore. So in that simple act of keeping the statue of Sir Stamford Raffles, I think the northern part of the river, the Singapore river as it is, sends a tremendous messaging to the world.

Coming back to the question of his success in mopping up the unemployment situation, getting them jobs. By the end of the 1960s, bordering 1970, Singapore was already more or less in full employment. But then, one of the things that he noticed was that our wage rates were quite low, and because of the low wage policy over the last 10 years, the 1960s up to end of 1960, he thinks that Singapore should now move on to a higher value-added economy. Don't be stuck in the past of low wage economy.

And so he believes that there should be a wage catch-up, and so he proposed an increase of wages of 20% actually over three years after 1970. Some people, including our founding Prime Minister, were very worried at the time, but he argues that this is an opportunity to send a signal to employers that we want to move up to a higher productivity, to higher wages, and so forcing the employers to restructure their companies. And so I think that was quite largely successful in moving up that wage policy. In fact, people argue that we were second highest to Japan at that time. But as a consequence of just a simple adjustment to wages hoping to affect productivity, it completely restructures the whole mentality as to we shouldn't be over-relying on perhaps foreign workers. Having all these low-wage people around, and the supply of labour coming from a foreign source, for example, would keep wages down. So he thought through all these things that we should change this mindset and force the economy to move into a different, higher-valued economy position.

Keith 00:13:36

I think he took example of the Dutch economy, and you detail that in your book where because the Dutch companies did follow a similar path towards economic recovery but they went horizontally, they expanded horizontally so they hired more, whereas in Singapore, he thought that we wanted to vertically integrate, so get our workers to move up the value chain as opposed to just expanding.

Professor Quah 00:13:58

Yes, in fact that's true. I forgot to mention too that he was always very outward-looking. He wanted Singapore to have an export-oriented growth. Now many countries at the time were focusing on import substitution, and he thinks that is not right for Singapore and we should embrace, for example, this export-led growth rather than state protectionism, those infant industry arguments.

So he also took it upon himself to persuade, through his networks, to get, for example, foreign investors into Singapore quickly. For example, Dutch companies like Philips, and then Dutch companies came, then there's Exxon, to come to Singapore. He also attracted the Sumitomo Corporation setting up petrochemicals. So a lot of things that he attempted to get foreign investments directly fast into Singapore. He doesn't shy away from that. At that time, people talked about fear of MNCs, but he said no. So that was quite successful.

And I think I have to mention that, in line with what I said, political stability in the background to allow development to grow, is the fact that we need also good cooperation between employers, employees, and the government. So that led to the precursor to the National Wages Council and tripartite system which we still have today. And I think that also because he had some experience also in the Dutch environment, that's why he brought this idea here.

And one could go on and on, so many things. For example, did he talk about, was he concerned with sustainable development issues? Well, the word "sustainable development" only became a household word in the 80s, not during his time. But his time was preoccupied with growth and development, but not so much as the idea of being a sustainable development sense. But he did care about the environment.

So one aspect I would like to point out, besides the recycling, but also the other aspect that it was Sentosa Island, which was barren at that time, and already he was earmarked to be a refinery island. When he heard about it, he was quite upset and he tried to persuade the leaders of the time that we cannot have Sentosa to be this refinery island for two reasons. One is that he envisaged Singapore to be a richer place in the future, and people need, Singapore being a land-scarce country, people need some areas for recreation and leisure and enjoyment from their hard-earned money over time. And so he thought Sentosa would give that opportunity to Singaporeans.

The second thing, the second reason is that it is too closely physically close to the mainland of Singapore, at the heart of the downtown area. And so he thought that, in economics, we have this term called "not in my backyard." So everything is important, but nobody wants them to be sited next to whatever facility you're thinking of. And definitely with refinery, it's going to be dirty, it's going to be maybe polluted. It's not a good idea to send it quite close to downtown area. So then he decided that he would reach out to the bosses, so to speak, of Esso, which has been granted that place. So he flew to New York and went to talk to them and persuading them to take another island, and then they took Jurong Island in the south, which is far away, further from the downtown area. And so he actually saved Sentosa. So what we know today as Sentosa was actually saved by him to become Sentosa of today. Can you imagine a refinery on Sentosa Island? That would be terrible.

So these are things, small things that he was concerned also about things like food security. At that point in time, he's talking about in the future Singapore might need to protect, it might somehow find ways to be self-sufficient in providing some food in case there is conflicts in the region and we are blockaded, or in case there's a crisis. And so he talked about setting up things like poultry and pig research institutes and some kind of agricultural base. But he realised that it's difficult because of the lack of land. But he also said, maybe we can intensify the cultivation of the crops, rearing of the animals, intensify it rather than to spread it widely. So he thinks that like we have some rubber and all those things, he thinks not very useful because they take up a lot of land. So these are things that he was concerned about, which we thought is so far away, we're just developing Singapore, but he did think about these things as well.

Keith 00:19:56

Could you speak a little bit more about the art of economic advising because it's not apparent to people that economic advisers in, I guess, today's economy are worth their salt or worth the kind of attention and effort. So if you draw reference from Dr. Winsemius, what's the lesson to be learned from his time here?

The Art of Economic Advising (20:35)

Professor Quah 00:20:17

Well, there are several, if I recall my research done on Winsemius, he was quite open-minded and he believes in engaging stakeholders. So if you have an economic policy, it's not just policy that is made on paper, you need to implement the policy. And I think there's a quote from the book about our former top civil servant, Mr. Peter Ho, who said, "Policy is implementation, implementation is policy." And there's a lot of truth in this. You just don't design in isolation, you have to see that it works and whether there are barriers and cost to prevent it from working, and tear down these. So both must synchronise. And so Albert Winsemius also believed in this kind of importance of implementation and the ease of implementation.

And he also does not just look at official statistics like we look at what is the unemployment rate, what is the GDP. He just looks at, for example, there was a point made about he wanted to look at Straits Times and he looked at the density of the vacancy available at any given period and he monitors that, a trend, these vacancies, because that tells you about employment and unemployment. So even though he went back to Holland, he has received this Straits Times from the Singapore officers to keep him in touch, his feel on the economy, observations, the deep observations that he goes around to look at how we do things.

So he's not just staying in the office or having group meetings. He actually goes out and observes our daily economic activities, simple ones even, like bicycle repair shops. Just amazing that he would take such a keen interest on small things like this, but he wanted to see how we work and how resourceful our people are and how dedicated our workers. And he came to the conclusion that we have the necessary prerequisite to succeed, to grow Singaporeans in manufacturing.

And he argues that we should not just be a place where you have employment when planning, but we also want to be a thinking place, so thinking for creation, in creative works, innovation, and development of new ideas. So that's something that he also emphasised. And so all this leads to this topic that you ask about what is economic advising.

Now, by the way, if you look at today, many of our leaders today are actually economists, starting with Prime Minister Lawrence Wong. The beauty about economists is that we understand our trade-offs better. There are certain principles that we learn from day one as an economist, that there's no such thing as a free lunch. So if somebody buys you a lunch, it's not free because you have to spend time with the person and time has a price. You could do other things with the time. So it's not free, everything is not free. Things that we devote on something mean things that we give up.

So if we spend a lot of time, say, on environment, we all care about environment, but if all our resources are spent on the environment, then we have very little left for other things like education, sports, welfare, just focusing on environmental needs. So everything has a trade-off. So that's one thing, and so in the art of advising, trade-offs are very important to economists.

And of course, Albert Winsemius, being economist, understood this aspect. Second thing is that we as economists don't make decisions on an all-or-nothing choice, black or white choice. We are always making decisions at the margin, the term "at the margin." So marginal decisions, should we have a little bit more of this or should we have less of this?

So a good example I give you is, let's say, we all want the best possible no pollution. But we currently have some pollution, so you want to have no pollution. We can by the end, nothing works, nothing moves, no cars on the road, no factories, no plane flies. We can't. So the question is, at the given level of pollution, the pollution causes some damage, some harm to us, but at the same time, we know that pollution is a result of economic activity which benefits us as well through jobs, employment, income. So the question is, are we having too much of the harm relative to the gains, or should we therefore reduce that harm? That means we'll be more strict on pollution or the converse. Some places have very little pollution, but do we want these places to cut down more on pollution? But that means that we have to give up something in order to have that. So this is called making decisions at the margin.

So that's something that economists also are very well aware of. And that leads on, of course, there is scarcity of resources, scarcity of time, scarcity of money, scarcity of everything. And so with scarcity, we just have to make choices, and these choices are based on our understanding of trade-offs and also the opportunity cost, which is the foregone gains that we do something or not do something. So Albert Winsemius, like most economists, worked with these principles, and we see that happening all the time. And I think an economist at the helm understands these things much better than the non-economist, what is at stake. It's not because they don't care, of course they care about things like environment, they care about no crime at all, we care about all these things, it's just that at what level?

Keith 00:27:05

It's like this instinct of economists, like 101, everyone knows that there's opportunity cost. I think that's the first lesson everyone goes into a class trying to understand.

Market Failures and State Intervention (27:56)

Professor Quah 00:27:11

I want to mention too about this aspect. While Albert Winsemius is very pro-market, I think he also realised that there are market failures, certain things which the market doesn't do very well in its solution. So pollution is a good example. This idea that if you, for example, you have a factory, the factory makes things and in the process of making things, it dumps its waste in the air or in the river, but it doesn't pay for it because there's no price. And because of that, the factory's cost of production is lower than what it should be. These are called externality issues in economics.

In that sense, the price of goods is lower than it should be, so the market price is lower than what it should be and it sends a wrong signal to the consumers, "Oh, it's cheap, it's good," then we buy. And if we buy more, the market again sends the wrong signal to the producers to tell them to produce more. And when the factories produce more, it results in more pollution, and so negative externalities increase. So if you leave it to the market, the market will simply overproduce such things.

And so Albert Winsemius, like most economists, will understand this very well that the market, while it's good for allocating scarce resources, and in almost 90% it does well, there are some that it cannot do that well. So this is externalities, and pollution is one example, is a clear example that they cannot do well. And so you have to correct it, and he argues that there is therefore a role for state intervention. And that's why you see today also government intervenes. And I think this advising should not again be so narrow to only one aspect. If you say we want the market solution and nothing else, that's wrong. So I think Albert Winsemius is flexible in his ideas as it should be to tackle a problem in all kinds of ways. And one will argue that the way, for example, he banished a negative externality is to fly out to convince someone to move over from Sentosa. That's his direct intervention, right, to solve that market failure.

Keith 00:29:47

There is a rich intellectual tradition in, I think, many advanced economies, based on the economists that were in their heyday. So like if we think about Keynes, we think about Hayek, we think about Friedman, we think about the way they kind of influence free market economics in, say, the Western world. So in Singapore, Albert Winsemius really imbued in Singapore this sense of pragmatism in economics.

Intellectual Tradition of Economics in Singapore (30:12)

What do you think is some of the kind of intellectual tradition that is being carried on or being continued today in Singapore, even through your work as an economist?

Singapore's Entrance Into An Uncertain World (31:06)

Professor Quah 00:30:25

Well, we are actually living in quite complex, uncertain times, and therefore the monitoring of, I'm just talking in terms of the economy, is very important to see whether there are the beginnings of new impacts on the economy and to be aware of it. So in Albert Winsemius's time, the simple looking at the newspapers and going and meeting stakeholders and observing life in Singapore. He's prepared to change the direction if things are not very well. And I think today's time is the same thing, we need this kind of approach.

And I think Singapore has shown in the past as well to be quite nimble, and we are not fixated on one particular policy and must ensure that this policy no matter what must exist. So when the policy is not working well, and then of course there's a time lag effect for filtration of the outcomes of the policy, and things are not working well, the government has changed that policy, moved into a different world. So I think Albert Winsemius, what he showed and what he wrote and what he said about policy, and how he changed mindsets, it's very practical today. We are the same, we're not doing anything different. So I think that's an important part of the changes.

Second thing is about talents, inculcating investing in them, and searching for talents, and not just in Singapore but all over the world. Singapore is too small a place, it's not like US, China, so we need to search and find the best talents to come to Singapore. And those in Singapore, to harness, to develop these talents. And exactly this is what happened also during Winsemius's times. He advocated moving up the talent ladder. So he actually advocated a strong development and also finding good talents for Singapore. So this thing also has not changed much, we are still doing it very much today. And so on. I could think about some other things, but what is relevant for Albert Winsemius, what he did and what he thought of in today's world.

Keith 00:33:14

In your work, you follow similarly in that tradition. You focus a lot on cost-benefit analysis, and I think you've alluded to it before about the fact that you needed to know the cost and benefit of any, say, policy decision or economic action. Most people, when they think about something, that cost-benefit analysis, they just think of it as I list the pros, I list the cons, outweigh, if the pros outweigh, or if there are more pros than cons, then I'll go for it. That seems to me quite an incomplete picture. Can you give me a fuller picture of what CBA actually looks like?

Why Cost-Benefit Analysis (34:27)

Professor Quah 00:34:27

I will tell you what CBA is not about. So in the early years of Singapore's history in development, and in most countries even today, actually, not in Singapore but many countries, we thought about cost-effectiveness. Cost-effectiveness is like, somehow we have decided what you want to do and find the cheapest way to do it. That's cost-effectiveness, but cost-effectiveness is not cost-benefit analysis. Because cost-benefit analysis, you have to think about why you're doing in the first place, what are the merits of your proposal.

And in Singapore's case, I think CBA, cost-benefit analysis, is actually much more relevant in the last 10 years, for example. Why? Because well, several things have happened. Number one, there is an increased demand for money, our funding, so we have to be very conscious where we put our funds to meet these proposals. And proposals come from all the ministries, give proposals for projects, policies, programs. So which one should, given our limited budget or scarce budget, what policies, programs, projects should we have, should we take up? So that involves thinking of what are the benefits of your proposal, not just looking at the cost side. So one is the justification of the proposal to benefits, and so they cast the analysis wider compared to cost-effectiveness. And two is the recognition that there are just a lot of demands for the existing scarce monetary resources, and so we have to allocate it efficiently, so to speak.

But that's from the standpoint of the country. But cost-benefit analysis is actually, to me, the science of common sense. We all do cost-benefit analysis, you and I do. So why do people, why do people take up certain courses, why do they buy certain cars, what jobs to do, and this even involving, for example, in my opinion, involving the choice of potential marriage mates. People don't think about it this way, but actually that's what we are doing. Why are we going after a particular marriage partner? That certainly involves some aspects of cost and benefit. I'm not talking about taking a pen and paper and writing all these benefits and costs, but rather when we are going out, testing certain potential mates, this is something which we search in our mind what works well for us and why. This is an exercise in cost-benefit analysis. And so even firms do cost-benefit analysis, what to produce, where to produce, should we outsource. And so the country does cost-benefit analysis.

To give you a few examples which I think may illustrate this better. Take the case of dengue. So dengue is a terrible spread of this mosquito, and it causes a lot of health damage, health implications for people who catch dengue. So we have to think of, have we invested enough resources to fight dengue in the management, monitoring, and the resources that we put to deal with dengue? So if you ask that question, which is a relevant question, then we have to figure out, well, what is the cost, the social cost of dengue to Singapore?

And that involves knowing or estimating the health impacts of dengue. So dengue causes this illness, when you get this illness, there is the cause of illness, there's a treatment cost. If they're hospitalised, then how many days hospitalisation, what does it cost? There's a loss cost to productivity, you can't go to work, and even if you just recovered, you feel very weak for a few months. So these are all impacts on productivity. All these things can be estimated. And so we figure out what the cost of all this dengue and then we compare it to what we are doing, what we are spending to fight this dengue. And so again, we are thinking at the margin, have we invested enough to fight dengue given all this cost, or should we do more?

So this is one aspect. Another aspect, which is a real-life, again, another real-life case which I was also involved in some time ago. The WHO they came out with new levels, they stipulate new levels for air quality. And so the question is, should countries meet that new level of air quality? So Singapore, of course, has to think through this again. So we find that with our existing air quality levels based on all the pollutants, we won't meet the new, more stringent air quality stipulated by WHO. And so, it's not a question whether we want to meet or don't want to meet. Again, it's a cost-benefit analysis.

So if you meet the WHO's new stringent air quality, you're going to get a healthier population. So it means people less sick, that means people more productive, because they're not sick. Even if you wait to see the doctor for treatment, that waiting period is also a loss in productivity. So the point is that you get a better, healthy population from better or higher air quality, that's the gain, if you meet the stringent higher air quality levels. Now, how do we meet it? Well, you have to control your air pollution levels. For example, you have to be more stringent on checks and new requirements and enforcement on vehicle traffic which contributes to high air pollution. You have to look at factories, you have to be checking on those factories as well. And all this would raise cost to not just the people in the street that drives cars, but also the cost of doing business in Singapore, and this affects Singapore's international competitiveness.

So are we prepared to do all these things? It's again, it's not an all-or-nothing choice. Yes, we are prepared. The question is how, how far do we go? And so the study then looks at different levels of WHO requirements. Fortunately, WHO requirements have like five levels. There's an interim period, so you meet level one, then you go level two. How which level do we go until? We can't straight away go to level five, the highest. And so that's another use of cost-benefit analysis to work on all these estimates and then make an informed decision for policy makers.

Keith 00:41:17

It seems to me that the cost is actually much more clearer up front. Like, I know the cost of a regulation in compliance, I know if I need to inspect a factory, I need to send someone there, I know how much I have to pay that person. The costs are very apparent, but the benefits are much more either implicit, or unquantifiable, or qualitative in nature. How do you balance that?

How To Appraise Costs & Benefits (42:22)

Professor Quah 00:41:43

It goes beyond financial appraisal. So financial appraisal, there are several differences. One is that they only care about whether there are market prices. So sometimes the question is, are those market prices reflecting the true social opportunity cost for society? So the example of externalities I used earlier, we just use market prices as a cost, that's not enough. So we have to look at whether it inflicts the negative externality cost and you have to estimate that cost. And so this part which we call the non-market things are included in the cost-benefit analysis.

Another example is like congestion and noise. Take, for example, if we have an LTA project, we build an MRT station. At the time when it builds, there's going to be a lot of congestion, going to be a lot of noise, a lot of vibration maybe. So all these things affect the local residents around that MRT station. These are real costs to the people living there. There's no cost to people like us who are not living there, but people who live there obviously face it. So when you propose the MRT station we build somewhere, are these been taken into account? And these are so-called the intangible aspects of the cost.

Another one is valuation of human life. Many people think, "Oh, life is precious, infinite value, we cannot, we should not be doing valuation of life." But valuation of life is integral to cost-benefit analysis. Why? Because many projects implicate or impact life. So for example, if you tighten the regulations with respect to speeding on the road or with factories and workers in factories, if you tighten this, you're going to save lives. As we know, lives are killed on the road, lives are lost during working in factories and construction sites, for example. So if you tighten the safety regulation, you're going to reduce injuries, you're going to save lives.

So it's no point just knowing we saved three lives. What does three lives mean? So you have to try to estimate what's the Value of Statistical Life and that goes into the calculation of the worth of the project. So when you build tunnels, highway, widen a road, it's not just to relieve traffic congestion but it's also going to reduce accidents. When you reduce accidents, you're going to save lives. So how much is a life worth? So these are studies. In fact, several years ago, I did this study with a colleague on calculating this what we call VSL in the case of Singapore. In the past, we didn't have so about 10 years ago, we came out with a number which I'm happy to note that is being used by government ministries today.

Keith 00:44:52

So what's the number?

Professor Quah 00:44:54

Well, if you're based on today's dollars, it's probably over $4 million.

Keith 00:44:59

Oh, that's quite expensive. I would have to ask necessarily, what do you think are the limits of the CBA model of thinking? What are the kind of gaps people should take note of?

Limitations of Cost-Benefit Analysis (45:37)

Professor Quah 00:45:15

Cost-benefit analysis helps in making informed decisions, but cost-benefit analysis is not the be-all and end-all because it's not the last arbiter of everything. Because there are also things that we may not be able to take into account, but maybe government has a better feeling on this, such as good neighbourliness, political neighbourliness across countries, some ideas of fairness. So these things which are hard to measure in cost-benefit analysis, we recognise that. And so we always make sure that what we can measure, both tangible and intangible, are done, but those that we cannot measure, the limitations are stated out clearly. There are some things which we cannot measure as well, and so these things ought to be stated out.

The other thing I think is the issue of the discounting. So cost-benefit analysis involves six steps. We have to identify, for example, the first step, the reference target group that is society as a whole. Then we have to identify what costs and what benefits to include such that there are certain accounting rules in CBA not to overcount, not to double count, and some are transfers. So you may think that it's a gain by one group but you should not count it as a gain because the gain comes from the transfer of the, somebody has to bear that cost. So these are things.

The third one could be like because the project and program takes time, but the decision has to be now. So we need to convert the future benefits and cost, the dollar signs, into today's dollars. So that's called the art of discounting. And that means that we are subject to a discount rate. So there are a lot of controversies as to what discount rate should be used. So a high discount rate would simply mean that for some of these benefits that occur far in the future rather than now, then when they're discounted today, it'll be very small. So environmental projects are one of them. Nuclear waste, for example, you put it in the cost, when you discount it, it will be very small today. We have high cost in the future, but today it is very small because of the discounting factor. And so environmental projects always get affected by this. So this is another limitation that we have to be aware. It's not because of anything but just because of the using of discount rates.

So what discount rate should we use? And there are things like should we think about income inequality, and especially developing countries, the poor countries, income inequality issue is a really big issue for them. So income disparity. We don't want projects and programs and policies that benefit substantially one group and then the cost is borne by another group. So if you look at cost-benefit analysis, one main limitation is that when it was first developed and used, its concern is with efficiency of resource allocation. It's not so much about promoting equity and fairness.

So the idea is that if you use projects and policies to promote fairness, equity, that's a rather not very efficient way of doing this because you could just think about subsidies and lump sum transfers to help the poor, for example, rather than creating projects indirectly to help the poor. So CBA is not seen as the main instrument to effect changes in income and income inequality. And so this is a limitation, but over the years, because societies are bound to see more and more of income disparity issues, so the concern is that we should include this into the CBA, and that's what we do. We actually have weights, to use weights, and even if we have no weights, we have a qualitative way to look at where the benefits and costs accrue to in the project. But the point is that this is taken into account also by CBA, even though we recognise that this is one of the limitations of CBA.

And then of course, the usual uncertainty. The further the project life is, the more uncertain will be your benefit cost. And then last one is using investment decision criteria such as calculation of net present value. So these are all the steps taken. So it's not what is the final result of the cost-benefit study, but rather, did you follow all these steps? Have we gone through them? So it's the steps that lead to the answer and not the answer itself that's important.

So CBA, some people say CBA, you can manipulate. I'm sure you can manipulate. But then the question is, how is it done? You can only do it if you don't show the results of the cost-benefit analysis. So once you show or release the results of a study done, the six steps will be shown very clearly. And if the analyst tries to manipulate, you will have to manipulate, for example, the discount rate, whether it is too high or too low but without good justification. So we can see at once that kind of manipulation. So once you hide it, of course it can be manipulation, but it's not a critique on the tool itself. I think the tool itself is very useful because it forces you to search for the right causes, right benefits, and lay out transparently in a systematic way to derive the answer.

Keith 00:51:11

Basically, you have to show them how you bake the cake.

How Valuation Works (51:54)

Professor Quah 00:51:14

Yes. I might add one more thing which is a very important component of cost-benefit analysis is valuation. Many times when the public intervention, they want to convert a piece of land from forested area to a built-up area. And when you look at these projects, the developers will be able to tell the government, "If you do that, it is worth $100 million," for example. And if you look at this piece of land that's going to be converted, what is on the land? Well, it's some animals, flora, fauna. And these things don't have a ready market price compared to the developers' conversion of land, how much it is worth. So that raises a problem.

Now, how do you make decisions based on such things? So you need to put a common denominator. Some people are opposed to this idea, but you think about it, if you don't have this conversion of a common denominator between the developers' monetary aspect with that of the non-developer, how do we therefore make that decision? Well, that decision comes from a government body, comes from maybe surveys from the people. Why should that be the main way to make decisions on allocating such resources? We should have a proper way to elicit values from the public. And cost-benefit analysis has methods to derive these values in monetary terms. So that's an important component of cost-benefit analysis, and that method is actually quite widely used all over the world in developed countries.

Why Sensitivity Analysis (54:08)

Again, there are several methods, and so you could argue why only this method. But cost-benefit analysis allows what you call sensitivity analysis, which means that you can use several methods and see the outcome. And then if all three methods, let's say, produce the same outcome, then this must be a very robust project, it's okay. But if you just change the method, you get a different answer to the outcome, then it becomes very sensitive to the choice of the valuation method. But at least the valuation method allows people to look at it in a more cohesive way.

I'd like to mention one example. There was a piece of land which a farmer wanted to sell in New South Wales. This is a real story in the 70s. Unfortunately for the farmer, or fortunately, unfortunately, this land had a habitat of the wombats. You know, being Australia, you have the kangaroo, the koala bear, but there's also the wombat, a lovable creature, looks like a giant mouse. So there are only three habitats in Australia where the wombats exist, rely on it, it happened to be on this farmer's land.

And so when the developer wanted to buy this land for conversion to development uses, they offered X dollars to the farmer. But then people came to know about it. So the Nature Society of Australia did something quite different. And what they did was they went to the public and they said, "Okay, this is what has been happening on this land. The farmer is going to sell to the developer. But we are thinking of setting up a trust fund, and whatever money that we collect, if it is enough, we can buy this land. We can compete against the developer." And so that became the choice method for this Nature Society Australia.

So they asked how much people are willing to pay into the trust fund, and they went not just to people on the streets but they also went to people outside New South Wales, to Queensland, to Western Australia, and also they went to organisations and institutions. So a bank, for example, may actually give more money into the trust fund. So eventually, they found that the amount that they collected was so high, even if you minus off 50%, it's still higher than the developer's bid for the farmer's land.

What does that tell you? It tells you that we need valuation. We need an entity, that there is an organisation that's able to solicit all these values which everybody holds but not properly released publicly. But they hold these reserve values. How to get these values out of the people in a proper way? And there are people who express giving values, willing to pay into a trust fund even though they are unlikely to go and visit the wombats often. They are particularly not much interest in it. But then they're willing to give. Why?

Because again, in the cost-benefit literature, we have what we call option values and existence values. Option value means I reserve the option to use the resource, in this case, to see the wombat in the future when I have more time and when I'm maybe retired, when I travel more. So I want to see the wombat still exist. Existence value is that people who are unlikely to have any use of the wombat but they think it's good for mankind to have these creatures exist. So a museum, for example, is a classic example of existence value.

And so it's not just use value, like those people who go and visit the wombats often, they want to pay money to save the wombats, these are called use value. So when you read a book is a use value, drink water is use value. The people who reserve the option to use it in the future, it's called option value. And people who think they have the right to exist, they are existence value. So in cost-benefit analysis, we are not just looking at valuation from the perspective of the user, but the perspective of all these other values built in. So it's much more comprehensive in the search for valuation, and I think valuation is the crux of the whole thing.

A final example I give you is this man who went on holiday to Ang Mo Kio. This is a 2021 example, I think. And after he came back on holiday after a week, he suddenly noticed that his favourite tree is cut down. It's gone. And in its place is a bicycle track. So he was so furious he wrote a letter to the forum in the Straits Times. And I picked this example up because it clearly illustrates this, which is that this person, and who knows, people in the neighbourhood who had use value for the tree, loved the tree and for whatever their reasons.

And this tree, which had certain value, is now replaced by bicycle track, which has certain value to other people. So who made the decision as to why the track is more important than the tree? And how do you make such a decision if you don't do any valuation on the part of the users of this tree? So remember, the tree is not just cutting the wood. The tree provides shade. The tree provides history. In this case, the tree had 75 years of history. And then the tree provides aesthetic value. So many things about a tree, it's not just the wood part of the tree, the timber part. So again, cost-benefit analysis takes into account such things. And so if you have proper valuation done to look at these two alternatives, you'll be able to make a more informed decision. So these are some of the examples that they use.

Keith 00:59:30

I'm mindful of time. So it seems to me that we need to continue, a huge part of becoming or staying pragmatic is actually remaining disciplined enough to understand the costs and benefits and valuing our decisions. So with that, I naturally have to ask you, especially with you as a Professor now, if you were to give an advice to a graduate student of yours that's entering into the working world, what would it be?

Advice for Graduates Entering the Workforce (1:00:09)

Professor Quah 00:59:58

I always tell my own students, you are just one of the many thousands of graduates each year, so you have to find ways in which you are different, you are unique. And one way is to not just be satisfied with what you have graduated in, and perhaps you might want to look at how you can enhance your qualification, for example, taking up different types of courses. Some of my students end up taking professional certifications beyond just academic degrees, that's very useful. And some students I encourage them to go for higher studies. So there are thousands of bachelor's degrees, why not get a Master's degree? You are one up against the market.

Then the third one is, of course, don't be limited that the market is only Singapore. Now, of course, if you have responsibility for your elderly parents, then you have higher constraints compared to another person who doesn't have elderly parents. So for those who are not constrained by that, they can look at the world as a global market for their labour. And then see the world. Of course, you can come back in the future, but the point is that you have widened your horizon beyond just limiting yourself to Singapore.

And thirdly, be always not be isolated. One thing about working life is that you have to create networks, and networks lead to more options for you.

Keith 01:01:42

With those timely words, thank you, Professor Quah, for coming.

Professor Quah 01:01:44

Thank you very much for having me.