Blowing Bubbles
    Category: Column By : James Kallman Read : 1028 Date : Monday, December 02, 2013 - 07:31:44

    The news that Cuba is to end its near 20-year experiment with a dual-currency system comes as no great surprise. Introduced in 1994 following the collapse of former major trading partner Soviet Union, the aim was to protect the island nation's fragile economy by pegging one currency (CUC) to the U.S. dollar and reserving it for use in the tourist and foreign trade sectors. A second, non-convertible currency (CUP), meanwhile, was reserved for internal use by Cubans. With the latter being worth just a fraction of the convertible currency, it led to the formation of a two-tier class system with deep resentment of those fortunate enough to have access to the lucrative CUC currency.

    Certainly, one thing the new system will remove the chance to profit from what is basically artificial price discrimination. When a disparity in purchasing power exists it is only natural that middlemen appear to offer their services. As veteran travelers have discovered over the years, there can often be a sizeable difference in the official and unofficial exchange rates for currencies, and hence the actual cost of purchases.

    Of course, price discrimination and middlemen have become an accepted part of our daily lives in many areas, as every visit to the middleman supermarket seeing items being offered at a “special price” to entice shoppers to buy. Employee discounts, coupons, discounts for bulk sales, segmentation by age groups, etc. are also commercial ploys with which we are all familiar. Then there is two-tier pricing whereby nationals (or kitas holders in Indonesia) enjoy discounts on goods and services that are not available to international tourists.

    To be successful though, price discrimination must be based on reality and logic, and these were largely missing during the 2001-2006 U.S. housing bubble, which for various reasons inevitably burst in 2007 as risks grew and sanity evaporated. Yet the lesson that property cannot continue to appreciate ad infinitum appears to be falling on deaf ears here in Asia, particularly in Singapore and Hong Kong. The Singapore case is of particular interest, as it demonstrates how even the best intentions can sometimes go astray.

    Established in 1960 when many were living in slums and squatter settlements, the Singapore Housing Development Board (HDB) embarked on an aggressive policy of building public housing. Initially for rental, Singaporeans were later encouraged to purchase their apartments in the belief that home ownership would lead to more responsible stewardship of these developments and as well as giving a valuable asset to its citizens. The program is a success and today over 80% of Singaporeans live in HDB apartments, with around 95% percent of them owning their own home under 99-year lease agreements.

    The success and stability that the city-state offers has seen it become an increasingly attractive destination in recent years for international investors, particular those from China, Malaysia and Indonesia, and property is still an attractive investment asset. However, with ownership of HDB apartments being restricted to Singaporeans and foreign citizens with three years of permanent residence, these outside investors have been restricted to private developments.

    Nevertheless, despite currently being the second most expensive market in Asia, international ownership of Singapore property keep rising, the percentage having reportedly jumped into double digits this year. The worry lies in this becoming driven more by speculation than reality and logic, with the rising risk of a price collapse. Thus, it may be wise for measures to be introduced to prevent the likelihood of Singapore's artificial two-tiered market crashing in ruins, for when the bubble bursts the balloon of voter disenchantment will surely expand.