Singapore's Scholarship System: A Study by Soon Sze Meng
Prologue: A few posts ago, I went on a extended spiel about academic meritocracy and the scholarship system in Singapore. It was meant to focus on issues in how we think about meritocracy, rather than a direct comment about the system operative in Singapore, or the ST Forum Page letter by Mr. Soon Sze Meng* who tangentially started it all.
As it turns out, blogger oikono knows Sze Meng personally, forwarded the link to his friend, who sent me an email, and with one thing leading to another, I soon discovered that he has actually done research on Singapore's Scholarship System in his undergraduate days (Stanford, CA) and was at one point involved with the Economic Review Committee (ERC) in which he made contributions to a set of proposals (not taken up, the last I heard) concerning the Scholarship System. (.pdf file, look especially under "Annex E") Thank you oikono for the introduction!
Sze Meng very kindly forwarded to me some material among which is a paper he wrote for Professor Bruce Owen when in Stanford. The paper tackles the question: is moral obligation an economically justifiable sanction for overseas Singapore government scholars who breach their contractual service obligations? With his permission, I am reproducing the paper in full below as a preliminary to offering some comments in the near future. I thought the paper offers a comprehensive (yet not overwhelming) and researched overview to a topic area that I am sure is close to the heart of many of my readers. Furthermore, I believe that it rightfully belongs in a publically accessible format for the perusal of Singapore's online community as one useful point of reference. Thank you Sze Meng for sharing this work with us.
addition: Note by Soon Sze Meng (received via email)
This is a final paper for the Economics and Law class taken in Fall 2001 under the Stanford in Washington Program. Bruce Owen was the professor supervising the writing of the paper, and was the previous chief economist of the Antitrust Division in the US Department of Justice. You may direct questions to me at szemeng@mail.com
addition 2: Sze emailed protesting the use of "Mr. Soon", saying that it's "so formal and old". So, I've changed all references of that to "Sze Meng". He also pointed out that "punitive damages" have been included in the PSC scholarship contract (something the paper suggests).
more: here
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Paper by Soon Sze Meng: Is moral obligation an economically justifiable sanction for overseas Singapore government scholars who breach their contractual service obligations?
Contents [Note: I've shortened some of the section titles here for space reasons; the full titles are with the main body of the paper below]
1. Background information
2. Economic rationale for offering government scholarships
3. Economic and legal rationales for a legal contract
4. Reasons for taking up and breaking scholarship contracts
5. Do the bond breakers have any duress in breaking the contract?
6. Government scholarship entails moral obligations
7. Reason for using moral obligations
8. Economic and legal-based rationales for using moral obligations
9. Economic but non-legal rationales for using moral obligations
10. Using moral obligations can be a blunt instrument
11. The government scholarship contract is a legal contract
12. Alternative approach
13. References
[Note: Monetary figures in (2001) US Dollars]
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1. Background information on the Singapore's college-bound government scholarships.
The Government of Singapore offers hundreds of scholarships to college-bound Singaporean students every year, through the Public Service Commission (PSC), government statutory boards such as the Economic Development Board (EDB) and government-linked companies (GLC) such as Port of Singapore Authority (PSA). The government is a dominant provider of college-bound scholarships, since it provides the largest number of scholarship in Singapore. When the government sponsors a prospective student (scholar) for a scholarship, the scholar is required to sign a scholarship contract that "bonds" him or her to work for the government for the stipulated number of years (PSC, 2001). The government scholarship mandatory bond period is similar to the obligatory bond period for the United States (US) Reserve Officer Training Corps (ROTC) college scholarship.
Government scholarships vary in terms of years of bond, as well as in pecuniary amount involved. The number of years of bond associated with a scholarship depends on the type of award and country of study (PSC, 2001). For PSC, for example, the bond is 6 years for study in US and United Kingdom (UK), 5 years for France, Germany, Japan and the People Republic of China (PRC), and 4 years for local scholarships. All government scholarships are awarded on the basis of merit, which is based on academic and non-academic achievements, intellect as well as character (Lee, 2000). The criteria for the government scholarship awards are blind to the race, religion or family background of the scholarship applicant. An overseas scholarship for study in the US is worth approximately $150,000, as the government pays for the tuition fees and provides a monthly maintenance allowance. In addition, there is a one-time allowance for clothing, books, return economy airfares and excess baggage (PSC, 2001).
2. Economic rationale for offering government scholarships.
The government has been instrumental to Singapore's rapid economic growth in the past 40 years. Therefore, the government is maximizing the economic welfare of the country by offering bonded government scholarships to attract and lock in talented Singaporeans into the public sector for a stipulated period of time, so as to ensure the continual growth of the Singapore's economy. The Singapore government is the sole employer for the public sector, and it made the deliberate choice to pay approximately the same entry-level salaries for all graduates, with some variations. However, in the global labor market, overseas Singaporean graduates from the top ranking universities and the few top local graduates often command higher pecuniary compensation as compared to most of the graduates (mainly local graduates) in Singapore. For example, the monthly entry level graduate government salary is in the region of $1200 to $2000, while the average monthly graduate entry level salary for global investment banking or consulting companies (whom often hire mostly overseas graduates) in Singapore is in the order of $2500 to $4000.
The government will have to raise the entry-level salaries for all graduates (due to its current entry-level salary policy) if they choose to pay a higher compensation for overseas Singaporean graduates and the few top local graduates to compete with the global labor market. This can lead to wage-push inflation as the government employs a significant proportion of the graduates in Singapore. In addition, the government will not want to differentiate wages between the overseas and few top local graduates with the rest of the local graduates, because it will implicitly discount the value of the local tertiary education, which is not socially optimal nor politically viable. As the potential government scholars can arguably be the overseas graduates from the top overseas universities and the few top local graduates, the scholarship award ($150,000) paid to the overseas (US and UK) government scholars is actually an implicit wage increase (around $1500 per month) discounted over the scholars' bond period of six years.
3. Economic and legal rationales for a legal scholarship contract.
A legal and enforceable contract is necessary for awarding the government scholarship because of the sequential character of the scholarship system, which encourages opportunism (Posner, 1998 p.101). The function of the scholarship contract is to deter scholars from behaving opportunistically towards the government, in order to encourage the optimal timing of economic activity and obviate any costly self-protection measures (Posner, 1998). As stipulated in the contract, the government will pay for the necessary tuition fees and living expenses of the student. Additionally, the government will make the effort to provide returning scholars with competitive salaries, rewarding careers and an enabling environment for growth and learning (Lee, 1998). In return, the scholars will have to make an honest, conscientious effort to fulfill his or her obligation by serving the stipulated number of years with the sponsor governmental organization (Lee, 1998). Without an enforceable legal contract, the scholar can choose to be opportunistic by not serving his scholarship bond after receiving the pecuniary support from the government and the prestige and honor of being a government scholar. Therefore, the scholarship contract provides the government with the incentives to offer scholarships and the ability to recoup its investment.
The scholarship contract also offers remedies for breach due to opportunism and unforeseen contingencies (Posner, 1998 p. 101). The scholar accepts the scholarship with the full knowledge, consent and approval of two sureties, who are usually parents, immediate relatives or close family friends (Tang, 1999). The sureties, whom have to be gainfully employed with a minimum monthly salary, and below the age of 50, will be responsible for paying back the scholarship expenses including liquidated damages if the scholar cannot afford to pay for the breach of the scholarship contract.
The damages for breaking the scholarship contract without any approved reasons is the liquidated damages of 10% per annum compounded interest on the total expenses (Tang, 1999). However, the government waives liquidated damages if the scholars break their bonds in certain circumstances such as medical ones. The 10% compounded interest rate does not appear to be deliberately pegged above or below the market interest rate. For example, United Overseas Bank, a major Singapore bank, is offering overseas study loan at 7% per annum, up to the maximum value of $27,000 (UOB, 2001). The higher 10% interest rate for the liquidated damages is likely due to the larger amount of the scholarship, which can come up to $150,000. Moreover, the government had not change the 10% interest rate for the past 5 years, even though market interest rates have fluctuated.
With regard to specific performance, it is impossible to compel scholarship recipients to serve, if they have made up their minds not to do so (Posner, 1998). The fundamental principle of law is that the courts will not compel specific performance of personal service contracts (Lee, 1998). It is beyond the powers of any court or anyone else to force a scholar to fulfill an obligation that the person does not want to. Therefore the remedy for non-performance of scholarship contracts is the payment of contract damages (Lee, 1998). Also, the liabilities for the scholarship contract is prorated, meaning that the scholar will pay a lower pecuniary amount to break the bond, in inverse proportion to the amount of time he had served. Prorated contracts make economic sense, as they prevent windfall gain by either side (Posner, 1998). For example, a prorated contract will not allow the government to benefit from a windfall gain from obtaining the full value of the scholarships, plus damages from the scholars if they break the bond, when they had already served a large part of the scholarship bond.
4. Reasons for taking up and breaking the government scholarship contracts.
A scholarship applicant takes up the government scholarship for many reasons. Some of the applicants wish to study overseas, but are not able to pay for the overseas education that can cost five times more than the partly subsidized local college education. Those who can afford to pay for the overseas education may take the scholarship for the prestige of being chosen as a government scholar after a rigorous selection process. Some applicants may also want to work for the government by serving the bond, in anticipation of a guaranteed and fulfilling career in the public sector. It is a fair assumption to state that families that can afford to pay for the scholars' overseas education will more likely be able to pay for the cost of breaking the scholarship contract.
Scholars break their scholarship contracts because there are better alternatives available as compared to working in the government service. Scholars calculate their individual benefits and costs in their decision to break their scholarship contract. The benefits of breaking the scholarship contract are that the scholars will be able to work in other alternative careers that bring them higher pecuniary compensation or non-pecuniary satisfaction. In addition, the qualitative benefits from jump-starting a career with more recognized private organizations, living in another country, and pursuing a university sponsored doctorate degree immediately after their undergraduate or other graduate studies are also part of the benefits in not serving their bonds after graduation. On the other hand, the costs of breaking the contract will be the actual expenses spent on the scholars, plus liquidated damages, to be paid in one lump sum. The liquidated damages for scholarship in the US ($150,000) can come up to $41,000, more than a year worth of tuition and living expenses. Scholars will break their contracts if they determine that the benefits, both pecuniary and qualitative outweigh the pecuniary costs of breaking the scholarship bond.
5. Do the bond breakers have any duress in breaking the scholarship contract?
Duress is a defense for breach, but the duress has to occur at the time the contract is entered into, not at the time of breach (Posner, 1998 p.126). Therefore, scholars have duress if the terms of the scholarship contracts are disadvantageous to them when the contracts were signed. There appears to be an asymmetrical information problem between the government and scholars when the scholarship contracts were entered into. Many scholarship applicants at the age of 18, as well as their parents, do not know the benefits and opportunities available to the scholars after graduation from the top overseas universities, and are often only presented with information on the positive aspects of working in the Singapore government. On the other hand, the government has more information on the opportunities that will be available to the scholars after they graduate from the top overseas universities, from its prior experiences with scholars who are graduating or have broken their bond.
However, if the government provides information as to the kinds of alternative opportunities offered to scholars when they graduated, there will be fewer government scholarship applicants, lowering the overall quality of the government scholars. Therefore, the government has no incentive to release this information, as the government desires to have the best talents in the public sector. In addition, since the government is the dominant provider of overseas scholarships in Singapore, by not presenting information on the opportunities of overseas scholars after they graduated, other private scholarship sponsors will also have no incentive to provide this information. Without the information on alternative economic and scholastic opportunities made available to potential scholarship applicants, there will be less concerted pressure for the scholarship bonds to be shortened, in order to make bonded scholarships more attractive. The government and other private scholarship sponsors will benefit at the expense of the scholarship applicants.
Although information once obtained may be cheap to convey to another party, there is a cost involved in obtaining the information. Therefore, if we do not allow parties to profit from information by keeping it to themselves, they will have little or no incentive to obtain in the first place, and society will be the loser (Posner, 1998 p. 122). Along this line of reasoning, the government should not be asked to provide information on the scholar's alternative opportunities On the other hand, liability for nondisclosure should depend on whether the government or scholar could produce, convey, or obtain the pertinent information at lower cost (Posner, 1998). The case for requiring disclosure by the government seems to be stronger as the alternative opportunities presented to overseas scholars after graduation is not ascertainable by the scholarship applicants at a lower cost (Posner, 1998 p.125). The scholars may therefore have duress, as there was the lack of this information at the time of the contracts was entered into.
6. Government scholarship entails moral obligations to serve the country.
The EDB and National Computer Board (NCB) published the names of three US based scholars who broke their bonds in the Straits Times, Singapore's largest broadsheet newspaper, on 27th February 1998, informing the public of the scholars' personal and pecuniary reasons for breaking their bonds. The scholars who declined to work for their sponsoring organizations were classified as bond breakers (Tang, 1999). After naming the three bond breakers in 1998, the government officially declared that government scholars had the moral obligation to serve the country, and the scholarship contract is not (as with commercial contracts) just a matter of contracts and liquidated damages (Lee, 2000). Deputy Prime Minister Lee Hsien Long stated, " It (government scholarship) involves deeper issues of right and wrong, moral integrity, a sense of shame at breaking a solemn personal undertaking. It is not just a legal, but also a moral obligation. There is a qualitative difference between the two" (Lee, 1998). The government stated that scholars should make every effort to fulfill their promise to serve the bond, and to stand ashamed when breaking the promise, because scholars who fail to serve their bond have used public funds to serve their personal ends and thwarted the government's purpose in investing in their abilities.
Government scholarships represent a use of public funds to train promising young men and women to take up public sector's leadership or specialist roles, in order to build up a highly efficient public service to realize the economic potential of Singapore. Therefore, government scholarships are not simply commercial contracts, which may be settled purely by paying liquidated damages, nor a study loan with an option to serve in lieu of repaying the loan (Lee, 1998). In addition, when the government sponsors a scholar for his or her university studies, it is giving one of the limited coveted places to him or her, depriving some other candidates a chance to be a government scholar (Lee, 1998). DPM Lee also stressed that scholars should have the maturity to understand that despite having all these boundless opportunities overseas, scholars, as Singaporeans, have their obligations and responsibilities in Singapore, which needs all the talent it can get (Lee, 2000).
7. Reason for using moral obligations to compel scholars into serving their bonds.
The are three main reasons why the government declared that government scholars have the moral obligations to serve their bonds, and all of these reasons are to compel potential bond breakers not to break their bond. First, as Singapore has a relatively small population (4 million) packed into an island slightly more than three and a half times the size of Washington D.C., being known as a bond breaker will most likely mean that you will be perceived as self centered and amoral by your family, relatives and friends (Tang, 1999). Scholars who break their bond, especially those that did not serve their bonds at all, will be viewed by society as ungrateful people who only seek to maximize their own benefits (Lee, 2000). Mr. Chng Hee Kok, Member of Parliament in 1998 argued that, "Obtaining the scholarship brings much honor and prestige to the family. Hence terminating a bond must bring with it some dishonor." (Lee, 1998). Therefore, the shame they had brought to their families and themselves for breaking the scholarship are the higher cost of breaking their bonds. In addition, these bond breakers will face a more restricted local labor markets, as local private and public sectors organizations will have greater hesitation in employing these bond breakers (Koh, 1998).
Second, the government is also attempting to check a worrying trend of more scholars breaking their bonds before serving. Rising affluence within the country has dissipated the sense of urgency about Singapore's future among parents and students, who are now driven by self-interest rather than public duty (Lee, 2000). Fewer scholars are now compelled to serve their bonds because of a sense of public duty. The rhetoric of moral obligations in the bond breaking issue enables the government to stress the importance of public duty and service. Third, the government is also "rewarding" scholars who are serving their bond by imputing greater honor and moral on them when they come back to serve, attributing them with greater status in society. All these reasons increase the costs of breaking the bond, and the benefits of serving the bond.
8. Economic and legal-based rationales for using moral obligations.
The use of moral obligations by the government indicates that the liquidated damages in the scholarship contract are not regarded by the government as a sufficient deterrent for breach by scholars. By employing moral obligations to compel the scholars to serve their bonds, the government is imposing a higher cost on the bond breakers. There is a higher cost to break the bond because all scholars have their personal cost of being shamed and viewed by society as amoral. The government chooses not to impose higher pecuniary contract damages than the current liquidated damages, because it will further penalize those who choose to serve for a limited part of the bond, as they will have to pay a greater amount of contract damages. In addition, higher pecuniary contract damages will deter potential government scholarship applicants, lowering the competition for the government scholarships, and subsequently, the quality of government scholars. Moral obligations appear to be the most effective method in deterring potential bond breakers by placing social pressure on them to serve their bonds, without raising the pecuniary contract damages of the scholarship contract.
The government is also ascribing moral obligations on government scholarship to correct an economic discrepancy. It appears that the government's reliance loss, which is the cost the government incurs in reasonable reliance on the scholar's performing the contract, appears to be more than the value of the liquidated damages (Posner, 1998 p.130). This may signify an economically justifiable reason for the government in using moral obligations to compel scholars to serve. If the scholars break their bonds before serving, the government not only loses the pecuniary expenditure and the interest incurred, but also the administrative expenses incurred in selecting and liaising with the scholars during the period when the scholars are in college. In addition, the government also suffers the opportunity cost of not selecting another potential scholar who may not break his or her bond, and also the cost involved in hiring another substitute professional to take over the position the bond breaker was slotted for (Socratic Circle, 2000). Therefore, the government may be discouraging inefficient breaches by increasing the costs of breach through moral obligation, as the liquidated damages may be insufficient to cover the government's reliance loss.
9. Economic but non-legal rationales for using moral obligations.
The prerogative to publish the names of bond breakers allows the government to place a higher cost of moral obligations on some scholars, but not indiscriminately on all scholars. It is reasonable to assume that there will be an additional higher cost of moral obligations being exacted on bond breakers who have their names published on the newspapers. The government does not spell out the exact grounds for an acceptable parting between the government and the scholar, and choose to review each bond breaking incident to decide whether to publish the bond breaker's name (Koh, 1998). However, potential bond breakers may be able to determine with great accuracy if their names will be published. The reason is because the government consistently only publishes the names of scholars who break their scholarship contracts before or immediately after graduation for alternative careers or research opportunities that will bring them higher pecuniary compensation, which is incidentally the reason for the majority of scholars who break their bonds. Therefore, the government is able to reduce the number of bond breakers who break their contracts for better pecuniary compensation, as their cost of moral obligations is magnified from having their names being published by the government in the newspapers.
On a macro level, the Singapore government will incur economic costs from losing the overseas scholars if they stay in their host countries (Low, 1998). Overseas scholars who are shamed in public and viewed as amoral by society will often work in their host countries, where the opportunities and compensations are greater (Tang, 1999). In addition, local companies may shy away from employing these bond breakers, since they are perceived as having the mindset of not thinking twice about breaking their contracts with the company either (Tang, 1999). Therefore, the government actually stands to lose the bond breaker for a long time to his or her host country, thereby losing a valuable asset that could have been deployed to another part of the economy (Wong, 2001). In addition, the host countries will be subsided by the pre-tertiary public education that the bond breaker had received in Singapore (Yeo, 2000). However, by losing a few scholars through the imposition of moral obligations, the government may actually persuade a larger number of potential bond breakers not to break their bonds, thereby benefiting the government.
10. Using moral obligations can be a blunt instrument to achieve its end.
However, even though using moral obligations benefits the government, the usage of moral obligations is still a blunt instrument because it is subjective. Every scholar based on his or her unique circumstances will value the cost of moral obligations differently. This may or may not result in more efficient breaches. Subjective moral obligations can be a double-edged sword. Potential bond breakers may be able to determine how the cost of moral obligations applies to them individually, resulting in more accurate benefits and costs analysis for bond breaking. On the other hand, potential bond breakers can impute too high an amount to the cost of moral obligations, resulting in less than the optimal amount of scholarship contracts' breaches.
Moral obligations are also a blunt instrument because they are applied to all bond breakers indiscriminately. The government focus in using moral obligations is to dissuade those scholars who break their bond for better pecuniary alternatives. However, a small percentage of bond breakers might have broken their bond due to non-pecuniary personal reasons. These include female scholars who have started a family and have chosen to become full time mothers at home, as well as those scholars wanting to get involved in non-profit charitable works. These personal reasons are in line with current government policies for Singaporean to have more children, and to be more involved in volunteer charity work. Even though the government may not publish the names of these bond breakers, and the scholars can explain their personal reasons for breaking their bonds, there is already an implicit cost of moral obligations being exacted on them. This cost of moral obligations results from the lack of perfect information, because society, including local companies, automatically perceives a bond breaker as an amoral self-interested individual, even though the scholar may break the bond for their non-pecuniary reasons. The problem of moral obligations is that all government bond breakers, regardless of the reasons for breaking the bond, already suffer from the indiscriminate blanket cost of moral obligations.
Also, since the government provides most of the college-bound scholarships in Singapore, the use of moral obligations has a spillover effect on bonded private college-bound scholarships, which are offered by private companies. Private sector scholars will have to suffer the cost of moral obligations if they decide to break the contract, because members of the public already have a negative perception of bond breakers, even though private companies and scholars view their scholarship contract more as a legal commercial contract than any form of moral obligations. If private sector scholars include the cost of moral obligations in their benefits and costs analysis, this will result in less than the optimal amount of contracts' breaches. Therefore, the cost of moral obligations being exacted on the private sector scholars will result in a non-optimal economic outcome.
Furthermore, using moral obligations to ensure that scholars fulfill their scholarship contracts has an economically counterproductive effect, if the scholar returns unwillingly for fear of being shamed. The scholar will have little motivation or incentive to perform at their best, and the government organizations will also have less incentives to provide a challenging and rewarding work environment for the returning scholars, as they know that the scholars are compelled to work because of the cost of moral obligations (Socratic Circle, 2000). This is clearly a sub-optimal economic outcome for both parties.
11. The government scholarship contract is a legal contract.
Regardless of the government's rhetoric of moral obligations, the penalty of liquidated damages in the scholarship contract technically refutes the government stand that government scholarships are a form of moral obligations. An extract of a government scholarship contract consisting of liquidated damages is as follow, "The Student and the Sureties jointly and severally for himself and themselves and their respective personal representatives covenant to pay to the government the sum specified in the Third schedule hereto as liquidated damages and not as a penalty if the student..." (Tang, 1999). A lengthy list of acceptable reasons that could result in bond breaking follows. Therefore, the scholarship contract is merely a legal contract, with no moral strings attached (Tang, 1999). It is nothing more than a legal document, with clauses provided to give the government due compensation (liquidated damages) in the event that the scholar terminates the agreement.
Entering (and exiting) from the scholarship bond is first and foremost a contractual obligation (Posner, 1998). It is an agreement both government and scholars enter into willingly. There are clauses in the agreement for both parties to terminate the relationship, provided certain conditions are met. When scholars sign their scholarship contracts, they acknowledge the penalty involved in breaking the bond. If the scholar decides to exit from the contract, a liquidated damages clause provides for what is deemed fair compensation to the government. Therefore, even as the scholarship contract buys the right to the scholar's performance, it is negated when damages are paid (Posner, 1998). Since the scholarship contract is drafted by the government and complies with the legal framework in Singapore by contract law, imputing that scholars are immoral when they break their bond is not within the terms of the scholarship contract. Moreover, the objective of contract damages is to give one party an incentive to fulfill his promise unless the result would be an inefficient use of resources (Posner, 1998). It is therefore economically efficient if the scholar breaks his contract because his gain (both pecuniary and non-monetary) from breach would exceed the expected gains to the government from serving or completing the contract (Posner, 1998).
Most importantly, the scholarship contract has no terms and conditions of the agreement allowing the government to publish the names of the bond breakers in the national press nor imputing that scholarship contracts are a form of moral obligations (Tang, 1999). If the government chooses to use moral obligations to compel their scholars to serve the bonds, then the details of the moral obligations linked to taking up the scholarship and conditions for publishing the names of bond breakers should be communicated in the text of the scholarship contract. For example, the three US-based bond breakers did not know that they would have their names published in the newspapers in 1998 when they signed their scholarship contracts three or four years before the naming incident. In addition, the scholars who had already signed their contracts prior to the publishing of the names also did not know the government's intention of publishing bond breakers' names when they signed the contract. For this reason alone, the government is opportunistic in applying the notion of moral obligations on these government scholars.
On the other hand, even though the conditions and terms of moral obligations and the publishing of bond breaker's names are not written in the scholarship contract, if both parties understand that these are the remedies that the government may use for bond breaking, it might as well be a written part of the contract in term of the effects. Government scholars who sign the contract after the 1998 incident will know that the rhetoric of moral obligations are being imposed on them, and the possible consequences of having their names published if they break their bond. However, using subjective moral obligations as a sanction does not generate value maximizing behavior, as it influences the benefits and costs decision analysis of a potential bond breaker subjectively. Scholars may impute too much value on the possibility of being viewed as amoral if they breach the contract, even though it may be economically efficient to break the contract. Therefore, using moral obligations is not an economically justifiable sanction into compelling scholars to serve their bonds.
12. Alternative approach to using moral obligations - punitive damages.
Instead of using moral obligations, which are subjective and not economically justifiable, the government should consider more objective pecuniary based measures such as punitive damages. The use of moral obligations appears to be targeted specifically at bond breakers who do not serve their bonds at all, and punitive damages can compel the scholars to serve their bond for a period of time before breaking the contract. Admittedly, punitive damages are not a perfect solution to the bond breaking issue, but the advantage over moral obligations is that punitive damages are objectively pecuniary based, enabling the scholars to make a more accurate economic decision on whether to break their contracts. Moreover, it may be infeasible for the government to retract the use of moral obligations in the public sphere, as the notion of the amoral government bond breaker may be already internalized into society's mindset. On the other hand, it is practical for the government to change the amount of punitive damages in the scholarship contract.
Including punitive damages for the breaking of scholarship contracts without valid reasons immediately after or before graduation may effectively deter scholars from breaking their contracts without serving a single day of their bond. The punitive damages can be removed after the scholars have served at least one year of their bond period. The government will therefore has the opportunity to convince the potential bond breakers that its work environment can be attractive, providing the potential bond breakers with more information to determine whether the alternatives are still more desirable. Moreover, the government organization will have the incentives to provide a rewarding and challenging work environment to compel the scholars to complete their bonds willingly (Socratic Circle, 2000). The scholars can also choose to pursue their personal aspirations in other careers or fields after a year in the government, which will not affect their progress as much as if they had served the full length of the bonds. As prior to the present scholarship contracts, after serving one year, the scholars can pay a prorated compensation including liquidated damages to the government if they still choose to break their contracts.
References
- Koh, Buck Song. "Unanswered Questions in Scholarship Debate." The Straits Times. 12 March 1998. Singapore.
- Lee, Hsien Loong. "Ministerial Statement on Scholars and Scholarship Bonds by DPM Lee at Parliament on 11 Mar 98." Ministry of Education: Government and Politics -1998. 11 March 1998. Singapore. (websource)
- Lee, Hsien Loong. "Scholarships Remain Way To Noble Ends." The Straits Times. 23 Jul 2000. Singapore.
- Low. Adrian. "Mutual Respect, Not A Bond, Ensures Scholars Return." The Straits Times.14 April 1998. Singapore. (websource)
- Posner, Richard. " Chapter 4: Contract Rights and Remedies." Economic Analysis of Law, 5th ed. 1998. Aspen.
- Public Service Commission (PSC). 2001. "Terms and Conditions." Chart on Award Schemes and Types of Award. 2001.Singapore. (websource)
- Socratic Circle. "In The Era of War For Talent." Socratic Circle Publication. 5 Aug 2000. Singapore. (websource)
- Tang, Sara. "Breaking the Bondage." Asiaonline. April 1998. Singapore. (websource)
- Wong, Gene. " Scholarship Paper Review." Email to Author. 26 November 2001.Stanford, California.
- Yeo, George. "The Economics of Human Resource Development." Productivity Digest. 7 November 2000. Singapore. (websource)
- United Overseas Bank (UOB). "Loan Rates." Campus Overseas Loans. 4 Dec. 2001. Singapore. (websource)
As it turns out, blogger oikono knows Sze Meng personally, forwarded the link to his friend, who sent me an email, and with one thing leading to another, I soon discovered that he has actually done research on Singapore's Scholarship System in his undergraduate days (Stanford, CA) and was at one point involved with the Economic Review Committee (ERC) in which he made contributions to a set of proposals (not taken up, the last I heard) concerning the Scholarship System. (.pdf file, look especially under "Annex E") Thank you oikono for the introduction!
Sze Meng very kindly forwarded to me some material among which is a paper he wrote for Professor Bruce Owen when in Stanford. The paper tackles the question: is moral obligation an economically justifiable sanction for overseas Singapore government scholars who breach their contractual service obligations? With his permission, I am reproducing the paper in full below as a preliminary to offering some comments in the near future. I thought the paper offers a comprehensive (yet not overwhelming) and researched overview to a topic area that I am sure is close to the heart of many of my readers. Furthermore, I believe that it rightfully belongs in a publically accessible format for the perusal of Singapore's online community as one useful point of reference. Thank you Sze Meng for sharing this work with us.
addition: Note by Soon Sze Meng (received via email)
This is a final paper for the Economics and Law class taken in Fall 2001 under the Stanford in Washington Program. Bruce Owen was the professor supervising the writing of the paper, and was the previous chief economist of the Antitrust Division in the US Department of Justice. You may direct questions to me at szemeng@mail.com
addition 2: Sze emailed protesting the use of "Mr. Soon", saying that it's "so formal and old". So, I've changed all references of that to "Sze Meng". He also pointed out that "punitive damages" have been included in the PSC scholarship contract (something the paper suggests).
more: here
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Paper by Soon Sze Meng: Is moral obligation an economically justifiable sanction for overseas Singapore government scholars who breach their contractual service obligations?
Contents [Note: I've shortened some of the section titles here for space reasons; the full titles are with the main body of the paper below]
1. Background information
2. Economic rationale for offering government scholarships
3. Economic and legal rationales for a legal contract
4. Reasons for taking up and breaking scholarship contracts
5. Do the bond breakers have any duress in breaking the contract?
6. Government scholarship entails moral obligations
7. Reason for using moral obligations
8. Economic and legal-based rationales for using moral obligations
9. Economic but non-legal rationales for using moral obligations
10. Using moral obligations can be a blunt instrument
11. The government scholarship contract is a legal contract
12. Alternative approach
13. References
[Note: Monetary figures in (2001) US Dollars]
* * * * *
1. Background information on the Singapore's college-bound government scholarships.
The Government of Singapore offers hundreds of scholarships to college-bound Singaporean students every year, through the Public Service Commission (PSC), government statutory boards such as the Economic Development Board (EDB) and government-linked companies (GLC) such as Port of Singapore Authority (PSA). The government is a dominant provider of college-bound scholarships, since it provides the largest number of scholarship in Singapore. When the government sponsors a prospective student (scholar) for a scholarship, the scholar is required to sign a scholarship contract that "bonds" him or her to work for the government for the stipulated number of years (PSC, 2001). The government scholarship mandatory bond period is similar to the obligatory bond period for the United States (US) Reserve Officer Training Corps (ROTC) college scholarship.
Government scholarships vary in terms of years of bond, as well as in pecuniary amount involved. The number of years of bond associated with a scholarship depends on the type of award and country of study (PSC, 2001). For PSC, for example, the bond is 6 years for study in US and United Kingdom (UK), 5 years for France, Germany, Japan and the People Republic of China (PRC), and 4 years for local scholarships. All government scholarships are awarded on the basis of merit, which is based on academic and non-academic achievements, intellect as well as character (Lee, 2000). The criteria for the government scholarship awards are blind to the race, religion or family background of the scholarship applicant. An overseas scholarship for study in the US is worth approximately $150,000, as the government pays for the tuition fees and provides a monthly maintenance allowance. In addition, there is a one-time allowance for clothing, books, return economy airfares and excess baggage (PSC, 2001).
2. Economic rationale for offering government scholarships.
The government has been instrumental to Singapore's rapid economic growth in the past 40 years. Therefore, the government is maximizing the economic welfare of the country by offering bonded government scholarships to attract and lock in talented Singaporeans into the public sector for a stipulated period of time, so as to ensure the continual growth of the Singapore's economy. The Singapore government is the sole employer for the public sector, and it made the deliberate choice to pay approximately the same entry-level salaries for all graduates, with some variations. However, in the global labor market, overseas Singaporean graduates from the top ranking universities and the few top local graduates often command higher pecuniary compensation as compared to most of the graduates (mainly local graduates) in Singapore. For example, the monthly entry level graduate government salary is in the region of $1200 to $2000, while the average monthly graduate entry level salary for global investment banking or consulting companies (whom often hire mostly overseas graduates) in Singapore is in the order of $2500 to $4000.
The government will have to raise the entry-level salaries for all graduates (due to its current entry-level salary policy) if they choose to pay a higher compensation for overseas Singaporean graduates and the few top local graduates to compete with the global labor market. This can lead to wage-push inflation as the government employs a significant proportion of the graduates in Singapore. In addition, the government will not want to differentiate wages between the overseas and few top local graduates with the rest of the local graduates, because it will implicitly discount the value of the local tertiary education, which is not socially optimal nor politically viable. As the potential government scholars can arguably be the overseas graduates from the top overseas universities and the few top local graduates, the scholarship award ($150,000) paid to the overseas (US and UK) government scholars is actually an implicit wage increase (around $1500 per month) discounted over the scholars' bond period of six years.
3. Economic and legal rationales for a legal scholarship contract.
A legal and enforceable contract is necessary for awarding the government scholarship because of the sequential character of the scholarship system, which encourages opportunism (Posner, 1998 p.101). The function of the scholarship contract is to deter scholars from behaving opportunistically towards the government, in order to encourage the optimal timing of economic activity and obviate any costly self-protection measures (Posner, 1998). As stipulated in the contract, the government will pay for the necessary tuition fees and living expenses of the student. Additionally, the government will make the effort to provide returning scholars with competitive salaries, rewarding careers and an enabling environment for growth and learning (Lee, 1998). In return, the scholars will have to make an honest, conscientious effort to fulfill his or her obligation by serving the stipulated number of years with the sponsor governmental organization (Lee, 1998). Without an enforceable legal contract, the scholar can choose to be opportunistic by not serving his scholarship bond after receiving the pecuniary support from the government and the prestige and honor of being a government scholar. Therefore, the scholarship contract provides the government with the incentives to offer scholarships and the ability to recoup its investment.
The scholarship contract also offers remedies for breach due to opportunism and unforeseen contingencies (Posner, 1998 p. 101). The scholar accepts the scholarship with the full knowledge, consent and approval of two sureties, who are usually parents, immediate relatives or close family friends (Tang, 1999). The sureties, whom have to be gainfully employed with a minimum monthly salary, and below the age of 50, will be responsible for paying back the scholarship expenses including liquidated damages if the scholar cannot afford to pay for the breach of the scholarship contract.
The damages for breaking the scholarship contract without any approved reasons is the liquidated damages of 10% per annum compounded interest on the total expenses (Tang, 1999). However, the government waives liquidated damages if the scholars break their bonds in certain circumstances such as medical ones. The 10% compounded interest rate does not appear to be deliberately pegged above or below the market interest rate. For example, United Overseas Bank, a major Singapore bank, is offering overseas study loan at 7% per annum, up to the maximum value of $27,000 (UOB, 2001). The higher 10% interest rate for the liquidated damages is likely due to the larger amount of the scholarship, which can come up to $150,000. Moreover, the government had not change the 10% interest rate for the past 5 years, even though market interest rates have fluctuated.
With regard to specific performance, it is impossible to compel scholarship recipients to serve, if they have made up their minds not to do so (Posner, 1998). The fundamental principle of law is that the courts will not compel specific performance of personal service contracts (Lee, 1998). It is beyond the powers of any court or anyone else to force a scholar to fulfill an obligation that the person does not want to. Therefore the remedy for non-performance of scholarship contracts is the payment of contract damages (Lee, 1998). Also, the liabilities for the scholarship contract is prorated, meaning that the scholar will pay a lower pecuniary amount to break the bond, in inverse proportion to the amount of time he had served. Prorated contracts make economic sense, as they prevent windfall gain by either side (Posner, 1998). For example, a prorated contract will not allow the government to benefit from a windfall gain from obtaining the full value of the scholarships, plus damages from the scholars if they break the bond, when they had already served a large part of the scholarship bond.
4. Reasons for taking up and breaking the government scholarship contracts.
A scholarship applicant takes up the government scholarship for many reasons. Some of the applicants wish to study overseas, but are not able to pay for the overseas education that can cost five times more than the partly subsidized local college education. Those who can afford to pay for the overseas education may take the scholarship for the prestige of being chosen as a government scholar after a rigorous selection process. Some applicants may also want to work for the government by serving the bond, in anticipation of a guaranteed and fulfilling career in the public sector. It is a fair assumption to state that families that can afford to pay for the scholars' overseas education will more likely be able to pay for the cost of breaking the scholarship contract.
Scholars break their scholarship contracts because there are better alternatives available as compared to working in the government service. Scholars calculate their individual benefits and costs in their decision to break their scholarship contract. The benefits of breaking the scholarship contract are that the scholars will be able to work in other alternative careers that bring them higher pecuniary compensation or non-pecuniary satisfaction. In addition, the qualitative benefits from jump-starting a career with more recognized private organizations, living in another country, and pursuing a university sponsored doctorate degree immediately after their undergraduate or other graduate studies are also part of the benefits in not serving their bonds after graduation. On the other hand, the costs of breaking the contract will be the actual expenses spent on the scholars, plus liquidated damages, to be paid in one lump sum. The liquidated damages for scholarship in the US ($150,000) can come up to $41,000, more than a year worth of tuition and living expenses. Scholars will break their contracts if they determine that the benefits, both pecuniary and qualitative outweigh the pecuniary costs of breaking the scholarship bond.
5. Do the bond breakers have any duress in breaking the scholarship contract?
Duress is a defense for breach, but the duress has to occur at the time the contract is entered into, not at the time of breach (Posner, 1998 p.126). Therefore, scholars have duress if the terms of the scholarship contracts are disadvantageous to them when the contracts were signed. There appears to be an asymmetrical information problem between the government and scholars when the scholarship contracts were entered into. Many scholarship applicants at the age of 18, as well as their parents, do not know the benefits and opportunities available to the scholars after graduation from the top overseas universities, and are often only presented with information on the positive aspects of working in the Singapore government. On the other hand, the government has more information on the opportunities that will be available to the scholars after they graduate from the top overseas universities, from its prior experiences with scholars who are graduating or have broken their bond.
However, if the government provides information as to the kinds of alternative opportunities offered to scholars when they graduated, there will be fewer government scholarship applicants, lowering the overall quality of the government scholars. Therefore, the government has no incentive to release this information, as the government desires to have the best talents in the public sector. In addition, since the government is the dominant provider of overseas scholarships in Singapore, by not presenting information on the opportunities of overseas scholars after they graduated, other private scholarship sponsors will also have no incentive to provide this information. Without the information on alternative economic and scholastic opportunities made available to potential scholarship applicants, there will be less concerted pressure for the scholarship bonds to be shortened, in order to make bonded scholarships more attractive. The government and other private scholarship sponsors will benefit at the expense of the scholarship applicants.
Although information once obtained may be cheap to convey to another party, there is a cost involved in obtaining the information. Therefore, if we do not allow parties to profit from information by keeping it to themselves, they will have little or no incentive to obtain in the first place, and society will be the loser (Posner, 1998 p. 122). Along this line of reasoning, the government should not be asked to provide information on the scholar's alternative opportunities On the other hand, liability for nondisclosure should depend on whether the government or scholar could produce, convey, or obtain the pertinent information at lower cost (Posner, 1998). The case for requiring disclosure by the government seems to be stronger as the alternative opportunities presented to overseas scholars after graduation is not ascertainable by the scholarship applicants at a lower cost (Posner, 1998 p.125). The scholars may therefore have duress, as there was the lack of this information at the time of the contracts was entered into.
6. Government scholarship entails moral obligations to serve the country.
The EDB and National Computer Board (NCB) published the names of three US based scholars who broke their bonds in the Straits Times, Singapore's largest broadsheet newspaper, on 27th February 1998, informing the public of the scholars' personal and pecuniary reasons for breaking their bonds. The scholars who declined to work for their sponsoring organizations were classified as bond breakers (Tang, 1999). After naming the three bond breakers in 1998, the government officially declared that government scholars had the moral obligation to serve the country, and the scholarship contract is not (as with commercial contracts) just a matter of contracts and liquidated damages (Lee, 2000). Deputy Prime Minister Lee Hsien Long stated, " It (government scholarship) involves deeper issues of right and wrong, moral integrity, a sense of shame at breaking a solemn personal undertaking. It is not just a legal, but also a moral obligation. There is a qualitative difference between the two" (Lee, 1998). The government stated that scholars should make every effort to fulfill their promise to serve the bond, and to stand ashamed when breaking the promise, because scholars who fail to serve their bond have used public funds to serve their personal ends and thwarted the government's purpose in investing in their abilities.
Government scholarships represent a use of public funds to train promising young men and women to take up public sector's leadership or specialist roles, in order to build up a highly efficient public service to realize the economic potential of Singapore. Therefore, government scholarships are not simply commercial contracts, which may be settled purely by paying liquidated damages, nor a study loan with an option to serve in lieu of repaying the loan (Lee, 1998). In addition, when the government sponsors a scholar for his or her university studies, it is giving one of the limited coveted places to him or her, depriving some other candidates a chance to be a government scholar (Lee, 1998). DPM Lee also stressed that scholars should have the maturity to understand that despite having all these boundless opportunities overseas, scholars, as Singaporeans, have their obligations and responsibilities in Singapore, which needs all the talent it can get (Lee, 2000).
7. Reason for using moral obligations to compel scholars into serving their bonds.
The are three main reasons why the government declared that government scholars have the moral obligations to serve their bonds, and all of these reasons are to compel potential bond breakers not to break their bond. First, as Singapore has a relatively small population (4 million) packed into an island slightly more than three and a half times the size of Washington D.C., being known as a bond breaker will most likely mean that you will be perceived as self centered and amoral by your family, relatives and friends (Tang, 1999). Scholars who break their bond, especially those that did not serve their bonds at all, will be viewed by society as ungrateful people who only seek to maximize their own benefits (Lee, 2000). Mr. Chng Hee Kok, Member of Parliament in 1998 argued that, "Obtaining the scholarship brings much honor and prestige to the family. Hence terminating a bond must bring with it some dishonor." (Lee, 1998). Therefore, the shame they had brought to their families and themselves for breaking the scholarship are the higher cost of breaking their bonds. In addition, these bond breakers will face a more restricted local labor markets, as local private and public sectors organizations will have greater hesitation in employing these bond breakers (Koh, 1998).
Second, the government is also attempting to check a worrying trend of more scholars breaking their bonds before serving. Rising affluence within the country has dissipated the sense of urgency about Singapore's future among parents and students, who are now driven by self-interest rather than public duty (Lee, 2000). Fewer scholars are now compelled to serve their bonds because of a sense of public duty. The rhetoric of moral obligations in the bond breaking issue enables the government to stress the importance of public duty and service. Third, the government is also "rewarding" scholars who are serving their bond by imputing greater honor and moral on them when they come back to serve, attributing them with greater status in society. All these reasons increase the costs of breaking the bond, and the benefits of serving the bond.
8. Economic and legal-based rationales for using moral obligations.
The use of moral obligations by the government indicates that the liquidated damages in the scholarship contract are not regarded by the government as a sufficient deterrent for breach by scholars. By employing moral obligations to compel the scholars to serve their bonds, the government is imposing a higher cost on the bond breakers. There is a higher cost to break the bond because all scholars have their personal cost of being shamed and viewed by society as amoral. The government chooses not to impose higher pecuniary contract damages than the current liquidated damages, because it will further penalize those who choose to serve for a limited part of the bond, as they will have to pay a greater amount of contract damages. In addition, higher pecuniary contract damages will deter potential government scholarship applicants, lowering the competition for the government scholarships, and subsequently, the quality of government scholars. Moral obligations appear to be the most effective method in deterring potential bond breakers by placing social pressure on them to serve their bonds, without raising the pecuniary contract damages of the scholarship contract.
The government is also ascribing moral obligations on government scholarship to correct an economic discrepancy. It appears that the government's reliance loss, which is the cost the government incurs in reasonable reliance on the scholar's performing the contract, appears to be more than the value of the liquidated damages (Posner, 1998 p.130). This may signify an economically justifiable reason for the government in using moral obligations to compel scholars to serve. If the scholars break their bonds before serving, the government not only loses the pecuniary expenditure and the interest incurred, but also the administrative expenses incurred in selecting and liaising with the scholars during the period when the scholars are in college. In addition, the government also suffers the opportunity cost of not selecting another potential scholar who may not break his or her bond, and also the cost involved in hiring another substitute professional to take over the position the bond breaker was slotted for (Socratic Circle, 2000). Therefore, the government may be discouraging inefficient breaches by increasing the costs of breach through moral obligation, as the liquidated damages may be insufficient to cover the government's reliance loss.
9. Economic but non-legal rationales for using moral obligations.
The prerogative to publish the names of bond breakers allows the government to place a higher cost of moral obligations on some scholars, but not indiscriminately on all scholars. It is reasonable to assume that there will be an additional higher cost of moral obligations being exacted on bond breakers who have their names published on the newspapers. The government does not spell out the exact grounds for an acceptable parting between the government and the scholar, and choose to review each bond breaking incident to decide whether to publish the bond breaker's name (Koh, 1998). However, potential bond breakers may be able to determine with great accuracy if their names will be published. The reason is because the government consistently only publishes the names of scholars who break their scholarship contracts before or immediately after graduation for alternative careers or research opportunities that will bring them higher pecuniary compensation, which is incidentally the reason for the majority of scholars who break their bonds. Therefore, the government is able to reduce the number of bond breakers who break their contracts for better pecuniary compensation, as their cost of moral obligations is magnified from having their names being published by the government in the newspapers.
On a macro level, the Singapore government will incur economic costs from losing the overseas scholars if they stay in their host countries (Low, 1998). Overseas scholars who are shamed in public and viewed as amoral by society will often work in their host countries, where the opportunities and compensations are greater (Tang, 1999). In addition, local companies may shy away from employing these bond breakers, since they are perceived as having the mindset of not thinking twice about breaking their contracts with the company either (Tang, 1999). Therefore, the government actually stands to lose the bond breaker for a long time to his or her host country, thereby losing a valuable asset that could have been deployed to another part of the economy (Wong, 2001). In addition, the host countries will be subsided by the pre-tertiary public education that the bond breaker had received in Singapore (Yeo, 2000). However, by losing a few scholars through the imposition of moral obligations, the government may actually persuade a larger number of potential bond breakers not to break their bonds, thereby benefiting the government.
10. Using moral obligations can be a blunt instrument to achieve its end.
However, even though using moral obligations benefits the government, the usage of moral obligations is still a blunt instrument because it is subjective. Every scholar based on his or her unique circumstances will value the cost of moral obligations differently. This may or may not result in more efficient breaches. Subjective moral obligations can be a double-edged sword. Potential bond breakers may be able to determine how the cost of moral obligations applies to them individually, resulting in more accurate benefits and costs analysis for bond breaking. On the other hand, potential bond breakers can impute too high an amount to the cost of moral obligations, resulting in less than the optimal amount of scholarship contracts' breaches.
Moral obligations are also a blunt instrument because they are applied to all bond breakers indiscriminately. The government focus in using moral obligations is to dissuade those scholars who break their bond for better pecuniary alternatives. However, a small percentage of bond breakers might have broken their bond due to non-pecuniary personal reasons. These include female scholars who have started a family and have chosen to become full time mothers at home, as well as those scholars wanting to get involved in non-profit charitable works. These personal reasons are in line with current government policies for Singaporean to have more children, and to be more involved in volunteer charity work. Even though the government may not publish the names of these bond breakers, and the scholars can explain their personal reasons for breaking their bonds, there is already an implicit cost of moral obligations being exacted on them. This cost of moral obligations results from the lack of perfect information, because society, including local companies, automatically perceives a bond breaker as an amoral self-interested individual, even though the scholar may break the bond for their non-pecuniary reasons. The problem of moral obligations is that all government bond breakers, regardless of the reasons for breaking the bond, already suffer from the indiscriminate blanket cost of moral obligations.
Also, since the government provides most of the college-bound scholarships in Singapore, the use of moral obligations has a spillover effect on bonded private college-bound scholarships, which are offered by private companies. Private sector scholars will have to suffer the cost of moral obligations if they decide to break the contract, because members of the public already have a negative perception of bond breakers, even though private companies and scholars view their scholarship contract more as a legal commercial contract than any form of moral obligations. If private sector scholars include the cost of moral obligations in their benefits and costs analysis, this will result in less than the optimal amount of contracts' breaches. Therefore, the cost of moral obligations being exacted on the private sector scholars will result in a non-optimal economic outcome.
Furthermore, using moral obligations to ensure that scholars fulfill their scholarship contracts has an economically counterproductive effect, if the scholar returns unwillingly for fear of being shamed. The scholar will have little motivation or incentive to perform at their best, and the government organizations will also have less incentives to provide a challenging and rewarding work environment for the returning scholars, as they know that the scholars are compelled to work because of the cost of moral obligations (Socratic Circle, 2000). This is clearly a sub-optimal economic outcome for both parties.
11. The government scholarship contract is a legal contract.
Regardless of the government's rhetoric of moral obligations, the penalty of liquidated damages in the scholarship contract technically refutes the government stand that government scholarships are a form of moral obligations. An extract of a government scholarship contract consisting of liquidated damages is as follow, "The Student and the Sureties jointly and severally for himself and themselves and their respective personal representatives covenant to pay to the government the sum specified in the Third schedule hereto as liquidated damages and not as a penalty if the student..." (Tang, 1999). A lengthy list of acceptable reasons that could result in bond breaking follows. Therefore, the scholarship contract is merely a legal contract, with no moral strings attached (Tang, 1999). It is nothing more than a legal document, with clauses provided to give the government due compensation (liquidated damages) in the event that the scholar terminates the agreement.
Entering (and exiting) from the scholarship bond is first and foremost a contractual obligation (Posner, 1998). It is an agreement both government and scholars enter into willingly. There are clauses in the agreement for both parties to terminate the relationship, provided certain conditions are met. When scholars sign their scholarship contracts, they acknowledge the penalty involved in breaking the bond. If the scholar decides to exit from the contract, a liquidated damages clause provides for what is deemed fair compensation to the government. Therefore, even as the scholarship contract buys the right to the scholar's performance, it is negated when damages are paid (Posner, 1998). Since the scholarship contract is drafted by the government and complies with the legal framework in Singapore by contract law, imputing that scholars are immoral when they break their bond is not within the terms of the scholarship contract. Moreover, the objective of contract damages is to give one party an incentive to fulfill his promise unless the result would be an inefficient use of resources (Posner, 1998). It is therefore economically efficient if the scholar breaks his contract because his gain (both pecuniary and non-monetary) from breach would exceed the expected gains to the government from serving or completing the contract (Posner, 1998).
Most importantly, the scholarship contract has no terms and conditions of the agreement allowing the government to publish the names of the bond breakers in the national press nor imputing that scholarship contracts are a form of moral obligations (Tang, 1999). If the government chooses to use moral obligations to compel their scholars to serve the bonds, then the details of the moral obligations linked to taking up the scholarship and conditions for publishing the names of bond breakers should be communicated in the text of the scholarship contract. For example, the three US-based bond breakers did not know that they would have their names published in the newspapers in 1998 when they signed their scholarship contracts three or four years before the naming incident. In addition, the scholars who had already signed their contracts prior to the publishing of the names also did not know the government's intention of publishing bond breakers' names when they signed the contract. For this reason alone, the government is opportunistic in applying the notion of moral obligations on these government scholars.
On the other hand, even though the conditions and terms of moral obligations and the publishing of bond breaker's names are not written in the scholarship contract, if both parties understand that these are the remedies that the government may use for bond breaking, it might as well be a written part of the contract in term of the effects. Government scholars who sign the contract after the 1998 incident will know that the rhetoric of moral obligations are being imposed on them, and the possible consequences of having their names published if they break their bond. However, using subjective moral obligations as a sanction does not generate value maximizing behavior, as it influences the benefits and costs decision analysis of a potential bond breaker subjectively. Scholars may impute too much value on the possibility of being viewed as amoral if they breach the contract, even though it may be economically efficient to break the contract. Therefore, using moral obligations is not an economically justifiable sanction into compelling scholars to serve their bonds.
12. Alternative approach to using moral obligations - punitive damages.
Instead of using moral obligations, which are subjective and not economically justifiable, the government should consider more objective pecuniary based measures such as punitive damages. The use of moral obligations appears to be targeted specifically at bond breakers who do not serve their bonds at all, and punitive damages can compel the scholars to serve their bond for a period of time before breaking the contract. Admittedly, punitive damages are not a perfect solution to the bond breaking issue, but the advantage over moral obligations is that punitive damages are objectively pecuniary based, enabling the scholars to make a more accurate economic decision on whether to break their contracts. Moreover, it may be infeasible for the government to retract the use of moral obligations in the public sphere, as the notion of the amoral government bond breaker may be already internalized into society's mindset. On the other hand, it is practical for the government to change the amount of punitive damages in the scholarship contract.
Including punitive damages for the breaking of scholarship contracts without valid reasons immediately after or before graduation may effectively deter scholars from breaking their contracts without serving a single day of their bond. The punitive damages can be removed after the scholars have served at least one year of their bond period. The government will therefore has the opportunity to convince the potential bond breakers that its work environment can be attractive, providing the potential bond breakers with more information to determine whether the alternatives are still more desirable. Moreover, the government organization will have the incentives to provide a rewarding and challenging work environment to compel the scholars to complete their bonds willingly (Socratic Circle, 2000). The scholars can also choose to pursue their personal aspirations in other careers or fields after a year in the government, which will not affect their progress as much as if they had served the full length of the bonds. As prior to the present scholarship contracts, after serving one year, the scholars can pay a prorated compensation including liquidated damages to the government if they still choose to break their contracts.
References
- Koh, Buck Song. "Unanswered Questions in Scholarship Debate." The Straits Times. 12 March 1998. Singapore.
- Lee, Hsien Loong. "Ministerial Statement on Scholars and Scholarship Bonds by DPM Lee at Parliament on 11 Mar 98." Ministry of Education: Government and Politics -1998. 11 March 1998. Singapore. (websource)
- Lee, Hsien Loong. "Scholarships Remain Way To Noble Ends." The Straits Times. 23 Jul 2000. Singapore.
- Low. Adrian. "Mutual Respect, Not A Bond, Ensures Scholars Return." The Straits Times.14 April 1998. Singapore. (websource)
- Posner, Richard. " Chapter 4: Contract Rights and Remedies." Economic Analysis of Law, 5th ed. 1998. Aspen.
- Public Service Commission (PSC). 2001. "Terms and Conditions." Chart on Award Schemes and Types of Award. 2001.Singapore. (websource)
- Socratic Circle. "In The Era of War For Talent." Socratic Circle Publication. 5 Aug 2000. Singapore. (websource)
- Tang, Sara. "Breaking the Bondage." Asiaonline. April 1998. Singapore. (websource)
- Wong, Gene. " Scholarship Paper Review." Email to Author. 26 November 2001.Stanford, California.
- Yeo, George. "The Economics of Human Resource Development." Productivity Digest. 7 November 2000. Singapore. (websource)
- United Overseas Bank (UOB). "Loan Rates." Campus Overseas Loans. 4 Dec. 2001. Singapore. (websource)
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