Hard Choices: Challenging the Singapore Consensus

9 Beware the Inequality Trap

9 9 BEWARE THE BEWARE THE INEQUALITY INEQUALITY TRAP TRAP Donald Low and Yeoh Lam Keong Whether measured by the Gini coefficient or by the ratio of incomes between the top and bottom 20 per cent, the evidence points to increasing income inequality in Singapore in the last decade. Government redistribution in the form of taxes and transfers has not slowed the increase in inequality sufficiently. Even after taking into account government redistribution, Singapore society was more unequal in 2012 than it was ten years ago before government redistribution, as measured by the Gini coefficient.12 Not only is income inequality rising, there are also certain aspects of our inequality patterns that are especially worrying. To begin with, the increase in income inequality is accompanied by wage stagnation for some segments of the workforce. Between 2001 and 2011, the median incomes for full-time employed citizens increased by just 11.2 per cent in real terms (or 1.1 per cent in annualised terms), while the 20th percentile had hardly any increase at all.3 Including parttime workers would likely show wage stagnation extending to a larger proportion of the workforce. Second, there are concerns that social mobility in Singapore has declined. Inequality is more tolerable if social mobility is high. Singapore ’s policymakers have also tended to place greater emphasis on social mobility when discussing rising inequality, arguing that the former ameliorates the effects of the latter. But evidence from other countries suggests that more equal societies are also more mobile. Intuitively, this makes sense too: it is easier to climb the income ladder when the rungs are spaced more closely together. Even if policymakers care only about social mobility and equality of opportunity, they cannot ignore distributional concerns altogether. Third, as a growing wealth of research indicates, people’s wellbeing are affected as much by inequality—or relative incomes—as by absolute incomes. Even if absolute incomes are rising across-theboard , rising inequality alone reduces subjective well-being. Fourth, a more unequal distribution also makes it more difficult to have coherent policies that all segments of society can rally behind. Income stratification, especially if combined with low social mobility, may polarise societies as different income groups begin to see their interests as conflicting. Lee Kuan Yew alluded to this in September 2011 when he said at a students’ forum that in a more stratified society, “What’s good for the middle income will be seen by the lower income as unfavourable … What is good for the higher income will be resisted by the middle income.”4 Singapore’s social policies—founded on the ideas of individual responsibility, economic growth and jobs for all, and a social security system that emphasises savings and home ownership—have served Singaporeans well. They have enabled Singapore to achieve “growth with equity” and delivered high standards in education, housing, healthcare and our social infrastructure without imposing a huge burden on public spending. But in the face of significant changes in our operating context—globalisation, rapid technological change, a maturing economy, an ageing population, greater economic volatility, and a more uneven distribution of the fruits of growth—our social compact needs to be re-examined and re-formulated. 114 BEWARE THE INEQUALITY TRAP Targeted versus Universal Approaches In much of the policy discourse on inequality, the emphasis in Singapore has been on what (more) the government should do for the poor. The implicit assumption here is that the state’s role should be confined to poverty reduction, and that inequality by itself does not merit policy action. This is consistent with the Anglo-Saxon or “residual” model of social welfare. In this approach, social transfers are means-tested rather than universal; they are also financed by general taxation rather than social insurance. This model envisages a smaller, less redistributive state since the aim of policy is not to achieve more equal outcomes but to ensure no one falls below a certain level. This approach is also more ambivalent about the need for more government redistribution in the face of rising inequality, especially if real incomes of the poor are not falling. Policymakers in Singapore generally subscribe to this more targeted approach of social welfare. They believe that government assistance should be limited, that it should only help those least able to afford basic services. There is also little questioning of the assumption that more extensive benefits will erode the work ethic, undermine...