Mind... the gap

The Straits Times Published on Apr 06, 2013

The nature of inequality is changing and the pressure to take from the rich to give to the poor looks set to grow. Rachel Chang dissects the challenges ahead.

THE millennium was a turning point for economic inequality in Singapore.

From the year 2000, an income gap that was narrowing turned the corner and began to widen. The wages of skilled, top earners began to pull away from unskilled workers at the bottom, whose incomes stagnated. This is the story of inequality in Singapore that the Gini coefficient alone - the most widely used measure of inequality - does not tell.

Singapore has always had a high Gini coefficient of over 0.4 due to its open economic structure. The Gini coefficient plots inequality from a scale of zero to 1, with zero representing completely equal incomes across a population. Singapore's Gini actually rose more briskly in the 1990s - from 0.408 in 1990 to 0.442 in 2000, than in the noughties, when it went to 0.472 in 2010.  But it is only in the past decade that a gulf has opened up between skilled and unskilled workers.

Globalisation and a technological boom have powered the "skills premium" that highly qualified workers command worldwide. In Singapore, it collided with local factors of an economic restructuring, a liberal intake of cheap foreign workers and an ageing demographic to explosive effect.

Singapore Management University economist Hoon Hian Teck's research shows that from 2000 to 2010, the economy moved decisively away from manufacturing to high-end services. For example, foreign direct investment in the manufacturing sector, as a ratio of gross domestic product, shrank from 36 per cent to 21 per cent over this period, but grew in its financial and insurance services sector from 36 per cent to 43 per cent. This exacerbated the skills premium for high-end workers as demand for them grew faster than supply, he explains. 

The millennial turning point is also reflected in the ratio of average incomes of the top fifth of earners compared to the bottom fifth. This fell from 14.4 in 1980 to 10.1 in 2000, before U-turning. It has risen through the last 10 years; as of last year, top earners made 13 times what bottom earners made. 

Thirteen years after its turning point, inequality has entered a new phase of urgency, say observers. Unlike in the past, notes Nominated MP Laurence Lien, income inequality is no longer set to a backdrop of a "rising tide that lifts all boats". Then, "most individuals and families felt that their plight was improving all the time and social mobility was higher", says the chief executive of the Lien Foundation. Now, there is wage stagnation and some depression, not just for those on a low income, but for a wider group.

The 'inequality' word

FROM 2000 to last year, as the wage gap grew, the word "inequality" was conspicuously absent from the Government's annual Budget statement.Competitiveness, rather than redistribution, was the order of the day. Following a global trend, top income tax rates were lowered throughout the decade from 28 per cent in 2000 to 20 per cent in 2006 for economic attractiveness.

But last year, the "inequality" word reared its head - three times at that, in Deputy Prime Minister Tharman Shanmugaratnam's Budget speech then. This year, he said it five times.

More noticeably, his rhetoric was sharply different.

In 2011, responding to MPs' concerns over the income gap, Mr Tharman said that "(income inequality) is something we should be concerned with. But what matters most is not income inequality itself, but whether we succeed in raising incomes and living standards for all Singaporeans, including and especially the lower-income groups".

In this year's Budget, which promised more social spending while hiking taxes on luxury cars and investment properties, Mr Tharman said that inequality is growing everywhere - but "it matters more to us because Singapore is not just a city but also a nation. We must take further steps to temper inequality". Observers see a new direction - and a new determination - in the Government's redistributive efforts.

In the past few years, it has curbed the inflow of foreign labour, cajoled companies to invest in enhancing productivity, and expanded its skills training programme to "upgrade" workers.  

It is also redistributing significantly straight from government coffers to low-income and older workers' pay cheques, through schemes such as the Workfare Income Supplement, the Special Employment Credit and the Wage Credit. 

"The Government deserves a lot of credit for really pushing the restructuring this time. There is a lot of resources being put in here," says Institute of Policy Studies research fellow Tan Meng Wah.

But economists and experts point to blind spots, and say it remains to be seen if the Government's new zeal can keep up with inequality's own momentum. The effort to boost productivity should raise incomes, but "this does not mean that nothing else needs to be done because rising wages is only one part of the problem", says the chief executive of Centennial Asia Advisors, Mr Manu Bhaskaran. The retired, elderly poor, for example, will not benefit from higher wages - but will suffer the inflation that comes in tandem, he notes. This group, who are both old and poor, will continue to grow in what Mr Tharman has said is a unique, local challenge.

Due to Singapore's rapid development, unskilled workers are largely also ageing ones. Of those who did not complete secondary school in the workforce, two- thirds are aged 50 and above. That Singapore is now on the ageing downswing overall has also made its inequality more visceral, says Dr Tan. "When you are 20 years old and you see large differences in income around you, it's okay. You're young, you can work harder and achieve that. But when you're 50, it's a different dynamic," he notes.

Inequality is a vicious circle of its own. Dr Tan notes that the income inequality of earlier decades has led to a "wealth gap" now, where the rich enjoy a steady stream of investment income that the poor do not. This wealth gap "has an even greater psychological impact because we live so close to one another", he notes. National University of Singapore economist Hui Weng Tat points to a perfect storm of high costs of living and high aspirations: "For a developed economy where educational and aspirational levels of a large proportion of the population are high, and affordability of major essentials such as housing and private transport seems to be slipping away... significant resentment will undoubtedly be focused on the extent of inequality that exists."  

Studies have found other psychological effects of inequality, such as reduced work morale and lower productivity, he notes. "The disillusionment and disappointment inevitably will be expressed at the polling booths."  Former chief statistician Paul Cheung says that a new "social distance" has emerged in Singapore in the last decade, one which may be unbridgeable. "In the past, you have HDB blocks next to the rich enclaves. Now you have enclaves that even the middle class can't access, such as Sentosa Cove and other 'high-class' places." 

Dr Cheung, now a social work professor at the National University of Singapore, adds: "Social class has become more distinct and stratified. This is a serious issue for Singapore as it underpins all political and social changes."

Tweaking social assistance

DURING the previous term of government, social spending rose from $13 billion in 2006 to $21.5 billion in 2011. Currently, low-income families get $4 in transfers for every $1 they pay in taxes. But there still exists a wide public consensus that the Government is not redistributing enough, and is too tight-fisted in its social assistance.

A part of this is philosophical. Still evident in its new progressivity is the Government's enduring ideological commitment to self-reliance and aversion to handouts. Almost all of its major new redistributive schemes are tied to being employed, and it has ploughed resources into early childhood education and adult skills training.

Its "humanitarian" assistance - that is, handouts - remains minimal. Public Assistance, given to the elderly with no one to depend on and who cannot work, is $450 a month, after a $50 increment in this year's Budget. The Lien Foundation's Mr Lien says that the Government can be much less conservative in how it manages its social assistance programmes, like in its use of endowment funds. It uses a percentage of investment returns from the reserves to set up such funds. Then, only a percentage of these funds is spent per year: a "doubly conservative" method that ensures that much less is spent on social assistance than is available to be spent, he says.

Mr Tharman has expressed the view that rather than being conservative, this guarantees such social assistance programmes beyond the current term of government - insuring them against the vagaries of populist pressures and economic cycles. While government transfers have grown in Singapore, this factor brings its Gini coefficient down by only about 6 per cent, from 0.478 before transfers, to 0.459 after. This is a far smaller magnitude than the 30 per cent downward effect that other Organisation for Economic Cooperation and Development countries achieve on average, says Prof Hui. Boosting transfers will help acceptance of income inequality, adds SMU's Prof Hoon. This is because inequality is then seen as a necessary way to generate the fiscal resources needed to subsidise the disadvantaged, he says. 

But some People's Action Party (PAP) backbenchers urge the Government to continue to stand firm against the political wind. "Big and broad transfers might give you a lot of political capital, but where does that take the country in 20 years' time?" says Moulmein-Kallang GRC MP Edwin Tong. He argues that social assistance needs to be targeted and means-tested, as opposed to blanket handouts. He says: "Once you start giving, it's much harder to scale back. Look at what's happening in the West. Why do we think we might be different?" PAP MP Liang Eng Hwa (Holland-Bukit Timah GRC) says the Government's expansion of social spending and redistribution may not keep up with growing public expectations because it must distil a general "call for more" into sustainable programmes.

In his response to MPs after the Budget debate this year, Mr Tharman emphasised that the Government will not attempt "progressivity or redistribution for its own sake"; spending better is as important as how much it spends, he added. "This 'Government must do more' thing is naturally everybody's call," says Mr Liang. "Every Budget debate, MPs call for more, and that's because we see that there are really those who need more. But it's also the Government's job to make sure that when you do more, you're doing something that's responsible and sustainable."