'There's nothing uniquely S'porean about inequality'

It's a global trend, but the Republic needs policies to tackle growing wealth gap, says expert

By Radha Basu, The Straits Times, 14 Sep 2011

AS OF June last year, some 4.2 per cent - or 83,400 - of employed Singaporeans and residents still earned less than $500 a month, the same as they did way back in 1999.

And in a nation that prides itself on home ownership, 45,000 households are renting subsidised one- and two-room flats now, up from around 40,500 in 2008.

Meanwhile, the number of those who earn $10,000 a month or more has soared fourfold to 121,700 in a decade. And Singapore has the highest proportion of millionaires in the world, with one in six households on that gilded rich list.

Reel off these statistics - gleaned from recent newspaper reports and government data sheets - to Associate Professor Aneel Karnani and he does not seem the least bit surprised.

Income inequality is an inevitable by-product of free market economies, says the Harvard-educated academic, who has spent nearly a decade researching how society can strike the right balance between private profit and public welfare.

'Singapore likes to think it is unique but there is nothing uniquely Singaporean about inequality. That's increasing in practically all affluent countries.'

Technology and globalisation are two major causes of this 'natural phenomenon', says the professor of business strategy at the University of Michigan's Stephen M. Ross Business School.

The 60-year-old was in Singapore recently to conduct a series of executive training workshops and speak at universities here.

As societies and economies become more knowledge-driven, there is a greater premium on higher education, which increases knowledge, and technology, which increases productivity. Highly educated and technically skilled people thus tend to earn more and more.

At the same time, globalisation has brought a large pool of unskilled labour into the global market, depressing wages and the bargaining power of lower-skilled people who find their jobs migrating to the lowest bidder, whether within their country or overseas.

This is to enable 'economic efficiency' - where resources are used to maximise the production of goods and services. Thus, Americans these days get shoes or garments from Bangladesh or China because it is cheaper to manufacture them there than in the United States.

'In the old days, you could be a blue-collar worker in the US and make a reasonable living,' says Prof Karnani.

'But now there are people all over the world who say I can do this cheaper - so it's difficult to be a blue-collar worker in the US or other rich countries, with their jobs migrating elsewhere. So globalisation and technology are increasing inequality.'

As someone who has spent three decades teaching at a business school, the professor stresses that he is in favour of economic efficiency and that private enterprise is a proven 'engine of growth'.

But he says too much of the discussion he hears in Singapore - he has been coming here two or three times a year for the past 20 years - is from people on the 'political right' who are keen to let free markets work unfettered. It increases the economic pie and makes the country rich.

But it is essential to know how to distribute the wealth as well: 'The sense I get is that Singapore has focused too much on growing the size of its economic pie and not enough on distributing it.'

While free markets are good, they also produce more inequality than what most would consider socially desirable. And they lead to the exploitation of the most vulnerable.

The solution, he says, is that 'we don't leave the market alone'.

'Governments should foster free markets but at the same time have another set of policies to temper the resulting inequality, even though it hurts economic efficiency to a certain extent.'

There are myriad ways for a government to do this - and most developed economies already have many such measures in place.

The simplest and most direct is through cash handouts or even conditional transfers of payments - where the poor are given cash, as long as they meet certain preset conditions.

Singapore's Workfare Income Supplement system is one such way, where low-income workers get their salaries topped up as long as they are employed.

Progressive taxation is another way forward, where rich individuals and companies are taxed more for a more equitable distribution of wealth.

Third, governments could intervene directly in the markets by setting minimum wage laws or by strengthening unions and enabling workers to collectively bargain for higher wages.

Providing public-funded services - such as education or health care - cheap or free to the poor is yet another way forward, he says.

But won't high taxes that must be exacted to fund such handouts kill incentive? And is it wise to advocate more spending on the poor at a time when so many debt-ridden Western economies are groaning under the weight of burgeoning welfare bills?

'You can take all these equality-inducing mechanisms to a silly, dysfunctional extreme. That, of course, must be avoided. The trouble is that the debate on this issue is polarising all too often - free markets or communism,' says the self-avowed political centrist.

'We can and must find the appropriate middle ground.'

This can be done through vigorous debate in democratic societies - in Parliament, in the media and in other public fora - with each country deciding for itself what is the best course of action.

Currently, similar debates are on in the US, which is deciding how best to deal with record deficits, and in Britain, where the recent London riots were blamed on rising income inequality.

Singapore, too, urgently needs more discourse on inequality, says Prof Karnani. Its economy may have grown at a blistering pace of 14.5 per cent last year. But at the same time, the gap between its rich and poor was the second-largest among the world's developed economies, according to a United Nations report.

Its Gini coefficient among resident employed households - a measure of income inequality between zero and one - has risen from 0.43 in 2000 to 0.452 last year, despite government transfers.

This figure could be higher still if wages of Singapore's large pool of blue-collar migrant workers were taken into account, he points out.

The Gini average among members of the Organisation for Economic Cooperation and Development (OECD), a consortium of developed economies, by contrast, is 0.31.

One issue Singapore can discuss, for instance, is whether its richest can be taxed more to help the poor gain access to better services and opportunities, he says.

After all, the Republic's Gini coefficient has grown steadily even as the highest personal income tax rates were cut from 28 per cent in 2002 to 20 per cent in 2007, one of the lowest in the developed world.

Currently, those earning $320,000 per year pay the same tax rate as those earning 10 times more.

'We can have progressive taxation without killing entrepreneurship or incentive. Taxes that can go up to 30-40 per cent. In Western countries, the rich don't say that because taxes are 30 per cent, I will stop working.'

In fact, back in his own country, billionaire investor Warren Buffett recently sparked debate by saying that the richest in the US could be taxed even more than the current 35 per cent to help ease deficit woes and avoid cutting services for the poor, says the Indian-born American citizen.

'These are interesting questions that need to be debated openly. Every society must decide how much inequality to have.'

And no discussion on inequality in Singapore can be complete without considering the impact of the large pool of blue-collar immigrants here. Being transient workers, they are not included in Gini coefficient calculations. But they work here - and deserve more protection, he argues.

'Singapore wants cheap labour, but you can't have cheap labour without having inequality. I think we should say that, no, we don't want cheap labour because that's what forms the basis for an unequal, exploitative society. But of course, that's up to you to decide.'

If immigrants must be let in, they must be protected by all the mechanisms of equality that a society has in place, he argues.

'I don't know about you, but I want a society that gives protection of equality to those who are legally and physically there, irrespective of where they were born.'

Solving the problem of labour shortages by creating an 'artificial underclass', like in the Middle East, he believes, is morally problematic.

'You can't say you want an egalitarian society only for Singaporeans and not for others. Then don't let immigrants in.'

Q&A: Putting egalitarianism over competitiveness

Why should the rich care about poverty or inequality?

We're increasingly living in societies that are governed by the lottery of birth. As countries become rich and wage gaps grow, social mobility is going down... Those who are comfortable with inequality will say that in a meritocratic society, people with high merit rise to the top; this will create ambition and striving. What they are wrong about is that too much inequality also leads to this inter-generational transfer of inequality and no social mobility. There will always be the odd example of a child who grew up in poverty becoming a Nobel Prize winner. But for every such story, there will be a hundred others where the son of a poor person remains poor.

The way to get rich in modern societies is through education, but poor children tend not to get a good education even if schools are free. If we don't increase social mobility, we will become a very stratified, ossified, class-oriented society where the rich stay rich and the poor stay poor...

So we must reduce inequality to some extent. But I don't want to remove it altogether.

Why do you support minimum wage laws when these laws can lead to higher unemployment?

I think as a society we should be willing to pay higher wages to some people even though the markets won't give it to them. In traditional neo-liberal economics, people are paid according to productivity and wages rise as productivity rises. But the trouble is that for some people, productivity doesn't rise. So then, what is going to determine how they are paid? There are many jobs where productivity doesn't go up.

For instance, a barber used to take 20 minutes to give a haircut 100 years ago. It still takes 20 minutes to give a haircut. The productivity of domestic helpers has not gone up radically either. We must be willing to let these people earn a higher wage even though free markets won't give it to them because we believe in a more egalitarian society. We can do it through transfer of payments or a minimum wage.

Won't it make a country non-competitive?

It's true minimum wages will lead to higher unemployment rates by reducing market efficiencies. But we as a society can decide that that's okay, because it leads to a more egalitarian society. People who don't qualify even for minimum wage can be helped in other ways - like through retraining and transfer of payments.

As a country grows rich, I think there is merit in its wanting to be seen as a high labour cost economy because it means that its people are rich. How rich people are is not always reflected in a high GDP (gross domestic product) per capita. The share of wages in Singapore's GDP, for instance, is lower than in most developed countries - and for its workers, that's not a good thing. And I don't buy the argument that minimum wages would make a country non-competitive.

Fighting poverty

PROFESSOR Aneel Karnani, 60, is a faculty member of the strategy group at the Stephen M. Ross School of Business, University of Michigan.

The eldest of three sons of an engineer and a housewife, he was born in India, grew up in Sudan, and eventually settled down in the United States.

He has a doctoral degree in managerial economics from the Harvard Business School, as well as an MBA and a bachelor's in electrical engineering from the Indian Institute of Management and the Indian Institute of Technology respectively.

His academic and research interests are focused on three broad areas: strategies for growth, global competition, and the role of business in society.

He researches poverty reduction and the appropriate roles for the private sector, the state and civil society. He is the author of the book Fighting Poverty Together: Rethinking Strategies For Business, Governments, And Civil Society To Reduce Poverty, which was published this year.

He has served as consultant or management educator for a number of organisations including GE, IBM, Singapore Airlines, Singapore Technologies, Temasek Holdings, Acer and Whirlpool.

He is married to Felicia, a Chinese American consultant in an energy company. They have two sons, aged 16 and 20.