Social mobility, lifting median wages key, says Tharman: Singapore Perspectives 2012

Effort to tackle problem of income inequality goes back several years

By Robin Chan, The Straits Times, 17 Jan 2012

DEPUTY Prime Minister Tharman Shanmugaratnam yesterday outlined three ways the Government is addressing the challenge of inequality and preserving an inclusive society in Singapore.

The Government wants to continue creating opportunities for social mobility, prevent incomes in the lower and middle income brackets from stagnating, and achieve a progressive policy of income redistribution to help the poor, he said.

But this must be supported by a social compact where the better-off have a sense of obligation to help the less fortunate, and it must be done without eroding the sense of value of working hard and looking after one's family.



Mr Tharman was the guest of honour at Singapore Perspectives, the annual forum organised by the Institute of Policy Studies, held at the Suntec City Convention Centre yesterday, where panellists spent the day discussing the issue of rising inequality in Singapore.

Mr Tharman, who is also Finance Minister and Manpower Minister, said that the effort to tackle the problem of inequality and inclusiveness was not a recent shift that came about after the general election last year.

'This is something we've been thinking about very hard for several years now. We made a major shift in 2007 when we embarked on Workfare, not just as a technicality, but a shift in a way we want to preserve an inclusive society.'

The rise of China and India has depressed wages at the low end and has taken away jobs and skills in the middle income bracket all over the world through globalisation, he said.

'We have to try to avoid that outcome in Singapore, we have to try to avoid the stagnation of median wages, which has afflicted most of the developed world over the past decade,' he said.

But Singapore, as a small and open economy, will inevitably have a higher 'Gini coefficient' - a common measure of income inequality - than most large countries.

'That's our fate in life. We are small, we can only survive and do well by staying open, but it brings inequality,' he said.

'So Gini coefficients and other indices that we look at will tend to be higher than most large societies but not very different from Hong Kong, London and key American cities, or even the key Chinese and Indian cities, Beijing or Shanghai, all of which have higher Gini coefficients than Singapore.

'That's not a source of comfort for us but it is a fact of life as a global city, somewhat higher degree of inequality.'

He said the basic factors to address inequality remain: social mobility and lifting wages of low and middle-income earners.

But this must be complemented with the progressive redistribution of income through taxes and transfers and without overburdening the middle-income group.

'How can we maintain a progressive slant - where the bulk of the benefits are delivered to those at the low end of the social ladder and the bulk of the taxes are paid by those at the upper end?' he said.

'While ensuring that we remain a society where at the core, people do have a sense of responsibility for their families, they do want to work hard to improve themselves, and do take pride in being part of a society where everyone moves up that way?'

So far the Government has managed this by intervening in the right areas - education, the workplace, housing and health care - while keeping taxes low, he said.

'That has to remain a distinct feature of our fiscal system - to try to avoid increasing the burden on the middle class.'

Doing all this requires an activist state, and he said the Government has shown it is far from being 'market fundamentalist' or one that believes only in letting market forces go to work.

'We are willing to intervene aggressively when we feel it is right to keep social mobility going and to redistribute in a way that ensures the ethic remains in place.'

These social interventions include early help for the young from broken families, trying to keep them in school and away from drug problems, and supporting the elderly struggling with a rapid rise in living costs.

And he added that 'no policies are sacrosanct'.

'We keep refining them every few years, make some significant shift in what we think is the right direction, always instructed by empirical evidence, always look for what's actually working now, encourage what's working out well, do away with what doesn't work out. Keep that empirical bias in our social and economic policies.'

He urged critics to put Singapore's income inequality challenge in perspective, noting that the Republic's median income growth has been faster than Britain, Hong Kong, Taiwan and South Korea, and that the nation also has a strong fiscal position to tackle problems.

'Very important is we have a fiscally sustainable set of solutions. Unlike countries that used their youthful years and rapid growth years to build up spending in excess of revenues and now find themselves trapped with high debts,' he said.

'We have to keep this position of strength as we can address the challenge of helping the elderly and the challenge of keeping social mobility going.'

Q & A: On foreign workers, elitism and unhappiness

The open-door policy [to foreign workers] is the source of some of our economic difficulties. How aggresively can we expect the Government to address them?
- Socio-political blogger Alex Au

We are an independent country that needs a relatively diversified economic structure. We cannot be a pure services centre like HK, which does most of its manufacturing across the border. We need a manufacturing sector, a logistics sector and we need a range of services to survive as an independent city-state. And that means we are not going to have Singaporeans in adequate numbers and with the right skills in every sector. If we want more them in construction, we have to do with less Singaporeans in other sectors.

So inherent in keeping to a diversified economic structure with a relatively small domestic workforce is that in each sector you need a varying amount of foreign workers. Then the challenge is to gradually tighten that, gradually improve the quality of foreign workers, and improve the quality of our own people at the same time. But we cannot shift to the extreme end of the spectrum where you only rely on local workers.

Our education system promotes the creation of an elite which goes against the very idea of an equal society... how do you reconcile the two?

Take my answer as random reflections rather than government policy. It is a very important question, because too much precision at too early an age does favour those who start off with more advantages. What we've been doing in recent years is moving towards some blurring of meritocracy... I do think we still have to move further in the direction of blurring the precision of scoring and placing into secondary schools. And we have to think about how we can do it without offending the sense of fairness that Singaporean parents have. If one parents' kid had 257 (PSLE score) and another parents' kid had 255 and got into the school they were competing for, the first parent gets upset. So we have to find ways of blurring this in a way that doesn't upset that sense of fairness in the Singapore system.

We live in a good society, we've done very well, but why are Singaporeans so unhappy?
- Professor Tommy Koh

We are going through a transition. The adjustments have been sudden not just in Singapore but everywhere else. An adjustment to a new set of economic circumstances, the fact that incomes are not going up as fast as before; and the fact that the sense of mobility that you got from the first 30 years, where there was a whole leap in living standards in each generation, that has slowed. And we have to adjust to that and find a new compact and a new understanding amongst everyone who is involved.

Secondly, we are going through a transition politically. From a very dominant, incumbent party, to more plurality, more voices and views in and out of parliament.

Over time things will settle. The underlying drivers, however, will not change - it is a very competitive world; but we also have to do more to help those at the lower end of the ladder.

Most important is to keep this as a place where people feel there is a realistic chance for them to improve over time. And I think this is one of the few places where, despite being relatively developed, we can achieve that - an upward, mobile society. And that will keep a sense of optimism about the place. And politically too, as a ruling party, we have to manage our incumbency somewhat better than we had in the past.

Investing in an inclusive society
This is an edited excerpt of remarks made by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance and Manpower at the Institute of Policy Studies' Singapore Perspectives 2012 conference this week.

BUILDING a fair and inclusive society is at the heart of our role as Government.

It is about both social and economic strategies, as they are bound inextricably together. The first question we must always ask ourselves is: how do we make our living in the world? How does Singapore move up in manufacturing, how do we gain appeal as a global city, in services, and how can we ensure that those who do well are not just those in the top 20 per cent but also average Singaporeans and those in the bottom 20 per cent of incomes?

The story of how China and other emerging countries have depressed wages for low-skilled jobs all over the world is well-known. But the next chapter has also begun. Pressure is shifting to the middle of the workforce, as more white-collar jobs are replaced by technology or cheaper competition. The result has been stagnant middle class incomes in most developed economies, in some cases a real decline over more than a decade.

An inclusive society therefore starts with economic strategies - competing in the global economy in a way that everyone gets pulled up. We are putting great effort and resources into this - raising the quality of every job, the skills and expertise of every worker, and giving them the confidence that they will be able to stay in demand.

Second, we need social strategies to deal with the challenge of inequality. We have a higher Gini coefficient in Singapore compared to most larger countries, because we are a global city. Hong Kong, London, the key American cities, and the leading Chinese and Indian cities in fact have somewhat higher inequality than Singapore.

But we cannot resign ourselves to widening inequality. Unlike these other cities, we are a country. We have to try to contain inequality, and ameliorate its effects on our society.

The most important way must be to spread out opportunities from young, and preserve social mobility. And just as important, we must preserve a sense of compact among Singaporeans, a sense of obligation on the part of those who are doing well to help others in their own society. We cannot build an inclusive society without that spirit of inclusiveness. It is not just a matter of getting the right government policies.

We still have reasonable mobility in our schools. Look at the PSLE (Primary School Leaving Examination). Among students from the bottom third of socio-economic backgrounds, half do well enough to end up in the top two-thirds of the PSLE cohort. And one out of every six from the bottom third ends up in the top third. Not many school systems see that among 12-year-olds. And if we look at children who live in one- to three-room HDB flats, almost half of them eventually make it into university or polytechnic. This is an unchanged proportion compared to a decade ago.

We know that it will get more difficult over time to sustain mobility. That's why we have to do more, and especially to do more upstream. We have to try new ways to help kids from disadvantaged families gain confidence in their early years, and find their strengths as they go through the school system.

Let's also intervene actively to help them in their teens, when some inevitably find themselves at a loose end. Get them engaged in CCAs, give them responsibilities, and not just to keep them in school for the day but so they can enjoy school. Much better that we intervene upstream than wait for problems to surface later.

We are also tackling some worrying, more complex trends among families - those that go through early divorces, or where one or sometimes two members are incarcerated, and the children lack the normal sense of a family. These are still micro trends, but we must prevent them growing, and prevent a permanent underclass forming over time. We have to address these problems early, and especially help the kids stay on track.

Thirdly, we have to redistribute. Our fiscal policies must be progressive, which means most of the benefits being received by lower income citizens and most tax revenues being paid by those at the upper end.

The key question is how we do this. How do we maintain and strengthen our progressive slant, do more to support those at the lower end, while ensuring that we remain a society where at the core, people do have a deep sense of responsibility for their families, do want to work hard to improve themselves, and take pride in being part of a society where everyone moves up together that way? Progressive-minded people have to be deeply concerned about this, not just social conservatives.

It means intervening boldly to help lower income families, but focusing on the right areas. We're doing more to support them in education; to make jobs pay better for them through Workfare and training; to enhance housing grants so lower income couples can own their own homes; and to ensure they can afford good quality health care through targeted subsidies as well as Medifund.

Adding it up, we have made this a more progressive fiscal system over the last 10 years. It may seem counter-intuitive, because we lowered income taxes and raised the goods and services tax (GST), which taken on their own would have been regressive moves. But a fiscal system can only be evaluated by looking at both taxes and benefits received by the population, not either one by itself. Lower income Singaporeans now receive more benefits, even after deducting the extra GST they pay. Through education, work, housing and health care, we have tilted the system further in their favour.

We must also keep the tax burden on the middle class low. That's an essential feature of our system, and we are quite different from most developed countries in this regard. Some of them have highly progressive systems - with large benefits for the poor and certain other groups, but the quiet fact is a high tax burden on the middle class (even after netting off the benefits they receive in return). The reality of the matter is that it is not just the rich who pay for their welfare systems. In Britain, for example, despite very high top rates of income tax, the top 10 per cent pays a lower share of total taxes than in Singapore.

There is more that we want to do. This includes how we help older Singaporeans meet their needs - help them if they wish to stay employed, and help ease their fears over medical costs. They may be short of savings too, but have value in their homes which can be unlocked. It does involve some change in attitudes, a willingness to downsize, but look at what's happening with studio apartments. They are a real hit with the elderly - not just nicely designed, but small units with 30-year leases, so they get significant savings by downsizing from their existing flats.

Our policies are not sacrosanct. But let's keep a sense of perspective as we discuss how we should evolve and improve them. We have a system that has preserved low unemployment. Our median incomes have continued to grow over the last decade and especially over the last five years - more than in countries at the same level of advancement. The average citizen's income is one of the highest in Asia and higher than in several developed countries. Our median income level is about 20 per cent higher than in Hong Kong, 30 per cent higher than in Korea and Taiwan, and similar to the UK - all adjusted for PPP (purchasing power parity) using the World Bank's estimates, so this measures real standards of living. Even if we allow for possible imprecision in estimates, the conclusions are clear. Our strategies are not doing badly for average Singaporeans.

A last point, but an important one. As we take further steps to build an inclusive society, we must be able to sustain what we do financially and not store up problems for the future. Short political horizons are never helpful. It is how most of the developed countries built up public spending in excess of revenues even during their youthful and rapid growth years, and now find themselves with unsustainable debts just as their societies age. Japan, the US and many European countries will have to spend a significant part of their government budgets each year - 3-4 per cent of GDP - just to service their debts. They will need painful cuts in spending to bring down these debt burdens, but it will take time. We are in the reverse position. We used our rapid growth years to accumulate savings, and are now in the unusual position of being able to add over 2 per cent of GDP into our budget each year, by drawing on income from our reserves.

We have to preserve a system of sustainable finances, so that we keep this position of strength as we address our challenges of helping the elderly live well, and keeping social mobility alive. It will allow us to invest in an inclusive society not just for two or three terms of Government, but for our children's generation.