Saturday, 30 August 2014

Thinking hard about S'pore's choices

A new book that challenges 'the Singapore consensus' scores some hits and some misses
By Vikram Khanna, Published The Straits Times, 29 Aug 2014

ONE of the unfortunate realities of economic discourse in Singapore is that outside the Government, there is relatively little research on practical public policy, especially social policy.

So the publication of the book, Hard Choices: Challenging The Singapore Consensus, featuring the views of scholars who do not serve in Government comes as a breath of fresh air - even more so for the fact that, as its sub-title suggests, it questions some long-held assumptions and dogmas, some of which have been baked into policy for decades.

Policymakers, academics and members of the public have come to accept as axiomatic certain policy ends and means - what the book's authors describe as "the Singapore consensus". For example, it is more or less taken for granted that economic growth is always good, universal government-funded welfare schemes are generally bad, meritocracy is an unmitigated plus, an ageing population portends serious problems and home ownership is good for everyone.

The authors of Hard Choices seem to believe that these axioms are open to question, or at least qualification.

The book consists of a series of essays, which have been published before separately, but which pack a powerful intellectual punch when put together in a volume. The essays are organised along different themes, though these sometimes overlap.

Inequality and wages

THE issue of inequality is one major theme that runs through the book. Unfashionable in economics until recently - governments were focused more on economic growth than income distribution - inequality now takes centre stage in economic debate. The global financial crisis was a watershed that exposed the dimensions of the problem; Singapore, too, has suffered from rising inequality since the 1990s.

Donald Low's fine essay, The Four Myths Of Inequality In Singapore, addresses some of the common misconceptions about inequality. He argues persuasively that it is not an inevitable consequence of growth and dynamism; the evidence shows that unequal societies do not produce superior economic outcomes.

Nor is helping the rich the best way to help the poor; in Singapore, the introduction of a less progressive tax system since the 1990s has increased inequality, which has not been sufficiently offset by redistributive policies in the form of Workfare and discretionary fiscal transfers, which Mr Low suggests have "simply not been aggressive enough". He makes a strong case for reinforcing them.

However on the regressive tax policies, the situation is not simple. Singapore needs to attract foreign direct investment (FDI) - much more so, relative to economic size than the high-tax economies of northern Europe, which are often cited in this book. While Singapore has many non-tax advantages relative to other countries, it cannot allow its tax rates to get too far out of line.

Since the 1990s, several economies, including Singapore's competitors, have been reducing their tax rates. Could Singapore have held the line with a top marginal tax rate of say, 30 per cent, when Hong Kong was at 15 per cent and Ireland, 12 per cent? Would it still have been able to attract the sort of FDI that it did? And if it did not, what would have happened to growth and jobs? Would lower-income Singaporeans have been better off? This seems unlikely. Mr Low rightly points out that people care more about their incomes relative to others than about their absolute levels of income. He notes that income inequality also leads to inequality of opportunity, which then perpetuates the problem: the children of the rich generally get a better education than the children of the poor, which carries inequality into the next generation.

He also contests the view that unequal pay is purely the result of unequal ability. He points out that wages are not only a function of productivity, but also of immigration. Thus he recommends that "to raise the wages of our lower-skilled workers, the emphasis should NOT (his emphasis) be on raising their productivity, but on reducing our intake of low-skilled foreign workers."

Certainly, reducing this intake will lead to higher wages, especially given that Singapore has near-full employment. But it is not sustainable for wage levels to keep rising without a rise in productivity; companies hiring such workers will sooner or later simply go out of business. Nor should wages be allowed to shoot up sharply and suddenly by, for instance, draconian curbs on labour imports. Companies need time to adjust and productivity increases are typically slow.

Nor can Singapore adopt a one-size-fits-all policy towards labour imports. It is well known that in certain sectors, foreign workers are indispensable, at least in the short term. Construction is one. The marine sector is arguably another. Household help is definitely a third. Singapore could stop the intake of foreign maids, which would lead to the development of a local household-help sector, with wages perhaps five times higher than they are now. But how popular would this be, especially with families where women work?

The constant refrain throughout the book about the need to curb labour imports contains no caveats or a sense of calibration. Nor does it even mention the challenges Singapore will face when other social needs have to be addressed in labour intensive areas such as eldercare, where local professionals are in short supply. If Singapore is to curb labour imports in this industry too, it will need to find alternatives - and fast.

Immigration

IMMIGRATION is another hot-button issue tackled in this book. In his essay The End of Identity, Sudhir Thomas Vadaketh examines the impact of immigration on the Singaporean identity - or at least, his definition of it.

"Diversity must be celebrated," he writes, but "it would be callous to ignore the impact of immigration on feelings of identity and belonging".

Alas, there is little celebration of diversity in this essay. Quite the reverse, the impact of immigration, it would seem, has been unremittingly negative.

Some of his arguments are more polemical than analytical or even factual. For example, echoing a lot of Internet chatter, he cites "many stories", "one common anecdote" and "countless accusations" to assert that immigrants have "torpedoed Singapore's meritocracy", for example, by recruiting friends from back home rather than qualified Singaporeans, or by employers giving preference to foreigners over locals. No evidence is cited for these claims, which human resource professionals, at least, will tell you are baseless. Many companies are, in fact, having a tough time hiring per se.

In passing, Mr Vadaketh takes a rather unkind dig at the China-born Singaporean Olympic and Commonwealth Games medal-winning table tennis player Feng Tianwei, who "to the bewilderment of her fellow citizens, has not bothered to learn English, despite having lived in Singapore for five years". In her defence, she does speak Chinese, which is one of Singapore's official languages. It is not as if she speaks only, say, Swahili. Besides, one wonders what Mr Vadaketh makes of his many Singapore-born, non-bilingual Chinese, Malay and Tamil-speaking fellow citizens.

Sadly, the essay has nothing to say about how Singapore has gained from immigrants - for example from new entrepreneurs, ideas and skills in areas ranging from technology to finance to education, which have enabled many companies to grow, to the benefit of Singaporeans as well, and from advances in R&D and innovation, where foreigners work with Singaporeans in agencies such as the Agency for Science, Technology and Research (A*Star).

Nor a word of appreciation for the thousands of foreign construction workers who have helped to physically build so much of modern Singapore, or the foreign medical staff who have cared for the sick, or the foreign maids who have taken some of the burden off working families and helped raise generations of children.

Nor indeed is there any appreciation of the greater diversity and richness in the artistic, cultural and culinary scene, as manifested, for example in the Singapore Symphony Orchestra, many of whose talented musicians are of foreign origin; there is also no mention of the foreign-born chefs and restaurateurs here, which has created the greatest variety of international cuisines in Asia. All of the above contribute to the quality of life, but this is not acknowledged. It has become unfashionable, and even politically incorrect, to speak of such things.

What is fashionable to speak of is the angst that immigration has created and which is the main focus of Mr Vadaketh's essay. He complains that foreigners have disrupted the traditional Chinese-Indian-Malay composition of Singapore; whether this is actually true or not, the perception must be acknowledged.

But as he would know, every country with a history of immigration has gone through changes in its social make-up. At the turn of the last century, existing settlers in America complained about Irish and Italian immigrants. These days, there are complaints about Spanish-speaking newcomers from immigrants who came earlier. Changes have occurred in Britain, Europe and Australia as well. Eventually, people adapt to social change and some, at least, grow to welcome the diversity, including in Singapore. As the US national immigration forum has pointed out, "every new wave of immigrants has been met with suspicion and doubt and yet, ultimately, every past wave of immigrants has been vindicated and saluted".

This has been true of Singapore as well. Its society has hardly been static; since the last century, successive waves of immigrants from different places kept changing the ethnic and social make-up and added to the richness of the society, in every sense. So while one can sympathise with Mr Vadaketh's nostalgia for one specific social configuration, it is a poor argument to clamp down on immigration.

It also does not sit well with his later point - an insightful one - that the "fragile, embryonic Singaporean identity" is evolving. He notes that Singapore is in the middle of a transition from a highly rooted "national identity" to a less-rooted "global city" identity, the latter being the identity that many migrants embrace. Increasingly, Singaporeans too are going the same way, becoming more cosmopolitan and global in tastes, outlook and world view.

Thus, after all his complaints about immigrants, Mr Vadaketh is able to end on a positive note, suggesting that "Singapore has unwittingly created a model for a future where nationhood, ethnicity and religion should not matter". "Each must be celebrated but remain secondary to the higher human identity."

And he points out, correctly, one of the great strengths of Singaporeans is that "they can find common ground with more people than any other nationality". It is hoped they will be able to do this at home as well.

The impact of immigration on the job market has attracted a lot of attention. One oft-cited observation, repeated several times in this book, is that low-cost foreign workers have allowed businesses to keep Singaporeans' wages lower than they otherwise would be.

This is probably true, but it is also too simple - a macroeconomist should look at the bigger picture. As Professor Ng Yew Kwang, Winsemius Professor of Economics at the Nanyang Technological University, has pointed out, while foreign workers can have the effect of depressing wages at the low end, they also contribute to the more efficient use of resources such as land and capital.

The classic example once cited by Prime Minister Lee Hsien Loong, about a factory that operates a day shift and a night shift. Singaporeans work the day shift and foreigners, the night shift. If you remove the foreigners, the factory becomes less efficient and maybe even unviable. In this particular example, the day-shift Singaporean workers benefit from the presence of the night-shift foreign workers. The whole factory benefits, and so does the economy.

The point is, you have to look at not just wages but also efficiency. The more productive use of land and capital because of the presence of foreign workers is a positive effect that must be weighed against the negative effect of lower wages. Even if the negative effect dominates and inequality rises, it is arguably better to resolve the issue through fiscal transfers rather than attacking efficiency by removing foreign workers.

On what happens at the top end of the workforce, Mr Vadaketh launches another polemical broadside, citing "the perception" that "the global elite has moved here with containers of cash in hunt of lower tax rates and is creaming off the spoils of Singapore's growth". It is not clear who he is talking about. Fund managers? Entrepreneurs? Billionaires? Nor is it clear how they are doing this skimming.

In her essay, Linda Lim takes the more reasoned view that at the upper end of the labour market, the presence of foreign workers reflects the fact that high-skilled jobs in many areas actively promoted by the government, such as high-tech electronics, petrochemicals, financial services and digital media, require specific skills that cannot be met locally. She proposes reducing the state's "micromanagement of investment allocation". But she does not say which sectors she would like see de-emphasised, which would be a tough call.

She also proposes revamping the education system by placing less emphasis on grades and more on soft skills and multicultural versatility, which Singaporean graduates allegedly lack and employers increasingly require. The Government is trying to do this, for example, by de-emphasising grades relative to skills, but Dr Lim has a point and there is surely scope to do more.

Social safety nets

IN THEIR essay on social safety nets, Donald Low and Yeoh Lam Keong bravely challenge the Singapore establishment's consensus view that social benefits be targeted at the needy, and make a case for northern Europe-style universal programmes that benefit the large majority of the population. They cite studies arguing that universal programmes foster greater social trust, because they lead to less inequality and greater social cohesion.

They acknowledge that these programmes are more expensive, but suggest that policymakers "weigh their costs against their benefits".

However, while the benefits are elaborated on, the costs are not. They are likely to be substantial and would almost certainly entail draconian increases in taxes. Since northern Europe is cited as a model, it bears noting that top income tax rates range from 48 per cent in Norway to 57 per cent in Sweden. The middle classes, too, pay direct taxes, unlike in Singapore, where some 70 per cent of the population does not.

Indirect taxes would probably need to go up sharply as well. In Scandinavian countries, VAT (value-added tax) rates are around 25 per cent. The people of Scandinavia accept this social contract of high taxes and high benefits.

Leaving aside whether Singaporeans would be willing to swallow such tax increases, even given the unquestioned benefits of universal programmes, there is also the issue of tax competitiveness. This is much less of an issue for northern European countries, which do not need to compete for foreign investment to the extent that Singapore does.

However, the authors do have a point when they say: "The critical question to ask is not how we can keep social spending on a tight leash, but what kinds of social spending would deliver the greatest social benefits."

It is worth translating this proposition to some policy action. While a universal programme of social spending would probably require punitive levels of taxation, Singapore can afford "selective" universality.

In particular, it could provide universal free education from kindergarten all the way through to a first university degree for all Singaporeans. Education is the ultimate ticket to social mobility. And as there are already subsidies being provided, albeit the regime being riddled with complicated qualifying criteria, the cost of extending these on a universal basis without exception would not be prohibitive. This would achieve at least some of the worthy social goals the authors seek.

On the issue of ageing, Mr Low's preference for zero population growth and his hardline view against immigration, dismissed as something "Singaporeans will not accept", leaves him with little choice but to propose that the way to deal with ageing is simply to adapt to it rather than try to mitigate it.

How? He advocates a "slower growth model" which relies largely, if not entirely, on productivity growth. He also calls for reforming the Central Provident Fund system and health and long-term care financing system. There is an assumption here that slower growth will somehow be accompanied by higher productivity, which is heroic and not borne out by recent experience. The costs of a higher dependency ratio and the implications for taxation, which will be considerable, also call for elaboration.

The assumption that population growth is not an option is questionable as well. Mr Low suggests that "even if our physical carrying capacity is not yet near its maximum limit, society's absorptive capacity is probably nearing a critical threshold".

He is probably right for now, although the Government, which has been on the defensive on this issue since the 2013 population White Paper, has not pressed the case for population growth. A case can be made, if Singapore's population is more spatially distributed and its infrastructure substantially enhanced - both of which are in process.

As Mr Low correctly points out, quoting behavioural economists, our assumptions about the future are often anchored in the present; "citizens' perceptions of quality of life in the future were... influenced by their current lived experience of congestion and crowdedness". He adds that "anchoring in the present" can be a mistake when projecting into the future.

He could take his own advice; attitudes to immigration, too, can change. As the research of Professor Benjamin Friedman of Harvard University found, such attitudes typically wax and wane over time, depending on economic conditions. Anti-immigrant sentiment has never been permanent in any society with a history of immigration, it remains to be seen how long it will last here.

There are many other issues in this book that this review has not tackled, such as housing, politics and governance, where, too, the authors call for reform.

Some of these ideas will be considered iconoclastic. But that is one of the merits of this book, which, whether you agree with it or not, is arguably the most stimulating and provocative ever written on public policy in Singapore. It deserves the wide readership it has received.

The writer is associate editor of The Business Times, where this article first appeared. Hard Choices: Challenging The Singapore Consensus by Donald Low and Sudhir Vadaketh is published by NUS Press and is available in major bookstores here and from the Amazon Kindle Bookstore.


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