The widening gap between the rich and poor is beginning to stymie social mobility. Singapore needs to ensure not only that incomes rise, but that the lowest earners have a chance to climb to the top.
Singapore is a really expensive place to live in, isn’t it?
That is what just about everyone says to me when I tell them that I am moving back to Singapore after 3½ years in Taiwan. The near-universal feeling among both locals and foreigners in Taiwan is that the Lion City is a place where you can live comfortably only if you are wealthy.
For one thing, the Singapore dollar has been relatively strong. And, the city’s property prices have shot skywards over the past decade. Moreover, the country seems to revel in news stories about it having the world’s highest number of Lamborghini deliveries per capita, and the highest concentration of millionaire households in the world. According to the Boston Consulting Group, 15.5% of Singapore households have at least US$1 million ($1.3 million) in assets. Even Switzerland trails in second place at 9.9%.
Yet, anyone who has actually lived in Singapore knows that things aren’t what they seem from the outside. In 2010, the median monthly income from work among households was just $5,704, according to the Department of Statistics. That’s nowhere near enough to afford ritzy restaurants and sports cars.
This year, angst over the growing gap between the ultra- rich and the man in the street has been raging the world over. In Singapore, the discontent hasn’t been as intense as in the West, where taxpayers have been forced to bail out banks owned and run by billionaires. Yet, there is a growing awareness of the widening gap between rich and poor, and a growing sense that the inequality is set to worsen.
Most people don’t begrudge others getting rich as long as they feel they have a similar shot at improving their own situation. Yet, these are times when an elite pool of high earners seems to have an unfair advantage at wealth creation, prodding the average person to question his own economic mobility.
Has it become harder for Singaporeans at the bottom and in the middle to move up in life? Is Singapore a place where only the rich get richer?
GINI OUT OF THE BOTTLE
A standard metric of inequality is the Gini coefficient, which measures the degree of inequality of income distribution. Even after imputing employers’ Central Provident Fund (CPF) contributions into household income as well as government benefits and taxes, the Gini coefficient went from 0.434 in 2000 to a high of 0.469 in 2007. It eased in the next two years as the economy weakened but crept back up last year to 0.454 as it bounced back (see chart).
A similar pattern is seen in the ratio of the average income of the top 20% resident employed households to the lowest 20%. This figure has gone from 10.1 in 2000 to peak at 13.2 in 2007 before easing to 12.9 last year.
While it is encouraging that the latest figures are below the peaks charted in 2007, their trajectory seems to suggest that inequality widens with economic growth. Over the last decade, even as Singapore’s overall GDP pie grew by 72.2%, income inequality worsened. Has it become harder for those at the bottom of the income chain to move up? Is government policy exacerbating the problem?
M-SHAPED ECONOMY
Markets have never been fair when allocating the gains of enterprise and risk-taking. And, in recent years, a growing gap between incomes of the rich and poor has become evident across a spectrum of countries, particularly those with open economies. This is due to the twin phenomena of globalisation and technology, which is the prime force changing the way incomes are distributed.
Big leaps in technology have made it possible for businesses to do more with fewer people. Technology and globalisation have also made it easier for companies to hire workers remotely and to outsource jobs to locations where labour costs are cheaper, such as Bangalore and Shenzhen. As a result, certain jobs are disappearing while whole businesses,such as brick-and-mortar bookstores and travel agencies, are being recast. At the same time, knowledge-based workers and those with the skills to suit the new economy are experiencing a jump in economic mobility.
This is a conundrum in not only Singapore but also in Hong Kong, which has evolved into the commercial centre for Greater China. Significant wealth has been created by its financial services and real estate sectors, yet Hong Kong has the worst income inequality among developed countries. In Taiwan, where an estimated one million manufacturing jobs have shifted to China over the last decade owing to lower wages, there is constant fretting about an M-shaped society. This refers to the hollowing out of the middle class, with swelling numbers of rich and poor people at both ends.
LABOUR AND TAX FACTORS
In Singapore, there have been other factors that have stifled economic mobility among the lower ranks. One is the government’s manpower policies. On the one hand, it has been importing expensive global talent into its small workforce to stay competitive. On the other, it has tapped unskilled and semi-skilled labour from poorer Asian countries such as Bangladesh and Indonesia for cleaning, construction and other lowly paid jobs, suppressing incomes in these categories.
Second, changes in the tax system over the last few years have tended to reward those with means. Personal income taxes have been shaved, benefitting higher-income earners more than lower- income earners. Estate duty was abolished in 2008, promoting intergenerational transfer of wealth. The goods and services tax, a regressive tax that hits all consumers regardless of income, was also raised that year to 7%.
The government has tried to help citizens displaced by these changes, though. Measures include GST credits, rebates on utilities, medical subsidies, Workfare Income Supplement disbursements, CPF top ups and Economic Restructuring Shares.
These assistance schemes have had some impact. For the bottom 10% of households, the real annual change in their average monthly incomes was less severe than the 3.2% drop all households suffered in the downturn of 2009. When growth spiked back up in 2010, their household incomes grew faster than the overall pace of 3.8% (see table).
Yet, not all Singaporeans qualify for these benefits. Those left out are the ones in the middle — not too poor, not too rich and grappling with rising costs such as higher tuition fees for their children or stiff medical bills for
their ageing parents.
BAD FOR SOCIETY?
While everyone will accept that it behoves society to look out for those on the lowest rungs, is inequality just the trade-off of an economic system that works? Why is inequality in itself a bad thing?
Robert H Frank, a professor of economics at Cornell University, describes in his recent book, The Darwin Economy, how a chasm between the very wealthy and the rest of society can start distorting behaviour and prices through “expenditure cascades”. When top earners start spending more than ever before, by buying bigger mansions or staging more elaborate weddings for their children, it filters down the food chain. Through their spending, the rich shift the frame of reference that shapes the demands of the group below them, says Frank.
In Singapore, this can be seen in the housing market. When buyers start bidding up prices at luxury developments such as Ardmore Park or Sentosa Cove, it sets new benchmarks for other properties on Singapore’s limited land mass. That in turn pushes up prices for apartments in the broader market. It even creates new classes of properties like shoebox flats. Eventually, this affects HDB flats in the secondary market, where prices have shot up 81% since end-2006.
When income gains aren’t keeping pace with asset price rises, affordability is curbed. Daiwa Capital Markets estimates that currently, the multiple of home prices to annual household income is 15.7 times. That is 11% higher than the average since 2000.
Moreover, an economy that provides disproportionate and growing returns to the already wealthy runs the risk of perpetuating a sense of entitlement among its elite. That ultimately becomes a political issue instead of just an economic problem, as it has in the US. As the Greek philosopher Plutarch said: “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
In Singapore, people have stuck together largely because their lives have improved with each successive generation, indicating that economic mobility has been attainable for most. That is an aspect of our society we should work hard to preserve.
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