Friday, April 13, 2012

Chee Soon Juan: The case against wealth disparity

Part 1 of  Wealth Disparity

Singapore Democrats,
Tuesday, 10 April 2012 (source)

The current turmoil that embroils the world's economy has disrupted more than just markets, it has exposed the grotesque underbelly of society where the rich have been allowed to run away with much of the wealth, leaving the vast majority in difficulty.

While one percent of the world's wealthiest families own nearly 40 percent of the world's wealth, one-third of workers – or 1.1 billion people – are either living in poverty or are unemployed.[1]

Just as with the world's wealth disparity, the rich-poor gap in Singapore is also extremely pronounced. In fact, Forbes magazine ranks Singapore as the world's third richest country, measured by GDP per capita adjusted for Purchaisng Power Parity.[2]

But according to the CIA World Factbook, our Gini coefficient index, a measure of income inequality, is the second highest among developed economies. At 0.473 (on a scale of zero to one with a higher score signalling more inequality), our income disparity is even greater than that in the United States - and that's really saying something. [3] For perspective, the average Gini among members of the Organisation for Economic Cooperation and Development (OECD), a grouping of developed economies, is only around 0.3.

In another measure of the ratio of the richest 20 percent to the poorest 20 percent, Singapore came out as the country with the highest inequality. (See figure below, source:

The Manpower Ministry reported that the income of the poorest 20 percent of Singaporeans stagnated over the last 10 years. Though their nominal income rose to $1,400 in 2010, $200 more than in 2001, real income only rose by 0.3 per cent over the decade.[4]

As disturbing as this news is, it may be an optimistic view. Financial analyst Mr Leong Sze Hian calculates the real pay of low-income workers such as cleaners may have declined by about 38 per cent in the last 10 years or so. Citing official statistics, Mr Leong showed that in 2000, the median gross wage for this category of workers was $1,277. By 2010, he points out, this fell to $960.[5] On the other end, those who earned $10,000 a month or more has multiplied four times in a decade. [6]

These numbers translate into starkly different worlds that the rich and poor in Singapore live. Consider the lifestyle of Mdm Carol John, a Singaporean housewife, struggles on $700 a month. She goes to bed at night sleeping on thin mattresses on the floor in a one-room flat with her three young children.

"I can't save anything, it's so difficult for me," Mdm John says. "We don't benefit at all from the economy. As far as I know, my husband's pay hasn't gone up."[7]

Mr Singhania, on the other hand, bought a luxury yacht costing him $435,000 and wants to buy a bigger one for $1.3 million. He was attracted to Singapore's grandiose living standards for foreigners.

A $3.6 million car. Anyone?
"You've got everything you want in Singapore,” he says, “you want to buy a fast car, you want to buy a big boat, you want to buy an aeroplane, whatever you need, you can get in this country."[8]Even a $3.6 million car, apparently. A local sportscar company is selling these motoring jewels to anyone "who wants to be different, after having had so many Ferraris, Lamborghinis and Rolls-Royces." And its business seems to be doing just fine.[9]

Technically, there is a difference betwen wealth and income inequality. The former refers to the difference in one's net wealth, ie, what you own (money in your bank account, your house, stocks, etc) versus what you owe (car loan, mortgage, credit card loan and so on). Income inequality refers to the difference between the revenue that that the richest individuals or households derive (from salaries, stock dividends, sale of belongings, etc) and those earned by the poorest segment.

The dangers of extreme wealth inequality

In this imperfect world, no one expects perfect equality. Income inequality is inevitable and there is truth that inequality spurs economic progress. However, the imbalance in wealth as I have described above - where, on one extreme, a wealthy family is able to buy a car worth more than a bungalow while, on the other, a poor one cannot even afford a bed - is inequality gone berserk.

Such extreme wealth disparity is not just a benign and inevitable economic outcome resultng from forces of the free-marlet, it is a perncious scourge deliberately constructed and maintained by the wealthy and one that wreaks its havoc in many ways and upon many sectors of society:

The Economy
. In a study published by the International Monetary Fund (IMF), economists Andrew Berg and Jonathan Ostry found that income inequality threatens, not supports, economic growth. They studied the Gini coefficient indices of various economies (including Singapore's) between 1950 and 2006 and tracked them over periods of economic growth. They found that as income inequality increased, growth periods lessened. They observed that

equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality. Countries may find that improving equality may also improve efficiency, understood as more sustainable long-run growth.[10]

A wide income gap also creates price distortions affecting the economy in unseen and undesirable ways. If the wealthy get too rich too quickly, the demand for goods and products increases exponentially. The rise in prices escalates beyond what the rest of society can afford.

An example of this phenomenon was the unprecedented inflation in 2007/08. Global commodity prices shot up, including that of rice and other basic necessities. The sky-high prces were maintained, in part at least, by the fact that the wealthy in Singapore could afford them because their wages rose faster than the poor. The burden of escalating prices fell on the lower-income groups.

Between 1998 and 2003 the average expenditure of richer households was much less than their income (see table on right). The bottom 40 percent of households, however, saw expenditure outstrip their wages.

A more recent development is HDB resale prices which continue to surprise even the most-experienced real estate agents. This is due to the higher-income groups paying huge amounts for the flats, leading the housing market to skyrocket and leaving the middle- and lower-income groups trapped in a price-warp unable to keep up with the inflation.

Belatedly, the Government has tried to rein in runaway housing prices by restricting wealthy foreigners from buying property on this island.[11] Such measures, however, are piecemeal and does little to tackle the overall problem.

Political stability. If inequality begets greater inequality, there will come a time when society breaks apart as it did many times throughout the course of history. From the fall of ancien regime in France to the sacking of the Last Emperor in China, from the Arab spring revolutions to the riots in modern Europe, populations snap when inequality veers to the extreme.

One ingredient needed in such explosions is greed – greed of those at the top. Greed becomes a problem when it is untethered. It is an emotion and, like all emotions, it does not lend itself to rational thought. But, then, neither does desperation. When people are faced with daily struggles and they see rich people indulge in over-the-top, in-your-face extravagance, something happens to the psyche. At some inevitable point, desperation and anger mix into a combustible cocktail that explodes in society's face.

Renowned economist Nouriel Roubini who foresaw the crisis that engulfed the world in 2008, put out this warning:
Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.[12]

So far, Singapore has been able to avoid such trouble not because we are doing better economically but because the crackdown on protests is much more efficient and effective. But there will come a point where conditions will get so bad that no amount of control will contain the frustrations of workers in this country and the turmoil will begin.

Health and healthcare
. The development of biotechnology has significantly advanced healthcare. And yet, medical treatment remains unaffordable for swathes of the Singaporean population.

Associate Professor Paul Tambyah pointed out in his presentation at the launch of the SDP's healthcare plan studies that show that lower-income groups are deterred from seeking medical care because of the high cost of treatment. As a result, life expectancy is lower. In the graph below, it can be seen that countries with greater wealth disparity also have lower life expectancies with Singapore positioned on the wrong end. (See figure below, source:

Higher-level – and more expensive – intervention is needed when these individuals succumb to diseases when early intervention could have arrested the problem. Additionally, those affected are effectively removed from the productive cycle of the economy. For those who find the money to pay for care, many end up in debt. Of the top three reasons that Singaporeans find themselves drowning in debt, medical expenses is one of them.

Poverty and inequality also drains the economy when segments of the population come under stress and mental health becomes a casualty. Singapore has the highest rate among developed economies for Obssessive-Compulsive Disorders (OCD) with 3 percent of Singaporeans afflicted. The figure for the United States is 2.3 per cent, while in Europe it is 1.1 per cent. OCD are anxiety-related disorders that trigger ritualistic behavioural excesses.[13]

Other manifestations of the emotional strain from financial want include diseases like alcoholism, drug abuse and even problem-gambling. The social cost, although hard to quantify, is nevertheless a very real one for which society has to pay.

Family, education and crime
. Financial deprivation also exacts a burden on familial relationships. Divorces often result from such want and the dysfunctional family further erodes the emotional and physical make-up of its members. Children growing up in such households are often the victims and they become easy-pickings for gangs.

Wealth inequality also limits the educational progress of those in the lower-income groups. Upon graduation, employment opportunities are much more limited for students from poorer families and the types of jobs are almost always the lower-paid ones. This vicious cycle puts those already at a disadvantage further down the totem pole. Family background is a major determinant in an individual's educational attainment.

Academic failure and school drop-out rates rise dramatically among needy families. This creates a culture of poverty which often lends itself to criminal behaviour. Offences such as drug abuse, borrowing from loan-sharks, inability to pay fines, etc arise from poverty. It should come as no surprise that unequal societies have higher prison rates. The graph below shows that Singapore, with its high inequality, has also one of the highest numbers of prisoners per capita.

Race relations.
Income inequality does not affect the ethnic groups uniformly. The Malay community in Singapore receives the brunt. The table on the right shows that household income is the lowest among the Malays. Not only that, in the ten-year period between 1990 and 2000, the rate of household income growth among the Malays is also the lowest.

The continuing slowness of the Malay community's socioeconomic progress constitutes an unhealthy obstacle towards improving relations between Malays and non-Malays in Singapore.

. Taken together, these factors militate against the building of a cohesive society. Wealth disparity increases the social distances between sub-populations. Disparate living standards lead to segregated lifestyles where the rich increasing alienate themselves from the rest of society by erecting ever-exclusive gated residences. Inequality destroys trust and undermines cooperation, it does not serve the common good.

Under such circumstances, the ability of the population to defend itself against threats and crises is severely restricted. Harvard law professor and former US solicitor-general, Charles Fried, noted:
To work together, to trade, and to accept authority as an enabler than a hindrance to enterprise, people must trust each other and trust requires and engenders respect. Gross inequalities are incompatible with relations of trust and respect.

Does the PAP have a plan?

Apart from causing extreme imbalance in wealth, the international system is very much behind the current recession in Singapore. The worry is that such a problem is not the cyclical boom and bust of global economics but a deep structural weakness in the way money is made in this country.

It is exacerbated by our being part of the global network of tax havens whose predatory nature in the world of high finance is hollowing out the very economies on which we depend for our own economic health, the subject of Part 2 of this discussion.

The problem that confronts our nation is clear. What is unclear is how the PAP is going to take us forward. Singapore is caught in this downward spiral where ordinary Singaporeans find it increasingly difficult to make economic progress. This is because the Government has positioned our economy to depend on multinational corporations (MNCs) which are constantly seeking out ever cheaper sources of labour.

In order to retain these multinationals, we have had to import foreign labour enmasse. Singaporeans cannot hope to compete with workers coming from our poorer neighbouring countries who are able to accept lower wage levels. Because of this, the income of working Singaporeans have been artificially depressed. It seems that the longer Singaporeans work, the less we earn.

Abundant foreign labour in Singapore has an deleterious effect on our productivity as well as our infrastructure. Even former Minister Mentor Lee Kuan Yew acknowledged that
We've grown in the last five years by just importing labour. Now, the people feel uncomfortable, there are too many foreigners. Trains are overcrowded with foreigners, buses too, property prices have gone up because foreigners with permanent residence are buying into the market.

Unfortunately, there doesn't seem to be any solution coming from the Government as it continues to rely heavily on foreign workers to prop up our GDP. As quickly as it announced that it would reduce our dependence of foreigners in 2010, it reversed course and increased its import of foreign workers the following year (from 53,000 such workers in 2010 to 85,000 in 2011).

Some may argue that as the economies in China and India expand, incomes in those countries will increase and wage equalisation will take place across the region, making Singapore more competitive again. But such a view makes the assumption – and it is a very big assumption – that the MNCs do not find new sources of cheap labour in Latin America, Africa or the Middle East.

There can be no dispute, we need an alternative economic paradigm where minimising wealth disparity is our prioriy. The big danger is that the PAP will prevent us from moving in that direction.

Chee Soon Juan is Secretary-General of the Singapore Democratic Party.


1. Global Jobs Crisis: Third Of Global Workers Either Unemployed Or Impoverished, Huffington Post, 23 January 2012.
2. Singapore 3rd-richest country: Forbes, Straits Times, 26 February 2012.
3. Distribution of family income - Gini index, CIA World Factbook 2012.
4. Low-wage earners' pay stagnated over last decade: MOM, Yahoo!News, 12 October 2011.
5. Cleaners’ pay up $250 to $1,000: Congratulations? The Online Citizen, 25 February 2012.
6. There is nothing uniquely Singaporean about inequality, Straits Times, 14 September 2011.
7. Singapore's economic boom widens income gap, Reuters, 9 November 2007.
8. Ibid.
9. S'pore's most expensive car at $3.6m launched this weekend, The Business Times, 26 February 2012.
10. Inequality and efficiency, International Monetary Fund, Sep 2011.
11. Singapore Cuts Options for Wealthy Seeking Permanent Stay, Bloomberg, 4 April 2012.
12. The instability of inequality, Nouriel Roubini, 13 October 2011
13. '1 in 10 will suffer from mental illness': Study, Straits Times, 19 Novemeber 2011.


Part 2: How did we come to this? - here

Part 3: What we can, and must, do - here

Related: Softly, softly will not narrow income gap,  by Yawning Bread (here)

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