Handling the coming Storm in the New Normal Environment?

Function 8 thank Economist, Mr Yeoh Lam Keong for sharing his thoughts on “The New Normal in Economics with specific reference to Singapore” held at Muse House on 6 November 2012. This is the report in two parts by Chng Suan Tze.

Handling the coming Storm in the New Normal Environment?

Part 1
Did you know that there are about 350,000 to 380,000 citizens living in poverty in Singapore? (Figures are based on a survey of households which estimated 100,000 poor households in Singapore). They include the desperately working poor (60,000 households), the unemployed poor (20,000) and the retired poor (20,000).

Such households earn about $357 per capital which is certainly not enough for the household to make ends meet. So you can expect kids from such a household not to have enough pocket money when they go to school, or parents to eat two meals a day so that the child/children can have three; and they will likely face utility shut off because they can’t pay the bills. They may have a television but they do not have enough money to live decently. About 8% of such poor households live like that – from hand to mouth.

The fact that we are a developed country with the second highest (if not the highest) per capital GDP in the world makes it rather disgraceful that we have in our backyard such an unacceptable social condition.

Can our government do something about this? The answer is “yes” if, (a big IF) they want to. “In fact you can do away with such kind of poverty within a month,” says Economist Yeoh Lam Keong. He suggests raising the workfare income supplement payout. The current payout is $120 per month which is currently paid into the CPF. If the government raises it to $350 per month ($120 in the CPF and the rest in cash, it will immediately take care of the worst poverty. Doing this will cost the government $900 million per year which is 0.3% of our GDP so it is easily affordable. This can be done next month, but wait, the government is still “studying it”.

The government had better not take too long to study it for according to Yeoh, there is a perfect storm coming to Singapore.

On the global/regional front there is the looming sharp slowdown in the US from the ‘fiscal cliff’; there is also the endemic Euro zone crisis, a vulnerable global financial system, depleted 3-G fiscal buffers, and limited global monetary easing.

In Singapore, inflation is currently at its worst since late 1970s. Cheap foreign labour is sharply reduced, MAS is forced to tighten, the property bubble may burst and there is the aging population to contend with.

So the next 5 to 10 years is going to be very critical.

Pressure in the New Normal Environment of Singapore
As a result of globalization there is great income inequalities especially for ordinary people.

The Singapore growth model for the last 20 years has not only created greater income inequality and wage stagnation, but has even brought down wages for the bottom 10-20% of workers. This needs to change, but the change is not going to be easy as big adjustments have to be made for workers, employers, companies, and industries in Singapore.

There will be added pressure on people resulting from our overdue wage restructuring policy of restricting unskilled immigration, relocation of people, takeovers and change of industries. As the population ages, there will be increasing pressure from people for medical care and retirement needs.

Strain in our Social Compact with the Government – breakdown of policy trust

Pressure will also come from a strain in our Social Compact with the Government.
In the past, our social compact (social compact= the relationship between the people and the government) had been one based on trust. (This trust did not come cheap as the people have traded in their political and social freedoms in exchange for good governance.) There still is a strong trust in the policies of the government – the belief that the government has our interest at heart and can do the right thing. This is a very valuable asset to have because it means that the government can do big difficult things in the long run at the expense of people suffering inconveniences and difficulties in the short run. But if this trust breaks down, it would be very difficult for the government to push through policies in the new normal, and more democratic environment.

In fact public scrutiny of government policies have grown exponentially and there is not much the government can do right now. A lack of trust of the government will create policy instability; it can lead to populism and/or policy policy paralysis.

Strain resulting from Population growth
We have pursued a policy of extremely high immigration intensive growth — well over one million and that has created its own problems. If we pursue a policy of 3.5% labour force growth as we have done for the last 20 years, our population will reach 18 million in 2050. Just imagine the squeeze (Singapore’s current land area stands at 710 square kilometers). Even if labour force growth is 2% or even 1.5 % the population will reach 10-11 million. The squeeze will still be very bad! Think of the prices of housing! In fact the society is going to be like Mumbai today. Most people on the streets are likely to be foreigners. Society is certainly not going to be like the Switzerland that some senior minister had once dreamed of. Income and wealth inequality, social tensions and overcrowding will be extreme if our population reaches anywhere near 10 million.The question is, ‘Is this the kind of society we want? Do we want in 2050 a population of over 10 million or 6.5 million? The population department is responsible for highlighting this choice to Singaporeans. If more Singaporeans are aware of this there will be greater pressure on government to bring down foreign labour.

Strain resulting from income inequality
Real wages of the lowest 20% declined by 8% in the period 1997 to 2010 while those of the top 20% increase by 27% in the same period. Wages had been flat on the individual level for a long time. The government claimed that wages had increased by 1% in real terms in the last ten years, but they counted only full time employed jobs and did not adjust for increased hours worked or people taking on part time jobs. But even a one percent increase in wages over the last ten years is not a lot, given the rising costs of living.

Singapore’s economic environment had been volatile. We have had four recessions and two major financial crisis in 13 years. As we adjust, we’ll have higher structural unemployment of professionals and managers.

There is the problem of the economically working poor, because wages had been depressed.

We also have a legacy problem of 300,000 to 400,000 workers age 40 to 50 years who have not passed their PSLE (Primary School Leaving Examination). A great number of these people have lost their jobs. Many of them have become taxi drivers.

In the light of pressure from globalization, pressure from economic restructuring (shifting people from labour intensive to capital intensive jobs; closing down of industries, people looking for jobs in between) pressure from demographics (rapid increase in population) there is a need to revamp the old social security system.

A new social security system is needed for following reasons:

1) Government credibility
The government need to retain the trust of the people who had paid a high price for their social compact with them.

2) Social justice (equality of opportunity through education)
The key to well being is that people need feel that their kids are going to be better than them and the key to social mobility is through education. But is our education system giving people this mobility?

Our education system is one of the best in the world, but it has an equally big shadow education system – the tuition system. The tuition system has been so entrenched and so commercially successful that it came as no big surprise that the biggest buyers of Lamborghini cars are tuition centre owners.

If you want to be in the running for a top school, the cost of putting a kid through tuition to get to the top school is $1,200 to $1,500 per kid per month in Primary school and $2000 per kid per month in secondary school. This is certainly beyond the reach of people with low income. The top 20% spend five times more in education than the bottom 20%. So there is no level playing field for the poor when it comes to educational opportunities.

The question is, do we recognize that the central function of education is a prime vehicle for social mobility?

We could do away with PSLE and make secondary school compulsory.

In the Finland example, there are no elite schools. Schools are given a curriculum guideline but most teachers set their own curriculum. Every teacher has a masters degree with an assistant and class sizes of 15 to 20 students per class. There is no mass assessment until they reach university level. There is complete freedom and not much homework. Yet Finnish students score as well as Singaporean students in reading, science and maths. So what Finland has is social mobility and people with a happy childhood.

The Finland example shows that there are alternative ways of getting the same results.

3) Competitiveness and Social Well-being
Countries which have strong social safety nets can be more competitive than those which do not. Denmark for example has a most favourable labour market because it has a strong social safety net. They can close down ship yards and relocate labour; they can make daring economic re-structuring because they know people are taken care of in between industries. They lose jobs, but are taken care of; they retrain and get re-employed. With a good social safety net you can be more aggressive in re-structuring the economy.

Social well being should be the ultimate aim of economic policy.

(Watch out for Part Two of Mr Yeoh Lam Keong’s speech)

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About fn8org

For computers, it means to start again in safe mode. For us, we hope we can also start again in safe mode. But it's more like re-booting our systems and starting from much needed basics for democracy in Singapore.
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