Human centric economic policy for Singapore
The disruption in 2020 from the global pandemic has promoted a fresh critical assessment of whether the status quo economic system in Singapore is fit-for-purpose for the challenges of the 21st century. In particular :
How can Singapore’s multinational corporate capitalistic economic system become more environmentally sustainable, equitable?
This article presents policy reforms for a more equitable, sustainable economy first by introducing a brief synopsis of the problem of the current economic system, and the upcoming global challenges that Singapore will need to prepare for. The concepts and ideas from this article draw from a report “Freedom for who?” a critique of free market capitalism.
- An economic model no longer fit-for-purpose
- Trends on the horizon
- Policy reforms for a more equitable, sustainable economy
An economic model no longer fit for purpose
In a recent global survey, 56% feel that capitalism in its current form is doing more harm than good (John, 2020). The declining support for capitalism can also be seen in Singapore. The political support for the ruling party People’s Action Party, dropped both in % vote share to a low of 61% and a loss of 2 electoral districts (GRCs), the lowest support level since independence in 1965. Top issues on voters’ minds in a survey prior to the election could trace to dissatisfaction on economic performance, not necessarily on aggregate, but how well the economy was working for the everyday citizen for issues such as inequality, cost of living (Quad Research, 2020).
The shortfalls of the current economic system are what it neglects to measure outside of Gross Domestic Product (GDP) — inequality, environmental sustainability and systemic hazards. Each of them are situations of the failure of the market to provide for collective welfare. Market failures are situations where “markets themselves cannot repair and that thus require active policy” (Birdsall, 2010). One way of visualizing the cumulative net effects of the externalities cost of free-market unfettered growth is the Genuine Progress index (GPI). GPI aims to account for the less visible social and environmental costs that are missed from GDP measurement by adding them to GDP. Social costs include family separation, and the unpaid labor of childcare in the home, and it adds to GDP any unpaid volunteer work. The GPI also subtracts environmental costs such as climate change costs from carbon pollution. Singapore’s Genuine Progress was estimated to have peaked in the early 2000’s at around US $35k and declined from 2000 to 2014 (Delang, 2016). Globally the situation appears even more alarming. GPI appears to have peaked in the 1970’s (Kubiszewski, 2013). Progress has under-performed on socioeconomic inequality and on climate change. Cross-country comparison shows mixed results for reducing inequality with generally poverty and inequality in the decline globally, but with large disparities by region, income group and more lackluster results in recent years since 2005 than in the previous 3 decades (OECD, 2015).
Socioeconomic inequality can be thought of as an under-investment in human capital for those on the margins of society, as well as an erosion of the social cohesiveness of society by stratifying into segregated non-overlapping classes. Human capital is those capacities of an individual to produce valuable goods and services such as knowledge, skills (OECD, 2015). Typical measures of human capital focus on education and skills, and often healthcare is included in the definition since health is a prerequisite condition for developing and utilizing these capacities. If left unresolved, over time inequality can be a limiting factor for future growth prospects (OECD, 2015). In a recent UN report, country-level pledges to the Paris Agreement fall short of what is required to limit global warming to < 1.5C (UNEP, 2019).
Trends on the horizon
Looking ahead, the economy for the 21st century not only will need to address the current shortfalls of inequality, environmental sustainability, but also meet the upcoming foreseeable challenges. Three overall drivers are rural-urban migration, labor-saving technology advancement and climate change — mitigation and adaptation. Each of these transformations could be managed with overall neutral or even positive welfare benefit with the right policy and economic system. Under the status quo system that tolerates socioeconomic inequality and neglects environmental sustainability, these changes could be a disrupting factor to accelerate those inequalities and further undermine future economic health.
- Urbanization, convergence, transition to service economy
- Slowing productivity growth rates globally
- Growing middle class in Southeast Asia, Africa, South Asia
- AI, automation — polarization of labor
- Climate change — direct impacts, transition impact
As of 2020, a majority of the world’s population is living in an urban environment and that trend is expected to continue to increase. The differences between urban and rural living conditions have a wide range of policy and political implications. A general phenomenon is that as a population becomes more urbanized, fertility rates fall which is believed to be due to the greater autonomy of women and higher opportunity cost of human capital (Barro, 1990). The lower fertility rates and the completion of build-up of physical infrastructure could explain the shift in the relative significance of different forms of capital from purely physical forms into labor, connectivity and information. The urbanization transformation has corresponded with structural shifts from industrial to services. In the service economy human capital and R&D rise to become greater determinants of future productivity growth compared to accumulation of physical capital stock (OECD, 2000). The theory of Baumol’s cost disease predicts that growth of the service economy will occur at a slower pace than in the 20th century (Nordhaus, 2006). The combined effect of slowing productivity growth with dropping fertility rates is lower growth of the national economy. Slower economic growth for an advanced economy is not necessarily a problem. With initial inequalities however, low growth can accelerate socioeconomic inequality in a free market capitalism economy in the absence of redistributive mechanisms such as taxes and transfers (Piketty, 2014). Globally there are still regions that have not yet fully urbanized and room for development — such Southeast Asia, Latin America, South Asia, the Middle East and many parts of Africa. Optimistically these regions are expected to grow their middle class with higher purchasing power and realize an increase in global political significance.
Another driving force occurring together with urbanization is labor-saving technology — artificial intelligence (AI) and automation. It remains to be seen whether this trend has any net effect on the aggregate growth rates. A more clear trend is the polarization effect on the workforce into two classes — highly educated knowledge workers whose creative, managerial and interpersonal skills are beyond the reach of current AI, and a lower skilled class whose comparative advantage to machinery is their fine motor skills dexterity, navigating irregular physical environments and genuine appeal of human contact in care work. At risk for substitution are the traditional middle-class jobs of clerical data manipulation and repetitive and assembly-line type work in regular predictable environments (Lee, 2017). This polarization of the workforce could either be capitalised for the social good by returning the surplus free time equitably back to citizens to improve social well-being, or by accelerating socioeconomic inequalities into two disparate classes of wealthy, educated knowledge workers and their lower paid hands, feet and eyes.
Perhaps the biggest shifts between now and the end of the century will be from the effects of climate change, both adapting to the increasingly hostile rising seas and extreme weather events, and managing the cost of the economic transitions for moving away from fossil fuels. The impacts of climate change, like urbanization and automation, will also depend on the economic system and the distribution of adaptive capacity both sub-nationally and between countries. Under the current system, climate change threatens to push those on the margins into extreme poverty in regions where adaptive capacity is low, or for those that successfully migrate out of direct impact areas they may be at a disadvantage relative to the native population for access to economic opportunity (UNHR, 2019).
Policy reforms for a more equitable, sustainable economy
8 policy reforms are proposed here to achieve the transitions to prepare Singapore’s economy for the 21st century. This list is neither necessary nor sufficient as there are numerous possible ways of achieving the same desired outcomes. They are a summary of pragmatic reforms based on a literature of economic reports and best practices from other advanced economies facing similar challenges.
- Structural shifts towards growth, away from sunset
- Decarbonization
- Human capital investments — healthcare, education
- Subsidize social mobility
- Progressive taxation
- Strengthen labor rights and protections
- Stable, assimilation focused immigration
- Strengthen regional diplomatic, trade relationships
Structural shifts
To be well positioned for the demands of the future global economy, the structural composition of the economy must shift towards growth sectors and away from sunset industries. At the top of the list of the new growth industries is the growth in digital services. To meet this opportunity will require substantial investment of training for new digital, programming skills. Other sectors which have strong growth potential to meet the human capital demands of an ageing population and service economy are healthcare, education services. Another potential source of employment from the upscaled investments in human capital which also creates a more level field for social mobility are care services for elderly and early childhood. For Singapore to stay relevant to continue to attract top talent and sustain the status as a cultural and innovative hub it may also be advantageous to expanded research, media, arts and entertainment industries. The dramatic changes needed for the economy to become more environmentally sustainable will create new opportunities of its own and within existing industries. To make room for the new to come in, the sunset must go out.
To be compliant with the fossil fuel reductions in line with the targets to limit global warming to less than 1.5C will require large write-downs from energy companies whose valuations include assumptions that those assets will be extracted and burned (Economist, 2020). Singapore in particular has significant exposure to this risk. It hosts the 7th largest petrochemical and refining complex in the world. The government has invested in creating Jurong and Bukom Islands which are designated zones for the industry. Not only the petrochemicals sector, but also the energy intensive airport and port have high risk exposure to a rapid rise in global climate change mitigation policy pressure. All of these could quickly become stranded assets as the rest of the world shifts to close the gaps in global emissions reduction targets.
Decarbonization
To meet its Paris Agreement obligations to limit global warming to <1.5C, Singapore must decarbonize the economy and reduce emissions by at least 50% by 2030 and zero by 2050 (Hickem, 2019). The current pledges do not achieve that, but the technical shifts can be achieved with a budget of 1–2% of GDP spread out over 30 years in line with what economists have reported (Hickem, 2019 ; Stern, 2008). These investments could be financed through a combination of taxes on carbon emissions US $75/ton at the supply, on the demand side in the form of an increase in consumption tax on luxury and non-essentials and green bonds (Hickem, 2019). To fully decarbonize the transition would require shifts in Singapore’s energy, transport, buildings, manufacturing industry in addition to nudges in consumption behavior, particularly for the high income households (Hickem, 2019). Given the scale and disruption potential of the changes, these direct investments should also be accompanied by transition assistance to shield low income families from potential higher cost of energy and energy equivalent portion of goods and services, as well as transition assistance to help workers make the career shifts from sunset into growth industries
Human capital investments
Current public spending on healthcare and education is <6% of GDP, however this is still far below other OECD countries such as the Scandinavian countries which have spending in excess of 16% of GDP (MOF, 2020). While Singapore reports one of the world’s highest human capital development, there are substantial subnational variations, particular in the minority and foreign worker population who would be the primary beneficiaries of such policies (World Bank Group, 2019).
Subsidize social mobility
Social mobility is the ease for individuals to participate in and benefit from the resources in the economy. For those who are already in precarious employment, policies that can provide them the reassurance to improve their situation are subsidies for lifetime learning where they can upgrade their skills without risking their income, expand pension benefits to lighten the stress load of saving for retirement, provision of affordable housing and care services for elderly parents and young children. Higher income households are able to resolve these demands using their own resources, so filling these gaps for the low income households can go a long way in levelling the playing field.
Progressive taxation
The unique characteristics of Singapore’s taxes compared to other advanced economies is the 0 capital gains tax, low corporate income tax (CIT) 17%, low top marginal tax rate 22% and general low taxes as % of GDP 17% (Hickem, 2020 Taxes). The insights from French economists Thomas Piketty is that wealth inequalities inevitably accumulate in a capitalist economy in the absence of progressive taxation policy (Piketty, 2014). A progressive taxation design raises the marginal tax rate with income and is already a feature of Singapore’s income tax design. There is a wide range of efficiency of tax-and-transfer systems. Some best practices from economists in addition to raising the top marginal tax rate and corporate income tax rates are to tax wealth directly via inheritance, property, to tax consumption VAT/GST and Pigouvian (carbon, added sugars) taxes aimed at raising the cost for public externalities .
Strengthen labor rights
Taxes and transfers can only do so much. In countries which have achieved very low levels of inequality such as the Scandinavian countries, the progressive taxation is complemented with labor policy that closes the gaps in income pay within firms. One way of boosting employment and improving quality of life is reducing working hours per week — either shorter work days, shorter work weeks or both. Economic studies have found that on average productivity improves when weekly hours are reduced from 50 to 40 hour work week (Economist, 2014). In addition to shorter working weeks, government subsidized stay of leave for lifelong learning and childcare is another policy which has the effect of boosting demand for labor hours and at the same time making direct investments in human capital. Wage compression, reduced pay for top executives and rising pay for the entry level positions is successful in systems with strong collective bargaining institutions (OECD, 2004). The union density — percentage of the population active in unions — is lower in Singapore compared to the Scandinavian countries. Policies which encourage wage compression and union participation can help to level the playing field in parallel to state policy reforms.
Stable, assimilation focused immigration
To stay relevant and survive as a small island city state, Singapore should maintain access and connectivity to the region and the global economy. Singapore’s continued existence depends on regular flows in and out of water, food, energy, materials, information and people. A stable population will help both to limit resource consumption for environmental sustainability, and to limit inflation for public services in schools, healthcare systems, housing and public transport. For a city with less than replacement fertility, the primary policy for managing population is immigration. Zero immigration would be undesirable as it would guarantee a population rate decline, and would limit opportunities for Singaporeans to migrate out for opportunities overseas due to the tit-for-tat tendency of bilateral agreements to be symmetric.
More than a quarter of Singapore’s 5.6 million are non-resident foreign workers (MOM, 2019). Current immigration dynamics present challenges for Singapore’s socio-economic imbalances, social cohesion and political stability. The immigration system is stratified passes based on salary level. Higher salary passes — Employment Pass, receive benefits similar to the rest of the population and covered under the Employment Act, whereas lower pay passes S-pass are excluded from the Employment act and are less assimilated — many living in low cost, high density dormitories. Furthermore foreign domestic workers (FDW) face a number of restrictions on basic personal rights such as reproduction and mobility (HOME, 2015 ; MOM, 2020). The human costs of the immigration policy were revealed in April this year, when an outbreak of coronavirus cases in migrant dormitories tarnished the prior narrative that the city-state was a success story of state response (Stack, NY Times, 2020). The deaths from the migrant workers were directly related to the crowded living conditions of their dormitories and limited ability to safe distance like those in the rest of society with higher housing standards. Lower wages from the foreign workers in an open labor market, open immigration policy is a downward pressure on wages for all unskilled work. The status quo is a liability for Singapore’s future social cohesion and political stability. The current immigration system is an arbitrage model which uses the relative economic advantage of Singapore compared to its regional neighbors for the benefit of businesses and households. Local businesses keep costs low for jobs Singaporeans do not find appealing, and households are able to trade-off domestic work with higher paid work in the market.
Instead, a new design approach should consider immigration as a way of building cultural and economic ties with the region to be assimilation focused rather than arbitrage focused. An assimilation centric immigration policy believes that the ultimate end goal of immigration is full assimilation as Singaporeans. This would include standardizing the pass system such that the benefits of Employment pass apply equally to FDW and unskilled workers such as construction. Assimilation would also mean ensuring that new immigrants have opportunities for connection and community engagement, and living as Singaporeans do in HDB estates. While full social benefits to programs such as CPF, healthcare, childcare, GST rebates may not be granted on day one, they can be scaled with tenure similar to what is done for the Permanent Resident system. Standardizing the employment benefits and wage rates could raise the cost of employment of foreign migrant workers, which may in turn slow the pace of net immigration rate closer to the replacement rate which is consistent with a stable population.
Strengthen regional diplomatic, trade relationships
The case for a “Common Market”, at least in the Malaysian Archipelago, traces at least as far back as Singapore’s post colonial history and was made by the economist Albert Winsemius, but the idea eventually faded due to the tense ethnic and political divisions at the time (UNDP, 2015). As the gap in time grows from the fall of communism in the 1980s and common threats and opportunities for SEA become more apparent such as the military encroachment of China into the South China Seas, there may be a renewed interest in the Common Market extended to the whole of Southeast Asia. The benefits for Singapore could be to capitalize on the new growth expected for the region, secure supply of essentials food, water which may be increasingly unreliable as climate change interrupts supply chains and land resources, and new source of labor for human capital value-add to supplement declining domestic fertility rates. Singapore’s track record performance in education and healthcare could be one source of comparative advantage to extend this specialization services to the rest of the region. Moving towards a more regional economic model involves strengthening bilateral and multilateral relationships, increased funding and scope for the Asian Development Bank and greater flows of trade and subnational partnerships such as universities and B2B. Switching to a regional supply chain is an emerging global trend and has received a new prompt when companies realized the risk of over concentration of value chains in one country or region. Increasing regional services could also reduce the dependency on activity related to the port. Singapore’s role as a global shipping trade hub may also come under threat in addition to pressure to reduce emissions from freight, but also from competition of new sea routes opening up Northern passage as warming melts summer Arctic sea ice. Singapore’s unique diversity of cultures and languages represented from the region could also well position it as one of several cultural hubs for arts, media and entertainment.
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