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Post date: May 11, 2012 7:33:14 AM

Rich-poor divide a global issue

The Straits Times (11 May 2012)

This is the third of 12 primers on various current affairs issues, which will be published in the run-up to The Straits Times - Ministry of Education National Current Affairs Quiz.

What accounts for the widening income gap in Singapore? Are we unique in having this problem?

IN 2001, 218,700 Singaporeans and permanent residents earned less than $1,000 per month. By last year, the figure had inched up to 236,000.

Meanwhile, the number of people who earned $10,000 and above per month has nearly tripled from 48,400 to nearly 140,000 over the past decade.

As these numbers of both full-time and part-time workers show, the income gap between the rich and the poor here is growing.

But Singapore is by no means unique, as income inequality is a global issue.

Singapore's Gini coefficient - a standard international measure of income inequality - rose to 0.473 last year, from 0.454 a decade ago. After accounting for government transfers and taxes, the Gini index narrowed to 0.452 last year, down from 0.455 in 2010.

Income inequality is measured on a scale of 0 to 1, with a higher number representing greater inequality.

Singapore's Gini index has inched past the United States' rate of 0.469 but is below Hong Kong, another small, business-friendly centre of free enterprise, with a Gini of 0.535 in 2010.

In Nordic countries such as Norway, Sweden, Denmark and Finland, the Gini, by contrast, has hovered below 0.3.

However, for Asia as a whole, a new report from the Asian Development Bank showed recently that inequalities have widened in 11 key economies that are home to more than eight in 10 Asians.

Economists have argued that income inequality is a result of most free market economies. It stems from two key things: unequal effort and unequal opportunities.

At this point, it must be clarified that a high Gini index is not a measure of poverty. Indeed, as the examples of the US and Singapore show, rich countries can have fairly high inequality as does Luxembourg, which, like Singapore, is a rich city-state.

But inequality is not bad per se. It fosters private enterprise and helps grow the economic pie. It rewards human effort - those who work hard are more likely to grow rich. Indeed, the rich could become richer, and that's not a bad thing, if not taken to egregious extremes like the greed of bankers that was partly responsible for the Wall Street collapse of 2008.

The bigger problem arises when inequality is a result of thwarted opportunity - making the poor poorer - and that's what governments must especially guard against.

The cost of living for the poor outpacing wage increases even as the rich get richer could foment social tension. According to some economists, a Gini coefficient of 0.5 or more could cause this to happen.

Why has inequality grown in much of the developed world?

Increasingly, societies and economies around the world have become more knowledge-driven, putting a premium on higher education. Technology - which increases productivity - has also been in high demand. Highly educated and technically skilled people, as a result, have seen their incomes soar.

At the same time, globalisation has brought a large pool of unskilled labour into the global market, depressing wages and the bargaining power of lower- skilled people who find their jobs migrating to the lowest bidder, whether within their country or overseas.

This is to enable economic efficiency, where resources are used to maximise the production of goods and services.

Thus, Americans these days could get their clothes manufactured in Bangladesh or China because it is cheaper to do so there. And garment workers in America, who once made a reasonable living, may well find themselves out of a job, as blue-collar jobs such as garment manufacturing migrate to countries with lower labour costs.

A steep decline in the power of organised unions worldwide and frequent slashing of tax rates for the rich have also widened the gap.

Singapore's inequality story

THAT Singapore has among the biggest income gaps in the developed world is a result of a confluence of factors: its small size, open economy and low taxes.

Consider size. Typically, cities - with their concentrated clusters of the mega rich and the dirt poor - tend to have higher inequality than countries with smaller towns or villages where the disparities are much narrower.

Indeed, megalopolises such as New York, Los Angeles, Hong Kong and Shanghai all have higher Gini coefficients than Singapore.

Singapore attracted companies by maintaining a cost-competitive regime, for example by lowering corporate taxes.

The Gross Domestic Product of a country is split three ways: One share is paid out in wages, another to companies as profits, and lastly, to the Government as taxes.

Singapore's wages as a share of GDP is less than 50 per cent - lower than in developed countries like the US, Japan or France. Its proportion of capital - or a company's profits - as a slice of GDP is high in comparison.

What this essentially means is that Singapore is rich - indeed it has one of the highest per capita GDPs in the world - and its companies make good profits. But its people - especially salaried employees who depend solely on income from work - do not get as large a share of the economic pie, when compared to their counterparts in other developed nations.

In a careful bid not to kill the spirit of enterprise and to keep itself attractive to talent, Singapore has one of the lowest tax rates for the rich in the world.

Meanwhile, the poor have seen incomes stagnate, or even fall. Some economists have argued that Singapore's reliance on cheap immigrant labour, while contributing to its dizzying economic growth in recent years, has also suppressed wages at the bottom.

But things are looking up. Last year, families at all income levels saw their wages rise, income data released recently by the Government shows.

Those in the top 10 per cent of the income scale saw their real household income rise 7.9 per cent, compared with 0.9 per cent for the bottom 10 per cent. Those in the middle, between the 51st and 60th percentiles, saw their real income going up by 2.4 per cent.

Singapore's approach

Singapore's approach to social policy is to invest heavily in helping people get a good life for themselves. This is done via government subsidies in major areas like housing, education and healthcare. These play a vital role in helping every citizen maintain a good quality of life regardless of income. For example, about 90 per cent of households live in subsidised public housing. Public schools cost only a few tens of dollars a month.

With good education, housing and healthcare, Singapore workers can then be in a position to provide for themselves and their families well.

Income growth has grown rapidly through much of the decades after Independence.

The phenomenon of income stagnation and the growing income divide is a relatively new one. Economists are generally agreed that globalisation has made this problem worse, not only in Singapore, but across much of the world.

The Government is well aware of the growing rich-poor divide and has been taking steps to combat it.

One key programme is the Workfare Income Supplement (WIS), provided by the Government to top up wages of low-income workers. It is a key pillar of Singapore's drive to temper inequality.

Another important way to fight income inequality is to help workers get better trained for better jobs. A variety of programmes aim to do this, by subsidising course fees for workers to improve their skills for example. There are also funds to encourage employers to send workers for training, by reimbursing companies for the cost of the workers' salaries when they attend training.

Heavy investment in education helps children from poor families get a good education so they can get better jobs. Singapore is well-known for having a diverse and rich range of scholarships that are available to send bright Singaporeans to top universities worldwide.

Moves are also afoot to shore up the wages of local workers through improvements in productivity. At the same time, higher foreign worker levies have tightened the tap on cheap labour - in the hope that it will boost wages of locals.

While speaking at a May Day rally last week, Prime Minister Lee Hsien Loong said the state would continue to help low-wage workers through a range of programmes, including the $100 million Inclusive Growth Programme which aims to improve the wages of 100,000 workers; GST vouchers of $3.6 billion over five years; and Workfare payouts for 400,000 workers.

Low-income households would receive more than $500,000 in government subsidies over the course of their lives, the Prime Minister said.

He added that the Government would also monitor inflation - which climbed to 5.2 per cent - to see if more needed to be done, and roll out programmes to help raise productivity and wages.

'Our ultimate aim is to improve lives for all...,' he said, 'especially the average Singaporeans and those with lower incomes.'