Addressing inequality issue in Singapore and studying its implications for India.
The publication of Thomas Piketty’s 2014 book Capital in the Twenty First Century has been a catalyst in bringing the issue of inequality to the forefront of public policy debates in many countries. This is remarkable, given the book’s length (696 pages), intricacies of historical data series from many sources forming the statistical foundations of the book’s main propositions; complexity of theoretical and empirical reasoning employed; and relatively narrow geographical focus (mainly US, UK, and Western Europe).
Mr Piketty’s data sources, statistical evidence, theoretical reasoning, and policy suggestions continue to receive searching scrutiny. This is likely to result in better understanding of the inequality issue around the world.
The issues of inequality, social mobility prospects, and of fairness and adequacy of social protection arrangements have recently been prominent in public policy debates in Singapore, and this is likely to continue. It may therefore be instructive to examine two implications of Piketty’s book for enhancing the quality of public policy debate on these issues in Singapore.
The first implication concerns the exemplary research culture and norms exhibited by Mr Piketty (and many but not all who have been critiquing his work). Thus Mr Piketty bases his analysis of inequality on empirical evidence, much of it historical and derived from a diversity of sources. He is open to refinement of his data and analysis. His admirable inclination to be transparent about the data, and willingness to advance public debate by encouraging other researchers to examine and duplicate his results by making it available to them without cost and pre-conditions, sets the right example for researchers, academics, think tanks, and government agencies. Asymmetric information between those given responsibilities to collect data and the users is one of the significant sources of poor public policies around the world.
There is considerable scope in Singapore for progressing towards the research culture and norms exhibited by Mr Piketty. There is considerable merit in considering a shift by concerned stakeholders in Singapore from regarding socio-economic information as a strategic or a tactical resource to regarding it as a public good to be shared widely and without unduly restrictive conditions. For enhancing quality of social science research, including on inequality and social protection issues, routine publication of suitably modified raw data, and methodology used should become a norm in Singapore. Without such progress, Singapore will be severely constrained in using wider expertise to improve its policies and their outcomes; and in enhancing credibility and trust which have become vital as difficult public policy trade-offs are needed.
The 21st century challenges are too complex to be resolved fully. They can only be addresses, and even that requires difficult trade-offs. Therefore trust between the government and other stakeholders, including the people, are needed. Among prime minister Modi’s most important accomplishments in a relatively short period of about four months is generating the confidence that public policy decisions are now being taken from the perspective of national interest, improving chances that India’s challenges will be more effectively addressed.
The second implication arises from the key relationship of rate of return on capital exceeding rate of economic growth, and important indicators used by Mr Piketty. A key distinction is made in the book between shares of national income accruing to labor and to capital as factors of production. In analysing household income, key indicator used is the share of income accruing to top ten percent of the households. Household income from all sources and all factors of production is included.
In Singapore, the estimates of rate of return to capital are not available, thus it is currently not feasible to ascertain whether the return on capital exceeds rate of economic growth. Publicly available data on share of labour and capital and on household income indicators have a restrictive scope that merits reconsideration.
As an illustration, while data on share of national income accruing to labor and to capital is published (with capital share at around 55 percent exceeding labor share at around 45 percent), it would be useful to provide a longer and consistent time series on the respective shares; and feasible disaggregation of each share. An expansion of the factor share trends to include labour and capital income accruing abroad, but not included currently, could also be useful as Singapore has large net external assets.
The household distribution of income includes only resident (citizens plus permanent residents) employed household, and their income from work, thus excluding unemployed, retirees and others not working, and income from capital. The data for top 1 percent of households are not provided. Even then, the ratio of income of the households in the highest decile to those in the lowest decile has increased sharply from 11.5 in 2000 to 16.8 in 2013, suggesting rising inequality even for labor income, an issue which merits considered policy responses. The need for improving the consistency of the government data is illustrated by the fact that another official source, while not providing time series, reports the top 10 percent of households receiving 24.1 times the labour income of the bottom 10 percent in 2013. The difference between the two numbers is too large and needs explanation.
As the share of the retired aged increases and they withdraw from the labour force, this indicator will be increasingly less informative and relevant for policy purpose as an increasing proportion of the population will be receiving income outside of labor work. Disruptive technologies affecting jobs and requiring deeper and more frequent restructuring also will have similar impact.
The above trends raise legitimate concerns about Singapore’s growth strategy requiring persistently and significantly higher capital shares. Excessively large income inequality makes it difficult to rebalance the economy towards greater reliance on domestic consumption. The forces of convergence which over time mitigate income inequalities primarily through wider education and career opportunities, have reached a point where their impact is weakening globally as well as in Singapore. But forces of divergence, particularly high capital income shares, wealth inequalities (there is a strong case for measuring and regularly making available data on wealth inequalities in Singapore), public policies which intentionally or unintentionally reward certain occupations disproportionately (as an example, the finance sector in recent years, in some countries public service and access it provides to income and wealth opportunities), tendency toward “winner-take all” rewards in the labour market; and wide divergence in social protection arrangements for different income and sometimes geographical groups, particularly as share of elderly population increases, appear to be getting stronger globally as well as in Singapore. This suggests that attributing rising income inequalities primarily to general forces of globalisation is inappropriate.
The estimates for Gini coefficient, a widely used indicator of household income inequality, include only wage income in Singapore, excluding capital income, which is usually much more unequally distributed. The unadjusted Gini coefficient is officially estimated at 0.47 (the coefficient ranges from 0 to 1, with higher value implying greater inequality), and just under 0.46 after transfers and taxes. If capital income were included, the coefficient is likely to be significantly higher. Addressing this gap in public debates will significantly enhance the quality of policy discourse in Singapore.
Research conducted by the European Central Bank and by the World Bank suggests that incomes of top 1 percent of the income group in the U.S ( and most probably in other countries) is undercounted, implying that the current methods understate income inequality (Jeanna Smialek “ Undervalued Riches of Top 1 percent Point to Greater Global Inequality” Bloomberg, August 7, 2014). Singapore could also consider disaggregating income levels of super-high income individuals further by publishing shares of national income accruing to top 5 percent and top 1 percent of the individuals and households.
The absence of social insurance methods in the pension and health care financing mechanism, and using absolute rather relative poverty as guide for public policies impacts on fairness and adequacy of the social protection arrangements in Singapore. Less robust provision for social protection for lower half as compared to upper half, particularly top 10 percent, of the population is one of the contributors to inequality globally. Singapore’s relatively low labor share suggests that this factor would be even more significant contributor to inequality than is the case in countries with relatively high labor share in national income.
A significant contributor to rising longevity is the higher life expectancy experienced by successive cohorts in middle and later ages. This suggests that debates on inequality and social protection systems in Singapore need to take successive cohorts, especially more recent ones, into account, rather taking aggregate mean or other indicators. An explanation by the policymakers concerning how this factor has been taken into account, including assumptions made, and simulations conducted, would be helpful in enhancing public policy discussions.
The authorities are strongly urged to consider publishing actual cash balances of all members of the Central Provident Fund (CPF), suitably classified by age, sex and other indicators; routinely publish actual nominal and real returns on CPF balances (which were SGD253 billion as at end 2013, equivalent of 68 percent of GDP) earned by Singapore as a country, as well as the return credited in the individual accounts of members; and publishing household consumption, and income-expenditure surveys on a regular and comprehensive, and transparent basis. These would be consistent with the spirit of Mr Picketty’s book and the current global debate on inequality.
In public policy debates on inequality and on special security reforms, the policymakers have the tendency to say, “Trust us”. The stakeholders increasingly lean towards “trust but verify” mind-set. Unless policymakers enable stakeholders to credibly verify official data and information, and unless there is consistency between words and deeds, virtuous circle cannot be sustained in the future.
Establishment of such a virtuous circle is essential as research suggests that the role of perceptions is also important in the inequality debate is consistent with the above argument. As an example, people in Germany perceive inequality to be worse than it actually is, while the reverse is the case for the US,
Given below is a summary of specific measures meriting consideration of the policymakers, which could assist in better addressing the inequality issue in Singapore.
One, Social (not commercial) insurance principles for CPF life, with benefits linked to relative income, and the difference between receipts and benefits filled through budgetary resources.
Two, Social insurance principle for Medishield Insurance scheme. In One and Two, this would mean that premiums or annuity costs will not differ between men and women, and will not be based on age. Future benefits will also be made more certain, and actuarial calculations, with all assumptions, published in a manner than can be duplicated by the analysts.
Three, Introduction of social pension to all elderly beyond 65 years of age, but benefits made taxable.
Four, Crediting CPF members with the returns actually obtained from CPF balances in a transparent and accountable manner, or provision of a rationale as to why that is not an appropriate policy.
Five, Selective increases in taxes on capital income (eg: slightly raising the corporate income tax; inclusion of certain interest, dividend, and capital gains income in income tax)
Six, Broadening the scope and enhancing benefit levels of social welfare programs, linking them to a measure of inflation.
Seven, Fine tuning business location based strategy to narrow the gap in labor income between low and high wage earners; and arrangements to assist workers affected by disruptive technologies and other factor requiring deeper and more frequent restructuring.
Eight, Take concrete actions to address the perception that the groups from which selection of persons with opportunities for upward mobility, and for access to high incomes and power is narrowing significantly.
Implications for India
In spite of significant differences between India and Singapore, there are implications from the above analysis for enhancing quality of inequality and social protection debate in India as well.
First, the database for India’s labour supply and demand and for household income and expenditure needs to be considerable strengthened. This will help in designing and implementing better policies with lower inclusion errors (inclusion in a program of those who should not be included according to the criteria set), and lower exclusion errors (excluding those who should be included in the program).
Second, social security institutions are currently not providing sufficient data for transparency and accountability. Thus, the Employees Provident fund organisation (EPFO) does not provide data on actual contributions and members; actuarial reports of its Employees’ Pension scheme (EPS); and its performance indicators in the annual Report.
The PFRDA (Pension Fund Regulatory and Development Authority) does not publish returns obtained by fund managers on a routine basis, and the classification of members by balances, age, gender and other characteristics. Its Annual Report is however of good quality and can be further improved.
The actuarial reports of the civil service, military, railways, public sector financial institutions are also not transparently made available to enhance management accountability.
The Employees’ State Insurance Corporation’s (ESIC) Annual Reports provide insufficient information on the management performance. Its actuarial reports are also not published, greatly diminishing transparency and accountability.
Prime Minister Modi’s government is recognising the transparency, accountability, and need to be citizen centric in some of these areas as reflected in this remarks at the Pandit Deen Dayal Upadhyay Sharemev Jayate Karyakram on October 16, 2014. But theses efforts must be sustained, and their scope widened, with administrative and governance reforms of social security institutions.
The third implication is that the factor which lead to convergence of incomes, primarily focused on better skilling and employability; narrowing differences in access and quality of such public amenities and physical and digital connectivity, need to be pursued with sustained focus and competence. Prime Minister Modi’s government has recognised the importance of convergence factors in addressing income inequalities in India.
Finally, Aspirations of people in India are rising. “Trust us” attitude is no longer appropriate, as outcomes and verifications are becoming more prominent in what people expect from government and from those in positions of public trust in any sector. So progress towards developing trust, but delivering verifiable outcomes must be sustained to meet India’s public policy challenges.