This article was written on Friday, 2 March 2012.
The Straits Times’ headlines today (“Grow economy to forge inclusive society: DPM – Strategies to tackle inequality are in place, Tharman assures MPs”, 2 March 2012), along with two talks I have recently attended, prompted me to write this article.
According to the Straits Times, “middle-income families have seen their real incomes rise by 3.2 per cent a year in the last five years” and “[t]hey have fared better than their counterparts in other developed countries” (page A1). According to another headline in the Home section, “Middle-income families [are] doing better” and it was repeated, again, that real incomes have risen by 3.2 per cent after taking inflation into account. (page C9)
Some familiar philosophical themes with regards to social policy surfaced in the articles. Firstly, Mr Tharman argued that “[t]he first and most fundamental way to tackle inequality is through economic growth and higher productivity that raise incomes ‘up and down the ladder’.” (page A1) This appears to me to be the “grow-the-pie-instead-of-redistribute-the-pie” kind of argument; social worker peers have mentioned to me that this mentality appears to be rather common in social policy circles.
Secondly, Mr Tharman does not like the idea of a First World safety net. (page C9) He explained, “Because [a First World safety net] means First World taxes and First World debts. And I don’t like both ideas.” (page C9) In addition, in a section on the same page titled, “A word of caution on expanding help”, Mr Tharman added that “[a]s benefits expand, people would have an incentive not to upgrade their skills”. (page C9) This is another familiar, and classic philosophical position of our ruling party – that the provision of a social safety net not only places unreasonable financial burdens on society, but also erodes economic incentives.
With all these in mind, I shall proceed to give accounts of the two talks I had attended at NUS in the past two weeks.
I had sat in twice for Dr Irene Ng’s graduate Social Work class, Social Welfare Policy and Services, as part of my research for my honours thesis. During the midterm break, Dr Ng invited former civil servant Mr Donald Low to give a guest lecture.
In preparation for this guest lecture, we were all given a background paper titled “Inequality and the Need for a New Social Compact” to read. The paper, which was co-authored by Manu Bhaskaran, Ho Seng Chee, Donald Low, Tan Kim Song, Sudhir Vadaketh and Yeoh Lam Keong, can be found at the Institute of Policy Studies’ website and was presented at an IPS-organized conference earlier this year.
Both the paper and the guest lecture challenged certain assumptions of the ruling ideology – in particular, that a state-financed social safety net erodes incentives for economic productivity and growth.
These policy thinkers (the authors and Mr Low in his guest lecture as well) presented an eloquent, coherent argument for a stronger, state-financed social safety net to reduce social inequality, using the same intellectual grounds that have been traditionally used to refute it – that is, using economic and public policy theories. To the non-expert, here, at last, was a comprehensible, accessible way of articulating in more ‘respectable’ terms our vague socialist tendencies – mindful though that we/I have yet to examine and authenticate the statistical data.
The policy thinkers note that with pressures from globalization, technological change, the entry of the Chinese and Indian population into the global labour pool and so on, the types of skills that are now needed for Singapore to retain her competitive edge are skills that require one to take risks. Experimentation, failure and uncertainty for example are part and parcel of entrepreneurial and creative processes.
Given the nature of these new challenges, these policy thinkers argue that the provision of more comprehensive social safety nets, far from eroding economic competitiveness and incentives, actually complement and provide a conducive environment to encourage the growth of these veritable qualities that Singapore needs.
The relationship between state-provision of social protection and economic growth is a complex one that tends to be oversimplified. It is not that social protection programs have a direct, adverse impact economic growth — rather, badly designed social protection programs will adversely affect economic productivity and growth, whilst well-designed social protection programs complement and may enhance economic productivity and growth. Investment in human capital via education and training programs is an example of social spending which is compatible with economic aims.
Empirical examples include the Nordic countries and Germany which have high welfare spending as well as prosperous and competitive economies. On the other hand, Greece’s welfare spending is lower than the Nordic countries but now possesses a collapsing economy, the slow disintegration of which we are witnessing.
Secondly, the policy thinkers question the market fundamentalist’s assumption that work effort is in essence a function of incentives. According to them, the 30 years before the economic crisis of 2007-2009 have witnessed the rise of market fundamentalism where the economics discipline was increasingly dominated by neo-classical economics. This paradigm was based on three main tenets: the rational expectations hypothesis, the efficient markets hypothesis, and lastly the idea that economics could only advance through the use of mathematics which could domesticate real-life situations into mathematical form.
Together, these three tenets spawned an ideology of market fundamentalism, which assumed rational agents who had full information and perfect anticipatory knowledge of economic events and a market that worked perfectly when unfettered, both of which necessitated a small and non-interfering government. This ideology also legitimized widening income inequalities with certain industries – like banking – flourishing much more than others.
In the wake of the economic crisis of 2007-2009, market fundamentalists were forced to accept that market failures, externalities, collective action problems, coordination problems, monopoly power and so on contribute to the failure of unregulated competitive markets.
Hence, the role of the state reemerged into prominence as people realized that activist governments were needed to maintain a stable market economy.
The policy makers challenge the market fundamentalist’s assumption that work effort is in essence a function of incentives. They cite Akerlof and Yellen who found that “wage compression (smaller wage inequalities) at the firm level yield more harmonious labour relations and greater employee effort.” The policy thinkers argue that at the societal level, social programs that promote a sense of economic security among workers may contribute to labour productivity.
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