Eighteen years ago, the World Bank published a landmark book, The East Asian Miracle [1]. The report praised eight Asian economies for their rapid and sustained economic progress and highlighted the fact that they seemed to have evolved a model which combined growth with equity. What is the situation today? Today we have growth, but with much less equity. All our societies have grown more unequal, as measured by the gini coefficient and the ratio of average incomes of the top 20% and the bottom 20%. According to the World Bank’s latest statistics [2], the gini coefficient for Singapore was 0.48 in 2010. In the case of the People’s Republic of China (PRC), the gini coefficient has risen from around 0.30 in the early 1980s to around 0.47 in 2009. Some social scientists have warned that inequality which exceeds the gini coefficient of 0.4 could lead to social unrest. Even without social unrest, great inequality is a threat to social cohesion and harmony. The current trend in Asia is fundamentally objectionable because it is inconsistent with the very purpose of development which is to benefit all citizens. ADB is, therefore, right to make inclusive growth one of its three agendas in its Strategy 2020 [3] document.
There are three causes for the current trend towards greater inequality: technology, globalisation and domestic policy.
There is a technological revolution taking place in the world. Automation, robotics, the information and communication technology have revolutionized the work place. As a result, some jobs have disappeared. New jobs have been created for those who are well educated and highly skilled. Workers with low education and low skills have either been made redundant or are stuck in low-paying jobs. There is nothing that a country can do to protect its workers from the advance of technology. What it can and should do is to invest heavily in educating its people and training them for the good jobs in the sunrise knowledge-intensive industries. This requires a shift of emphasis from quantity to quality in the provision of education and training.
The second cause of growing inequality is globalization. This is another irresistible force. On balance, globalization has done more good than harm to the world. Globalization has enabled Asia to compete with the West. Globalization has also enabled a country like the PRC to become the factory of the world, a country like India to become a service provider to the world and a country like the Philippines to provide seafarers to the world’s shipping industry. Globalisation has also brought enormous opportunities to Asia’s talented men and women. One negative aspect of globalization is that it has created a sharp divide in each of our countries between those who work in the domestic economy and those who work in the international economy. Singapore is a paradigm case of a country with two economies. Those who work in the domestic economy continue to earn Third World wages.
The third cause of the growing inequality is domestic policy. Most Asian governments prefer not to talk about this cause. Their public rhetoric is that the growing inequality is caused by technology and globalization. If that were true, then it must follow that successful European countries, such as Switzerland and Denmark, would be just as unequal as we are. The fact is that they are not. Denmark’s gini coefficient is 0.29 (2007) and Switzerland’s is 0.33 (2009). What accounts for the difference? The difference is due to the different economic, tax and social policies. Let us take Singapore as an example.
First, at the macro level, Singapore has probably over-rewarded capital and under rewarded labour. The wage component of the GDP for Singapore was 42.3% (2011), for Denmark, it was 55.5% (2010), and for Switzerland, it was 62.2% (2010). The capital component of the GDP for Singapore was 50.5% (2011), for Denmark, it was 30.6% (2010), and for Switzerland, it was 34.5% (2010). Second, we tax the rich very lightly and we have a regressive tax called the Goods and Services Tax, currently set at 7%. Third, we do not have a minimum wage. Fourth, we have a very large number of unskilled and semi-skilled foreign workers, which results in the stagnation of the wages of the bottom 20% to 30% of our workers. Fifth, the cash transfers to help the poor workers, by way of the innovative workfare and for their medical insurance, are relatively modest. The government wants to do more to help our poorer citizens, but it is constrained by the determination not to undermine the work ethic or the value of self reliance and to avoid creating an entitlement mentality.
In defence of Singapore, I would say that Singapore’s gini coefficient does not tell the full story. There is almost full employment as the unemployment rate is only 2%. Housing is heavily subsidised and there are no homeless people in Singapore. Public housing and private housing often exist side by side. There are no gated communities in Singapore. Education is also heavily subsidised and, while there are elite schools, there are no bad schools in Singapore. Health care and public transportation are good and are accessible to the poor and rich alike. The rule of law is strong and the government is non corrupt. Most important of all is equality of opportunities and social mobility. It is probably better to be poor in Singapore than anywhere else in Asia.
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This post was derived from a speech “Asia In The 21st Century: The Challenges of Equality, Good Governance and Sustainability” delivered by Professor Koh at the Asian Development Bank on 28 February 2012.