Effects of globalization in singapore

For more than 40 years, Singapore has enjoyed economic success, allowing Singaporeans to have a raised quality of life and standard of living. However, due to this increase in standard of living, this has caused income disparity (Yeoh, 2007/2008) among Singaporeans, between the low income families and the high income families.

This widening income gap was due to the side effects of the Singapore government’s pro growth policies (Yeoh, 2007/2008). However, the income gap was pushed even more by globalisation and the recessions from December 2007 until now, 2011. This caused the depression the unskilled workers’ salaries while inflating the skilled workers’ salaries. Thus, this caused the widening income gap in Singapore.

Due to the widening income gap, Singaporeans have become more aware of the differences in income among Singaporeans, which causes them to be more “class-conscious”. If the widening income gap continues to widen would cause unthinkable economic, social and political impacts in Singapore.

The main challenge policy makers face today is to seek a balance between income disparity reduction, economic growth and budget feasibility (Yeoh, 2007/2008). The policies are mainly to help the lower income families with the proper opportunities in order for them to move up the social and financial ladder. Policy makers should be aware that an overly egalitarian approach towards reducing income inequality is suboptimal. On the whole, the government needs to face the issue of widening income gap with an emphatic heart and mind, thinking for the needs of the people.

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BACKGROUND

Singapore, which used to be a small fishing village, has done well in the last decades of the twentieth century to rise from an entreport centre to be a global city and a developed nation. It had resolved most issues pertaining to underdevelopment and had developed the needed institutions to prepare its survival in the twenty-first century. From 2000-2008, these years mark the period in which globalization as a process affected all parts of the world. These years were significant politically, socially and economically for Singapore. (Amaldas, 2009)

One part in this paper that we would like to focus on is the issue of the widening income gap in Singapore. In this paper, we would be discussing about how the widening income gap is linked to globalisation and what measures are used to solve it, as well as the impacts and reasons for the manifestation of widening income gap.

Globalization is defined as the free movements of goods, services and capital across borders. It is a contentious process by which the western market economies have effectively spread across the globe. Although it does not constitute a new phenomenon, it is viewed as an inexorable integration of markets, nations and technologies to a degree never witnessed before in a way that is enabling individuals, and corporations to reach around the world further, faster, deeper and more economically than ever before (Heshmati, 2003).

Globalization causes rapid changes in trade relations, financial flows, and mobility of labour across the world. The development has brought the economies of developed countries closer together and more strongly interrelated. However, there is a large heterogeneity in the degree of globalization process over time and across countries and regions. This heterogeneity causes disparity in development and urges the need for research to find sources of disparity and quantification of its magnitude and impacts (Heshmati, 2003).

Many scholars regard globalization as a force which will inevitably bring about the decline (Held, 1995), erosion (Hall, 1991) or the end (Ohmae, 1995) of the nation-state. As the argument goes, the process of globalization in its various manifestations is increasingly undermining the territorial boundedness, sovereignty and traditional role of the existing system of the modern nation-state. With other major countries such as America and India facing the problem of the widening income gap as their countries continue to evolve, one major aim of this paper is to understand the risks of the widening income gap if Singapore ever falls into the trap with the advancement of our country.

WIDENING INCOME GAP

Economic inequality (or “wealth and income differences”) comprises all disparities in the distribution of economic assets and income. Widening income gap refers to the differences of income received by the employees and is a global phenomenon caused by globalisation. Due to globalisation, the elite and higher-educated are coveted for their expertise, hence the demand for these professionals causes their salary to be raised higher. Those at the lower-income group however suffer from globalisation as the jobs available are scarce; hence, their salaries are pushed lower because many people are fighting for the same job. This is called widening income gap.

The Gini coefficient is a standard measure of income inequality. It is given as a means of multiple observations for a given country in a given year. The multiplicity of observations is due to the different definitions of income, area coverage and units of measurement (Heshmati, 2003). The Gini Coefficient ranges between 0, where there is no concentration which is perfect equality, and 1 where there is total concentration which is perfect inequality (Slack and Rodrigue, 1998). Absolute poverty is where people do not have sufficient access to food, shelter, and clothing to provide a basic level of physical and mental development (Duncan, 2000).

National Household Income

In Singapore, the household income from work in 2010 increased due to strong economic growth. Median monthly household income from work in 2010 recovered to above the level before the economic downturn in 2009. Among resident households, median monthly income from work increased by 3.1 per cent from $4,850 in 2009 to $5,000 in 2010 (Table 1); in real terms, the increase was 0.3 per cent (Department of Statistics Singapore, 2010).

Table 1 Monthly Household Income from Work Among Resident Households

Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”

Among employedhousehold, with at least one working person, median monthly income from work increased by 5.7 per cent in nominal terms (from $5,400 in 2009 to $5,700 in 2010) and 2.8 per cent in real terms (Table 2).

Table 2 Monthly Household Income from Work Among Employed Households

Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”

Overall, the monthly household income has increased in Singapore in the year 2010. However, there are differences in the increase between the lower-income families and the higher-income families which cause the widening income gap in Singapore.

Gini Coefficient

The income gap between household incomes from work per household member among employed households increased marginally in 2010. The Gini coefficient, increased slightly in 2010. In particular, including employer CPF contributions5, the Gini coefficient was 0.472 in 2010, compared to 0.471 in 2009 (Figure 1). Adjusting in addition for government benefits and taxes, the Gini coefficient was 0.452 in 2010 (Yeoh, 2007/2008).

Source: Department of Statistics Singapore (2011) “Key Household Income Trends, 2010”

Figure 2 below shows the Gini coefficient5 trend for Singapore from 1974 to 2006.

Figure 2. Singapore Gini Coefficient from 1974 2007

Data from 2000 2007:Department of Statistics Singapore (2008)Source: Data from 1975 1999: Mukhopadhaya, Pundarik (2001)

LINK BETWEEN GLOBALISATION AND WIDENING INCOME GAP

What role has globalisation played in changes in income inequality? Most research on this issue has been concentrated in recent years on the changes in income inequality in the high-income countries. Discussion has mainly focussed on whether the widening wage gap is due to increased imports of labour intensive goods from developing countries (pushing down demand for low-wage labour) or technological change—in particular, improvements in information technology (increasing demand for high-skilled labour relative to demand for low-skilled labour).

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But besides these two factors, other factors thought to contribute are: slower growth in the supply of skilled workers (pushing up their wages relative to the wages of less-skilled workers); increased workforce participation of women and increased immigration of low skilled workers (pushing down wages of less-skilled labour); and the waning powers of trade unions (for a survey of the literature, see Tyers, Duncan and Martin 1999).

Economics research generally gives more support to improvements in technology as being most important, and much more important than increased trade with developing countries (see Tyers, Duncan, and Martin 1999). Low and middle income countries account for about 80 per cent of the world’s industrial workforce and manufactures comprise about 60 per cent of their exports (up from 20 per cent in the 1960s).

In line with predictions from economic theory, Williamson (1997) argues that the increased flow of labour-intensive goods and unskilled labour from developing countries to high-income countries in the latter half of the 20th Century reduced demand for lowskilled labour in the high-income countries, increasing income inequality in these countries. He argues that this is consistent with the Heckscher-Ohlin trade model that says that trade will tend to equalise factor payments, leading to greater cross-country income equality for low-skilled labour, increasing income inequality in the high-income countries, and increasing income equality in the lower-income countries. More importantly, he notes that in the earlier golden period of globalisation (1870 to 1913), the growing income inequality in the then higher income countries led to the reversal of globalisation (including restrictions on immigration) and the devastating 1921-38 period.

REASONS FOR WIDENING INCOME GAP

The underlying characteristic for the recent growing disparity is the difference in income growth for the bottom 20% and top 20% households (Yeoh, 2007/2008). Table 3 illustrates the different income growth rates for each income group since 2000.

Table 3. Annual Income Growth for Various Income Groups

Source: Department of Statistics Singapore (2008). “Key Household Income Trends 2007.”

Generally, the bottom 20% experienced slower growth rates than the top 20% of income earners during 2000 to 2007. Moreover, the ratio of average income of the top 20% to lowest 20%8 worsened from 9.99 in 2000 to 12.90 in 2007. Hence, these ratios show a widening income disparity between top and bottom income earners. Economists have also noted an understated stagnation of income amongst the middle class – households that form the middle 60% of the income ladder. However, more employed households have moved up the social and financial ladder in 2007 as compared to 2006 (Yeoh, 2007/2008).

There are differences between the different racial groups in Singapore as well. Table 4 below shows the income changes for each racial group in 2000 and 2005.

Table 4. Income of the Major Racial Groups in Singapore

Source: Department of Statistics Singapore (2006) “General Household Survey 2005 Statistical Release 2: Transport,Overseas Travel, Housing and Household Characteristics”.

As depicted in Table 4, the wage difference between the Malays and other races remain very alarming. From 2000 to 2005, among all the racial groups in Singapore, Malays had the lowest increase in income as compared to other races.

With regard to income disparity between occupations, skilled professionals continue to earn more than unskilled workers, and have extended their lead further since 1996. Figure 3 below shows the ratio of the respective occupations’ wages to the unskilled occupations’ wages.

Hence, this relative stagnation of wage growth amongst the unskilled would certainly have an effect on the widening income disparity between the two ends of the occupational spectrum as shown in Figure 3.

IMPACTS OF WIDENING INCOME GAP

Singaporeans are mainly concerned about the inflation which has raised about 3%-4% this year (Channelnews 17 February 2011) and skyrocketed housing prices in Singapore. Thus, many Singaporeans are unable to retire as they do not have the financial stability to sustain the high cost of living without being employed. According to the survey carried out by The Straits Times, this is the income gap situation: The average incomes of the top 20 per cent of households rose by 53 per cent – from $12,091 to $18,472 – from 1997/98 to 2007/08. By comparison, the average incomes of the poorest 20 per cent of households were kept down as a result of globalization, competition from emerging economies and new technology. They fell by 2.7 per cent over the same period – from $1,309 to $1,274.

The living conditions of the lower income households in Singapore will cause them to lose enthusiasm and motivation for work, thus the productivity will decrease and in turn lead to stagnation of the economy. In the short run, the large proportion of the poor and their lower marginal propensity to consume will lead to a lower injection multiplier and possible slower growth. In the long run, if the widening income gap in Singapore is done put to a stop, many people will fall into the poverty trap. As George Orwell laments, “Being poor isn’t about not having anything today, it is about knowing you’ll have nothing tomorrow.” Inequality and injustice in the society will also make people gradually lose national cohesion, and hence menace to act as a centrifugal force that tears the social fabric of our nation apart. The long-term stability of Singapore’s society will be severely disturbed.

The widening income gap is inclined to inflict social cohesion and undermine trust in the society. At the same time, it will impair social capital thus compromise the stability of the society. Uslaner & Brown found a correlation between the amount of trust and the amount of income equality. It can be explained that people can gain sense of security from high income equality therefore they are expected to trust each other. A related study by Putnam also demonstrated that economic equality tends to lead to a high level of social capital (or “connections among individuals”). People will show a tendency of engaging others and hence strong social connectedness and civic engagement can be forged. (Uslaner and Brown, 2002).

In view of the squeeze on income of middle class, the incessant wide income gap will also produce more ‘quitters’ which is a term popularized by Singapore’s then Prime Minister Mr. Goh Chok Tong. This word indicates that the rich nowadays are more globally-connected but less locally-disengaged (Goodman, 2003).The well-heeled are more likely to show off their conspicuous wealth and this pushes the government to loosen its tightfisted stance on welfare in the national budget as it tries to defuse criticism of its policies which burdened the plight of the common people. On the other hand, the enduring income disparity will impel the middle class to seek greener pastures overseas thus choose to emigrate. In the long run, the economic development and competitiveness of Singapore will be suppressed due to the resultant brain-drain.

According to Yeoh “A new social compact for Singapore”, rising income equality will impair the government’s credibility in imposing policies as well such as raising income tax rates.

It is significant that we have already seen public outcry and debate on such policies. The implicit social contract between the people and the government supports Singapore’s remarkable economic success. The widening income gap and the perception that a large proportion of the population has little access to the growth process and no share in the prosperity despite their ability and willingness to work has slowly but surely eroded this social contract. The ramifications of such a perception is indeed as the policymakers noted: “society would learn that economic growth would not always be the answer, and would begin to question and debate priorities and trade-offs…the policy issues that need to be re-examined are largely social and political.” This in turn translates into the shattering of the implicit social contract the ruling party has with its electorate, making it increasingly hard for the government to execute unpopular policies. Already we are hearing a chorus of dissent over recent policy decisions such as the ministerial wage hikes or the Goods and Service Tax increase, as well as the inextinguishable calls for increasing political openness, freedom to stage outdoor protests, among others.

The present-day influence of rising income inequality will create a class-conscious Singapore. The widening income gap and the wage stagnation threaten to destabilize the society as well as weaken the economy. Rising income disparity is also likely to arouse the social discontentment, reduce the credibility of the government as well as increase emigration of middle class.

POLICIES IMPLEMENTED

Growing the Economy and Maximising Opportunities

GPC Chair for Community Development, Youth and Sports Seah Kian Peng said: “One part is to keep the economy running and booming like what it is now, just like what we have experienced last year. What it means is that unemployment is very low and we know that the majority of people are earning a salary and as the economy booms, the government will be in a position to also, in any budget, consider how it could possibly distribute and share the growth with as many Singaporeans as possible. We have to focus on growth and embrace globalisation, but manage its downsides and make it work for everyone. We will do this by maximising opportunities for all Singaporeans — the opportunities to get a good education, to work or grow a business, to retrain yourself and upgrade, and to own your own home. We must maximise opportunities for all, but we must also accept that doing so does not result in equal rewards for all. We should never reduce the incentive for Singaporeans to work and to make the most of their skills and talents, so as to get higher reward for themselves. That has to be the basis for our society, for how we keep our economy growing, and for how living standards of Singaporeans can rise over time.”

In conclusion, our first priority to help the low-income group is to grow the economy. It is essential to attract new investments, grow new businesses, and create new and better paying jobs to replace old ones. As we grow the economy, it is important to ensure that no one is left behind and that all Singaporeans have the opportunity to succeed. Over the years, the Government has been helping the lower-income groups through various assistance measures. Since 2001, the Government has distributed more than $7.5 billion through the Progress Package, U-Save and S&CC rebates, CPF top-ups and New Singapore Shares, to share budget surpluses with Singaporeans. In all these distributions, deliberate efforts were made to ensure that the lower-income groups get the greatest benefits. But going forward, we have to do more to help needy Singaporeans, and to do it more systematically. This is one of the challenges that the government faces and have to solve.

Government Schemes

Over the years, Singapore has introduced various schemes such as GST Credits, Senior Citizen Bonus and rebates on utilities, rental and service and conservancy charges. The GST (Goods Service Tax) is one of the ways to help the lower-income families affected by the widening age gap. A zero-rate Goods and Services Tax (GST) policy on household essentials is an effective measure to help lower-income families. Finance Minister Tharman Shanmugaratnam, said: “The bulk of the GST is collected from the top 40 per cent of the population and foreigners … and we use the benefit to help those at the lower end. So if you talk about exempting food or any other essentials from GST, you’re really taking away a source of revenue we’re getting mainly from those at the upper end and foreigners and reducing our ability to help those at the lower end.” He added that lower-income Singaporeans get more Government benefits each year than the amount they pay in GST.

The government has also revamped their policies and more citizens are now able to receive payouts and rebates according to their income. On average, the various government schemes added $1,110 per household member to resident households in 2010. The various government schemes gave a larger boost to those staying in smaller housing types. Resident households in HDB 1- and 2-room flats received an average of $2,650 per household member while resident households in HDB 3-room flats received an average of $1,480 per household member. This was higher than the $530 per household member for households in private properties. With the subsidies, it ensures that the lower-income group will be less burdened with debts for housing and other utilities.

POLICIES THAT SHOULD BE IMPLEMENTED

Singapore needs policies which can help the needy, disadvantaged and poor, in order to increase their income and reduce the widening income gap in Singapore. However, at the same time the government must not compromise economic growth and funding sustainability. Basically, Singapore has to find a perfect balance between income equality, strong economic growth and prudence in finances, where income disparity can be reduced without affecting growth prospects and budget discipline (Yeoh, 2007/2008).

Expanding the Work fare of Older Workers

The Workfare Income Supplement scheme (WIS) seems to be the policy that is able to have the balance and is able to cover the middle ground. The scheme is laudable even though a large amount of money is involved, in the form of quantum of pay. This policy reduces the income disparity by raising income levels of the lower income workers, and encourages long term employment (Yeoh, 2007/2008).

It is argued that the current net payout of around $80 to $100 per month is insufficient for workers to accumulate surplus for further training and education (Yeoh Kam Leong, 2007). To address this problem, the WIS scheme also provides opportunities for worker