Relative versus Absolute Inequality

Straits Times  21 February 2012

TWO things strike me as significantly different from the past.

 

Firstly, the GST Voucher scheme, targeted at lowincome families, will become a permanent feature of Singapore's social safety net.

 

Secondly, concrete efforts, not just rhetoric, are made to improve both employability of senior workers through the enhanced Special Employment Credit, and at the same time raise their gross income, through the hike in Central Provident Fund contributions.

 

The Government should be applauded for the two measures. Their significance is not in quantum, as the sums involved are unlikely to make a dramatic impact on the poor and senior workers. Rather, through the two measures, the Government is sending out a signal of a small but quite fundamental shift in its long-held approach of not inculcating a handout mentality through welfare measures. 

 

Inclusive growth can be viewed from two perspectives: the absolute perspective when poor people benefit in absolute terms; or the relative perspective when the income of poor people grows faster than the population average so that the income gap eventually narrows.

 

The GST Voucher scheme is essentially a transfer payment that helps in fostering only absolute inclusive growth. While such measures are indispensable in alleviating hardship among the poor, they are only sub-optimal measures for the short term.

 

In the long term, policymakers must train their sights on the objective of achieving relative, not just absolute, growth. This can be achieved only by addressing the fundamental causes that bring about income inequality in the first place.

 

One reason for endemic income inequality in developed countries is over-zealous pursuit of gross domestic product growth, so that redistribution of the gains from growth is an afterthought.

 

In this system, benefits are apportioned based on not only value-add but also bargaining power of different stakeholders. Redressing that social inequity becomes increasingly tedious as interests become entrenched. Over time, society becomes more divisive as discontent sets in.

 

There are only two fundamental ways to resolve the issue. One is to increase transfer payments to compensate those who have lost out. The other way is to adjust the development model to take into consideration the interests of those with lower bargaining power right from the beginning.

 

The more successful policymakers are in achieving relative inclusive growth through more equitable income distribution, the less need there will be over time to adopt remedial measures for absolute inclusive growth through income redistribution.

 

For too long, globalisation, technological change and ageing population have become convenient excuses to justify lopsided income distribution. Those factors do help explain why a certain segment of a country's population stands to benefit more as an economy develops. Very often, however, structural issues and inappropriate policies may have worsened the trend of widening income gap.

 

This leads us to two important questions: First, are there structural or policy issues that unfairly accentuate the trend of widening income inequality in Singapore? Second, if there are, does the Government have the political willpower to address those structural issues, before the need to use welfarism to prop up the poor's incomes becomes the norm?

 

After all, welfarism is no substitute for relative inclusive growth that boosts incomes at the bottom end.

 

This Government has done an excellent job laying down a firm foundation that can facilitate the switch to a truly more inclusive society. It also has political dominance as well as economic clout, through its extensive web of government-linked companies and their subsidiaries, to carry out fundamental if difficult reforms to halt or reverse the trend of a widening income gap.  

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