SINGAPORE (April 1): Two developments make it imperative that we rethink how governments intervene in the economy. The first is the popular backlash against the market economy around the world: This has reached a point where major countries will make big policy changes and where large corporations will adjust their strategies in ways that will affect us greatly. The second is that these global trends have sparked a growing debate within Singapore itself, where thoughtful voices are pressing for a deep review of the way we set policies — how and what we tax, how much government spending should rise and whether a light-touch regulatory hand really does work.
What are the big issues that compel us to rethink our approaches?
Across the globe, countries, including Singapore, confront a highly diverse range of challenges, a few of which stand out in terms of their impact.
First, the debate over inequality has now extended beyond just looking at the distribution of incomes or wealth to examining inequality in terms of how some segments of the community lack the access that richer or better-positioned folks have to opportunities to better their lives, such as their chances of a good education or of securing well-paying jobs or affordable homes. Teo You Yenn’s thought-provoking book This Is What Inequality Looks Like tells us that Singapore is not exempt from the inequality that is growing in other parts of the world.
Second, disruptions caused by new technologies have reached a point where society is forced to react.
• It is clear that there will be much dislocation because these technologies — whether the application of artificial intelligence and robotics or the expanding possibilities to exploit 3D printing and other advanced manufacturing processes — change the competitive advantage of countries and lead to wholesale restructuring of industries, with big impacts on employment and wages. We could see greater job insecurity, rising unemployment and slower growth in wages.
• It is also clear that more questions are being asked about how “Big Tech” has been operating. Have firms such as Alibaba Group Holding, Google, whose parent company is Alphabet, Amazon.com and Facebook accumulated too much market power? Do they really have the right to profit hugely from the data they collect about each individual without sharing those profits with the individuals? In the US, many candidates running for president are pressing for radical responses, including even breaking these companies up into smaller ones. Europe has taken the lead in creating new regulatory frameworks such as the General Data Protection Regulation while also going much further than American regulators in penalising the tech giants for some of their alleged misdeeds.
Third, the rise of populism and extreme nationalism has led many analysts to delve more deeply into their underlying causes. The insights from this should help Singapore as it reformulates policies:
• What recent developments tell us is that individuals aspire to more than just economic comfort: A sense of identity, a feeling of being in control of their lives and concerns about how the communities around them are faring are also important to their well-being. As former IMF chief economist Raghuram Rajan has argued in his latest book, both the operations of the modern state and of free markets have weakened communities. The controversy over Brexit reminds us that, to significant sections of society, a sense of identity and the ability to be in control of their lives matter greatly — even to the point where some are willing to risk a dent in their living standards.
• There is also a growing feeling in some developed countries that the system is increasingly rigged in favour of the rich and powerful, who ruthlessly trample on the interests of the small guy.
The massive salaries paid to CEOs compared with the average worker, including grossly inflated payouts when those same executives lose their jobs, is one example. Another example is the recent scandal in the US, where the rich and famous were caught for bribing to get their children into top colleges.
In the next one to two years, these debates and rethinks will lead to substantial changes in the regulatory and fiscal policies of developed economies. Singapore needs to be prepared for this — and to be ahead of the game if possible.
What policy assumptions do we need to rethink?
As the world changes, we will be challenged to review some of the basic assumptions that have guided policies. What are some of the areas where we should have a rethink?
First, on inequality. The prevailing view is that policy should only concern itself with ensuring equality of opportunities and not get too fussed about inequality of outcomes. On the surface, this sounds reasonable, but on closer examination, this could be too pat an assumption to make. If the outcomes show persistent inequality, is that still acceptable? Is a society divided by stark inequality likely to see sustained stability or does it more likely suggest deeper problems that policymakers have not understood or tackled?
Second, our approach to fiscal policy has been based on a couple of notions that may appear sensible at first glance, but which actually merit questioning.
• For example, there is a deep suspicion of high taxes on income and wealth as well as of more welfare spending because of their supposedly deleterious effects on the incentive to work hard. But many recent commentaries have pointed out that the US in the past and European countries that rank as some of the happiest nations in the world today seemed to successfully combine high tax rates, increased welfare spending, hard work and innovative companies to produce vibrant economies as well as fair societies. There is a point beyond which high tax rates will deter hard work and innovation, but we are probably well below those rates.
• In addition, if accounted for in the standard way used by other countries, Singapore has been running budgetary surpluses for a long time. Not only that, we have extremely conservative approaches to using the income from those savings.
The tendency is to maximise fiscal savings rather than to optimise them.
This mindset needs to be reviewed because it constrains us from a pragmatic way of financing the likely expansion in government spending that an ageing society needs.
Third, when pressed about how to develop local enterprises, the riposte has been that ownership does not matter — we are told not to worry about a disproportionate reliance on foreign investors, all that matters is whether good jobs are created, not who creates those jobs. But is it wise to ignore the growing demand for a sense of identity and the urge to feel a sense of ownership and community, which are causing populist upheavals elsewhere? Do we simply assume that Singaporeans are immune to those sentiments? If we have not grown our local timber, would we not be gravely exposed if one of the implications of all these global changes described above is that the MNCs we have long relied on reshore their operations back home, a trend that is beginning to be evident? Fourth, when it comes to regulating corporations, there has been, especially in the past two decades, a preference for the “light touch”. There is certainly merit in this approach, but there are grounds to believe that it may have been taken too far.
• Consider the regulation of investment products, where “caveat emptor”, or “let the buyer beware”, rules. But as recent controversies over failed investment products show, a different approach is needed to protect retail investors. Otherwise, as has happened in some rich countries, people will start to feel that the system is rigged unfairly against the common man and there will be a populist backlash. These recent controversies show that a simple “caveat emptor” approach is not sufficient; it needs to be complemented with a more vigorous approach to protecting individual savers.
• Do we have a sufficiently robust framework for using competition law and consumer protection regulations to take care of Singaporeans? We have an impressive Competition and Consumer Commission of Singapore (CCCS), which has done very good work, but large sectors of the economy are exempt from its jurisdiction. Instead, competition issues are left to the statutory boards established to develop those sectors, but for whom competition and consumer protection may not be top of mind. But with the growing dominance of Big Tech companies, with some very controversial practices, is this approach still appropriate?
What should we do?
We should come to a new consensus on the above issues, which would then allow a re-engineered approach to addressing the challenges identified in the opening paragraphs above:
The most important area for action is a more vigorous approach in combating inequality:
• We should consider reintroducing taxes on wealth, especially inherited wealth. With sharper-edged regulations now in place that make it difficult for the rich to hide their wealth, unlike a few years ago, the old arguments that wealth taxes such as estate duties would only lead to avoidance may not hold anymore.
• But a more effective approach would be for much more aggressive early intervention policies to ensure that a Singaporean child’s prospects for a decent life should not depend on his luck as to whether he is born to rich or poor parents. High-quality, widely available and inexpensive infant and child care is vital. We need to seriously ask ourselves why we have a billion-dollar tuition industry that clearly disadvantages children from poor families.
• A broader social safety net is needed. For example, many experts have pointed out weaknesses in our retirement adequacy, which could be improved with a tax-funded, means-tested state pension. A second area in which action is needed is a more concerted effort to grow our own timber among local enterprises. The revamped Enterprise Singapore is a good start in this area and the plans announced in the latest Budget are also encouraging. However, we need to be far more ambitious and target the emergence of companies that can grow into large winners while also ensuring a thriving set of smaller companies that are globally competitive in their own niches.
There is a need to shift away from grants for specific purposes to building an ecosystem in which local enterprises will thrive. In Germany, the well-regarded Mittelstand companies — small and medium-sized enterprises that power Germany’s formidable export sector — have developed because they enjoy a supporting infrastructure of financing, training and R&D. An area that particularly merits a deeper study is the cost structure in Singapore, which many small and medium-sized companies have been complaining about for a long time.
A third area for policy change is regulation to protect consumers, especially in the finance sector, and to promote competition. The CCCS should be given much wider powers — to address all sectors in the economy as well as to bring consumer protection in Singapore to the same level as we have in advanced economies such as those in Europe. Singaporeans must be assured that the system will not be rigged against them, that they will be protected from bad behaviour by unscrupulous companies.
The bottom line: The world is not going to wait for us. We need to break out of old assumptions that are less relevant today and make way for more vigorous responses to the rapidly changing world. E
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy