After both a cataclysmic economic crisis and a watershed general election, Singapore stands at a cusp of forging a new social compact.

By Yeoh Lam Keong, Donald Low, and Manu Bhaskaran –

Singapore’s current social compact, founded on the principles of self-reliance, high growth, full employment and a social security system which emphasizes individual savings and home ownership, has served Singapore well and is widely admired abroad.  From independence till the end of the 1990s, this compact delivered “growth with equity” (World Bank, 1993), easy social mobility, and high standards in housing, education, healthcare and public infrastructure.

However, changes in the operating context since the late 1990s have put significant strain on this compact. These include markedly rising inequality, increased economic volatility, and stagnating wages for significant segments of the workforce as a consequence of rapid globalization, skill-biased technological change, excessive immigration, a maturing economy and an ageing population.

While these trends are not new, two major events around the turn of the last decade brought these pressures closer to a critical turning point that could well determine if Singapore’s current social compact can continue to flourish or will begin to unravel. The first event was the global financial crisis of 2008-2009; the second, the general election of 2011 and the political trends and sentiments it revealed.

The global financial crisis brought home two major lessons. The first is an ineluctable shift in economic power from a declining West to an ascendant East. A rising, emerging world led by China and India, combined with a weaker, more crisis-prone developed world is probably here to stay for the foreseeable future. Persistent economic imbalances and fiscal crises in the major developed economies point to continued volatility in global demand and asset prices. This does not bode well for income growth at the middle and lower ends of the income distribution. Equally important, the great crisis of 2007-09 showed that unregulated markets and the blind pursuit of market fundamentalist policies could be hugely damaging to both economy and society. The idea that deregulation, privatization and competitive markets alone can deliver stability and prosperity was laid to rest with the Great Recession.

A Watershed Election

Domestically, Singapore’s general election of 2011 was a political watershed. It revealed not just rising and irreversible demands for wider democratic participation but also uncovered a worrying undertow of discontent with key elements of the current social compact.

These difficulties have festered for over a decade.  Starting wages for unskilled labour have fallen significantly since 1995, not least because of the liberalization of foreign worker policies in the last two decades. The bottom 10 per cent of working age households have difficulty making basic ends meet; while the bottom third have little discretionary savings and are highly vulnerable to bouts of unemployment and illnesses. These create major barriers to social mobility.

The most recent official data shows that median citizen full-time incomes have risen 11 per cent between 2000 and 2010. While this is a creditable performance in a world characterized by stagnant median wages in many developed economies, in a city-state like Singapore where the option to move to lower cost areas does not exist, real income growth of just over 1 per cent per annum is effectively felt as stagnation, especially considering growing concerns over the steeply rising costs of education, healthcare, housing, and retirement adequacy.

Furthermore, these annual income figures tend to mask the real difficulties on the ground. Including part-time earners, median income growth over the last decade is probably even weaker, especially if also adjusted on an hourly basis.  Full-time work has become harder to find while structural unemployment has risen stubbornly between 1998 and 2010 and the share of unemployed workers with post-secondary qualifications rose from 30 per cent to around 55 per cent in the same period. It is increasingly common to experience longer working hours and witness dual-income families struggling with part-time jobs just to maintain living standards.

In this context, the inexorable global labour market trends towards wage stagnation and sharply rising inequality in developed economies, with attendant problems of chronic poverty, economic insecurity and insufficient savings for low-income deciles, have taken on a new tone with far-reaching implications for the political economy.

A Different Era

Singapore’s key social policies that were the foundation of the old social compact in the areas of housing, healthcare, social security, education and infrastructure were designed for an era characterized by a smaller, more youthful population, ample room to boost productivity, rising real wages and high rates of economic growth. With slower growth, an ageing, much larger population and stagnant wages, many of these policies just do not work in the long run, even for middle-income Singaporeans.

Rising inequality is bad enough when the rich are getting richer and the bottom 20-30 percent of households are left behind. It is much more worrying when the bottom 50-60 percent also begin to feel that improvements in their economic prospects, well-being and quality of life are much more uncertain, both for themselves and their children. Small wonder that fertility rates have fallen sharply to historic lows over the last decade.

These trends, combined with an increasingly difficult and uncertain economic outlook, the erosion of a naïve faith in market fundamentalism, and the rising political consciousness of Singaporeans, have moved the social policy debate in Singapore beyond just enhancement of social safety nets for the poor. Rather, Singapore also needs to reconstruct its social compact to one led by a more activist and redistributive state – one that strikes a better balance between growth and equity, between social protection and individual responsibility. At its heart, this new compact needs to pragmatically but creatively rethink how the state can more effectively ensure broad-based access, affordability and quality in the key areas of social security, public housing, healthcare, education, and public infrastructure and the environment.

These five key policy areas crucially determine our quality of life and well-being. In each of these social policy domains, there are significant market failures that necessitate government regulation, subsidy or outright provision. The state has a critical role not only in ensuring socially desirable outcomes, but also in pursuing outcomes that are consistent with the aspirations of Singaporeans, while keeping within fiscal means and maintaining work incentives.

Moderating the Risk Pendulum’s Swing

In doing so, the government has to realize that its previous policy stance – of emphasizing only individual and family responsibility – may have excessively shifted risks from the state to citizens.  As Joseph Stiglitz, former chief economist of the World Bank and 2001 winner of the Nobel Memorial Prize for Economic Sciences, observes, at a time of rising uncertainly, volatility and inequality, the state should instead be actively absorbing the increase in risks and insuring citizens against them.

Singapore has good potential to improve the lives of its citizens in precisely this way.  Government spending as a share of gross domestic product of around 17 per cent is among the lowest in the developed world compared to 35-40 percent of GDP in most Organisation for Economic Co-operation and Development (OECD) countries or 25-30 percent of GDP in other advanced Asian economies.  Singapore’s current levels of spending are low even by historical standards of up to 25 per cent of GDP seen in the mid-1980s and early 1990s. Singapore can afford to return to these levels of a public spending while maintaining competitiveness and long-term fiscal sustainability.

Forging a New Social Compact

It should also be borne in mind that what is proposed here is a long-term strategy to construct a new social compact.  Pursuing a vision of what Singapore society should be requires wide public discourse and consultation as well as intelligent design and careful implementation. However over a 10-20 year period, this could result in a far-reaching overhaul of the way the Singapore state provides social security, housing, healthcare, education and infrastructure/environmental goods, re-defining the social core and character of Singapore society with significantly higher levels of citizen well-being.

This means constructing the new social compact proactively as a shared strategic vision rather than as a series of piecemeal, reactive responses to any populist demands of the day. It also means that the government must be prepared to review and discard long-held beliefs, fixed policy mindsets and taboos, in particular its reflexive aversion to welfare and increased government spending, or an undue bias towards “leaving it to market forces”. These mindsets constitute the greatest barrier to the constructive remaking of our social compact.

After both a cataclysmic economic crisis and a watershed general election, we need to return to the Singapore state’s founding virtues of pragmatism, social activism and people-oriented policy innovations – virtues that so successfully guided Singapore in its first 40 years as an independent nation.

Yeoh Lam Keong is Vice-President of the Economic Society of Singapore, an independent economic consultant and ex-Chief Economist of Singapore GIC. Donald Low is Vice-President of the Economic Society of Singapore. Manu Bhaskaran is Adjunct Senior Research Fellow, Institute of Policy Studies.

Illustration by Paul Lachine for Global-is-Asian.

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