Ethos Issue 3, Oct 2007

Growth with Equity: The Challenge of Income Distribution
Kenneth Chan

The Singapore Government has also tried to redistribute in a pro-growth way. The Workfare Bonus Scheme, introduced as a one-time transfer in 2006, targeted the lowest 20% of income earners. Recipients had to have worked for at least six months to be eligible for the bonus. This helped to encourage a work-for- reward ethic rather than one seeking handouts. However, a one-time transfer does not alter the income distribution and keep the lower segment of incomes up on a permanent basis, and the scheme was expanded in 2007 to become a permanent support programme known as the Workfare Income Supplement, which operates very much like the Earned Income Tax Credit in the US or the Working Tax Credit in the UK.

The overriding consideration for the Singapore Government in implementing any new redistributive measure is to ensure that it does not undermine economic growth, erode the work ethic, or distort incentives. In this regard, the Government could consider measures to moderate the effects of job volatility through some form of unemployment insurance. As more segments of the working population become vulnerable to downward income volatility for extended periods, a basic unemployment insurance scheme might be a more efficient way of providing them some form of income security. Unemployment insurance helps workers pool their risks to fund key necessary expenditures when faced with a sudden loss of income. A publicly administered unemployment insurance system, integrated with assistance in job placement, re-training and targeted welfare, could also help the recovery of household incomes after recessions. If so, social insurance against the risk of unemployment could be an important component of Singapore’s social safety net in the future.

Human Capital Development
If the Government wishes to avoid large social transfers of the Nordic variety, its main alternative would be to invest substantially more in human capital development. This can be done in a variety of ways.

One would be to provide subsidies to the lower-income households for expenditures beyond mere subsistence, so as to allow for human capital formation. Currently, low income households spend about 60% of their income on food, housing and utility bills, leaving them with little for investments in education and education-related areas. Some studies in the US have shown that children from lower income families develop persistent skills gap as early as the age of three compared to those from higher-income families, should they go without effective pre-school programmes.⁴ Perhaps a suitable starting point to address poverty issues in a sustainable way would be to provide for assistance in the form of enhanced subsidies in early childhood education.

Simultaneously, the Government could expand existing retraining and re-skilling programmes to help workers transit from declining sectors of the economy to the new, faster-growing ones. This could be an important instrument to address the possible stagnation of median wages.

CONCLUSION
In any debate over helping the low-income, we are caught in a triangle of competing social goals: helping the affected income groups, maintaining incentives for them to work and strive for themselves, and keeping the programme budget affordable. Any movement within this triangle must move away from at least one goal. Yet societies care not just about the size of the economy, but also social peace and cohesion. Finding the right blend of pro-growth policies and redistributive measures will be critical for sustaining the Singapore story of growth with equity.

Kenneth Chan is Manager in the Strategy Unit, Strategic Policy Office of the Prime Minister’s Office. He first started researching socio-economic issues during the 2005 National Scenarios project, which included developments in the income distribution, the impact of new media on a participative citizenry and the evolution of the Singapore identity with increased immigration. He is also interested in how companies selling to "bottom-of-pyramid" markets will impact ASEAN in the future.

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