Globalisation has added a new twist to this challenge. Free trade and open markets are being blamed for widening income inequality and median wage stagnation. Hence, the rise in protectionism and xenophobia in many parts of the world.
Singapore has always subscribed to the principle of social inclusion. But the experience of other countries has given Singapore much reason to be cautious in the design of its social safety nets. The growth of the welfare state has been associated with an eroding work ethic, a deteriorating fiscal position, and a growing entitlement mentality.
Self-reliance is the basis for a healthy work ethic; it drives private initiative and enterprise. How does Singapore foster social inclusion while safeguarding the culture of self-reliance?
First, it provides massive subsidies for education. It is well known that education promotes social mobility. But in many parts of the world, this has not been the case because there are wide differences in educational opportunities that depend on socio-economic status.
Singapore has invested heavily in ensuring a high quality of education across the spectrum and made it highly affordable for all income groups. This is perhaps why the premium in test scores that Singapore students enjoy over students from other countries is widest for those in the bottom half of the education system.
This is not to suggest that starting positions do not matter in Singapore. They do. But they matter less because of the levelling effect of education.
Second, the Government has intervened substantially in making home ownership affordable for the vast majority of the population. Low-income families get a grant to purchase public housing flats, which are subsidised to begin with and come with a subsidised loan. Housing is an appreciating asset that promotes social mobility, financial security and a sense of pride and belonging.
Third, the Government provides a wage supplement to low-income workers. Faced with growing income inequality, Singapore has adopted a 'workfare' model instead of a 'welfare' model. Under a traditional welfare approach, the state insures citizens against a wide range of risks, especially unemployment and illness. But under a workfare approach, benefits are targeted at low-wage workers. Tying government transfers to work avoids the moral hazard problems associated with unconditional transfers to the poor. Workfare redistributes incomes, while preserving the work ethic and promoting self-reliance. It covers nearly 20 per cent of the workforce, providing wage supplements of up to 20 per cent of the incomes of low-wage, older workers.
But no government intervention is without distortion. It has been argued that Singapore's social safety net system is perhaps too heavily biased towards housing and that this comes at the expense of cash savings for retirement. Workfare payments may have contributed to reduced productivity by retaining in the workforce more lower-skilled workers than might have been the case.
There has also been criticism that Singapore's social safety nets are not sufficient - especially for the disabled, the aged destitute, the unemployable. We must continually seek incentive-compatible solutions to these problems, bearing in mind the risk of unintended consequences.
The crisis has shaken our confidence in both markets and governments. Both markets and governments have been found wanting. What we need is not more of one and less of the other. We need both to be more effective and to work in closer collaboration, so public interest and private initiative are better aligned. As economist Amartya Sen puts it: 'The invisible hand of the market has often relied on the visible hand of government.'
Singapore's experience is that market principles are necessary to help government work better, and good government is necessary to help markets work better. This is not to suggest that Singapore has got the balance right. Far from it. Singapore is still an experiment, a work-in-progress. If anything, the key take-away from the Singapore story is to keep an open mind, measure outcomes, continually review policies and learn from mistakes. Prag-matism and experimentation must become the watchwords in public policy.
The choice is not between big government and small government. It is about creating effective government. What matters is what governments do, not how big they are. The size of governments may well have to shrink - the revenue base in most countries will be capped by competition and demographics. But the responsibilities of government may well have to expand - to enable, regulate, stabilise and legitimise markets so they can work better. Getting the balance right between markets and government will be key to improving the standard of living and welfare of our fellow citizens.
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