Thursday, July 22, 2010

Look beyond GDP for true measure of welfare

Jul 21, 2010

Look beyond GDP for true measure of welfare

This is an edited excerpt of a speech by Nominated MP Viswa Sadasivan in Parliament on Monday when he moved a motion calling on the Government to track indicators beyond gross domestic product.

THE gross domestic product, or GDP, has been and will continue to remain the most commonly used indicator of economic performance and growth. Changed circumstances today require a broader framework where policymakers are prompted by socio-economic indicators other than GDP.

In the first 30 years of Singapore the population was less bifurcated, socially and economically - so, GDP as a key indicator was sufficient. We just needed to grow fast, create jobs and build affordable houses.

Today, it is no more about how fast we grow. Increasingly, it is about how we grow, where we grow, whether we are prepared to pay the price for growth and, whether we are growing together. These are all challenges that developed societies face; challenges of managing success.

The GDP is not equipped to prompt us or provide answers in these increasingly critical areas. Worse, if we focus too much and too long on the GDP, it could paint too rosy a picture - a false positive - and distract us from these issues.

The GDP is essentially a measurement of economic activity, not economic benefit. Used on its own, it can be a misleading indicator of economic progress and welfare of the individual Singaporean.

We need a system that helps us better anticipate these issues - be more proactive than reactive.

Singapore's per capita GDP has risen exponentially over the past 44 years. According to figures from the Department of Statistics, in Singdollar and nominal terms, Singapore's per capita GDP grew from $1,567 in 1965 to $53,192 in 2008, one of the highest in the world.

But profits take about 46 per cent of Singapore's GDP, extremely high compared to other developed economies. Half of this high profit share goes to the coffers of foreign-owned companies with operations here. What is left in the GDP pie to directly benefit Singaporeans is therefore a relatively small amount.

In other developed countries, wages take up more than half of the total GDP. In Singapore, wages account for about 43 per cent of our GDP, compared to 58 per cent in the US and 57 per cent in Japan.

While we have one of the highest per capita GDPs in the world, according to figures from the CIA (Central Intelligence Agency) World Factbook for 2009, Singapore ranks as one of the highest in the world in terms of income inequality. Based on 2008 figures, Singapore has a Gini coefficient of 48.10 - which is much higher than other countries in Asia including China, Malaysia and the Philippines. This should certainly be a cause for concern for us, but it will be red-flagged only if we pay prompt attention to this indicator together with the GDP.

[I think it is a given that as a country progresses, the GINI coefficient tends to rise. When everyone in the country is poor, the income inequality is practically zero - everyone is equally poor. But as income rises the range will increase and separate. There will always be poor people, but rich people can always be richer. In the case of China, the GINI is probably low because of their vast population. They may have more millionaires than Singapore, but they have a billion more poor people to even out the GINI.]

There is significant movement, especially in the developed world, to shift global thinking on how we measure our economy, our progress and prosperity.

US Federal Reserve chairman Ben Bernanke has argued passionately for an acknowledgement of the inherent limitations of the GDP as a policy tool for policymakers, as it focused primarily on what he terms 'material determinants of social welfare'. He calls for a 'broader measurement of human welfare'.

The Report On Economic Performance And Social Progress was commissioned by French President Nicolas Sarkozy in the aftermath of the global crisis that started in 2007. It states that conventional market-based measurements of income, wealth and consumption are insufficient to assess human well-being.

It emphasised the need to give greater prominence to factors such as income distribution, personal consumption and individual wealth, while assessing qualitative aspects such as health, education, the environment, employment, material well-being, interpersonal connectedness and political engagement.

It was tabled at the 2009 G-20 summit in Pittsburg, US. The leaders endorsed the need to include indicators other than GDP to have a better measurement of progress.

The Organisation for Economic Cooperation and Development (OECD) is actively challenging the pre-eminent status of the GDP as the 'end all' of all indicators. They strongly support the 'institutionalisation of a range of indicators'.

Apart from the currently used key indicators of GDP, consumer price index (CPI), industrial production index, and total exports/imports, we could consider including other economic indicators that measure median wages, income distribution, productivity, job satisfaction and household consumption. The new framework should also include indicators for quality of life and general well-being - a range of indices that measure income, public services, health, leisure, wealth, mobility, the environment and connectedness.

[Yes. By all means have "Miss Congeniality" titles, but the crown goes to Miss Universe. The other measures can flesh out the picture of an economy, and highlight areas for improvement, or areas of concern. But if the economy is in the toilet, everyone gets diarrhea. Was it Clinton who said, "It's the economy, stupid"?]

I would like to acknowledge our admirable economic achievement over the past 45 years because of sound economic policies and good governance. I urge the Government to view my observations with an open mind - to see it not as a criticism of current practice but as a considered appeal for a review that will help provide greater clarity in policy formulation, resulting in policies and programmes that resonate better with the ground.

Singapore's well-being goes far beyond GDP

This is the text of a speech by chairman of government feedback arm Reach and Senior Parliamentary Secretary for the Ministry of the Environment and Water Resources Amy Khor in Parliament on Monday. She was responding to a motion by Nominated MP Viswa Sadasivan calling for the Government to track indicators beyond gross domestic product as a measure of success.

LET me start by assuring Mr Viswa Sadasivan that the Government values and appreciates constructive feedback on its policies. So we take his comments seriously.

We agree with Mr Viswa that the development of a society cannot be predicated on pure economics alone. A responsible government takes a balanced approach towards developing a country, taking holistic account of its economic, social and security needs, and with a steady eye towards the long term, beyond the election cycle. Policies are developed for the collective benefit of our citizens so that progress is broad-based, and no single sector benefits at the expense of others. The ultimate aim is to enable our people to have a good quality of life, and not merely a high standard of living.

Hence, contrary to what the Member implies the Government had hitherto been adopting, it has never been a 'GDP growth at all cost' strategy. As Minister Mentor Lee Kuan Yew shared at a recent dialogue held in conjunction with the Singapore International Water Week and the World Cities Summit, even in our early days, when we were deprived, we were mindful not to allow heavy pollutive industries using old technology to set up base in Singapore, to ensure a good quality living environment. Hence, even back then, we had to turn away much needed investment opportunities.

To put things in their proper perspective, the Member might like to know that in terms of allocations, the economic sector takes up about 20 per cent of our Budget, whereas the social sector, which includes education, health and social services, makes up 40 per cent. This reflects the priority of this Government to invest in the capability and well-being of our citizens. I would like to assure the House that the Government, through its choices and its Budget, is very much focused on people.

As Mr Viswa has acknowledged, the GDP is a key economic indicator for any country. GDP measures the income generated by economic activities within a country - and for all its shortcomings, it is still one of the best gauges of a country's progress and wealth.

A country's GDP per capita tells us a lot more about the economic well-being of its people than any other single measure. Empirical studies have shown GDP to be highly correlated with other indicators of economic and social well-being. Put simply, economic growth is key to improving the lives of people.

The Member mentioned that our focus on GDP growth has led to some socio-economic dysfunctions. Specifically, he cites two observations - the large proportion taken up by profits relative to the wage component in the GDP and the significant share of profits by foreign- owned companies.

To clarify, this high profit share (vis-a-vis wages) is not the outcome of deliberate government policy to favour the corporate sector as against workers. It arises from contributions from a range of companies, large, medium and small, both foreign and local, which operate in Singapore. While it is true that a not insignificant share of the profits accrue to foreign companies, this is not a zero-sum game. Some of the profits go towards taxes while some will be retained or reinvested in other projects in Singapore, generating positive multiplier effects in terms of new jobs, technology transfers and management know-how and add to a vibrant corporate ecosystem, anchored in Singapore.

Also, the Government does not hold down wages. Indeed, it is not possible for us to artificially raise (or lower) the wages of our workers. To do so will distort the market and eventually lead to perverse outcomes. Instead, the sustainable way must be to upskill our workers.

[Witness the recent labour unrest in China leading to wage increase for the Chinese worker. No doubt they deserved their wages as they are hard workers, but the effect of their wage increase was to increase costs to manufacturers and MNCs are now considering alternatives to China as their manufacturing base. The point is that they cannot simply raise wages without a parallel increase in productivity. This would just raise costs. But it is disingenuous to say that the govt does not hold down wages. Sort of. By allowing foreign workers to work in Singapore, they are keeping wages low and so the lowest paid Singaporeans cannot get better wages.]

This in turn would raise the wages they can command. What is critical is that we continue to monitor wage and income growth of Singaporeans, to ensure that our workers benefit from growth.

In this year's Budget speech, the Minister for Finance had mentioned how median incomes per Singaporean household member had grown by about 20 per cent (adjusted for inflation) over the last decade, and particularly so from 2005 to 2008. Lower income households also saw their incomes rise over the past 10 years, albeit to a lesser extent compared to median households. Overall, the total income growth for lower income households was about 7 per cent in real terms.

The Government has also made strenuous efforts to redistribute the wealth generated by GDP growth through asset enhancements and income distribution measures in order to uplift the more vulnerable segments of our society. The Government provides substantial subsidies for housing and education.

We have also put in place the Workfare Income Supplement (WIS) scheme to supplement the incomes of our low wage workers, to encourage them to stay on their job and improve their skills.

Mr Viswa mentioned that Singapore has one of the highest levels of income inequality in the world, as indicated by our Gini coefficient. We are not alone. This is also faced by other global cities such as Hong Kong and New York. Their Gini coefficients are in fact more than five, like several other American cities. I would like to point out to Mr Viswa that the Gini coefficient of 4.81 that he cited for 2008 had not taken into account income redistribution via taxes and government transfers. In 2009, the Gini coefficient net of government transfers and taxes is in fact significantly lower at 4.53. But even this statistic, as is any other single indicator, is not perfect - it does not capture transfers through families, and community support through our Many Helping Hands approach. Furthermore, as noted by the Minister for Finance in his Budget speech this year, the solution for Singapore cannot be to grow slowly to reduce income inequality.

Slow growth will make everyone worse off, but it will have the harshest impact on the low income, the very ones we are trying to help. In other words, the correct approach is not to dumb down the top, but to pump up the bottom.

Mr Viswa also cited study findings to illustrate that Singapore has fared badly in indicators of well-being of our citizens and that this is a consequence of a GDP-focused drive for growth. But let me say that other study findings paint a different picture. Let me share with the House just one of these alternative findings.

The Human Development Index (HDI), published in the United Nations Human Development Report, looks beyond GDP to a broader definition of well-being. It is a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity and income).

Although the index is not a comprehensive measure of human development, it does indicate the average progress of a country in human development. Between 1980 and 2007, for nearly 30 years, Singapore's HDI rose by 0.68 per cent annually from 0.785 to 0.944. Singapore ranked in 23rd placing out of 182 countries, ahead of Hong Kong (24th), Malaysia (66th) and Thailand (87th).

Mr Viswa has called for a framework for broad-based public policy analysis, and the regular reporting of non-economic indicators.

The Government understands the need to adopt a Whole-of-Government approach towards developing policies. Civil servants are required and expected to think and formulate policies from the perspective of the public service as a whole, rather than from the viewpoint of a specific ministry or agency.

This mindset is critical as many of the challenges that we face can no longer be adequately addressed by a single ministry or agency because of their complexity and interdependence. This mindset will also ensure that all relevant factors are considered in the process of policymaking.

The Government already tracks a broad range of socio-economic indicators, with ministries and agencies actively monitoring outcomes and performance in their areas of responsibility. Some of the performance and outcome indicators are published annually in the Budget Book, which is available on the Ministry of Finance website.

Even as we debate the pros and cons of various indicators to reflect our socio- economic conditions, we must not forget that indicators are what they are described to be - signs and pointers.

It is a challenge to develop indicators that accurately or unambiguously capture a particular state of affairs in the socio- economic realm, or the outcomes of a policy at any point in time.

Hence, it is important that we do not skew behaviour or encourage short-term outlook by over-emphasising the use of indicators. Government policymaking must instead be anchored in a clear understanding of reality, and cannot be driven by short-term measurement of indicators. For this reason, the Government has expended many resources to gather the thoughts and reactions of people to all sorts of policy issues via its ministries and through the agency of Reach, the Government's dedicated feedback unit. It is perhaps one of the strongest endorsements that Singapore does not just pay lip service to non- or beyond-GDP factors that underpin our national well-being.

Mr Viswa's thesis that policymaking will be impoverished if it ignores beyond-GDP indicators is understood and appreciated. I thank him for his motion, and want to assure the House once more that the Government's approach to developing Singapore has always been holistic, multi-faceted and with the long term in view.

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