1 Rayner Teo PKP Supervision: Essay 4 Dr Nigel Knight 11 August 2012 Theoretical perspectives on public policy on inequality: a response

to "Inequality and the Need for a New Social Compact" Since independence in 1965, Singapore has been transformed by the governing People's Action Party (PAP) into a high-income developed country, by some measures one of the freest economies and one of the best places in the world to do business (Heritage Foundation, 2012; World Bank, 2012)although the extent of economic freedom might be questioned, given the government's record of intervention in industrial, labour and social policy. Economic growth has become the main legitimation for the PAP's continued rule: having determined the shape of the country's political discourse over the last half-century, the PAP retains credibility and wins voter support in elections largely by securing material wellbeing for the people through economic growth (George, 15). This is related to the rhetoric of meritocracysucceeding on one's own merits (rather than on family wealth or connections)which is a key principle of Singapore's government (Kenneth Tan, 7). Rising economic inequality, in the Singaporean context, is seen to undermine the legitimacy of the government, as the fruits of economic growth accrue increasingly to the well-off, who, as they are able to attain and solidify material well-being, seem to be pulling away from broader society, undermining the promise of a fair shot at success for everyone. Consequently, dealing with economic inequality has become more important for the government. In a recent paper "Inequality and the Need for a New Social Compact", Bhaskaran et al. of the Institute of Policy Studies in Singapore argue for a major rethink of the Singaporean government's economic and social policies in order to deal with rising inequalityin their words, a "new social compact". In this essay I review their argument through the theoretical lenses of two important political thinkers, Marx and Hayek, and augment it with the implications that arise out of Marxian and Hayekian theoretical frameworks. Bhaskaran et al. observe, using the Gini index, that income inequality has risen in the last decade, accompanied with a perceived decline in social mobility. They argue that inequality creates a polarised society and is detrimental to coalescing support for government policy, and it reduces the well-being of the populationit can be seen that their argument against inequality takes instrumental rather than intrinsic grounds. Next, the authors outline what they see has the global causes of inequality, globalisation and technological change. Similar to other developed economies, competition from newly industrialising economies is holding down wages and causing job losses low-wage sectors; meanwhile, technology is driving trends of outsourcing and automation. The authors then go on to argue that because Singapore is a small, open economy, government must be 'activist' and redistributivewhich brings them to their proposals. Central to this 'activist' government is a "new social contract", which provides opportunities for all and moderates inequalities, while not undermining the incentive to work. The authors also consider pragmatic policy experimentation necessary for the new social contract, and call on Singaporeans to be more forgiving of mistakes made by the bureaucracy. Lastly, they examine the possible impact on government spending and on incentives to work. Before examining the argument, it is useful to point out two (possibly unconscious) assumptions reflected in the paper. Firstlyand this is a pervasive problem in theorising

2 about Singaporethe authors seem to ignore any possible role for a democratic process in building a new social compact. Although there is a strong case for remaining apolitical in a paper on public policy, the silence is deafening when the authors repeatedly call for government to be more willing to undertake policy experiments and the citizenry to become more tolerant of government mistakes in policy experimentation (Bhaskaran et al., 15, 17, 20). They do not seem to realise that this undermines the accountability of government, by giving it a free hand to undertake policy experiments as it sees fit, without reciprocal obligations on its part. (One possible explanationcertainly not the only oneis an assumption on the part of the authors that government is and will continue to be benevolent. If this is indeed the operant assumption, it sits uneasily with the troubling consequences of some of the government's past economic policies, which the authors acknowledge.) There also seems to be a blind spot in the authors' suggestion that "government must forge a societal consensus" and "engage in a national conversation" with the citizenry on the shape of Singapore's social compact (Bhaskaran et al., 19). In a genuine multiparty democracy, this would be easily demonstrated in shifts in electoral support; in the Singaporean system, when the government wants to engage its citizens, there is a careful balancing act in getting them involved but not too involved. This balancing act seems to place the onus on government to engage the citizens in 'forging' the social consensus, rather than the citizens to be engaged in public life. While a full exposition of Singapore's political system cannot be attempted in this paper, it is nevertheless important to expose this blind spot because it makes the authors' vision of a new social compact seem somewhat lacking and artificial, and contingent upon assumptions about government that would be accepted in Singapore but perhaps not elsewhere. Secondly, the authors rely chiefly on the Gini index to demonstrate an increase in inequality in the period 2000-2010, and for cross-country comparisons. However, the paper does not acknowledge the limitations of the Gini index, and seems to assume that Gini comparisons across time and space are universally valid. The Gini index is a summary measure over the difference between every single pair of incomes in the population; as population changes, the weighting given to each pair of incomes changes as well. Over the period 2000-2010, though, the resident population of Singapore grew 15% (Department of Statistics 2010, v). Given Singapore's low birth rate, just over half of this increase (53.7%) was through naturalisation (and largely from relatively high-income professionals, given the stringent naturalisation criteria; Department of Statistics 2010, 6). This calls into question whether the figures for 2000 and 2010 are even comparable, given that the composition of the population was substantively different in those two years. Curiously, the authors then go on to compare the 0.02 increase in Gini index from 2000-2010 in Singapore, to what they consider a similar-sized increase over the twenty years from the "mid-1980s to mid-2000s" from a panel of 14 arbitrarily-chosen countries ranging from Mexico to New Zealand (see Figure 1). Such a comparison ignores differences in population size and median income between countries. Also, given that the Gini index is not decomposable (i.e., cannot be broken down into some sum of weighted indices for individual subgroup inequality plus a measure of between-subgroup inequality), the aggregation of Gini coefficients for such a diverse set of countriesin effect, treating each country as a subgroup of a larger population (and giving each country an equal weighting despite differences in population size)is descriptively meaningless. Although the paper claims that this shows the speed at which inequality has risen in Singapore, this claim seems instead to demonstrate a dubious interpretation of the Gini index.

Fig. 1, reproduced from "Chart 3. Change in Gini Coefficient in Selected Countries, mid-1980s to mid-2000s", Bhaskaran et al., p. 5

The most fundamental problem in the paper's use of the Gini index is that it implies some link between the Gini index and welfare, when other evidence is needed. The authors see fit to observe that Singapore is not alone in experiencing a rise in inequality in the recent past as measured by the Gini index, so there must be some purpose to their cross-country comparison. But comparing Gini indices across countries to come to some sort of conclusion about welfare requires so many assumptions about factors like population size, income and income growth, inflation, and the form of the social welfare function, that such a conclusion is virtually guaranteed to be useless. Yet if the authors were not implicitly trying to make a point about welfare in bringing up inequality, but treating the Gini index purely as a summary statistic of dispersion, then the purpose of bringing up a cross-country Gini comparison is unclear, if it is indeed descriptively meaningless as I have argued earlier. In short, the nature of the Gini coefficient does not lend itself as easily to black-andwhite inequality comparisons as the paper seems to assume. This is not to dispute their conclusion that inequality has risen in Singapore, and to their credit, the paper includes other evidence that citizen well-being has fallen. However, it does seem appropriate to note the limitations of the evidence used, before examining the substance of the paper's argument. The choice of Marx and Hayek needs some justification: Marx produced the most historically significant critique of capitalismthe economic system for which Hayek is one of the most important advocates, inspiring the economics of the Thatcher and Reagan eras. However, because distributional issues are central to the Marxian analysis of capitalism, it provides an alternative analytic toolkit with which to examine the system, whether or not we accept the prescriptive aspects of his theory. Hayek, on the other hand, provides an account of the legitimate role of the state as enforcer of laws and non-monopolistic provider of public goods, within a democratic, free-market system that protects private property rights. We might use his theory to suggest and legitimate directions for a "new social compact" as posited by Bhaskaran et al. Marxian economic theory emphasises the distributional conflict between capital owners and workers: for Marx, "the structure of distribution is completely determined by the structure of production" (Marx, Grundrisse, 233). Since capital owners control (through the institution of private property) the means of production, without which the worker is unable to produce, they reap the factor rewards, and pay the worker just enough to support him and

4 his family, perpetuating the proletariat. Meanwhile the capital owner can force the worker to work more than is needed to pay his wage, generating surplus value, the income of the capitalist class. Economic inequality results from the highly unequal allocation of factor rewards: the worker is paid a subsistence wage, and the capitalist class accumulates surplus value and cements its position. One of the complications in this analysis is that in a society with as high a rate of saving as Singapore, many wage-earners are also capital owners in a small way (the government-run mandatory retirement savings plan, the Central Provident Fund, allows people to invest the capital they have accumulated on the stock exchange). The division between these two classes is therefore blurred, although the analysis still holds to the extent that people rely on income from work rather than income from wealth. Bhaskaran et al., reasoning that the increases in inequality observed across many countries are probably driven by global causes, attribute the increase in inequality to globalisation and technology changethis forms the core of their analysis of the causes of rising inequality in Singapore. They point to a liberal policy on hiring unskilled foreign labour as responsible for holding wages down at the lower end (Bhaskaran et al., 6). They hypothesise that this comes at the same time that technological change has made some jobs redundant and marginalised workers who are unable to adapt to new technologies, while more highly-skilled, better-educated professionals earn an "education premium". Moreover, they cite studies showing that middle-income, middle-skilled jobs are being lost to outsourcing and automation, leading to the 'polarisation' of job opportunities toward the top and bottomarguably accentuating divides along class lines, because higher-income professionals are more likely to be able to save and invest, entering the capitalist class, even as low-wage workers see their incomes held down. Singaporean government policy exacerbates the effect on low-wage workers in two respects. Firstly, Singapore's labour laws and regulations restrict the impact of unionisation; strikes are practically non-existent, and trade unions are co-opted into a "tripartite partnership" with employers and the government (surely anathema to a contemporary Marxian conception)indeed, the Secretary-General of the National Trades Union Congress is customarily a cabinet minister (Barr, 480). Secondly, the National Wages Council establishes yearly wage guidelines which, if accepted by the government, serve as a reference for employers (Global Employment Practice Group, 249). These wage guidelines have tended to hold wages increases down in the interests of 'competitiveness'. Professionals working on non-standardised contracts are less likely to be affected by these recommendations. Bhaskaran et al. point out that the bottom 10% of incomes are barely enough for subsistence, let alone "human capital formation" (10). Marxian analysis brings several key features of the Singaporean system into focus. Firstly, the ability of labour to organise is restricted by regulations on trade unions and strikesthe last strike in Singapore was in 1986, and lasted two days (Barr, 492). The bargaining power of workers is also limited by the tripartite cooperation of unions, employers and the government, and by the guidelines set by the National Wages Council. All these limit the possibility for the struggle on the part of labour that is so central to Marx's thinking. Secondly, the study of income inequality in Singapore is hampered by the lack of data on capital gains. In Marxian theory, circulation of money refers to the process of using money to buy commodities, which are then resold at a higher price, generating surplus value (Mandel, 81). This surplus value, or income arising from wealth, is appropriated by the capitalist class, because it is the class with the capital necessary to engage in such activity. Because there is no capital gains tax in Singapore, income data is only available for income from work and

5 transfer schemes administered by the government, not income from wealth (Department of Statistics 2011, 9-10). This could potentially obscure a further source of inequality. Most importantly, the Marxian dichotomy of proletariat and capitalist offers a useful framework to think about the effects on inequality of a variety of government policies and external phenomena. For instance, the polarisation of job opportunities towards the high and low ends can be seen as sharpening class divides, increasing the validity of the Marxian analysis (which relies on such a dichotomy). Also, liberal government regulations on the hiring of low-skilled foreign workers hurt the proletariat by increasing competition for jobs and introducing downward pressure on wagessince their families are left in their home countries, where costs of living are lower, the 'subsistence' wage that they require is lower than that of a Singaporean worker. Orthodox economic theory might well have better tools for understanding phenomena like wage determination and the financial markets than Marxian economic theory. Neither can Marxian theory explain everything. However, the characterisation of production as an interaction between capitalist and worker tends to lend distributional problems greater emphasisproblems which, once located with a Marxian lens, can be thoroughly analysed with more orthodox tools, and (I suggest) possibly given a Hayekian remedy. Hayek saw government as complementary to the market. The proper function of government is twofold. First, it serves to enforce the general rules that society and the market depend onprimarily private property, contract, and prevention of harm. Second, it provides the goods which the market fails to provide at the socially optimal level (i.e., public goods). In his theory, the actions of all agents in society, including governments and private citizens, ought to be circumscribed by general rules that are (1) abstract, which means that they can apply to future circumstances of which we are currently unaware, hence providing a basis for decision-making in the market; (2) negative prohibitions of, rather than imperatives to, certain behaviour; and (3) end-independent, i.e., not aiming at a specific goal or result "increased production" for instance (Hayek, vol. 2, 35; 36; 40). Hayek argues that such rules protect our ability to interact with other agents in the market to take advantage of the dispersed information that we each have access to. Government, in its role as protector of the market order, acts to enforce such rules and refine them where they are inconsistent; however, in its role as provider of public goods, it must be limited by the same general rules as any other agent in the market. Although Singapore has been ranked one of the freest economies in the world, it is by no means laissez-fairelabour and industrial policy are just two of many areas in which the Singaporean government is actively interventionist. In addition, much of its efforts are directed at maintaining competitiveness or growth, for instance the policy on foreign workers mentioned earlier. However much it is praised by advocates of business and economic freedom (such as the Heritage Foundation), the Singaporean government is very far from Hayek's conception. Bhaskaran et al. make a particularly insightful observation in their paper Singaporean government policy was largely formed in what they call a "benign context" of many favourable circumstances: a young population, full employment, high economic growth, and rising real wages at all levels (Bhaskaran et al., 13). This was largely a result of the government's industrial policy and promotion of foreign direct investment. In this context, interventions to encourage economic growth, on the premise that "a rising tide lifts all ships", did indeed work as intended. This is not true any more of a small economy, with a mature economic structure and demographics, under the influence of global and technical forces which have opened up a significant divergence in incomes. The solution that Bhaskaran et al.

6 recommend is more policy intervention and experimentationin their words, an "activist government" (15). Though the paper does not make such a distinction, for the sake of clarity I will deal separately with the paper's recommendations on regulation of the market (which may be seen as negative prohibitions) and on the new social compact (positive duties). Because Bhaskaran et al. do not make such a distinction, the justification for activist regulation (what they consider the failure of "market fundamentalism") serves also to justify activism in the new social compact in the shape of policy experimentation, which unhelpfully conflates the two roles of government (a problem which I will return to). The paper argues that activist government is necessary to deal with pervasive market failures that the ongoing economic crisis has exposed, and that the "market fundamentalism" embodied in the neoclassical consensus (the idea that markets always clear, and that government interventions are ineffective and indeed destabilising) has been discredited. They see the state as regulating, stabilising and legitimising markets (Bhaskaran et al., 15) although it is not clear how exactly markets are legitimated by the state. "Activist government" is quite the opposite of Hayek's recommendation, and I argue that his theory provides a third way between ever-increasing government intervention and the "market fundamentalism" that the authors rightly question. The difference between these three approaches is illustrated in their stances on regulation. "Market fundamentalism" has tended to view government regulation as interfering with the efficient workings of the market, and has consequently advocated deregulation in all spheres. "Activist government" sees the problems caused by deregulation and concludes that a reversal is in orderthat more regulation is needed. To that end, the authors are willing to accept policy experimentation and even a certain level of error, in what they call a "pragmatic, adaptive, learning-by-doing approach" (Bhaskaran et al., 17). Besides the worrying problem of accountability raised at the start of my essay, I wonder whether this concedes too much to a pragmatist, instrumentalist, outcome-oriented view of policy; whether the authors really are willing to forego all principles and ideologies, except the one that says to take the policy option with the best outcomes. A problem with this is that consequences may take time to manifest themselves. Even on the authors' interpretation, the current economic crisis came out of the policy which at that time seemed the best option (deregulation), but which ended up spawning unforeseen consequences. The outcome-oriented view of policymaking advocated by the authors would have, at the time, supported the deregulation that they now condemn. I would suggest that Hayek's approach lies outside this continuum between deregulation and more regulation. He instead sees a particular kind of regulation as the solutionthose abstract, negative, end-independent rules that support the functioning of the spontaneous market order. One instance of good regulation might be antitrust legislation that prevents firms from engaging in anti-competitive practices like predatory pricing or consolidationbut would not be empowered to act if one firm grew 'too big' on its own. However, negative rules are only half of the public policy picturethe other half consists of the government's positive obligations, or the "new social compact" that the paper calls for. Bhaskaran et al. call for activist government in the areas of redistribution, providing equality of opportunity, and promoting social mobility (17); new, expanded social security obligations that remain consistent with economic incentives and social norms (20); and an increase of government spending from current lows (about 16% of GDP) to historical levels (20-25%, still low by OECD standards; 22). This is what the authors call the "activist state", in which the government intervenes to invest in human capital, ensure equality of

7 opportunities, and spread the wealththis constitutes the new social compact that they advocate. Most of this is indeed compatible with Hayek's recommendations. However, the justification given in the paper for the new social compact is suspectthe authors go from arguing that market fundamentalism has failed, to arguing that we need more regulation for markets, to arguing that we need a better social security net. However, arguing that markets don't always clear is a far stretch from arguing that we need a strong social security system. The Hayekian distinction between the two functions of government (regulator and provider of public goods) suggests that the case against market fundamentalism is not a strong enough case in itself for activism in social policy, because the two belong to different spheres of government activity. We need to find a different way to legitimate government 'activism' in providing public goods, and Hayek seems to provide this. For Hayek, there are two main requirements for such positive duties to be legitimate. They must not violate the same abstract, negative, end-independent rules by which all agents in society and the market operate, and they should relate to needs that cannot be met in another, better waygovernment ought not to maintain a monopoly on the provision of such services, and government provision ought to be the last resort (Hayek, vol. 3, 49). The case which best illustrates Hayek's thoughts on the positive duties of government is the minimum income: he argues that guaranteeing a minimum income is legitimate, because it protects against a risk that we all face, and is necessary in a modern society where traditional support networks have disintegrated or are inadequate. On the other hand, redistribution is proscribed, because it is an end-directed disruption to the market order, and can be maintained only through continuous coercive use of state power (taking from some to give to others). Hayek gives us one account of how to determine when government policies are legitimate. However, Hayek's approach to policymaking is lacking in that it does not prescribe very specifically what ought or ought not to be doneinstead we have to formulate possible policies and test each hypothetical policy option against the criteria he sets out (abstract, negative, end-independent). The solution might lie in synthesising several gaps in the paper's argument. The authors call for policymaking to be anchored by a "vision of a good society" (Bhaskaran et al., 19)but they do not commit themselves to any such vision to motivate their policy recommendations. This seems to be a third troubling gap in their argument, after the faith in bureaucrats to undertake policy experiments and outcomeoriented policymaking, and a corresponding lack of faith in the democratic process. Together, these three areas indicate what might be necessary to salvage their recommendations. There are many conceivable visions of a good society with something to be said for each of them, and the public may be concerned with different ends and different public goods at different points of time (economic growth, material well-being, income inequality, or indeed any of the other varieties of equality). Rather than having the bureaucrats decide which of these robust alternatives is the appropriate end to pursue, the "national conversation" that the authors posit should aim to determine what ends the public actually values, or in other words, what vision of a good society best matches the public's. And rather than the government 'forging' a consensus (which seems to place the agency in the hands of government), and depending on the benevolence and wisdom of bureaucratic policy experimentation, the national conversation should be between citizens (or groups of citizens) offering competing visions of the good society, each entailing its own set of policies. Out of this process a vision of the good society is both generated and legitimated, and policies (the concrete manifestation of such a vision) are offered by citizens in an effort to gain support. A

8 new social compact might necessitateindeed, might have to be legitimated bya new political paradigm. In this essay, I have attempted to demonstrate what Marx's and Hayek's theories can contribute to thinking about inequality and public policy, through a critique of the paper "Inequality and the Need for a New Social Compact". It is a bold paper, but as I have argued, it leaves some important assumptions unquestioned, and suffers from several blind spots. Because of that, its recommendation of activist government (which generates the new social compact) is weakly argued, and its suggestion that citizens ought to be more forgiving of bureaucratic policy experimentation and learning through mistakes is positively alarming. Marx's theoretical lens helps to focus our attention on distributional aspects of its analysis, while Hayek's perspective draws attention to the implications and shortcomings of the paper's recommendations. Even though many other aspects of their theoretical frameworks have remained unexplored, their theories help to clarify aspects and identify shortcomings in the paper's analysis, and Hayek's in particular points towards a remedy for the problems in the paper.
References Print sources and journal articles Barr, Michael D.. "Trade Unions in an Elitist Society: The Singapore Story." Australian Journal of Politics and History. 46.4 (2000): 480-496. Campbell, Mark. Capitalism in the UK: A Perspective from Marxist Political Economy . London: Croom Helm, 1981. Hayek, F. A. Law, Legislation and Liberty. London: Routledge, 1993. George, Cherian. Singapore: The Air-Conditioned Nation. Singapore: Landmark Books, 2000. Mandel, Ernest. Marxist Economic Theory. Trans. Brian Pearce. London: Merlin Press, 1968. Marx, Karl. Grundrisse in Tucker, Robert, ed. The Marx-Engels Reader. New York: Norton, 1978. Tan, Kenneth Paul. "Meritocracy and Elitism in a Global City: Ideological Shifts in Singapore." International Political Science Review. 29.1 (2008): 7-27. Tan, Kevin YL. "Economic Development, Legal Reform, and Rights in Singapore and Taiwan", in The East Asian Challenge for Human Rights. Cambridge: Cambridge University Press, 1999. Online sources Bhaskaran, Manu et al. Inequality and the Need for a New Social Compact. 11 Jan 2012. 11 Aug 2012. < http://www.spp.nus.edu.sg/ips/docs/events/p2012/SP2012_Bkgd%20Pa.pdf>. Global Employment Practice Group, Baker McKenzie. "Singapore", in Worldwide Guide to Trade Unions and Works Councils, 2009 ed. 22 May 2009. 12 Aug 2012. < http://www.bakermckenzie.com/files/Uploads/Documents/Supporting%20Your%20Business/Global%20M arkets%20QRGs/Trade%20Unions%20and%20Works%20Councils/qr_singapore_tradeunionsguide_2009. pdf>. Heritage Foundation. "Singapore", in 2012 Index of Economic Freedom. 9 Dec 2011. 11 Aug 2012. <http://www.heritage.org/index/pdf/2012/countries/singapore.pdf>. World Bank. Doing Business 2012. 20 Oct 2011. 11 Aug 2012. < http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/AnnualReports/English/DB12-FullReport.pdf>. Statistical sources Singapore Department of Statistics. "Census 2010 Advance Census Release". Aug 2010. 12 Aug 2012. <http://www.singstat.gov.sg/pubn/popn/c2010acr.pdf>. ---. "Singaporeans in the Workforce." Oct 2011. 12 Aug 2012. < http://www.mom.gov.sg/Publications/mrsd_singaporeans_in_the_workforce.pdf >.