No problem with welfare states

I refer to the 21 May 2013 Straits Times letter “The problem with welfare states” by Mr Tan Keng Soon [1].

Mr Tan was not comparing apples to apples when he compared Singapore’s tax and government spending with those of Western democracies and Japan. The Western democracies and Japan have much aged populations and hence much higher old age dependency ratios which naturally mean higher government spending and lower tax revenues. The table [2] below shows that Japan has nearly three times as many old people to support per working age person than Singapore. Is it any wonder that the Japanese government spends more and collects less than the Singapore government? As Singapore’s population ages and our old age dependency ratio rises, we too will end up spending more while collecting less.

Country Name 2011 old age dependency ratio
Japan 36.9
Italy 31.5
Germany 31.2
Sweden 28.6
Finland 27
Belgium 26.9
France 26.4
Austria 26.4
Denmark 25.8
United Kingdom 25.6
Spain 25.3
Switzerland 25.1
Netherlands 23.6
Norway 22.6
Canada 20.8
Australia 20.3
Luxembourg 20.3
New Zealand 20
United States 20
Ireland 17.8
Hong Kong 17.2
Korea, Rep. 15.9
Singapore 12.7

If higher tax rate is disincentive for people to work, then company CEOs must be feeling the most disincentive to work compared to Bangladeshi workers since they face much higher tax rates.

Cases of near bankrupt Western democracies have been attributed by some distinguished economists, notably Paul Krugman [3], to the failure of the Euro Zone project, not to the failure of one man one vote. Furthermore, if one man one vote is flawed, then surely Singapore being one man one vote too ought to suffer from the same flaw? Yet we don’t face near bankruptcy. Singapore is living proof that one man one vote doesn’t lead to near bankruptcy.

If what is electorally popular makes no economic sense, then HDB and lift upgrading would make no economic sense. But HDB and lift upgrading enhances flat value [4] and so makes economic sense from the point of view of flat owners.

It’s wrong to say that the Nordic countries went through the equivalent of “Greek crisis” in the 1990s. The financial crises that the Nordic countries went through in the mid-1990s were due to financial market liberalisation [5], quite different from the fiscal issues of the Greek crisis. While the Nordic nations made financial regulatory reforms in direct response to problems arising from financial market liberalisation, they did not quite cut back on welfare spending. The table below shows that the Nordic nations’ social spending today is more or less the same as that in the mid-1990s [6]. So it’s not true that the Nordic nations’ success today is the result of cutting down on social spending. The Nordic nations are living proofs that welfare states work.

Country 1995 social spending (% GDP) 2012 social spending (% GDP)
Denmark 28.90% 30.50%
Finland 30.70% 29%
Norway 23.40% 22.10%
Sweden 32% 28.20%

Mr Tan didn’t explain what he meant when he said that Singapore outperformed most Western countries over the past three decades or so. If he meant Singapore outgrew most Western countries in per capita GDP, then that is nothing out of the ordinary given that Singapore started from a lower base. Malaysia and China also outgrew most Western countries over the last three decades – nothing extraordinary since they started from a lower base.

If Mr Tan meant that Singapore’s per capita GDP had been higher than most Western countries over the last three decades or so; that would be incorrect. The following chart shows the per capita GDP of Singapore and Western countries over the last three decades [7]. Singapore had been close to the bottom from 1980 to 1992, then climbed up to the middle by 1997, then went down again to near bottom by 2003 and then picked up again over the last three years; definitely not higher than most Western countries over the last three decades or so.

per capita GDP

If Mr Tan meant that Singapore’s per capita GDP adjusted for purchasing power parity had been higher than most Western countries over the last three decades or so; that wouldn’t be quite correct either. The following chart shows the per capita GDP (PPP) of Singapore and Western countries over the last three decades [8]. Singapore’s per capita GDP (PPP) had been close to bottom from 1980 to 1987 but rose rapidly to near the top by 1992. It might be reasonable to say that Singapore’s per capita GDP adjusted for purchasing power parity had outperformed most Western countries over the last two decades but not over the last three decades.

per capita GDP (PPP)

What’s interesting to note is that while Singapore’s per capita GDP itself is unimpressive, it becomes impressive after being adjusted for purchasing power parity. In other words, we are impressive only because purchasing power parity says so. Purchasing power parity says that we are cheaper than most Western nations; hence our mediocre per capita GDP gets boosted tremendously to adjust for the idea that the same dollar in Singapore buys us more things than it does in Western nations. How sadly not true that is considering that nearly all international surveys put us as being more expensive than most Western countries. Two big ticket items – the house and the car very clearly put us as being more expensive than most Western countries, in direct contradiction to what purchasing power parity says about us being cheaper than most Western nations.

Finally, although Singapore has lower taxes, Singaporeans pay the government a lot more in many other ways through housing, COE, ERP and so on.

[1] Straits Times, The problem with welfare states, 21 May 2013, Tan Keng Soon

[2] World Bank old age dependency ratio data

[3] New York Times, Legends of the Fail, 10 Nov 2011, Paul Krugman
What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies.

[4] Straits Times, Why HDB lift upgrading takes time, 12 Apr 2012
But the upside, said Mr Colin Tan, who is research head at property firm Chesterton Suntec International, is that the LUP adds value to the units in the block and makes them more marketable if owners want to sell.

[5]
• Lessons from the Nordic Financial Crisis, 29 Dec 2010, Lars Jonung, Department of Economics Lund University Sweden, page 2
The Nordic crises have their roots in the process of financial liberalization that was carried out in a monetary regime based on pegged but adjustable exchange rates. In the 1980s, the financial systems of Finland, Norway and Sweden underwent major deregulation.

• Chapter 3: The Nordic banking crises in the early 1990s – resolution methods and fiscal costs, Knut Sandal, page 78
In a nutshell, deregulation was followed by boom and bust in all three countries.

[6] OECD social expenditure as a percentage of GDP

[7] World Bank per capita GDP

[8] World Bank per capita GDP (PPP)

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