Facing up to income inequality

Around the world, the Gini coefficient is rising, and governments should move to halt the wave or risk instability

By JOSEPH CHONG

THE government has recently raised concerns about growing income inequality in Singapore. Lower level civil servants were recently given a salary boost in order to reduce the disparity between those at the top and those at the bottom. This has also been a topic of discussion in the media. Anecdotally, as a financial advisory firm, we see this among our clients too. Many successful high flyers are retiring comfortably before 45, while others appear to need to work way past retirement.

This trend of increasing income inequity is not confined to Singapore only. Unfortunately, it is worldwide. We see this from an analysis of corporate profits as percentage of GDP in the G7 countries. Although this ratio is related to the business cycle, the peaks appear to be getting higher with each new round. The accompanying table illustrates this.

Currently this ratio is at a record high and still climbing. Unfortunately, the reverse is happening with income growth. Wage growth in the G7 has lagged GDP growth over the past few years and the trend does not seem to be reversing. This is the undesirable effect attributable to globalisation as firms arbitrage their labour costs with the integration of India and China into the global economy. It would appear that, thus far, globalisation has benefited shareholders at the expense of labour in the G7. Should we, however, continue on this path of unrestrained global economic meritocracy and 'natural selection'?

Measuring inequity

Income inequity is commonly measured by the Gini co-efficient. The Gini co-efficient is a measure of inequality or any form of uneven distribution developed by the Italian mathematician Corrado Gini in 1912. This coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income). The accompanying graph illustrates this concept. The more the curve sags, the higher the level of inequality.

The Gini co-efficient is one of the indices used by UN development agencies to assess the level of human development in countries around the world. For example, incomes in the US have become more unequal since 1970 as the Gini co-efficient has been increasing (see table).

Compare it with the table providing Gini co-efficients for a selection of nations extracted from the UN Human Development Report 2004. Generally, a high Gini index is associated with economically weak and/or politically unstable countries. A slide to a higher Gini would therefore be associated with higher social tension and political instability - a clear undesirable.

Indeed, income inequity, historically, has fomented insurrections. The French Revolution some 200 years ago and the Communist one 100 years back had their support in hungry bellies and hopelessness.

In Singapore's case

Nonetheless, what can Singapore do as an open, price-taking economy in confronting growing income inequity? I believe we need not worry about the high flyers. With some research and fees, they would know how to access good independent financial advice. The problem is those who are structurally unemployed - too old and without the basic education to be retrained in high-tech manufacturing.

Firstly, we might want to attract more labour-intensive businesses to come to Singapore. Indeed, the Integrated Resorts are a step in the right direction. Secondly, the market value of our reserves is estimated at $200 billion to $400 billion. Perhaps, a small fraction of this could be set aside as an endowment for those structurally unemployed. The money could be managed by highly respected GIC. This endowment would be for retirement funding and, if they have children, it will provide for their children's education. Indeed, the policies we adopt must eventually break the trap of inherited poverty and thus provide hope for a smaller Gini