The 6th S Rajaratnam Lecture by Mr Tharman Shanmugaratnam, Deputy Prime Minister & Minister for Finance on The Invisible Hand of Social Culture, 2 Dec 2013

The 6th S Rajaratnam Lecture by Mr Tharman Shanmugaratnam, Deputy Prime Minister & Minister for Finance

Mr S R Nathan, former President,
Dr Mohammad Waheed Hassan, former President of the Maldives,
Mr K Shanmugam, Minister for Foreign Affairs and Minister for Law,
Members of the Diplomatic and Consular Corps,
Distinguished Guests,
Ladies and Gentlemen,

Introduction

1. I would like to thank the MFA Academy for giving me the privilege of delivering the 6th S Rajaratnam Lecture. 

2. Mr Rajaratnam was, I am sure in all our minds, a larger than life character. As one of Singapore’s founding fathers and as our first and longest-serving Foreign Minister (from 1965 to 1980), he was instrumental in establishing Singapore’s credibility in the international arena when independence was thrust upon us and in the two decades after. He was also a student of history and a keen observer of contemporary society. He often brought these interests together to understand the reasons why societies rose or declined, and to distil lessons and insights that would shape thinking in Singapore and could be used in building a better society.

3. What Rajaratnam said three to four decades ago, some of which I will briefly highlight later, was in many ways remarkably prescient, and of much relevance today.

Social compacts under challenge

4. Almost every country today faces an acute challenge of preserving a fair social compact. In the advanced world, it is made more difficult by prolonged sub-normal growth and the need for fiscal consolidation. Tough choices have to be made – choices over how the sacrifices needed today should be borne and by whom, in order that society emerges better tomorrow.

5. The emerging economies too face an increasing challenge of achieving inclusive growth – with China on the one hand facing the prospect of an ageing population that is still largely poor, and India and most other developing countries on the other having to create more and better jobs for a rapidly growing young workforce.

6. The basic concerns however are common. Almost everywhere, people’s hopes and the key tasks of government are focused on three issues:

- First, enabling people to have jobs and better incomes over time;

- Second, preserving a sense of social equity, and especially giving people with humble beginnings the opportunities to see their lives improve and move up;

- Third, ensuring a fair deal between generations. In the advanced countries especially, there is the growing challenge of providing a fair deal for today’s generation of young people.

7. These tasks go to the heart of people’s hopes and anxieties – they worry about jobs, about what life will be like five to ten years from now, and whether their children will have a better future when they grow up.

8. Unfortunately, few societies have been able to deliver on these three basic objectives – jobs, social equity and a fair deal between generations. In many, jobs are slipping away. Social mobility is declining. And the build-up of unsustainable public debts has meant that a younger generation faces the prospect of paying for large welfare commitments made to older people today, but which the young will  themselves not be able to enjoy as they grow older.

Jobs and incomes

9. High levels of youth unemployment, a growing pool of the long-term unemployed, and the growing share of temporary, low-paying jobs are now the defining reality of labour markets in most advanced economies.

10. The problems in Europe, especially for youth, are well known. There is a real risk of a wasted and frustrated generation. Even in the US, youth unemployment remains high four years after the crisis, at 16%. And labour force participation in the US is at its lowest level in 35 years.

11. The challenges are most severe for those with low skills, but they are increasingly being seen in the middle of the labour force. In the UK, and US, a large proportion of recent college graduates – the younger college graduates – are underemployed, or working at jobs that do not require a college degree. (In the US, the proportion is 40% of recent graduates.)

12. For those with jobs, incomes are also faring poorly for the average worker. Median incomes across the advanced world have stagnated or declined in real terms for at least a decade. The same is true for lower income workers. Germany, which has seen lower unemployment than most other advanced economies, has achieved this through the growth of low-paying ‘mini-jobs^[1]’ .

Social equity

13. Inequality has been going up over the last two decades, virtually everywhere. Some of the sharpest increases have been seen in the Nordic countries, which have been amongst the most egalitarian societies. But they are also amongst the most open economies, and exposed to the same forces of globalisation and technology that have affected everyone.(Before taxes and transfers, Finland and Sweden’s Gini coefficients are at 0.48 and 0.44, compared to the US at 0.50 and the UK at 0.52 ^[2]).

14. Taxes and transfers have mitigated inequality, most so in Europe’s advanced welfare states. But taxes and transfers have with few exceptions been unable to rekindle social mobility, and achieve better prospects in education and the workforce for those who start off poor.

15. The sense of social equity has also been diminished by the growing difficulty of owning a home, especially among young adults – the so-called Millennial generation – and among lower income families. Home ownership has always been an important way to accumulate savings and wealth for the long term. It is now declining across the advanced countries, even in economies that have performed better like Germany and Australia. Amongst Americans, 35% today live in rented accommodation. Home-ownership among young adults has declined most sharply, and the share of young adults living with their parents is at a 40-year high.

Fair deal between generations

16. The crisis of equity between generations is however the biggest looming challenge. Most of the advanced countries’ welfare systems are living on borrowed time. Promises made when their countries were younger and growing more rapidly are no longer affordable.

17. There are two reasons for this unusual crisis of intergenerational equity. First, remarkable advances in medical science and living standards over the last five decades have led to greatly lengthened life expectancy, but have not been accompanied by needed reforms in pensions and healthcare financing.

18. The second reason is less widely understood. Pension funds have for some time now been assuming unrealistic future investment returns, and committed to paying out pension benefits based on those returns. It is now becoming clear that they cannot achieve such returns, and that there is a growing gap between their assets and their liabilities, which are the amounts they have committed to pay their members. There is therefore a large and growing problem of  unfunded liabilities. Detroit’s broken pension promises were founded on projected returns of 8% per year – far above what investment experts now consider realistic. But many other public pension funds have been making similarly unrealistic assumptions. Detroit is u nlikely to be the last city to declare bankruptcy.

19. Pension and healthcare financing reforms have begun in several advanced countries, but remain the largest unfinished project. Fundamental reforms will be needed to avoid an inequitable burden on the young, either through public spending cuts or significantly higher taxes through much of their working lives.

Singapore’s similar challenges

20. In Singapore, we face the same challenges that all societies face – of creating good and better-earning jobs for the majority of our people; preserving and enhancing a sense of social equity; and ensuring that we have a fair deal between the older and younger generations. We must keep our focus on these basic challenges.

21. We do not start from a position of disadvantage today.  Unemployment is low. Young people are able to secure jobs soon after graduation. The demand for older workers has also risen in a tight labour market. Hence our overall employment rate, at 64%^[3] is also one of the highest internationally.

22. Incomes have also grown significantly in real terms. The median Singaporean worker has seen real wages increase much faster than in the other Asian NIEs – Hong Kong, Korea and Taiwan in the last five years. The same is true for incomes at the household level. Our lower income households, those at the 20th percentile of the income ladder, have also seen their incomes grow, unlike the stagnation seen in many other countries^[4]. Our home-ownership rates, including the fact that over 80% of households in the bottom 20% of incomes own their homes, have no parallel anywhere else in the world.

23. However, the experience of wage stagnation in the advanced countries and slow income growth in the NIEs tells us something about the realities of the world we all live in. These are economies with highly competitive global enterprises and deep capabilities, which we can learn something from. We all live in the same world that complicates the task of achieving inclusive growth – the same world where China is moving up the value chain and other emerging economies are striving to create jobs and gain global market share; the same world where advances in computing power and Artificial Intelligence are increasingly taking the place of jobs, both at the lower end and middle of the workforce, and both in manufacturing and services.

24. We will have to learn from others who are ahead of us in every sector, and find our own way to ensure that Singapore continues to be a place where the majority of citizens can hold good jobs and see improving living standards.

25. We are making special effort to uplift our lowest paid workers. Most are older workers, who had far fewer educational opportunities in their time compared to today’s young. Through Workfare and the Special Employment Credit for older lower-wage workers, we are giving them about 40% on top of what their employers are actually paying. We are also working on raising their pay in sectors like cleaning and security, through the Progressive Wage Model that the tripartite partners have embarked upon.

26. We are also building on a progressive fiscal system to provide greater support to our lower income families and the elderly. Through enhanced education opportunities, from pre-school through to the workplace, and through HDB grants to enable home-ownership, we are doing more to level up those who start with less. And we are strengthening our social safety nets, especially in healthcare, to give Singaporeans a greater sense of security as they move into their silver years.

27. When you take our schemes together, existing and new, we are providing a significant lift to the lower income group. Let me explain. Minister Chan Chun Sing recently spoke in Parliament about the multiple lines of support – the ‘kueh lapis’ system of social safety nets – that we are providing for those with varying needs. When you add it all up, we are providing substantial support to the lower income group through targeted education subsidies, housing grants, wage supplements, healthcare subsidies and other schemes.

28. Take a typical, young low-income couple at the 10th percentile of the income ladder. And consider what will happen to them over their lifetimes, as they progress and as they obtain support – at work, in housing, for their children’s education and for their healthcare needs. The benefits that such a family would receive will add up to an amount that exceeds their own lifetime incomes. Over a lifetime, a low-income couple can expect to receive benefits that would help them more than double their lifetime earnings – after deducting the taxes they pay, which is mainly the GST. This is without taking into account the appreciation in home equity that they get as a result of the initial housing grant, which even with modest assumptions imply significant lifetime benefits in its own right.

Why social culture matters

29. The Government is playing a more active role in redistribution. We began tilting our policies in favour of the lower income group in 2007, and have expanded support for the middle income group in the last few years.

30. But the most important question – and this is the main theme of my speech – is not how much we redistribute, but how we do so.

31. How do we best intervene? In particular, how do we do so in a way that preserves the social culture and norms that enable Singapore to be a fair society without reducing its vim and energy? It is in every citizen’s interests, and certainly our lower income folk and elder’s interests, that we retain a vibrant economy, capable of supporting important social needs.

32. How do we intervene in a way that preserves a sense of pride that comes from standing on one’s own feet, the desire to improve and work hard for a better living? How does Government encourage, rather than stifle, the community initiatives and civic culture that makes us a better society? And critically, how we do sustain a social and political consensus that enables us to look well ahead, to ensure that what we do today to preserve equity can be sustained financially so that a fair and just society defines our children’s Singapore?

33. Social culture – the values and norms, and especially the willingness of individuals to take responsibility for themselves and their families, and to support others – this social culture matters in building the good society.

34. As Rajaratnam himself put it, in a National Day speech in 1977, “Where the vast majority of citizens regard rights and responsibilities as inseparable aspects of social life, there you will have the good society. Ultimately it is the quality and character of the individual citizens rather than blueprints and programmes which decide whether a society is good or bad, peaceful or violent, a success or failure.”

35. But history has also taught us how social culture is not immutable, and how it changes in response to policies themselves. Communism reshaped social values and norms, leaving a legacy that has lasted well after it collapsed as an economic system. Free-market capitalism breeds its own social ethos, as individuals look out for themselves. And the social-democratic model, which arose especially in Western Europe in response to both communism and fascism, and which sought to temper capitalism through a welfare state, has itself seen quiet and unintended changes in values and b ehaviour take place as initially modest social entitlements were expanded over the decades. Societies that were known for their industriousness have, in ways not anticipated in the original social-democratic vision, seen a steady erosion of the work ethic, increased dependence on state support, and weakening of community bonds. 

36. Those who count themselves as socially progressive have to be deeply concerned about social culture, not just conservatives. The invisible hand of social culture is at least as powerful as the invisible hand of the market. Policies to redistribute resources and level up the poor can hence only succeed and be sustained if they are designed to encourage a culture of personal responsibility – in the family, in education and at work – and if they promote collective responsibility among everyone, to improve the lives of others and the community we live in.

37. I believe there is this space for active government policies that level up those who start with less, in a way that reinforces the values and ethos needed to sustain a dynamic and fair society, one that all citizens contribute to and can be proud of. There is space for this true progressivism.

38. To illustrate, I will talk about four areas where policy has to be concerned about social culture, so that we can better our chances of sustaining a fair and inclusive society.

Sustaining Social Mobility

39. The first issue concerns social mobility, which is a challenge all over the world. Efforts to keep mobility alive must remain at the core of our efforts to level up those who start off with less.

40. In the US, the gap in standardised test scores between poor and rich children is about 40% wider today compared to the 1980s. That’s a very large increase. It has in fact happened while gaps in test scores have narrowed between black and white students. Family incomes now matter more than race in explaining test scores. But studies also point to a growing cultural divide. Better off parents are spending more time than ever before with their children from young, taking them to language and maths lessons, exposing them to sports and music, and finding every way to give them a head start. The divide has been accentuated by the educated marrying the educated. At the same time, social policies since the 1960s have accentuated trends where a lower income family is more likely than ever to be headed by a single parent, who is typically stretched for time.

41. Another factor has been the social dynamics within communities. Studies done in the last couple of years by a group of economists at Harvard and UC Berkeley  found wide divergences in mobility across different regions of the US, including areas with the same incomes^[5]. They looked for explanations. They found that traditional redistributive strategies, such as state-level tax credits for lower income families explained only a small portion of the differences in mobility, once other factors were taken into account.

42. The more important factors were social. Upward mobility for the poor was stronger where they were living in mixed-income neighbourhoods compared to those with high poverty concentrations. It was also stronger when they live in areas with higher concentrations of two-parent families, better preschools and schools, and higher levels of civic engagement.

43. These and other studies confirm why James Heckman, the Nobel laureate best known for his studies on education and mobility, has warned that it would be a mistake to think that just giving families more will improve their children’s prospects.

44. What happens at home, in school and in the community shape your aspirations, your confidence, the habits you pick up and the support you get as you grow up. Studies also point to the critical role played by the quality of parenting in the early years, before kids even go to preschool -  although no society has found an easy way to influence that.

45. We are intervening upstream, earlier in children’s lives, to reduce the gaps in the starting points between children from poorer and better off backgrounds. We are investing in better quality pre-schooling, at affordable rates, and in detecting those with learning difficulties early. We have to find every way of reducing these gaps, these early gaps between kids of different social backgrounds, through both government and community initiatives.

46. Our system of meritocracy too is evolving. We have moved away from excessive testing of pupils in the early primary years, which is not ideal for their development, and also works in favour of those with a head-start.  We are also moving away from fine differentiations in PSLE scoring at the end of primary school, and providing many pathways to recognise students with different talents and interests and help them to develop their potential in secondary schools and beyond. It is becoming a broader meritocracy, not just focused on academic scores.

47. We should avoid thinking that egalitarianism is best served by every child getting the same education in secondary schools. It has not worked out well in many countries. In France, for example, the insistence on a uniform education for all students in schools has led to manifestly non-egalitarian outcomes. The best students do well, with those at the top ending up in the elite Grand Écoles. But over a third of French students repeat a year in school by the time they are 15.  One in five leaves secondary school with no qualification. It is an example of seemingly egalitarian means with non-egalitarian outcomes.

48. We must continue to provide differentiated pathways to help every student discover his or her strengths, and help them achieve their aspirations. We are also investing heavily in continuous education for working adults. There must be bridges and ladders at every stage of life, so that the grades or qualifications you get in your youth do not settle things for life. There is much to learn too from some of the advanced countries, where the workplace culture is respectful of people in different vocations, and continuous investment in their skills has helped companies become global leaders in their own niches.

Compact between personal and collective responsibility

49. The second issue I will talk about has to do with the balance between individual and collective responsibility.

50. We know we should avoid the extremes. We cannot take a free market or laissez-faire approach to inequality and social divergences. It will lead to widening income gaps, that will tend over time to reflect not only people’s different abilities and efforts but the advantages and disadvantages of social backgrounds that people start with. It will sap the morale of our society. But we also know that too much dependence on the state eventually saps the energy of society.

51. Finding the right balance between personal and collective responsibility is a vexing issue all over the world, and especially because social values and norms themselves change over time. The advanced societies offer lessons.

52. The best way to illustrate the challenges is to look not at the societies that are failing, but at the more successful economies, like Sweden. The Swedes were well-known for an ethic that placed value on hard work and savings. They were a nation of small farmers at the end of the 19th century, and built up highly competitive industrial companies in the last century. Many of their companies remain global leaders, a remarkabl e achievement given Sweden’s small size, with activities all around the globe. However, Sweden has also seen profound changes in social culture in the last 40 years. Surveys show that the attitudes of today’s younger generation, towards work and society, are quite different from those born before or soon after the Second World War. Youth unemployment in Sweden is 24%. The unemployment rate for the whole labour force is 8%, but it is estimated to be 20% or higher if we count those who are on long-term sick leave, transfer payment programmes, and those who live on disability benefits. Remarkably high rates of sick leave and disability benefits exist despite Sweden having one of the healthiest people in the world. New social norms have evolved, hand-in-hand with the expansion of welfare entitlements.

53. In the US too, there has been a surge in the last decade in the number of people on disability benefits. Studies however show little evidence of an actual rise in disabilities, or that the health of Americans has deteriorated.  Disability claims have therefore been described as a ‘policy-driven epidemic’: many of the long-term unemployed who face no prospect of regaining a job are reclassified as disabled so that they can get continuing and permanent benefits.

54.  Countries like Sweden, Denmark and the UK are undertaking important reforms to reprioritize and refocus benefits, and roll back the excesses of the welfare state. This is not the end of their welfare state, but they want to reprioritise and refocus.  Denmark’s Finance Minister Bjarne Corydon recently called for a change in welfare habits so that Denmark is able to compete with populations that work harder at a lower cost. The price of not changing, as he put it, would also be to create distrust within society. In the UK, there are efforts to go back to a culture of mutual contributions that underpinned the welfare system that William Beveridge had originally described. They want to move away from a culture of ‘something for nothing’, where you get benefits even if you make no contribution.

55. However, reversing social norms takes time, and every democracy finds it more difficult to take something back from people once it is given.

56. As we step up our social policies in Singapore, our approach must therefore be to encourage a compact between personal and collective responsibility, where each reinforces the other, rather than a zero sum game. We must do more to help the poor and sustain mobility in each new generation, but do it in a way that reinforces individual effort and responsibility for the family. This paradox of active government support for self-reliance has to run through all our social policies.

57. An emphasis on self-reliance must therefore never be about leaving people to face life’s problems and uncertainties on their own. That is not our approach. It is about giving active government support, in education, at work and in housing, and in healthcare, but in ways that encourage individuals and families to take responsibility.

58. We must also avoid at all costs an entitlement mentality amongst those who have succeeded. Succeeding through a meritocracy does not mean that you made it on your own. Those who succeed have a special responsibility of reaching out to others in the community, giving them the respect they deserve for the work they do, and helping those who start off with less in each new generation to do well through meritocracy.

Nurturing a culture of innovation and risk-taking

59. Let me turn now to my third issue on social culture, which concerns nurturing an innovative and risk-taking culture.  It’s what every society needs. We all need an innovative culture because that’s where the rewards will be in the global economy and that’s the way in which economies who have moved beyond middle incomes can succeed. Innovation, and greater room for risk-taking.

60. But this is also a matter with no neat policy solution. In fact, the sources of risk-taking and entrepreneurship are not well-understood, and there is little consensus on them.

61.  We do know that some countries do better than others in innovation and risk-taking. The US does better than most. It has more of the early-stage entrepreneurial activity that many other countries, including ourselves, would like to develop. Silicon Valley, the Boston corridor, a few other locations. It has a combination of early-stage financing, close ties between universities and venture capitalists and entrepreneurs, and more lenient bankruptcy rules than most other countries. There are some things to be learnt from the US. But even in the US, the culture of Silicon Valley, that culture of risk-taking, is quite different from the main body of American society.

62. However, the bigger questions lie in social culture, for which there are even fewer easy answers. What is it that will create more of an innovative and risk-taking culture in our societies?

63. It probably starts from young. I would suggest three things. We need to engender amongst our young a strong sense of their own personality, and a stronger desire to do their own things. We need more people who grow up to be obsessive individuals, as many entrepreneurs are.

64. Second, we should encourage more questioning, starting from a young age. This has to be in the culture of the classroom, of the home, and as they grow up, in society. Questioning from young, so that more people think in original ways.

65. And third, it probably pays to provide more room for kids to do things outside the classroom, outside the academic – to provide a whole range of activities, as we are seeking to do as we broaden our education system.

66. In all these regards, it is not so much about the state doing more, or schools devising a new curriculum or trying to teach more, as much as about providing space. In some respects, doing less, particularly in education.

67. But we have to nurture this culture in a way that preserves a sense of cohesion and a common spirit in our society. This is a challenge that is greater for a very small country like ours than for a big one like the United States, where Silicon Valley and other risk-taking hotbeds can exist, while Middle America remains conservative.

68. So I raise this third issue, the task of nurturing an innovative and risk-taking culture, in an open-ended way. There are no easy solutions. It is something that requires more discussion and thought. But we should be willing to open up new directions, starting from young, in the hope that we break new ground.

Growing the Public Good: Quality Spaces and Civil Society

69. My fourth and final issue is about growing the public good, and in particular the role of public spaces and a civil society. We cannot think about a fair and inclusive society purely in terms of incomes or redistribution. It is also about everyone having access to quality living in our neighbourhoods and public spaces, and about the sharing of ideas and active civic participation that can grow the public good.

70. Our neighbourhoods are probably the most distinctive social feature of Singapore. The full span of HDB homes, from low income to upper-middle, and with private housing often in the same neighbourhood. A mix of races in every HDB precinct and block.  We have avoided the disadvantaged neighbourhoods seen in many countries. We have disadvantaged families, but we must make sure we never have disadvantaged neighbourho ods, where social problems can reinforce themselves, get more knotty, and solutions become more difficult.

71. We have built and must keep the consensus that enables us to invest in quality neighbourhoods all around the island that residents from all walks of life can enjoy. The latest URA Masterplan sets out our plans for the future. But it is not just about creating a beautiful and liveable island. It is also promoting the public good, and social equity.

72. We are creating more green and blue spaces in the neighbourhoods, and more nature corridors that connect different parts of the island. Spaces where people can relax and unwind, engage in sports or treasure nature. And we are creating spaces for the arts, both downtown and in the neighbourhoods, that give us pride in our identity and allow artists to imagine and push our boundaries.

73. We must also promote active civic participation and passion for the public good.  This too is a challenge in many societies. Civil society and civic participation has diminished in almost every advanced democracy. In the UK, membership in almost every civic organisation, and even political parties, has declined. In many of the advanced welfare states, an active state has freed people from the bonds of family and the local community. Collectivism has in an unexpected way led to a new individualism.

74. We have to promote an active exchange of ideas on how to make our society better, and beyond ideas, promote active civic participation and leadership.  We have to promote Rajaratnam’s ‘democracy of deeds’.

Conclusion

75. Let me conclude. I’ve spoken on a number of areas where policies can support the social culture that will make for a vibrant and better society.

76. We must also sustain as best as we can a political culture that looks at the long term – anticipating challenges on the horizon, and thinking hard about how we can sustain a fair and just society for our children’s generation.

77. Short political horizons are never helpful. That is a culture that we really have to avoid – the culture of short-term calculus, or extracting political gains for today and leaving someone else to solve the problem further down the road. We have to keep the popular narrative focused on the long term, even as we take care of today’s generation.

78. Our policies and even our thinking will of course evolve with the times. They must. As Rajaratnam himself put it in an interview in 1985, “I am quite sure that in the future, as circumstances change and as new environments emerge, as new attitudes develop, the practice of democratic socialism in Singapore must change…..In all dynamic political systems, there must be changes without end. When there is no change, you know you are dead.”

79. We are starting from a position of strength. I believe we can keep improving, changing, learning lessons from the rest of the world, and together build a better society.

80. Thank you.

^[1] Mini-jobs are a form of marginal employment that involve a cap on pay (recently raised to 450 Euros) and limited social security and tax obligations for both the employee and employer. Roughly one-fifth of the workforce is estimated to be on mini-jobs.

^[2] Source: OECD. Data is for latest available year (2010).

^[3] For those aged 15 and over in 2013.

^[4] Real incomes for the median and 20th percentile resident employed households grew 17% and 16% respectively over the five years from 2007 to 2012. This is deflated by the CPI All - Items index for the middle 60% and lowest 20% of households respectively. (This inflation rate includes imputed rentals on owner-occupied accommodation, which do not involve actual cash expenditures. Excluding imputed rentals, the growth of real incomes for the median and 20th percentile resident employed households would be higher at 22% and 26% respectively). Note also that these figures are after accounting for taxes and transfers, for international comparability.

^[5] See for example “The Geography of Opportunity” by Reihan Salam (Reuters August 1, 2013) and “In Climbing Income Ladder, Location Matters” by David Leonhardt (New York Times July 22, 2013), summarising results from the study. Details can be found at The Equality of Opportunity Project website.