Stagflation Hits Singapore as Inequity Grows

Stagflation Hits Singapore as Inequity Grows
Commentary by Andy Mukherjee

Photo by: Munshi Ahmed/Bloomberg News

Feb. 18 (Bloomberg) — Stagflation has come to Singapore.

The entire focus of the government’s annual budget, announced Feb. 15, was on dealing with the perils of slowing growth and accelerating inflation, a deadly combination as less fiscally robust governments than Singapore’s may soon discover.

Of the two, the bigger threat is clearly the 4.4 percent rate at which consumer prices rose from a year earlier in December, the quickest pace in a quarter century.

It’s quite natural then that the word “inflation” appears 43 times in this year’s budget statement.

Last year, it wasn’t even mentioned once.

To be sure, the authorities in the city-state are entering the combat zone from a position of strength, and not only because they have accumulated budget surpluses in most years for four decades now.

For two straight years, people in every income bracket have taken home bigger paychecks.

Not just that. If the consumer-price index is any reflection of the true cost of living in the city-state, then even the poorest 10 percent of non-retiree households — with a per-capita income of just S$180 ($127) a month — have had real gains in purchasing power.

However, the rich have fared much better. Starting in 2000, inequality has widened a little every year.

Singapore’s Gini coefficient, a widely used measure of income concentration, overtook that of the U.S. in 2006 and rose further last year to 0.485, a very high level of disparity for a society with an educated workforce.

Recession Risk

And this inequity may now become a problem because the growth momentum has suddenly collapsed as the much-expected “decoupling” from the troubled U.S. economy has — at least so far — failed to materialize.

On an annualized basis, gross domestic product contracted almost 5 percent in the final three months of last year compared with the previous quarter.

If there’s another fall in GDP in the current quarter, then Singapore would technically be in recession.

It’s one thing to have an unequal society where the workforce is, for all practical purposes, at full employment and income growth is outpacing inflation for everyone, albeit more quickly for the rich than for the poor.

A somewhat lopsided income distribution is only to be expected in a city that wants more rich people to come here to live, work and play. It now takes just a week to register a hedge fund from scratch in Singapore, many times faster than in the rival financial center of Hong Kong.

A couple of casinos will open by 2010, and an annual Formula One night race starts this year.

Helping Hand

When it comes to helping the poor, the island-state generally eschews consumption subsidies, except in education, basic health care and for public housing, the biggest source of wealth creation for the average Singaporean.

However, Singapore has mechanisms in place for transferring the government’s fiscal surpluses to the poor in bad years and ensuring that they can get by even on monthly wages that wouldn’t buy a meal for two at My Humble House, a restaurant that isn’t exactly what its name suggests.

What Singapore has resolutely shied away from is giving its citizens any handout that may dissuade them from seeking work. Unemployment insurance, an idea that was discussed following the 2001 recession, remains a no-no.

That may be a prudent strategy, especially in a fast-aging society that’s trying hard to retain competitiveness as cheaper locations in China and India become more sophisticated producers of almost everything that Singapore makes.

Prudent Versus Popular

Nonetheless, a prudent course may not be a very popular one in an environment of stagflation. When people start losing their jobs while their electricity bills keep going up, there may be resentment against the rich, many of whom are foreigners.

Singapore is too pragmatic to want to use tax policies to fashion a more egalitarian society. Even this year’s budget gave a bonus to the rich by scrapping estate duty.

The move is aimed at getting wealthy individuals around the world to shift their assets to Singapore, where there are no levies on capital gains and the top rate for personal income tax is 20 percent.

To make sure that the poor don’t fall further behind, the emphasis of the government’s budget this year is on returning S$5.4 billion worth of fiscal surplus to the people, especially low-income households and the elderly.

As a small, open economy of 4.6 million people, Singapore can’t do much to escape stagflation. As a prosperous nation — average household income from work last year was the equivalent of $50,000 a year — it is going to be under increasing pressure to shield its vulnerable from economic forces over which the city’s authorities have no control.

For now, the government has been proactive in responding to the challenge. If the economy slows more than the current official forecast of at least 4 percent expansion this year, or if the cost of living becomes more unbearable, the helping hand may have to extend its generosity further.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Andy Mukherjee in Singapore at

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