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-ChinaPopulationAgeing:ALookatOneChildPolicyEffects
-Singapore:AWelfareState?-VonMisessCritiqueofMarxsSocialism(Part1)
TheFortnightInBrief(16thSeptemberto29thSeptember)
US:Shutdownintheworks
OctoberlookstobeofftoarockystartastheHouseofRepresentativesfailedSunday,topassacleancontinuingresolutiontofundthegovernment.TheHousevoted231-192foraplantyingcontinuedfundingwithaoneyeardelayoftheAffordableCareAct.ThenewCRisexpectedtobedeadonarrivalinthe
Democratic-controlledSenatewhichreconvenesMonday.TheWhiteHousehas
issuedavetothreatonanybillthatwouldimpedetheimplementationofthehealthcarelawwhichissettobeginnextweek.
Asia:Mini-stimulusstabilisesChinaeconomy
ChinasPurchasingManagersIndex,preparedbyHSBC,missedanalystestimatesof51.2inSeptember.ThePMIresultscameinat50.2,indicatingmildexpansion.Atthesametime,exportorderswasupforthefirsttimeinsixmonths,withoverallnewordersremainingflat,indicatingadropindomesticorders.ThefigureshowsthatwhiletheChinesegovernmenthasmanagedtostabilisetheeconomywithitsmini-stimulus,therehasbeennosignificantpick-up.
EU:Unemploymentremainsstubbornlyhigh
Thismonth,homepricesintheUKroseatitsfastestrateinmorethansixyearsundertheeffectofgovernmentmeasures.TheHelptoBuyscheme,setintoactionbyPrimeMinisterDavidCameron,pushedpricesinSeptemberinthe9outof10regionstrackedbyHomeTrack,aLondon-basedpropertyresearcher.
Numberofbuyersincreased1.4%fromSeptembertoAugustwhilenewpropertylistingsfell0.3%.ThisunderscorestherisingconfidenceintheUKeconomy.
WhileoptimismintheEurozonehasrisen,unemploymentremainsstubbornlyhigh,withapollof30economistsbyBloombergshowingamedianestimateof12.1%rateofunemploymentinAugust.MarioDraghi,ECBspresident,hasurged
governmentstoimplementdecisivestructuralreformtocombatthehighunemployment.
INCOLLABORATION
WITH
PROUDLYSUPPORTEDBY
ISSUE 46
30 September 2013
SMU Political-EconomicExchange
ANSMUECONOMICSINTELLIGENCECLUBPRODUCTION
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STOXXEurope600
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Figure1:FertilityTrendsinChina,1950-2008
Source:Gu&Cai,2009
Figure2:ComparisonofBirthRates,1970,1980,1998
Source:Wangetal,2012
HowDoesPopulationAgeingAffectEconomy?
Populationageinghappenswhenacountrysdemographicstructurechangeswithahigher
proportionofthepopulationbeinginolderagegroup(65andabove),decliningTFR(below
thereplacementlevelat2.1),longerlifeexpectancyandincreasingdependencyratio.Ithas
variouseffectsontheeconomybutinthispaper,wefocusmainlyoneconomicgrowth.
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Chinaisexperiencingoneofthefastestratesofpopulationageingthankstodecadesof
decliningTFRandrapideconomicdevelopments.WhatChinaisgoingthroughin20yearsis
equivalenttowhatsomedevelopedcountriesexperiencein80years.Theagegroupabove65
inChinawillaccountforalmostaquarterofthepopulationinaround2030-2040,upfromthe
current7.5%(Cartier,2011).
Thefollowingequationistheformulaforeconomicgrowthaccounting:
Y=AKL1-
WhereYisoutputoftheeconomy,AisTotalFactorProductivity,KiscapitalintensityandLis
labourinputs.
Labourinputsforageingeconomieswillseeasteadydeclineduetomoreandmoreworkers
leavingtheworkforcethanthoseentering.Thelowerfertilityratewouldguaranteethatthe
youngerpopulationandconsequently,theworkforcewillshrinkrapidly.However,onewould
arguethatlabourinputscanstillbesustainediflabourparticipationrateisincreasedtomakeupforthelossinabsoluteworkforcenumbers.Unfortunately,datahasshownthatLabour
ForceParticipationRateinChinahasbeendeclinedinrecentyearsfrom75.9in2003to74.1
in2011(WorldBank).
AnotherfactorineconomicgrowthistotalfactorproductivityorAwhichcancounterthe
effectsofpopulationageing.VariousstudiesinthepasthasputTFPgrowthrateinChinaat
around2.98%.However,thecontributionofTFPgrowthtopotentialGDPgrowthdecreased
from3.0%in197894to2.7%in19952009,andthiswilldropfurtherto2.3%in2010
15(Kuijs,2009).Therefore,increasingly,ChinacannotrelyonitsTFPtodrivegrowthgiven
thecurrentlevelofinnovationandR&D.AlthoughChinaisaheadofotherdevelopingcountriesintermsofR&Dinvestmentandinnovation,itisfarfromthedevelopedones(Cai,
2012).
Capitalintensitymayincreasewhenthepopulationshrinks.However,giventhecurrentstate
oftechnologyinvestmentinChina,itwouldbehardforcapitalinvestmentalonetosustain
economicgrowthandcounterbalancethedeclineoflabourinputs.Inaddition,withrapid
populationageing,substantialsavingsfromprivateandpublicsectorwillneedtobeusedfor
caringfortheelderlycausingaconstraintonhowmuchChinacaninvestintoitsown
technology,innovationandhumancapitaldevelopmentinthefuture.
Conclusion
AlthoughtheOneChildPolicyisnoteffectiveinaffectingtheTFRlevelandthusaggravating
theageingissue,populationageingaloneisenoughtocauseproblemsforeconomicgrowth
throughdeclineinlabourinputsaswellasstrainingoninvestmentsinthefuture.Withits
currentpolicies,Chinaisnotwellpreparedtotacklethisproblem.
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Sources:
1.Cartier,M.(2011)ThirtyYearsofEconomicReformandWorkforceTransformationinChinaChinaPerspectives,No.2011/2
2.Alkema,Leontineetal.(2011)ProbabilisticprojectionsofthetotalfertilityrateforallcountriesDemography48(3):815839.
3.Feng,Cai&Gu(2012)Population,Policy,andPolitics:HowWillHistoryJudgeChinasOne-ChildPolicy?PopulationandDevelopmentreview38(Supplement):115129(2012)
4.WorldLabourForceParticipationRatedata19902011WorldBankAvailableathttp://data.worldbank.org/indicator/SL.TLF.CACT.ZS
5.Kuijs,Louis.(2009)Chinathrough2020AMacroeconomicScenario-WorldBankChinaOfficeResearchWorkingPaperNo.9.Beijing:WorldBankChinaOffice.
6.Cai,Fang.(2012)TheComingDemographicImpactonChinasGrowth:TheAgeFactorintheMiddle-IncomeTrapAsianEconomicPapers11:1
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Singapore:AWelfareState?
ByIshaanPoddar,SingaporeManagementUniversity
SingaporesrapidprogresstobecomeoneofAsiaswealthiestnationshasinvitedscrutinyon
thecountryssocialwelfarepolicy.Ourreserves,estimatedtobeabout$900billion,andourbudgetsurplus,$3.9billionlastyear,puzzlesmanyastowhywecontinuetospendsolittleonsocialspending.AndmanyhaveindeedstartedtodemandthattheSingaporegovernmentstartrethinkingtheirstanceontheissue.
ThispaperanalyseswhetherSingaporeiscapableofadoptingandsustainingthetraditionalEuropeanwelfaremodelemployedbycountrieslikeDenmark.
TheSingaporegovernmenthasalwaysbelievedthatitscountrycannotaffordtheEuropean-stylestatewelfarebecauseofalackofnaturalresourcesofitsowntofallbackon,andthateachgenerationwouldhavetoearnandsaveenoughforitsentirelifecycletosurvive.Asaresult,insteadofdirectcashpayments,theyhavebeenprovidingcertainsubsidiesforeducation,healthcareandpublichousingtoupliftskills,promotehealthandincreasetheassetsofallSingaporeans.Sincethesystemhasbeenasuccesssofar,thegovernmentbelievesthereisnoimminentneedforthemtoreconsidertheirperspective.
ReviewofSingaporescurrentpolicies
Eventhoughthegovernmentclaimsitisnotandcannotbeawelfarestate,manybelievethatthesystemisplayingitspartinredressingtheinequitabledistributionofresourcesbythefreemarketthroughaprogressiveincometaxsystem,highlyselectivesocialservices,andvariousmeans-testedsubsidiestotheneedy,fromlow-incomestudentstotheunassistedelderly.However,whatisimportanttonoteisthattheextentandmannerofwelfareprovided
actuallydistinguishesonecountryseffectivenessagainsttheother.
Laidoffworkersreceivenoautomaticbenefitsinstead,theyaresortedintoworkfareandtrainingschemes.Onlyabout3000families(TheEconomist,2010)qualifiedforpublicassistancemeantfordestitutecitizens.AndSingaporespentonly3.5%ofGDPonsocialprotection(AsianDevelopmentBank,2013).Thiswasfarbelowthe19.2%byJapanand8%spentbySouthKorea,theotherhigh-incomecountriesinthestudy.Furthermore,theCentralProvidedFund(CPF)accountsfor76%ofallsocialprotectionexpenditures.AstheCPFisnotspendingbythegovernment,butessentiallythepeoplesownsavingsSingaporessocialspendingisactuallylowerthanthatcitedinthesubjectreport.
Divisionbetweenfiscalcapacityandspending
Singaporehasthefiscalcapacitytofinanceadequatesystemsofsocialprotection,butapartfromsomeprotectionintheformofsocialinsurance,ithasntreallydonemuchyet.Historically,therehasntevenbeenmuchofaneedfrom1965untilaboutthemid-1990s,Singaporeenjoyedasteadygrowthwithlowunemploymentrates.ThatalongwiththeCPFschemeensuredthatmostpeoplesincomewasgrowingandatthesametimeeverybodywassavingsufficientlyforretirement.Assuch,therewasntanobviousneedforthegovernmenttoprovidesocialprotection.
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Inequality:ArisingGinicoefficient
Alot,however,haschangedsincetheAsianFinancialCrisisin1998andtheGlobalFinancialCrisisin2008.IncomeinequalityisontheriseSingaporesGinicoefficient,whichisalreadymuchhigherthaninotherdevelopedcountries,hasrisenfrom44.2in2000to48.5in2007.Inadditiontothat,wagerateshavestagnatedformostofthelow-incomeworkersduetovariousfactorslike,butnotlimitedto,theinfluxofforeignworkers.Socialmobilityhas
sloweddownconsiderablyandmiddleagelongtermunemploymentisincreasing.Inadditiontothese,theeffectivenessoftheCPFasaretirementschemehasalsocomeunderquestionsincethesefundscanbewithdrawnforotherpurposeswellbeforeretirement.
TheabovefactorshavepromptedmanytoquestionwhySingaporehasntincreaseditssocialprotectionexpenditureyet.Buteventhoughthereisanevidentneed,therearecertainreasonswhySingaporemaynotbeabletocompletelyadapttotheEuropean-styleofwelfarefollowedbycountrieslikeDenmark.
WhySingaporecantbeawelfarestate
UnlikeintheNorthernEuropeancountries,wherecitizensdonotmindpayinglargetaxestohelpbridgetheinequalitygapandallowtheirfellowcountrymentobenefit,mostSingaporeansbelieveeachpersonshouldbecapableofsustaininghimself,andsotendtobewaryofhelpingothersbysacrificingtheirpersonalincome.Singaporerecentlyreduceditspersonalincometaxrate(2012),wherethefirstS$20,000istax-free,andthemaximumamountoftaxanindividualpaysisS$43,350forthefirstS$320,000and20%fortheincomeabove$320,000.Ontheotherhand,inDenmark,personalincomeistaxedat37.48%forincomeaboveS$9,400andat59%forincomeaboveS$77,200.So,amovebythegovernmentraisingtaxratestothoseashighasthatinDenmarkmightnotbewelcomed.
Thereisalsoaseveresocialstigmathatactuallydissuadesthoseinneedofhelpfromreaching
out.Aspeoplefrownuponthosewhocannotsustainthemselves,manyfamilieswhoactuallyneedthegovernmentshelprefrainfromdoingso.
TheEconomist,inoneofitsarticlesexplainsthedogmareallywell:
OneexplainsthatSingaporeneedstoweedoutundeservingclaimantsandshakeshisheadatthepotentialcostofacomprehensivewelfareservice.Yetinhisnextbreathhementionsanumberoflocalfamilieswhohavebeenforcedtosleeproughsincemortgagelendersforeclosedontheirflats.
Conclusion
TheSingaporegovernmentiscashrich,andcertainlycandoalotmorethanitiscurrentlydoingforthewelfareofitscitizens.However,evenifitwantsto,itwillbeachallengeforittoincreaseitswelfarespendingtoprovideunemploymentbenefits,nationalizedhealthcare,andpay-as-you-gopublicpensions,whileatthesametime,maintainlowtaxratesandotherincentivesforpeopletocontinueworkingandincreasethecountrysGDP.
Sources:
1.AsianDevelopmentBank(2013)SocialProtectionIndex,AssessingresultsforAsiaandthePacific.
2.Dr.TanNgohTiong,ThedevelopmentofSocialWelfareandSocialWorkinSingapore:trendsandPotentials.
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3.http://www.economist.com/node/155240924.http://www.economist.com/node/155414235.http://www.social-dimension.com/2011/09/four-fallacies-about-the-singapore-welfare-
state.html
6.http://hdrstats.undp.org/en/countries/profiles/SGP.html7.http://www.iras.gov.sg/irashome/page04.aspx?id=11908.http://www.cfe-eutax.org/taxation/personal-income-tax/denmark
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VonMisessCritiqueofMarxsSocialism(Part1)ByKuangWencan,SingaporeManagementUniversity
Background
Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebaker,thatweexpectourdinner,butfromtheirregardtotheirowninterest.Weaddressourselves,nottotheirhumanity
buttotheirself-love,andnevertalktothemofournecessitiesbutoftheiradvantages.
AdamSmith(TheWealthofNations,1776)
Heintendsonlyhisowngain,andheisinthis,asinmanyothercases,ledbyaninvisiblehandtopromoteanendwhichwasnopartofhisintention.Norisitalwaystheworseforthesocietythat
itwasnotpartofit.Bypursuinghisowninterest,hefrequentlypromotesthatofthesocietymoreeffectuallythanwhenhereallyintendstopromoteit.
AdamSmith(TheWealthofNations,1776)InTheWealthofNations,AdamSmithfamouslyarguedthatundertherightinstitutionalframework,peoplepursuingtheirownenlightenedself-interests,would,atthesametime,besteeredbyaninvisiblehandtopromotethegeneralwelfareofsociety,asiftherewereanomniscientandbenevolentmindhiddenbehindthescene.Thisself-regulationnatureofthefreemarketsystemiscentraltotheclassicalliberalidealsofAdamSmith.AlthoughthroughoutTheWealthofNations,Smithusedthemetaphoroftheinvisiblehandonlyonce,thatdidntstopgenerationsofeconomistsandpoliticiansfromusingthistermastheircatchphrase.
Today,asitiscommonlyunderstoodbymosteconomists,thisrightinstitutionalframeworkthatAdamSmithwastalkingaboutisafreemarketsystemofprivateproperty,contractandconsent.However,200yearsafterthepublicationofTheWealthofNations,thisSmithianfreemarketideal,hasbeenchallengedonseveralfrontsbysocialists.
First,capitalismchallengeditonthegroundsofitstendencyformonopolization.Contrarytothepopularbeliefofthetimethatmonopolywasacreationofgovernmentprivilege,subsequentgenerationsofeconomistsandsocialists,likeKarlMarx,arguedthattheoppositeistrue;thatmonopolyisactuallyaninherentoutcomeofthefreemarketeconomy.Hereasonedthatinamarketsystem,thebiggerfirmstendtopossessmoremarketpowerandhencecanbetterdictatethetermsoftradewithboththeirsuppliersandconsumers;thus,
followingthislineofreasoning,ifwearegoingtoallowfirmstocompetewitheachotherfreeofgovernmentinterventions,thenafreemarketeconomywouldinevitablytendtowardsmonopolization.
Inaddition,Marxarguedthatthemarketeconomywhichisalsoinherentlyvolatile,couldunderminestheself-regulatorymechanismofthemarket.Henotedthattheresatendencyforthemarkettooverproduce,andoncethemarketismetwithanoversupplyofgoods,ittendstocontractsoastorestorethemarketequilibrium.Assuch,insteadofcreatingaharmonyofinterestsaspredictedbyAdamSmith,Marxarguedthatthemarketwouldactuallycreateunstoppablecrisisandchaosthatwouldhavethepotentialtowreckthelivesofthousandsandmillionsofpeople.
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Andlastly,giventheabundantsupplyoflaborinthesociety,wagewouldbepushedwaybeyondasubsistencelevel,andhencesubjectpeopletoexcruciatingsuffering.
Inshort,insteadofcreatingliberty,harmonyandeconomicprosperity,KarlMarxreasonedthatacapitalisticeconomywillactuallycreateasocietythatsfilledwithconflicts,irrationalproduction,andhumansuffering.AsfurtherelucidatedbyKarlMarxinhisbook,DasKapital,inordertocorrectalltheseinherentflawsinthecapitalistsociety,wehavetoabolishprivate
ownershipinsocietysoastoevolveourcapitalistsocietyintoasuperiorsocialistonewhereeveryoneproduceaccordingtohisabilityandreceivesaccordingtohisneeds;andonlyaftersocializingallthemeansofproductionthatresourcescouldbeeventuallyallocatedrationally,thatworkerswouldbefinallyliberated,andthateconomicwealthcouldbesharedmoreequally.
WhileKarlMarxssocialistmovementgraduallygainedmomentum,Smithianeconomistsfoughtback,andthesocialistcalculationdebateensued.
Misescritiqueofsocialism
Ifhistorycouldproveandteachusanything,itwouldbethatprivateownershipofthemeansofproductionisanecessaryrequisiteofcivilizationandmaterialwell-being....Onlynations
committedtotheprincipleofprivatepropertyhaverisenabovepenuryandproducedscience,artandliterature.
LudwigVonMises(PlannedChaos,1981)
LudwigVonMiseswasoneoftheleadingadvocatesofSmithianeconomicsatthetime.BeforeMisespublishedhisfirstcritiqueofsocialism,thegeneralunderstandingamongeconomistswasthatKarlMarxssocialismtheoryhadafatalflaw,andthatisitsoverrelianceonthebenevolenceofthegovernment.However,yearsofdebateoverthisincentiveproblemdidnt
getthesocialistsandtheSmithianeconomistsanywhere.Until1920,signsofresolutionshowedupandMisespublishedhispiece,EconomicCalculationintheSocialistCommonwealth.
Thetraditionalsocialistresponsetotheincentiveproblemisthatasocialistsocietywouldtransformhumannature,andcreateanewgenerationsofsocialistmenwhowouldbedevoidofanyselfishgenes.Asideologicalandsimplisticasitmaysound,thisresponsewasindeedbelievedtobetheappropriateanswer,atleasttheoretically,thiscouldbeachievable.Ofcourse,mosteconomistsdidntbuythatidea,butnoneofthemcouldcritiquethatsinceevolutionarypsychologywasbeyondtheirareasofexpertise.
ButMisesdidntgetcaughtupwiththisseemlyridiculousansweranddecidedtotakeacompletelydifferentapproachtoaddressthisissue.Inthispaper,heineffect,saidthatforthesakeofargument,letsjustgrantthecentralplannersmoralperfection,andassumethattheycancreateanarmyofself-sacrificingsocialistswhowouldbeeagertodowhatevertheirsocialistmastersaskedofthem.Butwhatexactlywouldthecentralplannersaskthemtodoanyway?Withouttheguidanceofthepricesystem,howwouldtheyevenknowwhatproductsshouldbeproduced,andatwhatquantitymusttheseproductsbeproduced,orwhattechniquesshouldbeusedtooptimizeproduction?Howwouldthesewell-intentionedplannersknowwhatsthebestwaytoutilizelimitedresources?Misespointedoutthatgiventheutterlycomplexnatureofourmoderneconomy,itssimplynotpossibleforthecentralplannertoanswerallthesevitalquestions.Nottomentionthedifficultyofensuringalltheir
commandsarefollowedthroughwith100%precision.
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ForbothMisesandthesocialistsoftheday,thedefiningfeatureofasocialistsocietyistheabolitionofprivateownershipofthemeansofproduction.But,accordingtoMisesitsexactlybecauseofthisfeature,thatacentrallyplannedsocialisteconomyisdoomedtorunpoorly.Hearguedthatwithoutprivateownershipofthemeansofproduction,therewouldntbeamarketformeansofproduction.Andwithoutamarketforthemeansofproduction,therecantbeanypricesforthemeansofproduction.Andwithouthavingthepricestoreflectthechangingeconomicconditionsunderneath,producerswouldneverknowtherelativescarcityofthemeansofproduction,andhencetherewillbenowaytoevenassesstheopportunitycostoftheproductioninputs,nottomentionitsoptimalusage.
Inshort,followingMiseslineofargument,economicplanningsimplywouldntbepossibleintheabsenceofthecapitalmarket.Because,therewontbeanyindicatorstosupportoureconomicanalysisandtheressimplynowayforthemtotellthewhethertheyshouldchoosetopursueprojectAorB;worsestill,evenafteradecisionismade,withoutprices,centralplannerswouldntbeabletofindoutwhethertheymadetherightchoiceornot.AsMisespointedout,rationalallocationofresourcesundersocialismissimplyimpossible.Thenotionofasocialisteconomyisthereforeanoxymoron;Therecouldbenosocialisteconomy,only
plannedchaos.StaytunedforacontinuationofWencansreviewofVonMisescritiquenextissue.
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TheS&P500isafree-floatcapitalization-weightedindexpublishedsince1957ofthepricesof500large-capcommonstocksactivelytradedin
theUnitedStates.IthasbeenwidelyregardedasagaugeforthelargecapUSequitiesmarket
TheMSCI Asiaex JapanIndex is a freefloat-adjustedmarketcapitalization indexconsistingof 10developedand emergingmarket country
indices:China,HongKong,India,Indonesia,Korea,Malaysia,Philippines,Singapore,Taiwan,andThailand.
The STOXX Europe 600 Index is regardedas a benchmark for European equity markets. It represents large, midand small capitalization
companiesacross 18countriesof theEuropeanregion:Austria,Belgium,Denmark,Finland, France,Germany,Greece, Iceland, Ireland, Italy,
Luxembourg,theNetherlands,Norway,Portugal,Spain,Sweden,SwitzerlandandtheUnitedKingdom.
Correspondents:
VeraSoh(VicePresident,Publication)vera.soh.2011@economics.smu.edu.sgSingaporeManagementUniversitySingapore
NgJiaWei(VicePresident,Operations) [email protected] SingaporeManagementUniversitySingapore
SamuelOng(PublicationsDirector/Editor)samuel.ong.2010@business.smu.edu.sgSingaporeManagementUniversitySingapore
YingyuZeng(LiaisonOfficer)yingyu.zeng.2010@economics.smu.edu.sgSingaporeManagementUniversitySingapore
NgYongxiang(MarketingDirector)
yx.ng.2011@accountancy.smu.edu.sgSingaporeManagementUniversitySingapore
DarrenGohXianYong(Editor)
darren.goh.2010@business.smu.edu.sgSingaporeManagementUniversitySingapore
HangDieuQuang(Writer)UndergraduateSchoolofEconomicsSingaporeManagementUniversitydqhang.2010@economics.smu.edu.sg
KuangWencan(Writer)UndergraduateSchoolofEconomicsSingaporeManagementUniversitywencankuang.2012@economics.smu.edu.sg
IshaanPoddar(Writer) UndergraduateLeeKongChianSchoolofBusinessSingaporeManagementUniversity
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