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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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S&P500

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STOXXEurope600

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Copyright 2012 SMU Economics Intelligence Club3

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

[email protected]

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