The above letter [Link]written bay Aloysius Chia explains how income inequality hinders social mobility. I have shown a number of examples of this. There is a big gap in the quality of pre-school education [Link] and at the university level the govt restricts the numbers -richer families can send their children overseas to get degrees and poor families cannot afford this. In every developed country, there is always a path for the highly talented 10-20% of the population but when you have a large income gap, the rest will have to be distributed to the unequal wage structure. Social mobility is necessary but insufficient to address the income inequality.
One lesson we have learnt or should have learnt is not to trade off income distribution for economic growth. There are numerous examples of economies that have slowed down temporary even going into recession then resuming growth after restructuring and finding new engines of growth. But there are few examples of developed economies being able to narrow the income gap after it has expanded in recent history[OECD Paper:Reducing income inequality while boosting economic growth: Can it be done?]. Once the income gap is there what can govts do? Is it sufficient to stop the gap from growing? Is it sufficient to just mitigate the effects of the inequality?
Singapore's income inequality problem is unique among developed countries. Our inequality measured the GINI index is similar to that of USA However, the effects of the income gap is not the same. The USA is divided into urban, sub-urban and farmland - the income gap between these areas may be large causing the GINI index to be bigger that it is within each of these areas. The place with the closest resemblance to Singapore is Hong Kong which is technically not a nation.
Hong Kong has had a large income gap for a long time.
You would think that Hong Kong residents would be able to accept this high inequality given it is not a nation and operates laissez faire economy with little govt intervention. The Hong Kong people do not serve NS and do not have reservist duties. It does not have large GLCs that dominate the economic landscape. When the income gap expanded, the Hong Kong govt expanded its social spending to mitigate the negative effects - these include free medical care for seniors, pension for the elderly, support for the poor, unemployment benefits. Hong Kong recently introduced minimum wages successfully without any negative impact to employment. If you view the Hong Kong island skyline from across Kowloon, the numerous ultra-modern skyscrapers reminds you of Hong Kong's success as a financial center. You would think the Hong Kong people in general should be able to accept the system and the outcomes but this is not case.
Today in Hong Kong there is widespread unhappiness due to income inequality. A few days ago more than 100,000 people demonstrated against its the govt and its new Chief Executive Leung. Yesterday, Leung tried to hold a dialogue with residents to demonstrate he will listen to the people but the relationship between Hong Kong leaders and the people is so strained, the meeting deteriorated into a scuffle in which residents chased after him and he had to escorted out by police. This episode shows how strained and polarised a society Hong Kong has become.
Why is Hong Kong's example important to us? Singapore GINI coefficient is 0.47 roughly the level of inequality in Hong Kong 10 years ago. A GINI coefficient of 0.40 is considered a threshold by social scientists at which strong govt action is needed otherwise there is risk of social unrest. During this last 10 years the Hong Kong govt has done much to mitigate the effects of income inequality including increased social spending and the recent implementation of minimum wage but it has not been insufficient to halt the polarising effect of the income gap.The lesson for Singapore is if too little is done, we will end up where Hong Kong is today and the people's trust in the govt will disappear. To understand what can happen, we need only to look at Hong Kong.
Prof Lim Chong Yau called his approach to narrow the income gap "Shock Therapy". However, it is only shocking to those who still don't understand the dangerous negative effects of a large income gap and what it will lead to if it is not fixed in the coming years. Small tweaks and reactive approaches means we are doing even less than the Hong Kong govt 10 years ago. We already know the outcome of doing too little, yet the PAP govt refuses to consider alternative ideas even those from the establishment and walks a path that is ideologically attractive to the PAP but leads to social outcomes that will become increasingly unacceptable to Singaporeans.