Scandinavian model
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Case study of low inequality economy models
Macroeconomic policies for small, developed low growth open market economies have been explored in Japan and in Northern Europe.
The analysis of the limits of free market capitalism and the geopolitical context is a warning sign that Singapore is likely to face similar challenges as Japan which has observed very low to flat GDP growth since the 1990s. Figure 6.1 illustrates that compared to other developed countries, Singapore’s level of taxes and transfers is low. While not shown on Figure 6.1 Japan has higher marginal tax rates as well as larger social safety net programs for the working class. Evidence is emerging that Singapore will face growing wealth inequality in the absence of policy interventions and Japan could be a useful case study of the policies that have worked for prolonged periods of stagnant GDP growth.
Japan 1990-present
Japan’s lost decade observed a sustained 20-year period of stagnant GDP, rising public debt, and higher marginal tax rates compared to Singapore. The lost decade also observed higher spending on social programs to improve human development, poverty reduction, political stability and stable transition into the service economy.
Without any similar changes to the current policy, Singapore is likely to face the challenge of continued volatility from exposure and dependence on global markets – due to its dependence on global trade and, building social tensions from the widening income inequality. An alternative system to free market capitalism is a hybrid approach of capitalism and socialism known as the “welfare state”. One of the more enduring models of the welfare state system are the Scandinavian countries.
Northern Europe 1970-1999
The economy of the European Tigers (Scandanavian examples of Denmark together with Austria, Netherlands and Ireland) – is compared to Germany, France and the US during the period 1970-1999 in a study by Schettkat in 1999, to understand how well these progressive policies achieved macroeconomic performance during the period (Schettkat, 1999). During this period the economic performance of these countries was similar to what Singapore has achieved, with the exception that Singapore has achieved higher levels of aggregate GDP and wage growth with notably higher levels of wage inequality and poverty. Singapore’s gini coefficient before taxes and transfers in 2015 was 0.41 and the relative poverty rate was 26% excluding foreign migrant workers (MTI,2015 ; Ng, 2015). This is especially so when the total population is considered rather than only permanent residents and citizens. The focus of interest is the policies which helped to manage the transition to service economy, lower income inequality, reduce working hours and still maintain healthy macroeconomic performance - inflation, productivity and unemployment.
Each of the countries in the study observed a similar range of macroeconomic performance, with France and Germany experiencing rising unemployment during periods when the European Tigers saw falling unemployment.
Monetary and fiscal policy
For these open economies, the stimulus strategy of running large, persistent deficits was reported to be less effective because the income effect was weaker, with a multiplier effect of only 1.1 reported. For this reason all of the economies adopted consolidated fiscal policies, whereby social welfare programs were financedThe size of the taxes contributing to social security programs were in the range of 30-50% of GDP, which is significantly higher than Singapore’s total GDP government spending of 17% through taxes in higher income groups. , including non-social services such as the military. As suggested, taxes were also significantly higher than in Singapore. The study reported that there was weak evidence to suggest that government or private spending was qualitatively better or worse at stimulating future job growth – supporting Keynes’ claim premise of aggregate demand. A measure of the effectiveness of job creation potential is the employment elasticity of consumption - which is the percentage change in new employment created for a % change in aggregate demand. The employment elasticity of consumption was reported in the range of 0.4-0.7 which means that a 1% increase in public spending could increase employment by 0.4 to 0.7%. The relationship between GDP, productivity growth and government spending was considered complex. As such, it was suspected that government expenditure investments might not be linked to improvements in factors of productivity such as education.
Regarding monetary policy, members of the European Union do not have full autonomy to set monetary policy so most of the countries in the study adopt a fixed exchange rate. According to the study’s analysis of fixed exchange rate for open economies, a devaluation of the currency can be an effective stimulus to raise employment as a response during recessions, which could also apply to Singapore.
Labor policy
Given the constraints for open economies on fiscal and monetary policy, labor policies were emphasized as primary means for intervention and achieving wage equality. The Schettkat study reports that there is little evidence that there is any net positive or negative benefit of corporatist vs decentralized labor bargaining institutional structure on aggregate income. There was evidence reported however that corporatist collective bargaining institutions were associated with outcomes of lower wage inequality, implying that while better collective bargaining power may help negotiate the share of GDP between management and employees, it does not have a strong positive or negative effect on aggregate incomes and productivity. In a corporatist system wages are bargained collectively through institutions such as unions, whereas in decentralized systems wages are negotiated bilaterally sometimes with asymmetry of bargaining power between the employer and the employee (OECD, 2014). While Singapore officially has an institution called the National Trade Union Congress (NTUC) in practice compared to Singapore in the 1970s modern Singapore is closer to a decentralized system where most wages are determined bilaterally between the employee and the employer. These conclusions are consistent with an OECD report on the same subject (OECD, 2014). Evidence was also reported that reduced working hours was associated with higher employment and higher wages while still sustaining modest gains in productivity and GDP. Evidence from Singapore’s past is consistent with the findings from this study. Monetary, fiscal policies are less effective for controlling unemployment and that wage, labor policy such as immigration quotas, foreign worker levy, and CPF employer contribution rates are more effective measures. A number of policy features from the welfare state model could be adopted for Singapore and there are recents signs in the early part of the 21st century that policy makers have already taken small steps in that transition (Lee, 2017).
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