What the GDP does to income inequality

February 25, 2013
Singapore Democrats

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Singapore Democrats

The SDP has shown how the GDP is not a good indicator of our economic health (see here). If fact, data shows that in Singapore income inequality gets wider as GDP increases.$CUT$

The graph below shows that the Gini coefficient which is a measure of income inequality (the higher the number, the bigger the inequality) tracks per capita GDP growth in Singapore.

From 2001 to 2007, our economy registered continual GDP growth which was mirrored by the increase of the Gini coefficient. Between 2007and 2009 as the GDP per capita contracted, so did the income gap.

In other words, as GDP per capita increases, the gap between the rich and poor also widens. (Sources of figure: Singaporeans in the workforce, Manpower Research and Department of Statistics and Department of Statistics)

This is not a good way to manage our economy where growth benefits the higher income groups at the expense of the rest.

The income inequality in Singapore is the highest among advanced economies in the world. Extremes in wealth disparity wreakpernicious effects in many ways and upon practically all sectors ofsociety.

On the economic front income inequality creates pricedistortions. If the wealthy get too rich too quickly, the demand forgoods and services increases exponentially. The rise in pricesescalates beyond what the rest of society can afford.

Renownedeconomist Nouriel Roubini who foresaw the crisis that engulfed theworld in 2008, puts out this warning: “Any economic model that doesnot properly address inequality will eventually face a crisis oflegitimacy.”

In healthcare, a high wealth gap tendsto make medical treatment unaffordable for lower-income Singaporeans.For those who are able to find the money to pay for care, many end up in direfinancial situations. Medical expenses are one of the top threereasons why Singaporeans find themselves in debt.

Wealth inequality also limits theeducational progress of those in the lower-income groups. Upongraduation, employment opportunities are much more limited forstudents from poorer families and the types of jobs are almost alwaysthe lower-paid ones.

Income inequalityalso affects the Malay community worse than other ethnic groups. Between1990 and 2000, the rate of household income growth among Malays isthe lowest. The continuing slowness of the Malay community’ssocioeconomic progress constitutes an unhealthy obstacle towardsimproving relations between Malays and non-Malays inSingapore.

Also, distrust among citizens increase with therise of income inequality. In a survey of the 23 countries, 80percent of Singaporeans indicated that most people cannot be trusted– only one country fared worse. Compare this to 70 percent ofSwedes, Danes and Norwegians who indicated that they can trust mostof their fellow countrymen. The researchers noted that

Evidence on inequality in relation totrust, community life and violence all tell the same story.Inequality divides people by increasing the social distances betweenus and widening differences in living standards and lifestyles. Byincreasing residential segregation of rich and poor, it alsoincreases physical distances.

Economic growth must benefit all segments of society, not just the elite. There is danger in chasing after GDP growth if such growth renders society divided and dysfunctional. To overcome this problem, we must stop focusing on using the GDP as an indicator of our economic health.

The SDP has proposed the use of the Genuine Progress Indicator (GPI) which takes into account the other costs that go into producing GDP growth. We elaborate on the usefulness of the GPI here.

Our economy is not going anywhere. Focusing on the GDP and increasing our population to achieve GDP growth will only widen income inequality in Singapore and set our economy back further.