Friday, February 04, 2005

High expectations and cost of living 

The Straits Times today reproduced an article by Ling Chien Yien that had first appeared in Lianhe Zaobao. An excerpt:

Several bread-and-butter issues were discussed at length in Parliament recently. The conclusion drawn was that since per capital income had grown faster than the cost of living from 1998 to 2003, it is not true that middle-income families are worse off than before. Rather it is Singaporeans’ rising expectations, among other reasons, that have led them to complain.
The writer, however, disputed this conclusion.

Singaporeans have for years heeded the call of the Government and worked hard to create economic wealth. It was the common hope of both the Government and the people to see their standard of living rise. Therefore, to hint now that Singaporeans’ rising expectations are not absolutely necessary, and are even asking for trouble, would be an injustice to the middle- and lower-income groups

In fact, we should ask whether, in the process of raising the standard of living, we realistically identified and addressed the high expectations of the people and the price to be paid to meet these expectations.

Given people’s current income levels, did we consider whether they could afford these expectations?
The writer then went on at length to describe how costs have gone up in Singapore.

The article drew a rebuttal from Chen Hwai Liang, press secretary to the Prime Minister.

It would not be correct to blame the difficulties that households face on the high cost of living, which in turn has resulted from government policies. Some prices have indeed risen, while other have come down. To households, no cost increase is welcome, especially in tough times. But we have to look at the overall impact of the price changes, to see how significant they have been... If we examine the facts more carefully, we will find that for most Singaporeans, the cost of living has not risen by much.
Mr Chen concluded as follows:

All Singaporeans hope and strive for a better life. We have achieved this for many years, even though the last few have been difficult. While costs have gone up modestly, they have not been the main reason that households have felt pressure. Nobody wants to turn back the clock to the days before air-conditioners or handphones, or when only a small minority could afford overseas travel, even though costs might have been lower then. The way forward is to create more prosperity and growth, so that Singaporeans can get better jobs, and attain the higher standards of living that we all aspire to.
First, let’s frame the issue properly. In my opinion, it is the frustration experienced by some Singaporeans from unmet expectations.

The argument that this frustration can be blamed on the government’s failure to curb rising costs is one that is commonly forwarded but is difficult to defend when confronted with the full set of economic data.

There are two components to rising costs: inflation in prices and increased consumption volume.

For price inflation, a sense of realism is needed. Singapore’s economic development depends on integrating itself into the global economy. An internationally-integrated economy must reflect international prices, adjusted for local conditions. Apart from certain exceptions, Singapore’s local prices are generally comparable to international prices and are not obviously out of line.

Prices of certain domestic goods and services may have risen rapidly over the past few decades. Hawker food is commonly cited. Actually, this rapid rise in prices is to be expected in a fast-developing economy. To put it simplistically, Singapore’s rising per capita income reflects the bidding-up of the price of labour in Singapore. All products and services produced by Singapore labour would tend to go up correspondingly. Any service whose price lags would tend to get bid up with rising affluence while at the same time, workers abandon that service to seek more lucrative trades, creating scarcity.

The point here is that prices tend to be pulled along with income. While there may be some areas of inefficiencies which give rise to unduly high prices, the fact is that real per capita income in Singapore has risen almost continuously over the past few decades.

So blaming unmet expectations on price inflation has relatively little obvious implication on policy. While some Singaporeans’ aspirations are possibly being frustrated by a perception that inflation is eroding income gains, as a matter of policy, it is not clear exactly how much more the government can do or could have done to reduce general inflation without creating other conditions that frustrate the aspirations of Singaporeans as a whole even more.

Which brings me to the other component of increasing costs: increased consumption volume. Singaporeans are consuming more, which is why their cost of living has gone up. Higher living costs resulting from higher consumption can hardly be depicted as bad (although Ling did allude to the possibility that part of the higher consumption could be the result of deficiencies in national income/expenditure accounting).

So if Singaporeans are consuming more but their expectations remain unsatisfied, doesn’t that mean it is their own fault for raising their expectations excessively?

Perhaps. But Singaporeans are humans. And humans base their expectations not only on absolute needs but on relative needs as well. In other words, the need to keep up with their neighbours.

And this phenomenon is hardly unique to Singapore. Take, for example, the following excerpt from a review by The Economist of a book entitled Happiness: Lessons from a New Science by Richard Layard, a professor of economics at the London School of Economics:

FOR the past half-century, those lucky enough to have been born in a rich country have had every prospect of growing richer. On average, incomes in Britain, America and Japan, adjusted for inflation, have easily doubled over that time. On top of this come the benefits of longer lives of better quality, thanks to advances in medicine and to a plethora of consumer goodies making living easier and more enjoyable. You might, even, expect folk to be a great deal happier today than in the 1950s.

You would be wrong, according to many surveys taken in rich countries. These tend to show that, once a country has lifted itself out of poverty, further rises in income seem not to create a meaningful rise in the proportion of people who count themselves as happy...

Lord Layard devotes a good portion of the book to a summary of what is known about how to be happy. Much of it will appear self-evident: cultivate friendships, be involved in a community, try for a good marriage. But his big idea is controversial. It is that a zero-sum game of competition for money and status has gripped rich societies, and that this rat race is a big source of unhappiness. Put simply, one person’s pay rise is another person’s psychic loss. To make that loss worse, says the author, there are only so many top rungs on the ladder of status...
And this suggests that press secretary Chen’s assertion that the “way forward is to create more prosperity and growth” may not necessarily be correct.

Rather, one should ask, as Ling did, whether, in asking Singaporeans to work hard to create economic wealth, the government had “realistically identified and addressed the high expectations of the people and the price to be paid to meet these expectations”, not so much because inflation increases that price but because the very process of wealth creation raises expectations and, in the words of Lord Layard, effectively puts people “on a treadmill that brings less advance in happiness than we expected”.


Good stuff! Just to let you know that I've linked to this post from my blog.

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