SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - China Population Ageing: A Look at One Child Policy Effects - Singapore: A Welfare State? - Von Misess Critique of Marxs Socialism (Part 1)
The Fortnight In Brief (16th September to 29th September) US: Shutdown in the works October looks to be off to a rocky start as the House of Representatives failed Sunday, to pass a clean continuing resolution to fund the government. The House voted 231-192 for a plan tying continued funding with a one year delay of the Affordable Care Act. The new CR is expected to be dead on arrival in the Democratic-controlled Senate which reconvenes Monday. The White House has issued a veto threat on any bill that would impede the implementation of the healthcare law which is set to begin next week. Asia: Mini-stimulus stabilises China economy Chinas Purchasing Managers Index, prepared by HSBC, missed analyst estimates of 51.2 in September. The PMI results came in at 50.2, indicating mild expansion. At the same time, export orders was up for the first time in six months, with overall new orders remaining flat, indicating a drop in domestic orders. The figure shows that while the Chinese government has managed to stabilise the economy with its mini-stimulus, there has been no significant pick-up. EU: Unemployment remains stubbornly high This month, home prices in the UK rose at its fastest rate in more than six years under the effect of government measures. The Help to Buy scheme, set into action by Prime Minister David Cameron, pushed prices in September in the 9 out of 10 regions tracked b y HomeTrack, a London-based property researcher. Number of b uyers increased 1.4% from September to August while new property listings fell 0.3%. This underscores the rising confidence in the UK economy. While optimism in the Eurozone has risen, unemployment remains stubbornly high, with a poll of 30 economists by Bloomberg showing a median estimate of 12.1% rate of unemployment in August. Mario Draghi, ECBs president, has urged governments to implement decisive structural reform to combat the high unemployment.

ISSUE 46 30 September 2013

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China Population Ageing: A Look at One Child Policy Effects

By Hang Dieu Quang, Singapore Management University
This article seeks to explore the various effects that the One Child Policy had on China Population Ageing issue and ultimately her economy. What is the One Child Policy? The One Child policy is a family planning policy of the Peoples Republic of China. It was officially implemented in 1979 to control population growth. Contrary to beliefs of many, the policy was never instituted into official law but was enforced in many parts of China. The policy does not restrict all families to have only one child. There are exceptions to the rule: rural areas, special cases, ethnic minorities. And as long as a family can afford the hefty fines and the increased childcare and education costs due to the withdrawal of government support, they can decide to have more than one child. While the government hailed it as a great success, which helped China avert a Malthusian catastrophe, by claiming that it helped to reduce about 400 million births since 1979, there have been criticisms about the hard-handedness of the implementation of the policy, the harsh punishments and abuse by the officials. In this article, we will be looking at whether the One Child Policy was effective and explore the effects it had on China economy through Population Ageing. Is One Child Policy Effective? Recent research have pointed out that the policy was not that effective in reducing the Total Fertility Rate (TFR) and in controlling the population growth. The main bulk of reduction in TFR happened in the early 1970s, before the One Child Policy was implemented. TFR dropped from 5.9 in 1970 to 2.5 in 1979 and birth rates dropped from 33.6 per 1000 women of child bearing age to 17.27 in the same period (Cartier, 2011). Even after the adoption of the One Child Policy, birth rate saw a rebound to 23 per 1000 women in 1987 with the TFR dropping only slightly to 2.2 (Cartier, 2011). The claim that the One Child Policy was instrumental in bringing down the TFR to the current level has been refuted by a wide range of research. One of them claims that, using Bayesian model to predict TFR level in the scenario that China had not implemented the One Child Policy, the fertility rate would still decline to the current levels (Alkema et al, 2011). Others point out that if the Chinese governments 1970s method of prediction were used, many countries would have their birth rates decline to levels below that of China even though these rates were higher initially (Wang et al, 2012). 2 Copyright 2013 SMU Economics Intelligence Club

Figure 1: Fertility Trends in China, 1950-2008

Source: Gu & Cai, 2009 Figure 2: Comparison of Birth Rates, 1970, 1980, 1998

Source: Wang et al, 2012 How Does Population Ageing Affect Economy? Population ageing happens when a countrys demographic structure changes with a higher proportion of the population being in older age group (65 and above), declining TFR (below the replacement level at 2.1), longer life expectancy and increasing dependency ratio. It has various effects on the economy but in this paper, we focus mainly on economic growth.

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China is experiencing one of the fastest rates of population ageing thanks to decades of declining TFR and rapid economic developments. What China is going through in 20 years is equivalent to what some developed countries experience in 80 years. The age group above 65 in China will account for almost a quarter of the population in around 2030-2040, up from the current 7.5% (Cartier, 2011). The following equation is the formula for economic growth accounting: Y = AKL1- Where Y is output of the economy, A is Total Factor Productivity, K is capital intensity and L is labour inputs. Labour inputs for ageing economies will see a steady decline due to more and more workers leaving the workforce than those entering. The lower fertility rate would guarantee that the younger population and consequently, the workforce will shrink rapidly. However, one would argue that labour inputs can still be sustained if labour participation rate is increased to make up for the loss in absolute work force numbers. Unfortunately, data has shown that Labour Force Participation Rate in China has been declined in recent years from 75.9 in 2003 to 74.1 in 2011 (World Bank). Another factor in economic growth is total factor productivity or A which can counter the effects of population ageing. Various studies in the past has put TFP growth rate in China at around 2.98%. However, the contribution of TFP growth to potential GDP growth decreased from 3.0% in 197894 to 2.7% in 19952009, and this will drop further to 2.3% in 2010 15(Kuijs, 2009). Therefore, increasingly, China cannot rely on its TFP to drive growth given the current level of innovation and R&D. Although China is ahead of other developing countries in terms of R&D investment and innovation, it is far from the developed ones (Cai, 2012). Capital intensity may increase when the population shrinks. However, given the current state of technology investment in China, it would be hard for capital investment alone to sustain economic growth and counter balance the decline of labour inputs. In addition, with rapid population ageing, substantial savings from private and public sector will need to be used for caring for the elderly causing a constraint on how much China can invest into its own technology, innovation and human capital development in the future. Conclusion Although the One Child Policy is not effective in affecting the TFR level and thus aggravating the ageing issue, population ageing alone is enough to cause problems for economic growth through decline in labour inputs as well as straining on investments in the future. With its current policies, China is not well prepared to tackle this problem.

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Sources: 1. Cartier, M. (2011) Thirty Years of Economic Reform and Workforce Transformation in China China Perspectives, No. 2011/2 2. Alkema, Leontine et al. (2011) Probabilistic projections of the total fertility rate for all countries Demography 48(3): 815839. 3. Feng, Cai & Gu (2012) Population, Policy, and Politics: How Will History Judge Chinas One-Child Policy? Population and Development review 38 (Supplement): 115129 (2012) 4. World Labour Force Participation Rate data 1990 2011 World Bank Available at http://data.worldbank.org/indicator/SL.TLF.CACT.ZS 5. Kuijs, Louis. (2009) China through 2020A Macroeconomic Scenario -World Bank China Office Research Working Paper No. 9. Beijing: World Bank China Office. 6. Cai, Fang. (2012) The Coming Demographic Impact on Chinas Growth: The Age Factor in the Middle-Income Trap Asian Economic Papers 11:1

5 Copyright 2012 SMU Economics Intelligence Club

Singapore: A Welfare State?

By Ishaan Poddar, Singapore Management University
Singapores rapid progress to become one of Asias wealthiest nations has invited scrutiny on the countrys social welfare policy. Our reserves, estimated to be about $900 billion, and our budget surplus, $3.9 billion last year, puzzles many as to why we continue to spend so little on social spending. And many have indeed started to demand that the Singapore government start rethinking their stance on the issue. This paper analyses whether Singapore is capable of adopting and sustaining the traditional European welfare model employed by countries like Denmark. The Singapore government has always believed that its country cannot afford the European- style state welfare because of a lack of natural resources of its own to fall back on, and that each generation would have to earn and save enough for its entire life cycle to survive. As a result, instead of direct cash payments, they have been providing certain subsidies for education, healthcare and public housing to uplift skills, promote health and increase the assets of all Singaporeans. Since the system has been a success so far, the government believes there is no imminent need for them to reconsider their perspective. Review of Singapores current policies Even though the government claims it is not and cannot be a welfare state, many believe that the system is playing its part in redressing the inequitable distribution of resources by the free market through a progressive income tax system, highly selective social services, and various means-tested subsidies to the needy, from low-income students to the unassisted elderly. However, what is important to note is that the extent and manner of welfare provided actually distinguishes one countrys effectiveness against the other. Laid off workers receive no automatic benefits instead, they are sorted into workfare and training schemes. Only about 3000 families (The Economist, 2010) qualified for public assistance meant for destitute citizens. And Singapore spent only 3.5% of GDP on social protection (Asian Development Bank, 2013). This was far below the 19.2% by Japan and 8% spent by South Korea, the other high-income countries in the study. Furthermore, the Central Provided Fund (CPF) accounts for 76% of all social protection expenditures. As the CPF is not spending by the government, but essentially the peoples own savings Singapores social spending is actually lower than that cited in the subject report. Division between fiscal capacity and spending Singapore has the fiscal capacity to finance adequate systems of social protection, but apart from some protection in the form of social insurance, it hasnt really done much yet. Historically, there hasnt even been much of a need from 1965 until about the mid-1990s, Singapore enjoyed a steady growth with low unemployment rates. That along with the CPF scheme ensured that most peoples income was growing and at the same time everybody was saving sufficiently for retirement. As such, there wasnt an obvious need for the government to provide social protection. 6 Copyright 2013 SMU Economics Intelligence Club

Inequality: A rising Gini coefficient A lot, however, has changed since the Asian Financial Crisis in 1998 and the Global Financial Crisis in 2008. Income inequality is on the rise Singapores Gini coefficient, which is already much higher than in other developed countries, has risen from 44.2 in 2000 to 48.5 in 2007. In addition to that, wage rates have stagnated for most of the low-income workers due to various factors like, but not limited to, the influx of foreign workers. Social mobility has slowed down considerably and middle age long term unemployment is increasing. In addition to these, the effectiveness of the CPF as a retirement scheme has also come under question since these funds can be withdrawn for other purposes well before retirement. The above factors have prompted many to question why Singapore hasnt increased its social protection expenditure yet. But even though there is an evident need, there are certain reasons why Singapore may not be able to completely adapt to the European-style of welfare followed by countries like Denmark. Why Singapore cant be a welfare state Unlike in the Northern European countries, where citizens do not mind paying large taxes to help bridge the inequality gap and allow their fellow countrymen to benefit, most Singaporeans believe each person should be capable of sustaining himself, and so tend to be wary of helping others by sacrificing their personal income. Singapore recently reduced its personal income tax rate (2012), where the first S$ 20,000 is tax-free, and the maximum amount of tax an individual pays is S$ 43,350 for the first S$ 320,000 and 20% for the income above $320,000. On the other hand, in Denmark, personal income is taxed at 37.48% for income above S$ 9,400 and at 59% for income above S$ 77,200. So, a move by the government raising tax rates to those as high as that in Denmark might not be welcomed. There is also a severe social stigma that actually dissuades those in need of help from reaching out. As people frown upon those who cannot sustain themselves, many families who actually need the governments help refrain from doing so. The Economist, in one of its articles explains the dogma really well: One explains that Singapore needs to weed out undeserving claimants and shakes his head at the potential cost of a comprehensive welfare service. Yet in his next breath he mentions a number of local families who have been forced to sleep rough since mortgage lenders foreclosed on their flats. Conclusion The Singapore government is cash rich, and certainly can do a lot more than it is currently doing for the welfare of its citizens. However, even if it wants to, it will be a challenge for it to increase its welfare spending to provide unemployment benefits, nationalized health care, and pay-as-you-go public pensions, while at the same time, maintain low tax rates and other incentives for people to continue working and increase the countrys GDP. Sources: 1. Asian Development Bank (2013)Social Protection Index, Assessing results for Asia and the Pacific. 2. Dr. Tan Ngoh Tiong , The development of SocialWelfare and Social Work in Singapore: trends and Potentials. 7 Copyright 2012 SMU Economics Intelligence Club

3. http://www.economist.com/node/15524092 4. http://www.economist.com/node/15541423 5. http://www.social-dimension.com/2011/09/four-fallacies-about-the-singapore-welfare- state.html 6. http://hdrstats.undp.org/en/countries/profiles/SGP.html 7. http://www.iras.gov.sg/irashome/page04.aspx?id=1190 8. http://www.cfe-eutax.org/taxation/personal-income-tax/denmark

8 Copyright 2013 SMU Economics Intelligence Club

Von Misess Critique of Marxs Socialism (Part 1)

By Kuang Wencan, Singapore Management University
Background

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. Adam Smith (The Wealth of Nations, 1776) He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. Adam Smith (The Wealth of Nations, 1776) In The Wealth of Nations, Adam Smith famously argued that under the right institutional framework, people pursuing their own enlightened self-interests, would, at the same time, be steered by an invisible hand to promote the general welfare of society, as if there were an omniscient and benevolent mind hidden behind the scene. This self-regulation nature of the free market system is central to the classical liberal ideals of Adam Smith. Although throughout The Wealth of Nations, Smith used the metaphor of the invisible hand only once, that didnt stop generations of economists and politicians from using this term as their catch phrase. Today, as it is commonly understood by most economists, this right institutional framework that Adam Smith was talking about is a free market system of private property, contract and consent. However, 200 years after the publication of The Wealth of Nations, this Smithian free market ideal, has been challenged on several fronts by socialists. First, capitalism challenged it on the grounds of its tendency for monopolization. Contrary to the popular belief of the time that monopoly was a creation of government privilege, subsequent generations of economists and socialists, like Karl Marx, argued that the opposite is true; that monopoly is actually an inherent outcome of the free market economy. He reasoned that in a market system, the bigger firms tend to possess more market power and hence can better dictate the terms of trade with both their suppliers and consumers; thus, following this line of reasoning, if we are going to allow firms to compete with each other free of government interventions, then a free market economy would inevitably tend towards monopolization. In addition, Marx argued that the market economy which is also inherently volatile, could undermines the self-regulatory mechanism of the market. He noted that theres a tendency for the market to overproduce, and once the market is met with an oversupply of goods, it tends to contract so as to restore the market equilibrium. As such, instead of creating a harmony of interests as predicted by Adam Smith, Marx argued that the market would actually create unstoppable crisis and chaos that would have the potential to wreck the lives of thousands and millions of people. 9 Copyright 2012 SMU Economics Intelligence Club

And lastly, given the abundant supply of labor in the society, wage would be pushed way beyond a subsistence level, and hence subject people to excruciating suffering. In short, instead of creating liberty, harmony and economic prosperity, Karl Marx reasoned that a capitalistic economy will actually create a society thats filled with conflicts, irrational production, and human suffering. As further elucidated by Karl Marx in his book, Das Kapital, in order to correct all these inherent flaws in the capitalist society, we have to abolish private ownership in society so as to evolve our capitalist society into a superior socialist one where everyone produce according to his ability and receives according to his needs; and only after socializing all the means of production that resources could be eventually allocated rationally, that workers would be finally liberated, and that economic wealth could be shared more equally. While Karl Marxs socialist movement gradually gained momentum, Smithian economists fought back, and the socialist calculation debate ensued. Mises critique of socialism If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material well-being. . . . Only nations committed to the principle of private property have risen above penury and produced science, art and literature. Ludwig Von Mises (Planned Chaos, 1981) Ludwig Von Mises was one of the leading advocates of Smithian economics at the time. Before Mises published his first critique of socialism, the general understanding among economists was that Karl Marxs socialism theory had a fatal flaw, and that is its overreliance on the benevolence of the government. However, years of debate over this incentive problem didnt get the socialists and the Smithian economists anywhere. Until 1920, signs of resolution showed up and Mises published his piece, Economic Calculation in the Socialist Commonwealth. The traditional socialist response to the incentive problem is that a socialist society would transform human nature, and create a new generations of socialist men who would be devoid of any selfish genes. As ideological and simplistic as it may sound, this response was indeed believed to be the appropriate answer, at least theoretically, this could be achievable. Of course, most economists didnt buy that idea, but none of them could critique that since evolutionary psychology was beyond their areas of expertise. But Mises didnt get caught up with this seemly ridiculous answer and decided to take a completely different approach to address this issue. In this paper, he in effect, said that for the sake of argument, lets just grant the central planners moral perfection, and assume that they can create an army of self-sacrificing socialists who would be eager to do whatever their socialist masters asked of them. But what exactly would the central planners ask them to do anyway? Without the guidance of the price system, how would they even know what products should be produced, and at what quantity must these products be produced, or what techniques should be used to optimize production? How would these well-intentioned planners know whats the best way to utilize limited resources? Mises pointed out that given the utterly complex nature of our modern economy, its simply not possible for the central planner to answer all these vital questions. Not to mention the difficulty of ensuring all their commands are followed through with 100% precision. 10 Copyright 2013 SMU Economics Intelligence Club

For both Mises and the socialists of the day, the defining feature of a socialist society is the abolition of private ownership of the means of production. But, according to Mises its exactly because of this feature, that a centrally planned socialist economy is doomed to run poorly. He argued that without private ownership of the means of production, there wouldnt be a market for means of production. And without a market for the means of production, there cant be any prices for the means of production. And without having the prices to reflect the changing economic conditions underneath, producers would never know the relative scarcity of the means of production, and hence there will be no way to even assess the opportunity cost of the production inputs, not to mention its optimal usage. In short, following Mises line of argument, economic planning simply wouldnt be possible in the absence of the capital market. Because, there wont be any indicators to support our economic analysis and theres simply no way for them to tell the whether they should choose to pursue project A or B; worse still, even after a decision is made, without prices, central planners wouldnt be able to find out whether they made the right choice or not. As Mises pointed out, rational allocation of resources under socialism is simply impossible. The notion of a socialist economy is therefore an oxymoron; There could be no socialist economy, only planned chaos. Stay tuned for a continuation of Wencans review of Von Mises critique next issue.

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The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents : Vera Soh (Vice President, Publication) vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Samuel Ong (Publications Director/ Editor) samuel.ong.2010@business.smu.edu.sg Singapore Management University Singapore Ng Yongxiang (Marketing Director) yx.ng.2011@accountancy.smu.edu.sg Singapore Management University Singapore Hang Dieu Quang (Writer) Undergraduate School of Economics Singapore Management University dqhang.2010@economics.smu.edu.sg Ishaan Poddar (Writer) Undergraduate Lee Kong Chian School of Business Singapore Management University ipoddar.2011@business.smu.edu.sg

Ng Jia Wei (Vice President, Operations) jiawei.ng.2012@economics.smu.edu.sg Singapore Management University Singapore Yingyu Zeng (Liaison Officer) yingyu.zeng.2010@economics.smu.edu.sg Singapore Management University Singapore Darren Goh Xian Yong (Editor) darren.goh.2010@business.smu.edu.sg Singapore Management University Singapore Kuang Wencan (Writer) Undergraduate School of Economics Singapore Management University wencankuang.2012@economics.smu.edu.sg

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