Professor Euston Quah, President, Economic Society of Singapore,
Professor David Lee, Vice President, Economic Society of Singapore,
Ladies and Gentlemen, friends and colleagues, a very good morning to you.
1 Congratulations, Mr Gilbert Ng and Mr Koh Weining, winners of this year’s Outstanding Economics Teachers Award (OETA). Teachers have a considerable influence over their students. You inspire the next generation, the same way my teachers have inspired me.
2 I did not take Economics in school, but developed an interest for it in my second year in University. PSC sponsored me for EECS, I decided to do a second degree in Economics without telling them. Took extra courses during semester time and did summer school, so I can complete both degrees within 4 years. Useful exposure to a different field of study, and importantly to understand how engineers and economists think about issues and solve problems.
3 During my first Economics class, Professor Steve Goldman said Economics is not about money, but about understanding how incentives shape behaviours and influence outcomes.
4 There is also a quote from Professor Thomas Sowell, who said that we should look at economic policies and systems “in terms of the incentives they create, rather than simply the goals they pursue. This means that consequences matter more than intentions – and not just the immediate consequences, but also the longer run repercussions of decisions, policies and institutions.”
5 These words have remained with me all these years, and have guided me when we work on new policies and review how existing policies can be improved.
6 Economics has been criticised to be a ‘dismal science’. I don’t subscribe to this rather pessimistic view, but I can understand why there are such strong sentiments against Economics.
7 Some economists are guilty of hiding behind numbers and equations, preferring to deal with complex Mathematics than coming up with practical solutions to tackle real world problems. There was a joke that my Econometrics professor told us – when told his model does not predict results in the real world accurately, the Economist replied that in that case, the real world must be wrong.
8 This is one reason I believe why behavioural economics has become more widely accepted, because it helps to explain why things happen in a certain way in the real world.
9 When I first went to the Ministry of Health in 2015, we used to provide a flat subsidy for health screenings under the Screen For Life (or SFL) programme. We provide subsidised health screening because prevention is better than cure, and early detection can help to save lives. Depending on whether you were a CHAS Blue/Orange card holder or a Pioneer, you would be eligible for a subsidy of $18.50 and $28.50 respectively when you went for health screening at a CHAS GP clinic, for up to two visits a year. This was easier to administer, but it did not consider two points from the individual’s perspective:
o Different CHAS GP clinics charge different prices for consultations to carry out health screening. So while the subsidy was fixed, the out of pocket amount that a person had to pay could vary according to the clinic. It is uncertain from the individual’s point of view. And this uncertainty affects his decision on whether to go for health screening.
o Second, while the subsequent follow-up consultation was similarly subsidised, there was also uncertainty over the out of pocket that a person had to pay for the subsequent follow-up consultation by the doctor after the results are out.
o Unsurprisingly, the take-up rate for SFL was not as high as desired. And many people would not follow-up to see a doctor after getting their screening results, which defeats the purpose of screening and can be risky to health if their test results are positive.
10 We made two changes to the scheme, using behavioural economics to guide our policy design.
o First, we fixed the price that an individual needs to pay instead of fixing the subsidy amount. For SFL health screenings at CHAS GP clinics, the price for eligible persons is $0 for Pioneers, $2 for CHAS Blue/Orange card holders and $5 for other Singaporeans. For Merdeka Generation, they can also enjoy the $2 rate from 1 Nov 2019. This removes the uncertainty for the individuals – they know exactly what they will be paying.
o We also subsume the cost of the first post-screening follow-up consultation in the above prices. So there is zero incremental cost to the individual, except for his time and effort to make the trip to the GP clinic.
We have seen an increase in the number of people screened under SFL.
o More than 65,000 Singaporeans have benefited from cardiovascular and cancer screening in the last 18 months following the enhancement of SFL subsidies in September 2017.
o This is almost 30 times higher than the number of Singaporeans who have come forward for screening over the preceding 18 months.
Dealing with externalities
11 I learnt about Pigovian taxes in Economics and how they account for externalities to achieve socially-optimal outcomes. Also generate revenue for Government which can be used to support social transfers for families who need more assistance.
12 One example is carbon tax. Singapore is the first country in SEA to introduce a carbon tax. I don’t have to elaborate why climate change is a serious issue for all countries, affecting not just the current generation but also our future generations.
13 Instead of reacting emotionally or using publicity stunts to get attention, it is more effective to deal with the problems of climate change through practical measures.
o These include understanding the science and evidence related to climate change, and using technology solutions that can improve energy efficiency, reduce carbon footprint of power generation and enhance ways to capture carbon emissions.
o Also include economic measures such as carbon tax, which uses pricing as a signal to incentivise changes in consumer behaviours and industry practices. Classic case of dealing with negative externalities – without pigovian taxes, we end up producing more carbon than what is socially optimal.
o The tax revenue collected can be used to fund R&D in clean energy production, subsidise energy efficiency initiatives and even redistributed to lower-income consumers to cushion the impact of price increases arising from the carbon tax.
14 The IMF supports the introduction of a carbon tax. So does the International Energy Agency. They believe that carbon taxes can be one of the most powerful and efficient tools to reduce carbon emissions. By providing the appropriate price signal, companies will be encouraged to reduce their emissions, whilst giving them the flexibility to take action where it makes economic sense.
15 So what is stopping more countries from implementing a carbon tax? There are a few possible reasons:
o Domestic politics – oppose anything that is called a “tax”. Worried about price increases.
o Actually the problem in many countries is even worse than not having a carbon tax. They offer energy subsidies, for petrol and electricity. End up encouraging over-consumption and wasteful behaviours. And most of the subsidies go towards the wealthy in society, as they are the ones who drive big cars which consume more petrol and live in big houses which consume more electricity. But like riding a tiger, it is politically impossible to get off as you fear being eaten by the tiger.
o I am reminded of a quote by then-PM of Luxembourg, and current President of the European Commission Jean-Claude Juncker. He said, “we all know what to do, we just don’t know how to get re-elected after we’ve done it”.
o Second problem is the incentive for countries to free ride, the typical “tragedy of the commons” problem that we study in Economics. They are thinking let other countries implement the carbon tax and reduce their emission. We benefit from the reduction in global carbon emission levels, without having to pay the price for it. The problem is when everyone does this, we will all sink together when sea levels rise.
Challenges of allocation and distribution
16 Going back to what I mentioned at the start of my speech, regarding the criticism of Economics as a “dismal science”. In my view, it is not because Economics is wrong, but Economics by itself is not adequate in dealing with the problems of widening income gap and unequal distribution in society.
17 The frustrations are exacerbated by fears of global competition and technological advancements, including having machines and robots take away jobs from human workers. The concerns are real and the pains that people feel are real, but we have to be careful that the solutions we prescribe will not make the problem worse. As the doctors would say, “first do no harm, and make sure the cure is not worse than the disease.”
18 The politics in many societies have driven government leaders to pursue short-term measures, often driven by expedient political considerations. These include measures to erect more barriers to trade, block investments and protect inefficient local industries. They may seem popular in the short-term, but this is because the harm they cause can often only be felt years after the policies are implemented. By then, elections are over.
19 In such a political environment, it is not surprising that populism has gained greater traction. Politicians who do not want to adopt this approach will either lose the election or choose to leave politics. The situation is unfortunately a “Nash Equilibrium”, to use a term from game theory.
20 The situation in Singapore is not so bad, but we are not immune to these driving forces. We know we cannot close our doors to the world, or cut our links with the global economy. That will be suicidal – jobs will disappear, property prices will plunge and young people will have a dim future. Adopting policies that support an open market-driven economy which is well-connected to the world is still our best overall strategy for the way forward.
21 At the same time, we must pay careful attention to tackling the risks to our society that come about when we have an open market-driven economy. For example, income inequality and inter-generational class divide which can potentially pull our society apart and affect the cohesion and harmony that we enjoy today.
22 The need for action is clear. What is less obvious is what kind of action should we pursue to best tackle these challenges? I do not have a simple answer to this complex question, but I would like to offer two thoughts for discussion.
23 First, Economics alone cannot solve the challenges of allocation and distribution, as that will also require the country to have the right politics and a set of social values which help to build broad-base support for these redistribution policies.
o If the politics is dysfunctional, Economics can generate the ideas and policies, but they will not get past the political system and will not become reality.
o Likewise, if the social values in a country do not support a system where the more successful are willing to contribute more taxes to help their more vulnerable countrymen, than what they themselves receive in terms of government subsidies and grants, there is not much scope for redistribution and reallocation to take place.
24 However, a good understanding of Economics can still help us to design schemes and interventions which can more effectively redistribute resources to different groups in society.
o For example, instead of energy subsidies, we allow the price of energy to be determined by market forces, to mitigate overconsumption and wastage by consumers as they face the full cost of production and delivery of electricity.
o At the same time, we provide targeted assistance in the form of U-Save rebates for lower- and middle-income families to help them offset their utilities bills. This helps households without distorting the market price of electricity.
o These rebates are designed to ensure that assistance is targeted at households who need it the most.
o Along with other social assistance schemes, this ensures that our overall system of taxes and transfers is a fair and progressive one, without distorting the market and price signals.
25 The second point I wish to highlight is that economic growth is still required if we want to tackle the challenges of allocation and distribution. The late Dr Goh Keng Swee gave a speech at the 1976 NTUC Second Triennial Delegates Conference. Referring to the British economic woes in the 1970s, he said, “The most important lesson we can draw from their misfortunes is the danger of small or no economic growth… Zero growth must result in an intensification of class antagonism, as is happening in Britain today. More money for the workers means lower profits and less income for management and professional people. This not only arouses their resentment but it reduces the incentive to invest, thereby making matters worse for everybody.”
26 SM Tharman used a different analogy to illustrate the same point. He spoke of the importance of having a rising escalator. When the escalator is rising, one can move up without someone else moving down.
27 When we have zero or very low economic growth, we are essentially faced with a zero-sum game. When we want to give more opportunities to older workers, it means we have to take away opportunities from younger workers. If we want to give more help to SMEs, it means we have to reduce what we do for larger companies. If we want to benefit the current generation, it means we have to take something away from future generations or worse, load them with debt and other obligations. We have seen how these trends have adversely affected other societies, and made their political environment more contentious and reduced their space to debate and solve problems in a constructive manner.
28 Growth is also needed to provide a sense of hope and optimism for our young, especially when many cities in our region are growing and offering more opportunities. If we are unable to grow together with the region, Singapore will become less attractive to talent, both our own talent and those from abroad. Our young people will seek their fortunes elsewhere, and with an ageing population, Singapore could become like a sleepy old folks home, lacking in vitality and dynamism. This is not the future society and economy I hope to see. It will be a vicious circle, and we may never recover once we get into this death spiral.
29 To achieve sustainable growth, we need to continue to subject our policies to rigorous economic analysis to ensure they are consistent with sound economic principles; enable our economy to remain strong and competitive; and to have a good understanding of how the incentives created will affect the outcomes we want to achieve. As policy-makers, we can be soft-hearted in designing our policies to have empathy and compassion, but we must never forget our economic fundamentals and become soft-headed.
30 To recap, I have touched on 3 areas in my speech today. These are:
o how Economics helps us to understand the impact of incentives on shaping behaviours;
o how Economics can be used to deal with externalities to achieve more socially-optimal outcomes;
o and finally how Economics can contribute to sustainable growth and fair distribution, which are essential to supporting a strong social-compact and a constructive political environment.
31 The complexity of today’s challenges require us to bring multiple perspectives to identify emerging issues and find effective solutions. The Singapore Economic Policy Forum offers an excellent opportunity for researchers and teachers to exchange and identify new ideas, and I look forward to the engaging discussions on how we should navigate the challenges of our future economy.
32 Thank you.