Wealth gains in a pandemic and no easy answers on inequality

Jul 14, 2021

A GLOBAL wealth report by Credit Suisse found that in a pandemic-hit year where Singapore experienced its worst-ever recession, wealth gains here continued to point north, moving in the opposite direction as the city-state's gross domestic product (GDP).

It adds to existing evidence that Covid-19 has deepened the gulf between the rich and the poor, with economists mixed on whether this growing wealth inequality in Singapore is a problem that needs to - and can - be solved.

The report showed that median wealth per resident adult in Singapore grew US$6,660 to US$86,720 in 2020, ranking 20th in the world. Total wealth in Singapore also went up from US$1.5 trillion in 2019 to US$1.6 trillion last year.

This comes in a year where Singapore's GDP shrank 5.4 per cent, with the resident unemployment rate ticking up to 4.1 per cent from 3.1 per cent in 2019. Retrenchments also more than doubled the number in 2019 across the services, manufacturing and construction sectors.

Meanwhile, according to the Singapore Department of Statistics, for household income among resident employed households (where at least one member is a working person), median monthly household income from work fell by 2.5 per cent in nominal terms, from S$9,425 in 2019 to S$9,189 in 2020, reflecting the impact of the pandemic. In real terms, it was down 2.4 per cent.

Wealth and income are not the same

Why did wealth trend up in a year where a global health crisis hit the economy - and subsequently the labour market - hard?

Wealth, or net worth, is defined as the value of financial assets plus real assets owned by households, minus their debts. It is distinct from income alone, as well as GDP, and may not move in tandem with each other.

As OCBC economist Selena Ling puts it: "Broad GDP indicators capture economic activities, while wealth also captures financial market activity, especially asset markets including stocks, bonds and alternative assets like cryptocurrencies, for instance."

A significant reason for the rise in wealth in Singapore and around the world last year had to do with the rise in asset prices following the initial Covid-19 shock.

The Credit Suisse report pointed out that the lowering of interest rates by central banks "probably had the greatest impact" on wealth, and a major reason why share prices soared to record levels by the end of 2020 while housing prices also jumped.

Danny Quah, economics professor at the NUS Lee Kuan Yew School of Public Policy, said that it is a combination of factors - sectoral reallocation, regained confidence, easier monetary and credit conditions worldwide - that led to some parts of the economy and certain segments of the population seeing significant financial gain over the course of the pandemic.

"In some economies such as Singapore, the asset price effect has been far stronger than whether GDP has declined or risen marginally," he said.

Desmond Teo, Asia Pacific Family Enterprise Leader, EY, noted that investment opportunities have created wealth, especially during this period of volatility. However, this may not result in broad-based increases on income earned by companies or individuals within the society, he added.

Walter Theseira, associate professor of economics, Singapore University of Social Sciences described this disconnect as the "ongoing separation between Main Street and Wall Street".

"Financial and asset markets have been quite divorced from economic reality on the ground during Covid-19, and this is attributed largely to aggressive efforts by the largest central banks to provide liquidity," he said.

But asset prices aside, the growth in overall wealth in Singapore over the years could also be driven by the inclusion of a handful of very high net-worth individuals.

Mr Theseira noted that adding a small number of ultra-high net worth residents would result in a noticeable change in the average statistics due to Singapore's small market.

The worsening divide

It is clear that the brunt of the pandemic did not fall equally, with the well-off seeing their wealth rise, while the low-income struggle to hold on to jobs.

The eventual economic rebound is also not the rising tide that will lift all boats.

Andre Toh, Asean Valuation, Modeling & Economics Leader, EY noted: "The K-shaped economic recovery from the global pandemic that we are experiencing now has exacerbated the uneven distribution of wealth, particularly with some sectors still struggling with an uncertain future."

The Credit Suisse report found that Singapore's wealth Gini index stood at 78.3, much higher than its Asian peers Japan, South Korea and Taiwan, which recorded Gini indexes of 64.4, 67.6 and 70.8 respectively.

A higher Gini index indicates greater inequality.

However, the report cautioned that in a small country like Singapore, higher wealth inequality can result from an unrepresentative cluster of very high net-worth individuals.

In a separate report on key household income trends by the Singapore Department of Statistics, the Gini coefficient based on household income from work per household member was 0.452 in 2020, unchanged from 2019.

But after taking into account the significant amount of government support during the crisis last year, especially for lower income households, the Gini coefficient went from 0.452 to 0.375. This is larger than the reduction in the Gini coefficient in 2019 from 0.452 to 0.398.

So is inequality worsening in Singapore?

OCBC's Ms Ling acknowledges that while it is a legitimate concern, one also has to take into account the government's "unprecedented" fiscal support and transfers, particularly for the low and middle income workers.

The Jobs Support Scheme, for example, which provides wage support for employers to retain their local staff, has helped to blunt the retrenchment edge last year, she noted.

She added that this could help to mitigate some of the economic spillover effects from the pandemic.

SUSS' Prof Theseira, on the other hand, said the pandemic has accentuated existing wealth inequality.

"The data is quite clear that the upper part of the wealth distribution has done very well, because financial and real estate assets have grown, and those workers were mostly in jobs that were insulated from Covid-19 as they could work from home," he said.

"The lower part of the income and wealth distribution got hit hard, and also didn't have the assets to benefit."

The problem with inequality

Economists and analysts are split into different camps when it comes to the significance of inequality, how to address the issue and even how to measure it.

While the Gini coefficient is used as a universal standard for measuring inequality, it may not tell the full story.

In a report by Singapore's sovereign wealth fund GIC in April, authors Rachel Teo and Wong De Rui wrote that it is an incomplete measure, with economic inequality increasingly recognised as an issue involving not just income and wealth, but opportunity as well.

GIC created a Composite Inequality Index (CII) to capture the three dimensions (income, wealth, and opportunities), and found that countries that ranked highly on the CII did not necessarily perform well on the income Gini coefficient.

Still, the authors of the GIC study concluded that broad inequality correlates with weaker economics, populism and less stable politics, as well as higher risk premiums, which indicate greater risk to long-term equity returns. "Inequality could thus be a material long-term investment issue, as more investors recognise its implications on the financial performance of their assets over time," they wrote.

However, NUS' Prof Quah argued in a paper in February this year that even as the pandemic reveals deep inequalities in society, this immiseration of the poor does not hinge on the existence of the rich.

"What has happened in the pandemic to poor families would have happened, independent of whether their societies contained any rich families," he wrote in his report titled Inequality Is no Sufficient Statistic: Cracks that the Pandemic Reveals.

Using his calculations, he found that inequality increased by 85 per cent in the two decades between 2000 and 2019 in Singapore. However, the bottom half of Singapore's population also had average incomes rise by 55 per cent, which saw upward mobility of 2.3 per cent a year.

"In other words, even as disparity increased, Singapore's weak and vulnerable steadily gained ever greater control over real resources over these past two decades," he wrote.

He had calculated inequality as the money amount separating the average incomes of the top 10 per cent and bottom 50 per cent of society in Singapore.

While policy conversations surrounding inequality often surface issues on human dignity and cohesion, there will be sharp limits to what economic policy can do to solve them, considering that these problems are non-economic, said Prof Quah.

His approach differs from Prof Theseira, who suggested that the government seriously consider the taxation of wealth or capital to close the gap. "It is arguably the case that policy interventions during Covid-19 have done a great job of preserving wealth, such as through economic stimulus and liquidity which supported asset markets in part, but at significant public cost," he said.

While he acknowledged that Singapore already does much to help citizens build wealth through public housing subsidies and public education, more can still be done.

"The issue today unfortunately is that the gap between those with existing inherited capital and people just starting out in Singapore is massive," he noted.

For example, he believes that entry into property in Singapore beyond HDB flats is now highly dependent on having had pre-existing wealth gains or existing property which has already appreciated in value to sell. "I don't think this was the case a generation ago," he said. "We need to look at what the effects of existing wealth appreciation and accumulation have been."

He noted, however, that while Singapore has done much through policy to cushion the impact of the pandemic through transfers and job support, government policy cannot really do anything about the uneven distribution of wealth that was accentuated due to the nature of the Covid-19 recovery in financial and asset markets.

Even as economists have split views on inequality, they concurred that it is always about trade-offs, with no easy choices.

With increasing wealth flows coming into Singapore as seen in the growth of family offices in the city-state, inequality may continue to dominate conversations for time to come. In the midst of a pandemic, assets under management in Singapore grew by 17 per cent year on year to S$4.7 trillion as at end-2020.

For Ms Ling, the "sensible approach" is to get the wealth flows in first to generate the economic activities and job creation. "Then, manage the potential inequality and distribution issues with a proactive fiscal and tax policy," she said.

At the same time, Singapore will need a medium term plan that can support firms and individuals working in sectors that are still uncertain, even as it encourages the growth of sectors that are taking off, said EY's Mr Toh.

This also entails ensuring that Singapore remains attractive to local talent so that they stay and support its economic growth, amid the current global war for talent, he pointed out.

"Care needs to be taken to ensure that economic development initiatives are paired with strategies to invest in the people so they have access to opportunities, which would otherwise threaten the social cohesion in the country," added Mr Toh.