SIMES July 2012 Newsletter

SIMES Newsletter

JULY 2012

More in this issue: Big Mac Index Pg 14

An Introduction to Healthcare Economics Pg 17

A Radical Plan.

Wage Shock. Pg 9

www.simeconomicsociety.org

For internal circulation only

CONTENTS

CONTENTS

SIMES Newsletter July 2012

SIMES NEWSLETTER

FEATURES

SIMES Photo source: http://en.wikipedia.org/wiki/ Big_Mac_Index

COVER STORY

9 On Wage Shock

A Radical Proposal by Professor Lim Chong Yah.

4 Editor’s Note reflections

food economics

14

DEPARTMENT

10

Big Mac Index

On fair value, PPP and standard of living.

5

A Talk by PM Lee

An evening of forward-looking perspectives.

7 A Talk by W. Brian Arthur

HealthCARE

14

Photo source: http://theonlinecitizen. com/2012/03/ how-to-dealwith-risinghealth-care-costpart-ii/

17 An Introduction to Healthcare Economics Healthcare vs Health.

How Technology is Re-shaping the 21st Century Economy

17

SIMES Newsletter April 2012

35A

SIMES

EDITOR’S NOTE

SIMES Newsletter July 2012

EDITOR’S NOTE In this issue, we are leaving all the hustle and bustle of the Eurozone debt crisis as well as the US financial crisis in the backdrop. It is time to look at the issues we are facing right back at home.

With the tensions in the global environment, outlook is indeed not pretty. We should expect restrained growth for Singapore. In an global environment filled with anxiety and fear, how can Singapore seek to stabilise herself and strengthen her social safety nets? The reflection on the ESS Annual Dinner has some insights on this, with a summary of PM Lee’s speech on the future of Singapore.

In our cover story, “On Wage Shock: A Radical Proposal by Professor Lim Chong Yah” by Kang On Wage Shock.

Yongkia, readers can expect a quick-witted yet in-depth discussion on the issue of widening in- By Kang Yong Kia. come gap. Kang sets the case for and against the idea of Shock therapy, its workabiity and coher- (Pages 9-13) ence in our society. As an effort to further the inquiry on our domestic social safety nets, the problem of income inequality between the top 1% and the bottom 99% is indeed worth exploration.

Also, in this issue, we have a continuation on the topic on healthcare. This discussion extends from the previous issues and focuses exclusively on Healthcare Economics. With an ageing population, the shifts in demography leads to increased attention to healthcare sector in recent years.

Tackling the sticky issue of healthcare is not easy, but research must be done in hope to maintaining the economic competitveness and the comparative advantages of our society. It is the heart of matter and therefore, it is imperative to understand this trend with a public view and a personal interest.

An Introduction to Healthcare Economics.

By Edwin Wan. (Pages 17-21)

Looking forward, even if some economies may seem to be on the road to recovery, complacency is unwarranted. We are living in perilous times, and a better understanding of Singapore leads us a step closer to understanding the world.

Liu CaiJun

Disclaimer: All the views and opinions reflected in the articles are the authors’ own. Neither SIMES nor SIM are to be held accountable for the authors’ views.

Access our SIMES website by reading our QR code (displayed at the back of this issue) with your smartphone. Download the QR code reader at your App Store.

Photo sources on the cover: http://ec.europa.eu/health-eu/newsletter/87/newsletter_en.htm http://www.cliffkule.com/2010_10_03_archive.html (cartoon courtesy of Dave Granlund) http://caracaschronicles.com/2012/02/23/a-roadmap-out-of-cadivi/ http://theonlinecitizen.com/2012/04/more-democracy-the-solution-not-shock-therapy/

4

SIMES Newsletter April 2012

REFLECTIONS

A TALK BY PM LEE

SIMES Newsletter July 2012

ESS ANNUAL DINNER:

PM Lee gives speech on: Opportunities and Challenges in the Next Phase of Singapore’s Development

Photo source: http://ifonlysingaporeans. blogspot. sg/2012/06/ pm-lee-on-singapores-economic-strategy.html

ON 8 June 2012, 9 members of SIM Economic Society were invited to attend the annual dinner of the Economic Society of Singapore (ESS) at Shangri La Hotel. This year, the ESS invited Prime Minister Lee Hsien Loong to give a speech about “Opportunities and Challenges in the Next Phase of Singapore’s Development”. The other plan for the evening was to award the young winners of the Essay Competition (which is one of the activities that the ESS initiates and engages in keeping its objectives).

Before PM Lee’s speech, the audiences were welcomed by an opening speech by the president of ESS, Professor Euston Quah. In his welcome speech, he introduced the ESS and how successful it has become throughout the years. He pressed that the ESS is “an important platform for discussions on issues facing the Singapore economy and the region” and that the ESS not only draws professional economists but also junior college students, universities, corporates and various government subsidiaries. In this speech, he also adjusted the views of people about the Economics, he claimed that “Economics is not just about finance, not just for investment and stock market and banking, economics is also about people and how the economy and national and social policy affect and be affected by them”.

BY DANG HOANG THAO

years’ time. Besides, PM Lee also emphasized on the idea of an inclusive Singapore.

PM Lee first indicated the worries of Singaporeans which were: crowding public places; housing and public transport provision falling behind the population growth rate; the frictions between the locals and the new arrivals.

He said he would commit to solving these problems for Singaporeans by specific and realistic actions.

The leader also showed everyone the current status of Singapore by giving the country’s performance in quantitative terms: per capita GDP is slightly above US$50,000 last year which places the country 11th worldwide, ahead of the USA; and if we adjust for Purchasing Power Parity, the per capita GDP even higher and places Singapore in 3th position, where we are only behind Qatar (US$102,900) and Luxembourg (US$ 80,100). With these numbers, every Singaporean should be proud. However, PM Lee advised people to look at broader and further and recognise where Singaporean is standing. Singapore is a city state and the comparison made above is among countries. Therefore, the comparison is not weighted equally and some developed countries like US have big cities surpassing in performance, by much more than the country on the average.

Furthermore, the wages and productivity of Singapore is still lower than developed countries.

PM Lee shared his thoughts and he drew a picture of how world would be in 20 years from now and where would Singaporeans want the country to be.

The ESS is also proud of its journal: Singapore Economic Review. It has become the leading journal in Economics in the Asia region.

It is easy to know that every Singaporean would want to go forward. PM Lee supports that view and wants to lead Singapore forefront as the leading global country.

PM Lee demonstrated that to be at the forefront, there is a need for Singaporeans to work harder and hence at the same time they can enjoy higher quality of life, in terms of material and intangible aspects. He also predicted a sluggish growth as Singapore is much more developed and faces the constraint of labour and land.

Later on, the speech given by PM Lee was deeply appreciated by the audiences with his view on the current place of Singapore and the future expectations of her in 20

It is true that some people may welcome the slow growth of the Economy but PM Lee corrected that idea and said that: “Growth is not an end in itself, but a means to

SIMES Newsletter April 2012

5

REFLECTIONS

A TALK BY PM LEE

SIMES Newsletter July 2012

improve our lives and achieve many other goals” and he added that Singaporeans should not be relaxed and contented with what they have achieved and should always keep looking forward.”

“We have been successful precisely because we have not taken success for granted. Our sense of vulnerability and consciousness of the competition we face, are important parts of the Singapore psyche”.

PM Lee also claimed that to become a leading global country, Singapore not only needed the economy to grow, but also a society that catering for all citizens. The idea is that “every society must strike a balance between individual rewards and social equity”.

For the less fortunate Singaporean, he claimed that the government has done much more than people acknowledged. With social safety nets and transfers, over a lifetime, one low-income household would be able to receive half of million from the government.

Eventually, in the talk about economics, PM Lee added the importance of politics. He believes that for the economy to run and to grow, it must be based on a sound and consensual legitimate political system.

“Only when citizens accept the political system as legitimate, and economic order as fair, will they give the government the support and the mandate to run Singapore in their best interests. And only with this mandate can the government do the best for Singapore and all of us”.

6

SIMES Newsletter April 2012

ATRANSFORMING TALK BY W. BRIAN ARTHUR HEALTH

Healthcare REFLECTIONS

SIMESNewsletter Newsletter April July 2012 SIMES

TECHNOLOGY

“How is Re-shaping the 21st Century Economy”

BY LIU CAIJUN

IN MARCH 2012, representatives of SIMES attended the seminar organised by the Economic Society of Singapore (ESS). Professor W. Brian Arthur, leading economist and technology thinker, was the speaker of the night.

The topic was “How Technology is Re-shaping 21st Century Economy”.

According to Professor Arthur, every 60 years some new technology comes along and transforms the economy.

So the question is, is there a new body of technology transforming the world today? There must be candidates. In recent years, we see routine processes gradually handled by machines, replacing humans. This new body of technology is qualitative and unseen. It involves underground conversation between servers or satellites, shuttling information back and forth.

So, forming under the physical economy is a second, unseen economy that is “vast, silent highly interconnected, remotely executing, global, always on, and embryonically building out”. A different economic landscape is shaped not just by the rise of China and India, but by this staggering and phenomenal secondary economy, the digital economy.

Professor Arthur finds it interesting that technology is becoming biologically neural and intelligent. He

SIMES Newsletter April 2012

thinks technology is self-configurable, self-organising, self-healing, and autonomous. It seems to be almost biological. The idea of Artificial Intelligence comes alive.

Biological definition of intelligence: An organism is intelligent if it senses something, changes its internal state and reacts appropriately.

No brain is required for such simple intelligence.

For example, Cnidarian is biologically intelligent, without a brain and with only a neural layer. Similarly, in our economy, a neural layer is forming; from the physical sensing to conversational re-computing to the feedback to the physical environment. In a way the US Postal Service (USPS) functions this way.

Professor Arthur sees the Industrial Revolution as the muscular system. This new technological revolution is the neural system. It is a much bigger force since there is no upper limit; with new modules constantly forming, build constantly out of old ones, and on top of the old ones. The process becomes increasingly sophisticated.

In a way, the physical economy is being directed by the digital economy. It can be illustrated by the Aspen forest imagery: the main economy forms the visible branches

7

REFLECTIONS

A TALK BY W. BRIAN ARTHUR

SIMES Newsletter July 2012

and the secondary economy becomes the hidden roots.

Just how large is the second economy? Professor Arthur posits that it will be as large as the physical economy by 2030 or so and there are no signs of the phenomenon going away. Furthermore, between years 2050 to 2100, this second autonomous economy could very well comprise nearly all of the economy.

As with all new happenings, nothing comes without consequences.

Professor Arthur is concerned about the technological unemployment that will arise. Jobs are disappearing—big problem in the US—in a rising sea of digitalization. In the case of USPS, 35,000 workers were laid off. Jobs such as typists, paralegals, secretary, personal assistants are gradually phasing out. Jobs left are those which require human intuition, empathy and judgement. The challenge then shifts from the production of wealth to the distribution of wealth. The access to wealth becomes the problem.

Governments will have to tackle the ‘how-tos’ in organizing production and proper distribution. Jobs will need to be redefined, political system adjusted.

Also, digital processes are deeply hyper-connected. So, problems propagate much faster and much further with greater impact. Proper governance structures are always last to catch up. There is lag time in identification and recognition of issues, followed by decision lag and public awareness lag. It affects the effectiveness of governance when technology comes into picture.

There is an underlying force driving the physical economy which is not to be ignored. Yet, it is not without consequences. Is this for better or worse? Will we ever be ready in time to brace ourselves against this twist of fate?

8

SIMES Newsletter July 2012

ON WAGE SHOCK

Cover Story

SIMES Newsletter July 2012

On WAGE Shock: A radical proposal by

Professor Lim Chong Yah

BY KANG YONGKIA

Dear Salary, Why Are You Not Growing Photo source: http://singaporedaily. net/2012/04/17/ daily-sg-17apr-2012/; Cartoon Credit: Facebook – Lalit Arora

SIMES Newsletter July 2012

9

Cover Story

ON WAGE SHOCK

IN RECENT NEWS, Profes

sor Lim Chong Yah of School of

Humanities and Social Sciences at Nanyang Technological University proposed a radical plan, in which he proclaims to have the effect of being able to close the income gap between the class of workers who are highly endowed in the labour market, and those who languish in the lower pay brackets. The proposal is simple: workers who earn monthly salaries of S$1,500 or less have their wages raised by 50% over 3 years. At the same time, wages of those who earn over S$15,000 a month see their wages stay stagnant over the same period, or in other words, a “wage freeze”. Professor Lim, who formerly chaired the National Wage Council, also pointed out that “our lowly paid workers have been underpaid by much more than 100 per cent of their pay when compared with their counterparts in countries with comparable national affluence like Hong Kong, Japan or Australia”.

This brings to mind the spate of protests that happened not too far back in the U.S.—the Occupy Wall Street movement. That time, disgruntled lower class workers campaigned for greater transparency in regulation of big businesses and heavier taxes on the super rich, and also spawned the slogan: “We are the 99%”. It is not hard to see why. According to a Congressional Budget Office (CBO) report1, the incomes of the top 1% of Americans grew by an average of 275% between 1979 and 2007. During the same time period, the 60% of Americans in the middle of the income scale saw their income rise by a mere 40%. To put things into perspective, one can perhaps utilize the Gini coefficient, which is an internationally accepted gauge of income inequality. Singapore’s Gini coefficient has risen over the last decade, from 0.454 in 2001 to 0.473 in 20112. It

10

SIMES Newsletter July 2012

is widely perceived that a point close to 0.5 for any country is alarming and threatens social security. Besides the Gini coefficient, another common measure of income inequality which we could employ is the ratio of household income per household member. It was found that in Singapore, at both the 90th and 10th percentiles, the ratio worsened from 8.58 in 2001 to 9.19 in 2011.

Income inequality and its potentially destabilizing repercussions have most sovereign leaders on their toes.

PM Lee was prompted to comment last October that “income inequality is starker than before” and that “at the lower end, incomes have risen too slowly, far too slowly”.

The ongoing Occupy movement is a stark reminder of how pent up frustrations can lead to desperate measures. For instance, the shutdown of the Port of Oakland in November saw just how these measures taken by protesters could lead to a fall in output in the economy and hence a decline in productivity.

But it begs the question: How then, should a wage shock be implemented, and who should be in charge of its initiation?

Well the obvious choice would be the tripartite members and the tripartite alliance. The tripartite in Singapore consists of the fortified trinity: the Ministry of Manpower, the National Trade Union Congress, and the Singapore National Employers Federation. The tripartite arrangement in Singapore underpins its economic competitiveness, harmonious labour-management relations and overall progress of the nation. Under the agreement of the Tripartite Alliance for Fair Employment Practices, its members aim to promote meritocratic employment practices to help both employers and employees attain their full potential. It should seem an instinctive choice that the NTUC, being the confederation of trade unions in the industrial, service and public sectors, would champion the proposition of a wage shock therapy, if and when it does happen. However, it is apparent that any such cause would face significant opposition from the other members of the tripartite, simply due to the anticipation of the austerity of the measures that we might see upon fruition of the wage shock therapy. What seems less apparent is the resistance of the proposition from within the NTUC itself.

It appears that the prospect of a wage shock is not the most welcoming thought for some within the congress.

NTUC secretary-general Lim Swee Say asserts that raising wages for the lower-income strata in Singapore would be a “very risky” move. The NTUC chief made this comment in response to the wage shock proposal by Professor Lim Chong Yah, citing the lack of knowledge about the consequences of such a plan within the pro-wage-shock camp.

“What is at stake are jobs and structural unemployment.

SIMES Newsletter July 2012

Cover Story

ON WAGE SHOCK

You can push up the wages of low-wage workers by 50 per cent in three years, but you cannot improve his skill, his productivity, his employability by 50 per cent in three years,” Sec-Gen Lim said3.

He puts forward a valid argument. The chief predicates that if you raise the wage of a worker by a percentage of x, but the productivity of said worker rises by a percentage less than x, then this discrepancy will result in dire consequences for both the labour market and the economy.

It will mean that the increase in real wages will translate into lesser quantity of labour demanded by employers but simultaneously flooding the labour market with unskilled labour, thus resulting in massive unemployment. On a larger scale, this discrepancy between a typical worker’s salary and his productivity would ultimately lead to a fall in output in the economy which drives up prices and trigger the onset of a crisis reminiscent of ’97.

At this point, it would be useful to examine the term structural unemployment. Structural unemployment refers to a mismatch between the skills possessed by potential workers in a particular location and the skills desired by firms in that location. A long-term mismatch will see the following scenario: skilled workers may not be offered the jobs that make use of their skills, but at the same time, are unwilling to accept low-paid, low-skill jobs instead, or move to a place where their skills are in demand. It is true that a wage shock may lead to rising structural unemployment in the longer term, especially when workers start to expect higher pay for the same set of skills that they possess, hence, aggravating this mismatch. However, it has to be said that this holds true only when we assume that real wages were already at the market-clearing level of wages before the implementation of the wage shock.

Can it get any worse than this? Yes, and it goes downhill from here. To make matters worse, the economy might even plunge into hysteresis should there be prolonged spells of unemployment that is high above the natural rate of unemployment (the hypothetical unemployment rate consistent with the level of output in the long run, which is constant). In economics, hysteresis arises when a single disturbance affects the course of the economy4 (Investopedia). Case in point: the delayed effects of unemployment. When unemployment increases, people will adjust to a lower standard of living. And when these people become accustomed to the lower standard of living, they tend to defect from their previously desired higher living standard. In addition, as more people become unemployed, other unemployed people will start to feel a little better than before and, very soon, being unemployed becomes a social norm. Even after the labour market returns to normal eventually, some unemployed people may be

SIMES Newsletter July 2012

SIMES Newsletter July 2012

disinterested in returning to the work force.

The whole series of events unfurls like how the human capital decumulation theory describes5. The theory posits that unemployment reduces both quality and attitude of workforce, thus, periods of high unemployment is associated with a low quality human capital. In periods of high unemployment, people who have been out of a job for a long time will have low bargaining power in wage negotiations, and will be unable to depress nominal wages to a lower level where the demand for labour is increased to a more adequate level. This will then lead to hysteresis where a short-term increase in unemployment rates tends to persist.

Are we then, ready to make the conclusion that a wage shock therapy such as Professor Lim’s is not feasible, and so put the lid on this raging argument? An important aspect in the drafting of national policies is ground sentiment, and as a recent online poll suggests, a significantly larger proportion of netizens believe in the potential effectiveness of such a campaign as opposed to those who do not. The online poll, ran by Yahoo! back in April, saw a resounding 65% of those polled in favour of such a scheme, in contrast to a mere 16% who frowned on it6. A total of 4283 netizens took part in said poll, which ran for four days. Among those who expressed positive vibes at Professor Lim’s proposal, some commented that the move will encourage more companies to increase productivity, and compel firms to invest in training and technology, a winwin situation for the local economy. Meanwhile, over at the other camp, opinions were less optimistic. Most feared the resulting high costs to firms would see large businesses leaving Singapore’s shores, causing the unemployed to be in even more dire straits than before. Particularly loud criticism came from managers of small and medium-sized enterprises who foresee many SMEs leaving the industry as a result of such a scheme, citing overwhelming variable costs that will be caused by the surge in real wages.

In actual fact, the rationale that drives Professor Lim’s radical proposal isn’t all that puzzling, considering that it comes on the heels of a success of similar nature in the Polish economy. The shock therapy that was applied in Poland is widely recognised as one of the most successful stories of such an economic plan.

11

Cover Story

WAGE SHOCK AND THE 99

SHOCK THERAPY (also the Balcerowicz

Plan) was intended to rapidly reform the Polish economic structure from a centrally planned economy into a privatized market-based one. According to Prospect Journal at UC San Diego, prior to 1989, post-war Poland’s socialist economic system was unsustainable. Industrial enterprises were predominantly state-owned and economic control was centralised. This was in line with the Marxist philosophy which governed the state of affairs in Poland at that time. Price controls were rife; state planners decided the exact quantities and official prices of goods and services to be produced in the economy. Naturally, this destroyed its economy. By the late 1960s the fundamental deficiencies of a planned economy had begun to wear out the Polish society in the form of agricultural production shortages and a disastrous level of efficiency in the economy. By 1989, inflation was well over 250 percent and the current account saw runaway deficits of US$50 billion, two thirds of its GDP7.

After a short period of strife and political upheaval, shock therapy (Balcerowicz Plan) was introduced almost immediately, aiming to implement economic reform and social change via the following measures: • Monetary contraction polices designed to restrict the supply of money and raise interest rates above the inflation level; • Reducing the Polish government deficit by cutting subsidies and eliminating tax exemptions; • Eliminating price controls; • Liberalizing foreign trade by reducing barriers to international trade, encouraging foreign investment and establishing the Polish currency, the zloty, with a flexible exchange rate; • Ending state control over income levels, reducing the role of state industries, thus allowing the Polish private sector to grow and wages to be determined by the free market

By privatising state-owned industries and converting to a free market economy, thereby raising wages at the lower percentile of the labour market, Poland managed to break free from its previous woes, and by the early 90s it was back on the growth track. Shock therapy’s introduction of a stable, convertible currency, inflation control, and privatisation of industries, all contributed to increasing economic activity which in turn stimulated job creation and rising incomes. By 2002, Poland had become 50 percent wealthier than it was under communism, making it the fastest-growing post-communist European nation. Keeping this success in mind, we might find the idea of having our wages catch up with our counterparts in countries like Hong Kong, Japan or Australia a little bit more convincing.

12

SIMES Newsletter July 2012

While much has been said thus far about the impact of a shock therapy, it is also worthy to note that all roads lead to Rome. One such other remedy that might be considered is the implementation of a minimum wage by legislation. Sure there has been much literature on the subject of minimum wage, but yet to date, data and tests on said subject have proved to be inconclusive. In a paper that was published in a daily newspaper in the U.S. state of Connecticut, the Hartford Courant, Associate Professor Johnny Williams of the Department of Sociology at Trinity College writes about how recent research on the subject of minimum wages has vindicated minimum wages from negativity8. He cites two studies—one published in the Review of Economics and Statistics (Dube, Lester, Reich, 2010) and the other in the journal Industrial Relations (Allegretto, Dube, Lester, 2011)—that showed that increasing the minimum wage had no significant adverse effect on employment. The paper states that business leaders within affluent nations understand that a living wage—minimum hourly income necessary for a worker to meet basic needs—leads to higher employee retention that translates into significant savings in recruitment and training.

As John Griffith-Jones, Chairman (UK) of global firm KPMG, puts it: “We have found that paying the living wage results in higher levels of motivation, loyalty and productivity. Turnover amongst staff receiving the living wage has more than halved.” Even large corporations such as Goldman Sachs, JP Morgan and Morgan Stanley have deliberately adopted the living wage in the UK because it is a boon to their bottom line.

One can even find research work on the minimum wage from as far back as papers published in 1993. An Evaluation of Recent Evidence on the Employment Effects of Minimum and Subminimum Wages (Card, Katz, Krueger, 1993) for the National Bureau of Economic Research in the US came to the conclusion that data from Neumark and Wascher’s study in 1992 showed no evidence of minimum wage having an adverse effect on teenage employment. If you are reading this and are sufficiently interested, you might find the following regression function to be more lucid than a lengthy paragraph:

Eit = α0 + MWitα1 + Xitβ + Ytδ + Siθ + εit where

Eit is the teenage employment-to-population rate in state i year t;

MWit

is a minimum wage index that equals the minimum wage in state I divided by average wage of adults in the US and multiplied by coverage rate of the Federal minimum wage in the state;

Xit

is a vector of explanatory variables;

SIMES Newsletter July 2012

Cover Story

WAGE SHOCK AND THE 99

Yt is a set of year dummies Si is a set of state dummies

The primary purpose of the above method was to find the relationship, if any, between teenage employment and the minimum wage index— an index which represents increases in minimum wages. The paper found that, contrary to prior belief, state-specific minimum wage increases during the 70s and 80s in the US have had no systematic effect on teenage employment; teenage employment is chosen as the dependent variable here because it is a depiction of the low-wage low-skill labour market in the US economy. This peculiar result lends weight to the conjecture that economists need to re-evaluate their models of the low-wage labour market, by including data on previously overlooked concepts such as the effect of efficiency wages9.

Thus, in overview, the crucial factor in our consideration of shock therapy as a possibility in the near future lies in the consensus on the level of tolerance towards income disparity in society. If the current Gini coefficient of 0.473 is acceptable by most standards, then there wouldn’t be a problem to begin with; Karl Marx’s proverbial proletariat and bourgeoisie shall live together in peace. However, it should be noted that the value of this indicator is, in fact, on an upward trend. As we move towards a value of 1 in the Gini coefficient, we are moving towards total income inequality, i.e. the disparity between the 1st and 99th percentile on the income spectrum is infinitely large. It is the grim reminder of a bleak future that the protestors of the Occupy movement would portend. Nonetheless, it is of utmost importance that in the process of building a more egalitarian society, people and their political representatives work together with the aim of restructuring taxes and the welfare system to accommodate the less privileged instead of inciting a nationwide class warfare.

SIMES Newsletter July 2012

5 Seet, M.K. 2011. Lecture 10 Unemployment. UOL065 Macroeconomics. Singapore: SIM Global Education, pp. 212-213 6 Teo, D. (19 April 2012). 65 per cent believe ‘wage shock therapy’ will work: Yahoo! Poll. [online]. Yahoo! Singapore News. http://sg.news.yahoo.com/65-per-cent-believe-%E2%80%98wageshock-therapy%E2%80%99-will-work--yahoo--poll.html [Accessed 7 July 2012] 7 Prospect Journal of International Affairs at UC San Diego. November 2010. Shock Therapy: What We Can Learn From Poland. [online]. http://prospectjournal.ucsd.edu/index.php/2010/11/shock-therapywhat-we-can-learn-from-poland/ [Accessed 3 July 2012] 8 Williams, J.E. (19 February 2012). Higher Minimum Wage Good For Workers, Economy. [online]. The Hartford Courant. ht t p : / / a r t i c l e s . c o u r a nt . c om / 2 0 1 2 - 0 2 - 1 9 / n e w s / h c - o p - w i l liams-raise-connecticuts-minimum-wage-021-20120219_1_minimum-wage-benefit-low-income-workers-increases [Accessed 3 July 2012] 9 Cards, D., Katz, L.F., & Krueger, A.B. 1993. An Evaluation of Recent Evidence on the Employment Effects of Minimum and Subminimum Wages. Working Paper No. 4528. Massachusetts: National Bureau of Economic Research, pp. 2-3, 18-20

References: 1 Pear, R. (25 October 2011). Top Earners Doubled Share of Nation’s Income, Study Finds.[Electronic version]. The New York Times. http://www.nytimes.com/2011/10/26/us/politics/top-earners-doubledshare-of-nations-income-cbo-says.html?_r=1 [Accessed 13 July 2012] 2 Teh, S.H. (11 April 2012). Rationale behind Lim Chong Yah’s wage shock therapy. [Electronic version]. The Business Times. http://www.asiaone.com/Business/News/Office/Stor y/A1Story20120411-339097.html [Accessed 1 July 2012].

3 Tan, J. (14 April 2012). Wage shock therapy ‘very risky’: Lim Swee Say. [online]. Yahoo! Singapore News. http://sg.news.yahoo.com/wage-shock-therapy-%E2%80%98veryrisky%E2%80%99--lim-swee-say.html [Accessed 28 June 2012] 4 Investopedia. Hysteresis definition. [online] http://www.investopedia.com/terms/h/hysteresis.asp#axzz20YMl4wRa [Accessed 5 July 2012]

SIMES Newsletter July 2012

13

Food Economics

THE BIG MAC INDEX

SIMES Newsletter July 2012

BIG MAC INDEX

What is it? Why do we care?

The reason why we care about the Big Mac Index: It is a fun, simplified gauge of fair value. It can also reveal the standard of living in different countries. BY LIU CAIJUN

Photo Source: An alternative Big Mac index How many minutes to earn the price of a Big Mac? http://www.economist.com/ node/14288808

The Economist’s Big Mac index is essentially based on the theory of purchasing power parity (PPP). In their case, the basket contains a Big Mac. The comparison of its price against the world is based on US $4.20. This allows us to determine the under- or overvaluation of various currencies around the world.

BIG MAC ON FAIR VALUE

The valuation of currencies and the measure of fair value are extremely important. Since 2009, the Americans have accused the Chinese of deliberately undervaluing the Chinese Yuan against the US dollar. The comparative disadvantage of the Americans in exports just seems too much to swallow, on top of their many internal financial struggles. According to Peter Morici, Professor, Smith School of Business, University of Maryland, the undervalued Yuan remains the biggest barrier to US sales in China and the greatest advantage for Chinese sales in the US. This basically widens the trade deficit and is one of the contributors to the sluggish growth in America.

According to Morici,The US-China bilateral trade deficit is at an alarming figure somewhere near $300 billion. If China could allow for its currency to trade fairly and liberalise capital flows, it could possibly redress the trade deficit. The silver lining in the redress would be the output growth of approximately $500 billion and creation of about 5 million jobs for the Americans. However, the idea of free market forces is completely theoretical in the

14

current context, given much understanding about the political ideology by which Beijing holds quite firmly to.

Gradual liberalisation is possible; a complete one is simply unimaginable right now.

Morici believes that the Chinese have been experiencing stronger productivity growth and lower inflation since 1998. China’s modernisation has been fast since 1998 due to increase in investment in exports. Worker productivity has increased by 250% as opposed to 25% increase in worker productivity in the States. The US has been experiencing higher inflation, which should drive the Yuan upwards as well.

Therefore, the Yuan should be valued at about 3.73 per dollar, some 40% less than its current value of 6.37.

SIMES Newsletter July 2012

Food Economics

THE BIG MAC INDEX

SIMES Newsletter July 2012

As social beings, we are naturally quite concerned about our standard of living. That is why we bother about

BIG MAC ON LIVING STANDARDS output growth.

According to Blanchard, to see the changes in standard of living across time and space, a variable we should focus on is the output per capita.

According to the Big Mac index, the Chinese Yuan is indeed close to 40% undervalued.

According to the figure below:

Source: http://www.tradingeconomics.com/china/currency

The Chinese Yuan has gradually appreciated a fair bit since the heated debate between the East and West.

Internationally, this action is welcomed. The International Monetary Fund (IMF), which has been labelling the Chinese Yuan as “substantially undervalued” is changing its position to “moderately undervalued” due to efforts by the Chinese. China’s trade surplus has been falling over the years along with gradual appreciation of its currency.

Even the Obama administration is dismissing the US Congress’ idea of currency manipulation by the Chinese, saying it is only an undervaluation.

SIMES Newsletter July 2012

Now how do we compare output per capita across countries? An immediate response would be to use exchange rates. However, exchange rate fluctuations and differences in bundles of basic goods lead to inaccurate analyses. Therefore, in an attempt to provide good measure, output per capita should be constructed using the same set of prices for all countries—the law of one price. According to The Economist, in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. These adjusted real output numbers, ideally measures of purchasing power across time or countries, are the purchasing power parity (PPP) numbers. The theory of PPP states that price levels in any two countries would be identical if prices are converted to the same currency. Blanchard concludes with the idea that consumption per capita is a better measure for standard of living; also, the use of PPP is the bottom line while comparing standard of living.

Therefore, since the Big Mac index is based on this theory of PPP, we can use it to gauge the cost of living and hence the standard of living in various countries. The general idea is that the higher the price of a burger in a country , the higher the standard of living,

taking biases and currency over- or undervaluation into consideration.

The Big Mac index is indeed digestible economics and is surprisingly accurate in the long run perspective. So, all hail the witty burgernomics!

References: http://www.cnbc.com/id/47413024/Morici_China_s_Yuan_Remains_ Hugely_Undervalued_Dragging_Down_US_Growth http://www.google.com/finance?q=USDCNY

15

Food Economics

THE BIG MAC INDEX

SIMES Newsletter July 2012

http://www.forbes.com/sites/investopedia/2012/07/18/the-big-mac-index-food-for-thought/ http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3 http://www.bacsafra.com/papers/BigMacAndPPP.pdf http://www.mas.gov.sg/en/About-MAS/Monographs-and-information-papers/Staff-Papers/1998/~/media/resource/publications/staff_ papers/MASOP006_ed.ashx Blanchard, Olivier (2008) Macroeconomics. Prentice Hall. http://online.wsj.com/article/BT-CO-20120608-703308.html http://www.channelnewsasia.com/stories/afp_world_business/ view/1203656/1/.html

16

SIMES Newsletter July 2012

Healthcare

HEALTH ECONOMICS

SIMES Newsletter July 2012

An Introduction to Healthcare Economics

BY EDWIN WAN

Photo sources: How will healthcare evolve in future urban cities?, http://www.edb.gov.sg/ future_ready/singapore_sessions/sessions/healthcare.html Healthcare in Singapore, http://www. gvpedia.com/Singapore/Top-Healthcare-Facilities.aspx Health care in 2012: Extension Of Palliative Care In Hospitals, http:// www.c3a.org.sg/learning/health-carein-2012-extension-of-palliative-carein-hospitals

SIMES Newsletter July 2012

17

Healthcare

HEALTH ECONOMICS TRANSFORMING HEALTH

ARE CHILDREN

born from a relatively affluent family much healthier than children from a family plagued with poverty? What would be the more efficient method of payment or mode of incentives for doctors to ensure that the welfare of the patients is the primary concern for the doctors? These are just a fraction of the many views that Health economists are concerned about. On the macro level, the issues of public health are prevalent to all people of all countries, regardless of how developed or affluent the country may be. In the case of developed countries like Germany and Japan, these societies are experiencing the onset of an ageing population.

Taking a look at the graph below regarding the old age dependency ratio:

SIMES Newsletter JulyApril 20122012 SIMES Newsletter

is scarce and desirable. Economic goods have a market where there would be transactions between the buyers and sellers. Since it is scarce and desirable, there would be an opportunity cost incurred with the consumption of the economic good.

In the case of healthcare, there are several differences between healthcare and health. Healthcare would be defined as goods with salubrious giving properties. Health would be defined by the WHO as ‘a state of complete physical, mental and social well being and not merely the absence of infirmity‘. Health and healthcare are differentiated in the aspect that demand for healthcare is a derived demand, a means to an end rather than as an end to itself.

Another difference would be that health cannot be traded due to fact that it is a characteristic of a good rather as good by itself. It cannot be bought or sold on a market.

Due to these contrasts, healthcare would more appropriate in the discussion as an economic good rather than health by itself.

Demand is defined as the willingness and the ability to purchase the commodity concerned which is health care. There are several factors that drive the demand of healthcare.

They are:

Source: UN world population statistics

Old age dependency ratio is defined as the ratio of people above aged 65 and above to the population that is aged 20 to 64. The forecast for these two countries beyond 2012 would be one that shows that the issue of ageing population would need care consideration and implementation of policies, particularly in the realm of health economics and population health. Another issue that a health economist could be concerned about would be the resources allocated to the distribution of healthcare in a country. This is an essential issue especially for developing countries where there is an unequal or inequitable distribution of health care.

Some basic concepts...

An economic good has two defining features: it

4 SIMES Newsletter July 2012

•Need ( from the patient point of view ) •Patient preference •Income •Price/user charge •Travel cost and waiting time •Quality of healthcare rendered(from the patient’s point of view )

Supply is defined as the willingness and the ability to produce the good. There are several factors that would influence the supply of healthcare: •Changes in the price level for the factors of production •Change in price of the health-inducing good These are the few of many concepts that has been covered in the field of health economics. The general outline of Health economics is shown in the flow chart below:

SIMES Newsletter July 2012 18

HEALTH ECONOMICS

Healthcare

SIMES Newsletter July 2012 A

B WHAT IS HEALTH? WHAT IS ITS VALUE?

WHAT INFLUENCES HEALTH? (OTHER THAN HEALTH CARE) Occupational hazards

Perceived attributes of health

Consumption patterns

Health status indexed: value of life

Education

Utility scaling of health

Income etc

E

C

MACROECONOMIC EVALUATION AT TREATMENT LEVEL

F

DEMAND FOR HEALTH CARE

MARKET EQUILIBRIUM

Influences of A+B on health care seeking behaviour Barriers to access (price, time, psychological, formal) Agency relationship Need

Cost effectiveness and cost benefit analysis of alternative ways of delivering care (e.g. choice of mode, place, timing or amount) at all phases (detection, diagnosis, treatment, aftercare, etc.)

Money prices, time prices Waiting lists and non-price rationing systems as equilibrating mechanisms and their differential effects

D SUPPLY FOR HEALTH CARE Costs of production Alternative production techniques Input Substitution Markets for inputs (manpower, equipment, drugs, etc.)

Renumeration methods and incentives

Table showing the main elements of Health economics Source:Williams (1987)

H PlANNING, BUDGETING AND MONITORING MECHANISMS Evaluation of effectiveness of instruments available for optimizing the system, including the interplay of budgeting, manpower allocations, norms, regulations, etc. and the incentive structures they generate

SIMES Newsletter July 2012

G EVALUATION AT WHOLE SYSTEM LEVEL Equity and allocative efficiency criteria brought to bear on E + F Inter-regional and international comparisons of performance

19

Healthcare

HEALTH ECONOMICS

Economics of Ageing population

SIMES Newsletter July 2012

Low fertility rates and increasing longevity are some of the factors that led to a demographic shift in most of the developed countries. The table shows the crude birth rate of the countries of Japan and Germany:

Table showing the crude birth rate( births per 1000 people)

There is a marked declined in births for both Germany and Japan, coupled with projected charts for life expectancies at age 75:

Source: UN population

20

SIMES Newsletter July 2012

Healthcare

HEALTH ECONOMICS

SIMES Newsletter July 2012

A rise in the life expectancies after age 75 along with declining birthrates would lead to an ageing population. This could lead to problems like rising cost of health care in the future. This could be illustrated using demand and supply analysis as mentioned above by the graph below:

A rise in people living longer would lead to a rise in demand for healthcare services such as podiatric services and open heart surgeries. This would lead to a rightward shift for the demand curve from DD0 to DD1. This would lead to a rise in price from P0 to P1 . Rising prices would be a severe problem in the case where there is no or little social safety net to cushion the rise price of healthcare. Age related spending would on the average rise by 7 percent of GDP as estimated by OECD and International Monetary fund in OECD countries (Magnus, 2009). This could be a worrying effect as the rise of proportion of retirees could affect government revenue as a result of a rise of retired elderly in the country.

However, this is a simplistic way of explaining how having ageing population would lead or result in the rise of health care. There are other factors that could affect the price of healthcare in the long run. In the long run, there could be possible technological innovation that could drive down the price of some of the health-inducing goods. One example would the reduction of cost for heart bypass surgery.

should be allocated in a healthcare system. Ageing population is just one of the many issues that Health economists are concerned about. In the long run, society could benefit from devoting time and research as to allow more efficient methods to allocate resources in a healthcare industry so as the rest of the resources could be used to expand the operations to assist a greater amount of people or to subsidize the cost of healthcare to those that needed it.

References: Carey, M., & Stulz, R. M. (2006). The Risks of Financial Institutions .

US: The University of Chicago Press .

Gardener, E. P., & Versluijs, P. C. (2001). Bank strategies and challenges in New Europe . New york: Palgrave.

WHO. (n.d.). Retrieved 04 9, 2012, from WHO: http://www.who.int/ publications/en/

There is much to be explored for this branch of economics as concern over health or the providence of healthcare is an integral part of society. The basic concepts of introducing demand and supply analysis could provide an insight, however superficial, on the how resources

SIMES Newsletter July 2012

21