Thursday, 18 June 2015

GUTS 1: Moving towards Singapore 2.0. Part 3: Enterprising Singaporeans

The Grand Unified Theory of Singapore (GUTS) today 
and what We need to move to SG 2.0

Part 3: How to Get Singaporeans to take more Risk

Part 1 covered the problems of Singapore today - An Ageing population, rising costs of living, Inflation from an emerging, rising China, the problem of home ownership, falling birthrates, rising healthcare costs, and the Sandwiched Generation.

Part 2, considered what Singaporeans want. Or need rather. And why we are so kiasu. And why Meritocracy leads one to the Just World Belief, and why that leads to justifying inequality.

In Part 3, we ask, "How to get a Singaporean to take more risk?"  You may also want to read "The Third Freedom". which ends with the same question.

My Dental Surgeon - A cautionary tale?

The only certainty in life is uncertainty. Disasters, natural or unnatural, domestic or global can strike at any time and affect everyone, good or bad, smart or not, deserving or undeserving. Perhaps there is a role for government to provide a social safety net not because people are lazy "takers", but simply because misfortune strikes us all.

My dentist (or dental surgeon), who's in his sixties, had heart surgery a few years ago, recovered, but found that he had to carry on with his practice in order to pay off his hospital bills. Yes, he did choose to go to a private hospital, but it struck me that this was a doctor of dentistry (or whatever is the official qualification of a dental surgeon is), running his own business, presumably making a lot of money (or not. His rates were rather reasonable. Low even), but who still have difficulties when a medical or health crisis struck.

Later he was diagnosed with liver cancer. And he did not and does not drink!

He sold his practice, but continued to work as an employee of the chain that bought his practice. He subsequently retired, but still comes back once a week to continue to provide for his old patients. So more like semi-retired.

If a dentist's (or more correctly a dental surgeon) retirement plans can be derailed by unforeseen medical or healthcare crises, and find it necessary to postpone his retirement plans, what of lesser qualified people doing jobs that do not pay as much?

Or perhaps his is a cautionary tale of small businesses like a private dental practice?

And while liver cirrhosis tends to afflict those who drink excessively, liver cancer seems to be less "punitive", it would seem. Certainly it is inconsistent with the Just World Belief.

As a dentist, he can still work into his sixties and later even, but what of those who depend on their physical strength, speed, or endurance?

As Obama said at his second inauguration, "no matter how responsibly we live our lives, any one of us, at any time, may face a job loss, or a sudden illness..."

No entrepreneur sets out to fail in his business, but there will be failures. A rough estimate is that 90% of start-ups fail.

And even if we are not trying to start a business, there are still the slings and arrows of outrageous misfortune. Like my dentist with a heart attack and liver cancer.

While Singaporeans may have the highest proportion of millionaires, it may also be a fact that most Singaporeans are just one crisis away from poverty.

So these Singaporeans are not "poor" as customarily understood as one with not enough income to meet basic needs.

So what should we call them?

The New "Poor"

My first reaction to the phrase the "New Poor" was derision. It sounded like a way of expanding the concept of "poor" to include "whining middle class".

But all the issues discussed previously - the "stuck between a rock and hard place" generation, the ageing population without a (sufficient) pension, inflation that eats away at our savings, and the deep abiding fear of failure that is succinctly encapsulated in the uniquely (?) Singaporean phrase, "kiasu".

The New Poor is the Singaporean middle class that is just one catastrophe away from complete meltdown. They may have modest to comfortable income, but they have have over-stretched themselves as they reach for the Singapore Dream or the Singapore Right, and are now precariously balanced between survival and destitution. Or they may have been as prudent as they can, but costs have risen, needs have arisen, and expectations have grown, while their income has failed to keep up. So they have drawn down on savings, mortgaged their future, and bet the farm to keep their heads above water.

So the New Poor is not "poor" in the classic sense of not having enough; of not having the income to meet basic needs. But they are just making ends meet, with no margin for error, and are often just one crisis away from the spiral down into poverty. They are "poor" in that they have no room to fail; no option to fail. No way to weather a disaster. No real alternatives. No way out. No choice but to play the cards life, reality, and fate has dealt them.

An exaggeration, you say. But as I have pointed out, even a dental surgeon could have his retirement plans delayed if not derailed by a single medical crisis.

So if we consider that in today's world, it is not enough to have an income that just manages to cover your immediate needs or basic needs. Your income should also provide some margin of error, some buffer to build up reserves. Then those that just meet their basic needs are not just meeting their basic needs. They have not provided for that reserve or buffer.

And that is why, they are the "new poor".

But this definition is not completely defensible. If part of the reason you have no "buffer" is because of your mortgage that takes up 50% of your income, could you have bought a smaller home and paid only 30% of your income for the mortgage?

Perhaps. But perhaps you need a larger home, and prices have been rising faster than you expected. So you are over-extended not through your own greed, but by necessity?  By market forces that have driven prices above and beyond the reasonable and the rational? By circumstances beyond your control?

What is this "circumstances beyond your control"?

The property market.

The predominant "wisdom" is that property is an investment that almost cannot fail in land-scarce Singapore. There are two problems with this "wisdom".

The first is that some observers have called the HDB and the general Singapore property market a Ponzi Scheme. This is simplistic, but understandable.

The "investors" in the 60s & 70s were buying flats from HDB for thousands of dollars. A 5-rm flat in the late 70s was priced about $40,000. In early 2014, 5-rm BTO flats were priced between $310,000 and $390,000. In the resale market, a 5-rm flat would be about $500,000 depending on the location (could vary between $400k to $640k).

Thus the early investors (like a Ponzi Scheme) are rewarded, and the later investors "finance" the gains of the early investors. And since the early investors are likely to liquidate their investments to finance their retirement, it was not unreasonable to conclude that the new "investors" or younger investors, are financing the retirement of the older or earlier investors.

The second problem is that your home should not be considered an "investment".

An investment should be something you can divest yourself of when you need the money. A property that is your home, is not an investment. If you liquidate your home, where will you live?

But some Singaporeans with poor planning, or a criminal lack of foresight, or were forced by circumstances to make a poverty-driven decision, sold their home to pay their bills and then found themselves in a deeper hole.

But that's another issue to be discussed.

The point is, small businesses and small businessmen have to take risks. And I believe the general consensus is that there are too few entrepreneurs in Singapore.

How to make Singaporeans take more risk.

This is a trick question. The answer is, you can't.

What you can try to do and what many analysts have done is to try to recommend how Singapore can be a more innovative place. How Singaporeans can be more entrepreneurial.

So some studies found that innovative places have great tolerance for alternative lifestyle. So we (meaning the SG govt) tried to loosen up and be more tolerant of alternative lifestyles. Then the scholar walked Holland Village with her boyfriend (?) in the nude and was arrested and charged in court. Not very tolerant.

I don't know if the "honest mistake" episode was to try to engender a culture more tolerant of failure, but it failed. But it's okay. We're trying to be more tolerant of failure, including tolerating the failure to engender a culture of tolerating failure.

It was an... understandable mistake.

The title of this section is a trick question, because if you start out by asking that question, you will fail to raise entrepreneurship or innovation.

The answer lies not in getting Singaporeans to be less risk-adverse - which would be a major attitudinal change for the population and would in effect castrate the entrepreneur. A risk-adverse entrepreneur is an oxymoron.

The answer lies in lowering the risks for Singaporeans or providing a safety net for people try and fly, but catch them if they fall.

A responsible citizen would save, or should save for their retirement, for medical emergencies, for job loss, for accidents and other unexpected catastrophes, for education (their own, or their children), marriage, childbirth, home ownership, etc.

Singaporeans have a lot of responsibilities. But as the "New Poor", they cannot afford to take risks; they cannot afford to fail. And because they cannot afford these, they will not start businesses.

Most people will not even start families! Because starting a family is also risky, especially when couples are delaying marriage, and delaying children, and the older the mother, the higher the risks of birth defects.

Hence the low TFR.

Baby bonus is all well and good, but if you have a Downs Syndrome child or some other medical issues with your child, the baby bonus isn't going to be much help.

Let's say the chances of a baby born with a medical issue to a mother above 35 years old is say 1 in 100. Couples who are older than 35 will consider the risk and may decide that 1 in 100 is just too risky. So 100 couples may decide NOT to have a child and there are 100 fewer children. Of which only 1 (statistically) is likely to have a medical issue. And Singapore's birth rate continues to fall.

What if society or the government provides for the children's medical care for life? And provides other programmes and services if the child has special needs? And provides respite care or home support care when the child is older and the parents are ageing? And when the parents pass on, the disabled child (now an adult) would be cared for.

(Medishield Life will start at the end of 2015. This will provide medical insurance for children from birth, which means medical issues from birth will be covered. This seems to provide some protection. Will need to see how it works. However, this covers health care and while this IS something, and we SHOULD have this, there are other needs. But this would really help if it is all I hope it will be.)

If we take care of children with medical issues or special needs, older parents will be relieved of at least one worry and maybe, just maybe, we can raise the TFR. Is the risk of one child with special needs worth the chance of 99 other children that we will have? And 99 is a modest estimate.

This is what I mean by reducing the risks for all Singaporeans.

And there is no moral hazard. No parent will deliberately delay starting a family just to raise the chances of having a child with special needs and take advantage of the generosity of the Singapore government in providing medical and special needs programme for their child. No parent would hope to have a child with special needs.

For entrepreneurs the situation is reversed. Nine in ten start-ups fail. The question then is, do we want to encourage start-ups and are we willing to pay the price to encourage start-ups knowing that 90% of them will fail.

Well, if we keep focusing on the 90% failures, we would never pay attention to the 10% that succeed, that go on to grow and be established nationally, regionally, and maybe eventually, globally.  But that is the long shot. The majority of entrepreneurs may just want to start a small business doing what they love or are passionate about. It may not contribute greatly to the economy, but it will mean that Singaporeans will feel that they have a better chance to pursue their dreams.

BUT, a lot of them will fail.

So how do we minimise the risk for entrepreneurs?

Unemployment insurance.

Some entrepreneurs never work for others, and go straight into their passion, But most start out as a "salary man" (or woman), save their wages, then resign to pursue their passion or dreams.

In Canada and other countries with unemployment insurance, UI is not seen as social welfare as the employees have to pay into UI for a minimum period and then draw on UI up to a maximum. It is only when UI is exhausted that additional unemployment benefits are seen as welfare.

The other problem is home ownership.

If the entrepreneur has a mortgage, business failure could also mean losing his home, and a roof over his family's head.

If we accept the explanation of the study that found home ownership is negatively correlated to entrepreneurship, then we need to address this issue. Should we start to discourage home ownership?

No. We're too invested in the home ownership society. Any attempt to reverse this will be catastrophic.

But the housing option in Singapore is rather limited. Entrepreneurs elsewhere tend to rent instead of committing to home ownership. They would rather invest in their business.

The solution may be to open up the rental market, or find some way to make rent less painful.

I hesitate to suggest allowing CPF for rental housing from HDB, as CPF is already being used for too many schemes. And HDB already has their hands full trying to meet buyers' demand, let alone dealing with rising rental demand.

But the success of our home ownership programme has become a liability. Unless the lack of entrepreneurs in Singapore is not considered a liability.

Needed - A Holistic Solution

An interesting observation of those trying to help the poor and the disadvantaged is that help needs to be holistic. Piecemeal help is often no help at all.

What do I mean?

If a person has $20,000 in personal debt (credit card), owes $300 in utilities, $800 in rent, and has no clothes to wear for an upcoming job interview, what would he do if he had $50. If you say buy some clothes for his job interview, you are a rational person with no experience working with the down-on-their-luck.

The correct answer (in the real world) is, splurge on food and entertainment.

Social workers and help organisations have found that people are not rational or systematic in their problem solving. They do not break up their problems into bite-size pieces and deal with the problem in a systematic way. Faced with a surfeit of problems, and with a small windfall, they will blow the windfall on some temporary pleasures and reward. Because it does them no good to solve a small problem when there are so many more problems.

And, everyone needs a break from their problem. Everyone needs to enjoy life once in a while. A $50 windfall is proof that God loves you and wants you to enjoy yourself despite your problems.

Similarly, given the many fears (potential problems) that Singaporeans face, it is not enough to solve just one or two problems. The solution must be a holistic solution in order to free Singaporeans to fail.

What do I mean, again?

Singaporeans worry about retirement, housing, education, healthcare, parenting burdens/ cost of caring for their children, unemployment and career, and catastrophic and unanticipated events. Solving any one of these problems, or two or three of these problems does not free Singaporeans from all their worries and so do not free them to fail.

Or more correctly, it does not free Singaporeans to take risks.

We need a holistic package of social safety nets that will address ALL (or at least MOST of) the concerns and uncertainties of Singaporeans in order to free Singaporeans to take risks.

We need unemployment insurance (that covers business FAILURE) to assure Singaporeans that a temporary setback does not become permanent and not the first step on the slippery slope to destitution.

We need some sort of universal health or medical insurance to ensure that medical needs are taken care of, whether it is acquired later in life or congenital, and that early preventive care is readily available, easily accessible, and universally affordable. (Which MediShield Life seems to be the solution)

We need some basic pension or living allowance for retirees, so that even if all their entrepreneurial bets are lost, they will not be cast aside as a FAILURES in their old age.

Parents need to be assured that their children are taken care of if anything happens to them, especially if their children has special needs, or require extraordinary care.

We need some way of breaking out of the "home ownership trap", perhaps by making renting more affordable, more viable, more acceptable?


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