Asia weaves strands of social safety net

Reuters News
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Posted: Mar 12, 2012 6:45 AM
Asia weaves strands of social safety net

By Emily Kaiser

SINGAPORE (Reuters) - While many European countries struggle to pay for social safety nets, some in Asia are finding they can no longer afford to do without them.

The shift is as much about politics as economics. Asia's explosive growth over the past decade has created thousands of new millionaires and widened the income gap. Rising inequality is becoming a bigger issue at the polls.

In Malaysia, where elections are widely expected this year, the cabinet has approved a national minimum wage for the first time, two government sources said. Hong Kong, which will select a new chief executive on March 25, adopted a minimum wage for the first time last year.

Singapore released a budget last month with the slogan, "An inclusive society, a stronger Singapore." It included tax relief for lower-income families and more spending on medical care for the needy. India's budget, expected on Friday, will probably contain heavier spending on social programs as well.

In both countries, the ruling party lost ground in the most recent polls.

Asian nations have traditionally left social protections up to families or perhaps local leaders who offer assistance in exchange for political support, said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong.

"Modernization has broken this down, leaving the poor arguably less well protected and creating a need for more formal protection," he said.

RESERVE RICH, YET POOR

Unlike in Greece or Portugal, where debt crises have forced painful budget cuts that will weaken the social safety net, most Asian governments have light debt burdens and fiscal space to maneuver.

The region also boasts some of the world's largest foreign exchange reserves, led by China's nearly $3.2 trillion. India, Malaysia, Indonesia, Singapore, South Korea, and Thailand each hold reserves in excess of $100 billion.

Yet almost half of the Asia-Pacific population is poor, OECD data shows.

To be sure, foreign exchange reserves are intended to serve as a self-insurance policy against the risk of financial upheaval, not to pay for a social safety net.

The memory of the Asian financial crisis in the late 1990s is still fresh, so deep reserves are also seen as a way to ensure countries won't have to turn to the IMF for emergency loans, which typically carry tough conditions.

But the apparent disconnect between those vast reserves and the scale of poverty leads to some tricky questions. When European leaders pressed China to invest more in euro zone debt to try to alleviate the debt crisis, many economists pointed out that Chinese citizens were far poorer than Europeans and should not be expected to bail out wealthy countries.

India is one of the few fiscal exceptions in Asia because it runs both budget and trade deficits, which means it must attract foreign capital to cover its spending needs.

Friday's budget is shaping up to be a bit of Catch-22: if the government opts for more populist measures to appease voters, financial markets may balk at the expanding deficit. But scrimping on subsidies could cause even more pain at the polls.

The budget "will be the litmus test on the government's commitment to judicious economic policies," Nomura economists wrote in a note to clients last week.

"While a poor showing in recent state elections has reduced the government's ability to pass politically sensitive reforms, this has only increased the onus on it to reduce the fiscal deficit," Nomura wrote.

LONG ROAD

The Asia-Pacific region, on average, spends the equivalent of about 5.2 percent of gross domestic product on social protection, barely a quarter of the average in advanced economies, according to a report released in December by the Organization for Economic Co-operation and Development.

Income inequality in the region is higher than the OECD average, the same report shows, with the widest gaps in Indonesia and India.

Nudging up the minimum wage or boosting healthcare spending will hardly alter those statistics. What Asia really needs, according to the International Monetary Fund, is more investment in education and health care, and stronger unemployment and pension benefits.

Not only would that reduce inequality, it might also help the economy. A flimsy social safety net encourages consumers to save, which leaves countries such as China overly reliant on exports and investment for growth.

Anoop Singh, director of the IMF's Asia and Pacific department, said in October that inclusive growth would get more attention in the fund's regular discussions with member countries in Asia.

But not all of the IMF's ideas have been popular.

For example, it recommended in February that Singapore adopt a minimum wage, and pointed out that rival Hong Kong had recently done so.

Singaporean authorities "expressed reservations" about a minimum wage, concerned that it would act as a tax on labor and drive up the unemployment rate, the IMF said in its annual report on the country.

In Malaysia, a study by the Ministry of Human Resources found that 34 percent of the 13 million-strong workforce earns less than 700 Malaysian ringgit ($230) a month. The poverty line for household income is currently set at 720 ringgit.

"The introduction of a minimum wage in Malaysia is really a political decision -- gearing up for the elections," said Shaun Levine, an Asia analyst with political risk consultancy Eurasia Group, based in Washington.

Levine pointed out that some 3.3 million workers may benefit from the wage increase, on top of 1.1 million who stand to gain from pay hikes for civil servants.

"That is a considerable number of potential voters." ($1 = 3.0100 Malaysian ringgit)

(Additional reporting by Niluksi Koswanage in Kuala Lumpur; Editing by Mathew Veedon)