Despite having one of the highest per capita incomes in the world, Singaporeans, believe it or not, have a few complaints. Some of these are political, but others are economic, and many intertwine the two factors.
Here’s a simple model which helps explain at least a few of these complaints. The nicer a place Singapore becomes, the more it is flooded with outside capital and migration. That raises the cost of land and thus rents and home prices. Imagine if I didn’t own a home and suddenly Fairfax, VA became like Beverly Hills or Palo Alto. I would have to pay more, but wouldn’t benefit much from the proximity of the movie stars or the tech titans.
For Singapore these effects are especially strong. The potential flow of outside capital is large relative to the size of the city-state. And because Singapore is small, the supply of decent, low-rent neighborhoods to move to is drying up and so the hinterland has pretty much disappeared. That said, I once argued that some parts of the Singapore arts community will end up priced into southern Malaysia; not every Singaporean I spoke to was happy to hear this.
(If you are studying the future of Singapore, keep your eye on that southern Malaysian gateway. One of the most important questions the two governments face is just how easy to make that border crossing. Right now it is “doable” but could be much easier, given the underlying wealth and competencies of the two governments.)
The political reaction is to make Singapore an even nicer place to live, which is what you would expect from a competent government. That’s great, but in some ways it makes the underlying problem worse by attracting additional foreign capital and labor. The city becomes more Westernized and more corporate and land values rise all the more.
This risk to Singapore is fundamentally about pecuniary externalities. It would all work better if this influx of capital and labor boosted service sector productivity for ordinary Singaporean jobs, but it is not obvious that it does. I’ve even heard credible reports that service sector productivity in Singapore is declining, though only slightly.
While most Singaporean households own their living quarters (I have seen estimates ranging from eighty to ninety percent), this is not entirely comforting to younger people living with their parents who eventually must buy or rent their own place. Or to immigrants, who make up over slightly half of the population and who typically do not own land property.
Eventually this stock of housing wealth will be inherited, but in the meantime large numbers of Singaporeans feel “income poor.” And they feel more income poor each year. Implicitly they convert future wealth into current liquidity by borrowing and indeed Singapore has a level of household debt which is surprisingly large to many people — about 75% of gdp. The debt service on those loans will cut into future real income of course. And the population faces a rate of forced saving which can amount to a third of income.
The upshot is that immigrants to Singapore consume far more niceness than they would like to, and at high prices. The citizens and land and apartment owners and capital owners become wealthy, but at the same time many people — most of all service sector workers, including the natives — feel they had higher living standards ten or fifteen years ago.
Many Singapore residents would be better off if in some regards the country were not so nice.
That is a hard problem to solve, but in some ways a nice problem to have.
Happy Birthday Singapore!