Mauritius and Singapore

Joseph Stiglitz hails the Mauritius miracle:

Suppose someone were to describe to you a small country that provided free education through university for all of its citizens, transportation for school children, and free health care—including heart surgery—for all. …

But Mauritius, a tropical island nation of 1.3 million people off the east coast of Africa, is neither particularly rich nor on its way to budgetary ruin. Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the United States, could learn from its experience.

But wait, there’s more:

Now comes the painful number: Mauritius’s GDP has grown faster than 5 percent annually for almost 30 years. Surely, you think, this must be some “trick.” Mauritius must be rich in diamonds, oil, or some other valuable commodity. But Mauritius has no exploitable natural resources. Indeed, so dismal were its prospects as it approached independence from Britain, which came in 1968, that the Nobel Prize-winning economist James Meade wrote in 1961: “It is going to be a great achievement if [the country] can find productive employment for its population without a serious reduction in the existing standard of living. … [T]he outlook for peaceful development is weak.”

Hold on a second. Lee Kuan Yew’s Singapore was so poor at independence that its leaders expressed the hope that it could one day match Calcutta’s level of economic development, and now it is one of the world’s richest countries. Stiglitz is suggesting that an annual GDP growth rate of over 5 percent sustained over three decades is really impressive. Singapore beats that record by a mile, as do a number of other countries.

The logic of conditional convergence or catch-up growth is that countries with a nominal GDP per capita in the range of $6,700 will definitely grow much faster than a country with a nominal GDP per capita $47,132 (I prefer PPP numbers, in which case Mauritius is at $13,500 and we’re the same) unless it is doing something really egregiously wrong. I’m guessing that Stiglitz understands this, which makes it particularly interesting that the best example of a high-growth Stiglitzian country he can find actually has pretty modest performance. 

First, the question is not whether we can afford to provide health care or education for all or ensure widespread homeownership. If Mauritius can afford these things, America and Europe—which are several orders of magnitude richer—can, too. The question, rather, is how to organize society. Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth—and to a lower level of inequality.

It helps to get a sense of the quality and cost of the public goods being provided. My guess is that we could indeed offer public goods to the standards that prevail in Mauritius at a manageable cost. But of course Baumol’s cost disease enters the picture. Freeing public sector managers to set compensation at competitive levels would presumably help reduce the cost of public services, and I’d love to see Stiglitz endorse this approach.

Second, unlike many other small countries, Mauritius has decided that most military spending is a waste. The United States need not go as far. If the United States reduced by just a fraction its defense spending, much of which goes toward weapons that don’t work against enemies that don’t exist, it would go a long way toward creating a more humane society, including the provision of health care and education to those who cannot afford them.

One can also cite Costa Rica as a model here. I’m open to reducing defense expenditures. It’s worth noting, however, that Mauritius is under the U.S. security umbrella. Stiglitz characterizes this as a cost — the U.S. uses the Diego Garcia military base without offering compensation — yet it does bring in hard currency, and it mitigates the need to develop an autonomous defense capability. Sharp reductions in U.S. defense expenditures might be necessary, but the shrinking of the U.S. global footprint may well force other countries to pick up the slack, with unpredictable economic and geopolitical consequences. 

Third, Mauritius recognized that without natural resources, its people were its only asset. Maybe that appreciation for its human resources is also what led Mauritius to realize that, particularly given the country’s potential religious, ethnic, and political differences—which some tried to exploit in order to induce it to remain a British colony—education for all was crucial to social unity. So was a strong commitment to democratic institutions and cooperation between workers, government, and employers—precisely the opposite of the kind of dissension and division being engendered by conservatives in the United States today.

Singapore felt the same way, and it embraced a different policy mix that has arguably proven far more successful. 

This leads me to Matt Yglesias’s post on Singapore’s welfare state:

I can’t say much about Chile and Hong Kong, but to me the striking thing about Singapore is how fundamentally similar it is to the Nordic countries in a lot of ways. People often see it as being all the way on the other end of the spectrum since the formal tax burden is so low. But this seems to me to largely be an artifact of the fact that the 35.5 percent Central Provident Fund contribution rate isn’t counted as a tax. So, okay, that’s not a tax it’s an individual mandate to save. But as we’ve learned lately with the health care debate, the distinction between taxes and mandates is a bit fuzzy. I also frequently hear the CPF invoked in the context of conservative schemes to privatize Social Security, but as you might have guessed from the name there’s nothing “private” about the Central Provident Fund. This is a government agency. The basic structure is similar to an idea Tyler Cowen put in his “would likely lead to massive socialism” file.

Which is all to say that Singapore seems to have achieved some enviable results in public policy, may well be on the cutting edge of sound welfare state design in many respects, but is very much a country with a large welfare state.

The difference between a forced savings program with personal accounts in which citizens have an ownership stake and pay-as-you-go welfare programs strikes me as pretty profound. To be sure, a forced savings program diminishes one’s freedom — but in exchange it gives you an asset rather than a contingent entitlement. And it’s true that the Central Provident Fund is a public agency. But the relationship between your contributions and your benefits is very clear. I would trade this system for Social Security in a heartbeat.

If we could get all liberal egalitarians to favor replacing taxes with forced savings programs that give us assets that we can pass on to our children, and that politicians can’t use to advance various present-day priorities, I’d be very pleased. (Indeed, one of the problems with contemporary Singapore is the perception that its sovereign investment funds are politicized, a claim that I can’t really evaluate.) If we could also get them to embrace Singapore-style market-based compensation for public servants — the best get paid large sums, the worst are quickly fired or, better still, never hired in the first place, and managers are given near-dictatorial power — we could start arguing about other things, like the meaning of life. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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