Monday, May 15, 2017

Singapore and the Puchasing Power Parity Adjustment

Singapore's gdp per capita is about $52,000 in 2015, pretty much the same as in the United States. But adjusted for purchasing power parity, its per capita gdp is closer to $80,000. This was interesting to me. I usually think of the purchasing power parity (PPP) adjustment as bringing up the gdp of very poor nations. This adjustment is accounting for the fact that in, say, Nepal, even though you earn a very low annual income, you can pay very low prices for certain labor intensive services. A Nepali who came to the US to buy a haircut and paid someone to launder his clothes would quickly go broke, but he could buy the same services in Nepal cheaply. If you were to state the average annual income of a Nepali in nominal terms simply by converting the average Nepali's annual income to dollars at the market exchange rate, you would understate their true command over goods and services. I generally think of this as a "cheap labor inputs" phenomenon, so it was surprising to me that a high-income nation got such a boost from the PPP adjustment.

Singapore must really be doing something right. They are a rich nation, but the PPP adjustment brings their gdp per capita up by a great deal. If an average Singaporean were to work one year and then convert his Singaporean dollars to USD and move to the US, he'd instantly have the same purchasing power as an average American. He has more purchasing power in Singapore because his dollars stretch farther. Likewise, if an American were to convert a year's earnings in USD into Singaporean dollars and spend them in Singapore, his purchasing power would jump dramatically (from $52,000 to $80,000). It's not quite correct to say that Singaporeans are "richer" than Americans. It's just that they somehow manage to pay lower prices for a similar basket of goods, so long as they purchase those goods in Singapore.

Here's a quick and dirty purchasing power parity adjustment. (It's probably wrong for a bunch of reasons, but it's an illustration of what the PPP adjustment is supposed to do. Bear with me.) Let's call the gdp per capita $50,000 for both nations (a slight rounding based on the link above). Say Singapore spends 4% of its gdp on healthcare, while the US spends about 18% (close to the real figures). So an average Singaporean buys $2,000 worth of healthcare and $48,000 worth of other stuff. An average American buys $9,000 worth of healthcare and $41,000 worth of other stuff. "But wait," someone says, "Singaporeans get the same health outcomes for lower spending. They have an awesome healthcare system that is far more efficient than ours." It's not quite fair to call the two nation's gdp's "equal", because Singapore is actually getting $48,000 worth of "other stuff" plus $9,000 worth of healthcare. It's just that they're somehow managing to pay only $2,000 for that healthcare. Adjusting for the fact that they get a lot more bang for the buck on their healthcare (and failing to adjust for "more bang for the buck" on other goods and services), their gdp is more like $57,000 (=$48k + $9k). Doing the PPP adjustment for healthcare alone brings up their incomes by 14%.

Obviously this doesn't get you all the way to the $80,000 figure from the link above, so something else is going on. I believe I've read somewhere that they import cheap foreign labor for some of their public works and construction projects. That one is likely to get demagogued as "exploitation", but this kind of arrangement is welfare enhancing for all parties involved. The immigrants get higher wages than otherwise, and Singapore gets more construction than otherwise, so it's good policy. I'm not sure what else could drive it. Good public transportation? Perhaps they get effectively the same quality of transportation using fewer vehicles and less fuel than the United States. That would certainly affect their purchasing power. What else? Diligent work habits? More efficient regulations? (Or perhaps fewer regulations?)

The way I came across this is interesting. In a recent Facebook thread, a few people suggested that Singapore had a very good healthcare system, and I agreed. Someone objected, claiming that Singapore has a very high gdp per capita compared to the United States. His claim was that they can get away with having a different healthcare system, specifically one with a lot more cost-sharing, because the average Singaporean is so much richer than the average American. A quick Google search showed that Singapore has the same nominal gdp per capita as America, but (though it took me a second look to realize it) a higher gdp when PPP adjusted. In other words, Singaporeans aren't "richer" than Americans. Rather, good policy for things like medicine and construction make their dollars stretch farther. Someone had carelessly looked up Singapore's gdp and saw the PPP adjusted number. A more careful searcher should have noticed that there were conflicting numbers (the $52k and $80k figures at the top of this post) and tried to figure out why. I considered this an important lesson: don't just Google until you get the answer you want. Check out contrary information and dig into it.

(It's not relevant to this post, but I also pointed out that Singapore has had the same healthcare system for a very long time, since long before they overtook the United States in gdp per capita. Their health spending per capita was even lower when they were poorer. According to the World Bank it was 2.9% of gdp in 1995 vs 4.9% in 2014. Besides that, their distribution of incomes overlaps ours significantly. They have poor, sick, and elderly, and the system with lots of cost-sharing and first-party payments works fine for them, too. I'm always skeptical when someone tries to dismiss relevant evidence too quickly, and in this case my skepticism was warranted.)

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