Racial preference: Bad for the economy, bad for business

Academic Views / Monday, June 21st, 2021

Linda Lim, Professor Emerita at the Stephen M. Ross School of Business, University of Michigan and AcademiaSG Editor, brings an economist’s perspective to the ongoing discussion of racism in Singapore. This piece contains some updates added on 28 June 2021.

Recent discourse in Singapore on race, racism and race relations, including on AcademiaSG,  has helpfully foregrounded various academic and practitioner perspectives. All of these are anchored, correctly, on the principle that the equal treatment of different races—including of minority populations by the majority, and by the state—is morally and ethically obligatory, and a fundamental human right, in line with international norms.

Missing so far have been perspectives from economics and business.  This is curious, particularly among supposedly “pragmatic” Singaporeans. Economists have been among the earliest, most prolific and distinguished researchers of racial discrimination (differential treatment by race), and investors, corporate boards and managers are among those currently most engaged in requiring, developing and implementing business practices to combat racial discrimination.

Race affects economic outcomes

Economists don’t spend a lot of time on definitions of “racism”, being preoccupied primarily (critics would say simplistically) with measuring the impact of race on economic outcomes like employment, income and wealth, typically in multivariate models that isolate race from other variables like gender, education, age and work experience.  Despite ongoing data limitations, the empirical result of decades of such studies is that “race matters” as a determinant of economic outcomes, from which some element of discrimination, or “racism”, is inferred, regardless of intentionality and motivation.

A further popular conclusion among economists is that racial bias (or preference), as measured by differential outcomes (discrimination) adversely affects not just minority racial groups in a country, but also the economy and thus the country as a whole, including the majority.

Racial discrimination affects Singapore’s housing rental market. (Photo: YouGov)

In his path-breaking 1957 book, The Economics of Discrimination, Nobel prizewinning economist Gary S. Becker of the University of Chicago used a model based on the rational, utility-maximizing individual, to argue that competition would eventually reduce racial discrimination in the labor market, since employers’ “taste (preference) for discrimination” would increase their cost and reduce competitiveness. But market forces would not completely eliminate discrimination, since (a) some customers’ racial preference would cause them to be willing to pay higher prices to “subsidize discrimination”, and (b) minorities “would still experience “premarket” discrimination (things that happen to people before they enter the labor market) and political-based modes of discrimination (prejudicial rules governing zoning, housing, and education)”.

In 1998, another Nobel prizewinning economist, Kenneth J. Arrow of Stanford University, noted that “beliefs and preferences may themselves be the product of social interactions unmediated by prices and markets”.[1] He particularly highlighted the role that personal interactions through social networks can play in “resource allocation”, especially job market segregation, such that market transactions themselves are not impersonal, and discrimination based on racial preference can have social if not economic rewards for the discriminator.

Standard economic models assume that individuals are rational, self-interested and utility-maximizing, so it must be structural and institutional barriers (including laws, regulations and social networks) that perpetuate costly discrimination.  More recently, behavioral economists have argued that society or individuals have implicit biases (or “mental models”) and stereotypes (including ones based on race), and seek to model their impact in labor, housing, and financial markets. Most obviously, people usually want to be with people like themselves, known as “homophily”.[2]  Their preferences may reflect not just individual utility maximization, but also social preferences or norms which may normalize or legitimize particular racial biases that then shape individual choice and behaviors even if they are not rational or welfare-enhancing for the individual. Stereotypes, bias and discrimination are “givens” in psychology, where researchers have also found that racial bias can lead to people making economic decisions which are costly for themselves, hence “economically irrational”.[3]

Media personality Preetipls satirically referring to the advantages enjoyed by the Chinese majority in Singapore with a T-shirt reading “Yes it’s because you’re Chinese” and the line “Cancel minority is ok”. (Photo: Screenshot of video by Preetipls and Subhas Nair)

Regardless, being in the majority in a racially-diverse society conveys many market advantages (over similarly-situated minorities), including linguistic and cultural assets, broader networks for getting jobs and buying and selling goods and services, and the scale economies and “clustering” advantages that contribute to competitive advantage. But for a country as a whole, discriminatory behavior by individuals acting out of personal preference or bias adds up to real economic loss.

Cost to the economy of systemic racism

The bank Citigroup estimated that the U.S. has lost some $16 trillion in output due to racial inequality, while the consulting firm McKinsey & Co. calculated that U.S. GDP—the total value of goods and services produced—could be up to 6% higher by 2028 if that country’s racial wealth gap is closed. 

Though data for other economies is less extensive and robust, economists widely accept that racial discrimination exists in all countries, and that it is economically detrimental.  International Monetary Fund (IMF) staff economists (of diverse national origins) conclude that: “Systemic racism is a global problem… Because it prevents people from making the most of their economic potential, systemic racism carries significant economic costs. A less racist society can be an economically stronger one” and “Combating discrimination is not a zero-sum game: research shows that, overall, it improves the economy’s performance“.

The Cambridge Dictionary defines “systemic racism” (also known as “structural” or “institutional” racism) as “policies and practices that exist throughout a whole society or organization, and that result in and support a continued unfair advantage to some people and unfair or harmful treatment of others based on race”. Thus sociologists have argued that economists should pay more attention to institutional discrimination, since even “minor forms of everyday interpersonal discrimination can be highly consequential” for economic outcomes.[4]

Cost to business of systemic racism

Most large global businesses accept that systemic racism exists, and face the challenge of adapting their business practices to counter it. The World Economic Forum has its own definition of systemic racism and has identified “5 Ways racism is bad for business”: it stifles creativity; causes a toxic work culture which is no good for anyone; increases absenteeism and health issues among employees; leads to bad PR, loss of income and litigation; and ignores the fact that “people want to do business with firms that take an anti-racist approach”.

For management scholars, the most important organizational function is the recruitment, retention, and optimal employment of diverse talent. IMF economists note that:

it is a fallacy to argue that there is a trade-off between increasing racial diversity and maintaining the excellence-based “meritocracies” that have made organizations successful. Leveling the playing field for minorities at each step goes a long way in addressing discrimination and making organizations more productive.

Unconscious bias

Recognizing unconscious or implicit bias is important[5] because research shows that (a) people are much more likely to encounter subtle forms of bias than overt ones, (b) the effects of subtle discrimination on employees and their work performance is “at least as bad as, if not worse, than overt discrimination” since “subtle discrimination is stressful because of its higher frequency… Because targets may be confronted with these slights on a daily, even hourly, basis, the negative effects of subtle discrimination may build and accumulate at a rapid pace”.

A comic illustrating the concept of “microaggressions” in Singapore.
(Source: Rachel Pang Comics)

“Slights” are “microaggressions”, based on stereotypes, which “seem small; but compounded over time, they can have a deleterious impact on an employee’s experience, physical health, and psychological well-being”. Workplace examples might include expressing surprise that a minority is “articulate” or “has good English” (or a PhD degree from Berkeley), or routinely ignoring/talking over comments by a minority or female (both typically poorly represented at higher occupational levels). Everyday examples might include deliberately (even ostentatiously) avoiding sitting or standing next to a minority. The same action if directed at a majority would not constitute a “microaggression”, or even be noticed, since it would not reinforce a lifelong sensitivity to being regarded or treated as inferior because of one’s race (or gender).

Among counselling psychologists, the concept of microaggressions was pioneered by a Chinese-American professor at Columbia, Derald Wing Sue, and the studies which have been done include many on Asian-Americans,[6] who are not typically considered subject to “overt discrimination” in the labor market. They also perform better on most economic metrics than other groups (though with the greatest within-group income inequality of any group), but this does not mean that they do not encounter and are not harmed by racial discrimination. For example, Asian-Americans (like women) are under-represented in leadership positions relative to their representation at middle levels of corporations (the “pipeline”), and are frequently asked “Where are you from?”, indicating a presumption of “perpetual foreignness” even though their families have been in the U.S. for generations.

Racial diversity, the economy and business in Singapore

Singapore’s labor force is much more diverse than in most other advanced economies, with a multiracial indigenous population, and a proportionately large immigrant and transient workforce at all levels. The business community is also diverse, with global multinationals and the government itself being major employers, including of non-national talent. Racial categorizations are deeply embedded in many of the country’s official institutions, including housing, education and immigration, there are legal barriers to open discourse on race and religion, and considerable cultural and social segmentation among different groups.

All parties, including minority “victims”, majority “perpetrators” (the terminology used in the scholarly literature), “bystanders” and the state, acknowledge that “racial preference”, even “racism” exists, though there is disagreement as to whether this constitutes a “problem” that needs to be addressed.

David Marshall, Singapore’s first chief minister, elected in 1955, was a Baghdadi Jew. (Photo: Courtesy of the National Museum of Singapore, National Heritage Board)

The government’s own “official line” that “Singaporeans are not ready for a non-Chinese prime minister” (despite the fact that its first Chief Minister, David Marshall, was a Baghdadi Jew elected in 1955) legitimizes racial preference. Its rigid adherence to maintaining the racial categories and racial population ratios prevailing at the end of the colonial period in 1963—the “CMIO” (Chinese-Malay-Indian-Other) model—reinforces both race consciousness and racially-biased attitudes, behaviors and practices which, from an economic perspective, make discrimination likely.  

In the job market, racial preference and CMIO quotas undermine meritocracy, which is otherwise close to a national ideology, and reduce the degrees of freedom which employers have to hire the best employees for their needs. In the global market for talent (which includes Singaporeans of all races), microaggressions which contribute to an uncomfortable work environment for minorities can actually drive away talent and undermine its local development.  As I wrote in 2019:

One of my MBA students from India, who spent 10 years studying and working in Singapore then decided to stay in the U.S. rather than return, gave as one reason: “Chinese privilege was extraordinarily apparent to me, and a lot of Chinese-Singaporeans were oblivious to it, leading to situations sometimes where they would make an off-color comment and not realize it was offensive.” Nearly every Indian and Malay growing up in Singapore can recount similar experiences, including being “damned with faint praise”…”the soft racism of lowered expectations” is well documented in educational psychology research in the U.S., which finds that the academic performance of minority students is positively correlated with self-esteem deriving from their parents’, teachers’ and classmates’ expectations.

Research also shows that minority (including female) “representation” or “role models” have a positive impact on the learning outcomes of both minority and majority students, and in business performance, including innovation and earnings. With suboptimal talent production and recruitment, and the lowered productivity which results from both overt and subtle discrimination and unconscious bias, our economy does not reach its full potential, and may lose international competitiveness. This harms everyone, including the majority race which has the largest share of the economy.

Race and the HDB economy

On a more local level, consider the impact of HDB’s “ethnic integration” policy which ensures but also limits the proportion of flats in a given block or estate that are occupied by minorities. Nobel prizewinning economist Thomas C. Schelling of Harvard University in 1971 used game theory to show that even small preferences for living among people like ourselves would lead eventually to residential self-segregation by race, without individuals explicitly desiring this, and despite their willingness to live among people who are different.[7] Though subject to recent theoretical and empirical challenge, this simple mathematical model remains intuitively attractive, and is used to justify state policy interventions that, it is argued, prevent “ghettoization” and the associated social problems which it is assumed would arise among minorities, though somehow not among self-segregating majorities.

Residential diversity, like diversity in other settings such as education and business, yields a large positive externality for society as a whole. But the costs are individualized and borne mainly by minorities, who are not compensated or subsidized for it as standard economics would prescribe. Because the resale market for minority-owned flats is artificially constrained by CMIO racial quotas, they face lower demand and thus lower prices for their property. Since housing constitutes the bulk of individual assets in any society, minorities’ ability to build and realize wealth is forced lower.  They thus end up with less wealth than members of the majority who have the same education, income, occupation, work experience and family size.

How is the provision of amenities in residential areas in Singapore negatively affected by the enforcement of lower minority numbers in particular blocks and estates? (Photo: Wikimedia)

Minorities’ enforced lower numbers in a particular block or estate also reduces the local market for products and services—from tuition centers to places of worship and hawker stalls—that cater to their specific ethnic, cultural, educational and religious needs. In other countries without racial quotas for “public housing”, and in Singapore before CMIO, the “natural” market tendency is for clusters of commercial establishments to emerge catering to specific groups of residents—Chinatowns being the prime example. Clusters emerge because they create sufficient market size or scale economies and agglomeration advantages that enable minority entrepreneurs to build businesses (and wealth) by catering to minority consumers (and, often, also domestic and international tourists interested in experiencing diverse local cultures).

Without such clusters, minority consumers are disadvantaged by, for example, having to travel further afield for their daily needs, while their majority neighbors face lesser choice, diversity and competition in, for example, the local  coffee shop or hawker center. Minorities cannot practice or enjoy homophily, the utility of living among others of the same culture, as the majority do, and as higher-income residents of private housing (where CMIO quotas do not apply) can. There is also an intangible loss for both minorities and the majority in the lesser ability to experience, even occasionally, “immersion” in the minority’s culture “without leaving home”. 

There is an instrumental (for another purpose) as well as essential (for its own sake) value to such experience.  Instrumentally, it is both because the specifics of Singapore’s minority ethnic cultures provide a window into Singapore’s regional neighbors with whom our future economic livelihood is inevitably tied, and because, as I have always taught, “In international business everyone is a minority”. Experience as a minority develops sensitivities to others which majorities used only to “people like us” often lack, handicapping them/us in negotiating multi-cultural environments which are unavoidable as businesses based in our “global city” venture abroad.

Pragmatism with principle

Economists and business practitioners—Nobel prizewinners, the World Bank, IMF, World Economic Forum, McKinsey, multinational corporations, and legions of individual scholars and managers—believe that systemic racism, of which racial preference is a part, exists everywhere. Singaporeans, including the government, concur that this is true in Singapore as well.

Few would disagree that moral and ethical principles should always take precedence in race relations. But this does not mean the sacrifice of pragmatic considerations, or that a trade-off between racial equality and economic well-being is necessary. On the contrary, research unambiguously shows that discrimination on the basis of race, whether by government regulation, business practice or conscious or unconscious individual racial bias or preference, is costly to the economy, to business, and to members of both majority and minority races. To overcome these costs, the consensus recommendation for all countries is that “the first step is to create a safe environment to talk about racism, raise awareness”. From a pragmatic viewpoint, principle also pays.


[1] Kenneth J. Arrow, “What has economics to say about racial discrimination”  Journal of Economic Perspectives 12(2): 91-100 (1998).

[2] Sergio Currarini, Matthew O. Jackson, Paolo Pin, “An Economic Model of Friendship: Homophily, Minorities and Segregation”, Econometrica 77(4):1003-1045 (2009); Willemien Kets and Alvaro Sandroni, “A belief-based theory of homophily”, Managerial Economics, Decision Science and Operations 115:410-435 (2019).

[3] Karla Hoff and James Walsh, “The Whys of Social Exclusion: Insights from Behavioral Economics”, The World Bank Research Observer 33(1):1-33 (2019).

[4] Mario L. Small and Devah Pager, “Sociological Perspectives on Racial Discrimination”, Journal of Economic Perspectives 34 (2):49-67 (2020).

[5] For a pioneering study on implicit racial bias among Chinese and Indian Singaporean preschoolers, see Peipei Setoh et al, “Racial Categorization Predicts Implicit Bias in Preschool Children”, Child Development (2019).

[6] See many articles in the Journal of Counselling Psychology and the Asian American Journal of Psychology.

[7] Thomas C. Schelling, Micromotives and Macrobehavior. New York, W.W. Norton (1978).

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