Higher productivity, the only option left for Singapore

Aug 03, 2015 at 11:31 am | Hits: 17274

By Nicholas Koh

Singapore continues to struggle to improve labour productivity. Labour productivity saw its fourth consecutive decline in the first quarter of this year, falling short of the Government’s target of 2–3% annual growth over a 10-year period to 2019.

Improving productivity has taken on an added urgency in recent times. Lagging productivity will affect wage growth and, from a global standpoint, make the Singapore economy less competitive. As alternative ways of achieving economic growth— particularly growth induced by the influx of foreign workers— run out, a successful productivity campaign becomes ever more salient.

Forty Years of Productivity Wilderness

Singapore has been in productivity wilderness for the last 40 years. Since the early 1970s, the state has embarked on numerous productivity campaigns not dissimilar to the one we see today, where companies are encouraged to use innovation, training and technology to increase output.

However, every attempt to raise labour productivity in the past was interrupted by economic crises that impelled the government to focus on ways to arrest economic decline. This was in part achieved through the loosening of low-skilled foreign labour supply, which suppressed business costs, and helped businesses to stay afloat. The productivity drive of the 1970s ended with the 1985 recession and similar efforts in the late 1980s ended with the 1997 Asian Financial Crisis.

The period of economic uncertainty at the turn of the millennium — including the 2001 bursting of the Dotcom bubble, the 2003 SARS outbreak, and the 2008 Global Financial Crisis — encouraged a mindset of focusing on short-term economic gains. Compressed economic cycles have become the new normal and companies want to ride the wave before it is too late. As Prime Minister Lee Hsien Loong articulated in his 2006 National Day Rally, “when conditions are good and the sun is shining, we should go for it, as fast as we can, as much as we can. Get the growth, put it under our belt, put it aside a little bit, so when the thunderstorm comes again, we will be ready.”

In gunning for growth, Singapore has experienced a massive influx of foreigners that resulted in a population increase from 4 million in 2000 to 5.3 million in 2013, despite a decreasing Total Fertility Rate (TFR). Although a larger labour force — engendered by the injection of low-skilled labour inputs — has contributed to a higher Gross Domestic Product (GDP), this has come at the expense of lower productivity growth. This trade-off manifested itself most clearly in the bull period between 2004 and 2008, prior to the collapse of investment bank Lehman Brothers, when the Singapore economy was burgeoning at about 8%, but productivity growth was marginally above zero. Even though there tends to be a positive correlation between economic growth and productivity, especially for small and open economies like Singapore, this was not the case as the economic progress made then was entirely the by-product of population increase.

In 2010, the Singapore government announced the latest iteration of its productivity campaign, a medium-term target of 2–3% productivity growth per annum, over the decade. While labour productivity rose by approximately 2% from 2010 to 2014 (well within the government’s mid-term target), most of the gains were achieved in 2010 alone, when the Singapore economy recovered from the aftermath of the Global Financial Crisis — an outlier to the general trend. With the exclusion of that rebound year, average productivity growth came in weak at 0.3% in the past five years. Unlike official headlines of 2% productivity growth, the trend line points towards productivity decline (figure below). In a recent paper on what Singapore can learn from other small advanced economies, Dr David Skilling, who is director of government advisory firm Landfall Strategy Group, pointed out that in 2013, Singapore had labour productivity of $21/hour worked, far lower than its developed contemporaries, with the United States (US) at $41/hour worked and the Nordics at more than $30/hour worked.

Alternative ways of achieving Economic Growth are Running Out

Increasingly, how much growth the Singapore economy generates is determined by how effectively scarce resources are utilised.

Given Singapore’s already developed economy, well-educated populace and full employment rates, inputs as labour and capital are close to being fully utilised. Raising productivity through greater access to education and infrastructure development is no longer an option. There is no easy catch-up productivity growth to be exploited. With a GDP per capita that ranks higher than that of many developed countries including the US and the United Kingdom, Singaporeans now enjoy a high standard of living. Any further improvement to the lives of Singaporeans in the form of wage increments in the medium to long term will have to come from productivity growth.

Socially, the physical constraints of a small state have finally reached a saturation point, reflected in overcrowding and infrastructural strains. More importantly, growth driven on population expansion tends to worsen income inequality. The Institute of Policy Studies (IPS) 2012 Singapore Perspectives Background Paper, titled Inequality and the Need for a New Social Compact, highlighted that wage gains in Singapore were predominantly concentrated in the higher income segments while the lower-income households experienced stagnant or even negative wage growth. According to the report, the decision to attract high-skilled foreign talent and low-cost foreign labour had inflated wages at the top and depressed wages at the bottom. Widening income disparity weakens the egalitarian and meritocratic creed Singaporeans subscribe to, as the rich perpetuate their wealth and the poor relive poverty.

Politically, a middle-class majority with a growing desire for expanding political participation is less willing to accept a larger population of immigrants if it feels deterioration in social well-being. Reverting to a liberal immigration policy runs the risk of diluting the social compact of the population, possibly posing repercussions that far outweigh an economic slowdown.

The experience of the last 40 years suggests that a U-turn in policy seems to be just another major crisis away. Sure enough, a severe economic shock could alter the current sentiments of the medium voter to accept population-driven growth in the short run. However, the need to restructure the economy would only be delayed and not disappear. Hence, the urgency to boost productivity growth this time is ever more crucial. Productivity should not be seen as a buzzword or preference or an idiosyncratic policy goal, but as an imperative. It is the most important driver of prosperity and the only way to improve living standards in the future.

Some three decades ago in his 1984 Annual Budget Statement, then Finance and Trade & Industry Minister Tony Tan called for higher productivity growth. Dr Tan, who is now Singapore’s President, said: “If we are to reduce our dependence on foreign workers without sacrificing high economic growth, we have to no choice but to speed up the pace of automation and mechanisation”. This argument still stands today. It is about time we make some real progress in our productivity drive.

Nicholas Koh is majoring in economics and political science at National University of Singapore. He is currently interning at the Economics & Business research cluster at IPS.

Photo credit Flickr