This article was published on May 19 in The Straits Times.

Challenges facing Singapore’s economy

Challenges facing Singapore's economy

The 50th anniversary of Singapore’s birth as a nation next year will also mark the midpoint of a bold effort to reshape its future.

The country launched a 10-year economic restructuring plan in 2010, centring on raising the economy’s productivity and lifting the salaries of its workers.

Its ultimate goal is to address some of the long-term economic challenges Singapore faces as it steers towards sustained and inclusive growth in the next stage of its development.

These include providing good jobs and raising incomes for an increasingly educated workforce, reducing the reliance on low-skilled foreign workers and narrowing an income gap that has been widening over the past decade.

By 2030, two-thirds of workers in Singapore will be PMETs: professionals, managers, executives and technicians, up from about half today, according to a population White Paper released last year.

While it is good news that more Singaporeans are aspiring to better jobs, it also throws up two hurdles: First, will Singapore be able to create enough good PMET jobs for them all? And second, will there be enough people to take up all the other jobs – such as cleaners and construction workers – that university graduates will probably shun, but that are still necessary for the country to function smoothly?

For years, these less prestigious jobs have been filled by foreigners, who mostly come from poorer countries in the region and are thus willing to work for lower pay than Singaporeans.

But that has kept salaries for such jobs depressed, contributing to worsening income inequality as pay in other industries rose.

Singapore’s Gini coefficient, a globally used measure of income inequality, climbed from 0.457 in 2003 to 0.478 in 2012. A higher number signals greater inequality.

Although the easy availability of cheap foreign workers helped to fuel Singapore’s strong economic expansion prior to the global financial crisis in 2008, such a method of growth was unsustainable. Worse, the swelling influx of foreigners started to lead to social tensions and discontent among Singaporeans.

The productivity plan

Aware of these issues, the Government decided in 2010 to pursue better-quality economic growth: One that is based on improving skills and productivity, rather than on a continuous increase in workers. Its target is to raise the productivity of the country’s workforce by 2 per cent to 3 per cent a year on average from 2010 to 2019 – up from the 1 per cent a year logged in the 10 years prior to that.

In other words, each worker should be producing an average of 2 per cent to 3 per cent more value each year than the year before, without working extra hours to do so. This can be achieved by increasing each worker’s efficiency – for instance, by automating work processes or training workers to be more skilled – or by creating more innovative products and services with higher value.

To help this process gain traction, the Government has been tightening the tap on inflow of foreign workers and introducing incentives for companies to be more productive.

In this year’s Budget, for instance, it raised the levies construction firms have to pay to hire lower-skilled workers.

It also extended and enhanced the Productivity and Innovation Credit (PIC), a key scheme that rewards firms that invest in productivity-boosting areas such as automation, worker training and research and development.

If the restructuring drive succeeds, Singapore can begin a virtuous circle of better skills, better jobs and higher salaries.

The economy would grow an average of 3 per cent to 5 per cent a year from 2010 to 2019, which is slower than the 5 per cent a year in the preceding decade. But the growth will be of better quality: Productivity improvements will account for two-thirds of growth, up from just one-fifth previously.

Of course, the plan’s success is not yet guaranteed. Between 2011 and 2013, productivity fell an average of 0.6 per cent a year.

This is worrying because if Singapore misses its productivity targets, having clamped down on foreign labour, economic growth may be even slower than forecast.

In the meantime, the restructuring process is causing pain of its own. Economists warn that the manufacturing and construction sectors, which were particularly dependent on foreign labour, may shrink significantly by the time the restructuring is over.

“Parts of the manufacturing industry, particularly electronics, are likely to become unviable,” RBS economist Vaninder Singh said in a recent commentary. “The overall size of the manufacturing sector will likely shrink further from its current one-fifth share of the economy.”

The slowdown in foreign workers has also led to a labour crunch in Singapore, sending wage bills soaring for businesses.

This has already contributed to the closures of some companies. For those that remain, their higher business costs are translating into pricier consumer goods and services, for everything from clinic fees to restaurant meals.

DBS economist Irvin Seah noted that Singapore’s inflation had been lower than the average of its major Asian neighbours until mid-2010, when “Singapore’s prices began to rise faster than elsewhere”.

Other challenges

Higher inflation is complicating some of Singapore’s other economic challenges as well.

Like in most affluent countries, Singapore’s population is ageing as its birth rate declines and lifespans lengthen. Higher inflation will eat into the spending power of retirees’ savings, which in turn means more money must be set aside for them.

To help Singaporeans save enough for retirement, the Government in this year’s Budget raised the amount that employers must contribute to their workers’ Central Provident Fund savings. The entire increase will go into workers’ Medisave accounts.

On top of that, older workers aged 50 to 65 also had their CPF contribution rates bumped up further. The aim is to ensure, as far as possible, that each generation pays for its own needs without burdening future generations.

As it is, the calls on the Government’s purse are already rising. Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam said in his Budget speech this year that Singapore’s spending needs will “grow significantly in the next 10 to 15 years”, as it spends more on infrastructure, health care and education.

Economists expect that taxes will likely have to rise to help fund this spending – a process that will be more painful if wages do not keep up with inflation.

The bottom line is that as Singapore’s economy matures, it faces slower growth and potentially higher inflation than in the past.

The only way to ensure high living standards and growing incomes for Singaporeans is to press on with the drive to raise skills, productivity and wages.

The Singapore perspective: Economic restructuring for growth

The 10-year productivity drive now under way in Singapore is not the first time the country has tried to remake its economy.

In 1979, the Government introduced a “wage correction policy”, aiming to raise productivity by increasing wages.

The National Wages Council recommended three consecutive years of aggressive salary increases – of 20 per cent a year – in an attempt to move the manufacturing industry up the value chain.

The theory was that if employers had to pay higher salaries, they would demand greater output from their workers.

But the policy ended up spiralling out of control: After the initial three years, the wage increases continued for another three years, as workers started to expect higher wages and employers had to meet those expectations.

Meanwhile, productivity grew at a much slower rate of 4 per cent a year. The spiral was halted in 1985, when Singapore slipped into its first recession since independence, as a result of soaring labour costs, business failures and a property correction.

The Government reacted quickly, convening an Economic Committee in April 1985 to review the economy and identify new strategies for growth. This was the start of what would become a pattern of economic soul-searching after each major recession in Singapore. The committee recommended cutting employers’ Central Provident Fund (CPF) contribution rates, imposing a two-year wage restraint and reforming wage structures. By 1986, the economy was growing again.

More recently, after Singapore endured a severe recession in the wake of the dot-com bust of 2001, the Government formed an Economic Review Committee to look into how the country could remake its economy.

The 20-member committee, chaired by then Deputy Prime Minister Lee Hsien Loong, proposed lowering taxes, refining the CPF system, developing Singapore’s human capital and finding new areas of growth for manufacturing and services.

Finally, the current restructuring drive was the brainchild of the Economic Strategies Committee, which was set up in 2009 after the global financial crisis to develop strategies for Singapore’s future growth. Helmed by Finance Minister Tharman Shanmugaratnam, it marks a full circle in Singapore’s economic reviews by focusing again on raising the economy’s productivity

 

This article was published on May 19 in The Straits Times.

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