Singapore’s Labour Productivity Challenge

Economy
Mar 11, 2016 at 2:16 pm | Hits: 4545

By Hawyee Auyong

As a cluster development officer at the Economic Development Board, I once heard a quote, probably quite apocryphal, that was attributed to the then-Chairman of EDB Mr Lim Siong Guan. He supposedly said: “If EDB can already achieve so much, imagine our heights of excellence if we actually got our HR [Human Resource] processes right.”

Whether that quote was accurate or just plain invented by a disgruntled employee, it recently came to mind again during my research into Singapore’s past challenges in raising labour productivity.

Singapore has tremendous economic potential. The country is wealthy and well-resourced, and so economically advanced that labour productivity should really be a non-issue. Instead, labour productivity seems to pose an almost existential problem for Singapore. As then-Minister for Finance Tharman Shanmugaratnam put it in his 2014 budget speech, raising productivity “is at the centre of our economic agenda”, and will be a “major, multi-year undertaking.”

Today, Singapore’s efforts to raise labour productivity are hindered by several structural issues. Productivity growth has been stuck in the doldrums since 2010. Surely, if Singapore has already achieved so much economic success despite these problems, the country will be even more of an economic powerhouse once we overcome these issues.

Convened at the height of the global financial crisis, the Economic Steering Committee that submitted its report in 2010 set an ambitious target of 2% to 3% productivity growth per year for the following decade. Unfortunately, real productivity growth over the past five years has averaged only 0.4% per year.

The Nobel Prize-winning economist Paul Krugman once wrote: “Productivity isn’t everything, but in the long run it is almost everything.” For a small, labour- and land-constrained economy like Singapore, raising productivity is critical to sustaining its economic growth, especially since the country has fully tapped the easy sources of growth. Singapore has long run out of labour, and is fast running out of land despite ongoing reclamation efforts.

A short history of productivity initiatives in Singapore

The current focus on productivity is not new. The most prominent example of such an effort dates from 1979, when the government attempted to engineer a “second industrial revolution’’ through “wage shock therapy”. Wages were raised significantly from 1979 to 1981 to weed out industries that were not making the best use of Singapore’s limited labour supply. Similar restructuring efforts were also undertaken in, among other times, the early 1990s (with the release of the 1991 Strategic Economic Plan) and the early 2000s (with the release of the 2003 Economic Restructuring Committee report).

However, the overriding imperative of economic growth has oftentimes caused the government to prematurely abort these painful attempts at economic restructuring. The 1985 recession caused the government to dial back some of the measures put in place between 1979 and 1982 to increase wages. The 1997 Asian Financial Crisis prompted the government to again resort to cutting CPF contribution rates to lower wage costs. In both instances, severe cost-cutting measures that were undertaken shored up export competitiveness and kept unemployment rates low, with the side effect of prolonging the existence of businesses that were no longer well-suited to Singapore’s cost structure.

Structural impediments to increasing labour productivity

An economy is a complex ecosystem that evolves. Thus, every economy has inertia and path-dependent features that make it resistant to change. In Singapore’s case, this means that past policy decisions have created structural features that could stymie current efforts to raise labour productivity.

Some of these structural features include:

  • Dependence on MNC-led foreign direct investments as a key driver of economic growth.
    • Singapore’s increasing cost structure has made it less attractive as an investment location, and wage stagnation in the developed world has made on-shoring production an attractive option for mobile global capital.
  • A two-tier economy with relatively unproductive domestic sectors, and very productive export-oriented sectors that are faced with a (possibly protracted) period of global secular stagnation.
    • Domestic sectors continue to be less productive than export-oriented sectors. These sectors are a drag on the rest of the economy because a majority of our workforce is employed in them.
    • The export-oriented sector displays a productivity growth pattern that is highly pro-cyclical. As a result, the current period of global economic slowdown could dampen productivity growth in Singapore.
  • An increasing graduate glut and skills mismatch given the recent restrictions on importing foreign labour.
    • Too many Singaporeans are pursuing university degrees at a time when the government is trying to reducing the intake of blue-collar workers from the region.
  • Low innovation efficiency relative to other advanced economies.
    • Despite Singapore’s high ranking on innovation inputs such as investment in R&D, its efficiency in translating these inputs into economic impact is lower than its economic peers.
  • Entrenched business interests that lobby for a continued supply of cheap labour.
    • Decades of access to cheap and abundant labour has allowed businesses in Singapore to persist with unproductive uses of labour. For example, Taipei, a city of similar size to Singapore, has only a tenth as many cleaners as we do.

Evolving a new economic ecosystem

Overcoming Singapore’s productivity challenge requires significant political will, sustained national effort, and (most of all) patience.

Policymakers seem determined enough to solve this problem, but it will not be enough for Singapore to just copy the form of other innovative economies without simultaneously investing in the substance that makes sense in the local context. For example, targeting an input indicator like Gross Expenditure on Research and Development (GERD) makes little sense if the surrounding innovation ecosystem to translate such expenditures into impactful innovation is not simultaneously enhanced. Amid the current push to invest heavily in R&D (estimated at $19 billion over the next five years) our funding agencies need to ensure that they also devote more effort to increasing industry collaboration so that publicly-funded research will have positive economic spinoffs.

When new grants or scheme are designed, there will also be a need to address structural and cultural issues that prevent public monies from being used effectively. The Productivity and Innovation Credit (PIC) scheme was launched to great fanfare as a way to incentivise companies to invest in productivity enhancing technologies, but the cash bonus component of the PIC had to be scuttled last year because many businesses were submitting inflated or outright fraudulent claims. The Inland Revenue Authority revealed in February that about one in three PIC claims filed by the self-employed was either false or fraudulent.

While the Committee on the Future Economy (CFE) will certainly provide part of the answer in our current restructuring efforts, a structured, top-down approach is unlikely to be very effective given how much more complex the Singapore economy is today. Patience is needed to allow businesses here to “evolve” the appropriate adaptations as the government applies the right selection pressures at the macro level such as tightening the labour market.

The most counterproductive thing that can happen now is if we expect to achieve quick wins in this productivity marathon. Our current problems have emerged over decades, and it will take at least that long before the Singapore economy gets back onto the right track. In 1981, the National Wages Council (NWC) was convinced that the “wage shock therapy” started in 1979 had been effective in pushing the Singapore economy towards productivity-driven growth. In 2008, it was declared in Parliament that Singapore’s investment in innovation had succeeded because we had reached our GERD target. Strong economic growth was presented as proof of “a new economy emerging out of the old”. Our continued challenges with raising labour productivity have shown that our confidence in both these instances were unfounded.

As we embark on this productivity journey, we should not let global events distract us from continuing with painful but much needed reforms. Recent changes to the labour market such as sectoral minimum wages (through the Progressive Wage Model) are good steps towards ensuring that wages reflect the true value and scarcity of labour in Singapore. Such efforts at reform should be sustained even if they are temporarily painful for businesses. We need to avoid repeating our mistake in 1985, when the shock of the first recession in 20 years muted talk of industrial restructuring and caused a return to policies of boosting export competitiveness and economic growth through cheap and abundant labour.

Singapore is already a successful economy with one of the highest per capita GDPs in the world. But to reach greater heights we will need to venture away from the relative safety of the local maxima and endure a period of painful adjustment. Clear national vision and strong political leadership will be essential.

 

Hawyee Auyong is a Research Associate with the Case Study Unit at the Lee Kuan Yew School of Public Policy. He is co-organising an essay competition on how Singapore’s economy can transform itself at: http://lkyspp.sg/sgfutureready

Hawyee Auyong is is also featured on The Future of Us Ideas Bank Page (Dreamers).

Top photo from thinkstock.

Category: Young Singaporeans Series

Comments

Related articles