2econdsight

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Singapore will tank because of PAP’s addiction

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Addiction to labour that is, which is why Prime Minister Lee Hsien Loong has this to say at the NDR.

“If we close our doors to foreign workers, our economy will tank.”

In this article, the writer critique the PM from a conversation with Professor Pang Eng Fong who briefly introduced himself to the writer at the Singfirst forum on national reserves. He is the former Dean of the Lee Kong Chian School of Business at the SMU, High Commissioner to the UK and Ambassador to the EU.

The writer and blogger Law Kim Hwee had coffee with the professor to discuss socio-economic issues and a recently published paper “Labour, Productivity and Singapore’s Development Model” written by Linda Lim, University of Michigan, and himself.

Growth driven by Labour

Singapore’s impressive economic record is characterized by “extensive growth” which is driven by factor accumulation (adding capital, labor, land to create “extensive growth” or more output from more inputs) rather than increases in total factor productivity (the more efficient use of existing resources, enhanced by technological progress, to create “intensive growth” producing more output per unit of input). This is evidenced by the lack of Total Factor Productivity (TFP).

On the labour, the proportion of foreign non-resident workers rose from just 3.2% in 1970 to 38.1% in 2014, more than a third of the labour force of 3.5m. Very few countries have GDP growth that is driven largely by an influx of foreign labor. Professor Hui Weng Tat and Associate Ruby Toh of the Lee Kuan Yew School of Public Policy found that “employment as the driver of growth has increased its share from 31% in the 1970s to 75% in 2000s”.

Growth with perspiration, not inspiration

The Singapore government did recognize criticism that the impressive growth is achieved with perspiration, not inspiration; euphemism for the lack of productivity. Hence the restructuring efforts to attract knowledge-intensive and high value added industries such as clean technology and precision engineering, and high value services such as medical services and wealth management.

Although these efforts have transformed Singapore’s industrial landscape, it makes little difference to TFP growth, with productivity actually falling 0.8% in 2014.

Why the failure?

Despite a recognition that a switch toward intensive growth — or increasing productivity — was necessary, the basic model of state-driven multinational-led export manufacturing did not change, but rather was extended through ever more factor accumulation.

  • Industrial upgrading, for example, required more and more capital investment per unit of output, and of labor, with its attendant need for ever-more-generous tax incentives and other subsidies.
  • When rapid growth at full employment caused the prices of land and labor to rise, the policy response was to prevent market adjustments from taking place, by continuing to subsidize scarce land (e.g., in state-provided industrial estates) and allowing greater access to foreign labor which depressed the price of competing local labor
  • Without the obsessive government intervention, market forces would have forced out businesses that are overly reliant on cheap foreign labour, subsidized land, low taxes and rebates. This would have reduce the need for cheap labour and generated higher productivity.

Carrots for Business, Stick for Workers

The above simply provide academic confirmation to the writer’s assertion that the PAP government avoided its own Hard Truths. For the government has consistently back-tracked from its own policy intentions to reduce dependence on foreign labor, increase productivity and encourage high wages. This has been so consistent that businesses simply had to wait for those obscenely remunerated knees to buckle. Look no further than the recent relaxation of the foreign workers curbs.

The reason given was the repeated short-run need of foreign investors (and local SMEs which were part of their Singapore supply-chain) for “cost competitiveness” in the face of external demand shocks, and increasing international supply-side competition to which the traded goods sector (export-oriented manufacturing) is highly vulnerable.

When economic adjustments have to be made, the vast majority of adjustments fell on workers through reductions in CPF contribution rates and by the suppression of real wages through ready access to cheap foreign labour. This has the awful effect of structurally weak personal consumption which would have lessen those external shocks on the export sector.

Conclusion

Academia or at least the independent thinking part of it is not enthralled by the PAP’s economic record. It is just that the 156th ranked Pravda-in-the Red-Dot did not publish such thinking. If Singapore stayed within its long run growth potential of 2-4% instead of running at 6-7% during PM Lee’s tenure, as the writer repeated ad nauseam, then all these socio-economic problems would not exist today or are much smaller.

Similarly, some economic growth are not worth having if these means more subsidies, tax breaks and foreign labour.  Singapore should concentrate on commercial and industrial services in which her advantages are much harder to be competed away by neighbouring countries. More on this in another article.

Nevertheless, the writer is left with a depressing thought.  Each successive policy back-tracking to the extensive growth model, diminishing returns worsened and opportunity costs rose as pointed out by Pang and Lim. The data conform to research by Paul Romer and others suggesting that

“the availability of abundant cheap labor not only discourages investment in productivity but also reduces innovation and increases income inequality.” (Economist, 2013).

However the Prime Minister seems bent on reinforcing policy failures with his party’s addiction to the easy option of cheap foreign labour evidenced in his NDR speech. More of the same with 6.9m population or even 10m? We have already seen what 5.5m population has caused today. This addiction may well spell the end of Singapore’s existential meaning of citizenship and nationhood.

 

Chris Kuan

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