Kamal Salih Comment:
E.F. Pang and Linda Lim's comments on Singapore economic growth may well be relevant for Malaysia's own economic prospects for the medium term. Our immediate concerns, however, are markedly distinct respectively, namely the fiscal capacity of the government to promote aggregate demand in order to sustain growth above 5% in the face of declining oil and other commodity prices and the declining Ringgit. Singapore's immediate concern is over slowing growth (below 4%) and stagnant productivity under conditions of budget surplus. I wonder if there is anything useful from this following article for the Special Economic Committee to consider in delivering better news for the Malaysian economy.
Here is Pang and Lim's article:
Economists, government leaders and opposition politicians all agree Singapore must jettison its development model of “extensive growth” based on factor accumulation - the addition of more labour, talent and capital to the singularly scarce resource, land, that defines our territorial space.
We must, like other developed countries whose ranks we supposedly lead on many metrics, rely on productivity increases to deliver output growth at a much lower but more sustainable rate of 1-3% per year.
From our own experience and that of other rich countries, we know this is a difficult and long-term task requiring considerable behavioral adjustments at the individual and household as well as business and government policy levels.
Our recent survey of numerous labor market studies* shows low labor productivity has characterized Singapore’s economic growth as long ago as the early 1970s and as recently as the last several years. The heavy reliance on imports of foreign labor has depressed wages for low-wage citizen workers, contributing to our higher income inequality (income-only Gini of 0.46, not including wealth inequality which is typically higher) and poverty rates (20 to 22%) compared with other rich countries.
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| Singapore GDP ChartFrom Focus Economics |
Cutting back on labor imports can deliver productivity increases in sectors such as construction, retail and F&B where our productivity greatly lags that in other rich countries. But the cutback will be painful for businesses and households whose profits and consumption have been subsidized for too long by cheap labor imports. Our capacity for imitation, flexibility and innovation should help us adjust at least as well as other developed countries.
Productivity increase - producing more with less - is not the only way to income (not just output) growth and higher living standards and better consumer welfare for Singaporeans. The shares of our GDP derived from wages and devoted to household consumption are very low (35-40%) compared with other developed countries, where they typically range from 55% (Korea) to 75% (U.S.). Rebalancing our economy away from export-and investment-driven growth to consumption, and from state-to market-driven development (as China is also trying to do) will mean that a higher proportion of income from GDP will flow to Singaporeans.
Domestic demand can also be increased through more social transfers, which in Singapore is again very low compared with other rich countries. Public spending as a proportion of GDP in Singapore is half that of many developed countries - 20% versus over 40% - and lower than it was in our first three decades. Recent budgets have increased government subsidies for health care (Medishield Life), training (SkillsFuture) and the elderly (Pioneer Generation and Silver Support). But these are narrowly tied to specific expenditures, many occurring primarily in the public sector, and so do not promote spending by a broader base of consumers (the majority who are neither poor nor elderly nor likely to need or want skills training) that could create demand for a wider range of goods and services to be provided by private entrepreneurs.
Besides directly improving citizen welfare, social transfers reduce inequality and increase domestic demand as net recipients are mostly lower-income earners who have a higher marginal propensity to consume than the wealthy. More transfers are affordable given Singapore’s large accumulated public sector surpluses—which represent decades of transfers from households to the government chiefly via CPF mandatory contributions, annual budget surpluses, and off-budget user charges by statutory boards and GLCs.**
In Singapore’s early decades, these transfers enabled the rapid construction of world-class infrastructure, provision of efficient public services and, most importantly, affordable housing for 85% of the population, without incurring government budget deficits and public sector debt. They also arguably contributed to citizens’ over-investment in housing relative to other assets, and relative to the consumption of other (non-housing) goods and services.
As a result, Singaporeans are “asset-rich but cash-poor”. This phenomenon poses problems for the support of a rapidly-ageing population as well as the housing and living standards (and perhaps fertility and emigration rates) of younger Singaporeans.
Restructuring the Singapore economy requires not just microeconomic resource reallocation to increase productivity at the firm level. Macroeconomic rebalancing and institutional change to boost domestic demand are critical too. Cost reduction must form part of this transformation - with reduced property prices and rental costs as a necessary component, as well as reduced fees and user charges for transportation, utilities and other basic needs. Together with productivity increases, this rebalancing will preserve and even enhance Singapore’s international competitiveness.
Reducing the numbers - and we recommend an absolute reduction and not just a slower inflow - of foreign workers will remove this longstanding disincentive to increasing productivity, and also reduce excess demand pressures on property and infrastructure congestion. Wages of lower- and medium-skilled Singaporeans will rise, boosting consumer demand. The selective importing of foreign talent should continue, focusing on permanent immigrants who will stay with us for the long haul to build our nation.
There is much that Singaporeans need to do to ensure a smooth transition to becoming a fully First World nation. In terms of labour, we could revert to doing more for ourselves - like “keeping Singapore clean” which we used to do without armies of short-term low-wage foreign cleaners picking up after us. Equalising gender relations within the family could raise our female labor force participation (58%) to the higher rates (65%) prevailing in many other developed countries. We could also reap what some call the “gender equity demographic dividend” of higher fertility found in developed countries with better gender equity.
In terms of capital, we could invest our savings in productive assets and entrepreneurial ventures (including enterprises catering to the services needs of our fellow Singaporeans such as working parents and the elderly) rather than devote them disproportionately to property speculation in the hopes of earning monopoly rents and unproductive capital gains.
Slower GDP growth with an absolutely falling number of foreign workers can improve the welfare and quality of life of Singaporeans. The challenge is to adopt a development strategy based on realistic expectations of productivity gains, reduced non-labor costs, higher market wages and consumer spending, and larger but sustainable social transfers.
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