Growing the future together

Inclusive growth requires more equitable wage share

By Tan Meng Wah, The Straits Times, 1 Dec 2011

SINGAPORE'S push for faster growth by importing foreigners, bringing in the skills and inter-national experience needed to develop new sectors of the economy, has sparked a critical challenge for the Government: how to balance growth so both Singaporeans and foreigners benefit.

This is because the strategy to pursue growth at all costs has created a two-speed, dual-track economy.

The high-growth external track of the economy is mostly made up of workers in multinational corporations (MNCs) serving overseas clients in the financial services and business sectors as well as in high-end manufacturing. With the specific skills and experience required in these sectors, there are significantly more foreigners and permanent residents working in this part of the economy than the national average. This external track accounts for a disproportionately large share of the total GDP, and this workforce commands higher wages even though it is a segment that employs less than a quarter of the labour force.

By contrast, the slower domestic track is made up of businesses and workers serving the local market, with most workers either Singaporeans or unskilled foreigners. Even though they make up three-quarters of the total labour force, these workers account for a disproportionately smaller share of the overall GDP with their lower value-added activities and lower wages.

The net effect of the two-speed, dual-track economy is that wage differentials between workers in the two segments have widened in recent years. Although the economy as a whole registered impressive growth, the distribution of benefits has not been equitable.

While headline GDP grew 6.4 per cent in 2005 and 10.6 per cent in 2006, domestic demand by comparison expanded only 3.3 per cent and 4.9 per cent respectively.

The disproportionate growth in the two segments shows up in the growth of household income. While the higher income and foreign segment groups saw their income grow 2.8 per cent annually between 2000 and 2005, the lower income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3 per cent fall in average household income, while the 21st to 30th income decile group saw a 0.5 per cent decline.

Between 2000 and 2008, Singapore's Gini coefficient (a measure of income in-equality) climbed from 0.444 to 0.481. Similarly, profitability shrank for local businesses. While domestic costs such as wages have risen in recent years due to high inflation, selling prices of non-tradable goods and services remained depressed in the domestic market due to competition.

More worryingly, the situation is not likely to improve in the future as dislocated older workers are unable to benefit directly from new high value-added sectors promoted by the Economic Development Board (EDB), such as clean technology, media, urban solutions and biotechnology.

For policymakers, there will be the challenge of addressing a worsening income gap as Singapore's economy continues to expand in coming years. In fact, the better the economy performs, the wider the wage gap is likely to be as younger Singaporeans and imported professionals in the high value-added sectors enjoy faster income growth, while older workers see their wages stagnate or even decline in real terms.

But in fact, despite the influx of skilled well-paid foreigners aggravating discontent, the unhappiness is somewhat irrational. This is because developments in both tracks of the economy are not mutually exclusive. Slowing down the external track will not help to speed up growth in the domestic track.

Instead, the two tracks may be mutually beneficial, as faster growth in the external track will boost demand for products and services, and create new jobs or raise income in the domestic track, even if the trickle-down effect comes with a time-lag. And a dynamic external track brings in more revenue for the Government to fund higher social welfare spending for an ageing population.

As for the widening income gap: While this is a sore point, the discontent may be more about stagnating income growth and rapidly rising living costs, which have caused a significant deterioration in living standards, rather than with the wage differential per se. Since the income gap is unlikely to narrow, the Government must do the next best thing, which is to lower living costs and raise incomes to ameliorate the people's hardship.

Unlike previous financial crises which were predominantly external events, this new challenge is more internally driven because of Singapore's demographic shifts. An ageing population is not an economic factor that can be conveniently assumed away.

Changes in Singapore's external environment dictates that its economy speeds up on its structural upgrading, importing more foreign talent to leverage on its world-class soft and hard infrastructures while the city-state still enjoys those advantages.

But domestic discontent arising from such change demands that growth be inclusive in order for it to be sustainable.

This problem of external motivation versus internal inertia has long been a conundrum of globalisation, which no government has yet found a solution to.

In the aftermath of this year's general election, the Government introduced a slew of measures to help lower living costs. At the same time, programmes to increase income by raising productivity have been launched but results from such efforts, if past experience of similar efforts is any indication, are hard to foretell. There is also a strong likelihood that any income growth from higher productivity may not be enough to keep pace with inflation in coming years.

Lowering living costs and raising incomes through increasing productivity are necessary but are at best stop-gap measures that buy time. What is required are not minor adjustments but a major review and update of Singapore's socio-economic development model.

Policymakers need to critically question assumptions and fundamental principles that have been going into policymaking but are rendered invalid or have been proven to be wrong or flawed by recent events.

Wage structure

ONE nagging economic issue that needs to be revisited, for example, is Singapore's income structure. While foreign businesses have contributed tremendously to Singapore's development, that heavy dependence on them comes at a cost. Because capital is more mobile than labour, the Government has to offer favourable incentives that in the end allow MNCs to enjoy a higher share of national income as profit, most of which is repatriated. Conversely, Singapore workers' share of the national income declined from 47 per cent in 2001 to 41 per cent in 2006, which is considerably lower than the 60 per cent or more enjoyed by their counterparts in other developed economies.

More importantly, foreign companies relocate as soon as an industry loses cost competitiveness. Their exit forces Singapore to constantly restructure its economy by moving into new industries, not upgrading within the same industries. Skills learnt become obsolete almost overnight and senior workers become progressively unemployable. In the end, Singapore workers, especially the older and unskilled ones, bear the brunt of the costs of globalisation.

Clearly, this 'use-and-discard' mentality does not do justice to a world-class workforce and certainly does not help in building an inclusive economy. Policymakers need to gradually adjust the national income-sharing formula and tilt it in favour of Singapore workers. As the Singapore economy becomes more knowledge- and innovation-driven, there will be room to gradually raise the share of wages over time without eroding foreign businesses' return on investment.

A longer-term solution is to develop indigenous world-class companies, especially in the new economic sectors targeted by the EDB. Japan is a case in point. Despite Japanese companies' constant upgrading of their businesses, high value-added activities are kept at home. This allows Japanese workers to constantly upgrade their skills to remain relevant even at a senior age. Lifelong learning and paying by seniority therefore make excellent business sense in Japan, as the value of employees accumulates with age because of the continuity in their jobs. Significantly, even though Japan's Gini coefficient has also been rising as a result of its ageing population, its reading of 0.376 in 2008 is considerably lower than that of Singapore's 0.481.

Of course, Singapore's new model for success should not be narrowly defined only in terms of income. Fortunately, several elements of the new model needed in building an inclusive society are already present.

The city-state already has a homogenous, urbanised population which is easier to look after than one with a sizeable and politically powerful agricultural sector. There is also a relatively stable and tested tripartite industrial relationship that serves as an effective channel for communication and conflict resolution. Singapore also has a government that has been dominated by a single political party, which not only ensures continuity but also speed in formulating and implementing legislation.

Moreover, the city-state's ultra-pragmatic policymakers have over the years put in place a highly effective and yet affordable welfare system that includes education, housing, and health, all of which not only helps to guarantee a minimum standard of living for all but also sets the baseline for equitable societal development. More importantly, all this has been achieved while maintaining a healthy fiscal position, supported by a strong currency, high reserves and no external debts.

While the Government should continue to exhort the virtues of self-help, it should also recognise that a growing segment of Singaporeans will be inevitably disadvantaged by the process of change and will lag behind in future as the population continues to age.

The worry of Singapore degenerating into a welfare state is a valid one, which is why the Government's role should not be just to dole out populist measures but also to present a unified blueprint, consolidated from all agencies, so the country as a whole can be rallied to address this daunting challenge.

At the end of the day, only when everyone plays his part can Singapore become a caring and inclusive society while still avoiding the dependency-culture trap that has so ensnared the developed economies of the West.

The writer is a Singaporean who recently completed his PhD in World Economics at Nanjing University.