Wednesday 18 January 2012

Raise wages in domestic service industries: Ho Kwon Ping

By Magdalen Ng & Robin Chan, The Straits Times, 17 Jan 2012

SINGAPORE needs to complete the wage revolution that began in the 1980s if it has any hope of closing the widening income gap, said Banyan Tree's executive chairman Ho Kwon Ping.

Mr Ho told the IPS conference that while manufacturing moved to higher value-added industries such as life sciences and pharmaceuticals, domestic services such as construction, retail and hospitality remained untouched.

'The strategy worked,' he noted.

'It is no accident that the IPS (Institute of Policy Studies) wage data for the past 10 years show that while wages actually declined in real terms for construction workers, plumbers, waiters, cleaners, they rose substantially for technical workers in the life sciences and electronics industries.

'We have a dual-income economy: an internationally competitive and well-paid economy, and a low-cost, low-skilled domestic economy.'

Mr Ho added that while in the 1980s, there was a 'do-or-die imperative' that the export-oriented industries had to be radically restructured, there was no sense of urgency to do the same for local sectors.

'At the same time, you could also argue that not restructuring (the local industries) then, was actually quite beneficial because it helped to have lower cost of operations for Singaporeans and the export-oriented platforms,' he noted.

'The incomplete wage revolution made some sense at that time. It was benign neglect.'

However, the drawbacks to this incomplete wage revolution - suppressed pay for low-income jobs and little incentive for domestic industries to improve productivity or professionalism - are fast becoming unsustainable.

The solution is to move towards a more equal and self-reliant society, by 'gradually but relentlessly' increasing wages in the domestic service industries and reducing the influx of low-cost foreign labour.

This must be combined with a culture which respects quality plumbers, builders and food service staff, said Mr Ho.

'We need to create a social ethos... where self-reliance and equality are not only widely respected, but actually practised, within a free market economy.'

Completing the wage revolution
Ho Kwon Ping, the executive chairman of Banyan Tree Holdings, spoke at an Institute of Policy Studies (IPS) seminar yesterday about the need for the restructuring of income relationships in Singapore. We provide an edited excerpt below.

SINGAPORE embarked on a major restructuring exercise in the mid-1980s but it remains unfinished. We need to complete that revolution and bring Singapore completely into the ranks of a developed society, in terms of income relationships between our citizenry.

If we achieve a complete economic restructuring, and there will certainly be transitional pain for affected industries, Singapore will be a more equal and self-reliant society even as we grow wealthier. But if we continue as we have been, we will be an increasingly rich and unequal society with growing dependence on an underclass of lowly paid foreign workers. The vision, put somewhat simplistically, is between say, a Denmark or a Dubai.

Before I proceed further, it may be interesting to look at comparative national data on wages. I asked IPS to give me specific examples of wage gaps between different occupational levels, recognising that they are not comprehensive but illustrative.

We chose doctors to represent the highest paid, professional class; nurses and self-employed plumbers to represent the medium-skill occupations, and construction workers to represent the lowest-skilled class. IPS chose USA, UK, Germany, Australia, Japan, Hong Kong, Taiwan and South Korea to be the comparative sample.

Here are the findings.

First, professionals like doctors and lawyers are paid slightly better in Singapore than the average of the IPS sample of developed countries. Second, our lower-income workers fare much worse than their counterparts in developed countries. A Singapore construction worker earns less than 10 per cent of what a Singapore doctor earns, whilst the builder's counterpart in the other countries earns about a third of a doctor's salary.

In fact, in Germany and Australia where immigration policies are more restrictive, construction workers earn about - believe it or not - half the salary of a doctor. This might seem hard to believe, but I guess this would include for doctors, young interns in government service, and for builders it would include older, self-employed home builders.

Lest one thinks that somehow European and American economies are not comparable to Singapore's, let's compare with Hong Kong, which is not only closer to home but is also a city-state economy with a small population and abundant foreign labour from across the border.

Interestingly, doctors in Hong Kong and Singapore on average earn the same salary. You would therefore expect a similar wage ratio for other occupations.

But that's not the case. Construction workers in Singapore earn only 9 per cent of the income of a doctor compared to about 25 per cent in Hong Kong. However, nurses in Singapore earn about 25 per cent of a doctor's pay compared to about 33 per cent in Hong Kong. So it appears that at the bottom of the occupational and income ladder, Singapore's disparities compared to other countries are very high, but narrow as the skill content increases.

Overall, the wage disparity between a Singaporean doctor and construction labourer or plumber, is three times higher in Singapore than elsewhere.

How can this be explained? Hong Kong has access to cheap and abundant labour from China, and yet construction workers earn a lot more. I do not have a definitive answer, but I can only surmise that this is because Singapore's construction industry uses a lot more low-cost, unskilled foreign workers which depress wages for the few Singaporeans in the same jobs. Singapore's building industry has argued that it cannot do without a large supply of foreign workers. That may well be the case, but Hong Kong's building industry can afford much better-paid workers amidst a thriving property industry.

The data is similar for other occupations such as in retail and hospitality but is less glaring. And so the question is: If in Hong Kong's laissez faire economy where one would expect higher wage disparity and also liberal access to foreign workers, there is actually less disparity, why does Singapore have such high disparity?

I alluded earlier to a wage restructuring in the mid-1980s when Singapore's low-cost, low-skill industries were no longer competitive. The Government induced a bold, even risky wage hike to force manufacturers to upgrade, move out, or close shop. In the meantime, the Economic Development Board (EDB) courted new, higher value-added industries to come and our vocational schools and polytechnics produced more technically skilled school-leavers for these industries. Although painful for many companies, this effectively weeded out the labour-intensive and encouraged the skills-intensive export industries.

I recall those years vividly as I had just joined our family business, and witnessed the transition as many companies in Jurong - including some of ours - closed down or had to relocate to Malaysia or Thailand.

But the strategy worked. Today's life sciences, pharmaceuticals and other high-tech manufacturing industries testify to the correctness of that vision. It is no accident that the IPS wage data for the past 10 years shows that while wages actually declined in real terms for construction workers, plumbers, waiters, cleaners, etc - they rose substantially for technical workers in the life sciences and electronics industries.

But the wage revolution of the 1980s stopped halfway. It did not extend to the domestic economy, and that is why the domestic services industries - construction, retail, hospitality, etc - were left untouched. In fact, to the extent that low labour costs in these industries kept the cost of living and doing business relatively low, a low-wage domestic services economy actually helped our export industries to be more cost competitive. So to put it starkly, we have a dual-income economy: an internationally competitive and well-paid economy, and a low-cost, low-skilled domestic economy.

Middle-class Singaporeans didn't complain that the cost of their hawker food was kept reasonable because of low-paid hawker assistants from China or Indonesia. They did not complain that charges for laying broadband to their homes were kept reasonable because low-wage Bangladeshi workers were doing the digging and laying. So, on the backs of the South Asian construction worker, the Filipino nurse, the Chinese retail assistant, or the Filipino restaurant waiter, Singaporeans had a good life. Furthermore, with virtually full employment, it wasn't as if foreigners were robbing Singaporeans of jobs. They were doing jobs most locals shunned anyway.

But there are two drawbacks. First, the incomplete wage revolution had a wage dampening effect on Singaporean low-income jobs, which is now apparent. Second, as a result of the lower wages, there has been little incentive or pressure for the domestic services industries to improve their own productivity or professionalism.

These drawbacks have existed for so long that they are no longer sustainable.

Politically, an underclass of low-income Singaporeans and permanent residents stuck in low-skilled, low-paying jobs, and another underclass of low-income foreigners living in enclaves, can only lead to more social tensions which will periodically flare up.

Economically, the faster growth made possible by low-cost labour but at a cost of stagnant productivity, has diminishing returns. Lower domestic costs due to cheaper wages will be offset by the strain on public services of all kinds resulting from a rapidly growing foreign worker population. There will come a point when the economic cost of a large, low-skilled foreign worker population will become greater than their benefits.

Socially, the central ethos of our society, which is based on social mobility within an egalitarian culture, is being eroded. To have more millionaires per capita than anywhere else in the world - a questionable accolade awarded by several publications including Forbes - is one thing. It is another to have the highest income disparity in the developed world.

We need to complete the wage revolution started in the 1980s. We need to gradually but relentlessly increase wages in our domestic services industries while reducing the influx of low-cost foreign labour which keeps these jobs low-skilled and low-paying. At the same time, we must incentivise businesses to invest in productivity-enhancing technology. Higher-skilled foreign workers armed with labour-saving equipment should of course still be welcomed, because there will never be enough locals to fill our industries, regardless of wage levels.

I know the chairman of the Korean company which built Marina Bay Sands. Their workers are more expensive than those of the usual Singapore contractor, but their technologies and productivity are so much higher. He also observed once that Singapore construction sites employ about double the workers in developed countries and half that in developing countries, yet we are economically amongst the most developed countries. This is probably true not only in construction but other domestic services like retail and restaurants.

There have been attempts to increase wage and skill levels in our domestic economy over the past 20 years but they have not been enough. I speak with some experience, since my family used to own a construction company in Singapore for several decades.

We must create an educational and industrial system which trains, respects and rewards the concept of apprenticeship. We must create a culture which respects quality plumbers, builders, food- service staff - and the entrepreneurs who will be self-employed in providing these services. We need to create a social ethos like in Scandinavia, where self-reliance and equality are not only widely respected, but actually practised, within a free-market economy.

Most articulated visions of Singapore deal with things like education, the arts, or even political governance. They usually do not deal with work relations, which actually are at the heart of a society's ethos and culture because work relations define how we treat each other. At the core of Japanese society are its unique values regarding self-reliance and respect towards work. Similar values, although manifested differently, also are at the core of Scandinavian or German culture.

In Singapore there is no such consensus. The supposed social compact between the Government and its people must be underpinned by a consensus about the nature of Singapore society itself.

What is the benefit of more participatory politics if we have a society so hypocritical that citizens complain of poor service and how young Singaporeans are too soft to work in service industries, but in the same breath complain if costs rise because of higher wages? Or a society where a private housing estate raises a huge ruckus because a foreign workers' dormitory will be built in the same neighbourhood, as if it were a leper colony?

Any paradigm shift towards a more egalitarian and self-reliant society as in Japan and Scandinavia will require a paradigm shift. And this can happen only if there is a collective consensus which is at the heart of political exchange. And in that exchange, informed debate will be necessary, or else xenophobia and other crude and emotionally charged issues will obscure rationality.


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