Wednesday 11 April 2012

Economic Restructuring Round 2: Professor Lim Chong Yah's wage shock therapy

Professor's 'shock therapy' to revamp wages
By Melissa Tan, The Straits Times, 10 Apr 2012

A LEADING economics professor has called for a radical shake-up of pay that would involve huge raises for low-income earners and salary freezes at the top.

Professor Lim Chong Yah told an economics gathering yesterday that his three-year restructuring proposal would help close the widening income gap in Singapore and ease its dependence on foreign workers.

He wants those earning below $1,500 a month to get pay rises of 15 per cent in the first year, a further 15 per cent in the second year and 20 per cent in the third year of the restructuring.

Over the same period, Singapore should 'let the rich continue to be rich, but for the next three years, hold their horses steady', he said, by freezing the pay of those earning $15,000 a month or more. People falling in between should get an annual pay rise of around 4 per cent to 5 per cent.

Prof Lim, the Albert Winsemius Chair Professor of Economics at Nanyang Technological University, who was sharing his personal opinion, was delivering a lecture organised by the Economic Society of Singapore.

Such radical proposals, which he described as 'shock therapy', did not go down well with the business community and economists yesterday.

MP Inderjit Singh felt that the proposals were 'too complex to implement'. Economist Chua Hak Bin from Bank of America Merrill Lynch said: 'Putting a lid on wages on such talent, which is a reason for Singapore's success, spells economic suicide.'

Referring to the plan to hold top earners' pay unchanged, Jian Huang Construction's boss Annie Gan said: 'You pay (them) higher pay because they contribute a lot to the company. If you freeze their wages for three years, why should they work hard?'

From 1979 to 1981, Singapore went through a similar restructuring exercise where wages were raised cumulatively by 20 per cent per year. That was spearheaded by the National Wages Council, then chaired by Prof Lim.

Yesterday, Prof Lim dubbed his plan 'Economic Restructuring II' and said it was what is needed to bring Singapore's 'very low' wage share of economic output back up to a 'less embarrassing position in three years' time'.

'Only way out is to restructure again'
Economics prof says income gap approaching dangerous levels
By Melissa Tan, The Straits Times, 10 Apr 2012

ONE of the architects of an economic restructuring exercise that overhauled Singapore's wage system in the late 1970s said yesterday that the country now 'needs shock therapy to wake up its economy'.

Professor Lim Chong Yah pointed to growing income inequality, which he says is approaching dangerous levels, and the nation's overdependence on cheap foreign labour.

Prof Lim, who is 80 next month, said 'the only way out is to restructure again', in the area of pay for low earners.

The economics professor at Nanyang Technological University knows a thing or two about radical reform.

He was the founding chairman of the National Wages Council which masterminded an economic shake-up from 1979 to 1981 that lifted wages by 20 per cent per year.

At that time, Singapore needed to move from a 'low-skilled, low-value added and highly labour-intensive structure' to one that used more technology and more knowledge, he said.

Fast forward 33 years and 'we are faced with a new set of economic problems, which may be called the problems of economic success'.

He attributed the easing of the restrictions on foreign labour to Singapore's fear of being uncompetitive. The result was that the non-resident labour force increased from 300,800 in 1991 to 1.157 million last year, out of which only 1.7 per cent earned wages high enough to pay income tax.

But gross domestic product expanded impressively during this period.

Prof Lim also highlighted the Gini coefficient, a globally used indicator of income inequality where 0 is complete equality and 1 complete inequality.

Singapore was at 0.473 last year, perilously close to the 0.5 mark, 'normally considered a dangerous line to reach, far less to cross'. It was 0.454 in 2001.

Income inequality has worsened as global forces pull up the highest income groups while cheaper foreign labour pulls down the lowest income groups.

Prof Lim's proposal, which he called 'Economic Restructuring II', includes substantially increasing wages for the lowest-paid workers and freezing top earners' salaries for three years.

The restructuring exercise process should be discussed and determined by the National Wages Council, added Prof Lim, who chaired that organisation from 1972 to 2001.

His radical proposal - presented at a lecture organised by the Economic Society of Singapore yesterday - prompted a steady flow of questions from audience members. Prof Lim made clear his proposal reflected his personal views.

When asked by the society's vice-president Yeoh Lam Keong why he had proposed 'such an abrupt move as opposed to a gradual path', Prof Lim said: 'If we go gradually, nothing will move.'

He added that despite the weak external environment, 'this is the best timing' for such a move given Singapore's low unemployment rate and strong fiscal position.

He told The Straits Times after the lecture that the pay rise for low-income earners would have 'hardly any impact' on inflation as a significant portion of the increment would be 'mopped up for training and retraining and for retirement'.

Using higher taxes on the rich to redistribute incomes instead would 'frighten investors', he noted.

'I have no intention to destroy the investment climate. But if a company is labour-intensive and needs to import cheap labour it may think twice. For high-skilled companies that use a lot of technology, Singapore is still an ideal place.'

Prof Lim also maintained that the economic restructuring in the late 1970s had turned out well, despite critics who questioned whether the acute pain of the subsequent recession was worth it.

'Despite some teething problems, the then considered iconoclastic restructuring exercise was a great success,' he said.

Prof Lim pointed to real economic output having grown 9.4 per cent in 1979, 10 per cent in 1980 and 10.7 per cent in 1981.

'After 1981, the built-in restructuring momentum continued unabated until the regional recession year of 1985.'

Proposal impractical, say economists
By Magdalen Ng, The Straits Times, 10 Apr 2012

THE proposal to increase pay for the lowest income workers over three years while freezing salaries for top earners was deemed impractical and 'economic suicide' yesterday.

Economists maintain that the plan would be nearly impossible to implement while possibly resulting in unintended but harmful effects on the economy.

The proposal was put forward by Professor Lim Chong Yah, the founding chairman of the National Wages Council.

He has suggested that all workers earning below $1,500 a month should get a 15 per cent pay rise in the first year, a further 15 per cent in the second and another 20 per cent in the third.

And during these three years, the wages of those who bring home more than $15,000 a month will be frozen.

Economists warn that regulating wages like this will distort labour markets and throw a wedge between labour demand and supply.

The aggressive increase of wages at the lower level could even lead to increased unemployment among the poor as industries that depend on such labour may leave Singapore as their profit margins get squeezed.

DBS economist Irvin Seah questioned if the changes will really achieve Prof Lim's objectives of closing Singapore's fast-diverging income gap and reducing the dependence on foreign labour.

Mr Seah explained that industries that are relatively dependent on foreign workers will be forced to relocate, leading to structural unemployment for low-wage local workers.

'The foreign workers can move back home, but our local workers will have nowhere to go,' he noted.

'Maybe they can move to another industry, but bear in mind the reason why many of them have remained low-wage earners is because they are unable to improve or upgrade their skill sets.'

OCBC economist Selena Ling added: 'For a lot of small- and medium-sized enterprises, the bread and butter issues will come to the fore very fast. If the margins were quite slim to start with, or in a sunset industry, these proposals basically deliver the death blow.'

Some bosses of companies employing low-paid labour told The Straits Times that they fear they will not be able to survive if the wage hikes are introduced.

Ms Annie Gan, managing director of Jian Huang Construction, said that in the first few years, profits would drop drastically as the tender prices for projects would not reflect these increased costs.

'If the company does not close down first, the increased costs will be factored in eventually, and who will bear them? The end user. Buildings will become more expensive,' she added.

Jian Huang hires up to 600 low-wage earners, depending on the number of projects under way.

DBS' Mr Seah believes that the structured wage increase may even reduce the competitiveness of local low-income workers compared with foreign workers because employers will have to increase Central Provident Fund (CPF) contributions to Singaporeans.

'Higher wages mean higher total contribution in terms of absolute dollar value, although the rate is the same. Employers may be better off continuing to employ foreign workers rather than local workers, where there is no CPF contribution,' he said.

The wage proposal could also ignite inflation as domestic services and labour-intensive activities become more pricey.

Ms Ling said: 'There will be a cascading effect, and the increase in prices will eventually affect everyone, including the low-wage earners.'

There are also concerns that the wage freeze for top earners may drive talent out of the country.

MP Inderjit Singh who has spoken about needing to improve Singaporeans' wages said: 'This is too complex to implement... It doesn't have to be a zero sum game when we want to help low wage earners. If you freeze wages, you disincentivise and demoralise your workers. In the end, we might lose them to some other countries.'

Ms Stella Tang, associate director at Robert Half International, said: 'The policy would be difficult to enforce. If a salary cap was enforced, then companies would need to look at other incentives to attract top talent such as accommodation and education allowances, flights home and bonus arrangements.'

Dr Chua Hak Bin, Bank of America Merrill Lynch economist, said: 'The world is now more open to talent, with borders becoming more porous to skilled workers.

'Putting a lid on wages on such talent, which is a reason for Singapore's success, spells economic suicide.'

Time to restructure Singapore for the future
Thirty years after Singapore's major wage restructuring, eminent economics professor Lim Chong Yah calls for Economic Restructuring Round 2: a pay hike for the low-income and a pay freeze at the top for three years.

SINGAPORE went through a formal economic restructuring exercise for three years between 1979 and 1981.

Wages increased by 20 per cent a year, a portion of which went into the Central Provident Fund (CPF) while another 4 per cent of wages below a certain level went to a Skills Development Fund (SDF). The new fund's advisory council oversaw it with twin objectives: subsidies for training and retraining of employees at all levels opened to all employers, and a subsidy for the mechanisation of production processes.

The restructuring's overall objective was to move from a low-skilled, value-added and highly labour-intensive structure to a more technology- and knowledge-based new economy. The need for restructuring was urgent with increasing competition from East Asia's emerging and developing economies, particularly the robust industrialisation in China since 1978.

Five general observations of this economic restructuring exercise can be made:
- It was self-funded by the employers, not by the Government through higher taxes or from quantitative easing, or from accumulated reserves.
- The exercise was very focused with only one tripartite agency, the Skills Development Fund Advisory Council, overseeing the exercise.
- The 'means' for the restructuring objective were also focused - mechanisation where capital substituted for labour, and training and retraining of workers, particularly technologically replaced workers.
- Even the training and mechanisation programmes were highly focused to meet employers' anticipated demands and not training for the sake of it.
- Lastly, the modus operandi was through inducement, incentives and disincentives programmes, and not direction. Market forces were given full rein, and the SDF merely provided the direction, the GPS.
Despite teething problems, the restructuring was a great success with high real gross domestic product (GDP) growth rates from 9.4 per cent in 1979 to 10.7 per cent by 1981. The restructuring momentum continued unabated until 1985's regional recession.

Since 1985, fearing the Singapore economy would become internationally uncompetitive, we imperceptibly eased the moratorium on the intake of lowly paid foreign labour. The non-resident labour force increased steadily from 300,800 in 1991 to 1.157 million in 2011. Such labour is cheap, with only 1.7 per cent earning wages high enough to pay income tax.

Successful restructuring can only take place with a moratorium on cheap labour. There is an unlimited supply of lowly paid foreign labour in our region. One cannot substitute capital for labour, if labour is cheap.

Do we need another economic restructuring now in 2012? Political, economic and social conditions now differ strikingly from before. Our per capita income in 1979 was US$4,071, and by 2011, it was US$50,123, one of the highest in the world.

Technological advance has also been dramatic. We had a reservoir of untapped female labour. Now the female participation rate has become so high that the real problem is a serious decline in family formation, which is a pointer to our population renewal and survival.

However, the chairman of this meeting, Mr Ho Kwon Ping, said not too long ago that Singapore needed another wage revolution to complete the earlier one. He said the first wage revolution was successful only in the manufacturing sector, not in other sectors such as in the construction industry, the retail trade and household sectors. Unlike 1979, we are all aware now that we have 1.157 million non-resident workers. I hasten to add that I am thankful these foreigners have chosen Singapore in which to work instead of other countries.

Another Achilles heel is increasing income inequality. Much research has been done by the Organisation for Economic Cooperation and Development, the International Monetary Fund, the World Bank and by the International Labour Organisation. In Singapore, growing income inequality is pulling away from the centre in opposite directions. Global forces pull up the highest-income groups while the increasing inflow of cheaper foreign labour pulls down the lower-income groups. Singapore's fairly bad Gini coefficient was exacerbated further to 0.473 in 2011 from 0.454 in 2001. The P90/P10 index, another frequently used measure of income inequality, increased from the already high 8.58 in 2001 to 9.19 in 2011. A Gini coefficient of 0.5 is normally considered a danger to breach.

In 1985, when our best-selling Economic Structure And Organisation was written, the Gini coefficient actually showed a declining tendency. Individual and company taxes then were much higher and there were inheritance taxes. There was no goods and services tax (GST) then.

As a solution to these new problems of increasing income inequality and the excessive reliance on cheap foreign labour, I propose a second economic restructuring programme over three years, with the following six features:
- First, sizeable pay increases for the lowest-income workers, where the salaries of those paid below $1,500 per month are cumulatively increased by 15 per cent in year one, 15 per cent in year two and 20 per cent in year three. A dollar quantum is also to be included in the package.
- Second, channel part of the pay increase to the SDF and the CPF Retirement Account (RA). A third of the increased pay package should go into the SDF, another third as take-home pay and the remaining third into the RA. For foreign workers, this will be ex gratia payments when leaving Singapore on expiry of tenure. The SDF should be reactivated to train and retrain workers, upgrade mechanisation and technology, and to better redesign labour use. The restructuring momentum has to be regenerated and sustained. The buzzwords should continue to be 'use one worker instead of two'.
- Third, implement a pay moratorium on the highest-income groups. Those on $15,000 a month or more will have their wages or salaries frozen for three years. There is no paycut or a pay ceiling or supertaxes for high-fliers, only a moratorium on pay increases. The intention is not to frighten the geese that lay the golden eggs. No Wall Street protests of the US kind need ever be envisaged.
- Fourth, those whose pay is between $1,500 and $15,000 a month will receive increases a quarter to a third of those less than $1,500 per month. A portion should still go to the inadequate CPF Retirement Account.
- Fifth, the state should contribute to the SDF on a one-to-one quid pro quo basis to demonstrate tripartite commitment, participation and responsibility in the new economic restructuring process.
Sixth and lastly, like the first time, the modus operandi of the second economic restructuring should be discussed and decided upon by the tripartite National Wages Council, which has to forge consensus among the three tripartite social partners, as in 1979.
The basic objectives of Economic Restructuring 2 (ER2) are to check and halt, and if possible to reverse somewhat, the disturbing increasing income inequality trend; to increase total factor productivity as a growth target; and to check and halt the increasing reliance on cheap imported labour to generate quantitative GDP growth. The overall objective must be, and should be, to enhance further the quality of life of all those who live and work in Singapore, and in particular, for those whose home and country is Singapore. With ER2, we will have a stronger, more robust and more productive economy, and a fairer, more just society. With ER2, hopefully, our very low and embarrassing wage/GDP ratio can return to a less embarrassing position.

We moved successfully from 1979 to 1981 in the first restructuring exercise. We gradually changed course after 1985's economic trauma. If we continue at the present course without slowing down or curtailing lowly paid foreign labour imports, our GDP will take on the route of a certain transformation curve with all the negative implications on income distribution, increasing demand for public services, and congestion.

If we restructure our economy following the first model, our economy would move along a different growth path with a slight improvement to the Gini coefficient, slowing a disturbing deteriorating trend.

ER2, if successfully carried out, also means the lessening need for increasing taxation, including GST, to meet the multifaceted needs for subsidies and transfers. This hits the basic restructuring problem on the head.

It is much harder to do national economic restructuring now than three decades ago. The political and socio-economic environments have changed. But what has not changed is that we still have effective tripartism, and we still have a government and civil service that are among the best in the world in integrity and ability.

Economic restructuring needs a national will. Do we have it now, as we had it then? Now, we are faced with a new set of economic problems, which may be called the problems of economic success. Previously, we called it Growth with Equity. Now, we call it Inclusive Growth.

I have no doubt that the second restructuring will bring Inclusive Growth to a more respectable and meaningful level. I recognise, however, that this restructuring I have proposed is but one way of achieving inclusive growth.

We were the first country in the world to have the then bold and iconoclastic Economic Restructuring 1 some 33 years ago and we will be the first country in the world now to have a formal Economic Restructuring 2, also for three years.

The writer is Albert Winsemius Chair Professor of Economics at the Nanyang Technological University. Prof Lim, an advocate for workers' training and equitable wages, chaired the National Wages Council from 1972 to 2001, during which real wages grew at an average of 4.6 per cent per year. This is an edited version of a lecture given at the Economic Society of Singapore yesterday evening (9 Apr).

Cheers and fears over wages shake-up plan
Unionists say proposal is timely; others fear it could harm economy
By Melissa Tan, The Straits Times, 11 Apr 2012

THE radical wages shake-up championed by economics professor Lim Chong Yah has been welcomed by unionists, but has raised concerns among some business leaders and economists.

Food, Drinks and Allied Workers Union president Abdul Subhan Shamsul Hussein said the entrenched problem of a widening income gap and overdependence on cheap foreign labour demanded a radical approach.

'A lot of the low-wage workers work very hard. We cannot go on depending on cheap foreign labour; we need a creative solution,' he added.

Shipbuilding and Marine Engineering Employees' Union president Wong Weng Ong called the plan 'a real morale booster' and 'long overdue'.

Prof Lim proposed sharp increments for workers earning below $1,500 a month over a three-year period, while freezing the salaries of those earning $15,000 a month or more. In his role as founding chairman of the National Wages Council (NWC), Prof Lim was among the architects of an economic restructuring exercise that overhauled Singapore's wage system in the late 1970s.

Current NWC chairman Lim Pin, a professor at the Yong Loo Lin School of Medicine at the National University of Singapore, said yesterday: 'Prof Lim's proposal has implications and consequences that require to be carefully evaluated. It is premature to comment at this stage.'

Business chiefs and academics said the proposals could hurt the economy.

Mr Hernaikh Singh, chief executive of the Singapore Indian Chamber of Commerce and Industry, noted: 'We cannot come up with magic figures and insist that companies should increase salaries based on these figures.'

Singapore Management University economics professor Hoon Hian Teck said setting 'quantitative guidelines for wages' could distort demand and supply in individual industries.

He added that the 1979-1981 economic restructuring happened when 'there was still a great deal of growth momentum', which was not the case now.

Associate professor of economics Tilak Abeysinghe at the National University of Singapore said that while the objectives of the proposal were 'noble', the outcome 'is likely to be disappointing'.

Mr Zainal Sapari, an MP for Pasir Ris-Punggol GRC, said the devil was in the details: 'If we can push wages up without eroding competitiveness then it's fine, but if it erodes competitiveness then we don't benefit in the long run.'

Mr Victor Tay, chief operating officer of the Singapore Business Federation, said a wage rise was 'inevitable' due to the increased cost of living but said it should not be used as a blunt instrument to force firms to boost productivity.

Productivity gains should instead naturally arise from training, job redesign and technological upgrading, Mr Tay said, noting that these could be 'encouraged' by Prof Lim's proposal that part of the wage increase should go to the skills development fund.

Prof Lim stuck to his guns yesterday, saying the plan was 'as practical as taking an MRT train to go to work'.

'Economic restructuring was done before. We are on a well-trodden path,' he told The Straits Times via e-mail.

To critics who said the plan was hard to implement, he said his proposal did not require creating new laws or institutions but did require national courage: 'If the will is lacking, the road is closed. There are obstacles everywhere.

'No Robin Hood operation is involved. There is no transfer of funds from the rich to the poor.'

He added: '(Higher) pay alone does not increase productivity. However, an underpaid worker is not expected to put his best foot forward.'

Timely reminder of need to tackle wage gap boldly
By Aaron Low, The Straits Times, 11 Apr 2012

THERE is no doubt that Singapore's twin challenges of raising productivity and closing the inequality gap are pressing and difficult issues.

And in many cases, difficult problems require radical solutions.

On Monday, one of Singapore's most esteemed economists, Professor Lim Chong Yah, offered a suggestion that was as radical as they come.

In a speech delivered to the Economics Society that raised many eyebrows, he suggested it was time to intervene forcefully, through the National Wages Council (NWC), to raise productivity and reduce the income gap, which he described as approaching 'dangerous levels'.

The wages of the lowest-paid should be raised by more than 50 per cent over three years, while the top earners, those earning more than $15,000 a month, should have their salaries frozen in the same period.

A third of the pay increases will go to a skills development fund, which the Government will co-fund and which will pay for workers' training, while another third will go into the workers' Central Provident Fund (CPF) savings.

If all this sounds strangely familiar, that is because Prof Lim, who was NWC chairman from 1972 to 2001, proposed the same thing in 1979.

Back then, Singapore was struggling to break out of a low-productivity and low-wage economy which was made worse by high inflation, following the oil supply shock in the middle of the 1970s.

To jolt Singapore out of this low-wage, low-productivity trap, the NWC, under Prof Lim's leadership, recommended a drastic move to raise salaries of workers by 20 per cent a year over three years.

Like the reactions that came fast and furious this week, both firms and analysts back then were overwhelmingly against the idea.

They warned that costs would skyrocket, firms would become uncompetitive and workers may lose their jobs as firms shut down.

But the Government accepted the recommendations, so over the period from 1979 to 1981, wages across the board - regardless of position or level - were raised in many sectors. This was done with help from the unions which bargained with employers for the increases.

And although Prof Lim maintains that the policy was a success, many other economists now blame the so-called 'high-wage policy' as the main reason for the major recession in 1985. The economy shrank by 0.6 per cent and unemployment spiked to 6.5 per cent.

Soon after, in 1986, the Government embarked on another wage reform drive, this time to restrain wages and implement a flexible wage policy, almost a reversal of the years before.

Considering the pain the economy went through in the mid-1980s, Prof Lim's suggestion now might seem just as misguided as it was back then.

But is it really as impractical as some analysts seem to think it is? Or is there something in his suggestion that bears further consideration?

There are some in Singapore who have serious doubts that the big productivity revolution the country is hoping for can be led by the private sector.

The Government is trying to coax companies into increasing productivity with cash and tax incentives, but it will be a long grind to get them all to collectively eke out even low single-digit increases each year, goes this school of thought.

Already, companies are quibbling over everything from application procedures to scope of coverage of the incentives.

The harsh reality is that whether it is 1979 or 2012, getting firms to rethink their organisation and work processes to raise productivity is a tough sell.

And if you give businesses an easy way out, such as access to foreign labour, they will take it. As Prof Lim notes: 'One cannot substitute capital for labour if labour is cheap.'

What he is suggesting is to force the issue, or induce 'shock therapy' to the system, as he puts it.

If you raise wages dramatically in a short time, companies will have no choice but to raise productivity.

In fact, they will get creative pretty quickly, and figure out how they will need to raise output to justify the rise in costs.

Of course, the big risk is that firms could shut down or move out.

But proponents of shock therapy will argue that if they cannot raise their game, then perhaps they ought not to even be in business in a high-cost, high-value business environment such as Singapore.

The difference between 1979 and 2012, however, is that far fewer will be willing to stick out their necks to recommend taking such a risk. Singapore Management University economics professor Hoon Hian Teck worries that Prof Lim's proposals will lead to a sharp rise in the unit cost of labour, without the benefit of growth to keep pace.

'A set of quantitative guidelines for wages to be applied at the national level - though well intentioned to narrow the widening wage gap - runs a huge risk of misjudging the levels of pay needed to equilibrate demand and supply in individual industries. The result is a misallocation of labour,' he notes.

Then, there is the problem of further jacking up inflation.

Soon after the wage adjustment policy was taken in 1979, inflation soared to 8.5 per cent in 1980 and prices rose by a further 8.1 per cent in the following year.

If wage restructuring were to take place now, when cost pressures are building from domestic demand and inflation is close to 5 per cent, some think that the threat of inflation hitting double digits cannot be ruled out.

This is to say nothing of the implementation problems.

In 1979, unions were able to implement the wage restructuring through collective bargaining.

Today, while unions still hold much power, it is arguable if multinational firms will simply take guidelines issued by the NWC, especially if they directly affect their business and profit levels.

Can the NWC, or even the Government, change wage policies of big multinational firms today simply by issuing a decree?

Freezing wages at the top also goes against Singapore's drive to attract the best talent.

The world in 2012 is a lot more global than it was 33 years ago. Talent is mobile, and should Singapore embark on this, it is likely that the good workers will simply relocate to somewhere else less onerous.

These problems show that Prof Lim's suggestions may not be practical. Still, they are not for naught.

The ideas he has raised are provocative and should give policymakers and other key players here reason to rethink some of the assumptions that underline their own more evolutionary proposals to ramp up productivity and close the income gap.

At the very least, they serve as a timely reminder of the urgent need to restructure the economy and tackle deep-seated problems in a brave and uncompromising manner.

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