Wednesday, 25 April 2012

'Shock Therapy' - Wage fixes need to be sector specific

By Ho Kwon Ping, Published The Straits Times, 24 Apr 2012

SINCE Professor Lim Chong Yah said that my speech and article on an interrupted wage revolution inspired his own 'Shock Therapy' proposals for radical wage hikes, many people have asked for my reactions. Here they are:

Prof Lim has made a convincing argument that income inequality in Singapore is serious and growing. However, I am not sure that this is the crux of the problem I have tried to identify. Income inequality is undoubtedly a growing global problem which has affected Singapore perhaps more, perhaps less, than other developed nations. Policymakers around the world must devise effective solutions and Singapore is no exception.

However, I am particularly concerned about a peculiarly Singapore problem: We have a two-tiered economy which is not sustainable. We have, on the one hand, a high-productivity and skills-competitive export economy (which includes not just manufacturing but also financial and other services) and, on the other, a low-efficiency, unsustainable domestic economy, which I define as all the businesses which essentially serve customers located in Singapore. By and large, these are small and medium-sized enterprises engaged in retail, construction, hospitality, cleaning, nursing, and the like.

The main reason for this sector's low wages and productivity is the liberal import of unskilled workers in this sector. And it is not sustainable because the increase of such workers required to satisfy the growing domestic economy will be inevitably greater than the ability of infrastructure, such as transport and housing, to keep pace. This is now apparent to regular public transport users.

It is this sector which requires restructuring - rapid productivity increase coupled with wage increase. Prof Lim says that a radical wage increase will force productivity increases. His detractors say that productivity increase must come first. It sounds like a chicken-and-egg argument to me. Both must happen at the same time, and with no delay.

Specific sectors need to be identified; unions, employers associations, and the trade associations in these sectors need to have a coordinated approach. True tripartism will be required here as the medicine will be painful.

In the sector which I am most familiar with - hospitality - I am shocked to see that many restaurants in even secondary cities in China are already using the latest handheld digital equipment for wait-staff to take and electronically transmit orders and handle credit cards, among others. I have yet to see this in Singapore because it is much easier to just hire cheap foreign workers. And in order to incentivise young Singaporeans to enter this unrewarding industry, hospitality establishments should distribute service charges to their staff rather than retain them for themselves.

The construction industry will need to have both carrots and sticks to quickly modernise its trade. Our building industry's manpower and technology levels have been stuck in time, unchanged since some 20 years ago. The technology is there; skills training can be accelerated, and wage increases must incentivise the transition.

We need industry-specific measures and a high level of coordination by industry players, backed by the consensus that this is a restructuring which cannot be further delayed. In this sense, my view is that just raising the lowest wages across the board is an overly blunt and arbitrary instrument. While we do need to address inequality, we should focus not simply on national wage and productivity levels, but on restructuring specific domestic industries.

But I also think it is somewhat disingenuous of Prof Lim's detractors to simply use scare tactics like 'investors will flee' or 'we will have a drastic economic decline' to reject his proposals out of hand. Critics of the plan - many of whom have access to economic modelling capabilities - should run their models and share with everyone their findings. I suspect that the cost impact will not be that high, given that only the lowest wage levels will be affected, and most multinational corporation investors - except perhaps the foreign bar and restaurant operators - will have only marginally higher operating costs. There are other reasons not to favour Prof Lim's proposals than the potential cost increase for businesses.

In fact, those critics who invoke the foreign investor scare tactic are doing a great disservice to all Singaporeans, and particularly our own Government.

Singapore is not a cheap-labour attraction. Singapore's investment climate is stellar because we have achieved that rare combination of clean, pragmatic and efficient government, a hard-working and problem-solving population, and a good society to live in.

I am personally not in favour of Prof Lim's proposals, but I admire him for having the gumption to make radical proposals. If we are to have a thoughtful society, we should debate the merits of his proposals with equally coherent arguments, grounded in data and reason.

The writer is chairman of the board of trustees of Singapore Management University and executive chairman of Banyan Tree Holdings.



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