Saturday 21 July 2012

Foreigners still needed for growth

Does Singapore need foreign workers and immigrants for economic growth?
By Robin Chan, The Straits Times, 20 Jul 2012

THE short answer is yes.

This has been true for most of Singapore's recent history because of its limited local population and a declining fertility rate.

Traditional economic growth theory explains that the more factors of labour and capital are added, the faster the economy expands. The efficiency of labour is determined by its productivity. The higher the productivity, the faster the growth.

By adding foreign workers to the local labour force, Singapore's economy can grow even faster than its potential might have allowed - likened by some to steroids that enhance performance.

Singapore has used levies and quotas to manage the foreign worker inflow, while making sure the economy did not overheat.

For most of its history, this has worked.

But in the last 10 years, the foreign workforce has increased much faster than anticipated.

The foreign labour force expanded from 605,000 in 2003 to 1.19 million people at the end of last year.

The Government has explained that it allowed more foreign workers to enter Singapore to ride on a strong wave of growth after its economy suffered a period of weak growth at the century's start.

In 2000, the bubble burst in the United States, and not too long after, the Sars crisis followed in 2003. The economy stabilised and grew after that.

Prime Minister Lee Hsien Loong explained in 2006: 'When the conditions are good and the sun is shining, we should go for it, as fast as we can, as much as we can.'

But there are drawbacks to using large numbers of foreign workers to drive growth.

The first is that there is less incentive to raise productivity, especially in sectors where large numbers of foreign workers are allowed such as in construction.

Productivity growth averaged 1.7 per cent a year over the past decade, falling from an average of 2.5 per cent between 1995 and 2000.

It creates a vicious circle: Cheap foreign workers depress wages for some jobs, fewer locals are willing to do the work, and companies are forced to depend on foreigners.

A second effect is that wages at the bottom have stagnated.

The median monthly household income grew 1.8 per cent in real terms - after inflation is accounted for - each year from 2001 to 2010.

But the monthly household incomes of the poorest fifth grew only 0.8 per cent in real terms over the same period.

A third effect is rising income inequality. As wages at the bottom fall, wages at the top are pushed up by the very top earners who include locals, as well as foreigners and immigrants. Result: a widening income gulf in between.

The top fifth of employed households earned 12.9 times that of the bottom fifth last year.

The rapid influx of foreigners in the last decade has also led to unhappiness over crowded transport and public spaces, clashes over the location of foreign worker dormitories, and strong demand for housing driving prices to record highs.

This has sparked debate on whether Singapore should go for slower growth so it does not need so many foreign workers.

Tweaking numbers

THE prevailing thought has been to pursue productivity, and to reduce the reliance on foreign labour.

The Government has acted to slow the inflow of foreigners, to raise wages at the bottom and to boost productivity.

By July next year, the levies for foreign workers are set to increase to between $300 and $600 for those in construction and services, and $250 to $550 for those in the manufacturing sector.

Dependency ratio ceilings, which determine how many foreigners a company can employ for every Singaporean, have also been reduced across the board.

At the higher income end, S-Pass and employment pass criteria have been raised, making it tougher for companies to bring in foreign professionals.

Permanent residency and citizenship are also being given out in smaller numbers than before.

The Government has acted on the social aspects as well.

It has recently raised the income requirements for foreigners who want to sponsor their family members to live in Singapore.

But is it too much, too soon? Or not enough?

Some foreigners are growing wary of Singapore turning 'anti-foreigner', despite wanting to remain open.

Singapore firms have been in a tizzy over the tightening of the tap, with many small and medium-size firms warning that the costlier levies and difficulty in finding Singaporean workers may force them to shut down.

During the restructuring, economists say unemployment will probably rise.

And PM Lee has said: 'Because it's not as if you send away all the foreign workers or keep out all the foreign workers, then we live in paradise. There is a price, and it's quite a high price to pay. As we try to manage the population in Singapore, we are going to also accept a lower growth rate.'

With fewer foreign workers, labour inputs are reduced, leading to slower growth.

But slower economic growth can lead to higher wages, economists say, if it is driven by productivity increases.

A more productive worker can do the job of more workers, and should therefore be paid a higher wage for doing more with his time. This would help to raise wages at the bottom, and reduce the need for foreign labour.

As Economic Society of Singapore vice-president Yeoh Lam Keong has argued: 'We should grow at our potential where labour force growth is restrained to a low rate estimated to be around 0.5 per cent to 1 per cent, that both enables incentivisation of productivity growth and does not lead to an overcrowded population.'

Based on 2 per cent to 3 per cent productivity growth a year, and population growth of not more than 1 per cent, Singapore's optimal growth rate is around 2 per cent to 4 per cent, he said. This is lower than the 3 per cent to 5 per cent the Government has previously estimated.

But raising productivity is no easy feat. Businesses will have to change their attitudes after being reliant on foreign labour.

Some employers may hope that the Government will reopen the tap for temporary relief. But there is no indication it will do so.

Singaporeans too will have to adjust their lifestyles with fewer foreign workers.

They will have to take up jobs now filled by large numbers of foreign workers, such as construction workers, factory machine operators or wait staff.

But they will demand higher salaries. Will companies be prepared to pay more for these services?

And if they do, the price of goods and services will surely rise. How will Singaporeans adjust and adapt?

And at the top end of the skills spectrum, other countries are competing for the same pool of foreigners that Singapore may relinquish.

Australia recently tweaked its immigration policy to boost the economy and woo workers to jobs shunned by its citizens. A new visa category is being created to give permanent residency to wealthy migrants who invest at least A$5 million (S$6.5 million) in the country.

Singapore is feeling the stresses and strains of a decade of growth assisted by the steroid of a large pool of foreign workers.

The conversation on foreign workers and immigration has certainly changed, but Singaporeans should be wary of the tide turning too much against foreigners.

Singapore does not have the local population needed to drive the fast growth of the past. Growth can therefore come from productivity, or foreign workers, or both.

Unless productivity increases dramatically, or the birth rate rises sharply, Singapore will continue to need foreign workers, even if it is in smaller numbers.

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