Wednesday, 14 November 2012

Can Singapore adjust to a low-growth paradigm?

There are signs policymakers are looking more at qualitative aspects of growth, but this has its risks
By Aaron Low, The Straits Times, 13 Nov 2012

THE past 10 months has been a difficult period for the Singapore economy.

Growth has slowed to a crawl, and the economy is expected to grow by just 1.5 per cent to 2.5 per cent for the whole year.

Manufacturing has been badly hit by the global economic condition, and electronics is facing one of its worst barren spells, contracting for the 18th straight month in September.

Next year, the central bank has warned that Singapore could grow below potential - which is between 3 per cent and 5 per cent - given the lingering uncertainties.

But the gloomy outlook has not quite elicited a strong response from policymakers to tackle the downturn.

Instead, they seem to have adopted a sanguine attitude towards slowing growth, which has surprised economists, who had been expecting a stronger policy response from the Government.

Acting Manpower Minister Tan Chuan-Jin's comments last month seem to indicate that the Government's attitude towards growth has shifted.

Speaking to The Straits Times in an interview, Mr Tan said that growth is not about numbers, but a means to an end.

"At the end of it, it's (about) how does it add up, really, to the bread-and-butter issues of the individual concerned, how does it add up to the society," said Mr Tan. He suggested that to generate enough income for people here, Singapore needs "good quality 3 per cent growth".

In a speech to economists in June, Prime Minister Lee Hsien Loong said that growth is still crucial to improving Singaporeans' lives. Still, he did acknowledge that growth is not everything: "I agree fully that material goals are not everything in life."

Flash back to five years ago, when then Minister Mentor Lee Kuan Yew stressed the primacy of growth when he addressed hundreds of young people at the heart of Orchard Road.

Urging young people to seize the opportunities ahead of them, he said Singapore's progress was possible because of strong economic growth. "Once you have growth, all problems can be managed. When you have no growth and you have unemployment and no jobs, then all problems become intractable," he said.

Has growth really become less important? Has a paradigm shift towards growth taken place?

Accepting slow growth?

BANK of America Merrill Lynch economist Chua Hak Bin thinks so, and considers it worrying.

He worries that the push to restructure the economy has become the predominant overwhelming objective, while other issues, such as buffering the economy from a downturn, have become secondary.

For instance, while there is a need to tighten the foreign manpower influx to wean companies off cheap labour and raise productivity, he wonders if the costs of such a policy are being ignored.

He calculated that if the policies were relaxed, Singapore could have grown at 3 per cent, about twice the rate now.

The stricter foreign labour regime has led to the Government having to forgo $1.1 billion of potential tax revenue, and 35,800 jobs were forgone as a result of the stricter labour policy, estimated Dr Chua.

"I worry that the Government has gone ideological on this front. There are ways to grow in an inclusive manner, without having to enforce a slowdown in growth," he said.

For instance, extra taxes from better growth could have gone into strengthening the country's social safety net, such as Workfare, he added.

Other analysts also think there has been a subtle but discernible shift in how the Government views growth, and the importance it attaches to growth numbers.

Part of this can be traced back to the so-called "new normal" in politics, brought on in the aftermath of the last general election.

PM Lee had then pledged to make right some of the grievances people had against the Government.

Chief among them was the growing number of foreign workers, who were being blamed for overcrowding on transport systems and expensive housing.

Since then, government leaders have repeatedly said that there will be no U-turn on foreign worker policies, even though many companies are crying out for help.

Another reason for the willingness to accept lower rates of growth is the realisation that Singapore simply cannot grow at the pace it used to.

A rate of 1.5 per cent this year might seem abysmal compared with the 14.8 per cent pace Singapore grew at in 2010. But given that Singapore is in a mature phase of growth, 1.5 per cent is actually not terrible.

In comparison, a mature economy such as Sweden has been growing at an average of 2.5 per cent a year for the past five years. Denmark's growth rate was just 2 per cent between 1970 and 1990.

It it clear that there are certain limits to growth in Singapore, says United Overseas Bank economist Suan Teck Kin. Some of the limits can be overcome by innovative engineering and urban planning, but the marginal social cost of adding a million people to the population will be high.

Externally, competition in the region is getting intense, so effortless growth is no longer the norm, he said.

"Look at how Malaysia, Thailand are all looking at Singapore and wanting to do the same things Singapore has done, like (developing) an efficient public service and building high-end manufacturing sectors like in drugs," he added.

"So the drive to grow has always been there. It's just that there are limits to how fast you can grow."

Slow but more inclusive?

ANOTHER fact: Even though Sweden and Denmark have grown at "slow" rates, these two countries also consistently rank as some of the best places in the world to live in. Social tensions are low and societies in these Nordic states are a lot more equal than those in other developed economies. Quality of education is also high, while social welfare nets are strong.

As Lee Kuan Yew School of Public Policy associate professor Hui Weng Tat noted, it is not a bad thing, as there is more focus on the type of growth rather than how fast Singapore grows.

"Government policies, especially in the past decade, have been aimed at maximising growth without due regard to the opportunity costs of doing so," he said.

"High growth therefore became an end, instead of the means to an end, which should rightly be the welfare of citizens."

How will the slowing growth story pan out?

If economic restructuring works, and Singapore is able to eke out the productivity gains needed to push the economy up to the next level of development, the outlook is good.

Less reliance on foreign workers will mean a stronger imperative for companies to use technology, work processes and innovation to drive growth. In turn, this could boost wages at the bottom, as employers are forced to turn away from a cheap source of labour.

As Mr Suan noted: "Eventually these sources of cheap labour will run dry, as countries like Bangladesh and China will require manpower to develop their own countries."

Some of the lifting of wages at the bottom is already being done by unions and the Government working together to raise wages for the lowest paid. For instance, cleaners' wages are expected to rise 23 per cent to $1,000, after unions, the Government and cleaning companies proposed a new pay structure for cleaners last month.

This way, even though growth is slower, it can be more inclusive.

But at $1,000 a month, cleaners' wages are still way below the median income of $3,249.

But such an approach - paying attention to qualitative aspects of growth rather than pure quantitative factors - is not without its risks.

Managing a complex entity such as Singapore's open economy is a very delicate task. Tweak one policy too much, and the economy could tilt irreversibly towards one direction.

DBS economist Irvin Seah noted there could be a risk that Singapore's manufacturers and companies will become uncompetitive due to the high manpower costs.

"You could get a major hollowing out. Such firms leave and are unlikely to return," he said.

There will also be the attendant pains associated with restructuring, such as elevated inflation.

Already inflation is likely to stay high, at between 3.5 per cent and 4.5 per cent next year. This level represents twice the historical rate seen in the past 30 years, and could last for some years.

Adjusting to this new reality of low growth is not going to be easy.

As Mr K. Shanmugam, Minister for Foreign Affairs and Law, recently pointed out, low growth could potentially mean fewer opportunities for young people and reduced dynamism in the economy.

Will there be enough good jobs in an economy that has a reduced dynamism? What will slow growth do to the values of properties, which Singaporeans rely on as a source of retirement income?

These are huge challenges that will need to be tackled as Singapore manages its transition into slow-growth territory.

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