The productive shall inherit the Earth

Learn from the Neanderthals, wiped out ages ago by the more productive homo sapiens. Singapore needs to re-focus its push on productivity to reap rewards.
By Joseph Chong, Published The Straits Times, 18 Jan 2013

FOR a developed country like Singapore with severe space constraints, productivity growth is the key to raising living standards.

It is the only way forward for Singaporeans to have sustainable increases in real wages.

The official target of 2.5 per cent is indeed a stretch.

Such productivity growth over 30 years is a tough slog - but no pipe dream. The Americans have done it. Since 1947, real GDP growth in the United States has averaged 3.2 per cent annually. Most of this came about through productivity growth, which has averaged 2.2 per cent since 1947.

Plentiful space is clearly not Singapore's competitive advantage. As a city, Singapore's potential edge is in knowledge and creative industries.

Go-for-growth policies of importing cheap foreign labour to exploit regional "opportunities" that result in higher Singaporean living standards is unsustainable economics, as it ignores the true cost of having a large pool of foreign workers who put a strain on infrastructure.

The focus of Singapore's productivity drive thus far appears to be narrow, concentrating on labour productivity among smaller firms and automation.

It is vital to look at other macro-economic issues that will eventually feed into productivity.

Productivity after all is a macro-economic issue, if one reads the productivity pronouncements of the US Federal Reserve and the European Central Bank. Long-term monetary policy objectives are dictated, in the final analysis, by productivity trends in the economy.

The German experience between 2000 and 2005 is instructive, demonstrating the need to look at productivity more widely.

In the aftermath of the Euro-pean monetary union in 1999, the German economy slumped as it lost competitiveness despite healthy productivity levels. Germany lost its cost-of-capital advantage because of the convergence of interest rates in countries such as Spain and Italy.

Consequently, labour productivity had to climb even further to offset this loss. Even if one is running at high labour productivity levels, other factors could blindside and whack you if you miss the totality.

Germany's 2000 to 2005 experience is also the reason discipline and persistence are needed. Despite restructuring efforts, German productivity growth took time to recover. Any operational restructuring is almost invariably disruptive to business output and, hence, productivity.

Persistence needed

THIS system of inertia and friction manifests itself as the S-curve.

System changes exhibit a progression from slow beginnings that accelerate, approach a climax and level off over time.

Children's education is an S-curve we would be familiar with. If we are impatient and stop their schooling after nine years, there would be little payback. On the other hand, a double doctorate will pay you about the same as a single PhD.

Singapore's drive to lift productivity will not escape the S-curve constraints. Therefore, it is important to be patient and persistent or there will be no payback.

A few macro-economic issues to do with efficiency need addressing if Singapore wants to sustain a 2.5 per cent productivity growth rate.

Here are just three: the low labour force participation rate of women, the reluctance to impose higher standards on the domestic economy, and weakness in intellectual property creation.

Women in the workforce

THE female labour participation rate in Singapore is currently about 57 per cent versus about 75 per cent for males. Norway, with a population of about 5 million, has a female participation rate of 78 per cent. This is achieved while sustaining a fertility rate close to replacement levels.

If Singapore moves from 57 to 73 per cent, an additional pool of 150,000 workers will be available. Given that it costs about $300,000 to educate each child, we are sitting on an underutilised asset worth $45 billion. It makes no sense to educate women but not create sufficient incentives for them to be active in the labour force.

Local economy standards

THE chairman of Singapore Management University, Mr Ho Kwon Ping, was spot on when he wrote about Singapore's "double" standards.

We have an efficient export sector because we have to meet the standards set by the developed economies. But on the domestic front, we struggle to impose and enforce standards on even very basic matters such as public toilets, accreditation of cleaners and rest days for maids.

Singapore is a regional medical hub today because the medical profession has maintained high standards for decades. Globally, Germany is a good case study of the importance of high domestic standards to overall competitiveness.

There were once two very different Germanys. West Germany, with its high standards, produced goods such as cars that were desired all over the world. A mass-market Volkswagen could be sold as a premium product abroad.

But East Germany adopted Soviet standards and its car, the Trabant, was the laughing stock of the West. "Made in Germany" is a premium that has arisen because of high standards Germans have imposed on themselves.

As a student in West Germany in the 1980s, I was amazed how German consumers always focused on quality and durability in making purchases, whether the item met their famous DIN (German Institute for Standardisation) standards, which cover almost all aspects of modern civilisation.

Singapore similarly needs to embrace high standards for domestic, not just export, goods and services.

Creativity

PATENTS are a proxy used by most economists to measure an economy's creativity.

There is a clear correlation between the intensity of applying for patents and future productivity - how creative an economy will be dictates its future productivity and sustainable wealth.

My preferred metric for patent application intensity is the number of patents filed annually by residents per million population. Singapore's numbers are worrying, according to the World Intellectual Property Organisation database.

We have stagnated throughout the entire past decade, averaging about 150 resident patent applications annually per million of population. The US, already at high levels of more than 600 in 2001, has gone on to about 800 resident patent applications per million of population in 2011.

Meanwhile, China from a very low 24 in 2001 has gone on to more than 300 resident patent applications per million of population in 2011. However, the supernova is South Korea - from more than 1,500 in 2001, the Koreans have gone on to about 2,700 resident patent applications in 2011.

The efficiency of Singapore's R&D spending is also disconcerting.

The US produces about four times as many resident patent applications per dollar of R&D expenditure. The Koreans are doing 16 times as many! This is not a one-off phenomenon. This has been the trend throughout the past decade. It is the same pattern when resident patent applications are measured against GDP.

Singapore's patent paucity is of further concern as resident patent applications come mainly from government-funded organisations. Creative Technology was Singapore's local private star with 15 applications in 2011, but is dwarfed by Samsung, which filed for more than 750 (50 times!) patent applications in 2011. This probably explains why Samsung is able to slug it out with Apple in their global patent legal fight.

Perhaps the most crucial lesson on productivity comes from anthropology. It involves the extinction of the Neanderthals. Homo sapiens and Neanderthals share a common ancestor that lived about 500,000 years ago.

Neanderthals are almost genetically identical to humans. They had a spoken language and a brain of about the same size, but fossil remains show that they were physically stronger. They dominated Europe until homo sapiens arrived from Africa about 50,000 years ago.

A comparison of tools and weapons shows, nevertheless, that homo sapiens had the creative edge - we outcompeted and marginalised them into extinction over time.

Here is the maths. Even assuming a small difference in productivity of just 0.1 per cent a year between two equal communities, the more productive community will be wealthier by more than 140 times at the end of 5,000 years. The US dwarfs Singapore but the US economy is only 60 times larger, not 140.

The Neanderthals' fate tells us that the productive will inherit the Earth. Nobel laureate Paul Krugman once aptly said: "Productivity isn't everything, but in the long run it's almost everything."

The writer is the former CEO of a financial advisory firm.