The productivity drive is a long and hard slog fraught with risks. But it has to be carried out, or Singapore's economy will face the risk of falling competitiveness.
By Aaron Low, The Straits Times, 15 Jan 2013
IT'S a routine that has become as traditional as Christmas: the Budget looms on the horizon, and as if on cue, business groups roll out their wishlists.
The details might change, but the concerns and complaints are almost always the same every year, with the list topped by the rising cost of doing business.
This year looks to be no different. A survey of 575 companies released by the Institute of Certified Public Accountants of Singapore last week showed that 60 per cent of bosses flagged high business costs as a key worry.
Another survey by the Singapore Business Federation (SBF) and DP Information Group found that the bulk of its respondents complained that margins are being squeezed by the tight foreign worker policy.
It might be tempting to dismiss these surveys as being the usual business moaning. After all, no boss likes rising costs.
But the numbers support their complaints. Inflation has averaged 3.9 per cent over the past five years, which is about double the historic rate of 2 per cent.
This year, inflation is expected to continue treading higher, within the 3.5 per cent-to-4.5 per cent range.
Industrial rents, for instance, climbed 6 per cent in the first nine months of last year, and industrial property prices soared about 26.7 per cent in the same period.
Labour unit costs - a key indicator of how expensive workers are - rose 6.1 per cent in the third quarter of last year.
The unit labour cost index, which measures the cost of labour in the economy, stood at 111.9 in September last year, 7.8 per cent higher than the 103.8 two years earlier.
There are firm indications that rising costs and falling productivity are becoming a real issue for companies, and the world is noticing.
Last year, Singapore dropped one place in the IMD World Competitiveness study, coming in fourth behind top-ranked Hong Kong, the United States and Switzerland, a victim of rocketing prices, a slowing economy and falling productivity.
Productivity grew by just 1 per cent in 2011, and it fell by an average of 2.4 per cent in the first nine months of last year.
Multinational companies are also getting more cautious about relocating here, according to a poll by the Economist Corporate Network, the business research arm of the Economist magazine.
"Our survey shows that companies are increasingly concerned about issues such as inflation, rising costs, expensive property prices and shortages of staff," said Mr Justin Wood, the company's director for South-east Asia.
Whither productivity?
THESE pains are directly related to the Government's push to raise productivity by between 2 per cent and 3 per cent a year over the next decade.
That has led to a tightening in the flow of foreign workers, in the hope that companies will either turn to more productive ways of delivering the same product or sell higher-value products to raise profit margins.
Indeed, over the long term, Singapore has to raise its productivity.
According to Lee Kuan Yew School of Public Policy's Associate Professor Tan Khee Giap, average labour productivity here is only about half that of the US.
On the supply side, foreign workers are also not the sustainable way to grow, given that they are also getting more expensive, with wages rising quickly in their home countries. Chinese minimum wages, for instance, have shot up as much as 37 per cent over the past two years.
While foreign workers are "cheap", there are also intangible costs to society, in the form of overcrowding of public transport and other facilities.
Racing against time
THE biggest problem many businesses have with the current productivity drive is simply that it is being done too fast and at an inopportune time.
The global economy is still sputtering along and two of Singapore's biggest markets, the US and Europe, remain mired in uncertainty.
Demand is still weak, but at the same time, local businesses have to cope with soaring costs.
The risk is that pushing for productivity faster than companies can adapt means many will fold or ship out - taking jobs with them.
"Many of these industries like small-time food manufacturers, which are mainly SMEs (small and medium-sized enterprises), once they go, they don't return," said DBS economist Irvin Seah.
And if the productivity drive takes too long to bear fruit, and costs rise in the meantime, Singapore may have lost too much competitiveness to catch up.
SBF chief operating officer Victor Tay said companies now accept that restructuring the economy is the way to go, but hope that the Government can still address the key issue of costs.
"It's not just about manpower now, it's about how to grow business and cut costs," he said.
He cited the move last Friday to levy a seller's stamp duty on industrial property as precisely the type of policy that companies want.
Prof Tan from the Lee Kuan Yew School of Public Policy agrees. He believes the way to approach productivity is to work with companies, rather than give them cash gifts such as the Productivity and Innovation Credit.
"We have to start with the local firms, especially the top SMEs in the various sectors. Work with them to develop new processes, ways of doing things more efficiently," he said.
If Singapore is to achieve its productivity growth, it cannot depend on a few tried-and-tested ways such as tax incentives to change the behaviour of companies, said Prof Tan.
To be fair, there are signs that the productivity drive is slowly seeping through the economy.
Last month, I was at Changi Airport, and I saw a most curious thing at a Chinese restaurant.
Rice was being fried in a typical Chinese wok. But instead of a man or woman standing there to toss the rice, the wok was attached to a mechanical spatula, which moved back and forth, mimicking the action of tossing.
I bought a plate of the fried rice whipped up by the "robot", and it didn't taste half bad.
It was just one small example of what can be done to boost productivity.
But the question remains: Will companies continue to take up the urgent call to raise their game? Or will they simply throw in the towel and ship out?
The answer to that question, more than any government policy, will determine if Singapore's economy continues to float and thrive, or simply sink into irrelevance.
But the Budget, which will be delivered on Feb 25, can do its part to help ease the short-term pain of what is likely to be a long period of restructuring.
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