Saturday, 16 February 2013

Mind the short-term trade-offs

The main concern for businesses is whether, in the economic upgrading ahead, good productivity performances will outweigh poorer ones to make up for the cut in foreign manpower employment.
By Randolph Tan, Published TODAY, 15 Feb 2013

Despite the differences of opinion about the extent to which future growth should be driven by foreign manpower infusions, there is broad consensus on at least one point — productivity gains will have to play a much larger part in future growth.

Given the record to date, it is natural to be concerned about whether productivity gains can be raised to the level required, and how soon this could occur. Since the computation is done on a per worker basis, would curbing reliance on foreign manpower produce the gains required — or are there other conditions as well? How soon will the improvements be manifested?

If we use real output per worker as the measure of labour productivity, then Singapore’s growth performance deteriorated significantly after 2005. Using the World Bank’s World Development Indicators (WDI) database, among the 121 countries for which data is available, Singapore’s ranking plunged from 15th in the 2001 to 2005 period to 85th in 2005 to 2011.

In terms of number of places dropped, we were only outdone (or under-performed!) by Bahrain (which dropped 76 places), Iceland (77) and Kuwait (82). Interestingly, all are also high income countries. In addition, Kuwait and Bahrain also have high rates of dependence on foreign manpower.

While Iceland did not have the same extent of dependence on foreign manpower, its rate of immigration in the period 2005 to 2010 was one of the highest in the world. Yet, even if we consider only high income countries, our ranking in terms of productivity gains dropped from second to 21st out of 44 countries between the same two periods (2001 to 2005 versus 2005 to 2011).


Despite this rather dismal picture, Singapore’s overall performance has been far from poor. Over the entire period from 2001 to 2011, Singapore’s average annual productivity growth actually out-performed many other prominent economies, such as the United States, Japan and Australia.

This comparison is not meant to be conclusive, but rather to illustrate the fact that a country’s productivity performance may not be even. This is especially so during periods of rapid structural transformation.

In Singapore’s case, such a lack of uniformity in our productivity performance is likely to have been exacerbated by the lack of physical room to manoeuvre.

Take our system of underground cables and pipes as an illustration. While it has provided a neater layout to our urban environment, the disruption to traffic gets bad when whenever there is a need to dig up roads to gain access for maintenance.

Without the luxury of as much room to manoeuvre as a larger country would have, there is a need to prioritise the use of our facilities during the periods of transformation, during which time aggregate productivity will take a hit. It is less an issue of space, than of the degree of interruptions relative to the available space.


In a statistical comparison using the WDI data for all countries over the last two decades for which data is available, I found a significant negative relationship between productivity performance and volatility in employment growth. In Singapore’s case, the volatility in our employment growth has been higher than most.

So, the apparent conflict between employment growth and productivity is really an issue with the frame of reference.

The latest news on US employment pretty much sums up the same conundrum we are facing: At the same time the jobless claims are falling to near five-year lows, signalling the improving employment situation that has been eluding the US since the global financial crisis, there are also reports its aggregate non-farm productivity is falling.

Of course, if things are going well, productivity should not continue falling and would eventually improve hand-in-hand with steady jobs creation.

Conversely, if things were going bad, the jobs creation should eventually hit the brakes. So, it takes time — a period of consolidation — before the full picture emerges. In the meantime, it may not be as simple as changing course mid-stream in order to bring about an improvement.

Indeed, we should take a measure of comfort from the fact that in Singapore’s case, the productivity performance has been patchy and not uniformly dismal. The main concern for businesses and policy makers is whether, in the continuing economic upgrading ahead, the good performances will outweigh the poorer ones by a large enough margin to put us sufficiently ahead to make up for the cut in foreign manpower employment.


What then are the prospects for an improved performance? To consider this question, we should look into what exactly is driving the continuing creation of jobs that is leading to the diminution of average labour output.

Firms should not need increasing amounts of manpower if they were continuing along a stable scale of operations. If their demand for manpower is increasing without any expansion in scale, then obviously, there is inefficiency in manpower use.

Is it simply a case of hoarding of low-cost manpower? That would have been a credible explanation if not for the increase in levies since 2010.

If it is not a problem of inefficiency, then the other possibility is that companies have embarked on an expansion path for which they require increasing infusions of manpower in a variety of specialisations which they cannot fill with the indigenous labour pool alone.

For companies planning to expand regionally or globally, the dynamics of cross-border operations may make it impossible for businesses to put a sudden stop to their hiring without a period of adjustment.

In the worst-case scenario, if the expansion is suppressed in the wrong way, the ability of the economy to create jobs may be impaired. The prospects for stable productivity gains to power future growth may elude us even longer.

Associate Professor Randolph Tan is Associate Professor, Business at SIM University, School of Business. This is the first of a three-part series on productivity issues.

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