Quality growth

Devadas Krishnadas, a social and political commentator, is the director of a foresight consultancy. This is a three-part series of commentaries on quality growth.

Published TODAY, 25, 26, 28 Mar 2013

The Singapore romancing of quality growth

In recent years the buzz word from the Government has been “inclusive growth”. In Budget 2013 this has been substituted with “quality growth”.

Deputy Prime Minister Tharman Shanmugaratnam has clarified that quality growth means growth that benefits workers through better jobs and higher wages. He also spoke of an inclusive society which would be, in part, achieved through redistribution.

We can impute that quality growth is also growth with a social purpose. In this sense, ‘’inclusive growth’’ can be treated as synonymous with quality growth.

Given that Budget 2013 envisages a multi-year commitment to wooing quality growth, it is useful to explore the concept more thoroughly. This is the object of a three-part series of articles.

Innovations in Budget, such as a three-year transition programme and the Wage Credit Scheme for the economy, are being introduced as affirmation of the Government’s commitment to boosting productivity and to securing higher wages for Singaporean workers.

These come on top of earlier largesse such as Productivity and Innovation Credit, the National Productivity Fund and the enhanced Workfare policy. This link between productivity improvements and rising wages is the central thesis of the economic thinking in recent Budgets — and as it is justification for the public expenditure of many billions in incentives from the public purse, it is important to review how we got to this point.

GROWTH 2000-2009: HEEDLESS, HEADLESS AND TAILLESS

The Singapore economy suffered a series of economic shocks in the first half of the last decade. We began the new century struggling to get over the Asian Dollar Crisis when in 2001, we were buffeted by the ripple effects of the Dot Com bust and then the impact of SARS in 2003.

By 2005, as the term of government neared its conclusion, it was clear that the preceding five years were effectively wasted years in terms of economic and wage performance.

At the time, global macroeconomic indicators began to show a positive turn suggestive of growth possibilities for us. We embarked on aggressive labour force augmentation to feed those possibilities.

However, undetected by most, including the policy makers, the supply-side tactic to take advantage of demand-side growth opportunities quickly turned into the demand side-strategy generating supply-side growth, as labour force addition — rather than productivity — began to be the primary driver of Gross Domestic Product (GDP) performance.

This supply-side growth created overheating effects in housing and transport and removed the impetus for capital investments in productivity, in favour of cheap labour injections.

It is arguable that the wage stagnation at the lower end and marginal improvements in the middle of the income ladder were a by-product of this. Most Singaporean workers therefore did not benefit much from the growth.

The data shown in the table shows that almost all the GDP growth over 2005 to 2009 — the period prior to the Government committing to moderation in foreign labour intake — was a function of labour force change. Of this, the greater proportion, indeed almost all, came from foreign supply.

The data is admittedly cloudy because the Government was pursuing an aggressive programme to absorb new citizens. Citizens and permanent residents (PRs) together form the “residents” of the labour force. Hence, if it were possible to strip out the additions to the PR pool and allocate them as foreign labour — which they functionally were, being foreign-supplied injects into the labour force — we should logically expect to see that the foreign labour force change was even higher.

On reflection it is not hard to argue that this growth model came at longer term costs and negative externalities which outweigh the short term economic benefits. This is a reflection of search for growth which, however well-intentioned, did not think ahead to side effects nor consider the citizenry’s sentiments.

It was therefore heedless but also headless, because it was not calibrated well as the Government itself acknowledged; and tailless, because the benefits did not fully trickle down to most Singaporean workers.

SIGNIFICANT TRANSFERS TO BUSINESSES

Businesses have historically received favourable attention from the “pro-business” stance of the Government. Since the global financial crisis, this has been taken to a whole new level.

The Government has tried to wean businesses of an overreliance on labour by enhancing levies and changing the employment policies on foreign workers. It is doing so with the goal of getting the economy to be more productive. While using the price signal has imposed a cost burden on businesses, the Government has been generous with “flow-back” to encourage productivity improvements

In the 2009 Budget, businesses have benefited from the Jobs Credit Scheme, the Skills Programme for Upgrading and Resilience (SPUR) (together estimated at S$4.9 billion), cash-flow assistance (mostly tax concessions, S$2.6 billion), the Productivity and Innovation Credit, National Productivity Fund (S$2 billion) and a myriad targeted grants and schemes from SPRING Singapore.

All of these are essentially special transfers from the public account to firms in the form of cash. This reduces their costs and facilitates their “restructuring” and “productivity” and boosts their innovation efforts.

Yet, as we have heard in the Budget 2013 speech, productivity performance has been negligible in the years since 2009, save for 2010 which was due to the GDP bounce off a low base in combination with labour force reductions in 2009.

LET WEAK BE WEEDED OUT

The economic plan as conceived by the 2013 Budget is good, but it can be made even better.

As with the Jobs Credit Scheme, the new Wage Credit Scheme has good intentions but comes at the cost of dead weight and the risk of pushing on a string. This risk can be mitigated only if the Government makes clear that there will be no extensions and further transition assistance beyond the three-year plan — and sticks to this condition.

The costs are unavoidable and thus, we have to focus on justifying it on the basis on results.

The declared object of the three-year transition plan is to buy time while entrenching a deadline for firms to become productive. But in aggregate terms it is, correctly, designed to force a circumstance where scarce resources of land, capital and, most emphatically, labour are shifted to productive and higher value-added activities. This higher goal makes sense, but we should push our policy thinking even further.

The Government continues, year after year, to provide financial and non-financial assistance to small and medium enterprises (SMEs). We must be mindful that micro-economic level intervention does not inadvertently impede the macro-economic level goal of restructuring.

We should permit consolidation to occur in the SME sector as part and parcel of achieving the necessary economy of scale efficiencies and leaning-out of processes, thereby leading to productivity gains at the firm and sector levels. The Government should be mindful not to permit well-intentioned intervention by sector champions within its agencies to inadvertently impede competition from weeding out weak-performing SMEs. We should permit the market to find its way.

VALUE ADDED VS VALUE CREATING

At the economy level, we should ask fundamental questions about the relative importance of value-added versus value-creating. Both are needed but while the former can help us keep and improve existing jobs, the latter helps create whole new ones.

Value-added provides the difference in input and output that creates surplus value in the form of profits and wages. Value-added is about firm level activities in the form of more efficient processes and productive use factor inputs.

Value creation is about ideas and knowledge. It is about the invention of new ways of doing things or new products. Value creation is the best route to GDP growth with momentum despite the limits of factor input. Value creation uses the vehicles of innovation and entrepreneurship.

To underpin this, we should make a policy shift from supporting SMEs to nourishing ISEs — Ideas, Start-Ups and Entrepreneurs.

Ideas are the fuel, start-ups are the vehicles and entrepreneurs the pilots of value-creation. To give the emerging generations of highly educated and aspirational Singaporean workers jobs which give them both fulfilment and income, we need to create the underlying ideas and vehicles.

We should think of ways to create a strong presence of venture capitalists, to encourage risk-taking through entrepreneurship and to encourage crowding in of the innovation and entrepreneurship space.

The recent measures announced by the Ministry of Trade and Industry (MTI) are good steps in this direction. But the process of creating ISEs requires more than simple injections of capital.

GROWTH 2010-2020: HEEDFUL, HEAD-LED AND TAIL HEAVY?

If we can re-base the economy on value-added and value-creating activities, we can be certain that the goal of good jobs and higher wages will be secured. Our economic planning — head-led — will thus be serving a clear purpose — heedful.

But we also need to ensure that the benefits from this restructuring are shared with greater equity between firms and labour.

The MTI has asserted that wage share of GDP has gone up from an average of 41.8 per cent in the 1980s to an average of 42.5 per cent in 2000-2009. This is no cause for celebration. In most advanced economies, the wage share of GDP is greater than the share attributed to firms — often significantly so.

For “quality” growth to also be “inclusive”, more steps will be required to ensure that the “tail” of growth is heavy, with an equitable share of GDP flowing to Singaporean workers in terms of higher wages.

When we have achieved this, the economic romancing of quality growth will not only be completed but be requited with renewed political faith by Singaporean workers in the Government.

Shift all gears, not just some

Hitherto, the pronouncements by the Government on its economic plans, and what it will take to realise those goals, have been addressed to private sector firms and to private sector labour.

They are being encouraged to become more productive, more skilled and move into more valued-added activities.

Deputy Prime Minister Tharman Shanmugaratnam has spoken in terms of the need to “shift gears”. I make the case that such a shifting has to occur in both private and public sectors.

As argued in my first article yesterday, we should shift from an intense emphasis on value-added gains to an emphasis on value creation. Value creation is about human capital, since ideas come from people not machines. In a scarce labour environment, we need to allocate our limited human capital effectively to avoid a crowding-out effect or other distortions.

PRODUCTIVITY IN GOVERNMENT

The public sector is the largest employer of total labour in Singapore and of resident labour by far.

According to the Manpower Ministry, in 2011, the total size of the labour force was 3.327 million, while the size of the resident labour force was 2.08 million. The public service sector formed approximately 3.95 per cent of the total labour force but 6.3 per cent of the resident labour force. This is before including those serving in the military.

This figure is low compared to many other advanced countries which typically have public sectors exceeding 10 per cent (sometimes much more) of total employment.

However, we should not excuse ourselves from the need to urge more productivity in and of government just because of this favourable comparison.

The exceptionalism of our circumstances means that we have to squeeze our productivity gains at the system level of the economy.

To date, the Government has 16 ministries and more than 50 statutory boards. This is in addition to the uniformed services and organs of the State. In a scarce labour environment, it should be asked how we can make government more productive in line with its expectations of the private sector.

Even while some segments of the public sector need to grow to meet demands from driving forces such as ageing and healthcare, surely trade-offs can be made, and have been made, by re-prioritising other public policies.

It would be absurd if all public policies and programmes, historical, current and future, enjoyed similar labour prioritisation in a contemporary world where the Government acknowledges that the principal factor input limitation is labour.

A PROBLEMATIC DICHOTOMY

There is a stark dichotomy in the Singapore labour market.

First, the concentration of resident labour in the public sector could add to the challenge of hiring in the private sector market, where hiring supplementary foreign labour is indexed, through the Dependency Ratio model, to hiring of a base of residents.

Second, whereas the private labour market is risk-loaded for employees, given that it is exposed to the travails of competition, the public labour market is relatively risk-free for staff. This could create a wall of disgruntlement.

Third, even where it is judged absolutely necessary to add employment to the public sector, we should not fall into the trap of assuming the Government creates jobs in the same way the private sector does.

Government employment should be about meeting the needs of the citizen; more such employment reflects an expansion of needs. Private sector jobs are about fulfilling economic functions; more such employment reflects an expansion of growth.

Growth is the means to financing expansion in the public sector, and not the other way around.

RIGHT-SIZED AND SMARTER

A right-sized and smarter public sector footprint would be helpful in several ways.

First, it is important for the Government to set an example for what it expects of the private sector. It must also make trade-offs, find efficiencies, create more flexibility in its labour pool so that it can cross-flow from lower- to higher-priority functions over time, and even inflate and deflate as circumstances require.

This would help build a sense of labour solidarity between private and public sector employees that they are facing similar risks. It would also ensure that policymakers are not making labour and economic policy divorced from a visceral appreciation of the policy conditions.

Second, it would avoid crowding out the private sector in the competition for scarce labour. More particularly, we must avoid a situation where talented and highly educated young Singaporeans, uncomfortable with the vicariousness of the competitive private sector, seek shelter in the public sector where jobs are secure and wages (particularly in the starting grades) competitive.

If too much talent flows into the Government, it can stall value creation simply because there is no impetus.

Third, we have to restrain the sense that just because we have the fiscal means or that there are strong drivers of demand, we should expand the public sector. This can happen in specific pockets but, at the system level, we should keep an eye on total growth of the Public Service.

RETHINK SECTOR CHAMPIONS

The Government has a history of establishing sector champions to drive advancement of specific economic sectors which it deemed desirable for the larger economic success of Singapore.

However, it may be time to revisit the premise for some of these sector champions, in the light of the restructuring that needs to occur.

An example would be tourism. In the 1970s and 1980s, tourism was judged an important sector because it brought in hard currency, marketed us to the wider world and created employment. It also generated investment to build hotels and impetus for public investment in tourist features such as the zoo and bird park, which had spin-off benefits for Singaporeans. The Singapore Tourism Board was established to champion the sector and it has done, and continues to do, an excellent job.

However, we are now in an environment where tourism jobs are largely low- or semi-skilled, and the sector as a whole is low value-add compared with knowledge-based sectors such as finance and information technology.

In 2010, the Ministry of Trade and Industry released a paper which claimed that tourism generated over S$8 billion in nominal value added in 2010. It also noted that “tourism is an important component of Singapore’s economy, contributing towards both gross domestic product and job creation ... Beyond (value-added) and job creation, tourism also brings about intangible benefits.

“Specifically, by raising Singapore’s visibility and profile through iconic events and tourism infrastructure, Singapore could become a stronger magnet for global talent. With more global talent relocating to Singapore, our economy would become even more dynamic and be able to continue its move up the value chain.”

This could all be true. However, tourism also comes with a large land footprint for hotels and facilities. It also adds to loads on our infrastructure. And employment in the tourism industry, as should be clearly visible to anyone visiting hotels for weddings or to patronise the amenities, is mostly made up of foreign labour.

CHANGE IS HARD

Singapore is no longer a stranger to the wider world, and we have a surfeit of hard currency flows given our strong position as a financial centre. Such “intangible benefits” that may arise from any particular sector must be netted in a trade-off calculus at the economy level.

In short, to win at the total economy level, we need not win in every sector. We have to prioritise and that involves ensuring that bureaucratic and policy inertia is held in check.

We need to recalibrate our emphasis on boosting specific sectors with a wider and longer view at the economy level. This may mean performing the novel action of cutting back on niche success in order to succeed at the system level.

Given the non-trivial presence of the public sector as both an economic actor through its policy action and as an employer, shifting gears at the economy level requires the Government to play its part alongside the private economy, not just through the private economy.

As acknowledged in Budget 2013, change is hard. Harder still, is when it has to start from within.

The growth of a quality society

Firms which emphasise profits or market share are the most likely to perform poorly and suffer from short-term thinking, so British economist John Kay argues in his book, Obliquity.

As The Financial Times commented in its review: “Strange as it may seem, overcoming geographic obstacles, winning decisive battles or meeting global business targets are the type of goals often best achieved when pursued indirectly.

“This is the idea of Obliquity. Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people.”

Kay argues that when it comes to complex problems, we often do not know about the nature of our problems to introduce effective direct action solutions. Indeed, we often misdiagnose causation, and this is not made better by simplification of reality in the developing of models or viewing problems through cultural frameworks.

I earlier made the case for an IES sector — Ideas, Entrepreneurs and Start-Ups. The challenge is that we cannot simply expect a random unit of labour to become an active IES participant. That process is a generational one — and is wrapped up within a spectrum of dimensions which have no easy answers, such as how to boost the total fertility rate to maximise each generation’s creative potentia.

In this final part of the series, I argue that to sustain quality growth over time, we must find ways to grow the quality of our society.

We should supplement short-term direct attacks to achieving economic success, with longer term indirect strategies to populate the IES sector with creative minds bursting with innovation, and enlightened risk takers to start future global brands here.

SOCIAL INVESTMENTS, NOT COSTS

Until fairly recently, the Government has seen social policies, other than education, as a cost and not an investment. This was probably for four reasons.

First has been a rigid adherence to the principles of self-reliance and the family as the first line of support. This meant that the individual and his or her family should bear the greater share of the burden to meet their social needs. The State did its best to be the source of last resort for assistance.

Second, the principle of meritocracy fed into a larger framework of belief that it was fair that the best accrued the most gains, and it was not fair to unduly socialise collective costs for the rest at the former’s expense. Over the past two decades, the top income tax rate has fallen almost by half, while regressive taxation such as the Goods and Services Tax has been introduced and increased over the same period.

Third has been the difficulty in showing a positive cause-and-effect correlation in social support systems. In other words, it was difficult to demonstrate that boosting social safety nets lead to positive results that out-sized dollar expenditure. This was very much due to a mindset that perceived social safety nets as welfare, rather than as a means to generate human capital.

Fourth, there was an over-dependency in the use of the price mechanism to achieve policy aims.

An example would be financial incentive-driven marriage and procreation packages, where the underlying assumption is that at some point, a clearing price would be reached where individuals would decide to get married and have babies. The evidence of unrelenting decline in TFR failed to deter this mode of thinking.

BUILD SOCIAL CAPITAL

However, if we were to switch mindsets to view the public finance of social policies and social safety nets as investments rather than costs, we could end up with different outcomes.

We have the examples of Finland and its neighbouring Scandinavian countries as examples. These have been exhaustively studied and discussed by our policy-makers so the lessons of investing in social capital are not unknown to us, nor are the dangers of fiscal irresponsibility of many Western European countries with welfare systems.

The mistake to make is that the one implies the other.

We must overcome the four impediments to switching mindsets and take the risk that achieving social outcomes, such as boosting marriage and fertility rates and generating innovation and creativity, are predicated first on putting in place conditions conducive for socialising and learning.

The process of doing so is neither direct nor simple.

Our labour force works some of the longest hours among developed countries. Our education system is one of the world’s most competitive. Our costs of housing are high and rising. The wages of the workforce, for most income deciles, have been growing slowly when at all. Inflation has been elevated and persistently so.

Competition makes the climb up the career ladder difficult and stressful. All of these characteristics work against conditions for socialising, which is the premise for the higher-order actions of marriage and fertility.

We cannot do something about everything — but there are several things we can do.

WORK TO LIVE, NOT LIVE TO WORK

First, regulation should be introduced to limit the hours worked by all occupations, including PMETS and non-union labour. Protect the private lives of workers so that they have time to live their lives. We must create a culture where workers work to live, and not live to work.

As was noted in Part 1 of this series, the poor wage share to gross domestic product (GDP) shows that firms already retain the lion’s share of GDP as profits. Firms are not therefore in a strong position to make the case that they would suffer competitively if workers worked to a limit of eight hours per day.

It is important to make it mandatory to compensate workers for overtime. This is to discourage the situation where employers, facing tightening labour conditions, pressure their workers to work longer rather than invest or reinvent to make their firms more productive.

‘US’ PLUS ‘I’

Second, we need to move from a mental model that individual gains are derived mostly from individual responsibility, to one where individual gains are best arrived at through collective responsibility supplementing individual effort.

We have shown that we are not averse to spending large sums on physical infrastructure for education at the State level, and large sums on tuition and enrichment at the household level. We must ask if our excessive emphasis on individual merit through hyper-competition is creating more harm than good.

Finland has a high rate of entrepreneurship and a strong knowledge industry base. It is arguable that this was made possible because people are more willing to take risks, knowing that failing need not imply financial ruin for themselves or their families. This is because of strong and comprehensive social safety nets and State-supported social support systems such as education.

We have to use legislation to restrain our impulse to indulge in “arms races” in education. In Finland there are no arms races in education not only because the standard of public education is so high, but also because State support for parents of either gender to take care of the family over a multi-year period helps create a balanced view of life.

Third, we should consider the benefits of national level risk pooling for healthcare. Our costs of healthcare, particularly for catastrophic health crisis, are high and rising. By risk pooling, we can lower the insurance premiums for every Singaporean and absorb the costs of covering those with pre-existing conditions.

As a First World country, we can provide peace of mind for all, especially for those considering having children, that they need not fear the unexpected onset of a catastrophic illness in their family or unforeseen condition in a newborn.

Together, through risk pooling, we are better off than insisting on the individual to assume the costs of his or her personalised risk.

FOR SUCCESS, CELEBRATE FAILURE

Fourth, we have to change our thinking about success and failure. We are addicted to the idea of success where success means not failing. This is a false and dangerous idea. Success is usually a function of iterated failure.

Our misguided notion of success gets in the way of learning, distorts life choices and induces risk aversion. It gets in the way of learning because it encourages students to study to score instead of studying to learn. The recent discussion on the decline in the study of literature in schools is instructive.

It distorts aggregate social outcomes as it affects how we individually prioritise choices in life. Work and career building are seen as nearly mutually exclusive and, in some cases, perhaps even substitutable for relationships and family.

It induces risk aversion because we do not want to fail. But to build the IES, we need to be comfortable with “failure” and even celebrate it.

As much as policy and legislation can accomplish, it will never be enough. The greater share of effort in growing in quality as a society must be made by ourselves, not the Government. Public policy merely reflects the priorities, values and aspirations of the society.

The future is malleable. If we decide to be a quality society, we can do it. The decision to do so must first be made within ourselves.