Economic Restructuring: Time for a pause?

MTI refutes calls to slow the pace of restructuring
It says economists are 'too hasty' in saying the policy is not working
By Robin Chan Assistant Political Editor, The Straits Times, 2 Aug 2014

THE Ministry of Trade and Industry (MTI) has strongly refuted economists who have warned in recent weeks that the ongoing restructuring of Singapore's economy is not working and needs to be put on hold.

MTI said these economists were being "too hasty" in making this claim based on gross domestic product (GDP) growth figures from just one quarter - namely the second quarter - which came in worse than expected.

It also disagreed that the restructuring pace is too fast for businesses to adapt to. On the contrary, it said, the pace is "balanced" and restructuring is taking place in phases to give firms time to adapt. "We need to press on with restructuring at a steady, sustainable pace," it added.

In a four-page response to questions from The Straits Times, MTI said of the second quarter's growth figures, which have been a matter of concern: "Weak GDP growth in the second quarter of 2014 is not reflective of the impact of economic restructuring."

Fluctuations each quarter are to be expected given Singapore's export-oriented economy, it added.

And the average growth of 3.4 per cent year-on-year for the first half of the year is "healthy" given the current stage of economic development.

Four years into a 10-year plan to boost productivity and median wages while tightening the inflow of foreign labour, several established economists have become concerned that the effort is hurting the economy.

Bank of America Merrill Lynch economist Chua Hak Bin said in a report on Singapore to clients that economic restructuring is failing and Singapore is losing its ability to seize growth opportunities.

Singapore Management University economist Augustine Tan raised similar concerns in a commentary in this newspaper. He drew parallels with the restructuring efforts of the early 1980s which contributed to Singapore falling into a recession.

Rebutting their views, MTI cited a slew of figures which point not only to the economy being in good shape, but businesses and investors also having confidence in it going forward.

These include the monthly Purchasing Managers' Index, a leading indicator of factory output. It has been in expansionary territory for six consecutive months.

A Department of Statistics survey of about 1,500 firms in the service sector in June found that 21 per cent expect business to improve in the second half of the year, up from 15 per cent of those polled in April.

More companies are also being formed, and investment commitments and unemployment levels remain healthy so far this year, while wages continue to grow.

These show that "business sentiments and outlook for the rest of the year have generally improved in tandem with an expected improvement in the global economy", the MTI said.

On productivity, MTI said that while growth overall has been weak, certain manufacturing sectors have achieved gains. It acknowledged that industries like construction and retail and food, which have historically relied heavily on cheap foreign labour, continue to be laggards.

But the situation is improving and gaining momentum, MTI said, and there is greater take-up of productivity incentive schemes.

"We remain confident that the economy will be able to restructure successfully over time to be more productivity-driven," MTI added.

The new economy: Too fast, too furious?
It was meant to make Singapore more competitive and less reliant on foreign workers. But the hoped-for surge in productivity has not happened with economic restructuring. Growth lags expectations. Workers may not care, as pay has risen. Is it time for a breather? Insight checks this out.
By Robin Chan Assistant Political Editor And Aaron Low Assistant Money Editor, The Straits Times, 2 Aug 2014

AT THE four-year mark of the decade-long economic restructuring, to the man in the street, it looks to be paying off - the inflow of foreign labour has slowed, wages are up and unemployment remains low.

Yet for businesses, things are not so rosy. While economic growth is slowing as predicted, the push for increased productivity does not yet seem to be bearing fruit.

This is because the same measures to restructure the economy have created stark labour shortages and driven up costs. A strengthening Singapore dollar has also made exports more costly. These factors are hurting the competitiveness of firms, making them look to move to other countries, and for those not so agile, even threatening their survival.

However, despite their cries for help, the Government continues to assure that all is well, urging companies to push harder to adapt and telling doubters that things will improve in the second half of the decade.

Asked about the progress of restructuring in the Committee of Supply debate in March this year, Minister for Trade and Industry Lim Hng Kiang said Singapore is behind schedule and needs to try harder. "If you look at the way the economy is still growing, the jobs we're still generating and the labour force is still growing - one could argue that we're slightly behind the curve."

But several heavyweight economists are now sounding the alarm bells, adding backing to the chorus of protests by business owners and MPs against the unrelenting pace of restructuring.

With Singapore's latest export numbers disappointing, and the economy contracting by 0.8 per cent in the second quarter from the first, several research houses rushed to downgrade their gross domestic product (GDP) growth forecasts this year to 3 per cent - the very bottom of the 3 to 5 per cent growth range predicted in this new era of growth.

Bank of America Merrill Lynch economist Chua Hak Bin declares that restructuring is failing, Singapore is losing its competitiveness and flexibility, and this will hurt the economy in the long run.

And Professor Augustine Tan of the Singapore Management University warns that there could be a repeat of the recession in 1985 caused by restructuring too drastically to raise productivity. "Perhaps we should pause in the helter-skelter drive towards the holy grail of higher productivity and higher wages and ask: Is it realistic to push so hard?" he says.

Are these economists right, and has the economic restructuring been too fast, too furious? And if they are, what are the potential consequences, politically and economically?

Failure to launch

THE restructuring drive began in earnest in 2010, acting on the recommendations of the high-powered Economic Strategies Committee chaired by Deputy Prime Minister Tharman Shanmugaratnam.

It said Singapore must raise productivity and reduce the foreign worker inflow - moves aimed at fundamentally changing the way the economy grows, to prepare Singapore for the future challenges of an ageing population and a more competitive region, and to ensure its growth is sustainable and inclusive.

Since then, measures have been introduced to drive change: foreign worker quotas lowered, levies raised, and the ratio of foreigners-to-locals a company can hire reduced.

But four years on, the poor results of the restructuring drive are worrying economists.

For one thing, economic growth has clearly been crimped by the restructuring, growing slower by 1 to 2 percentage points than it should be, they say.

Lee Kuan Yew School of Public Policy associate professor Tan Khee Giap estimates that Singapore could be growing at about 5.5 per cent. But it has only grown by about 4 per cent a year between 2011 and 2013.

Slower growth is to be expected as with any push to change the underlying fundamentals of the economy, notes Dr Chua. But he adds that the Republic could be losing what has been its strength - the ability to be flexible to catch opportunities.

Rising wages while productivity gains remain elusive is also misleading, he adds, as it means that the growth is not sustainable.

The official target has been for the economy to raise productivity by between 2 per cent and 3 per cent a year. But in the last three years, this target has not been met, with productivity growth averaging just 1.3 per cent each year.

"Not being able to see any visible productivity improvements for such a long period must surely raise doubts and question marks," says Dr Chua, who was also one of the first economists to flag that dependence on foreign workers and a growth-focused government agenda were creating widening income inequality here.

Yet even as productivity growth fails to live up to expectations, workers are enjoying higher pay. Management group Hay Group said in June that the actual average salary increase for this year is forecast to be 4.3 per cent.

There are two views on this. Some economists argue that wage growth should follow productivity gains, so it is important to first boost productivity. But others feel that higher wages will in turn force up productivity, which was the thinking behind the wage restructuring in the early 1980s - although this eventually led to a recession in 1985.

DBS economist Irvin Seah points out that real median income per household member grew by an average of 3.1 per cent a year between 2010 and 2012. Last year the real median income per household member grew by 3.3 per cent. He, for one, asserts that "the widely cited measurement of productivity is not a good indicator of true productivity growth. Real median income has been rising steadily; the goal of restructuring is on target".

Meanwhile, businesses are feeling the pinch from the labour crunch - which Nominated MP and Singapore Business Federation chairman Teo Siong Seng says will only become more challenging as more measures kick in. "These challenges, amid the backdrop of lacklustre productivity performance, rising business costs and a weak external environment, are weighing heavily on businesses, particularly SMEs."

Association of Small and Medium Enterprises president Kurt Wee says that despite the pressure from businesses at many levels, the Government "feels their hands are tied because they think they can't change course where labour policies are concerned".

"We've had this conversation for three years, and each time they say they can't turn back."

While in theory business owners understand what they need to do to raise productivity - make more efficient use of workers by adopting technology - in practice many find it challenging to adapt rather than perish, and feel that the Government needs to cut them some slack.

Take one company, CE Engineering - its director Christian Eber has had to roll up his sleeves to fix and fit air-conditioners himself alongside his technicians, because there is not enough people to do the work. For the business to run at optimal levels, he needs to have about 25 people on the team. He currently has seven and struggles to find more.

"We tried to recruit ITE students who were on attachments with us, but not a single one wanted to join us. Levies are so high that many of my business owner friends have decided to work with their own hands rather than pay the high levies," he says.

This predicament has been noted by DBS' Mr Seah, who observes: "The restructuring rests upon the belief that by starving companies from easy access to lower-skilled foreign labour, it'll force them to invest more on technology, thereby raising productivity in the process. But reality has proven otherwise. Not all business functions can be replaced by technology."

He says that apart from inhibiting growth, because the restructuring is raising cost levels, there is a danger of a scenario of slow growth and high inflation, a phenomenon that could lead to negative real wage growth over time.

Adding to the woes, the restructuring is taking place amid an uncertain global environment. As well as the crises in Ukraine and the Middle East, there are questions over China, Europe and the United States. Both the World Bank and the International Monetary Fund have downgraded their global growth forecasts this year.

The environment has led to a stronger Singdollar - it is up nearly 2 per cent against the US dollar - making Singapore's exports more costly and less competitive relative to others.

Taken all together, the pace of change and restructuring has been punishing and it could lead to "killing off the goose that lays the golden egg", worries Ang Mo Kio GRC MP Inderjit Singh.

"We have been too ambitious and failed to understand the real issues (on rents and labour costs) companies are facing as we went for rapid economic restructuring. We are today losing our competitiveness as our costs have skyrocketed and we face a tight manpower situation," he says.

While he thinks this restructuring policy is "far-sighted and the right one for the country", the Government has been too ambitious in wanting to see results quickly. This has hurt many companies and resulted in closures and failures for some that could have become stronger companies had the rate of restructuring been more measured, he says. "It is urgent that someone takes a closer look at the problems created as a result of the restructuring policies and addresses them systematically to rebalance things," he adds.

Time to pause?

MR SINGH thinks a time-out is called for. "Overall, I think we are going to be worse off with the current situation. I would rather see companies have a little more breathing space than to force the restructuring efforts, hurting companies more than necessary."

Taking a pause has its advantages because the restructuring will still continue, just at a slower pace, say economists.

Among the suggestions of how to make use of such a time-out, Dr Chua says the impact of foreign worker levies may not be fully understood and should be looked at further.

West Coast GRC MP Foo Mee Har says the policy approach needs to be more multi-dimensional, taking into account overall productivity plans of companies and giving them more room to manoeuvre. She cites the problems faced by a company wanting to be leaner - to re-engineer its processes and buy more machines, and to participate in Singapore's call to hire more women, it needs to invest time to get all these things in place.

"If these people are already invested (to restructure) and you have evidence that they are doing all these things, can they have a bit more slack regarding the tightening of manpower policy and adapting to new rules?" she asks.

However, such a pause could be economically and politically unpalatable. The economic costs of failed restructuring are huge, and the livelihoods of each individual business owner must be taken into account. And if the restructuring efforts continue to yield little in results, it could exact further political cost on the PAP.

The dilemma for the PAP is that it may also be turning another large voting bloc - SME owners and employees - against it. Says Mr Singh: "SMEs hire two-thirds of people so the employees of SMEs who see their companies hurting will also be unhappy."

Others say that there is actually no need to hit the pause button on restructuring.

Mr Liang Eng Hwa, chairman of the Government Parliamentary Committee for Finance and Trade, is one who keeps the faith, noting that the results of the push will only be seen with time. "This is a leap of faith journey and we have no other choices. To revert back to our old way of growth would also not yield higher real growth either, as we have basically reached the limits and the physical and social constraints. There is no turning back now," he says.

Responding to concerns, a spokesman for the Ministry of Trade and Industry points to positive business expectations in the services sector and low unemployment, among other data, as evidence that there is no need to get too alarmed about Singapore's economy. It is too hasty to draw such conclusions from a single quarter of economic data.

The productivity drive is also yielding results in sectors such as precision engineering and transport engineering, although progress in more domestic sectors such as construction and retail remain poor. "We are restructuring our economy at a balanced pace," she says.

Indeed, closures of companies - a measure of the uncertainty of the economic climate - have not skyrocketed, and therefore neither has unemployment. Between 2010, when the squeeze began, and 2013, company cessation climbed from 15,134 a year in 2010 to 19,007 in 2011. But it has been on a decline over the last two years, falling to 17,376 last year.

For every 100 new companies formed over that four-year period, 52 closed. This is comparable to the 51 company closures for every 100 new companies registered during the high-growth four-year period from 2003 to 2006.

It could be argued that while larger companies are more resilient, smaller firms have struggled, but again the statistics show otherwise. For smaller businesses not required to register as companies, from 2010 to 2013, there were 99 closures for every 100 new businesses formed. This was lower than the 118 businesses closed down for 100 new businesses formed from 2003 to 2006.

Economic restructuring is always painful, and often the time of transition is one of slower growth, and sometimes even recession. On the Government's part, its challenge is to exercise judgment as to how fast to push towards a goal that can be reached only some time in the future, while moderating and managing the shorter-term impact on small businesses and employees.

DANGER SIGN NO. 1

Economic growth lags expectations

Economists are downgrading forecasts for the year to the bottom of their earlier 3-5 per cent range


DANGER SIGN NO. 2

Productivity does not match wage increases

The average salary hike is forecast to hit 4.3 per cent, but productivity growth is averaging 1.3 per cent a year


DANGER SIGN NO. 3

Rising $ means a less competitive economy

Exports are now more costly, as the local currency has risen nearly 2 per cent against the US dollar


DANGER SIGN NO. 4

Labour shortage, higher costs

Some businesses being hit hard by tighter foreign worker quotas and levies that continue to rise

MTI replies: Restructuring at a balanced pace
The Straits Times, 2 Aug 2014

ECONOMIC restructuring is a long-term undertaking. Some analysts have cited the slowdown in second-quarter GDP growth as evidence that economic restructuring is failing. It is too hasty to draw such conclusions from a single quarter of economic data.

Weak GDP growth in the second quarter is not reflective of the impact of economic restructuring.

Given Singapore's externally oriented economy, quarter-to-quarter fluctuations are to be expected. For the first half of this year, GDP growth averaged 3.4 per cent year on year, representing a healthy growth rate given our stage of economic development.

Latest leading indicators such as the Purchasing Managers' Index for the manufacturing sector and Business Expectations Survey for the service sector have shown that business sentiment and outlook for the rest of the year have generally improved in tandem with an expected improvement in the global economy.

It is important for analysts to consider other indicators beyond GDP when assessing the state of the economy.

In the second quarter of this year, the net formation of companies and businesses was 8,837, higher than the quarterly average of 5,051 establishments in 2013.

Singapore remains an attractive location for doing business. In the first quarter, investment commitments remained healthy, with fixed assets investment and total business expenditure commitments coming in at $2.5 billion and $1.3 billion respectively.

Labour market conditions are healthy, with the resident unemployment rate at 2.8 per cent in June this year.

Steady wage growth remains. The nominal median gross monthly income from work of employed residents (including the employer Central Provident Fund contribution) rose by 6.5 per cent in 2013.

We are restructuring our economy at a balanced pace.

We need to press on with restructuring at a steady, sustainable pace. To give firms sufficient time to adjust, we have introduced measures in phases.

The reductions in dependency ratio ceilings were announced two years before they take full effect. We have also provided support packages such as the Wage Credit Scheme.

While overall productivity growth remains weak, we have seen improvement in competitive sectors.

From 2009 to 2013, labour productivity grew by 2.9 per cent per year, within the National Productivity and Continuing Education Council's productivity growth target of 2 per cent to 3 per cent per annum until 2020.

This aggregate figure, however, masks cyclical fluctuations. Recent productivity growth has been weak, with labour productivity up 0.2 per cent per year from 2010 to 2013.

However, a sectoral analysis gives a clearer picture. From 2010 to 2013, exportable sectors such as precision engineering, transport engineering and finance and insurance showed healthy productivity growth of 4.1 per cent, 8.1 per cent and 2.2 per cent per year respectively. These sectors are globally competitive and were able to transform and adjust their processes quickly.

On the other hand, domestic sectors, such as construction and retail and food services, have seen poor real productivity growth. Productivity in the construction sector declined by 0.2 per cent per annum from 2010 to 2013. These sectors are struggling with the tightening manpower supply, with some companies facing problems moving up the value-chain or improving processes. Nevertheless, we must continue to press on with restructuring in these sectors.

The restructuring progress is gaining momentum. Businesses are changing their mindsets and adapting to the new environment.

Businesses have responded well to the call to raise productivity, and take-up of our incentives has been ramped up. To date, more than 17,000 companies have benefited from productivity initiatives, with 7,000 companies in 2013 alone. Take-up is also healthy in laggard low productivity sectors. More than 6,000 companies have tapped schemes under the Building and Construction Authority's $250 million Construction Productivity and Capability Fund.

The Productivity and Innovation Credit scheme, which provides businesses with enhanced tax benefits and cash incentives for investing in a broad range of productivity and innovation activities, saw take-up rates increase from 36,000, or 33 per cent of all active companies in Singapore in 2011, to 50,000, or 40 per cent of all companies in 2013.

Similarly, we have seen take-up rates for the Innovation and Capability Voucher scheme increase. From March 2 to June 13 this year, over 2,700 vouchers were awarded to businesses.

Our labour market is more flexible than it was in the 1980s and our workforce is higher-skilled - these are key advantages we did not have before, and will help support our competitiveness even as we restructure the economy.

Boost to growth not reflected in polls
By Robin Chan, The Straits Times, 2 Aug 2014

ECONOMIC restructuring efforts of the past have boosted growth, created jobs and kept Singapore economically relevant to the world.

Yet they have rarely translated to election gains for the People's Action Party (PAP) Government.

In contrast, the only time an election was held during an economic recession, it resulted in huge swings towards the PAP.

This is shown by a look at the last four restructuring periods.

The 1984 General Election took place well into Singapore's first restructuring efforts since independence. And the PAP's vote share fell to 64.8 per cent, from 77.7 per cent in 1980.

Five years before GE84, the Government introduced a policy aimed at raising productivity through wage rises. The National Wages Council had recommended three consecutive years of aggressive salary increases - of 20 per cent a year - to move the manufacturing industry up the value chain. But it spiralled out of control, and the restructuring took its toll on the economy.

Indeed, a year after GE84, the economy contracted by 0.7 per cent - leading to a recession - Singapore's first since independence.

More restructuring came when the Economic Committee was formed in 1985 to find new ways to grow, and in fact, growth returned to the double digits of the earlier boom years.

In the next election year, 1988, the economy expanded 11.1 per cent. This did not help the PAP, however, as its vote share fell further to 63.2 per cent.

This trend of economic restructuring yielding little at the polls would repeat itself again over the next two decades.

Of course, it is difficult to draw a direct correlation between economic restructuring efforts and electoral behaviour. This is because many factors affect voting decisions including non-economic issues, as well as developments in the external environment.

For example, GE2001 came amid a deep economic recession for Singapore, with the 1997 Asian financial crisis followed by the dot.com bust in 2000 and 2001, and then the Sept 11 terrorist attacks.

And yet the GE in November that year saw the PAP's vote share rise to 75.3 per cent.

Observers describe this voting behaviour as a "flight to safety", meaning that voters go with the party they know amid uncertainty.

A new restructuring period began in 2004, steered by the Economic Review Committee set up in December 2001. Implementing their recommendations had been delayed by Sars in 2003.

The economy recovered to average 8.6 per cent growth between 2004 and 2006.During that time the Government opened the door to more foreign workers to spur economic growth.

However, in GE2006, the restructuring and higher economic growth did little to move voters. The PAP's vote share fell to 66.6 per cent.

The high-powered Economic Strategies Committee was formed in 2009 and its recommendations for the latest restructuring - involving a 10-year period - kicked off the next year.Measures included reducing the foreign worker inflow, while rolling out productivity-enhancing incentives such as the Productivity and Innovation Credit Scheme.

Economic growth clocked in at a healthy 6.1 per cent in 2011.

However, at the next GE in 2011, a year into the restructuring, the PAP recorded its worst electoral performance, losing Aljunied GRC, and seeing voter share fall to 60.1 per cent.

Voters were concerned about soaring home prices, crowded MRT trains and buses due to more foreigners, and fears that they would steal locals' jobs.

With the law requiring the next general election to be held at the latest by January 2017, what does this mean for the PAP as this long and painful economic restructuring presses on?

Much will depend on the progress of the restructuring efforts in the next two years. Will there be a productivity boom as companies and industries finally adapt?

Or could there be more transitional pains with an increasing number of companies shutting down or relocating, higher unemployment and perhaps even a recession, if there is another global economic crisis?

Or perhaps it will be more of a slow burn, with low economic growth, poor productivity gains and companies continuing to feel the pain of the labour squeeze and high costs?

Analysts and MPs agree that it is hard to draw conclusively any relation between economic restructuring and the polls.

Singapore Management University Associate Professor of Law Eugene Tan says: "Given the PAP's track record with economic performance, economic slowdown and recessions tend to see voters being less willing to challenge the status quo and (more inclined) to opt for the tried-and-tested PAP."

In which case, an economic crisis might actually work in the PAP's favour as it did in 2001.

However the other two scenarios could be trickier.

If the restructuring efforts are paying off, and productivity growth is high, and economic growth healthy, voters may be more confident to take a risk against the PAP, as they have done in previous elections following economic restructuring.

Similarly, in a slow-burn-type scenario the PAP could continue to lose votes.

The current restructuring, while in part prompted by external developments, is largely seen as being initiated by the current Government, "so responsibility for success or failure is wholly the Government's", says Prof Tan.

Even if the Government cannot be faulted for putting in much effort but with little to show for it, that is not something voters will stomach, he adds.

"If the pains from current restructuring are laid squarely at the Government, then it will have a bigger negative effect, and may even be a potential game-changer in marginal seats," he says.

Says former Nominated MP Zulkifli Baharudin: "It will be painful and that pain is going to happen right smack when you go for elections. I can't see the PAP not being affected."

S'pore 'must stay the course' on restructuring
Journey to improve productivity and innovation gaining momentum: Swee Say
By Joanna Seow, The Sunday Times, 3 Aug 2014

Singapore must stay the course on its restructuring journey, even though it may not be a painless or instant one, labour chief Lim Swee Say said yesterday.

"I firmly believe that we are heading in the right direction," he said.

Even though there is still much work to be done in some sectors, such as construction and retail, the move towards productivity improvement and innovation is gaining momentum, added Mr Lim, who is secretary-general of the National Trades Union Congress.

To improve, the jobs that are created must be above the national average in terms of productivity and the value they add.

At the first of the labour movement's National Day observance ceremonies, held at The Promontory @ Marina Bay, he told reporters: "Our business cost and wage cost are going up, so we are becoming a higher-cost location for doing business. But being a higher-cost location does not mean being a high-cost location."

Speaking to an audience of 7,000 comprising workers and their family members who had gathered for a picnic, Mr Lim also said that Singapore needs to keep one step ahead of the competition by doing things other people cannot do, so that the profitability for businesses and the wages of workers can continue to improve.

Separately, in his written National Day message to unionists, Mr Lim said that a higher re-employment age for older workers and a more progressive wage ladder for low-wage workers will make Singapore's labour situation even better.

Under the Retirement and Re-employment Act, which kicked in in 2012, bosses must offer healthy workers who have performed satisfactorily re-employment from the ages of 62 to 65, or a one-off payment. But calls have been made to raise the ceiling to 67, and a tripartite committee is discussing when and how to do so.

Mr Lim also said separately that progressive wages are applicable to workers at all levels. "For us to succeed at restructuring, we have to find ways to make better use of every worker because of the tight labour market."

The progressive wage model sets out career ladders with benchmark wages for resident workers - Singaporeans and permanent residents - in various sectors.

Adopting the scheme is mandatory for licensed cleaning companies, and this will soon apply to the security sector as well. Discussions are under way about the need for a progressive wage model for the landscaping industry.

Mr Lim, who is Minister in the Prime Minister's Office, shared in his message that he told international union leaders in June about Singapore's low unemployment rate, its growing employment rates for women and mature workers, and how wages were rising faster than inflation.

"I hope the next time when we share our Singapore Story with tripartite leaders of other countries, it will be an even better story," he added.

Only a minority of countries will succeed in creating enough jobs, both in number and quality, said Mr Lim. "I believe Singapore will be one of them."

While employers agree with the need to improve productivity, many are at a level where, without additional manpower, they feel unable to grow their capacity, said Association of Small and Medium Enterprises president Kurt Wee.

He added that although the association tries to help members make use of available government assistance programmes, it still comes across some who are unable to take on additional orders.

"It still feels like productivity doesn't happen overnight and sometimes, businesses wonder if it will happen at all," he said.