Restructuring not just about productivity: MAS

Exercise aims to align economy with capabilities, resources; raising productivity is for increasing real wages
By Kelly Tay, The Business Times, 4 Nov 2014

AS it becomes clearer that it will be extremely challenging for Singapore to hit its ambitious 2-3 per cent productivity growth target, the Monetary Authority of Singapore (MAS) has said restructuring should not be measured solely against productivity performance, and that productivity is not an end in itself.

In response to queries from The Business Times, MAS chief economist and assistant managing director (Economic Policy) Edward Robinson said: "Restructuring is about making the shifts necessary to align the structure of the economy with our capabilities and endowments, in other words, to produce what we are good at and have the resources for. The ultimate objective of raising productivity is to increase real wages for Singaporeans, which in turn is a means to increase economic welfare through consumption of a variety of goods and services. Hence, productivity is not an end in itself; neither is production, exports, or competitiveness per se."

Mr Robinson's comments come as Singapore nears the halfway mark of its 10-year economic restructuring drive - and with little to show for it, at least by way of labour productivity growth. This averaged just 0.1 per cent from 2011 to Q2 2014, and only 0.4 per cent if construction - often cited as a productivity laggard - is excluded.

But Mr Robinson told BT that in the short term, "there are limitations in relying on simple productivity indicators" since they are "not a good guide" to the country's ability to sustain and enhance the population's standard of living. This is not only because productivity growth can see-saw from quarter to quarter - it is, after all, dependent on GDP performance - but also because productivity can be affected by sector-specific developments, based on the needs of society.

An increasingly ageing and affluent population, for instance, has meant greater demand for health and education services, as well as recreational activities - all of which require more workers. With a ramp-up in the number of infrastructure projects of late, additional labour has also been necessary in the construction sector.

Because of the increase in labour inputs, a direct measure of productivity - conventionally calculated as output over input - may not necessarily yield favourable results. In fact, mathematically, productivity is likely to fall. "But in both these instances, it is clearly the case that Singaporeans' welfare is enhanced by the production and availability of such infrastructure and services," said Mr Robinson, stressing that short-term fluctuations in productivity growth "do not mean that the welfare of Singaporeans has suddenly deteriorated or improved".

Just as the MAS is hesitant to assess restructuring by a single metric, it is also loathe to judge Singapore's competitiveness solely by its real exchange rate, unit labour cost, export performance or market share.

Private-sector economists have highlighted how Singapore's real effective exchange rate (REER) has been climbing steadily against the average REER of regional economies. They argue that this has made the Republic's exports even more uncompetitive, leading to a decline in export performance.

But Mr Robinson said that it can be "misleading" to infer that Singapore has lost overall export competitiveness just because its real exchange rate has strengthened over time.

For one thing, the product mix of Singapore's export basket continues to evolve, to include higher value-added goods which command higher unit prices. And while Singapore may have lost competitiveness in one market or industry (such as disk drives), it has also gained competitiveness in other areas (including semiconductors and storage devices).

Said Mr Robinson: "Similarly, if our export growth is slowing or if we are not gaining market share, it does not necessarily mean that we are no longer competitive."

While other ministries and government agencies have a more direct bearing on the restructuring process - by providing businesses with incentives and support to transform - Mr Robinson says the MAS's role in restructuring is a different one.

"Monetary policy in Singapore is not the driver of the restructuring process, but rather the handmaiden to keep inflation low and stable during the transitory period. As MAS has repeatedly emphasised, an orchestrated weakening of the domestic currency will not enhance competitiveness, and will only lead to higher inflation."

As such, even though restructuring could entail higher costs and slower growth, Mr Robinson says the MAS seeks to instill confidence that prices are stable over the medium term.

"This would provide the certainty and assurance for firms to make longer-term investment decisions, initiate changes in business processes, and spur new lines of activity. The returns from such investments will more likely be higher in an environment with macroeconomic stability," he added.

In a statement on Monday, the Ministry of Trade and Industry (MTI) maintained its productivity growth target of 2-3 per cent per year, which was adopted in February 2010 for the 10-year period to 2019.

MTI said: "While it was ambitious, it reflected the room for improvement after just 1 per cent growth on average in the decade up to 2009. Productivity is now expected to grow by slightly over 2 per cent per year on average in the first five years of the target period, but with almost all the gains being achieved in 2010 when the economy recovered strongly."