The tough must get going in Singapore’s new economics

By Devadas Krishnadas, Published TODAY, 23 Dec 2014

Singapore’s continuing modest economic growth of only 3 per cent or so each year and the uncertainty inherent in the global economy suggest that we cannot be complacent about our immediate economic future.

Within South-east Asia, the Republic’s competitiveness is being eroded by high domestic business costs and the economic uplifting seen in economies more rich in resource and human capital, such as Indonesia and Myanmar. It has been nearly five years since the Government adopted the recommendations of the Economic Strategies Committee (ESC). The targets set included annual growth in gross domestic product of 3 to 5 per cent, annual productivity growth of 2 to 3 per cent and a 30 per cent rise in the median wage by 2020.

We have barely met the GDP target and only with a significant contribution from the Government’s fiscal impulse into the economy.

We have not yet had a single positive productivity growth year apart from 2010, whose positive number was a one-off given the labour contraction during the 2009 recession.

And while wages at the lower end have risen slightly, they have not done so fast or far enough to give confidence that we will meet the median wage target.

This has not been for want of trying. The Government has poured billions into trying to drive productivity and innovation, and used policy action to tighten the labour market.

At the halfway mark of the ESC plan, it is opportune to ask whether Singapore needs new economics in the next five years.

MORE COMPETITION INSTEAD OF SUBSIDIES

Given the poor results and the increasingly challenging macroeconomic environment, we should have a sense of urgency about the economic restructuring which we have been struggling to realise since 2010.

We have to take a serious look at whether well-intentioned government interventions to support businesses in restructuring have had the perverse effect of retarding rather than reinforcing the effect of natural market forces in reshaping the economy.

After all, after the expenditure of several billion dollars through various schemes such as Productivity and Innovation Credit, the annual productivity growth number is flat.

Why is this so? I think we should avoid adopting the “escape clause” and take the view that matters would be worse if not for the heavy public investment. Rather, we should face the difficult possibility that things might have been better if not for that heavy investment. Under less benign conditions, businesses would have had to adopt the required adjustments or perish.

Business owners should not be complacent and expect to survive on the drip-feed of government subsidies. We should be aggressive in searching out opportunities and taking the risks necessary to exploit them where and as we find them.

We have far too many small businesses — about 140,000 — for far too small a domestic economy. Only a quarter of our annual S$350 billion or so in GDP is not trade weighted and hence can be considered domestic.

We need greater competition and agency within our local business community rather than a continuation of a dependency on the Government to set direction and provide the means to undertake restructuring, when that should really be the business owner’s responsibility.

In the long run, a sustained and generous, even if well-motivated, intervention policy runs the risk of weakening strong businesses by eroding the drive to perform, while not necessarily strengthening weak businesses that would ordinarily be outcompeted. Our companies have to think international from the onset of their operations and be prepared to function in the international arena.

A strong dependency on the Government for support can handicap our small and medium enterprises. It may be better to allow the market to winnow out weak players and ensure that local conditions are not too different from those of the international playing field, such that the transition from domestic to international competition is not a severe wrench for companies.

TIME TO LOOSEN THE GRIP?

We have to also ask ourselves whether, after four years of a policy to tighten the labour force, if the marginal costs of the policy are starting to outweigh the marginal benefits. Our businesses are facing wage pressures at a time when demand levels are not elevated. While the intention of the labour tightening is correctly to incentivise businesses to become more productive and innovative rather than rely on inexpensive labour, we should also recognise that the services sector — which is the fastest-growing sector — is by definition labour-intensive and thus has natural limits to capital substitution for labour. A broad continuation of the tight labour policy may cripple our competitiveness due to wage inflation.

We should also deal with the elephant in the room — the public sector. It employs about 10 per cent of the resident labour force. Is this reasonable for a small population and when we are facing a persistent labour squeeze?

Our cultural competitiveness is a big part of our historical success. Our diverse population is an asset. We have to harvest the best talent globally and concentrate them here to generate competitive ideas, energy and value for the international market.

We simply do not enjoy and thus cannot afford an idealised picture of job security and comfortable conditions when we are being outcompeted on the economic playing field.

There is an old saying that it is sometimes necessary to be cruel to be kind. The new economics proposed in this commentary should be assessed only on the basis of whether they offer a better chance of us succeeding.

Economic success for Singapore, a small economy without resources or a hinterland, is like riding a high-performance bicycle — we either peddle furiously or fall over. We cannot have a second-best economy or a “throttled back” stage — these are false choices.

It is time to get tough with our choices before conditions get tough on us.

Devadas Krishnadas is chief executive of Future-Moves Group, an international strategic consultancy and executive education provider based in Singapore.