Futuring the Economy: Looking far and going deep

Wages have risen ahead of productivity growth and the gap needs closing quickly to avert a recession.
By Devadas Krishnadas, Published The Straits Times, 2 Sep 2016

Economists at Credit Suisse have concluded that Singapore's competitiveness has deteriorated in recent years. They attribute this to three causes - elevated wages, negative inflation and a dependency on exports.

The erosion of competitiveness is not a trivial matter ; rather, it is an existential consideration. The high level of services, infrastructure and even security that Singaporeans have enjoyed in recent decades and to some degree have come to accept as a norm are all contingent on economic prosperity. In other words, it has to be paid for on a continuing basis and doing so is dependent on a thriving economy.

But even more than this, there is the social consideration which hinges on the premise of an expanding economy. Without a healthy economy, we will not produce enough jobs to absorb each new generation of workers. The workers that are employed will not have adequate professional space in which to deepen their skills and enlarge their exposure to new experiences and challenges.

There is also the danger of economic exclusion if there is a concentration of under-employment or unemployment among certain ethnicities or socioeconomic or other groups, due to lagging educational levels. History and the present day are littered with examples of the social and political dangers of economic exclusion.

Let us take a look at each of the causations cited by the report.

On the matter of wages, the report comments that "wages have continued to rise in spite of low productivity growth, depressing corporate profits and pushing up unit labour costs, driven in part by the foreign-labour curbs imposed since 2010".

Deputy Prime Minister Tharman Shanmugaratam recently observed that there has been a divergence in productivity growth between outward-oriented sectors such as logistics and manufacturing - which have made improvements over the last five years - and domestically-oriented sectors such as retail and F&B, where productivity has declined consistently.

However, overall productivity in Singapore has declined or at best seen marginal growth since 2007, with the exception of 2010, when the economy bounced back from the sharp recession the year before due to the global financial crisis. This represents an entire decade of very marginal productivity performance.

Data from the Department of Statistics clearly shows that growth in median income has been overshooting productivity growth since 2011 and that the gap is persistent and growing. Last year, median income growth was 4.7 per cent while productivity growth was negative 0.1 per cent.

We need to bring down wages quickly or at least close the gap between the rate of productivity improvements, which is dismal, and wage rises. It is wholly understandable that any talk of wage restraints would be anathema to the individual worker but, at a structural level, this misalignment between wages and productivity presents a serious risk of recession.

We have been here before - 1985 being the most notable example where such a misalignment clearly caused a recession. But 2001, 2003, 2005 and 2007 all featured this phenomenon - if not as a driver than certainly as a signal of eminent economic danger.

Wage levels have been driven up primarily by labour force controls, such as a cut in foreign labour growth. This would have been acceptable, even welcome, if it had been matched by equal or superior rises in productivity. Unfortunately, despite heavy state intervention to promote it, the economy continues to be a laggard in productivity improvements. Businesses are facing a scissors crisis. Aggregate demand is contracting rapidly while, on the supply side, costs are high and rising due to high wage and rental costs. Our economy risks being crushed between the jaws of these powerful forces.

LESS PAINFUL WAY

Elevated wage levels will ultimately be resolved one way or another, either by early and elective policy intervention - loosening the foreign labour controls, restructuring public-sector wage levels and restating the national wage guides - or ultimately by economic forces. The latter is the more painful route and where wage restraints are likely to overshoot. However, the former route requires political courage of the sort we have not seen in decades.

On the matter of negative inflation, the situation is persistent. We have experienced nearly 24 months of negative inflation. The decline in the headline inflation number is largely a function of the fall in commodity prices, especially oil, supported by a decline in price of private transport.

Nevertheless, we should watch this indicator carefully for signs that core inflation may start to move in the same direction. That would reflect that the weakening in the general economy has had a dampening effect on prices and shaped both general consumer behaviour and appetite for big- ticket items such as housing, and has also suppressed business expenditure - both on discretionary items and on investments. We would then find ourselves in a deflationary situation.

In the same way that a layman may be repelled by the notion of wage restraints, he or she may welcome the prospect of falling prices. What seems bad or good at the individual level is quite a different story at the aggregate level. Deflation has a vicious circle with human behaviour. Falling prices ultimately affects sentiment over longer-term prospects and mutes investment. This can be self-reinforcing.

The shield against deflation is revitalising our economy. This is thus a chicken-and-egg conundrum.

ACHILLES' HEEL

Overdependence on exports, once Singapore's boon, is now its Achilles' heel. We have no domestic economy of consequence. We are not merely trade driven but also trade bound. Given our small population, we are structurally unable to rebalance the economic weight between domestic sectors and trade. However, we can rebalance the economic weight between kinds of trade. We need to move from an overconcentration on physical trade that has been our historical economic basis. And indeed we have been moving towards a services-based economy. Half of our professionals are now employed in service sectors. However, these are mostly transactional and challenging to scale.

What we need are globally scalable businesses and a drive towards internationalisation. Scalability comes from owning commercially deployable intellectual property. So we need more scientists, more researchers and more entrepreneurs. And we need our very best minds to fulfil these roles rather than become administrators. We also need business leaders who are willing to venture overseas. Unless they tap larger sources of demand, our local businesses cannot grow. To turn matters around, we do not need more speeches or exhortations. What is needed is bold action - on the part of both the state and business leaders.

The state must be prepared to consider intervention to restrain wages, starting with its own employees as the public sector wages are out of sync with the private sector wage levels and thus are both a benchmark and a source of upward wage competition. It should also work with the National Wages Council to relook wage guidelines. Going beyond wages, it should also take a serious look at the fundamental causation behind high rentals and be prepared to rethink its approach to Government Land Sales and the role of real estate investment trusts.

Businesses, especially small and medium-sized enterprises, should not depend on the Government to hand-hold them both through good and bad times. It is up to business leaders to take responsibility to innovate their products and processes, promote their businesses and upgrade their workforce. It is also up to them to face the fact of our limited local market space and that there is a competitive imperative to reach a certain critical mass to be economically viable.

Workers too must take ownership of their destinies. The future will only get more challenging for labour. But not because of exploitation of businesses but from the introduction of cognitive technology. Few, if any, occupations will be insulated from the effects of technological substitution of labour. At the same time, with different mindsets and by taking the initiative to upskill or reskill, the future can be made exciting rather than scary.

My hope is that the Committee on the Future Economy considers these deeper structural issues as the main focus. It is tempting to skate over these embedded tensions and emphasise the fashionable trends in the economy and recommend yet more enabling schemes for businesses.

However well-intentioned, such an ephemeral and superficial focus will not address our more persistent - and, ultimately, shaping - internal challenges. It is these deeper issues after all that either will doom or catalyse our economic future. Not dealing with them now only means having to deal with them more painfully later.

The writer is the CEO of Future-Moves Group, a management consulting firm. His new book, The Seduction Of The Simple, will be released by Marshall Cavendish this month.