Contents
7.1 Problem of Growing Income Inequality
7.2 Inclusive Growth Underpinned by Rise in Productivity
7.3 Re-evaluating Singapore Growth Strategy
Moving into 2010, the economic continues its robust recovery. GDP grew at a record pace of 14.5% compared to the contraction of 0.8% in 2009. Overall, manufacturing sector grew by a stunning 29.7% while the services sector, which makes up about two-thirds of the economy, expanded by 10.5%. With the opening of the integrated resorts, the ‘arts, entertainment and recreation’ sector grew by an astounding 123.5%. A record 11.6 million tourists visited Singapore and their spendings amounted to $18.8 billion.
7.1 Problem of Growing Income Inequality
The sterling economic data, however, hid an increasing strain attributable to the ballooning foreign population. The strain was already beginning to show before the onset of the global financial crisis in 2008. Even when the economy was expanding prior to the crisis, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same time. Efforts to position Singapore as a global city and to move into higher-end technologically- and knowledge-intensive industries led to the shortage of professionals with both the relevant skills and international exposure. On the other hand, the hollowing out of low value-add manufacturing operations resulted in an excess of unskilled workers. The problem was exacerbated by the fact that Singapore was importing not only highly-skilled professionals. Many unskilled low-cost labourers were also brought in to do menial works shunned by the unemployed Singaporeans.[1]
The end result is that income gap has been widening between the high skilled, whose wages are pushed up by shortages, and the unskilled, whose wages have been depressed by low-cost foreign workers. Since the turn of the century, even though the economy as a whole registered impressive growth, in particular after 2004, the unequal distribution of income persisted. Between 2000 – 2005, for example, the lower income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3% fall in average household income, while the 21st to 30th income decile group saw a 0.5% decline.[2] Consequently, between 2000 and 2007, the Singapore’s Gini coefficient climbed from 0.444 to a high of 0.489. It moderated to 0.481 in 2008 and 0.478 in 2009 only because of the financial crisis (See Figure 7.1).[3]
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Figure 7.1 : Gini Coefficient among Employed Households (2006 – 2009) |
Source : Singapore Department of Statistics. “Key Household Income Trends, 2009.” February 2010.
Despite putting up a vehement defence for its policy actions, the government has been quick in responding to the grouses of the poor. With rising discontent, government’s inaction can upset the social cohesiveness and put a crack line in the “Total-defence” concept that underpins the government’s effort to enhance Singapore’s national security.[4] The riot and bloodshed in Thailand in May 2010 is a stark reminder of the consequence of inequitable redistribution of the fruit of economic growth. The rural-based red-shirt faction represents the dispossessed class that feels that it has been unfairly excluded from the country’s economic growth by the urban-based elites. Even though the Thai government, which has the support of the urban elites, succeeded in forcibly quelling the protestors, long term social order depends on its ability to address the grievances of the economically dislocated rural class in order to close the rift.
So, what has the Singapore government done in response to the trend of rising Gini coefficient? Right from the start, the government has put in place measures that provide subsidised services such as public housing, education and healthcare. These services help to ensure that the lower-income group are able to maintain a minimum standard of living and that their offspring receive quality education so that there is equality in opportunity. In addition, the greater amount of subsidy received by the low-income groups also means that their higher real incomes in turn help to lower the post-subsidy Gini coefficient (See Figure 7.1). On top of these permanent measures, the government has also initiated several programmes to help the poor and the dislocated since the 2001 General Election when the opposition drove a ‘new poor’ campaign to make the plights of the low income a political issue.
High on the list of those programmes is the provision of subsidies by Workforce Development Agency for approved training courses as well as bonus payments when training under the new Workfare Training Supplement scheme is completed. The emphasis on retraining ensures that dislocated workers can as far as possible be re-equipped with new technical skills and diverted into emerging industries. Besides assistance associated with retraining, financial support in the form of cash supplements from the Workfare Income Supplement (WIS) has also been offered to families in financial distress. Older low-wage workers also received a boost in their retirement funds through the CPF component of the WIS. In addition, the government put forth a host of measures covering education, housing and healthcare. In public housing, for example, other than the concessionary loan from the Housing Board for the housing mortgage, various grants are also provided for the purchase of public flats. For education, in addition to bursaries, students received top-ups to their Edusave accounts. As for healthcare, the government has also set up a Medifund from which low-income families can tap to pay for their medical bills.[5]
In times of extreme economic hardship, the government has been quick to implement relief packages to ameliorate any adverse impacts of economic shocks on the lower-income households. In February 2008, for example, to help Singaporeans cope with the rising inflation, relief measures including Growth Dividends, enhanced Marriage and Parenthood measures, personal income tax rebates, and utility rebates were implemented as part of the Budget. In November the same year, in the aftermath of Lehman Brothers’ collapse, the Skills Programme for Upgrading and Resilience (SPUR) was introduced to ramp up training and at the same time to keep the workers stay employed. In February 2009, as the global financial crisis evolved into the Great Recession, a S$20.5 billion (8.2% of GDP) Resilience Package was introduced to cushion the impact of the worst economic contraction since Singapore’s independence. Even though many of the measures were for companies, the aim was to help workers stayed employed.[6]
All in all, therefore, the government has indeed been responsive to the grouses of the people. Special transfers by the government to the poorer segments of the society have increased in recent years and to finance such transfers, the constitution has been amended to unprecedentedly allow the government regard the returns from the investments of the country’s reserves as fiscal revenue. Despite all the government’s efforts, however, there are indications that discontent is still smouldering, not only from those structurally unemployed but also from those who have managed to hold on to a job. What they have on their wish list is a secured job with rising income, not just ad hoc relief measures when the time is hard. In that regard, the workers have little leverage against the employers given that the trade unions have relinquished their collective bargaining role since the 1980s.[7] Singapore’s MNC-driven growth model means that a large proportion of a company’s earnings is likely to be repatriated rather than recycled among the local population as wages. As a result of the workers’ lack of bargaining power, wages constitutes only 43% of Singapore’s GDP, compared to 58% in the US and 57% in Japan. Conversely, profits make up about 46% of Singapore’s GDP, extremely high compared to other developed economies.[8]
7.2 Inclusive Growth Underpinned by Rise in Productivity
To quell discontent over stagnating income, the government launched a new economic strategy through the Economic Strategies Committee (ESC) on February 1, 2010.[9] Among other things, the new strategy calls for a switch from the ‘growth at all costs’ to an ‘inclusive growth’ approach to ensure that weaker segments of the population would not be left behind. This would be achieved by a push to raise productivity from the 1% recorded over the last decade to 2 – 3% over the next ten years so that wages, in particular for the lower income segments, can rise in tandem. The aim is to raise the median income by an average of 2.8% a year or a total of one-third to S$3,100 by 2020.[10]
For the strategy to succeed, businesses must try to grow qualitatively by upgrading, not just by expansion using more low-cost unskilled foreign workers. To ‘persuade’ businesses to invest in better equipment in order to raise productivity, measures to increase foreign worker levies based on a tiered system were announced in February 2010. These measures would make it increasingly costly to employ many lower- and semi-skilled foreign workers. On its part, the government is committed to spending S$5.5 billion on productivity-related initiatives over the next five years.
Similar productivity movements were also launched in the 80s and 90s but policy measures implemented then were not ‘exploited’ fully because of a ready supply of low-cost foreign-labour. As such, there is no shortage of sceptics that the current renewed effort will peter out again especially when global demand improves. Their scepticism is based on the projection that to achieve a GDP growth rate of more than 6%, employment growth rate must exceed 4%.[11] With a population that is expanding at less than 2% annually, a substantial jump in productivity is needed to compensate for shortfall in number of workers. Given that discernible productivity improvements are not likely to materialize in the short term, there seems to be no alternative to importing more foreign workers. Hence, despite the official rhetoric, the number of foreign workers is likely to continue growing albeit at a slower rate than in the previous decade.
In spite of the reservations, however, internal and external conditions may be really different this time round to warrant optimism for the renewed impetus. During the 1980s, even with the influx of foreign workers, income was still growing for all segments of the workforce. Workers who lost their jobs then could easily find employment in other areas of the economy. Hence, few felt the pain from loss of jobs then. Fast forward two decades and Singapore’s external environments have fundamentally changed and become less favourable because of mounting external competition. For the workers, the motivation is not only the higher wages that come with the productivity improvement. If productivity continues to languish and industries lose competitiveness, companies may be forced to relocate and more people will lose their job. This time round, those unemployed will stay unemployed unless they acquire new skills and get re-deployed to new growth areas.
The upgrading process cannot be just a one-time affair. Policymakers need to nurture a culture of life-long learning in order to keep up with the incessant upgrading the economy has to undergo in the future. The competing regional economies are entering an investment-driven high-growth phase which Singapore already enjoyed in the past decades. They are upgrading their capabilities aggressively and will in time catch up in more industries. A case in point is the growing threat from China as a result of the emergence of sophisticated production networks due to agglomeration effects. A high proportion of Singapore’s exports to China comprised of upstream components to support downstream assembly operations in China. With the entire production network now gradually being localised in China, the scope for Singapore’s export has been significantly reduced. In addition, China has the advantage of a huge and relatively yet untapped consumer market which serves as a strong pull factor for attracting FDI. Hence, as MNCs rationalize their operations, relocation of operations out of Singapore is likely to continue in the future, contributing to more structural unemployment.
The stark message for Singapore workers, especially those in the low- and middle- income segments, is therefore that they need to increase their productivity to remain competitive or face a downgrade in their standards of living. Raising productivity to ensure that Singapore remains competitive is therefore not an option but an absolute necessity. The collapse of demand in the West due to the Great Recession is largely cyclical and hence not the root of the problem. Even if global demand fully recovers, the sobering truth is that certain jobs will not return to Singapore. [N.B. Read the article on Inclusive Growth for a more in-depth look at the issue.]
7.3 Re-evaluating Singapore Growth Strategy
Just as the Asian Financial Crisis enabled Singapore to see both problems and opportunities relating to its financial sector, the lull provided by the Great Recession also afforded Singapore the break to re-evaluate its growth strategy. This time round, the ESC, which had eight sub-committees[12] comprising representatives from the public and private sectors, was also tasked to review Singapore’s medium term economic strategies in five broad areas: seizing growth opportunities, strengthening corporate capabilities, growing human and knowledge capital, creating quality jobs and real wage growth for Singaporeans to foster inclusive growth, and optimising the use of scarce resources.[13]
In February 2010, the ESC released its reports outlining its recommendations to the government.[14] Besides the aforementioned strategy to grow output not only by expanding workforce but by increasingly workers’ productivity to foster inclusive growth, the report also calls for an economic restructuring and qualitative transformation of the Singapore economy based on six other strategies.
First, Singapore must continue to enhance its position as a global city as well as an Asia hub so that it can grow both high-value complex manufacturing and international services. The committee envisages that Singapore will eventually retain a globally competitive manufacturing sector at between 20% to 25% of the economy.
Second, Singapore needs to build a vibrant and diverse corporate ecosystem that comprises of a mix of large and small enterprises, be they local or foreign. In particular, Singapore must help to strengthen the capabilities of the local companies so that they can internationalize to become globally-competitive Singapore enterprises.
Third, Singapore must not only intensify efforts to build R&D capabilities, but should also seek to reap greater economic benefits from its R&D investments by emphasizing on commercialization of new ideas.
Fourth, in order that energy does not become a limiting barrier for a small and resource-constrained country like Singapore, the city-state must strive to become a smart energy economy or an economy that is resilient, sustainable, and innovative in its energy use.
Next, given that Singapore is also land-constraint, the economy should accelerate its shift towards higher value-added and more land-efficient activities.
Finally, to achieve all the above, Singapore must continue to attract foreign talent by making the city-state an endearing home with the best quality of life in Asia.[15]
Along with the seven strategies, many specific proposals were put forth by the various subcommittees. To illustrate, let’s take the need to shift to more land-efficient activities for example. In order to make better use of land and the transport system, it has been suggested that economic activities be decentralized across the island. Also, to achieve greater economies of scale in terms of land and operations, a feasibility study has been proposed to evaluate the possibility of constructing a consolidated port at Tuas (an area in the island’s south-western part where an industrial park is sited) in the long term. The freed-up port land at the existing Tanjong Pagar Port can then be re-developed as a new waterfront city. Finally, an even more radical idea is the development of underground space as a means to intensify land use. Specific plans to catalyze the fruition of this revolutionary vision include developing a subterranean land rights and valuation framework, and establishing a national geology office.
It is too early to tell at this point whether the strategy works. The switch to ‘inclusive growth’ is timely but may be perceived as mere rhetoric since concrete benefits to the general populace may not be discernible by the next election, which must be held by February 2012. Voters’ unhappiness with the inequality in income distribution may cause a backlash for the government at the ballot box. Without a viable opposition, the ruling party is certain to be returned with a majority but the level of support it receives in terms of percentage of vote will reveal the voters’ underlying sentiment. Given the dominance of the ruling party, even if a swing in vote occurs, its impact on the future direction of policymaking in Singapore is hard to tell, unless if the swing is by a substantial margin. Without a strong opposition, the motivation for engaging in populist welfarism to win vote is mitigated. Still, with the Gini coefficient set to rise further, there will be an inexorable increase in transfers to the poor even just to maintain the post-subsidy index at the current level.
More than ever, Singapore’s economic development is at a critical juncture where highly sought-after foreign talent plays an increasingly indispensable supplementary role in bringing policymakers’ vision of a vibrant global city to fruition. Changes in the external competitive environment also dictates that the economy speeds up on its upgrading and restructuring by importing more foreign talents to leverage on the world-class soft- and hard-infrastructures while the city-state still commands those advantages. But domestic discontent arising from dislocation caused by the changes demands that growth be inclusive in order for it to be sustainable. This problem of external motivation for change versus internal inertia to maintain status quo has long been a conundrum of globalization that no government has yet found a solution to. It remains to be seen whether the city-state’s two-track pro-poor but not anti-rich strategy supplemented by ad hoc compensatory measures can succeed in substantially lifting the earning of the low income amidst high economic growth. Until then, one can only say that, at best, income distribution in Singapore is technically not inequitable and economic growth is not anti-poor.
[1] Factories, for example, have difficulties recruiting Singaporeans to staff their night shifts without which the unit cost of production would be much higher.
[2] See Singapore Department of Statistics. (2006)
[3] Straits Times. “A Global, Vibrant Singapore.” December 31, 2009.
[4] The Total Defence concept encompasses the government’s efforts in protecting the Singaporean’s way of life through 5 pillars: military defence, civil defence, economic defence, social defence, and psychological defence. Economic defence is about achieving a better life for everyone. Social defence is about making people living in harmony looking out for one another. Hence, the unequal distribution of benefits, if unchecked, will inexorably negate government’s efforts in the building of economic and social defence.
[5] Straits Times. “No lack of help for low-wage workers.” March 5, 2010.
[6] One of the key features of the package, for example, was the $4.5 billion Jobs Credit Scheme, which involved giving cash grants to employers to subsidize part of their local wage bill.
[7] See Leggett. (2005A, 2005B).
[8] Straits Times. “Look beyond GDP for true measure of welfare.” July 21, 2010.
[9] See Economic Strategies Committee. (2010).
[10] Straits Times. “Goal 2020 timely and significant.” July 16, 2010
[11] Straits Times. “Shift to ‘quality’ growth a big change: Experts.” January 27, 2010.
[12] More information on the ESC and its various sub-committees is available at the website: http://www.esc.gov.sg.
[13] See IMF (2009)
[14] See Economic Strategies Committee. (2010).
[15] In a survey conducted by ECA International, Singapore has been voted to offer the best living environment for Asian expatriates. See Channel News Asia, “Singapore offers best living environment for Asian expats: Survey”. March 24, 2010.
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