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.

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.

This article was first published on August 2, 2014.
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