Singapore's disappointing second-quarter growth of 2.1 per cent compared with the same period last year has raised concerns about the impact of economic restructuring. When compared with the last quarter, growth even dipped 0.8 per cent.
At the same time, productivity performance has been dismal.
After rising by 2.2 per cent in 2011, productivity dropped by 1.4 per cent in 2012 and another 0.2 per cent last year.
Government officials repeatedly emphasise that the productivity drive will take time to bear fruit. But the short-term effect of rising pay without productivity increases can only mean higher costs and prices. And this will have an impact on the cost of living and the viability of firms, encouraging some firms to leave the country.
The situation is reminiscent of that in the early 1980s, when wages were artificially raised in the hope that firms would be motivated to look for ways to increase productivity. During that period, Singapore also had an over-valued exchange rate because the Singapore dollar was closely tied to the overvalued US currency.
Recognising how the strong US dollar was damaging industry in Detroit, then President Ronald Reagan belatedly pressured Germany and Japan to revalue their currencies substantially at the Plaza Accord of September 1985. But that was too late to prevent the serious recession we experienced in 1985 and 1986.
According to the Bank of International Settlements, the real effective exchange rate of the Singapore dollar is higher today than it was in the 1980s.
An over-valued currency penalises the tradable sector and favours non-tradable ones.
It is therefore no surprise that asset markets here, especially real estate, reached bubble conditions.
The Monetary Authority of Singapore's (MAS) traditional defence of a strong Singapore dollar policy is built on balancing imported inflation against export competitiveness. The MAS believes a strong currency does not hurt manufacturing as the heavy reliance on imported components - which are cheaper when our currency is strong - helps hold down costs.
But this leaves service exports in the cold - and subject to the vagaries of a strong currency - because they are typically much less reliant on imported inputs. The negative effect of an over- valued currency on service exports like tourism and medical care was very evident in the aftermath of the Asian Currency Crisis of 1997 and 1998. We saw inbound tourism form East and South-east Asian countries dry up. Singapore's private hospitals and clinics were also adversely affected.
The MAS needs to modify its exchange rate policy in the light of Singapore's increasingly service-oriented economy, especially because costs are now much more wage driven.