Tuesday, March 26, 2013

The Singapore romancing of quality growth

The Singapore romancing of quality growth


In recent years the buzz word from the Government has been “inclusive growth”. In Budget 2013 this has been substituted with “quality growth”.

25 Mar 2013

In recent years the buzz word from the Government has been “inclusive growth”. In Budget 2013 this has been substituted with “quality growth”.

Deputy Prime Minister Tharman Shanmugaratnam has clarified that quality growth means growth that benefits workers through better jobs and higher wages. He also spoke of an inclusive society which would be, in part, achieved through redistribution.

We can impute that quality growth is also growth with a social purpose. In this sense, ‘’inclusive growth’’ can be treated as synonymous with quality growth.

Given that Budget 2013 envisages a multi-year commitment to wooing quality growth, it is useful to explore the concept more thoroughly. This is the object of a three-part series of articles.

Innovations in Budget, such as a three-year transition programme and the Wage Credit Scheme for the economy, are being introduced as affirmation of the Government’s commitment to boosting productivity and to securing higher wages for Singaporean workers.

These come on top of earlier largesse such as Productivity and Innovation Credit, the National Productivity Fund and the enhanced Workfare policy. This link between productivity improvements and rising wages is the central thesis of the economic thinking in recent Budgets — and as it is justification for the public expenditure of many billions in incentives from the public purse, it is important to review how we got to this point.


The Singapore economy suffered a series of economic shocks in the first half of the last decade. We began the new century struggling to get over the Asian Dollar Crisis when in 2001, we were buffeted by the ripple effects of the Dot Com bust and then the impact of SARS in 2003.

By 2005, as the term of government neared its conclusion, it was clear that the preceding five years were effectively wasted years in terms of economic and wage performance.

At the time, global macroeconomic indicators began to show a positive turn suggestive of growth possibilities for us. We embarked on aggressive labour force augmentation to feed those possibilities.

However, undetected by most, including the policy makers, the supply-side tactic to take advantage of demand-side growth opportunities quickly turned into the demand side-strategy generating supply-side growth, as labour force addition — rather than productivity — began to be the primary driver of Gross Domestic Product (GDP) performance.

This supply-side growth created overheating effects in housing and transport and removed the impetus for capital investments in productivity, in favour of cheap labour injections.

It is arguable that the wage stagnation at the lower end and marginal improvements in the middle of the income ladder were a by-product of this. Most Singaporean workers therefore did not benefit much from the growth.

[I have to re-read the last three paragraphs several times. I think I understand what he means. It sounds like it should be right. But I'm still struggling. What I think he means is, that we tried to ride the Tiger, but the Tiger ended up taking us for a ride.]

The data shown in the table shows that almost all the GDP growth over 2005 to 2009 — the period prior to the Government committing to moderation in foreign labour intake — was a function of labour force change. Of this, the greater proportion, indeed almost all, came from foreign supply.

The data is admittedly cloudy because the Government was pursuing an aggressive programme to absorb new citizens. Citizens and permanent residents (PRs) together form the “residents” of the labour force. Hence, if it were possible to strip out the additions to the PR pool and allocate them as foreign labour — which they functionally were, being foreign-supplied injects into the labour force — we should logically expect to see that the foreign labour force change was even higher.

On reflection it is not hard to argue that this growth model came at longer term costs and negative externalities which outweigh the short term economic benefits. This is a reflection of search for growth which, however well-intentioned, did not think ahead to side effects nor consider the citizenry’s sentiments.

It was therefore heedless but also headless, because it was not calibrated well as the Government itself acknowledged; and tailless, because the benefits did not fully trickle down to most Singaporean workers.


Businesses have historically received favourable attention from the “pro-business” stance of the Government. Since the global financial crisis, this has been taken to a whole new level.

The Government has tried to wean businesses of an overreliance on labour by enhancing levies and changing the employment policies on foreign workers. It is doing so with the goal of getting the economy to be more productive. While using the price signal has imposed a cost burden on businesses, the Government has been generous with “flow-back” to encourage productivity improvements

In the 2009 Budget, businesses have benefited from the Jobs Credit Scheme, the Skills Programme for Upgrading and Resilience (SPUR) (together estimated at S$4.9 billion), cash-flow assistance (mostly tax concessions, S$2.6 billion), the Productivity and Innovation Credit, National Productivity Fund (S$2 billion) and a myriad targeted grants and schemes from SPRING Singapore.

All of these are essentially special transfers from the public account to firms in the form of cash. This reduces their costs and facilitates their “restructuring” and “productivity” and boosts their innovation efforts.

Yet, as we have heard in the Budget 2013 speech, productivity performance has been negligible in the years since 2009, save for 2010 which was due to the GDP bounce off a low base in combination with labour force reductions in 2009.


The economic plan as conceived by the 2013 Budget is good, but it can be made even better.

As with the Jobs Credit Scheme, the new Wage Credit Scheme has good intentions but comes at the cost of dead weight and the risk of pushing on a string. This risk can be mitigated only if the Government makes clear that there will be no extensions and further transition assistance beyond the three-year plan — and sticks to this condition.

The costs are unavoidable and thus, we have to focus on justifying it on the basis on results.

The declared object of the three- year transition plan is to buy time while entrenching a deadline for firms to become productive. But in aggregate terms it is, correctly, designed to force a circumstance where scarce resources of land, capital and, most emphatically, labour are shifted to productive and higher value-added activities. This higher goal makes sense, but we should push our policy thinking even further.

The Government continues, year after year, to provide financial and non-financial assistance to small and medium enterprises (SMEs). We must be mindful that micro-economic level intervention does not inadvertently impede the macro-economic level goal of restructuring.

We should permit consolidation to occur in the SME sector as part and parcel of achieving the necessary economy of scale efficiencies and leaning-out of processes, thereby leading to productivity gains at the firm and sector levels. The Government should be mindful not to permit well-intentioned intervention by sector champions within its agencies to inadvertently impede competition from weeding out weak-performing SMEs. We should permit the market to find its way.


At the economy level, we should ask fundamental questions about the relative importance of value-added versus value-creating. Both are needed but while the former can help us keep and improve existing jobs, the latter helps create whole new ones.

Value-added provides the difference in input and output that creates surplus value in the form of profits and wages. Value-added is about firm level activities in the form of more efficient processes and productive use factor inputs.

Value creation is about ideas and knowledge. It is about the invention of new ways of doing things or new products. Value creation is the best route to GDP growth with momentum despite the limits of factor input. Value creation uses the vehicles of innovation and entrepreneurship.

To underpin this, we should make a policy shift from supporting SMEs to nourishing ISEs — Ideas, Start-Ups and Entrepreneurs.

Ideas are the fuel, start-ups are the vehicles and entrepreneurs the pilots of value-creation. To give the emerging generations of highly educated and aspirational Singaporean workers jobs which give them both fulfilment and income, we need to create the underlying ideas and vehicles.

We should think of ways to create a strong presence of venture capitalists, to encourage risk-taking through entrepreneurship and to encourage crowding in of the innovation and entrepreneurship space.

The recent measures announced by the Ministry of Trade and Industry (MTI) are good steps in this direction. But the process of creating ISEs requires more than simple injections of capital.


If we can re-base the economy on value-added and value-creating activities, we can be certain that the goal of good jobs and higher wages will be secured. Our economic planning — head-led — will thus be serving a clear purpose — heedful.

But we also need to ensure that the benefits from this restructuring are shared with greater equity between firms and labour.

The MTI has asserted that wage share of GDP has gone up from an average of 41.8 per cent in the 1980s to an average of 42.5 per cent in 2000-2009. This is no cause for celebration. In most advanced economies, the wage share of GDP is greater than the share attributed to firms — often significantly so.

For “quality” growth to also be “inclusive”, more steps will be required to ensure that the “tail” of growth is heavy, with an equitable share of GDP flowing to Singaporean workers in terms of higher wages.

When we have achieved this, the economic romancing of quality growth will not only be completed but be requited with renewed political faith by Singaporean workers in the Government.


Devadas Krishnadas, a social and political commentator, is the director of a foresight consultancy. This is the first of a three-part series of commentaries on quality growth.

Next: Shift all gears, not just some

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