Economic Policy-Making in Singapore: Some Reflections

Economic Policy-Making in Singapore: Some Reflections Basant K. Kapur Department of Economics National University of Singapore

Issues • ‘Growthmanship’ (B) Domestic Demand Issues (C) Concern for Others, Social Cohesiveness (D) The Importance of ‘Passion’

(A) ‘Growthmanship’ Emphasis on high rates of GDP growth has been a hallmark of economic policy in Singapore since Independence. GDP growth can be achieved through a variety of positive means: capital accumulation, technological and skills upgrading, efficiency improvements, etc.

(A) ‘Growthmanship’, cont. Import of professional and skilled foreign talent at a reasonable pace is also beneficial - augments the economy’s talent pool. However, Singapore has also relied on large imports of unskilled and lower-skilled foreign labour, in pursuing GDP growth, and here the consequences are much more mixed.

(A) ‘Growthmanship’, cont. Such large inflows create a vicious circle: Their availability reduces employers’ incentives to upgrade their operations through further mechanization, automation, etc.; Resulting low productivity levels imply that employers can only afford to offer low wages, which act as a disincentive to Singaporeans to take up such jobs;

(A) ‘Growthmanship’, cont. Which in turn leads to continuing employer demands for inflows of foreign workers. In a 1994 speech, Dr Lee Boon Yang, then Minister for Defence and Minister for Labour, quoted illustratively from a 1989 CIDB study:

(A) ‘Growthmanship’, cont. "In Perth, the cost of the two major construction inputs are considerably higher than those in Singapore. The prices of basic building materials are, on the average, 60 per cent higher than Singapore's and all-in labour wages are 400 per cent to 500 per cent those in Singapore. However, the unit construction cost for luxury apartments, offices and hotels in Perth are only between five per cent and 11 per cent higher than the corresponding levels reported for Singapore."

(A) ‘Growthmanship’, cont. More recent examples can also be given, e.g. South Korean shipbuilding industry. Time horizon: need for gradual but sustained adjustment, which should have commenced earlier, but anyway can commence now. Intention should be not to eliminate low-skilled foreign labour inflow altogether, but to tighten it over time, e.g. through levy increases.

(A) ‘Growthmanship’, cont. Recent policy pronouncements are in my view a step in the correct direction. The ‘GDP Bonus’ scheme for civil servants may also usefully be modified. Consideration should, in my view, be given to replacing it by a composite criterion comprising:

(A) ‘Growthmanship’, cont. (a) GDP growth, (b) a broad-based measure of productivity growth of Singaporeans, e.g. growth rate of per capita indigenous GDP, and (c) a measure of the well-being of lower-paid Singaporeans, e.g. growth rate of the average householddisposableincome of the lowest 20% of Singaporeans.

(A) ‘Growthmanship’, cont. A composite criterion along these lines would serve to highlight more clearly some key priorities in policy-making.

(B) Domestic Demand Issues Last year, Prof Linda Lim observed: ‘It turns out that both China and Singapore have the world’s lowest shares of consump-tion in GDP — about 40%’. GDP may not be best deflator for Singapore, owing to high profits component in it, much accruing to foreign MNC’s.

(B) Domestic Demand Issues However, from 1986-87 to 1998-99, C/GDP ratio went down from about 0.46 to 0.39, even as wage share of GDP remained fairly constant, around 0.42. While low domestic demand has become an issue of policy concern in China, the same does not appear to have occurred in Singapore.

(B) Domestic Demand Issues, cont. One argument in favour of the status quo is that in recent years domestic consumption growth contributed only a small fraction to overall GDP growth. However, this does not imply that the former could not contribute more to the latter if the C/GDP ratio were higher.

(B) Domestic Demand Issues, cont. Another argument in favour of the status quo is that meeting domestic demand is mainly useful if the local firms that cater to such demand eventually branch out into exports, thus increasing Singapore’s earnings from the rest of the world. But meeting domestic demands is also an economically valuable activity in its own right.

(B) Domestic Demand Issues, cont. Singapore residents derive benefits from consuming an entire array of tradable, and nontradable, items, from more to less sophisticated ones – services of doctors, restaurants and hawker centres, barbers, etc. Domestic production cannot obviously meet all our needs, so trade is necessary, but such production is still valuable. In a market econ-omy, price generally reflects value to consumers closely.

(B) Domestic Demand Issues, cont. If one wishes to adopt a ‘quasi-mercantilist’ viewpoint – which is not necessary in my view – one could still argue that spending on nontradables diverts spending from tradables, helping to improve our trade balance. Growth standpoint: SME’s often first cater to the local market, and, after acquiring experience, expand overseas. E.g. Bread-Talk, Sakae Sushi, Charles & Keith, OSIM.

(B) Domestic Demand Issues, cont. At around 40%, Singapore’s C/GDP ratio is far below that of another small economy, Hong Kong, which is over 60%. If we could move closer to the HK figure, there would likely be larger scope for domestic enterprises to start up, grow, and expand into a wider range of markets. In some respects, thus, production for the home market and for exports are complements.

(B) Domestic Demand Issues, cont. As firms grow, they also tend to spend more on R&D, leading to new and better products, and lower production costs. Relevance of (private) property prices to C/GDP ratio (Abeysinghe, Choy, Gu). E.g., some S. Korean thinking currently (that property prices there are too high). Implications of 5-6 million population target for property prices here?

(C) Concern for Others, Social Cohesiveness Arguably, we also wish to become a society characterized by concern for others, and social cohesiveness – a ‘gracious society’, in the true sense of the term. Apart from its intrinsic social worth, a more humane society also commands greater loyalty and support from its citizens, and encourages them to sink roots here.

(C) Concern for Others, Social Cohesiveness Some selected issues, in this regard: (A) Healthcare issues: Is encouraging that MOH is now considering extending the Medishield coverage age beyond 80. In one area, however – subsidies for ARV-medication for HIV/AIDS victims – we come up glaringly short.

(C) Concern for Others, Social Cohesiveness ST reports in December last year are instructive. On Dec 1, Salma Khalik, Health Correspondent, wrote: ‘And unlike other major illnesses where there is at least one, sometimes as many as a dozen, medicines available to the poor at highly subsidised prices, there is no Government subsidy at all for the treatment of HIV here.’

(C) Concern for Others, Social Cohesiveness ‘Today, HIV is about the only major illness where patients do not enjoy any subsidies on medication.’ Then, in an article on Dec 6, she provided some good news: ‘People with..HIV, who have long complained about the cost of medi- ication here, are about to get some relief - the Government has decided to subsidise their medicines.’

(C) Concern for Others, Social Cohesiveness She continues, ‘Health Minister Khaw Boon Wan told The Straits Times he agreed with the view that HIV should be treated “like any chronic disease”. “The committee of experts will apply the same approach as they do when evaluating drugs for other diseases. We should not single out HIV for special treatment,” he said.’

(C) Concern for Others, Social Cohesiveness Unfortunately, since the announcement was made, no further action has been taken. Hopefully action will be taken soon.

(C) Concern for Others, Social Cohesiveness I turn next to another set of issues, inspired by recent observations by Professor Tommy Koh in two ST articles:

(C) Concern for Others, Social Cohesiveness ‘Unfortunately, that 'greed is good' culture [of Wall Street] has infected some Asian countries. Excessive pay for senior management, for example, has become fashionable in certain parts of Asia. This is not consistent with our communitarian values or our emphasis on team work and equity.’ (4 March 2009)

(C) Concern for Others, Social Cohesiveness ‘We seem to calculate everything in terms of money. We think that a person's worth is measured by the amount of money he or she makes. We have imitated one of the worst aspects of American capitalism, by paying our senior executives inflated salaries while, at the same time, stagnating the salaries of our middle and lower strata. As a result, Singapore has become a more unequal society than the United States.’ (19 Aug ’09)

(C) Concern for Others, Social Cohesiveness In their 1995 book, The Winner-Take-All Society, economists Robert Frank and Philip Cook argue that very high salaries at the top in various occupations – management, banking and finance, movie-acting, law, etc. – are largely due to (a) widening of markets, owing to technological advances that lower communications and transport costs, etc., and (b) open competition for top performers’ salaries. Changing social norms also play a role.

(C) Concern for Others, Social Cohesiveness They also argue that owing to negative externalities (each entrant into such competitions does not internalize the effect of his entry on others’ prospects of winning), entry into such occupations tends to be socially excessive, at the expense of entry into other, lesser-paid but also socially valuable occupations, such as engineering, the sciences, etc.

(C) Concern for Others, Social Cohesiveness A progressive income or expenditure tax system is thus in their view potentially efficiency-enhancing, in discouraging excess entry into such occupations. They observe: ‘In Japan and Germany, for example, CEOs earn much lower salaries and face much higher tax rates than do their American counterparts…And yet the companies they manage have provided much of America’s stiffest competition in recent years.’

(C) Concern for Others, Social Cohesiveness Some policies that Singapore might consider: (a) an increase in the progressivity of our tax system, which currently appears lower than the United States’; (b) Heightened incentives for students to pursue engineering and science degrees, e.g. through tuition subsidies (as also proposed by Frank and Cook).

(D) The Importance of ‘Passion’ During his visit to Singapore in 1999, Nobel-Prize-winning physicist Steven Chu pointed out, if I recollect correctly, that true excellence in research cannot be motivated by material incentives: there has to be an intrinsic passion for it. In the area of business, Professor Charles Handy was quoted in TheStraits Times of March 17 1999 as saying:

(D) The Importance of ‘Passion’ ‘Entrepreneurs have got to be passionate and totally committed to what they are doing. Now, I don’t mean passionate and committed to making money, because that’s just an outcome, but to what they’re doing – whether they’re crafting something beautiful, or making cameras, or starting an Internet business, or whatever’.

(D) The Importance of ‘Passion’ An excellent, academic, rationale for the importance of passion may be found in another book by Robert Frank, Passions within Reason: The Strategic Role of the Emotions, 1988. What about the situation in Singapore?

(D) The Importance of ‘Passion’ One writer, Phillip Holden, referred to ‘the Singapore’s developmental state’s focus on material prosperity, or “moneytheism”’ – a description which appears largely apt even today. In characterizing the ‘special and unique Lee Kuan Yew model of governance for Singapore’, writer Catherine Lim commented,

(D) The Importance of ‘Passion’ ‘Its goal—total economic success’, and she also makes reference to ‘a culture so deeply attached to material wealth’ (2008). Highergoals, such as self-actualization, self- realization, seeking to attain one’s fullest creative potential, etc., do not appear to figure high in our system’s priorities. In keeping with our materialistic motivations,

(D) The Importance of ‘Passion’ our approach to social and economic engineering is largely of the ‘carrot-and-stick’ variety – which reinforces our materialism. Can passion, creativity, imagination, the desire to excel for its own sake, and to help others excel, flourish in such an environment?

(D) The Importance of ‘Passion’ Is it any wonder that, e.g., school-teachers and principals have in the past been motivated by examination-rankings-based performance criteria, with the severe effects it has had on the education of our children? As an example, consider ST journalist’s Andy Ho’s column of June 12 2008: ‘There is an outcry about punitively difficult “sure fail” exams that teachers set for students prior to the national PSLE, O levels and A levels…

(D) The Importance of ‘Passion’ ‘Is there not something dishonest in doing so? After all, national exams are not pitched at the same levels of difficulty…The authentic teacher..would not ever be a party to, or even consider setting, 'sure fail' exams. Exploitative tactics like these signal inauthenticity in the system. What teachers need to be first and foremost is to be real.’

(D) The Importance of ‘Passion’ Theabove leads naturally to the most important question of all – how can passion be nurtured and fostered? Some tentative thoughts : In my view, ‘culture’ in a broad sense, inclusive of religion and spirituality, has a key role to play – it sensitizes man to the nonmaterial dimensions of human existence, thus rendering him authentically human. ‘Man does not live by bread alone.’

(D) The Importance of ‘Passion’ Consideration should, I believe, be given to the introduction of courses on ‘Comparative Cultures’ in schools. Highlighting the commonalities across the world’s great cultures – while recognizing that differences remain - will foster tolerance, greater understanding, and non-exclusivism. It will also develop students’ awareness and appreciation of the aesthetic and other non-

(D) The Importance of ‘Passion’ material dimensions of the human experience, which could then foster their interests in other fields as well, for their own sake – i.e., stimulate their passion. Those who are metaphysically inclined might wish to note the following observation, which various spiritual traditions subscribe to: ‘The beauty that can be seen in all of creation is merely a reflection of God’s artistic mastery.’

(D) The Importance of ‘Passion’ This sense of beauty – which can be in art, physics, economics, engineering, etc. – is an enduring source of inspiration and passion. Ironically, effort – in any field – motivated by an enduring passion could well lead to more durable, sustained, material achievements, as Frank has argued, even though this cannot be the proximate motivation.

Economic Policy-Making in Singapore: Some Reflections