Tuesday, May 03, 2011

The New Singapore Economy - Part I

One of the Powerhouse Opposition candidate Mr Tan Jee Say wrote a comprehensive paper to revamp Singapore's economy recently. I had the opportunity to read it in full and I must admit it's IMPRESSIVE. You have to give it to him (and the Govt training that he went through). After all that's the quality we would expect from a former high ranking civil servant and PPS (Principal Private Secretary) for the top officials.

Here is my unabashed point form summary that really doesn't do justice to the 45 page report. I urge readers who are free to read it in full. It's available on the onlinecitizen website. Here are the points:

1. Mr Tan Jee Say thinks that Singapore's economy should move away from manufacturing as this industry takes up too much land, labour and resources and Singapore is in short of all three elements. Manufacturing also adds volatility to our business cycle as it relies on global exports which is dependent on fast-changing consumer demand. In today's knowledge based economy, Singapore's reliance on manufacturing does not make sense.

2. Partly due to our big manufacturing industry (and also other reasons), the Singapore Govt had to rely too much on cheap foreign labour to generate GDP growth. This resulted in economic benefits trickling down to foreigners rather than the bottom 20%-30% of the population, causing their income to stagnate or even fall.

3. Singapore's future lies in the service industry but the Govt went into the wrong kind of services by building casinos. The emphasis should be on education, healthcare and creative industries.

4. Cost inflation in Singapore is largely driven by the rise of non-tradable goods and services (55%). While import prices accounted for the rest (45%). This means that costs like labour, fees and perhaps most importantly rental accounted for a significant portion of cost inflation in Singapore.

5. He proposed a $60bn package to address various needs including a restructuring of the manufacturing industry, promoting education, healthcare and creative industries, improving neighbourhoods and quality of life and a reduction in various fees that has added to cost inflation.

The paper also highlighted economic irregularities amongst various issues that really challenges some of our basic assumptions in Singapore. At least to me, it was a totally worthwhile read that was not only informative but also highly educational on economics, policies and moral issues.

Just as an example: he mentioned that the Sg Govt usually resort to price-mechanism to control demand such as in the case of ERP for driving and Foreign Work Levy in the case of importing foreign labour. However there are flaws with price-mechanism bcos the crux of the issue sometimes lies in supply or demand dislocations and using price does not solve the issue but simply add money to Govt coffers.

Take the case of ERP. The real problem has to do with too many cars and not enough roads. In 10 years the car population increased by 20-30% while the length of roads stayed the same. So is it a surprise that raising ERP doesn't work but just add money to the Govt coffers?

In the case of Foreign Work Levy, raising the levy benefits neither the employer nor the employee. Instead it benefits the Govt. So obviously, the Govt would use it in the first instance to restrict employers from recruiting too many foreigners. However this does not solve the fundamental problem: manufacturing and some industries like construction, low-end services are not suitable for Singapore's knowledge based economy. Hence we need to import foreigners to fill the gap.

On moral grounds, the paper also highlighted that is was not just economic no.s that matter, Govt should implement measures that are also morally right.

So, casinos was a major setback. While the Govt tried to promote a different image via the concept of Integrated Resorts, the truth of the matter is casinos come with social costs/issues that are very difficult to avoid.

Minimum wage, besides having a strong economic argument, is also morally right. If we ask for the service and effort of others, we should pay them what is an acceptable minimum amount in our society. When foreigners come, this concept is totally lost and the lower income households bear the full brunt.

Next post, we look at some Govt rebuttals!
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