26 Mar 2012
Topics Singapore

Developments in the past decade bear witness to how Singapore’s connection to the global economy has not only produced an economic miracle but also brought keener competition both at home and abroad. Much attention has been paid to the widening income divide, structural unemployment and the necessity of retraining low-skilled workers. Some panelists at the Singapore Perspectives 2012 held by the Institute of Policy Studies looked at challenges ahead, and proposed some directions.

How the economic pie is distributed

Professor Paul Cheung, Director of the United Nations Statistics Division, provided a view of income distribution in Singapore between 2000 and 2010, to show how economic inequalities had evolved. While Singapore’s economic growth had been impressive, employee compensation as a share of gross domestic product (GDP) had been persistently lower that other developed economies such as the UK and the US, where employee compensation was consistently above 50 per cent of GDP. This, he said, could be attributed to the lower educational profile of Singapore’s resident workforce, due to an influx of lower-educated foreigners in low-paying jobs. He argued that while a reliance on foreigners had helped Singaporean companies to accrue significant profits, it would be a challenge to reach the requisite productivity growth necessary to improve the overall wage share.

Worryingly, all three speakers drew attention to the startling fact that “productivity had disappeared” in Singapore’s boom years from 2005 to 2010. The fruits of growth had also not been equally distributed. Prof. Cheung observed that only those in Singapore’s top 20 per cent had seen their share of total income rise between 2000 and 2010, with “tremendous rewards going to successful entrepreneurs and innovators”. Everyone else had to contend with a smaller share of the economic pie. It was also becoming more difficult for those in the lower to middle income groups to achieve income mobility.

The changing face of vulnerable groups

The speakers pointed out that the most vulnerable group in Singapore’s economy were families in the lowest-earning 10 per cent, whose household incomes had declined over the decade. Associate Professor Hui Weng Tat, a labour economist at the Lee Kuan Yew School, estimated that the real median wages of the top 20 per cent of employed residents rose 27 per cent while those in the lowest 20 per cent suffered a decline of about 8 per cent between 1997 and 2010. Speakers agreed that the government’s liberal immigration policies had the effect of pushing wages lower. Between 1998 and 2010, foreigners accounted for 50 per cent of the increase in employment. Prof. Cheung said low-wage workers were “struggling to find a foothold in a post-industrialised economy in a globalised world”. Such families were “running on empty”, as they faced rising prices on diminishing incomes, he said. This was despite a higher percentage of lower income families now surviving on dual incomes compared to ten years ago.

Such trends showed the increasing challenges to income mobility, said Prof. Cheung, and were worrying for the generation aged 30 to 39 years struggling to establish careers. The demographic profile shows 43 per cent had tertiary education compared to only 19 per cent of the same age cohort in 2000. This “new competitive landscape” was further accentuated by increasing competition from foreigners and permanent residents (PRs), given the dramatic increase in the percentage of PRs in the same age group. In 2010, one out of three residents was a PR. Even highly educated professionals might face anxiety about any “fair chance” not only to move up the income ladder but also to give their children a similar level of inter-generational mobility their generation had received. Given such challenges, Prof. Cheung said that the government should pay heed to highly educated younger Singaporeans, now that education was no longer a sure route to financial stability.

Changing face of unemployment

Examining unemployment trends over the last two decades, Prof. Hui noted a rising share of those with diplomas or degrees among the unemployed and a rising share of professionals, managers, executives and technicians (PMETs) among retrenched workers. The share of older workers among the unemployed, especially those aged 50 years and above, had also increased in the last decade, with consistently low re-employment rates among the retrenched.

This increasing incidence of displacement among the highly educated and older workers amid an unpredictable global economy had implications for retirement adequacy, Prof. Hui said. Savings in the Central Provident Fund (CPF), the basis of retirement funding, are largely dependent on favourable employment situations and rising real wages. A healthy monthly retirement income needs to meet twothirds of their last drawn pay, he said. Prof. Hui simulated the accumulation of CPF savings by workers in three different educational groups, based on median wages, existing CPF contribution rates and patterns of wage growth. Based on his projections, the existing CPF system was inadequate for those earning the median wage. On CPF savings alone at existing contribution rates, workers with post-secondary education and above would fall short of retirement adequacy most, and could expect to live on much less than two-thirds of their last drawn pay.

…education was no longer a sure route to financial stability.

Threats to retirement adequacy

Prof. Hui said that policies to aid retirement adequacy could include a combination of increasing CPF salary ceilings, CPF contribution rates and rates of return on CPF balances, as well as sustained wage growth. In assessing policy options however, two existing “threats” to retirement adequacy for Singaporeans must be considered: first, the increasing incidence of displacement among older workers who may face one or even two episodes of unemployment, and second, property price escalation, given how much Singaporeans draw from their CPF accounts for a housing purchase. To deal with this second threat, Prof. Hui advocated the need for the government to “emphatically contain, and if necessary deflate” public housing prices for long-term sustainability, and move away from the mindset of encouraging property as investment to one of consumption. He said that a “strategic review of the longer term impact of policies on property prices and the future welfare of residents” would be necessary.

“New growth model”

Dr. Chua Hak Bin, Director of Global Research at Bank of America Merrill Lynch, said Singapore’s “new growth model” seemed to include policies aimed at shaping economic growth to more inclusively benefit those in the lower to middle income groups. While this “transition” model was still evolving, certain defining characteristics had come into greater clarity, especially after the May 2011 general election. These included a shift from “population-led” growth to a greater emphasis on productivity growth, through initiatives that rewarded companies’ investments into technology; and “segmented policies” which differentiated the treatment of Singaporeans, PRs and foreigners in areas of employment, housing and healthcare.

The latter included a January 2012 announcement to raise stamp duties on purchases of private residential properties, hitting foreigners hardest, as the government sought to address the increasing numbers of active foreign property investors. This, he said, was a significant policy shift marking the end of Singapore being technically free from capital controls, after having “prided itself on openness” for so long. Dr. Chua believed that this “sea change” in policy direction—with its strong productivity push and tighter immigration— was “here to stay”. In a move that surprised many, the government had announced after the election that higher foreign worker levies, first introduced in the 2011 Budget, would be extended to 2014.

Limits to inclusive growth in a new economy

However, while the goal of “inclusive growth” was evident, with transfer schemes to assist low income families, more measures would be necessary to help them with the income gap still large, Dr. Chua said. Economic growth was likely to be much lower than in previous years, while rising prices in healthcare, transport and housing raised inflationary pressures.

At the same time, he observed the changing nature of Singapore’s economy, with the manufacturing sector, once an essential “pillar of growth” now “bearing the brunt of economic restructuring pains”, having declined from 26 per cent of GDP in 2001 to 23 per cent in 2010. Dr. Chua expected this “hollowing out” to continue with manufacturing dwindling further to around 15–20 per cent of GDP, amid hiring uncertainties and rising costs. In this environment, Singapore’s ability to solve its “productivity puzzle” also remained uncertain. With lower growth anticipated, tax revenues would decline and limit the government’s fiscal flexibility, as well as affect policies aimed at promoting inclusive growth in the future, he said.

Forging “a good society”

The debate drew a consensus that while some level of income inequality was inevitable in any society, there was no “ideal state” of inequality or income distribution. Nonetheless, it behooved the government to ensure that lower-income groups are able to sustain a minimum standard of living and enjoy a “fair chance” at mobility, the speakers reiterated. One participant suggested that a difficult challenge has evolved around the fact that different values had emerged to create some tension among Singaporeans: some were more accepting of widening inequality and others found it “immoral” or “shocking”. Speakers agreed that a focus on market fundamentals and economic incentives has dominated policy-making discourses to the exclusion of considering how the right social norms could be shaped.

At this stage of Singapore’s economic development, it would be important to re-evaluate “what kind of good society we want to be in the next ten years”, to formulate policy decisions that may necessarily entail a tradeoff between efficiency and equality, suggested one participant. It was pointed out that just because “Singapore’s good years are over doesn’t mean good society cannot be created”.

Rachel Hui () and Sarjune Ibrahim S/O Sitheek (sarjune.ibrahim@ nus.edu.sg) are Research Assistants at the Institute of Policy Studies.

Topics Singapore