21 Jan 2013

Reducing Singapore’s dependence on foreigners won’t affect living standards if productivity and wages rise. It may even help the country’s fertility rate. Linda Lim writes.

Reducing Singapore’s dependence on foreigners won’t affect living standards if productivity and wages rise. It may even help the country’s fertility rate. Linda Lim writes.

Can slower growth lead to a stronger, more cohesive society?

In debating Singapore’s population policy, some have assumed that fewer foreign workers and lower immigration levels would hurt economic growth and businesses and by extension, Singaporeans’ way of life as well. However, other affluent economies with low fertility, ageing demographics and small populations have managed to achieve sustained if modest improvements in living standards without importing large numbers of foreign labour and talent. Singapore too can adapt with tried and tested technological and business process innovations.

Higher productivity can substitute for more workers in achieving a particular gross domestic product growth rate. Lower aggregate growth is not just inevitable for a mature economy, given diminishing marginal returns to added inputs of labour and capital, but may even be desirable, when real income and total well-being are taken into account (reduced congestion, environmental degradation, income inequality, social unease). It may even have the added benefit of encouraging couples to have children, mitigating concerns about the falling fertility rate in Singapore.

Benefits of Lower Growth

Just as higher growth has repercussions, so does a lower growth trajectory.

Economically sustainable activities that may generate lower growth but employ a higher ratio of Singaporeans would also contribute to higher wage and domestic shares of GDP. Put another way, a higher proportion of a given dollar of GDP would accrue to Singaporeans, so local living standards can be maintained or increased with slower growth. Policy instruments to achieve this could include: investment incentives to hire and train Singaporeans, greater stringency in handing out work permits and employment passes by ensuring there are no qualified Singaporeans for the jobs as is standard practice in some other countries.

Higher wages would encourage employers to improve productivity and attract more Singaporeans into particular jobs, giving both an incentive to invest in upgraded skills (since there will be a higher income payoff).

One way to reduce the chronic excess demand for labour that Singapore has long suffered (despite or because of a liberal immigration policy) occurs when some businesses exit the country. This is a normal process of adjustment to shifting comparative and competitive advantage.

It’s crucial to smooth such adjustments and minimise the costs to both employers and workers by committing to a clear, long-term labour market policy not subject to short-term business or electoral cycles. Such a policy should not be bluntly applied but nuanced and gradual, according to the circumstances of individual sectors and businesses.

Economic planning agencies need to be involved in calibrating the demand side of the labour market. For example, they shouldn’t provide incentives to businesses whose highly specific manpower needs require a heavy reliance on imported labour and talent, with few jobs for native Singaporeans, or favour highly land-intensive businesses.

Choices and trade-offs must be made—not between growth and foreign labour dependence, but between different sectors contributing to growth.

Benefits of “Failure”

One could anticipate that businesses that cannot or would not pay higher wages would fail, easing the manpower shortages that fuel inflation and increasing supply of skilled workers for those businesses that remain. A reduction in demand would alleviate any labour shortage.

One often missed opportunity in the debate is the concept of higher operating costs from rentals –fewer foreign workers reduces pressures on the housing market and on commercial rents to the benefit of businesses, which may raise wages as well. By the same token, reduced foreign capital inflows to purchase property, and other investments, would mitigate asset inflation and currency appreciation, thus helping to maintain cost competitiveness.

It is a mistake to imagine that higher wages with higher productivity and moderating rents necessarily mean higher costs. But if they do, these are costs Singapore’s consumers will have to pay. As consumers are also workers, their real incomes may increase with higher salaries, lower rents and mortgage payments. If those enjoying higher wages are Singaporeans (rather than foreigners with higher savings rates and remittance outflows), the multiplier impact of their local spending will be greater – their higher costs are other Singaporeans’ higher income, most of which is spent in Singapore.

Mindset Shift

Many high-income economies have chosen this model of raising productivity. However, emulating their market-derived solutions requires mindset and values shifts among Singaporeans. Consider three sectors in Singapore that are labour-intensive, and usually considered low-wage, low-skilled and low-productivity jobs shunned by citizens.

First, the construction industry: in no other high-income country is this associated almost exclusively with foreign labour from neighbouring countries. In the US, this is a high-wage, high-skill, capital-intensive industry employing mostly unionised native workers, with high safety standards, sophisticated equipment and processes. Construction workers earn at least twice the median national wage in the US state I live in; their hourly wage is probably three times higher. Some Singaporeans would be willing to work in this sector if adequately compensated, while construction firms would employ them at high wages if productivity were sufficiently high.

Second is the food and beverage industry. In even high-immigrant big cities and on the coasts of the US, most restaurant workers are Americans. They include students or mature individuals (mothers, retirees) working part-time as well as seasoned professionals for whom this is a full-time, long-term career. People skills such as customer service and professional skills involving knowledge of the menu and wine list are required and rewarded by tips. There is a strong monetary incentive to develop skills and even a personal brand. In the kitchen, much food preparation has been automated and outsourced to specialist food services.

In Singapore, the use of temporary foreign workers and the standardised service charge has repressed wages and upward mobility, thus discouraging the participation of Singaporeans in this sector.

Third is the domestic service industry of household help, care for children, the elderly and disabled. This is a heterogeneous sector, but nowhere in the rich world is the dominant mode of operation that of the individual maid bound to a single individual or household. Rather, professional services of house maintenance, cleaning, food preparation and delivery, child and elder care and transport are the norm, compensated at hourly rates many times the minimum wage. Many self-employed workers in this sector simultaneously serve multiple clients, some for many years at a stretch or to work part-time, while private enterprises employing such workers provide a range of customised services. Many offering child and elder-care services are personally dedicated to helping others, or are training for careers in teaching or nursing.

Foreign workers in both this sector and F&B are usually new long-term immigrants, not temporary guest workers, so integration into the majority society is only a matter of time.

In all three examples, much higher wages would both attract more workers and encourage investments in higher productivity methods. It would require a mindset shift regarding the social status and value collectively ascribed to such occupations.

In the US, social barriers are highly permeable with respect for hard work, enterprise and professionalism even in “blue collar” or manual service occupations, some of which pay better than many “white collar” jobs. A social egalitarian ethic in Europe, and national group solidarity in Japan, both regions with limited income inequality, fulfill the same role. In contrast, the Singapore model favours academic credentials and professional achievement.

A sustainable low-growth model is not unattainable but is hampered by the availability of cheap and low-skilled labour as an alternative fall back that discourages businesses from innovation. Innovations could be accelerated by temporary public subsidies that would not cost more than the investments in the housing and transport infrastructure required to accommodate a larger population.

The situation at the higher end of the labour market is more complex, given the global or regional roles many companies fulfill from their Singapore base and the geographically mobile talent that they may require.

Towards Greater Cohesion

Nonetheless, the bottom line is that Singapore can survive economically, even prosper, without further large increases in foreign labour and immigration. A reduction in both will also deliver compensating benefits, such as lower housing costs, higher domestic consumption, lower income inequality and a less congested, more environmentally friendly city whose residents may even be willing to have more children. Given this outcome, policy-makers can craft a message that persuades businesses and the governed alike to adjust expectations and adapt to, and gain from, slower labour growth.

The concurrent debate about Singapore’s population policy also provides a timely opportunity to reconsider how different pieces of our economic growth model fit—or do not fit—together.

Asset Appreciation Risk

GDP (output) growth in any country comes from either or both increases in inputs (primarily land, labour and capital) or the productivity of those inputs. As noted first in Lee Tsao Yuan’s 1982 Harvard PhD economics dissertation, and continuing to the present day, Singapore’s GDP growth has depended more on input than on productivity increases, as reflected in the high dependence on foreign labour.

This has had the unintended (but predictable) consequence of discouraging increased labour productivity.

Employers could increase output more readily and cheaply by recruiting foreign workers, particularly from lower-income countries, than by investing in capital-labour substitution and upgrading the skills of the domestic labour force. This was and is an entirely rational decision for profit-maximising private enterprises.

But increasing output by increasing inputs eventually runs into the problem of diminishing marginal returns.

In Singapore’s case, this is because the addition of more and more people to an essentially fixed and extremely scarce complementary resource, namely land, inevitably raises other costs. These include rising housing and commercial rental costs, and congestion costs especially in transportation. Moreover, both higher housing costs and lengthening commute times effectively lower the real wage of workers (because it now takes them 10 or 11 hours to earn an 8-hour daily wage).

In a closed labour market, the rising cost of living eventually translates into higher nominal wages. But in an open labour market like Singapore’s, wage increases held down by the increased supply of foreign labour discourages the substitution of capital, higher technology and sophisticated management processes, for labour.

This is why the policy of tightening foreign labour supply and increasing labour productivity is necessary.

Policy Consequences

Given Singapore’s extreme land scarcity, reliance on foreign labour and immigration has another unintended consequence. It contributes marginally to the low fertility rate and emigration of native Singaporeans, and to labour force participation rates that are lower than they might be for certain demographics.

These are, for example, mothers of young children, and professionals and skilled workers more than 50 years of age who in other developed countries would be at the pinnacle of their careers, but in Singapore are too often sidelined in favour of cheaper (or more globally accomplished) imported talent.

High housing costs reduce fertility by delaying the age of marriage since young couples work longer to afford their own home. Also, long commutes on congested public transportation reduce time for social interaction and family formation, affecting the transport of children for childcare and schooling.

The costs of child-raising are high, including the cost of hired help which also increases population density, including in the ever-shrinking space of home. Competition with foreigners in school and the job market also increases the stress and expense of child-raising.

16-GIA-37-28Credit: AFP/Getty Images

Brain Drain?

One unintended consequence of the current economic model would be to prompt young professional couples or eligible single to consider emigration to less congested or competitive countries as they cannot envisage replicating their parents’ standard of living.

The feeling of being treated as a second-class citizen and being crowded out by foreigners, adds to the loss of physical markers of “home”—buildings, land, green and wild areas which in every country constitute part of the native’s national patrimony and identity—in discouraging the sojourner’s return to be a “stranger in a strange land”.

The over-representation of foreigners or immigrants in the leadership and even middle ranks of many organisations also suggests that a “glass ceiling” exists for the locally-born, such that upward career mobility may be more limited than in a larger country.

From a purely GDP growth input perspective, it may not matter if emigrating or low-reproducing native Singaporeans are readily replaced in the labour market by immigrants and new citizens. But particularly at the high end of the skill ladder, among the globally-mobile talent Singapore wishes to attract, many of the same “push factors” operate to discourage a permanent stay in Singapore—from the cost of living to quality of life—reinforced by lack of the bond of a shared collective national identity.

They face the same pressures that imply that their birth rates will also fall over time for the same reasons this has happened with native Singaporeans.

Land and people together constitute a nation. Residents – citizens, immigrants and temporary workers – would be better off if our population policy takes a more comprehensive view of both economic growth and social integration in this small but precious piece of land. The challenges of our time should not be seen as obstacles but an opportunity for policy-makers to shine as they reshape the economic, social and human landscape of Singapore.

Linda Lim is professor of strategy at the Stephen M. Ross School of Business at the University of Michigan in the United States. These articles are edited with her permission; her views have been expressed in other forms in the Straits Times and Yahoo news.