Business and Economics Growth Related Questions

Singapore's Rising Income Inequality and a Strategy to Address It Author(s): Tan Meng Wah Source: ASEAN Economic Bulletin, Vol. 29, No. 2 (August 2012), pp. 128-145 Published by: ISEAS - Yusof Ishak Institute Stable URL: https://www.jstor.org/stable/43184870 Accessed: 27-01-2021 04:05 UTC

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ASEAN Economic Bulletin Vol. 29, No. 2 (2012), pp. 128-45 ISSN 0217-4472 print / ISSN 1793-2831 electronic

DOI: 10.1355/ae29-2d

Singapore's Rising Income Inequality and a Strategy to Address It

Tan Meng Wah

This paper starts by tracing how Singapore's path of incessant economic upgrading and restructuring over the decades has led to the emergence of a two-speed dual economy characterized by falling productivity and a widening income gap. This is followed by an in- depth analysis of government efforts to foster absolute inclusive growth through redistribution

against recent suggestions of building relative inclusive growth through more equitable distribution of gains from economic development using a wage-shock approach. Finally ; the paper explains why the Government's strategy of linking wage adjustments to productivity growth may be no panacea to bridging the income gap and how relative inclusive growth can be better achieved by adopting a more incremental approach of wage adjustments, starting first with businesses and workers providing non-critical services in non-tradable sector.

Keywords: Income gap, wage adjustment, productivity, Singapore.

Over the past four decades, numerous accolades have been sung about Singapore's economic success. Despite a bleak economic outlook at the time of its independence, the city-state went on to engineer an astounding transformation from a regional trading port in the 1960s to a low value- added labour-intensive manufacturing base in 1970s and eventually ending up today as a high value-added, technology-intensive manufacturing base as well as a hub for providing professional business and financial services.

The success is not merely just in terms of economics. In almost all social, environmental and political aspects, Singapore has won adulations from not only the developing but also the

developed countries. The achievements, however, did not come easy for Singapore. Given the lack of natural resources and absence of a large hinterland,

Singapore had to stay ahead of its competition by incessantly upgrading its economic structure and investing heavily to build up its soft and hard infrastructures.

I. Incessant Upgrading of Singapore's Economy since the 1970s

Singapore underwent its "First Industrial Revolution" during the 1960s when it embarked on its export-oriented industrialization efforts to drive economic growth as proposed in the

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1961 Winsemius Report.1 Efforts to upgrade its economic structure started as early as the 1970s. As the economy expanded and approached full employment, dependence on foreign workers grew. By 1970, there were a total of 72,590 foreign

workers making up about 1 1 per cent of the work

force.2 Increasingly, there were worries about the sustainability of the economic growth driven by labour-intensive industries, prompting a shift to capital- and technology-intensive industries.3 The National Productivity Board (NPB) was set up in 1972 to improve productivity in all sectors of the economy. As a "disincentive" for companies to remain labour-intensive, wages were set to increase

in stages under the guidance of the National Wages

Council (NWC). Unfortunately, this initial attempt to upgrade the economy was disrupted by the first

oil crisis in 1973 and the ensuing world recession in 1974-76. As foreign direct investment (FDI) inflow declined sharply almost by half in 1973, economic growth fell to 6.1 per cent in 1974 and 4.1 per cent in 1975.4 The fear of recession and unemployment caused the economy to cling on to labour-intensive industries. Consequently, as economic upgrading slowed down, wage increases were delayed and high growth resumed by the late 1970s.5

By the 1980s, many national governments began to emulate the success of the four Asian Tigers by abandoning their import-substitution developmental model and "liberalizing" their economies to receive FDI to drive export-led growth. As competition mounted, it became apparent that the shift towards capital- and technology-intensive industries could wait no more. In 1980, the Singapore Government launched the "Economic Development Plan for the Eighties", which heralded the city- state's "Second Industrial Revolution". The plan outlined Singapore's efforts to diversify its economic activities into new information-based

services, such as computer, medical, consultancy and warehousing services.6 To spread the use of information technology (IT) and automation in raising productivity, the government launched the National Computerization Plan (1980-85) in

1980. This was followed by the National IT Plan (1986-91) in 1986. Besides offering incentives to encourage multinational corporations (MNCs) to switch to capital-intensive manufacturing methods, education and training programmes for the labour force were also introduced to upgrade their skills. In addition, to encourage companies to climb up the value chain, the NWC initiated wage increases of about 20 per cent from 1979 for three years in a row. In 1980-84, high economic growth continued with real GDP growth averaging 8.5 per cent per annum.7 By 1985, however, there was a slowdown in global demand and exports declined drastically. For the first time since its independence in 1965, the city-state's GDP contracted by 1 .4 per cent. To make matters worse,

Singapore was losing its competitiveness. The high- wage policy of 1979-84 squeezed profits at the same time as external demand was declining. The strategy to nudge enterprises up the value- ladder also did not produce the desired results. Instead of "upgrading" their operations, many industrial MNCs chose to relocate to locations where factor costs were lower.8

The recession in 1985 also exposed the peril of overdependence in a few industries such as electronics and chemicals. In 1986, a report entitled

"The Singapore Economy: New Directions" was released by the Economic Committee set up a year earlier to look into the recession. It reaffirmed

Singapore's limitation in human and natural resources and recommended that Singapore be made into a "total business centre" with not only manufacturing but also services (international services, transport and communications, logistics, and finance and banking) sectors as the backbones of the economy.9 To regain cost competitiveness, the government froze wages for two years and reduced employer Central Provident Fund (CPF) contribution from 25 per cent to 10 per cent. By the

second half of the 1980s, the Singapore economy again accelerated. Between 1986 and 1990, growth rates averaged 8.5 per cent per annum.10 More importantly, there was a strong expansion in

new, higher value-added computers, electronics, machinery, printing, and pharmaceuticals

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industries. In particular, the city-state succeeded in

attracting many major electronics multinationals and emerged to be an important production platform for computers and hard disk drives.

In 1991, the government introduced another new national economic development strategy known as the "Strategic Economic Plan". The objective was to propel Singapore into the league of developed countries within the next 30 to 40 years. By then, Singapore would be a global city with economic dynamism, a high quality of life and a strong national identity.11 To overcome the key constraints of shortages in people and land, the plan suggested firstly to set up a Growth Triangle linking Singapore with Indonesia's Riau Islands and Malaysia's Johor so that production works could be distributed according to the comparative advantages of the three locations. Secondly, Singapore also needed to improve resource efficiency internally. The service sector, in particular, was plagued with low productivity. In

1989, for example, the sector employed 39 per cent

of the workforce but contributed only to 9 per cent

of the GDP. Thirdly, to meet increasing competition

from neighbouring countries, Singapore needed to re-position itself and build up new capabilities to reduce the technological gap with advanced economies in niche areas. In particular, investment in technological infrastructure would be increased to amass a pool of trained manpower in key technologies as well as to build a network of research institutes capable of doing R&D. In 1991, the first five-year National Technology Plan was formulated to steer the development of science and technology in Singapore. Meanwhile, the push for widespread use of IT continued in the 1990s with the release of the IT2000 Report in 1992. The report painted a grand vision of an 'Intelligent Island' based on an advanced nation-wide National

Information Infrastructure (Nil) that interconnect computers in virtually every home, office, school and factory.

Economic growth peaked in 1993 at 11.9 per cent before hovering around 8 per cent from 1995 to 1997. Growth, however, was disrupted when the Asian Financial crisis erupted in 1997. The weakening of the regional currencies made

Singapore's exports relatively less competitive. In 1998, Singapore underwent its second recession when GDP contracted by 1.4 per cent.12 However, a S$2 billion cost-cutting package proposed by a Committee on Singapore's Competitiveness (CSC)13 as well as the depreciation of Singdollar help the economy to regain competitiveness. Overall, Singapore weathered the crisis relatively well and by 1999, the economy rebounded strongly with a growth of 7.2 per cent.14 To address the separate issue of the loss of long- term competitiveness, the CSC also recommended another cost-cutting package amounting to S$10 billion or about 7 per cent of Singapore's GDP. The move would in effect reduce the total wage costs by 15 per cent from the 1997 level to bring the wage competitiveness back to the level in 1994. Furthermore, to enhance the capabilities of businesses and workers in leveraging on science and technology, the second five-year National Science and Technology Plan was launched in 1996. In the same year, the Singapore Productivity

and Standards Board (PSB)15 was established to

work on raising the total factor productivity (TFP) of the workforce.

As for the economic structure, besides reaffirming the strategy of building both the manufacturing and services sectors as the twin engines of the economy, CSC also suggested capitalizing on the existing hub services (e.g. financial services, international trading, transport and logistics, exhibition management and tourism) where Singapore had already achieved international repute to develop new high-growth hub services (e.g. health care, education, media, communications and IT services, e-commerce and

direct marketing). In addition, the negative impacts

of the regional crisis demonstrated the need for Singapore to incorporate a global dimension in its effort to nurture an external wing. To achieve this, Singapore needed to have its own world-class companies (WCCs) with core competencies that could enable them to compete effectively in the global market. In that regard, many government- linked companies (GLCs) were dynamic enough by then to even be leaders within their industries not only in Singapore but also regionally and were

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good candidates to be developed into WCCs. As for the small and medium enterprises (SMEs), they needed to be strengthened so that they could become more productive. In 1999, for example, even though SMEs employed 51.7 per cent of the labour force, their total value-add to the overall

economy was only 30.4 per cent.16 In 1999, PSB introduced its first ten-year plan, Productivity Action 21, with the aim to sustain TFP growth and make Singapore one of the world's ten most productive countries in both manufacturing and services sectors. Another ten-year plan, SME 21, was formulated in January 2000 with the aim to create vibrant and resilient small and medium-

sized enterprises in the new economy.17 Finally, the CSC report also recommended that Singapore should continue to develop a world class workforce by adopting a dual approach - maximizing the potential of the domestic workforce while enhancing the attractiveness of Singapore to foreign talent.

As we can see from the evolution of Singapore's economy since independence till the end of the last

century, the incessant need to move up the value- add ladder to keep ahead of competition posed a great demand on its lean labour force to upgrade its skills and knowledge continuously. See Figure 1 for the various phases of Singapore's economic development and the government's efforts in upgrading the economy. In other words, human resource had been a binding constraint that limited

economic growth since as early as the 1970s. The problem was not only the small size of the population. When the labour force was young and adaptable in the 70s, 80s, and 90s, new skills could be assimilated quickly. However, as the population aged, upgrading became increasingly tedious. New skills required were also more complex than in yesteryears. In time, there would likely be more and more dislocation among the older workers as the economy continued with its restructuring. This mismatch in supply and demand of skill sets as the economy moves up the value ladder would result in more structural unemployment. It also meant that Singapore's dependence on foreign workers would increase because of the shrinking and ageing population.

II. Emergence of a Two-Speed Dual Economy and its Impact on Productivity and Income Distribution

Moving into the new century, just as the regional economy was recovering from the Asian financial crisis, a series of shocks again rattled the Singapore

economy. In 2000, the NASDAQ dot.com bubble reached its peak and by 2001 was deflating at full speed. On 11 September of the same year, airplanes hijacked by terrorists collapsed the Twin Towers of the World Trade Center in New York

City. In 2003, the combination of bird flu and the Severe Acute Respiratory Syndrome (SARS) near-pandemic outbreak severely affected regional economies. In March of the same year, the United States launched its war against terrorism by invading Iraq. Singapore's GDP declined by 2.4 per cent in 2001. Given its strong fundamentals, the economy recovered the following year, as external environment improved, to register 4.2 per

cent growth but slowed again to 3.1 per cent in 2003.

Global demand, however, was beginning to pick up strongly in 2003. As MNCs increased their investments in Singapore, the city-state again

was faced with the problem of labour shortages. Policy-makers were faced with the dilemma of letting the economy grow beyond its potential by bringing in more foreign workers and dealing with

the problem of over-reliance on imported labour later or turning away those investments and grow at a slower and more comfortable pace. In the end, policy-makers chose what has been termed as the "growth at all costs" strategy and allowed the influx

of more foreign labour. In effect, policy-makers sought to ride on the recovery of the global demand

by pushing out the economy's aggregate supply curve through importing more foreign labour and talent. The strategy had the benefit of allowing the

economy to diversify quickly into new industries by importing skills sets which Singapore lacked and at the same time keeping costs competitive. Between 2004 and 2007, the economy grew an average of 8 per cent in real term, in comparison to the average of 5.7 per cent chalked up by its other NIE peers.

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The sterling economic data, however, hid an increasing strain attributable to the ballooning foreign population. The strain was already beginning to show before the onset of the global financial crisis in 2008. Even when the economy was expanding prior to the crisis, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same

time. Efforts to position Singapore as a global city and to move into higher-end technologically- and knowledge-intensive industries led to the shortage of professionals with both the relevant skills and international exposure. On the other hand, the hollowing out of low value-added manufacturing operations resulted in an excess of unskilled workers. The problem was exacerbated by the fact that Singapore was importing not only highly- skilled professionals. Many unskilled low-cost labourers were also brought in to do menial works shunned by the unemployed Singaporeans.18

There is no simple solution. The government has set a target of 6.5 million as the optimal population

size that can provide the economy with a critical mass without overstretching the limited natural and

social resources. With fertility rate plunging from

1.60 in 2000 to 1.28 in 2008, far below the 2.1

needed for a population to replace itself, foreign newcomers are expected to make up the bulk of the

increase in population over the next few decades. Between 2000 and 2009, for example, the foreign

population increased by 70.9 per cent while the number of citizens increased by only 7 per cent. In terms of composition, citizens now constitute only 64 per cent of the total population, a decline of 10 per cent over the same period (see Table 1).

Gradually but surely, voices of discontent grew, first and foremost with the issue of job poaching. In 2005, for example, about 49,800 (44 per cent) of the 113,300 jobs created went to foreign workers even though foreign workers made up only 28.9 per cent of the labour force. Foreign labour growth

of 8 per cent was double that of local labour growth.19 In 2007 and 2008, as many as 300,000 foreigners took up jobs in Singapore.20 Compared to other high immigration countries, the influx of foreigners has a greater impact on Singapore because they comprise a larger percentage of the total work force. By 2009, they accounted for a third of the three-million-strong labour force, up from only a quarter in 2004. To make matters worse, while these foreign workers occupied mainly the top and bottom rungs of the job ladder in the past, there are indications today that they are

competing with Singaporeans for jobs on almost every rung.21

Besides being accused of taking away jobs, foreign workers are said to be also exerting demand

pressures on Singapore infrastructures, pushing up housing prices, and taking up places in school at Singaporeans' expense. More fundamentally,

TABLE 1

Change in Composition of Population Between 2000 and 2009

Number ('000s) Composition in %Citizenship 2000 2009 % Change 2000 2009 Change

Resident population 3,278 3,733 13.9% 81.2 74.8 -6.4 Citizens 2,990 3,200 7.0% 74.1 64.1 -10.0 Permanent residents 288 533 85.1% 7.1 10.7 3.6

Non-resident population 755 1,250 65.6% 18.7 25.1 6.4 Total population 4,033 4,983 23.6% 100.0 100.0 - Foreign population 1,043 1,783 70.9% 25.8 35.8 10.0

Source: Straits Times , "The Singapore Story in Figures", 31 December 2009.

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there is now a sufficient critical mass of foreign population that results in divergent growth patterns

between different income groups and businesses which in turn contributes to the emergence of a two-speed dual economy comprising of two segments known as the "global periphery" and the "domestic core".22

The "global periphery" segment is made up of workers and large businesses (mostly MNCs) serving predominantly regional and global clients involved in subsectors like offshore finance, private

banking, asset management, high-end residential market, marine and aviation transport services and equipment, and pharmaceutical products. This segment has not only been able to benefit directly from the recovery of global demand, it also enjoys favourable policies offered by the government to entice foreign investments. Given that a higher level of skills and international exposure are needed to carry out activities in this segment, the number of foreigners and permanent residents here

is significantly larger than the national average. Because of the high value-added nature of the activities, the workers in this segment command higher wages and the segment as a whole accounts for a disproportionately larger share of the total GDP even though it employs less than a quarter of the labour force.

In contrast to the "global periphery" segment's external orientation, the "domestic core" segment is comprised of businesses and workers serving the domestic market. Their activities cover subsectors including retail trades, construction, the

mass residential market, catering trade, transport,

public services (for example, health care), hotels and restaurants, and domestic Singapore dollar financial activities (for example, retail banking). In other words, growth of this segment depends directly on the state of the domestic economy. Most of the workers in this segment are either Singaporeans or unskilled foreign workers. Because the activities have lower value-added, workers

here command lower wages than those in the "global periphery" segment. Hence, even though this segment employs about three-quarters of the total labour force in Singapore, it accounts for a disproportionately smaller share of the country's

overall GDP. Similarly, at the firm level, profit margin is comparatively lower in the domestic core

segment because of high domestic competition and because their prohibitive size excludes them from reaping any benefits from long-term investments for economies of scale. Finally, at the industry level, while the global periphery segment's activities enjoy high growth as a result of rising opportunities in regional and global markets, the domestic core segment's activities remain sluggish because of people's habits of high saving and low consumption.

Besides being accused of poaching jobs and depressing wages, foreign workers have also been partly blamed for causing productivity to plummet in recent years. While the overall economy has grown with the enlarged workforce, the productivity of each worker has fallen. The fall

is thought to be caused by the easy availability of low-cost foreign workers which enable employers to employ more workers instead of investing in capital equipment to raise productivity. The issue spells a bigger problem for policy-makers when looked at from the perspective of the two- speed dual economy. Generally, companies in the global periphery segment are mostly MNCs and large local firms (predominantly the GLCs). They are more capital intensive and hence productive. In contrast, the SMEs, in particular those in the construction, retail, and hospitality industries, either have no incentives and resources to upgrade or do not have the knowledge to redesign their work processes to increase the productivity of their

workers. The productivity level of the construction

industry in Singapore, for example, is estimated to

be only one-third that of Japan's and half that of Australia's.23

The productivity gap between the foreign and the local companies in Singapore is also evident in the falling contribution to GDP by the latter. The share of GDP contributed by resident companies and individuals declined from about two-thirds in

1998 to about 54.3 per cent in 2008. In terms of contribution to GDP growth, the figures are even more worrying. In 2004, residents contributed slightly more than half of GDP growth. That figure

fell to less than a third by 2008. Finally, while the

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overall per capita GDP was S$53,192, the resident per capita GDP reached only S$38,372.24

The net effect of the two-speed dual economy is that wage differentials between workers in the two segments began to widen. The trend of rising income inequality became increasingly noticeable after the Asian financial crisis. Even though there was an increase in mean income and social welfare

had increased in terms of better education, health and standard of living, the Gini coefficient rose from 0.44 in 1990, 1995 and 1997 to 0.45 in 1998

and 0.47 in 1999.25 Another study by Chia and Chen (2003) also arrived at a similar conclusion. They found that, contrary to Kuznets' prediction,26

ratios of the top to bottom quintiles of households by income from work fell from 14.4 in 1980 to 1 1 .4

in 1990 and rose again to 20.9 in 2000, showing that income inequality improved initially (i.e. the Gini coefficient fell) in the 1980s but deteriorated (i.e. Gini coefficient rose) in the 1990s.27

After the turn of the century, even though the

economy as a whole registered impressive growth, in particular after 2004, the unequal distribution of

income persisted. While headline GDP grew 6.4 per cent in 2005 and 10.6 per cent in 2006, domestic demand expanded only by 3.3 per cent and 4.9 per cent for the two periods, respectively.28 Again, the

disproportionate growth in the two segments shows

up in the growth of household income. While the higher income groups saw their income grow 2.8 per cent annually between 2000 and 2005, the lower

income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3 per cent fall in average household income, while the 21st to 30th income decile group saw a 0.5 per cent decline.29 Consequently, between 2000 and 2007, Singapore's Gini coefficient climbed from 0.444 to a high of 0.489. It moderated to 0.481 in 2008 and 0.478 in 2009 only because of the financial crisis (see Figure 2).30

FIGURE 2

Gini Coefficient among Employed Households (2000-09)

Source: Singapore Department of Statistics, "Key Household Income Trends, 2009", February 2010.

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Increasingly, the unrestrained influx of cheap foreign labour has been blamed for depressing both productivity and wages, especially at the lower end of the economic spectrum.

During the 1970s and 1980s, Singapore's industries were more capital intensive and the labour shortage was more in terms of quantity than quality. Domestic workers were also in their prime. Foreign workers were brought in then to supplement, not to supplant them. In the end, the influx of foreign workers helped to raise wages across the board.

However, when Singapore again upgraded its economic structure to focus on knowledge-based and innovation-driven industries after the turn of

the century, the floodgate for unskilled foreign workers destined for non-tradable services sector

- such as public transport, cleaning, retailing and construction - should have been narrowed

or closed, so that the jobs in that sector could go to the older Singaporean workers who were becoming increasingly unemployable with the relocation of jobs out of the city-state by MNCs.

The fact that more low-skilled foreign workers continued to stream in to help keep costs low worked to the disadvantage of the low-income workers. The practice especially benefited the higher-income workers, as they enjoyed not only rising wages but also lower costs of living made possible by the low-cost foreign workers.

An appreciating Singapore dollar helped to constrain imported inflation but it was the use of low-cost foreign labour that helped to maintain price stability in the domestic sector. Inflation averaged about 1 per cent between 2000 and 2007 but that impressive low inflation was arguably achieved in part at the expense of the low-income wage earners.

In short, globalization and advancement of technology contributed to structural unemployment

but it was the foreign labour policy that exacerbated

the plights of the dislocated low-income wage earners. Had the strength of low-cost foreign workers been reduced in tandem with the pace of economic restructuring, the wages of low-income

Singaporean workers in the domestic sector would have undoubtedly risen along with the tide.

III. Government Responses to Widening Income Gap: Relative or Absolute Inclusive Growth

To begin with, inclusive growth can be viewed from two perspectives: the absolute perspective and the relative perspective. In the absolute perspective, poor people benefit in absolute terms even though their income is growing slower than the population's average. The relative perspective of inclusive growth, on the other hand, seeks to grow the income of poor people faster than the population's average so that the income gap eventually narrows.31

Despite much debate, the discourse over relative and absolute inclusive growth is far from conclusive. For instance, Ravallion and Chen (2003) argue that it is possible for the poor to derive no absolute gain from distributional changes

that are pro-poor. Conversely, it is equally possible

that pro-rich distributional policies can come with absolute gains to the poor. Also, Ianchovichina and Lundstrom (2009) caution that jumping too hastily to the conclusion that growth is against the poor has

its danger. By focusing on inequality, for example,

governments could adopt distortionary policies that eventually lead to sub-optimal outcomes for both poor and non-poor households.

Still, the debate points to two fundamental approaches of addressing the issue of widening income gap. The first boosts absolute inclusive growth by increasing transfer payments to compensate those who have lost out. The key, then, according to welfare economists like John Hicks and Nicholas Kaldor, is to seek a Pareto optimal outcome by taking from the people who benefit from an economic policy to compensate the people made worse off by it. As long as the net effect of the policy is positive, society benefits

as a whole.32 Alternatively, the government can foster relative inclusive growth by adjusting the development model to take into consideration the interests of those with lower bargaining power

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right from the beginning so that they can enjoy a larger share of income as wages.

In general, the more successful policy-makers are in achieving relative inclusive growth through more equitable income distribution at the onset, the less need there will be over time to adopt remedial measures for absolute inclusive growth through income redistribution.

Singapore's government actions all along appear to have been guided more by the absolute definition of inclusive growth. The government's fundamental position is that in a maturing society, it is inevitable that the Gini coefficient, which

is a relative concept, rises as a consequence to increasing global competition. Instead of worrying about bringing down the indicator, the government

should focus on providing everybody with a job.33 Opting for slower growth for the sake of achieving

equality would have ended up hitting those at the bottom the hardest. In contrast, by allowing the economy to grow beyond its potential for a few years when external environment permits, everybody benefits although those in the higher income groups benefit more.

Indeed, the booming economy helped to create more jobs and raise income in recent years. The resident unemployment rate, for example, fell from 6 per cent in late 2003 to 2.4 per cent by the end of 2007. Even though the low-income earners suffered income contraction in 2000-05,

their wages rose in real terms, 16 per cent between

2006 and 2008, or about 7 per cent for the last decade as a whole.34 Also, the median individual

monthly income rose from S$ 1,840 in 1999 to a high of S$2,450 in 2008 before settling at S$2,420 in 2009, indicating that income has generally increased over the decade for all.35 If judged by this yardstick, growth has brought absolute gains to the poor.

In their defence also, policy-makers have been quick in pointing out that the low income wage-earners in Singapore enjoy a higher living standard compared to the latter's counterparts in other developing countries. Right from the start, the government has put in place measures that provide subsidized public housing, education

and health care. These services help to ensure that the lower-income group are able to maintain a minimum standard of living and that their offspring receive quality education so that there is equality in opportunity. The greater amount of subsidy received by the low-income groups also helps to lower the post-subsidy Gini coefficient (see Figure 2).

On top of these permanent measures, the government has also initiated several programmes to help the poor and the dislocated since the 2001 General Election when the opposition drove a "new poor" campaign to make the plights of the low income a political issue.

High on the list of those programmes is the provision of subsidies by Workforce Development Agency for approved training courses as well as bonus payments when training under the new Workfare Training Supplement scheme is completed. The emphasis on retraining ensures that dislocated workers can as far as possible be re-equipped with new technical skills and diverted into emerging industries. Besides assistance associated with retraining, financial support in the form of cash supplements from the Workfare Income Supplement (WIS) has also been offered to families in financial distress. Older low-wage workers also received a boost in their retirement

funds through the CPF component of the WIS. In addition, the government put forth a host of measures covering education, housing and health care. In public housing, for example, other than the concessionary loan from the Housing Board for the housing mortgage, various grants are also provided for the purchase of public flats. For education, in addition to bursaries, students

received top-ups to their Edusave accounts. As for health care, the government has also set up a Medifund from which low-income families can tap to pay for their medical bills.36 In the 2012 annual budget, the GST voucher scheme, targeted at low- income families, was made a permanent feature of Singapore's social safety net. At the same time, concrete efforts, not just rhetoric, were made to improve both employability of senior workers, through the enhanced Special Employment Credit,

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and their gross income, through the hike in CPF contributions.

Furthermore, in times of extreme economic

hardship, the government has also been quick to implement relief packages to ameliorate any adverse impacts of economic shocks on the lower-income households. In February 2008, for example, to help Singaporeans cope with the rising inflation, relief measures including Growth Dividends, enhanced Marriage and Parenthood measures, personal income tax rebates, and utility rebates were implemented as part of the Budget. In November the same year, in the aftermath of Lehman Brothers' collapse, the Skills Programme for Upgrading and Resilience (SPUR) was introduced to ramp up training and at the same time

to help keep workers employed. In February 2009, as the global financial crisis evolved into the Great Recession, a S$20.5 billion (8.2 per cent of GDP) Resilience Package was introduced to cushion the impact of the worst economic contraction since Singapore's independence. Even though many of the measures were for companies, the aim was to help workers stay employed.37

Finally, to quell discontent over stagnating income, the government launched a new economic strategy based on recommendations from the Economic Strategies Committee on 1 February 20 10.38 Among other things, the new strategy calls for a switch from the "growth at all costs" to an "inclusive growth" approach to ensure that weaker segments of the population would not be left behind. This would be achieved by a push to raise productivity from the 1 per cent recorded over the last decade to 2-3 per cent over the next ten years so that wages, in particular for the lower-

income segments, can rise in tandem. The aim is to raise the median income by an average of 2.8 per cent a year or a total of one-third to S$3,100 by 2020.39 For the strategy to succeed, businesses must try to grow qualitatively by upgrading, not just by expansion using more low-cost unskilled foreign workers. To "persuade" businesses to invest in better equipment in order to raise productivity, measures to increase foreign worker levies based on a tiered system were announced in February 2010. These measures would make

it increasingly costly to employ many lower- and semi-skilled foreign workers. On its part, the government is committed to spending S$5.5 billion on productivity-related initiatives over five years.

Similar productivity movements were also launched in the 80s and 90s but policy measures implemented then were not "exploited" fully because of a ready supply of low-cost foreign labour. As such, there is no shortage of sceptics that the current renewed effort will peter out again especially when global demand improves. Their scepticism is based on the projection that to achieve a GDP growth rate of more than 6 per cent, employment growth rate must exceed 4 per cent.40 With a population that is expanding at less than 2 per cent annually, a substantial jump in productivity is needed to compensate for shortfall in the number of workers. Given that

discernible productivity improvements are not likely to materialize in the short term, there seems

to be no alternative to importing more foreign workers. Hence, despite the official rhetoric, the number of foreign workers looks set to continue growing albeit at a slower rate than in the previous decade.

More pertinently, despite all the efforts to mollify the pains of the low-income workers, it is hard not to notice that the measures introduced

so far are mostly redistributive measures that help

in fostering only absolute inclusive growth. While such measures are indispensable in alleviating hardship among the poor, they do not address the issues of depressed wages suffered unfairly by the low-income workers and the related trend of

widening income gap.

IV. Shock Therapy Approach vs. Government's Productivity-Linked Approach

In a recent public lecture entitled Economic Restructuring II, Professor Lim Chong Yah, who was the founding chairman of National Wage Council (1972-2001), reported that low- wage workers in Singapore today are being underpaid by much more than 100 per cent when compared with their counterparts in other equally

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affluent economies like Japan, Hong Kong, or Australia. To narrow the income gap, Professor Lim proposed easing the city-state's dependence on foreign workers and increasing the pay of those

earning less than S$ 1,500 a month by 50 per cent over three years while freezing wages of those with a monthly income of S$ 15,000 or more.

This radical shock therapy approach that aims to foster relative inclusive growth elicited quick and strong response from the government, which pointed out that rapid wage adjustments during Economic Restructuring I in the early 1980s resulted in deterioration of Singapore's economic competitiveness and exacerbated the 1985 recession triggered by a fall in global demand. Concerned that any rapid and substantial adjustments in wages may again derail economic development, the government chose to fall back on the hard-to-refute economic maxim that links

wage to productivity growth, a position consistent with the new economic strategy proposed by the 2010 Economic Strategies Committee.

However, that "no productivity growth, no wage

adjustment" strategy has its own failings. Firstly, it assumes that low productivity is the key, if not the sole cause, for the low-income growth suffered

by the unskilled workers. In reality, a host of other

factors may also be at play. For example, business costs may have gone up rapidly in recent years, leaving employers, in particular the SMEs, with little room to raise the pay of their employees. Rental for retail outlets, for instance, has shot up because of growth of Real Estate Investment Trust (REITs) activities. The rapid rise in rental has important ramifications on the share of income as wages for a large number of low-income workers employed in the retail sector.

Secondly, increasing workforce productivity both at the sectoral and the national levels is easier said than done. For MNCs in high value- added manufacturing operations, aggressive capital investments to raise productivity can be easily recouped because of their high profit margin

and the economies of scale they enjoy. Local manufacturing SMEs, on the other hand, will face difficulty in defraying their capital investment because their limited scales do not afford them

the same cost advantage. For SMEs in low value- added labour-intensive services sector, the room

for productivity growth through capital investment

is even more limited. How else, for example, can a bus driver who is already driving a double-decker bus increase his total value-added? Drive two buses at the same time?

The elusive nature of productivity growth is hardly peculiar to Singapore and the same experience is shared by other economies, especially those developed ones. A developing economy like China has tremendous room for productivity growth in the coming years because of, among other

things, market inefficiencies attributable to anti- competitive and rent-seeking actions and policies. For an ultra-efficient economy like Singapore's, any such room for productivity growth has long been exploited.

A research by McKinsey in 2004, for example, revealed that over a period of thirty years, Japan's

economic growth had been generated more by increases in the number of hours worked and the

amount of capital equipment used than by increase in the productivity of the workforce.41 For a much

smaller economy like Singapore's, the room to generate growth through increased used of capital equipment is even smaller once development has reached a certain stage and further capital investments elicit diminished marginal returns. To have higher income, what is left for workers in Singapore then is to work longer hours, as exemplified by SMRT Corporation's recent move to raise the basic monthly pay of its Singapore bus drivers only to also extend their work-week from five to six days. Alternatively, more family members have to join the workforce to help the family meet rising living costs, which explains policy-makers' growing preference to talk about household, rather than individual, income.

Next, the concept of productivity has the tendency of undervaluing the efforts of our low- wage workers while overvaluing those of the top executives. In a tightly integrated value chain, the whole is usually more than the sum of its parts. Productivity growth takes into account the increase

in work done directly by the workers but not the surplus value created by thhe company as a whole.

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That surplus value, which shows up as profit, ends up frequently as generous bonus and pay packages to top management as well as fees to the board of directors who have oversight over top-executive compensation. In the end, top management has the incentive to scrimp on compensation for employees so that their burgeoning pay packages can be justified by ever-growing profit spurring the

company's rising stock price. In the United States, for example, even though

output per hour rose by 70 per cent between 1981 and 2006, average real hourly wages were virtually flat, increasing from US$7.88 in 1981 to US$8.23 in 2006. In contrast, share of corporate profits in national income in 2006 was close to the highest levels since 1947 and the share of wage income of the top 1 per cent wage earners was almost double the level recorded in 1980.42

Furthermore, the definition of wages solely from an economic perspective is also too narrow. The social harmony and political stability that Singapore enjoys do not come free and should not be taken for granted. That price must be borne by all, if not more, by the higher income groups given

that the harmony and stability represent greater value to them. The full value of the wages for low-

income earners, therefore, must reflect not only the economic value created by them but also the social cost and political costs needed to preserve harmony and stability.

Wages for Low-income Workers = Economic value + Social cost + Political cost (Productivity) (Harmony) (Stability)

Finally, blaming the income gap on productivity

may conceal underlying and fundamental issues that need to be relooked at. The unfettered pursuit of market fundamentalism, for example, has allowed market power to be skewed towards increasingly well-organized capital owners. The system seems to be gravitating towards rewarding capital owners who seek higher and higher returns

from their capital while shunning workers who have to sweat and toll to barely earn a decent living.

It may therefore be time that policy-makers re-

evaluate the priorities so that workers can reclaim the dignity and the full value of their labour.

In the end, productivity growth is hardly the panacea to the problem of rising income gap. Even if productivity growth is achieved, it is likely that

growth of income for the PMETs will continue to outstrip that of the unskilled workers, further widening the wage gap down the road. In effect, wage policies underpinned by productivity growth allow incremental pay increases supposedly to keep up with inflation but can do little to narrow the sizeable income gap that already exists.

Moreover, objections to the bold wage adjustments for the low-income workers and wage moratorium for high-income workers also sound sensible but may not stand up to scrutiny.

For example, the argument that a moratorium in pay raise for all high-income wage earners may lead to mass exodus of talent is a moot point since they are probably already earning more in Singapore than in many other places. Where else can they go for such high income while paying one

of the lowest income taxes around and still enjoy social harmony, political stability, clean and green living space, and most importantly, an excellent education system and family-friendly environment

for their children? Some, especially the singles, may indeed choose to leave but for the majority with families, their options for greener pastures are probably limited.

Next, the government is indeed justified in worrying that any efforts to help the poor risk cultivating a crutch culture. Ironically, however, the government is doing exactly what it professes ought not to. By offering a slew of redistributive measures to mollify the pain of the low-income wage earners now, the government undertakes the full cost of trying to narrow the income gap. As the

population ages and if inflationary pressure persists

and productivity growth fails to materialize, which

is very likely if past experience is any indication, then Singapore's future government may be forced

to increase their redistributive efforts, doling out more measures to help an even greater number of poor in dire straits. Over time, a dependency culture becomes progressively entrenched.

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In contrast, by resolutely attacking that imbalance

at its root now while we are still at a position of strength, the costs of adjustment will be borne not just by the government but by all, including employers and high-wage earners. Low-wage earners still have to work for the higher pay which

affords them not only a decent living standard but

also a reasonable amount of savings so that they do not have to depend on the government upon retirement.

Lastly, any substantial wage adjustment for the poor will certainly lead to higher costs. This may sound especially worrying because of the already higher-than-average inflation. However, the high inflation is precisely the reason why wage adjustment for the low-income should not be delayed for any longer. This is because the rising prices exert comparatively more stress on the poor with their meagre income. Moreover, pay increases for high-income earners in the past also contributed to higher costs which were also borne by low-wage earners in the form of depressed wages to keep inflation down. It is time the high- wage earners reciprocate.

Furthermore, the current high inflation is more

attributable to rising prices of private housing and cars. In March, for example, while headline inflation hit a high of 5.2 per cent, core inflation was only 2.9 per cent. Hence, core inflation has room to rise if asset inflation can be curtailed.

Comparatively, core inflation due to rising wages for the poor does more good for closing income gap than rising asset inflation which worsens the already lopsided wealth distribution.

Also, the hike in wages is a one-time adjustment like GST. The government needs to help the SMEs in the short term but as costs become more diffused

among all stakeholders, including the government through a reduction in fees and other cost-sharing measures, the high-income wage earners through a pay-raise moratorium, the landlords through lower rental, and to a lesser extent the consumers

through price increases, the financial assistance to the SMEs from the government can be weaned off. Future adjustment in wages will then be underpinned by productivity growth as well as

in the form of bonus in times of good economic performance.

In short, simplifying the issue by falling back on

an economic maxim makes good economic sense but loses out in overall logic.

At the end of the day, the whole debate really hinges on whether the low-wage workers have been unfairly denied an otherwise higher income had the unskilled foreign workers been kept out when structural unemployment became more widespread and the domestic services sector became the last haven for the increasingly unemployable older Singapore workers, especially over the past decade.

While rapid pay increase for high-income wage earners were allowed to be effected through the working of market forces, selective intervention through in-sourcing of foreign workers in the lower-end labour market prevented similar rise in pay for low-income workers. Inequitable policy measures certainly exacerbated their plights.

Hence, even if the costs of adjustment are going

to be substantial, the wrong must first be put right.

The pay for low-income wage earners has to be substantially adjusted to a more equitable level before its future movements can be capped by corresponding movement in productivity.

V. An Incremental and Sectoral Approach of Fostering Relative Inclusive Growth

The government's fear of economic derailment from a wage-shock therapy is understandable. Any sharp increases in wages at a time of already rising

inflation risk sparking a wage-price spiral that can dent Singapore's external competitiveness. Therefore, to minimize the adverse impacts on the tradeable sector, adjustments can be implemented in stages in a carefully controlled manner starting first with businesses and workers in the non- tradeable sector.

One of the keys in narrowing the widening income gap is the reduction in the supply of unskilled foreign workers. Notably, the government

has begun a process of "calibrated reduction" of foreign workers. From 1 July 2012, foreigners

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will be reduced from 65 per cent to 60 per cent of the workforce for manufacturing companies and 50 per cent to 45 per cent for the services sector. That rate of reduction, however, may be too conservative. For selected industries in the non-

tradeable sector providing non-critical services, the pace of repatriation of foreign workers can be boldly quickened.

To get the momentum started, government agencies or government-linked companies can take the lead by cutting down the number of foreign workers that they directly or indirectly employ. With fewer low-cost foreign workers to do cleaning

and to drive public buses, for example, the reduced

labour supply will drive wages upward and attract more workers from other industries to take up jobs

in the cleaning and transport sectors. The resultant

labour shortages created in other industries will push up wages for low-income wage earners in those sectors. Over time, given Singapore's labour mobility, a new equilibrium wage level based on market forces can be reached across the non-

tradeable services sector. To regulate the speed and magnitude of the wage adjustments, these government-related entities can also increase the pay of Singapore workers within their folds to set benchmarks for businesses in the private sector.

There are several reasons why it is good to start with the non-tradeable services sector. Firstly, in Singapore's dual-track economy, the workers in the lower-growth domestic track have seen slower income growth over the years than those in the higher-growth export-oriented external track. Secondly, working on the non-tradeable sector helps to ensure that Singapore's export competitiveness will not be adversely affected in the short term. Policy-makers will have more time to better monitor the negative impacts on the rest of the economy and fine-tune supply-side microeconomic and administrative policy measures to manage the transmission of those impacts.

There will no doubt be adjustment pains and strong government actions are needed to mollify those pains. Firstly, the government can provide subsidies to SMEs to help share the burden of the higher wage costs. At the same time, a thorough review of the overall cost structure can

be carried out to help reduce business costs for SMEs. More importantly, it is necessary to look into how gains in the value creation process are currently distributed among other stakeholders. To prevent the government and the SMEs from being disproportionately burdened, these other stakeholders within the value chain must help share the adjustment costs. What are costs to SMEs

are revenues and profits to other stakeholders. Adjustments in wages for the low-income earners therefore need to be accompanied by re-distribution

of profits among different stakeholders within the

value chain. A small amount of the costs may also be passed on to consumers, especially those earning higher income, while any inflationary impact on the low-income wage earners can now be better met with their higher wages.

There are also concerns that local workers are less hard-working than foreign workers. Part of the adjustment can therefore also be performance-based. Companies may also prefer to recruit younger workers (for example, those in their forties) who are attracted by the higher pay. More senior workers (those in their fifties and above) may become dislocated in the short term. However, as the supply of foreign workers dwindles and if appropriate financial incentives and measures are in place to make employing them attractive, demand for senior workers should again rise. In fact, the higher pay may attract more retirees to take up jobs that were once deemed financially unrewarding. To wean Singapore off dependence on foreign workers, all pairs of hands must be on deck.

In the end, some SMEs may fail to adjust and will be forced to close down or relocate. The government may also have to bear with a few years of fiscal deficits during the adjustment phase

while new revenue sources are being sought to cover the higher fiscal layouts and the lower foreign worker levy collections. However, as the new normal settles in and companies return to profitability over time, assistance measures from the government can be phased out.

Detractors may voice their opposition on the ground of the difficult external environment that the country currently faces. On the contrary, we

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should take advantage of the lull and bite the bullet now so that Singapore is ready to ride the wind again when new opportunities emerge.

Given the exceptionally strong political leadership and foundation this country has, the impacts of the adjustments will be painful in the short term but diffusible and totally manageable in

the long term.

VI. Conclusion

In the course of a country's economic development,

especially for developing economies, early successes of growth very often are built upon sacrifices from a disadvantaged segment of the population. After the founding of New China in 1949, for example, the growth of the Chinese urban sector was built on sacrifices by the rural sector as a result of Mao's singular focus to industrialize the Chinese economy in order to catch

up with Developed West. Even after the advent of ground-shattering economic reforms initiated by Deng Xiaoping after the demise of Mao, the urban population continued to gain disproportionately from China's phenomenal economic growth over the past three decades. That resultant growing disparity in income and wealth distributions has led to rising social tension in recent years, prompting the Chinese government to aggressively

initiate policy measures to raise income and living standards of the peasants.

Singapore's GDP per capita is among the highest in the world and therefore can hardly claim to still

be a developing economy. Furthermore, living costs in Singapore have also risen so rapidly that the city-state is among the most expensive cities in the world. Hence, it is neither realistic

nor fair for Singaporeans to demand First World living standards while still expecting to pay Third World prices for services rendered by their fellow citizens.

If indeed the income inequality can be attributed

in part to inequity, then the government has the responsibility to act, even if the adjustment measures could inflict high short-term costs. For too long, globalization, technological change, and an ageing population have become convenient

excuses to justify lopsided income distribution. Welfarism is also no substitute for relative inclusive

growth that boosts incomes at the bottom end. Fundamental adjustments to address the widening gap can realistically take place only by giving employees a larger share of the economic pie. This entails encroaching on deep-rooted vested interests of other stakeholders and can only be effected by leaders with strong political will.

Meanwhile, efforts to raise productivity through mechanization, business process re- engineering, and trainings must be kept up. The concept of productivity still explains at least in part why workers in different economies enjoy differing living standards. Given an increasingly competitive external environment, the stark message for Singapore workers, especially those in the low- and middle-income segments, is that, in the long term, they still need to increase their productivity to keep their higher living standards.

Raising productivity to ensure that Singapore remains competitive is therefore not an option but

an absolute necessity. As for foreign workers, they should still be

welcomed but only to supplement and strengthen Singapore's workforce, not to unfairly supplant our domestic unskilled workers.

The Singapore government has done an excellent job laying down a firm foundation that can facilitate the switch to a truly more inclusive society. It also has political dominance as well as economic clout, through its extensive web of government-linked companies and their subsidiaries, to carry out fundamental if difficult reforms to halt or reverse the trend of a widening

income gap. After forty years of impressive economic

development, Singapore is in a uniquely privileged position to grow not only as an economic entity but

more so as a caring and compassionate society. This can be better achieved by building a truly inclusive

society not through redistribution as an afterthought

of economic development, but by distributing gains

from economic development equitably at the onset.

The alternative will be an increasingly divided, squabbling, welfare-oriented, and eventually debt- laden society we see in the West.

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NOTES

1. See Rodan (1989). 2. See Soon and Tan (1993). 3. See Hon Sui-Sen (1973). 4. See Singapore Department of Statistics (2008). 5. See Goh Chok Tong (1980). 6. See Tselichtchev and Debroux f 2009V

7. See Economic Committee (1986).

8. See Krause (1987). For example, in 1989, labour costs on Batam Island, Indonesia were only 25 per cent of those in Singapore on average. See Kumar and Lee (1991).

9. See Economic Committee (1986). 10. See Singapore Department of Statistics (2008). 1 1 . See Ministry of Trade and Industry (1991). 12. See Tselichtchev and Debroux (2009).

13. The committee was put together by the government to review Singapore's long-term competitiveness just about the same time the crisis started. But as the crisis wore on and spread, the committee began to also deliberate on strategies that could help Singapore deal with the crisis. In the end, the committee first proposed strategies to deal with the crisis. Next, a separate package of measures was proposed to deal with the issue of the lost of long-term competitiveness caused by the high wage policies in the previous years.

14. See the Singapore Department of Statistics website <www.singstat.gov.sg>.

15. The Productivity and Standards Board (PSB) was formed from the merger of the National Productivity Board (NPB) and the Singapore Institute of Standards and Industrial Research (SISIR) in April 1996. It is a statutory board under the Ministry of Trade and Industry with a mission is to raise productivity so as to enhance Singapore's competitiveness and economic growth for a better quality of life for her people.

16. See SPRING Singapore Annual Report 2001-02. 17. See PSB Annual Report 1999/2000, Chairman's Statement at <http://www.spring.gov.sg/newsarchive/annual_

report/ar 1 999_2000/review/index.html>.

18. Factories, for example, have difficulties recruiting Singaporeans to staff their night shifts without which the unit cost of production would be much higher.

19. See Chua (2006). 20. Straits Times , "Don't let foreign workers become a soft option", 9 January 2010. 21. The Economist. Singapore and immigration: A PR problem", 14 November 2009. 22. See Chua (2006). 23. Straits Times , "What ails Singapore's building industry?", 13 March 2010. 24. Straits Times , "Go for Goldilocks Growth", 23 January 2010. 25. See Singapore Department of Statistics (2000) and Mukhopadhaya (2001). 26. Kuznets' hypothesis posits that as development proceeds and mean income grows, inequality in income

distribution first increases and then decreases, producing an inverse-U shape Gini coefficient curve. See Kuznets (1955).

27. See Chia and Chen (2003) for a summary of various studies conducted by different economists on how income distribution in Singapore changes at different phases of economic development.

28. See Chua (2006). 29. See Singapore Department of Statistics (2006). 30. Straits Times , "A Global, Vibrant Singapore ", 3 1 December 2009. 31. See Rawls (1971). 32. See Hicks (1939) and Kaldor (1939). 33. Straits Times , "MM Lee: Social divide inevitable", 29 October 2009. 34. Straits Times , "Singapore's well-being goes far bevond GDP", 21 Jul v 2010.

35. Straits Times , "Goal 2020 timely and significant", 16 July 2010. 36. Straits Times , "No lack of help for low- wage workers", 5 March 2010. 37. One of the key features of the package, for example, was the S$4.5 billion Jobs Credit Scheme, which involved

giving cash grants to employers to subsidize part of their local wage bill. 38. See Economic Strategies Committee (2010). 39. Straits Times , "Goal 2020 timely and significant", 16 July 2010. 40. Straits Times , "Shift to 'quality' growth a big change: Experts", 27 January 2010.

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41. Lewis (2004). 42. Lawrence (2008).

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Tan Meng Wah graduated recently from Nanjing University with a Ph.D. in World Economics. He is currently an associate faculty member of UniSIM.

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