Does Singapore need Economic Restructuring II or another 'Wage Revolution?' Part 1

~ By Prof Lim Chong Yah ~

Paper presented at the Economic Society of Singapore Distinguished Speaker Public Lecture Series on 9 April 2012 at the Orchard Hotel, Singapore. This is Part 1 of Prof Lim's speech and Part 2 can be found here. TOC thanks Prof Lim for allowing us to republish his lecture in full.



Economic Conditions in Singapore in late 1970s

(Surfeit of low-wage workers)

* Low-wage occupations: ubiquitous

* Low-wage manufacturing: common

* General technology level: low, very low

* Women employment: low

* General under-employment: rife

* Wind of change in East Asia, particularly China

Economic Restructuring I (1979 – 81)

Singapore went through a formal economic restructuring exercise for three years, 1979 – 81, during which:

(1) Wage rates were increased across-the-board cumulatively by 20% per year;

(2) A portion of the wage increase went to CPF through increases in employers’ and employees’ contributions;

(3) Another portion of the wage increase, 4% of wages below a certain level, went to a newly-created tripartite-run Skills Development Fund;

(4) The new Skills Development Fund Advisory Council oversaw the administration of the Fund with twin objectives

(i) Substantial across-the-board subsidy for training and retraining of employees at all levels opened to all employers in Singapore.

(ii) A common-playing-field substantial subsidy for the mechanization of the production processes opened to all employers in Singapore.

Need and Objective of ER I

The overall objective of the restructuring exercise was to move the old traditional economy from a low-skilled, low-value-added and highly-labour-intensive structure to a high-skilled, high-value-added, and more technology and more knowledge-based new economy. The need for restructuring was urgent in view of increasing competition from new emerging and developing economies in East Asia particularly following the opening-up and the robust new industrialization programme of the People's Republic of China since 1978.

Five-Point Observations on ER I

Five general observations of the first formal economic restructuring exercise (1979-81) will be made here.

(1) It was self-funded, or strictly speaking, funded by the employers, not by the Government through higher taxes or from quantitative easing, or from accumulated reserves or otherwise.

(2) The exercise was very focused with only one Government-appointed tripartite agency, the Skills Development Fund Advisory Council, overseeing the exercise.

(3) The “means” for the restructuring objective was also much focused. The means were only two: one, mechanization, that is, the substitution of capital for labour, and two, training and re-training of workers, particularly technologically replaced workers.

(4) Even the training and mechanization programmes were highly focused: mechanized and trained to meet the anticipated demand of the employers; not training for the sake of training and mechanization for the sake of mechanization.

(5) Lastly, the modus operandi was through inducement, incentives and disincentives programmes, and not direction. Market forces were given a full reign. The Skills Development Fund was merely providing the direction, the support, the philip and the accelerator. The SDF merely provided the GPS.

Success of ER I

Despite some teething problems, the then considered bold and iconoclastic restructuring exercise was a great success. Real GDP displayed high real growth rates of 9.4% in 1979, 10.0% in 1980 and 10.7% in 1981. After 1981, the built-in restructuring momentum continued unabated until the regional recession year of 1985.

Subsequent Low-Wage Labour Import

Since 1985, fearing that the Singapore economy would become internationally uncompetitive, we gradually and imperceptibly eased the moratorium on the intake of lowly-paid, lowlyskilled foreign labour. Non-resident labour force increased steadily from 300.8 thousand in 1991 to 1.157 million in 2011, as shown in Diagram 1, which is based on published official statistics. GDP, as expected, expanded pari passu, as impressively as the inflow of lowlypaid foreign labour. Non-resident labour is cheap. Out of the 1.157 million non-resident work-force in 2011, only 1.7% earned wages high enough to pay income tax. The rest, the majority 98.3%, did not earn high enough to fall into the income-taxable bracket.


Increasing Supply of Non-resident Labour Force (‘000)

It cannot be over-stated that successful economic restructuring can only take place with a moratorium on cheap labour import. There is, as you know, an unlimited supply of lowlypaid foreign labour in our region. One cannot substitute capital for labour, if labour is cheap.

That was why the NWC in 1979 recommended a cumulative 20% increase in labour cost per year for the restructuring years of 1979-81.

Adverse Impact on Domestic Wage Rates

Below is a simplified diagram to illustrate this often forgotten simple principle of price in relation to supply and demand. Diagram 2 shows that an increase in the supply of labour, ceteris paribus, brings down the wage rate from W0 to W1.

Part 2 continues here