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Does Singapore need Economic Restructuring II or another 'Wage Revolution?' Part 2

~ 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 2 of Prof Lim's speech and part 1 can be found here. TOC thanks Prof Lim for allowing us to republish his lecture in full.

Do we need another economic restructuring now in 2012, as opposed to the one we had in 1979, 33 years ago? Political, economic and social conditions then and now differ strikingly. Our per capita income then in 1979 was US$4,071, one of the lowest in the world and in 2011, US$50,123, one of the highest in the world. The level of technological advance too has been dramatic, from, for example, as shown in Diagram 3, a coolie carrying a bag of rice at his back in a tongkang at the mouth of the Singapore River to one of the first-rate, worldclass containerized ports in the world. Then, we had a reservoir of untapped, under-utilized and mis-utilized domestic labour force with a very low participation rate of female labour. Now the female participation rate has become so high that the real problem and the realcasualty is the serious decline in family formation, which is a pointer to our future succession, population renewal and survival.

However, the distinguished presiding Chairman of this meeting, Mr Ho Kwon Ping, said not too long ago that Singapore needed another wage revolution to complete the 1979-81 successful wage revolution. He added that the first wage revolution had been most successful only in the manufacturing sector, but not in the other sectors, such as in the construction industry, the retail trade sector and the household sector. We all are aware now that we have 1.157 million non-resident workers, not like in 1979. However, I must hasten to add that I am thankful that these foreign workers have chosen Singapore to work, instead of other countries, and that it is not their fault or shortcoming that our employers, out of sheer necessity, have chosen to employ them to work here in Singapore.

Increasing Income Inequality, another Achilles’ heel

In recent decades, consequent on globalization and technological advance in a largely market-oriented global economic system, the world economy, particularly in advanced and emerging economies, has been faced with increasing and disconcerting income inequality.

Much of the research work in this field has been very ably done by the OECD, the IMF, and the World Bank and by the ILO. In Singapore, the twin pulls of income inequality have taken on the pull away from the centre by both the lowest-income and the highest income groups, pulling away from the centre at both ends in the opposite directions by the two groups. The global contagion forces pull up the highest income groups whilst the increasing inflow of much cheaper foreign labour pulls down the lowest income groups. Singapore’s fairly bad Gini-coefficient, as shown in Diagram 4, thus exacerbated further from 0.454 in 2001 to 0.473 in 2011. The P90/P10 index, another frequently used measure of income inequality, increased from the already high index of 8.58 in 2001 to 9.19 in 2011, as shown in Diagram 5.

A Gini-coefficient of 0.5 is normally considered a dangerous line to reach, far less to cross, and we have reached 0.473, according to official estimates, in 2011.

 


Source: Key Household Characteristics and Household Income Trends, 2011, p. 16

 

Source: Key Household Characteristics and Household Income Trends, 2011, p. 16

 

On Singapore’s increasing Gini Coefficient in the last decade or so, it may interest you to note that in 1985, when the Third Edition of one of our best-selling Economics College Texts “Economic Structure and Organisation” was written, the Gini Coefficient, as shown on page 303 in Chapter 8 “Income Distribution”, actually showed a declining tendency, reaching 0.422 by 1980, as opposed to the present 0.473. Individual and company income taxes then were much higher and there were inheritance taxes. There was no GST then. Besides, NWC was recommending quantitative guidelines with dollar quantum favouring the lower income groups in percentage terms.

Solution to Problems of the Two Achilles' Heels?

As a solution to the new problems of increasing income inequality and the excessive reliance on cheap foreign labour import, I would like to propose Economic Restructuring II operational for three years, with the following six features.

(1) Sizable Pay Increase for Lowest Income Workers

One, that all workers’ pay below $1500 per month be cumulatively increased by 15% in year one, 15% in year two and 20% in year three. This increase is applicable to all workers, local or foreign, if he or she draws a pay of less than S$1500 per month. A dollar quantum is also to be included in the increase pay package.

(2) Part of Pay Increase to SDF and RA

Two, that one third of the increase pay package be channelled to the Skills Development Fund, one-third in the form of take-home pay and the other third to CPF Retirement Account (RA). For foreign workers, it will take the form of ex-gratia payment upon leaving Singapore on expiry of tenure. The SDF should be re-activated, re-vitalized and re-invigorated to perform the functions of (1) training and re-training of workers, (2) mechanization and technological upgrading and (3) better employment of labour through re-designing in labour use. The restructuring momentum has to be re-generated and sustained. The buzzwords should continue to be “use one worker instead of two”.

(3) Moratorium on Pay of Highest Income Groups

Three, those who receive $15,000 a month or more will have their wages or salaries frozen for three years only during former Economic Restructuring II. There is no proposal for a pay-cut or a pay-ceiling or super-taxes for high-flyers, only a moratorium on pay increase for three years. The intention is not to frighten the geese that lay the golden eggs. No Wall Street protests of the kind in the US should ever be envisaged. Company income tax then was 40%, now 17%. The maximum personal income tax then was 55%, now20%.

(4) Moderation for Middle Income Groups

Four, those whose pay is between $1,500 per month and $15,000 a month will receive a quarter to a third of those less than $1,500 per month. A portion should still go to the much inadequate CPF Retirement Account.

(5) Government Co-Payment of SDF

Fifth, the state (or the Government) should contribute to the SDF on a 1 to 1 quid pro quo basis to demonstrate tripartite commitment, participation and responsibility in the new economic restructuring process.

(6) Involvement of NWC Absolutely Necessary

Six and lastly, like in Economic Restructuring I, the modus operandi of Economic Restructuring II, including the operational details, should be discussed and decided upon by the tripartite National Wages Council, which has to forge consensus by the three tripartite social partners, as in 1979.

Restatement of Objectives ER II

In other words, the basic objectives of Economic Restructuring II are (a) to check and to halt and if possible to reverse somewhat the disturbing increasing income inequality trend, (b) to increase productivity, total factor productivity, as a growth target and (c) to check and to halt the trend towards increasing reliance on very much cheaper imported labour to generate quantitative GDP growth. The overall objective must be, and should be, to enhance further the quality of life of all those who live and work in

Singapore, and in particular, for those whose home and country is Singapore. With ER II, we will have a stronger, more robust, and more productive economy and a fairer, more just society. With ER2, hopefully, our very low and embarrassing Wage/GDP ratio can return to a less embarrassing position in three years.

Economic Restructuring Models I and II

Let me now put the first and the second restructuring model in a simple diagrammatic form to round-off this presentation. The curves in Diagram 7 are isoquant curves. They show factor proportions between capital and labour. The higher the curve the higher is the output. The model is not drawn to scale. Only inflexion years are shown. We moved successfully from 1979 to 1981 in the first restructuring exercise. We gradually changed our course after the economic trauma of 1985. If we continue at the present course without the slowing down or curtailment of lowly-paid foreign labour import, our GDP will take on the route of Transformation Curve A with all the negative implications on income distribution, increasing demand for public services, and congestion. If we restructure our economy following the first model, mutatis mutandis, our economy would move along TCB. I opt for TCB. TCB also implies a slight improvement to the Gini coefficient which, as has been stated, has shown a disturbing deteriorating trend. Economic Restructuring II, if successfully carried out, also means the lessening of the need for increasing taxation, including GST to meet the multifaceted needs for subsidies and transfers. Economic Restructuring II hits the basic ER problem on the head.

Restructuring Model I and II

TCA means transformation curve A

TCB means transformation curve B

 

Concluding Remarks

Finally, it is much more difficult to have national economic restructuring now than three decades ago. The politico-economic and the socio-economic environment have changed. But what has not changed, however, is that we still have effective tripartism and we still have a government and the civil service that are among the best in the world in cleanness, integrity and ability. Economic restructuring needs a national will. Do we have it now, as we had it then, a little more than three decades ago, but now, we are faced with a new set of economic problems, which may be called the problems of economic success? Previously, we called Growth with Equity. Now, we call Inclusive Growth. I have no doubt that Economic Restructuring II will bring Inclusive Growth to a more respectable and a more meaningful level. I recognise, however, that Economic Restructuring II as proposed by me is but one way of achieving the aims of Inclusive Growth, probably, in my view, the best way.

We were the first country in the world to have the then bold and iconoclastic Economic Restructuring I some 33 years ago and we will be the first country in the world now to have a formal Economic Restructuring II, also bold and iconoclastic and for another three years.

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