Prof Lim clarifies on Economic Restructuring II (ERII).


By Professor Lim Chong Yah ~

TOC NewsI am honoured that my public lecture on ERII (also termed as shock therapy) has attracted the attention of so many concerned Singaporeans. At least two reservations should be explained by me to clear the cobweb of misunderstanding.

The first serious and perfectly understandable and deeply appreciated concern is the gap between productivity growth and my recommended pay increase of 50% over the next three years: 15% for year one, 15% for year two and 20% for year three. The perfectly understandable argument is that remuneration increase must be according to productivity growth. My position, however, is that our lowly‐paid workers have been underpaid by much more than 100% of their pay when compared with their counterparts in countries with comparable national affluence like Hong Kong, Japan or Australia. Even if we compare our position with countries with much lower per capita income like South Korea or Taiwan, our lowest paid workers have been grossly underpaid. My thesis is that the gross underpayment is consequent on the unlimited influx of cheap foreign labour to Singapore. In 1991, our nonresident
labour force was 300,800.This shot up to 686,200 in 2001 and to 1,157,000 in 2011. Of this foreign labour population, only 1.7% earned high enough that they are legally obliged topay income tax. Do we need a wage shock‐therapy, or ERII?
My assumption that they are paid 100% less than their productivity contribution is an underestimation. So, if over three years, their pay has gone up by an accumulated rate of 50%, they will still be paid 50% less at the end of the restructuring period of three years. In other words, we should pay them according to their productivity contribution, or at least a larger portion of their real productivity contribution.
Now, it should be pointed out in this connection that our wage/GDP ratio is one of the lowest in the world. Leaving aside the wage income distribution within our national wage bill, our current wage/GDP ratio (2010) is 42%, as against 63% in Japan. Even Taiwan and South Korea, both have a per capita income much lower than us, have a wage/GDP ratio of 50% and 51% respectively. The low wage ratio reflects the gross underpayment of our lowest paid workers, local or foreign. Our construction workers, for example, are paid 3 to 5 times lower than their counterparts in Hong Kong. This is just an example for comparison. And Hong Kong has not
been importing cheap foreign labour in the construction sector as a matter of government policy.
My second point is the alternative fiscal solution suggested by the very reflective Straits Times Editorial this morning (16 April 2012). What does it mean by the traditional fiscal solution? It means government subsidies, transfers and hand‐outs to the under‐paid workers. There are two problems here. One is that this is likely to entail the raising of taxes. Will not the raising of direct taxes including personal income tax and corporate income tax erode our competitiveness?
Will it not frighten investors and the equally much‐valued professionals to seek greener pastures elsewhere? And if this route is not that encouraging, would the government raise our GST, current at 7%, to 10% or more to finance the subsidies and hand‐outs? Or would our government follow the footsteps of some advanced countries by resorting to deficit financing or eroding the precious reserves that we have so painstakingly built up over the decades?
But what is more worrying to me is the development of a dependency syndrome among the low‐income workers and their families. They will come to depend on the government for their well‐being. In my public lecture, and those who attended the lecture will bear me out, I advocated training a man to catch fish, rather than giving him a fish a day for his survival. That is why an integral part of ERII is the training and retraining of our workers to enhance their occupational mobility and their ability to catch fish, rather than to fall into the clutch of dependence on the government for their well‐being and the well‐being of their family. Those in the comfort zone should be alerted to the danger of this fiscal hysteresis process.