More democracy is the solution, not shock therapy

~ By Kenneth Jeyaretnam ~

Despite Prof Lim’s undoubtedly good intentions, the solution to wage stagnation for Singaporeans is not some central planning directive taking us back to the Soviet era. It is Singapore’s lack of democracy that is holding us back. What we need now is thoroughgoing reform ofSingapore’s political institutions so that they become more democratic and inclusive and thus more responsive to the interests of the bulk of Singaporeans and not just a narrow elite.

I read the outlines in our State media of Prof Lim Chong Yah’s proposals for restructuring the Singapore economy with some scepticism. Among the questions that immediately sprang to mind was how we were going to simultaneously reduce our dependence on cheap foreign labour and raise the wages of the low-paid (by 50%!) without either a statutory minimum wage or greater curbs on foreign labour. Without either of these, Singaporean workers would just be priced out of the market which I assume is not the intention. The State media were predictably short of details given that a minimum wage has up till now been anathema to the PAP government. However Prof Lim’s proposals have been criticised by the head of the NTUC, Lim Swee Say, as “very risky” and likely to lead to unemployment.

This has always been the government’s line whenever discussion of a minimum wage has come up. However such criticisms are disingenuous as they omit to mention that Singaporeans have been priced out of working in several sectors because of undercutting by foreign workers and therefore there may not be much additional unemployment among Singaporeans. In fact it could lead to higher employment of Singaporeans while at the same time spurring restructuring of the economy towards higher value-added activities and cutting our dependence on foreign workers.

However Prof Lim’s proposals go much further than a minimum wage and amount to wholesale state intervention in the labour market to determine wages. This would be anathema to me as a free market economist. Despite the longstanding efforts to burnish Singapore’s market credentials with international media and global business, the proposals are revealing of the appeal of Communist and statist central planning to many in the government and establishment. As the former head of the National Wages Council, Prof Lim was responsible for the policy of pushing up wages rapidly at the beginning of the 1980s. This was aimed at bringing about the restructuring of the Singaporeeconomy towards higher value-added activities.

Classic development strategy, but...

I remember discussing this plan with my Director of Studies at Queens’ College Cambridge in 1981. His comment was that this was classic development strategy. However the policy was abandoned after the economic recession in 1986 when there was a big rise in unemployment. In the 1990s as labour force participation rates rose towards full employment levels there was an ideal opportunity to resume the restructuring of the economy and to move away from low-value added activities and our dependence on extensive growth without any increase in underlying productivity.

But, rather than let the growth rate decline the government chose instead to open the gates wider to foreign labour, first a trickle but one which had become a deluge by the late 2000s. This kept our growth rate high and impressed foreigners but caused wage stagnation for those workers at the 80th percentile and below and probable real wage declines for the bottom two deciles over the period 1998-2010.

Since I pointed out in 2009 that the emperor had no clothes, the PAP government has started enthusiastically talking the language of restructuring and higher productivity and cutting our dependence on foreign labour while making noises about how “inclusive” they are. They devoted a whole Budget to it in 2010. The truth is that the government would not like any curbs on foreign labour but they have been reluctantly forced to be seen doing something after the last election where unhappiness at uncontrolled immigration was a major factor. Hence they have come up with the gradualist policy of raising foreign worker levies instead.

Drawback of using just levies

While a tax (which is what the levies are) is generally preferable to a quota because the price mechanism is a more efficient way of allocating resources than quantitative restrictions, there are potential drawbacks. I have already pointed out that raising levies may not be enough in a situation where employers are able to source cheaper labour from poorer countries to replace Chinese and Indian workers who find themselves priced out of the market.

One has to ask why the PAP government have pursued economic policies for so long which are not in the economic interests of the broad mass of Singaporeans. After all governments in democratic countries have been voted out of office for what is perceived as their failure to control immigration. The flood of workers from Eastern European countries that had joined the EU was a factor in the Labour government’s defeat in the UK in 2010. Clearly for our government it was not lack of knowledge of the economic consequences of their policies.

As Why Nations Fail* makes clear, history is littered with examples of countries with extractive political institutions that have pursued policies that have impoverished the bulk of the population but allowed a small segment to get immensely wealthy. Singapore also suffers from non-democratic and non-inclusive political institutions. This in turn ensures that policies that favour a small elite get implemented and that economic institutions get less inclusive.

By allowing in cheap foreign labour and cutting real wages for ordinary Singaporeans the PAP government increases the share of GDP going to profits and the high-paid. High economic growth rates and increased profitability do not translate into higher living standards for the bulk of Singaporeans but do serve to justify high salaries for the leaders of our GLCs, our Sovereign Wealth Funds, senior civil servants and of course government ministers. At the same time higher property prices stemming from a deliberate policy of uncontrolled immigration also benefits the elite who in turn are quite happy to support the non-democratic nature of our political institutions.

*Why Nations Fail, by Daron Acemoglu and James A. Robinson

This article was first published on Kenneth Jeyaretnam's blog, Reinventing the Rice Bowl. TOC thanks the writer for allowing us to republish this article in full.

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