Minimum wage proposal is just a placebo, go for the root cause instead!

Below is the speech delivered by Kumaran Pillai, TOC Chief Editor at the Minimum Wage Forum organised by Transitioning.

Good afternoon ladies and gentlemen, distinguished panel of speakers and the organizers of this forum.  

As a first speaker at this forum, I have the privilege of setting the tone or at least have the honour of putting all the arguments forward for the other speakers to either refute or develop my arguments further.

As a way of introduction, perhaps it is worthy to mention that MM Lee had said that the opposition has a closed loop system and in fact the opposition would come up with the same solutions (economic, social and presumably political) if they had an open platform.

I differ on that point. I think we are capable of having an even more open and robust platform should we be more open.

So today, I have decided to take a different tack. I’ll put the arguments as to why we should also consider the alternatives for minimum wage, I’ll make a case that minimum wage is only a temporary measure and has very limited implementation. 

So, in that vein, let’s proceed to have an open discussion about it.

There will be 3 things that I shall cover in my speech today:

One, on historical perspective of wealth – I am not just limiting my arguments about minimum wages, but I am going to focus on overall wealth distribution strategies for a mature economy like Singapore. My primary assumption is that work is just a function of wealth building; it is a means to an end and not the end by itself.  It means that we go to work each day to enrich ourselves and it should not be viewed merely as means of sustenance.

So anybody who is interested in helping those who are downtrodden must look at a holistic solution and not just a patchwork of policies. Some hold the view however, that minimum wage is the solution and the way to building an egalitarian society.

In that regard, I concern myself with the equality of rights, social mobility and upward movement, because that would be the basis on which wealth building can take place. No one, I mean no one, should be disadvantaged based on age, gender, race or even educational qualification. To participate in the economy is a fundamental right.  The case for minimum wage comes when one’s wage is so low that he has lost his ability to participate because of his current economic status.

Two, a situational analysis of the current challenges faced by the local workforce, business (especially the small and medium sized businesses) and our current economic structure and why it is not working anymore. 

And finally, to build a case for minimum wage and more so to consider the alternatives to minimum wage and why the stakeholders should take a hard look at the alternatives. 

Historical Perspective of Wealth

It may sound a bit cliché, but modern societies have resolved much of the problems associated with wealth building and wealth distribution. From a historical perspective, all of us are living better lives that those living in abject poverty and those living under the brutality of hunting and gathering. 

Two things have led to this:

1. Rational thinking and institutionalized learning
2. The concept of ownership – first it was land, later labour (which led to slavery and now it has been abolished) and now capital

In fact, in the past, the concept of ownership was so potent that it led to structures of ownership, power and influence.

In a feudalistic society, for example, ownership of land resides with the feudal lord. Everything is owned by the king or the emperor and people in return worked and tilled the ground in exchange for goods and services. With a monopoly of all the productive resources, he soon became the source of power, authority and influence.

We have evolved since and because of rapid industrialisation in much of Europe and America, philosophers began to think about the ownership structures of productive resources in a nation and who should be the real owners of these assets. Since then, we have seen a shift of power because ownership was transferred from the state to the people. Today, we are able to achieve that through the capital markets. It is the democratisation of our productive resources.

If you come from that perspective, then we should have a limited government. We should not have a government that interferes into the workings of the economy and real ownership of these assets is the real key to wealth building. Then, having a conversation about minimum wage would be akin to giving a patient a placebo. It is just a symptomatic relieve and does not address the underlying issues at hand.  

Singapore is a mixed economy, much of our economic assets are state owned and as a result, the government is in a rent seeking mode. Whenever, I use the term rent seeking, it reminds me of the feudal structures of the past, where rulers were lording over the subjects.

The government is the problem not the solution

When American President Ronald Regan took office in the 80s, the first thing he said was that

“The government is not the solution to the problem, the government is the problem.”

We have a similar situation in Singapore today.  If I were to purely advocate minimum wage, without addressing the fundamental issues of rent seeking, without addressing how the government is lording over us, without having a discussion about the inefficiencies of the GLC structures of GIC and Temasek and without my spiel about widespread malaise that is taking place like in the case of SCDF and CNB. Then, I will be doing this forum disfavour.

We need to be cognizant of the fact that historical performance does not guarantee future performance or results. What worked in the past, worked well in the past! When we first started, the government opted for a model where the state controlled the resources; they set the savings rate, and they determined the GDP growth rate. It worked well for us, for a period of time though, and I must add that there were several other factors that contributed to our success, such as the geographical location of Singapore and the FDI driven model. But, things are different now, there is no assurance that what worked in the past will continue to work in the future. That those in power, i.e. our very own “feudal lord” will continue to give us the magic pill or that we can rely on the asset enhancement programme of the government to ensure that we have a fair share of the economic progress.

New challenges of Today

In a globalized economy, resources are fairly mobile and it includes both capital and human resources. It works on the basis that capital seeks assets that yield the best returns. In other words, if I were a money manager, I would invest in an instrument that would give me the best ROI. If I were a HR manager, I would seek the best man for the job.

The government has no business in this front. Its core function is to be a regulator and not a provider of services. It should focus on coming up with the right policy framework and not meddle with the way the economy is run. The government should not be in the business of making money.

All of us have gathered around this room today to speak about the social injustices that are taking place. Some people believe that the current social malaise exists because of capital markets and the underlying greed that drives it. As a Chief Editor of The Online Citizen, I receive many letters and some of them hold the view that there exists social inequality because of greed, because the rich exploit the poor and the portrayal that the rich are mean heartless bastards who have no remorse or conscience. It tells me that there are perception issues – in this case, about capitalism.

As a spokesperson for the free enterprise economy and as a spokesperson who advocates a limited government, I say that such aspersions are baseless and unfair.

Even if I bought the argument that capitalism is greedy, through reasoning, the biggest greedy pig in Singapore is the government for it owns 60% of our productive resources.

The current Situation

So what are the problems that we face in our society today?

1. An economy that is under-performing because of rent seeking practices of the government. Allocation of resources is not efficient and some economists have also argued that investing our national reserves abroad develops foreign economies at the expense of our own.
2. An insular trading culture among GLCs – contracts are based on affinity and common shareholding. Though there is an open tender system, it is not what meets the eyes. The sales process usually starts way before the tender exercise and potential awardees are shortlisted even before the tender is called.  
3. Anti-competition commission needs to step up and rein in the GLCs –  the acquisition of SCS by NCS should have been disallowed. In fact they should put more pressure on GLCs and should look into the anti-competitive practices that I just pointed out.
4. CPF is underperforming – performing below market returns. Temasek holdings making 17% while our CFP is returning 2+% returns per annum. So our monies are put to good work elsewhere while we get the short end of the stick.
5. A high inflation rate at 5% erodes our overall wealth – it affects everybody and not just the low wage worker. Setting a minimum wage is useless under such conditions; unless there is a provision that minimum wage is adjusted every year for inflation.
6. High property prices making it almost impossible for first time owners to purchase a flat. Also commercial rents are so high that it constitutes the major part of business costs.
7. Technology acquisition costs are so high that some businesses substitute technology with low wage workers. Worse, companies exploit labour to keep costs to a minimum.
8. High cost of financing – government has an unfair advantage while small and medium sized business find it difficult to raise finance. The government finances its business activities through taxation, while the individual can’t.
9. Hyper competition – where business owners compete based on price alone and there are no other differentiating factors.

Possible solutions

I am going to enumerate possible solutions to our current challenges. These can be either considered independently or in tandem with the current proposal for minimum wage.

1. Wage supplement/subsidies for low wage workers to assist companies to cope with the rise in wages and costs.
2. Innovation grant for local companies so that local businesses can invest in technology and training for their staff.
3. Restrict the flow of foreigners – WDA to draw up a competency framework and work out the skill gap in our economy.  I was told that they do have a current framework in place. In which case, much needs to be done to ensure that the framework is implemented and enforced by the Ministry of Manpower. We should rationalize the current flow of both foreign workers and talent that is coming through our doors and it should only be the case where we bring in talent to meet short term demands. At the same time, the government should focus on developing long term capability of our workforce.
4. Planned divestment of Temasek’s assets so that a more equitable wealth distribution can take place.
5. Abolish supplementary income on the national budget but the side effect of this is that it, we may need to increase corporate taxes. On the upside, we have more people participating in the economy and a more equitable wealth distribution can take place. 
6. Introduce capital gains tax for stocks – this would eliminate excessive churning in the stock market and it would curtail all the unscrupulous speculation that is taking place in our capital markets today.
7. Encourage stock options and other schemes to include workers in the wealth creation process.

Having a workforce that is experienced, well trained and loyal is an asset. In the long run, business owners and government should focus on employee retention policies rather than policies that promote hyper competition.

Conclusion

The exploitation that is taking place in the market today is not because of greed as what some people put it. It is because the Singapore government is an active participant in the local economy, stifling innovation and drawing monies out of the circular flow of income. It is the rent seeking practices of our government that needs to be abolished.

I like to add that minimum wage is just an artificial wage floor. What I fear most, is that, unscrupulous employers will start circumventing the proposed minimum wage system by paying lower than the recommended wages. That is bound to happen as long as there are people who are desperate enough to take up those jobs.

We are only going to end up spending heaps of monies monitoring these illegal activities. That money can be spent on wage subsidies and other programmes that directly impacts and alleviates the issues faced by low wage earners.

In my opinion, the natural and the best way to do this, is to restrict the flow, in this case the flow of foreign workers to ensure wages reach a new equilibrium.

To institute a government sanctioned minimum wage policy, whether today or sometime in the future is in the same vein. It is replacing one form of inefficiency with another.  I hope some wisdom will prevail.

Thank you.