Unrealistic for NEA to rely on SEHCs to produce “tech or business model innovations” that can remedy hawker industry’s “cost disease”: Former academic Donald Low

It is “unrealistic” for the National Environment Agency (NEA) to expect social enterprise hawker centres (SEHCs) to be the panacea for “the underlying cost disease in the hawker industry,” says former academic Donald Low.

Baumol’s cost disease, or the Baumol effect, refers to a rise in wages in industries with no productivity gains as a result of higher wages observed in industries with high productivity gains.

In his Facebook post on Thursday (25 Oct), Mr Low argued that “industries that benefit less from economies of scale and labour-saving technologies — think hawkers, tailors, barbers, and even teachers and doctors — will see their productivity grow at a slower rate than in other industries.” This is in contrast to sectors such as “manufacturing and certain highly-skilled services (e.g. software, finance, e-commerce), standardisation, automation and scale economies” where labour productivity is maximised.

In relation to how the mechanism of high labour productivity could have a negative impact on hawker stalls, Mr Low said that “efforts to automate or standardize these relatively stagnant industries often result in (perceived) lower quality,” as seen in “central kitchens or factory-produced fried shallots instead of the hawker preparing everything from scratch” where “productivity improves but quality falls.”

“A slower than average rate of productivity growth,” according to Mr Low, would result in a higher inflation rate in the hawker trade than in other industries, which would see an increase in hawker food prices at a faster rate than the average prices.

Mr Low argues that “if prices in the stagnant industries aren’t allowed to increase faster than average prices, these industries would have to cut costs,” which will also result in stagnation of wages compared to “incomes in other industries where prices aren’t constrained.”

“This is why the hawker industry hasn’t been able to attract younger people: hawker prices probably haven’t risen faster than the general inflation rate, and as a result, incomes have stagnated,” he added.

Mr Low also stressed the role of the government’s financial intervention in ensuring that SEHCs would be able to keep prices of hawker food low and, at the same time, ensure that hawkers are also making a profit, adding that expecting to do both without offering subsidies is impractical and unsustainable.

“There was never a realistic chance that SEHCs would be able to square the circle of ensuring affordable hawker food and profitable hawkers without government subsidy.

“When someone says that SEHCs would come up with innovative practices or business models that would keep prices low and make hawker centres vibrant, while still ensuring that hawkers’ businesses are viable, it’s really a reflection of their ignorance or delusional optimism,” he concluded.