Essays by economists show how policies have worked (or not)
in the last 50 years as Singapore - and the world outside - changed.
TUE, MAR 08, 2016 LINDA
YC LIM
LAST year, 17 economists, mostly Singaporean academics, got
together to prepare 13 papers for an SG50 Special Issue of the Singapore
Economic Review, that I guest edited. This has since been republished as a
book, Singapore's Economic Development: Retrospection and Reflections.
We look at Singapore's economic development of the past 50
years from different policy perspectives: governance, lessons for other
developing countries, role of the state, monetary policy, public financial
management, labour and productivity, trade and foreign direct investment,
demographics and population, housing, the Central Provident Fund (CPF), poverty
and social welfare and energy and the environment. And we reflect on what lies
ahead for the economy.
There are several common themes among our papers. The
dominant theme is the primacy of economic growth in driving social as well as
economic policies. This was maintained throughout our 50-year history, even
after per capita gross domestic product (GDP) had risen well beyond the level
at which growth tends to slow down in developed countries.
Examples of social policy being harnessed for economic
growth include: ensuring affordable housing to keep factory wages low during
the years of labour-intensive manufacturing; reducing employers' CPF
contributions and government industrial estate rentals to lower business costs
during growth slowdowns; the liberal foreign worker and talent policy
underlying the extensive growth model based on factor accumulation; public
finances oriented toward providing incentives and subsidies for investors;
social welfare policies focused on human capital development; and energy and
environmental policies focused on developing the oil and gas sector and
lowering costs through energy efficiency.
A second theme is the interconnection between different
policy arenas, which increased the effectiveness of individual policies. The
best known of these is the mobilisation of individuals' CPF savings to finance
their publicly-constructed housing, thus avoiding budget deficits, creating a
home-ownership society and motivating national service. Racial quotas in public
housing estates helped to foster national unity and prevent the formation of
ethnic ghettoes and voting blocs. Housing Development Board (HDB), CPF and
labour policy also served industrial policy conducted by the Economic
Development Board (EDB). Housing, education and health policy were used to
lower birth rates during the 1960s and 1970s, while budget measures such as tax
relief and child payments were later employed to encourage births.
Third, there were sharp changes in policy direction, but
within the same development model and institutional infrastructure. The HDB's
goals moved from dealing with a chronic housing shortage and providing
affordable basic housing in the 1960s through the 1980s, to upgrading, market
deregulation and asset enhancement after 1990, with some return to a focus on
affordability very recently. CPF moved quickly from retirement savings to
mortgage financing, later adding non-housing investments, healthcare and education
financing to its allowable expenditures.
Investment incentives and industrial policy moved up the
technological ladder from labour- to capital- and skill-intensive, while
foreign labour policy swung back and forth between heavy dependence and
tightening. Population policy, which was emphatically anti-natalist in the
1960s and 1970s, was reversed in the 1980s to encourage higher fertility. There
was a switch from public provision to partial privatisation of public and
social services, reflecting an ideological shift from state to individual
responsibility for social welfare, which has recently begun to shift back.
Fourth, the dominant role of the state in the economy was
maintained, and even expanded. Rather than retreating with the development of
markets and institutions, state and state-linked entities have reached into
ever more areas of public and private life and the provision of commercial
goods and services which in other developed-market economies would be
undertaken by private enterprise.
Strong central executive control, an undivided legislature
and what Associate Professor Tilak Abeysinghe of the National University of
Singapore (NUS) calls "politicians with high opportunity cost",
facilitated swift decision-making and policy implementation by the civil
service, statutory boards, the government-linked companies (GLCs), NTUC and
other state-linked units and their private-sector subcontractors. This
pervasive state apparatus enabled the rapid mass mobilisation of resources for
economic growth during different developmental phases.
These policies were very successful in achieving both the
primary goal of rapid GDP growth (with low unemployment and inflation), and
each policy's multifaceted social and economic goals. They were greatly enabled
and enhanced by a favourable world market environment, which also benefited
other Asian newly-industrialising economies. But focusing on maximising growth
through factor accumulation proved to be unsustainable. The depression of both
capital and labour costs preserved international competitiveness and
attractiveness to foreign investors. But there were diminishing returns,
especially given the extreme scarcity of land and the early appearance and
continuation of low, and even negative, productivity growth.
Both public and private housing prices rose due to
heightened scarcity values intensified by foreign demand (the result of open
capital and labour markets). In response, Singaporeans saved more of their
income to spend on housing, with a corresponding fall in the share of income
spent on consumption of other goods and services to a very low level (40 per
cent of GDP) by local historical and comparative international standards.
Becoming "asset-rich and cash-poor" in a
rapidly-ageing society, where most retirement savings lodged at the CPF have
been devoted to housing, poses serious problems for retirement-income adequacy.
The integration of CPF savings with HDB housing policy, so perfect for a much
younger, lower-income, higher-fertility society in a much lower-cost,
faster-growth era, now presents difficult policy challenges in a much older,
higher-income, lower-fertility society in a much higher-cost, lower-growth era.
Higher land and property costs have also directly and indirectly reduced
international competitiveness and hence, the capacity for growth through
foreign investment.
While individual policies interacted to enhance their
collective effectiveness, successful policy in one domain also had negative
impacts on other policy domains. For example, during the labour-intensive era
of development, low-skilled manufacturing jobs were plentiful for
lowly-educated residents. Their employment and wages rose rapidly, reducing
poverty and inequality and increasing their ability to pay for affordable
public housing out of CPF.
But as Singapore's comparative advantage shifted, returns to
internationally mobile capital and skills increased, while those to low-skilled
domestic labour decreased, as in other developed countries also subject to
intensified global competition and skill-biased technological change. This
resulted in increased income inequality, intensified in Singapore by the
massive import of low-skilled labour which depressed wages at the lower end of
the scale, and reduced productivity growth by removing the incentive for firms
to automate and innovate.
At the same time, the policy to attract global talent,
especially into financial services, pushed salaries up dramatically at the high
end of the labour force. Not surprisingly, earned-income inequality in
Singapore is now greater than in most other developed countries, and overall
inequality is even greater if wealth inequality is also taken into account.
Combined with the rising cost of living, this has introduced challenges of
poverty and retirement adequacy for significant proportions of the population.
Industrial upgrading through statist policies has also
increased economic volatility, given concentration in a few volatile and
capital-intensive industries. Volatility not only reduces growth and
productivity, it also makes macroeconomic stabilisation more challenging,
reducing the degrees of freedom which monetary and fiscal policy previously had
to pursue other goals. Increased volatility has also arguably reduced welfare
for workers by forcing them to shoulder higher risks, in the absence of an
effective social safety net.
Industrial upgrading also increased the skill-wage premium,
worsening income inequality, while prioritising heavily capital-intensive
industries such as petroleum refining and chemicals also conflicts with
environmental goals of reducing energy use and pollution. Growth based on large
imports of foreign labour and talent has resulted in increased physical
congestion, and increased risk of social divisions between indigenous citizens
and the "new residents".
We collectively conclude that economic policy was both
innovative and effective in the first two to three decades of independence,
particularly in simultaneously delivering on both rapid economic growth and
improved social welfare. In more recent decades, economic growth and social
welfare for a significant minority of Singaporeans have begun to diverge. At
the same time, external demand and domestic supply-side constraints have
sharply lowered growth potential, even as the income, housing and healthcare
needs of the ageing population rise.
Furthermore, prolonged dependence on foreign enterprises has
left the economy lacking what economists Tan Kim Song and Manu Bhaskaran call
the "inherent production capacity" and "core of strong vibrant
local enterprise" - necessary to propel development into the future.
"An investment approach - putting bets on many new industries with the
expectation that some would pay off handsomely even if others fail - limited
the likelihood of developing sufficient depth and globally competitive scale in
any of these industries, since all would be competing for already extremely
scarce resources."
Looking ahead, there is consensus that slower GDP growth,
higher productivity, a more vibrant and innovative local private
entrepreneurial class, and a relative shift from manufacturing to services, and
from a global to a regional market orientation, are necessary for continued
economic development. The big question here is whether and what the government
can and should do in this transformation away from the development model it
created.
There is also consensus that public policy must continue to
pay greater attention to directly meeting the growing social needs of the
population, especially the poor, low-income and elderly. Fortunately, we have
the financial and institutional resources to effect the necessary transfers,
which will be reduced if we also allow labour and capital markets to function
more freely and efficiently.
- The
writer is guest editor of "A Fifty-Year Retrospective on the
Singapore Economy" published in a special issue of the Singapore
Economic Review Vol 60, No 3 (2015), and republished as "Singapore's
Economic Development: Retrospection and Reflections" in World
Scientific Publishing Co's SG50 Series. She is also professor of strategy
at the Ross School of Business, University of Michigan
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