Singapore faces lower standard of living
25 August 2003
Prime Minister Goh Chok Tong's National Day Rally speech on 17 August has really set Singapore abuzz. There were two important themes in his speech that were widely followed up upon in the following days. One was on the need to restore Singapore's competitiveness by cutting the contribution rate to the Central Provident Fund. The other was on political succession.
That Deputy Prime Minister Lee Hsien Loong would take over from Prime Minister Goh was never really much in doubt. More in question was the timing. The National Day Rally speech made it quite clear that the takeover would occur some time within the next year or two.
As for the cut in the Central Provident Fund (CPF) contribution rate -- expected to take the form of a cut in the employer's contribution -- there has been much debate over the past week on its pros and cons. For sure, such a cut would have a significant and adverse impact on the property market, since home buyers usually use CPF money to fund a large proportion of the purchase. The problem to salaried workers would be compounded if the planned tightening of the CPF withdrawal at age 55 also takes place. Essentially, workers would see their effective income falling and would need to plan their retirement much more carefully.
Or, in a nutshell, workers need to be prepared for a lower standard of living.
In spite of rising unemployment in Singapore over the past few years, this message has taken a long time to hit home. To many Singaporeans, the rising unemployment is a cyclical phenomenon that resulted from a cyclical recession, exacerbated by the bursting of the stock market and technology bubble of the late 1990s. The reality, however, is that the recession and a burst bubble do not give the full picture. A more chronic problem is the rising competition from China and India.
China and India have cheap labour -- much cheaper than their quality merits. China is strong in manufacturing, India in professional services. More and more multinational companies are shifting their production and services to these countries to cut costs. That also means that jobs are shifting from industrialised countries to China and India. And because the labour pool in these countries is so huge, this process will continue for a long time to come.
In the face of such competition, where can countries like Singapore find a niche? Singapore has been trying to build up its high-tech and financial sectors to keep ahead of low-cost competitors, but universities in China and India are turning out millions of graduates every year. Singapore can run to the high-value sectors to try to keep its wage premium but it cannot hide there for long.
So a cut in wages appears inevitable. For a while, the Singapore government had tried to encourage employers to implement flexible wages to facilitate such a cut. The civil service led the way in implementing flexible wages, but the private sector largely held back. Instead, retrenchment has been the main tool for cutting labour cost. To stem the rising tide of unemployment, the government has little choice but to cut the CPF contribution rate by the employer.
However, the Singapore government should not stop there. Other options must continue to be explored. For example, the Singapore currency should continue to be carefully managed to ensure Singapore's competitiveness. Here, though, there is a limit to what the government can do. Just last month, the Monetary Authority of Singapore lowered its target trading band for the Singapore dollar to increase the economy's competitiveness. However, repeated devaluation would undermine confidence in the currency, raise interest rates and increase import costs.
There are other ways for the government to help. Ways that help to spread the drop in the standard of living among as many people in Singapore as possible and thereby dilute the pain. So even as salaried workers see their incomes fall, consumer as well as business costs should also fall.
As a component of consumer and business costs, property prices should be allowed to continue to fall. The trick here, though, is to avoid a deflationary spiral, something easier said than done, since a lot of consumer debt is tied to residential property.
There have been calls on the government to reduce its fees to help reduce business costs. That would be a direct help to businesses. The government has to ensure, though, that it does not inadvertently subsidise businesses by charging below market rates. That merely shifts the costs to tax payers.
Possibly a better way to help businesses is to reduce bureaucracy. A good example recently is the liberalisation of rules for the use of public flats for business, as it promotes entrepreneurship and provides an avenue for the unemployed to get back on their feet. In fact, rules or liberalisations that promote the formation of small businesses are probably the most important in the current state of the economy, as they are likely to have the greatest impact in reducing unemployment.
If, at the same time, they increase the supply of consumer services, they have the side effect of reducing consumer costs as well, something to be welcomed by most workers in the midst of wage cuts.
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