Challenges Facing Singapore's Economy (Part 3) - Implications of Rising Costs on Industrial Policy

As briefly explained in the Part 1 of this series posted on Dec 20 below, rising costs have an impact on industrial policy here as well. The implications of these rising costs are the viability of low-cost industries operating in Singapore. As other more cost-competitive countries, such as China and Vietnam, exist in this region, we have been forced to push the level of economic activity in Singapore up the value-chain and forcing lower value-added activities to lower cost countries. An analogy for this is like the Business Process Outsourcing (BPO) strategy that multinationals have adopted in decentralizing production processes. Most developed nations also adopted a similar strategy.

Advocates of this policy may argue that moving up the value chain is a positive development for the economy as we will benefit from greater technological and capital advancement. The point I feel that should be reevaluated is the rate at which this transition has occurred for Singapore. The Manufacturing Value-Added (MVA), which reflects the composition of a country’s higher value-added activities in its aggregate production, helps to put my point in perspective.

Source: United Nations Conference on Trade and Development Trade Development Report                                                                          

Looking at Singapore’s MVA in the table above, it can be seen that our share of medium and high value-added activities in the world has increased by 4.5 times in these 23 years. Singapore’s rate of transition is more than other developing countries over the same time period. Even China, which experienced an unprecedented level of industrialization and technological adoption over this time period, increased its MVA by only 2.5 times with the group of developed countries, which was 64.5 percent of the world’s share in 1980, and grown to 73.3 percent by 2003, had its MVA increased by only 1.1 times during this period. Hence we can derive that Singapore’s transition up the value chain has occurred too rapidly. In my next post, I will discuss why this quick transition up the value chain has been a problem for Singapore and may continue to do so.

Challenges Facing Singapore's Economy (Part 2) - Implications of Rising Costs on Households

Rising costs have been a problem for Singapore in recent years due to our scarce resources. As Asian countries grow and competition for these resources intensifies, this may translate to higher costs of production passed onto consumers as higher prices. In the first half of 2009, the inflation rate for the bottom 20 percent income group was 1.6 percent, compared to 0.9 percent for the top 20 percent. As inflation rate differs for households across the income groups, lower-income households will be worse hit and this will contribute to the widening of income inequality in Singapore. According to the 2000 Singapore Census, the average household income from work for the bottom 10 percent is $61 compared to $16,804 for the top 10 percent.

Besides social implications, increasing income inequality also creates economic concerns. A study done by Robert H. Frank of Cornell University, argued that income inequality creates price distortion as rapid income growth for the top earners allows them to spend more resulting in an “expenditure cascade”. This in turn raises the expenditure standards for those in the lower income brackets, and since their incomes have not grown as rapidly, they experience a loss of welfare. This could particularly be seen in the current property prices boom in Singapore leading to higher HDB prices for the lower income here.

Also, current income inequality in Singapore could potentially lead to the future generations of the lower income to sink deeper into this predicament assuming that they may not be positioned to take advantage of opportunities to better themselves economically. When income inequality worsens, poverty could become a major economic issue, which could be a severe strain on government resources dedicated towards this problem. Although many countries utilize the progressive income tax regime as their main tool to tackle income inequality, and even though this is the existing tax structure here, it will be a challenge for Singapore to rely too heavily on this instrument as it could disincentivise the upper levels of society from living here and potentially lead to a brain drain. Hence, the government will have to look into more creative ways of tackling this problem.

Challenges Facing Singapore's Economy (Part 1) - Shifts in the Global Economy

Global economic shifts, highlighted by the current economic crisis, have seen a severe fall in demand from the Western hemisphere with Asia playing a more central role. As the US and European countries recover, with their demand for Asian exports taking a much longer time than expected to return to normalcy, export-oriented Singapore will have to look at newer markets to correct its falling trade balances and fuel aggregate demand. Here, newer markets in Asia, Latin America and Middle East will have to be developed through a more creative trade policy. Bilateral and multilateral engagements within the region, such as ASEAN, may allow Singapore to develop the hinterland as its market so as to supplement a small domestic economy.

The rise of China and India provide economic potential for Singapore exports and businesses as they are large markets that may help compensate the drop in demand in the US. While they provide opportunities, the ascendancy of these countries, particularly China, may also compete with Singapore for resources and investments for similar industries. Given that China primarily engages in more labour-intensive lower-end manufacturing activities, nevertheless a large domestic market and cheaper labour provides China with a comparative advantage that Singapore may find difficult to compete with over time. Moreover, the rising costs of fuel have made transport costs no longer negligible and may reverse the trend of transnational production networks. If production networks become more vertically integrated, then China may be well-placed to capture more stages of the production process, creating adverse impact for other manufacturing-intensive countries in the region.

Given that Singapore could concede this competition and continue to move up the value-chain of economic activities, this in itself has implications for the economy. Singapore has been quick to move up the value-chain and phase out industries that are lower in the rung. While this is strategic in utilizing the comparative advantage we have in technology, knowledge and capital, it has led to rising costs of doing business here, which has disadvantaged our Small and Medium Enterprises (SMEs).

Challenges Facing Singapore's Economy

The year is almost over and many believe that we have also seen the end of the gloomy economic climate. That may be a little presumptuous, but I would rather leave that discussion to a separate post. For this particular series of posts, I thought it would be informative to take a glimpse into the future and to discuss some of the challenges that face Singapore’s economy, recession or not.

Although Singapore’s economic growth has often been described as miraculous, there are also a fair number of skeptics who firmly believe that the best may be over for the island-state. While such unqualified prophecies garner little ground in economic policy review, it can be agreed that Singapore faces certain significant challenges that will have implications on its economy. The key among these are an ageing population, shifts in the global economy, restructuring of the economy, rising costs, declining labour productivity and widening income inequality. In the coming weeks, Insights-Asia will attempt to assess some of these challenges and their implications on the Singapore economy in a series of posts.

Citizenship Tests - Choosing Wisely

There has been some discussion recently on the need for a Citizenship Test for new Singaporeans. While this is not a novel idea, with Citizenship Tests being employed in many Western societies, including the US, as a criteria for being accepted as a citizen, it is probably the first time this idea has been discussed as widely in Singapore.

The discussions that have emerged thus far have largely focused on the need for a General Knowledge/Current Affairs Test on all things Singapore. Critics of this proposal have, however, questioned if this was a fair assessment, their rationale being that many Singaporeans are also ignorant of the history and general knowledge regarding the country. There is some validity in their argument though, but a discussion on the criteria of who gets to be a Singaporean begs a more detailed analysis than pointing out the obvious neglects of our society. The things we have to ask ourselves are: Why the test and what do we intend to achieve out of it? Who should take this test?

The answer to these questions are related, of course. Let us first trace the underlying issue that acted as a catalyst for this debate evolving in the public domain. There has been some concern within society regarding the poor grasp of English some of the foreign workers, particularly those working in the service industry as shop assistants, waiters and coffeeshop attendants etc., have. As a result, irate members of society have been voicing out the need for a quality check on the qualification of foreigners we bring in. This concern also drew light to the ability and willingness of foreigners to contribute to the shared values central to the society here. While initial discussion focused on the use of English as a medium of communication here (perhaps a spillover from the discussion surrounding the inadequate command of the language by a certain beauty pageant winner), and how certain foreign groups of employees coming in may be less able to or comfortable in contributing towards that, this analysis soon engulfed other values that Singaporeans held close to their heart, such as multiracialism. Lo and behold, suddenly we all started asking ourselves if the next foreigner queueing to apply for Citizenship thought the same way as us, took an interest in the same things as us or stood for the same values and principles as us. It is a valid concern nonetheless, especially since there was a rapidly growing rate of foreigners in Singapore and that many of these values being discussed formed the bedrock of our economic and social development ever since the country was given independence. The point is, will a Citizenship Test be the answer to these questions being thrown up. The answer, as disturbing as it may sound, is that we will never be able to guarantee that every single new citizen is able to assimiliate into our body of values and way of life, just as we cannot guarantee that every Singapore-born and bred would do so. However, we can certainly put procedures in place to improve the chances of this happening. Let us look at the process that may help us achieve this.

Since most of the foreign expats who are granted citizenship here are well-educated and fluent in English, then an English test is perhaps less relevant to them than it would be for a foreign worker applying for a work permit to be employed in the service sector. Why the discrimination between the work sectors, you may ask? Well, it is actually not disrimination, but a work requirement. Just as the electrical technician applying to work here needs to prove that he has the requisite qualifications for being employed in the technical position, and thus being granted the work permit, a service worker being brought in should display a requisite level of proficiency in the English language since it is the mode of communication here. So, English tests should be made mandatory for workers in the service industry.

What about the foreign expats coming in though? The ideas proposed thus far focus on the current affairs test, which would probably include questions on the history and geography of the country. What is the objective of such a test though? If we are looking for new citizens who are able to memorize a bunch of facts about the country and then able to regurgitate this information in a 2 or 3 hour test, then this would be an ideal tool. I am not downplaying  the power of memory but I am sure that is not the sole criteria we are looking for when selecting our fellow citizens. The Singapore current affairs test could be a part of the whole process but there should be other more focused and complementary mechanisms. Well, an interview is always a useful way to gain an insight into an applicant's opinions and thinking. Just like a job interview, the Citizenship interview should provide an opportunity for both sides to gain a better understanding of what to expect and then to decide if there is a suitability match. To make it an even more objective and calculated process, the interview panel could consist of community representatives and other stakeholders of our society. This should result in a fair and objective assessment.

In addition to the interview, there should be a mechanism to help the new citizen assimilate into society here and perhaps help him to internalize some of Singapore's more important values. For those of you who have taken language courses in college/university, you may remember that many educational institutions use an immersion program as an effective learning method. The rationale behind this is that if you want to learn the language of a particular land and people, then the best way to pick it up is to throw you in so that you are surrounded by these people and are left with no choice but to adopt the language of the majority. As a result, you are forced to drop your inhibitions and replace your normal mode of communication with this less familiar language. I do not have evidence of the success rate of such programs, but I do feel strongly that we can adopt this system to suit the needs of our citizenship assimilation preferences. So, the question is, how do we conceptualize and operationalize an immersion program for new citizens here? The diversity within our society actually does not allow us to structure a program where a new citizen will be immersed in a particular community and pick up a specific language or culture. Nor is it useful to take new citizens on a cultural tour of Chinatown, Little India, Geylang Serai and iconic destinations as it would add little value to his assimilation needs. If we leave the new citizen alone, there is a high probability that he or she would contact other new immigrants in Singapore from his country/city/province/religious/ethnic/linguistic background and as a result, stick to these newly formed cliques. This is of course a rather broad generalization as there are new immigrants who contribute tirelessly towards strengthening the social fabric of our nation. However, we should not take it for granted that each new immigrant coming in would do the same. My suggestion then is to make it mandatory that all new citizens, who are granted their citizenship, be required to complete x hours of community service each year for a period of say, 5 years. I firmly believe that community service is a great platform to bring people from diverse backgrounds together and as they work together for a common purpose, it helps them to develop and strengthen bonds. So, if say, a new citizen is required to complete 80 hours of community service a year, then that works out to be about 1 and a half hours per week for a period of 5 years. Whether this would actually help a new citizen incorporate and believe in the broad values that our society holds dear is indefinite. However, 400 hours of community service over 5 years would definitely go a long way in helping a new citizen assimilate with others here. Even if after 400 hours of community service, a new citizen is able to develop a network of, say, 20 people (which is a conservative figure of 4 people a year) from different segments of community, I think that is a valuable contribution towards strengthening the bonds of our society. Of course the interests and passions of a new citizen play an important role here and therefore the community service definition should be kept broad to include work in various facets of society so as to better suit the aspirations and interests of every individual. This will benefit locals as well, as they get to broaden their horizons during their interactions with the new citizens, who may have different world views and experiences to share.

With this 3 part selection process of a Singapore-knowledge test, an interview and a community service requirement, there is a greater chance that the new citizen is able to understand Singapore, Singaporeans, its values and our way of life better and is able to contribute towards pursuing the common goals of preserving economic and social growth. It may appear as a long and tedious process, but we are selecting a new citizen and therefore, it is our duty to ensure that we give them every chance to embrace us as much as we welcome them as one of us.  

Background

About Insights-Asia

Insights-Asia is a blog created to provide current affairs analysis of news related to selected Asian countries. Tapping on the insights of subject and country experts and decision-makers, this blog aims to equip readers with diverse perspectives of news topics on a regular basis.

About the Author

This blog is authored by Malminderjit Singh. Based in Singapore, Malminderjit has professional experience in social sciences research, policy-making, diplomacy and public service. Besides being an independent current affairs analyst in his free time, he is also engaged in social, community and youth development activities to give him a broader and deeper understanding of the impact of news on the lives' of everyday people. He intends to leverage on his diverse network of contacts consisting of academics, policy-makers and industry professionals to offer articles containing fresh and analytical perspectives. Malminderjit's opinion pieces and articles have appeared in respectable newspapers and magazines in different countries.