Challenges Facing Singapore's Economy (Part 4) - Implications of Rising Costs on Businesses

In my previous post, I explained how Singapore has moved rapidly up the value chain based on international comparisons of the Manufacturing Value-Added (MVA) data. Many may look at this as less of a problem and more of a positive sign as having a higher MVA indicates progression in manufacturing activity. Critics may also argue that since we are being presented with these opportunities to upgrade, there is no reason to turn them away and should instead embrace them.

The point is that moving up the value-chain too quickly has forced business costs in Singapore to rise rapidly. This is reflected by higher unit business costs here as unit labour costs in Singapore increased by 22.8 percent in 2007 to 2008. This is enormous when compared to corresponding figures of 0.4 percent and 2.8 percent in Japan and US respectively, not to mention the drop in Korea’s unit labour costs by 0.3 percent.

Moreover, the rising labour costs in Singapore are not directly a result of higher productivity. Comparing the productivity growth rates released by the International Labour Organization, Singapore’s productivity increased by 3.7 percent from 1980 to 2002, thus showing that its productive efficiency is increasing at a slower rate than its MVA growth as well as its rising business costs. We can conclude from this that Singapore’s rapid rate of rise up the manufacturing value chain has contributed to higher unit labour costs here, and consequently higher business costs, which have not been compensated by a substantial increase in productivity. If we are to continue on this trend of moving up the value chain quickly, then we should at least ensure that productivity gets a greater push so that higher labour costs can be substantiated for our SMEs and MNCs.

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.