[Cost reduction using cheap foreign labour is at most an expediency in the present crisis, i.e. saving jobs and lessening the burden of the businesses. It is not and cannot be a long-term solution. Instead of relying on cost competitiveness and constantly comparing it with other developing nations, Singapore, already seeing herself as a First World nation, should think and act like a developed country.
A number Western European countries show it is possible to have high wages and a hefty welfare and medical systems alongside with sustainable growth and competitiveness.
The importance in the role of the government in focusing on a few strategic sectors, together by leveraging on the opportunities accruing from the globalising economy, and by identifying Singapore's role in the value chain in an increasing China-centric world, our competitiveness on the international stage can be greatly improved.
Singapore is among the most internationalised economies in the world. The globalising world has been a double-edge sword for Singapore. One the one hand, accessed to the global market has fuelled growth in Singapore through attracting FDI the likes of MNCs and foreign investment into the local equity market. On the other hand, blue-collar as well as white-collar jobs are taking flight to low-costs countries such China and India.
Stephane Garelli, Director of the World Competitiveness Project : Competitiveness of nations refers the measures of competitiveness as "...the facts and policies that shape the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people."
In short, competitiveness means productivity. According to the neo-classical theory, one way for any economy to grow is to increase its level of factor inputs like labours and capital accumulation. However, as pointed out by economists like Paul Krugman, INPUT-DRIVEN GROWTH WILL INVARIABLY SUFFER FROM DIMINISHING RETURNS AND IS THEREBY NOT SUSTAINABLE.
There are social and political constraints for how much more capital and foreign labour that can be brought in. Hence, improving productivity is therefore crucial for an economy to sustain long-term economic growth.
In general, there are two ways of measuring productivity, i.e. The Labour Productivity and The Total Factor Productivity :
i) Labour productivity measures attribute output entirely to one factor of production, which is labour in this case.
ii) Total Factor Productivity, however, measures the joint influence on economic growth of factors such as technological change, efficiency improvements, returns to scale and reallocation of resources.
Improvement in productivity will almost surely mean an increase in competitiveness; but this relation does always hold vice-versa. Trying to reduce nominal wages in every country will lead to higher unemployment without improving growth and competitiveness.
Moreover, exports based on low wages or a cheap currency do not support an attractive standard of living. Only productivity allows a nation to support and enjoy high wages, a strong currency, and attractive return to capital. Productivity should be the goal for growth and prosperity.
According to Harvard Business School Prof Michael Porter, "Only if a nation expands exports of products and services it can produce productivity will national productivity rise". Productivity is the goal, not exports per se.
As Singapore looks to a future increasingly marked by globalisation, the strategies which have served the us well in the past may not do the same from now onwards. The last couple of years have been extremely challenging for Singapore. The rapidly changing world of globalisation can erode Singapore's competitive advantage within a short span of time.
Another worrying sign is that Singapore was ranked a 8th in terms of innovation (WEF 2009-2010). She belongs to the non-core technology economies. Though these non-core economies can achieve high growth, but they have their inherent limitations. As the gap with the technology economies narrows, these non-core technology economies will find difficulties in closing the gap unless they become technology innovators themselves.
Exacerbating the situation are the unemployed born and bred Singapore; as well as the low real GDP growth. Together with Singapore's tiny domestic market, a less than dynamic regional hinterland, an aging population, and an increasing reliance on foreign labour, the years ahead seem challenging and uncertain. There are only a few strategic sectors, when competitiveness and innovation are needed to drive productivity and therefore sustaining growth in the overall economy.
The role of the government may prove important in industry-targeting as well as selecting the types of innovation to be developed here. Singapore is constrained by her small domestic market and workforce, though Singapore has and continues to import significant number of foreign workers in order to grow, the government CANNOT continue this policy perpetually.
Nor can we rely on "footloose" MNCs investing here. There is a limit as to how much Singapore can grow through merely increasing capital and foreign labour.
In fact, Singapore faces the same barriers as other developing countries in playing "catch-up" with the industrialised nations. F. M. Scherer (Professor of Business and Government, John F. Kennedy School of Government, Harvard University, USA) has identified three kinds of barrier :
1) The political, social and economic environment lack the institutional and legal framework to encourage and foster independent risk-taking and dynamic competition. 2) The scarcity of business entrepreneurs willing and able to undertake the risk and opportunity offered by new technology.
3) Developing nations have low real per capita income; therefore, they face constraints in allocating funds for long term projects like R&D which often require long gestation period.
The first two points are particularly fitting to the problems in Singapore. Moreover, the presence of GLCs deters some entrepreneurs from venturing into certain areas. Even if the government is willing to divest all of her GLCs, this does not mean the businessmen can compete successfully in domestic or the international markets.
Nurturing entrepreneurship among Singaporeans takes more than just a couple of policies. It requires a completed change of mindset and that is not expected to happen within a few years.
In the meantime, Singapore can adopt a two-pronged approach, i.e. nurturing entrepreneurs and making the environment conducive for conducting businesses, while practising industry-targeting and promoting certain kind of innovations developed by industrialised countries.
Entrepreneurs, if left to their own devices, may do little and too late in boosting the whole Singapore's economy. What's more, they may neglect the high growth sectors. Government should act as a facilitator for high growth areas and develop new growth engines wherever and whenever private enterprises are unable or unwilling to participate because the risk is too high or the gestation period too long, yet the growth potential can be enormous.
The government should not also ignore the domestic industry altogether. Instead, the government must ensure that domestic businesses raise their efficiency and productivity. These domestic industries provides the crucial non-tradable goods and services to GLCs and MNCs.
Substandard domestic services raise the cost of doing businesses and reduce competitiveness as pointed out by Harvard Business School Prof Michael Porter. Singapore may ignore the productivity of the local industry at her own peril.
Singapore should not make the same mistake of investing heavily in new technology (or IT) for the sake of new technology. Singapore is always at the forefront of adopting the latest technology, especially in influencing the business community in adopting these capabilities with projects like SingaporeOne, TradeNet, MediNet and LawNet.
Technology is merely a means to an end, not an end per se. Ultimately, productivity comes from the "old-fashioned competition and managerial innovations" in more efficient and effective ways of developing and delivering goods and services. Unless the technology can add value to the supply chain, the government should not be over zealous in investing them. The so-called first mover advantage, touted during the dotcom's craze, can be a serious disadvantage when the precious resources could be better allocated to other much needed areas.
Of course, the government should lead the way in setting an example to the business community within its public sectors. Beyond that, the government should adopt a down-top and demand-driven approach in adopting technology. Another cost effective way is to closely monitor what other developed countries have been doing. If these nations are reaping returns from their investment in certain technology, Singapore can follow suit, with uncertainty greatly reduced.
In the areas of deregulation to spur competition, the Singapore government has made the right move by liberalising its telecommunication and finance sector which needs more and quicker of such liberalisations as competition ultimately spurs innovations and, therefore, productivity.
One of the greatest economists of the last century John Maynard Keynes underlined the importance of breaking away from the past when he said: "The real difficulty lies not in developing new ideas but in escaping from the old ones." Singapore must deal with both.]
Adapted from KC Leo