This article first appeared in Forum, The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

As Singapore commemorates its 55th national day, it is not the most auspicious of times. The nation confronts multiple challenges outside its control, such as the Covid-19 pandemic and geo-political tensions.

And, it has to face up to these forces when there are also big domestic issues to tackle: It has to manage a political transition to a fourth generation of leaders while also attending to growing internal challenges that have created a degree of angst that was not there before.

Getting to grips with these internal issues could involve difficult policy choices that could create pain in the short term, but that Singapore cannot avoid.

The recent general election showed much of what is good about Singapore. The ruling party won a strong mandate that will ensure political stability and create conditions for sound policymaking.

Both the ruling party as well as the opposition were able to recruit talented candidates who appealed to Singaporeans. The winning party agreed to revive the position of Leader of the Opposition in a gracious recognition of the advances made by the opposition.

But, still, Singaporeans are a worried lot, and there are many reasons for this.

First, there are looming difficulties at the global level that could be disruptive for Singapore.

Like the rest of the world, the country is in the midst of a terrible Covid-19 pandemic that has infected tens of thousands while crushing its economy.

The pandemic has also raised questions over the long-term prospects for crucial parts of its economy such as its airport and tourism businesses.

Moreover, Singapore is in an awkward geo-political position as its two most important big power partners, the US and China, enter into a nasty cold war that could last a long time. Southeast Asia will be one of the primary arenas of contention for these two powers and Singapore might be pressed to take sides.

And, finally, many trends in the global economy are disadvantageous for Singapore: The globalisation that enriched the city state is slowing and, in some areas, reversing. The flows of goods, services, people and capital that helped its economy blossom are decelerating and large economies are turning inward while populist policies are gaining traction.

Nevertheless, Singapore has overcome global challenges before. Its small size and nimbleness allow it some flexibility to negotiate its way around them.

Furthermore, it has strong fundamentals, including massive savings, an extraordinary level of connectivity with the rest of the world, and a critical mass of high-value activities in the economy that offer it the opportunities to find innovative solutions to global challenges.

There is a second reason for Singaporeans to be concerned and that is the growing unease over domestic frailties.

It is not clear what exactly is troubling Singaporeans, but the slower growth in incomes and fear that the kind of jobs that they desire may be less available in the future seem to be one concern.

In addition, some citizens appear to feel that they are not getting their just deserts, that foreigners are benefiting more than they are and that society has become less equal, with fewer opportunities for social mobility.

Related to this is the anxiety that one would expect in an ageing society — concerns over the adequacy of funds for retirement and healthcare as well as question marks over whether the value of their public housing will be protected.

These problems are intricately interconnected and have to be addressed jointly. To be adequately addressed, two things are needed: One is that the economy needs a development model that works to sufficiently create the resources needed to meet citizens’ expectations.

A second requirement is that society must have the policies, systems, frameworks and institutions to transform these resources into the things that the citizens want — decent jobs at decent pay and adequate social protections to deal with unemployment, healthcare emergencies, retirement needs and housing needs.

So, if there is angst, it is probably because either or both of these are not working sufficiently well and that policy has to respond adequately to address the gaps.

First, economic growth has slowed — and could slow a lot more. Growth comes from an expanding labour force plus the increase in productivity of that labour force. Because Singapore’s fertility rates have been so low for so long, the natural increase in population is no longer enough to expand the pool of workers.

In the coming years, the indigenous labour force will shrink. And the backlash against immigration makes it difficult to offset that with a large inflow of immigrants. And that, in turn, means we have to rely almost entirely on higher productivity to generate economic growth.

But productivity growth over the long term has been disappointing and may not be enough to generate the pace of economic expansion that Singaporeans have become used to. Here are some broad patterns in productivity over the recent decades:

•    Productivity has grown 1.8% a year in the last 15 years since we embarked on a new growth phase, that is, over the 2004-to-2019 period. That will not be high enough to offset the shrinkage in our labour force;

•    The trouble is that during this period, Singapore’s productivity growth lagged the average of that of its top 15 trading partners — the economies that we compete against. In recent years, it has begun to catch up but we have many lost years to make up for; and

•    On the broadest measure of productivity — total factor productivity — which is roughly a measure of how efficiently the economy is able to extract the best value from all its factors of production: labour, capital, technology and natural resources.

Here, Singapore’s performance has been poor in absolute terms and relative to its peer economies (other small but developed economies). Worse still, this sub-par relative performance is actually worsening.

In short, if we do not have sufficient productivity growth when our labour force might be declining, then our economy will not deliver the economic upside that matches Singaporeans’ expectations.

Also of concern is that, if our productivity does not grow apace with that of our trading partners, we will lose our competitiveness and, over time, our economic growth will be further compromised. Thus, there is a critical need to revamp the economic development model to address growth.

Second, the economic expansion does not seem to translate into adequate welfare gains for citizens.

The benefits of the growth of the Singapore economy are not being evenly distributed.

•    Growth in real median wages has been weak: 1.7% a year from 2004 to 2011 and 2.5% from 2011 to 2019. Over time, real median wage growth has tended to lag GDP growth;

•    The Gini coefficient remains at levels that suggest inequality in Singapore is far worse than in its peer group of small, open and highly developed economies such as those in Scandinavia and Israel;

•    Indigenous GDP — the share of GDP that accrues to Singaporeans — has not been keeping pace with total GDP, at least for the time frame that we have data for; and

•    The share of profits in GDP is much higher than the wage share — and this discrepancy is far worse than in the peer group.

There is also anecdotal evidence of a feeling of deepening economic insecurity as many professionals lose their jobs and struggle to secure new jobs that pay as much or fully utilise their skills and abilities.

What does Singapore need to do?

A policy response is needed on two fronts — a set of policies to generate adequate economic growth; and new policies to create

the systems of social protection that will ensure a balanced outcome in terms of actual welfare gains to citizens.

First, a new economic development model that focuses on promoting productivity growth.

At one level, Singapore should preserve, and indeed strengthen, the parts of the model that have been successful. The Economic Development Board has demonstrated a stellar ability to attract high-quality investments from the most dynamic global corporations that Singapore will still need. Given the importance of its finance sector, the development efforts by the Monetary Authority of Singapore should also continue.

But Singapore also needs to go beyond these and venture into new areas, some of which may not be familiar and some of which we may have been underrated by policymakers in the past.

Further tightening of its immigration policy: There are two elements to immigration policy — that for low-skilled work permit and S-Pass holders and another for professional and talented people. Singapore needs to tighten the first while maintaining an open approach towards professionals.

If anything, the restrictive policy on low-skilled foreign workers needs to be substantially increased. Only in this way will there be enough incentive for businesses to adopt productivity-enhancing investments in labour-saving equipment and processes.

This will be unpopular because many small and medium enterprises (SMEs) have become so reliant on cheap foreign labour that it would take a huge effort and much difficulty for them to adjust to a less labour-intensive approach.

Developed countries such as Japan, Australia and much of Europe have shown how a reduced dependence on foreign unskilled labour can be managed. Singapore should continue to remain open with regard to professional foreigners.

But there is a need for some fine-tuning. The composition of the foreign talents can be geared more towards those who can assimilate better into Singapore society. Also, there should be stronger policies than we currently have to ensure that Singaporean employees are not displaced when foreign talent is hired.

A well-crafted industrial policy is needed more than ever: Local SMEs require more aggressive support. The government can leverage off the revamped Enterprise Singapore to build an expanded ecosystem that better nurtures SMEs. This would include financial institutions that specialise in small businesses, rejigged procurement policies, and government-supported apprenticeship schemes.

More comprehensive regulatory frameworks to improve competition, protect consumers and protect SMEs from potential pressures from larger enterprises: More competition would lead to more efficiency gains and thus more productivity growth. Protection of the “small guy” in society would redress the power balance in society and alleviate some of the concerns over unfairness.

Second, Singapore needs to expand its social protection framework, building on the good work done after 2011. The nation has made much progress in recent years in expanding social protections, mostly in the area of healthcare and eldercare.

Yet, there remain glaring gaps in social safety nets. In particular, Singapore would benefit greatly from the following:

Minimum wage: This need not be as controversial as it seems to have become. There is a strong body of hard evidence that a well-calibrated minimum wage will have net benefits.

Unemployment benefits: The post-crisis world is likely to be marked by greater volatility and frequent economic shocks. That requires more buffers against unemployment than we needed in the past. Again, this need not be controversial, as there are many good models — such as Denmark — where unemployment insurance alleviates citizens’ insecurity without damaging the incentive to work hard.

Revamp the retirement framework into a multi-pillared one: Singapore’s current retirement system is overly dependent on the Central Provident Fund framework of forced savings. As good as the CPF might be, the World Bank and other institutions have advocated a multi-pillared system that includes a state-funded pension and tax incentives for retirement plans. Such a system would go far in addressing the insecurity of the elderly.

Aggressive early intervention schemes to ensure children born into disadvantaged backgrounds escape these social traps: Progress has been made in this areas in recent years, but much more needs to be done.

Address the Housing and Development Board lease decay issue: Close to 80% of households have as their principal asset the HDB flat they live in. For them, it is the looming issue of a large proportion of these flats suffering sharp falls in their value.

Singapore is at an important inflexion point. A challenging new environment and the emergence of domestic frailties require a new approach. What is suggested above is not meant to be comprehensive but is, rather, a selected list to give flavour to what needs to be done. The critical point is that this is no longer the time for half measures but a time for a full-blooded push to revamp the Singapore model.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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