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Rising Inequality due to the Emergence of Two-Speed Dual Economy & to the Influx of Foreign Workers/Talents

Singapore embarked on one round of economic restructuring almost every decade after from the 1960s.  After each round, some Singaporeans inevitably fell behind due to skill obsolescence. Those who could be retrained were redeployed to high value-add emerging sectors but many usually up in domestic services sector earning lower pay. After the turn of the century, the situation is exacerbated by the influx of foreign workers and mid-level talents poaching jobs and depressing wage growth in the lower and middle rungs. Over time, wage disparity inexorably widened due to the incessant economic restructuring and to the influx of foreign workers and talents.

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1 January 2011

As we can see from the evolution of Singapore’s economy since its independence, other than the four short recessions which was primarily caused by either slowdown in global demand or external financial crises, the city-state chalked up impressive growth with the economy expanding on an average of about 8% annually.

 

On the flip side, however, the incessant need to move up the value-add ladder to keep ahead of competition posed a great demand on its lean labour force to upgrade its skills and knowledge continuously.[1]

 

To be sure, human resource has been a binding constraint that limits economic growth since as early as the 1970s. The problem is not only the small size of the population. When the labour force was young and adaptable in the 70s and 80s, new skills could be assimilated quickly. However, as the population continues to age in the 90s and after the turn of the century, upgrading became increasingly tedious. New skills required today are also more complex than in yesteryears.

 

Inadvertently, the incessant restructuring produced winners and losers. In time, more and more older workers faced dislocation due to skill obsolescence. This mismatch in supply and demand of skill sets as the economy moves up the value ladder resulted not only in more structural unemployment but also increasing dependence on foreign talent with the skill sets for emerging high-growth economic sectors.

 

 

Emergence of a Two-Speed Dual Economy

 

By the 1990s, as a result of the interminable process of economic restructuring, a divergent pattern of growth had emerged, culminating in the emergence of a two-speed dual-track economy comprising of the “global periphery” and the “domestic core”. [2]

 

The faster “global periphery” track is made up of workers and large businesses (mostly MNCs) serving predominantly regional and global clients involved in subsectors like offshore finance, private banking, asset management, high-end residential market, marine and aviation transport services and equipment, and pharmaceutical products. This segment has not only been able to benefit directly from the recovery of global demand, it also enjoys favourable policies offered by the government to entice foreign investments. Given that a higher level of skills and international exposure are needed to carry out activities in this segment, the number of foreigners and permanent residents here is significantly larger than the national average. Because of the high value-add nature of the activities, the workers in this segment command higher wages and the segment as a whole accounts for a disproportionately larger share of the total GDP even though it employs less than a quarter of the labour force.

 

In contrast to the “global periphery” track’s external orientation, the slower growth “domestic core” track is comprised of businesses and workers serving the domestic market. Their activities cover subsectors including retail trades, construction, the mass residential market, catering trade, transport, public services (e.g. health care), hotels and restaurants, and domestic Singdollar financial activities (e.g. retail banking). In other words, growth of this track depends directly on the state of the domestic economy. Most of the workers in this track are either Singaporeans or unskilled foreign workers. Because the activities have lower value-add, workers here command lower wages than those in the “global periphery” track. The presence of foreign workers willing to work at low wages further depresses wage growth for Singapore workers. Hence, even though the domestic track employs about three-quarters of the total labour force in Singapore, it accounts for a disproportionately smaller share of the country’s overall GDP.

 

The emergence of the two-speed dual-track economy also complicates policymakers’ efforts to drive productivity growth. Generally, companies in the global periphery track are mostly MNCs and large local firms (predominantly the GLCs). They are more capital intensive and hence productive. In contrast, the SMEs, in particular those in the construction, retail, and hospitality industries, either have no incentives and resources to upgrade or do not have the knowledge to redesign their work processes to increase the productivity of their workers. The productivity level of the construction industry in Singapore, for example, is estimated to be only one-third that of Japan’s and half that of Australia’s.[3]

 

The productivity gap between the foreign and the local companies in Singapore is also evident in the falling contribution to GDP by the latter. The share of GDP contributed by resident companies and workers declined from about two-thirds in 1998 to about 54.3% in 2008. In terms of contribution to GDP growth, the figures are even more worrying. In 2004, residents contributed slightly more than half of GDP growth. That figure fell to less than a third by 2008. Finally, while the overall per capita GDP was S$53,192, the resident per capita GDP reached only S$38,372.[4]

 

Similarly, at the firm level, profit margin is comparatively lower in the domestic core track because of high domestic competition and because their prohibitive size excludes them from reaping any benefits from long term investments for economies of scale. Finally, at the industry level, while the global periphery track’s activities enjoy high growth as a result of rising opportunities in regional and global markets, the domestic core segment’s activities remain sluggish because of people’s habits of high saving and low consumption.

 

The net effect of the two-speed dual-track economy is the widening of the wage differentials between workers in the two tracks over the years particularly from the 1990s onward.

Influx of Foreign Workers and Talents

 

Meanwhile, the situation is aggravated by the influx of foreign workers and talents.

 

To be sure, human resource has been a binding constraint that limits economic growth since as early as the 1970s. By 1970, for example, there were a total of 72,590 foreign workers making up about 11% of the work force. Since then, the number of foreign workers has grown rapidly in tandem with the high economic growth in the 1980s and 1990s. The increasing strain attributable to the ballooning foreign population, however, was masked by the sterling economic data.

 

By the turn of the century, the adverse impacts of Singapore’s overdependence on foreign workers began to show. Even when the economy was expanding prior to the Global Financial Crisis in 2008, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same time. Efforts to position Singapore as a global city and to move into higher-end technologically- and knowledge-intensive industries has led to the shortage of professionals with both the relevant skills and international exposure. On the other hand, the hollowing out of lower value-add manufacturing operations results in an excess of workers with obsolete skillsets.

 

The government had set a target of 6.5 million as the optimal population size that could provide the economy with a critical mass without overstretching the limited natural and social resources. The official rhetoric was that with an ageing population and with fertility rate plunging from 1.60 in 2000 to 1.28 in 2008, far below the 2.1 needed for a population to replace itself, foreign newcomers would make up the bulk of the increase in population and work force over the next few decades. As a result of the influx, the foreign population increased by 70.9% while the number of citizens increased by only 7% between 2000 and 2009. In terms of composition, citizens constituted only 64% of the total population, a decline of 10% over the same period.[5] 

Change in Demographic Composition (2000

Gradually but surely, voices of discontent grew, first and foremost with the issues of job poaching.

 

During the ’70s and ’80s, Singapore’s industries were more capital intensive and the labour shortage was more in terms of quantity than quality. Domestic workers were also in their prime. Foreign workers were brought in then to supplement, not to supplant them. In the end, the influx of foreign workers helped to spur economic activities that resulted in rising wages across the board. Growth was inclusive as evidenced by the falling Gini coefficient then.

 

However, when Singapore again upgraded its economic structure to focus on knowledge- based and innovation-driven industries after the turn of the century, the floodgate for unskilled foreign workers destined for non-tradable services sector — such as public transport, cleaning, retailing and construction — should have been narrowed or closed, so that the jobs in that sector could go to the older Singaporean workers who were becoming increasingly unemployable with the relocation of jobs out of the city-state by MNCs.

 

In 2005, for example, about 49,800 (44%) of the 113,300 jobs created went to foreign workers even though foreign workers made up only 28.9% of the labour force. Foreign labour growth of 8% was double that of local labour growth.[6] In 2007 and 2008, as many as 300,000 foreigners took up jobs in Singapore.[7] By 2009, they accounted for a third of the three-million-strong labour force, up from only a quarter in 2004. The availability of these foreign workers willing to work for a significantly lower pay also depressed wage growth of Singapore workers at the lower rungs.

 

To make matter worse, while foreign workers and talents occupied mainly the top and bottom rungs of the job ladder in the past, they were now also competing with displaced PMETs for jobs in the middle rungs.[8]

 

Besides being accused of poaching job and depressing wages, foreign workers have also been partly blamed for causing productivity to plummet in recent years. While the overall economy has grown with the enlarged workforce, the productivity of each worker has fallen. The fall is thought to be caused by the easy availability of low-cost foreign workers which incentivizes employers to employ more workers instead of investing in capital equipment to raise productivity.

 

Lastly, the influx of foreigners is said to be also exerting demand pressures on Singapore infrastructures, pushing up housing prices, taking up places in school at Singaporeans’ expense and contributing to the frequent breakdowns of the mass rapid transit system.

 

 

Rising Inequality due to Economic Restructuring and Influx of Foreigners

The trend of rising income inequality due to economic restructuring and influx of foreign workers became increasingly noticeable after the Asian Financial Crisis. Even though there was an increase in mean income and that social welfare has increased in terms of better education, healthcare and overall standard of living, Gini coefficient rose from 0.44 in 1990, 1995 and 1997 to 0.45 in 1998 and 0.47 in 1999. [9]  Another study by Chia and Chen (2003) arrived also at similar conclusion. They found that, contrary to Kuznets’ prediction[10], ratios of the top to bottom quintiles of households by income from work fell from 14.4 in 1980 to 11.4 in 1990 but rose again to an even higher level of 20.9 in 2000, showing that income inequality improved initially (i.e. Gini coefficient fell) in the 1980s but deteriorated significantly (i.e. Gini coefficient rose) in the 1990s.[11] By 2000, the workers were in fact worse off in terms of wage growth.

 

[About Kuznets’ Hypothesis] Kuznets’ hypothesis posits that as development proceeds and mean income grows, inequality in income distribution first increases and then decreases, producing an inverse-U shape Gini coefficient curve.

After the turn of the century, even though the economy as a whole registered impressive growth, in particular after 2004, the unequal distribution of income persisted. While headline GDP grew 6.4% in 2005 and 10.6% in 2006, domestic demand expanded only by 3.3% and 4.9% for the two periods respectively.[12] Again, the disproportionate growth in the two tracks showed up in the growth of household income. While the higher income groups saw their income grow 2.8% annually between 2000 – 2005, the lower income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3% fall in average household income, while the 21st to 30th income decile group saw a 0.5% decline.[13] Consequently, between 2000 and 2007, the Singapore’s Gini coefficient climbed from 0.444 to a high of 0.489. It moderated to 0.481 in 2008 and 0.478 in 2009 only because of the financial crisis.[14]

Gini coefficient 2000 - 2009 copy.jpg

The fact that more low-skilled foreign workers continued to stream in to help keep costs low worked to the disadvantage of the low-income workers. It benefited especially the higher-income workers, as they enjoyed not only rising wages higher GDP growth but also lower cost of living made possible by the low-cost foreign workers.

 

An appreciating Singapore dollar helped to constrain imported inflation but it was the use of low-cost foreign labour that helped to maintain price stability in the domestic sector. Inflation averaged about 1 per cent between 2000 and 2007 but that impressive low inflation was arguably achieved in part at the expense of the low-income Singaporean wage earners.

 

In short, globalization and advancement of technology certainly contributed to structural unemployment but it was the foreign labour policy that exacerbated the plights of the dislocated low-income wage earners. Had the strength of low-cost foreign workers been reduced in tandem with the pace of economic restructuring, the wages of low-income Singaporean workers in the domestic sector would have undoubtedly risen along with the tide. More importantly, the competition for job is not only limited to the top and bottom rungs but also those in the middle thus hitting our middle-income households.

 

Going forward, to fundamentally tackle the challenge of widening wage disparity, it is important that policymakers relook at the roles foreign workers and talent plays in Singapore’s next phase of economic development.

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REFERENCES

[1] See Figure 1 for the various phases of Singapore’s economic development and the government’s efforts in upgrading the economy.

[2] See Chua H.B. (2006).                                                    

[3] Straits Times. “What ails Singapore’s building industry?” March 13, 2010

[4] Straits Times. “Go for Goldilocks Growth.” January 23, 2010

[5] Straits Times. “The Singapore Story in Figures.” December 31, 2009.

[6] See Chua H.B. (2006).

[7] Straits Times. “Don't let foreign workers become a soft option.” January 9, 2010.

[8] The Economist. “Singapore and immigration: A PR problem.” November 14, 2009.

[9] See Singapore Department of Statistics (2000) and Mukhopadhaya (2001).

[10] See Kuznets (1955).

[11] See Chia and Chen (2003) for a summary of various studies conducted by different economists on how income distribution in Singapore changes at different phases of economic development.

[12] See Chua H.B. (2006).

[13] See Singapore Department of Statistics. (2006)

[14] Straits Times. “A Global, Vibrant Singapore.” December 31, 2009.