Rising Inequality due to Emergence of Two-Speed Dual-Track Economy in Singapore

Singapore embarked on one round of economic restructuring almost every decade after from the 1960s.  By the 1990s, a two-speed dual-track economy comprising a slower 'domestic' track and a faster 'global track' began to emerge.

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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 need to keep ahead of competition entailed incessant upgrading of its economic structure. 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”. [1]

The Faster "Global Periphery" Track 

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 track 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.

The Slower "Domestic Core" Track 

 

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.

Performance Differences between the Two Tracks

 

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.[2]

 

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.[3]

 

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. Despite rising living standards, Gini coefficient rose from 0.44 in 1990, 1995 and 1997 to 0.45 in 1998 and 0.47 in 1999.

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REFERENCES

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

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

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