Wednesday 24th Feb, 2010

The Business Times - 24 Feb 2010

MONEY MATTERS
Beware of quick fixes for low productivity

The haste to grow income through higher productivity may end up making Singaporeans poorer

By JOSEPH CHONG

THERE has been much said about the low productivity nature of Singapore's economic growth in the past decade. Average productivity growth has been only one per cent per annum in the past decade. Most of the economic growth apparently came through labour force growth - primarily through having more foreign workers. The chart plotted from Department of Statistics (DOS) data shows this trend which must eventually end.
Since 2005, the population has increased by 17 per cent or about 720,000. The complaints of lower quality of life, overcrowded places and trains are therefore not likely to be a misperception.

Productivity is the key to non-inflationary economic growth. Former US Fed chairman Alan Greenspan used to flog this in testimonies and it is the key indicator watched by the Fed and other major central banks. It is the key to making the people richer without inflationary erosion. Getting more done by each person without consuming more resources is the key to a better life at the individual level. Indeed, our low productivity growth is reflected in our declining GDP per capita growth rates - income growth per person in Singapore has been clearly eroding - as the charts plotted from DOS data illustrates. Real GDP per capita, after adjusting for consumer price inflation, was only a touch above 2 per cent per annum between 2000 and 2008. Given the steady rise in our Gini coefficient throughout the last decade, the lower income has done worse than 2 per cent per annum.

There is an inverse correlation between productivity and the foreign labour content of our workforce but we must be careful with statistical correlations, as my professor of naval architecture used to point out. For example, there is a clear correlation between the size of ships and the age of their captains but the relationship is not causal. This correlation cannot be used to design ships. As an investor, I am not convinced that Singapore's low productivity was caused primarily by excessive foreign labour usage.
From media discussions, the low productivity also appears to be blamed on the inefficient private sector. Businesses have been run unproductively in Singapore. Again, I am unconvinced - looking at land use statistics. Whether it is office, factory or retail space, businesses have been using land more efficiently - they have grown their space requirements less than the workforce.

For example, according to URA data over the past 11 years, the demand for office space in Singapore has grown at an annualised rate of about 1.94 per cent. From data published by the Manpower Ministry (MOM), the labour force has grown at an annualised rate of about 3.85 per cent in about the same period. When compared with the service sector employment growth rate, the efficiency gains are even more pronounced. During this period, MOM data shows that the service sector has grown from 62.7 per cent to 67.3 per cent of employment - translating into a service sector employment growth rate of 4.6 per cent annually.

Despite these gains in efficiency, businesses suffered the sharpest ever increase in office rentals from 2005 to 2007 with CBD office rents tripling as the 'go for growth' policy was unleashed. Interestingly, productivity fell sharply during this period. According to MOM, productivity growth's contribution to Singapore's economic growth fell from 51 per cent in 1997-2002 to just 14 per cent in 2004-07.
 

As an investor, I am leery of 'go for growth' anywhere in the world. It is unsustainable as it eventually leads to overheating and low productivity. Excessive demand allows companies to raise prices whilst productivity gets thrown into the wind as firms bid aggressively for labour and other resources. Goldilocks is what investors want - not too hot, not too cold. Will we see a repeat for 'go for growth' going forward?
I believe we need to be careful about how Singapore transitions from foreign worker dependency. Among other issues, one needs to manage the impact on asset prices - especially residential home prices. Curbs on the overall population means fewer homes would be needed. As we stand, we may already be staring down the barrel of an oversupply glut by 2013 that will hit residential housing, private and public, across the board.

From 2000 to 2008, demand for dwellings from the resident population has been running at 2.25 per cent although the resident population growth rate has been 1.5 per cent. This can be explained by the reduction in household size. This has however stabilised at 3.5 since 2005. Assuming we stay at 1.2 million foreigners, demand for dwellings going forward will be about 55,000/3.5=15,714 per annum. HDB and private developers will deliver an estimated 27,000 completions in 2013. Those who are calling for lower HDB resale prices may not have to wait forever.

Unfortunately, HDB flats are now also an 'official' pension asset. The HDB website explains in detail the methods for monetising this retirement asset. Affordable housing and maximising the value of one's pension are conflicting goals. Falling housing prices and rentals will affect people who need to retire from their HDB flats.
 

Ironically, the haste to grow the income of Singaporeans through higher productivity may end up making Singaporeans poorer.

The writer is CEO of financial adviser New Independent. He welcomes feedback at : josephchong@ni.com.sg

This article is for information only. Readers should seek independent advice before making any investment decisions