In short, every study has revealed that Singapore’s achievement of the highest degree of economic development in Asia a per capita GDP higher than the United States was based on large capital and labor accumulation, with productivity growth playing a minor, if not non-existent, role.
What makes a high GDP per capita desirable?
The GDP per capita is a fair measure of a country’s standard of living since it divides a country’s economic output by its total population. It also tells you how affluent a country feels to each of its residents.
What makes Singapore so wealthy?
Singapore’s riches is based on its status as a stable, open, technologically sophisticated economy with low taxation. Capital gains, dividends, investment income, and inheritance are all tax-free.
What accounts for Singapore’s low productivity?
Given the importance of productivity, Singaporeans should be concerned about the country’s poor performance in recent decades. We contend that:
- Regardless of how the data is sliced and diced, Singapore’s productivity growth has lagged behind what is required to maintain our living standards.
- This underperformance extends beyond the global productivity slowdown: Singapore has consistently trailed behind peers and competitors, and the pattern continues.
- Productivity increases have been concentrated in just a few industries, with the remainder of the economy performing mediocrely at best. This pattern has gotten worse over time, with fewer and fewer industries now providing creditable productivity growth.
- The consequences are dire: our living standards, competitiveness, economic growth, and possibly even our monetary policy and inflation management would be jeopardized.
Policy decisions that may have altered the economy’s incentive structure are to blame for the low productivity performance. One possible explanation is the enormous influx of immigrant labor, much of it low-skilled, between 2004 and 2011. In a later post, policy proposals will be examined.
Singapore’s productivity performance has weakened over time and in relation to peers
The Singapore government launched a major push to boost productivity in 2010, establishing the National Productivity and Continuing Education Council (NPCEC) to monitor and implement productivity-boosting programs.
The results are still disappointing over a decade later. The trend of slowing has persisted for a long time, whether assessed by labor productivity or total factor productivity (TFP).
- On two criteria, production per employed person and output per hour worked, there has been a continuous slowing in trend labor productivity growth (Chart 1).
- Even more troubling is the dismal performance of total factor productivity (TFP) growth, which has been essentially negative in the last ten years. This is a measure of an economy’s ability to maximize output by integrating labor, capital, technology, and management skills (Chart 2).
- The long-term fall in trend labor productivity growth is widespread and visible across most industries (Chart 3).
Furthermore, only a few industries, such as banking and manufacturing, contributed to the minimal productivity improvements (Charts 4 and 5). This dependency has grown in recent years.
- Between 2010 and 2014, the rise in real value-added per actual hour worked in the information and communications technology (ICT), manufacturing, wholesale and retail trade, and banking and insurance sectors exceeded the overall economy, as shown in Chart 4.
- Manufacturing’s real value-added (VA) per actual hour worked increased dramatically between 2015 and 2019, but banking and insurance’s VA stayed stable, despite far higher marginal productivity growth in the rest of the economy (Chart 5).
- In the vast majority of the economy, productivity growth is limitedvalue added per actual hour worked in real terms is expanding slowly in most sectors, with significant consequences for wage growth.
- In recent years, productivity measurement in the banking sector has undergone significant changes, raising concerns about its veracity.
- Here, for example, there are ongoing discussions over how to assess value-added and price fluctuations. One question is whether much of finance’s output consists of economic rents, or revenue gained not from productive work but from control over a limited-supply item or resource. This begs the question of whether or not productivity growth is really possible or desirable.
- Manufacturing productivity increases are encouraging, but the industry is heavily reliant on global commerce, which is expected to decrease in the coming years as a result of structural headwinds such as rising protectionism, a larger use of inward-looking policies, and environmental restraints.
Singapore’s performance has been significantly lower than that of its trading partners and peer group (Charts 6 and 7), posing serious threats to our economic competitiveness.
- Up until roughly 2005, output per worker tracked the top 15 trading partners of Singapore, underperforming in some years and outperforming in others (Chart 6). Following that, there was a consistent and wide level of underperformance, which coincided with the early 2000s’ dramatic expansion in the immigration of cheap foreign labor. Recent policies (e.g., decreased S-Pass quotas for specific sectors, labor force upskilling, and enterprise capability upgrades) have helped to close the gap with our competitors, but only temporarily. Following 2017, our labor productivity growth slowed dramatically.
- TFP growth, the broadest and most important indicator of productivity, is poor in comparison to our peer group and the OECD group of industrialized countries (Chart 7), and has been deteriorating significantly over time. TFP growth began to slow after a boom in 2003-2004, eventually falling completely after 2005.
Singapore’s productivity challenges are not merely a microcosm of the global trend
We must not, however, dismiss Singapore’s low relative performance as a worldwide phenomena. Many other countries have recently had slower productivity growth, which economists ascribe in part to a long-lasting but eventually temporary “hangover” from the global financial crisis (GFC). In comparison to the OECD group of nations, however, a decomposition of labor productivity growth into its underlying determinants reveals a different profile in Singapore (Charts 8 and 9).
- Capital deepening’s contribution to average labor productivity growth in Singapore declined 0.64 percentage points in the post-GFC period (2009-2019) compared to the previous decade (1990-2008), somewhat offset by a 0.14 percentage point increase in the contribution from labor quality. The most striking difference was what happened to total factor productivity: before the GFC, TFP had been subtracting 0.07 percentage points from overall labor productivity, but this drag increased to 0.58 percentage points in the subsequent year (Chart 8).
- The majority of the productivity slowdown in the OECD group of countries, on the other hand, can be attributed to a smaller contribution from capital deepening, which is expected if the global financial crisis’ economic “scarring” impacts on businesses’ willingness to spend. The contribution of capital services to labor productivity growth decreased by 0.75 percentage points, while the contribution of labor quality remained virtually same, and TFP decreased by 0.16 percentage points.
To put it another way, while most of the global economy’s productivity slowdown since the GFC appears to be cyclical (and thus transitory), Singapore’s sub-par productivity performance during the same period appears to be more structural or deep-rootedwith poor TFP playing a larger roleand thus potentially more long-lasting.
Growth potential is compromised by weak productivity growth
Low productivity growth, particularly low TFP, indicates that the economy as a whole is not well-organized enough to extract value from the means of production it oversees. As a result, Singapore can only attain its desired growth rates by mobilizing ever-increasing extra labor and/or capital inputs.
The former is difficult given (a) our low, and now contracting, indigenous labor force growth due to extremely low fertility, (b) reduced social tolerance for perpetually increasing inflows of both immigrants and transient workers following previous episodes of extraordinary foreign labor growth (see Charts 1011), and (c) intensified environmental constraints in an already congested small physical territory. As a result, a slower pace of labor force expansion indicates a lower equilibrium rate of investment, above which further capital mobilization would be unproductive or inefficient (Chart 14).
This suggests that if we can’t increase TFP growth, our economic growth potential will be harmed. The International Monetary Fund (IMF) put our medium-term potential growth at 2.5 percent in 2019, identical to its 2016 estimates, which showed a declining tendency over time (Chart 15).
In the future years, there is a serious danger that this negative tendency may become ossified. As a result, the only way to maintain a reasonable rate of economic growth is to address the structural causes of our low productivity.
Improvement in living standards is compromised by poor productivity
If productivity growth is not re-ignited, the translation of economic expansion into what matters most to citizenswage growth and living standardswill be jeopardized.
- During the first decade of the 2000s, when foreign labor inflows were at an all-time high, real median wage growth slowed dramatically. Following the GFC, real wages rose sharply as commerce in global value chains grew, boosting the Singapore economy, but this swiftly faded after 2014. (Chart 16). If recent productivity trends are any indication, the modest but significant increase in real wage growth in 2019 will not be sustained, and would not have occurred even if the pandemic had not occurred.
- While some pay growth slowdown is to be expected in a maturing economy, it is notable that our salaries have not converged with those of countries with similar per capita incomes over time (Chart 17). In all industries except finance and insurance, the average monthly wage earned locally is lower in nominal terms than the average across our peer group.
- The disparity is dangerously big in some industries (Charts 18 and 19; charts for individual sectors of the economy in Appendix). For example, in our hotel and food services sector, the average monthly income is less than half of what it is in Denmark, the Netherlands, and Sweden (Chart 18). Similarly, a Singaporean worker in the “construction” and “other services industries” earns about 40% less than his equivalent in our peer group (Chart 19). Crucially, the same industries that have substantial salary disparities also have a hard time improving productivity (Charts 4 and 5). This strongly shows that the two issues are interconnected.
Singapore’s economic competitiveness is also at risk if productivity does not improve
Unit labor costs may rise if productivity development lags, resulting in a loss of competitiveness. Singapore, on the other hand, does not compete solely on price. It must compete on its ability to provide investors with a superior return. There appears to be the start of a problem here as well.
- Singapore has the lowest rate of return for investors, not only among other growing Asian economies (where bigger yields are presumably required to offset greater country risk), but also among small, open economies with similar per capita GDP levels (Charts 20 and 21). Both groups have similar average FDI return rates.
Why has Singapore been able to attract substantial volumes of investment pledges despite failing poorly on these metrics? Investor incentives to move their operations and regional offices here may have swung the odds in our favor. While the contents of such incentives are not made public, they do appear in the income tax part of public firms’ financial reports in the notes.
- For example, Xilinx, a US fabless semiconductor company that first established its regional headquarters in Singapore in 2005, reported in its most recent Form-10K filing in May that the Singapore Economic Development Board (EDB) had awarded it a license in the third quarter of 2019 “Development and Expansion Incentive” that would reduce its local tax rate from 17 percent to 5% for fiscal years 2022 to 2031. (see highlighted notes in Exhibit 1). A grant was also given to the company “From 2005 to 2021, it has been granted “Pioneer Status,” which reduces its local tax to 0%. (see highlighted notes in Exhibit 2).
Is Singapore a first-world nation?
Following World War II, the world was divided into two main geopolitical blocs, with communism and capitalist spheres. Because of its political, social, and economic significance, the term “First World” was frequently used during the Cold War. The phrase “global warming” was coined by the United Nations in the late 1940s. The term “First World” is a little out of date these days, and there is no official meaning, but it is commonly understood to refer to capitalist, industrial, wealthy, and developed countries. Australia and New Zealand are included in this definition, as are the developed Asian countries (South Korea, Japan, Singapore, and Taiwan), as well as the wealthy countries of North America and Europe, particularly Western Europe. In today’s culture, the First World is defined as countries with the most sophisticated economies, biggest influence, best living standards, and most technological advancements. Following the Cold War, these countries of the First World included NATO members, US-aligned governments, developed and industrialized neutral countries, and former British colonies that were considered developed. Europe plus the wealthier countries of the former British Empire (USA, Canada, Australia, Singapore, New Zealand), Israel, Japan, South Korea, and Taiwan can be summarized in a few words. According to Nations Online, NATO’s post-Cold War member countries included:
- Belgium, Canada, Denmark, France, West Germany, Greece, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Turkey, the United Kingdom, and the United States are among the countries participating.
- Australia, Israel, Japan, New Zealand, the Philippines, South Africa, South Korea, and Taiwan are among the countries represented.
Why is GDP per capita such a poor metric?
The most popular justifications for continuing to use GDP per capita as a measure of quality of life are essentially justifications for rejecting any viable alternatives. One of the major flaws with GDP per capita is that it does not take into account social inequality.
Is Singapore wealthier than the United States?
Singapore has become the only Asian country to surpass the United States in terms of per capita gross domestic GDP.
Is Singapore a dull place to visit?
According to the Time Out City Life Index, a poll of 15,000 people, Singapore ranks 31st out of 32 of the world’s most fascinating cities, which some could argue makes our city boring in comparison to the others.
How does Singapore boost its output?
Singapore’s productivity growth rate was also higher than that of other advanced nations over the last decade. According to the shift-share study, productivity gains over the decade were primarily driven by productivity growth within sectors, particularly in outward-oriented sectors.
Why has Singapore’s productivity development posed such a challenge for so long?
However, in recent years, genuine growth has slowed. Singapore’s remarkable economic expansion was fueled mostly by factor accumulation attracting international money and importing foreign labour rather than productivity growth.
Is Singapore becoming less competitive?
SINGAPORE has lost its title as the world’s most competitive economy, which it had held for the previous two years. Singapore is currently the fifth most competitive economy in the world, according to the latest Institute for Management Development (IMD) World Competitiveness Ranking 2021, with Switzerland at the top.