With Lee Gone, Singapore Confronts Hard Truths

Lee Kuan Yew may have been no more than a spectator for the last two years of his life while his son and a cohort of capable ministers ran the show. But just as the patriarch’s departure from this life has set Singaporeans wondering just how the political and social system will now evolve without him, so there are also more questions about the direction of the economy.

The doubts about the economic future are seldom noticed by foreigners who mostly bask in the comforts and tax benefits the city offers, nor by a cowed foreign media. But they are asked by thinking Singaporeans including some close to the elite in the People’s Action Party, founded by Lee in 1954.

The media cite the growth of the economy over the past decade, including its quick recovery from the global crisis. They cite too the strong growth in per capita GDP which, combined with a strong currency helped Singapore overtake several economies, not least Hong Kong, on this important measurement.

But there are other statistics – and Singapore has plenty of reliable ones – which tell another story. Over the past eight years labor productivity has grown by a total of only about 1.5 percent. Here are the annual changes:

2007 +0.4 percent 2008 -7.2 percent 2009 -3.3 percent 2010 +11.6 percent 2011 +2.2 percent 2012 -1.4 percent 2013 -0.2 percent 2014 -0.8 percent

In other words, an increase in the amount of labor has been by far the biggest contributor both to GDP and GDP per capita. Productivity has been on a par with the poorer performing European economies such as the United Kingdom.

Two factors have been at work. By far the largest has been the increase in the size of the population, by 31 percent over a decade to 5.47 million. Most of this is explained by a more than doubling to 1.6 million in the number of non-residents. Some of these are well-paid bankers and employees of the many multinationals with regional bases in Singapore but the great majority are low-skilled workers in construction, domestic service and cleaning. These mostly have no dependents so the total amount of employment has risen far faster than the overall population.

A second factor is that the workforce participation rate of the 3.8 million residents (3.3 million Citizens plus 0.5 million Permanent Residents) has risen by five percentage points to 67 percent. This increase is primarily due to the demographic profile. Years of low fertility have led to a decline in the percentage of young dependents while the rise in old dependents is just beginning. The median age the median age of citizens is now 40 and is forecast to reach 45 by 2025.

The huge rise in the work force and the significant increase in permanent residents was deliberate government policy from the early 2000s to grow GDP. More recently that policy faced public opposition due to overcrowding on public transport and the un-Singaporean habits and behavior of many – not just the low income workers. (The resident public naturally prefers to ignore the huge implicit subsidy that the non-residents supply as cheap labour with few dependents and source of tax via their employers). But although the government has responded with a sharp drop in population growth, the percentage of non-residents still well exceeds that of residents.

That trend may now be difficult to stop as aging causes the resident participation rate to fall, even though retirement is now being delayed, a process that has barely begun. The government in its recent budget has also had to admit that years of hefty CPF contributions have not yielded enough retirement income for lower paid residents and a government subsidy is now needed. Any sustained rise in the fertility rate, unlikely as it seems, would also probably reduce the participation rate.

Nor is poor labor productivity growth currently compensated by the productivity of capital. Investment as a percentage of GDP has declined since criticized 20 years ago, notably by Paul Krugman, for being excessive and unproductive but has still remained at a fairly high 27-30 percent in recent years. However multi-factor productivity (combining labor and capital) has shows capital has done no better than labor.

Multifactor productivity change 2007 +2.6 percent 2008 -5.1 percent 2009 -4.7 percent 2010 +9.7 percent 2011 +1.4 percent 2012 -2.3 percent 2013 -0.7 percent

Some of the official efforts to attract investment and talent into high value activities in the likes of IT and bio-tech have been a success. But overall performance has been poor.

It may be that by ending the fixation with GDP growth driven by migrant labor Singapore will achieve a rise in productivity. But it will have to do so in the face of the rapid ageing of the residents.

It is hardly the fault of Lee Hsien Loong that Singapore’s economy as a whole is well into middle age. The youth factors that so long contributed to impressive productivity as well as GDP growth for most of his father’s tenure are no longer present. Most of east Asia is in or nearing the same situation. But none has had Singapore’s policy of compensating via massive imports of labor and Taiwan, Korea and Hong Kong and even Japan have all shown equal or better labor productivity growth. So its situation is now potentially more difficult.