IN CASE YOU MISSED IT

Different spin on wheels of productivity

This story was first published in The Straits Times on May 21, 2013

ECONOMIC discussion in Singapore tends to focus too much on hitting a Gross Domestic Product growth target.

It is true that living standards cannot be raised by flat-lining gross domestic product growth and focusing on redistribution. So growth remains essential. This is the classic "goose that lays the golden eggs" argument: feed the goose and the eggs follow.

But sometimes, you need to pay attention to the quality of the eggs and not focus only on the goose. In economic terms, this means looking at the quality of growth, not just looking at whether the economy is growing.

From 2001 to 2010, while real GDP growth averaged well over 5 per cent a year, real median monthly income growth for Singaporeans averaged 1.2 per cent a year.

Between 2000 and 2010, real median household income from work grew by a modest 1.6 per cent per year on average; and even this was partly due to more persons per household working.

This level of real income growth compares poorly with the experience of previous decades.

What this implies is that the decade of the 2000s can be considered Singapore's lost decade.

But the same period has been described by some as Singapore's Golden Age - as indeed it has been for the top 10 per cent of income earners, who saw their real household income rise 53.9 per cent, or 4.4 per cent a year.

The bottom 10 per cent saw real household income rise by 1.8 per cent, or 0.2 per cent a year - essentially this group suffered wage stagnation.

The 2011 to 2012 picture remains challenging - real median gross monthly income of residents excluding employer's Central Provident Fund contributions rose 2.6 per cent in 2011 before falling 1.9 per cent in 2012.

Including employer's CPF contributions, the figures are healthier, at 2.9 per cent and 2.5 per cent respectively.

Battle for better jobs

HOW can we generate the kind of growth that brings broad-based income growth to all, not just the higher-income group?

The battle must be fought on two fronts: raise the wage share of GDP to ensure that the gains from productivity growth are well distributed, as well as improve productivity growth.

There are other key outcomes that should concern us - quality of life measures like health, living space, cultural life, freedom and community bonding.

But our economic development efforts should be geared towards improving material standards as measured by real income growth per person and per worker.

Metrics like GDP, investment and tourist arrival growth are means to achieve this end.

GDP includes wages and profits. In Singapore, wages form about 40 per cent of GDP, compared with about 60 per cent in other advanced economies.

This is partly due to the profitable, capital-intensive operations of multinational corporations in sectors like infocommunications technology and petrochemicals. Such investments have multiplier effects as they generate other spending and should be defended.

Singapore's low wage share might be the result of insufficient focus (and public scrutiny and debate) on the right key performance indicators (KPIs) in economic planning. When wages stagnate, economic planners need to put in more effort to look beyond creating jobs, to look at raising the quality of jobs so that workers have access to better-paying jobs.

In this respect, high-quality job creation for Singaporeans, especially those in the lower- and middle-income groups, should be a top KPI for planners. But it is not always clear if job creation and enhancement for Singaporeans is the overriding goal in industrial policy. Singapore does track quarterly figures on jobs created, but there is scant information on the link between quality job creation and industrial policy.

Targets for high-quality jobs created or defended for Singaporeans should take precedence over more traditional KPIs such as fixed asset investment, inbound tourist arrivals, total business spending or numbers of local enterprises assisted.

Explicitly measuring jobs created and defended by industrial policy is fairly common in other First World countries.

More transparency around the link between industrial policy and local job creation would also benefit the planning process.

What sectors and types of companies generate the best real income performance for Singaporeans per dollar of state financial incentive or per unit of land use?

Do our investments nurture transferable workforce skills that enhance employability and stimulate entrepreneurship?

These questions should direct industrial policy.

Singapore's research and development policy also deserves scrutiny. State incentives amount to hundreds of millions, and yet it is not always clear if this spending translates into sufficient economic multipliers and job creation for Singaporeans.

Similarly, some parts of the services sector, such as gaming operations, may contribute significantly to GDP, but may be less effective in nurturing transferable skills and entrepreneurship.

The point is not about the state picking the right or wrong sectors; rather the KPI should be clearly focused on improving job quality, and the data behind the planning process should be more transparent to track against the KPIs. After all, companies consume land, foreign worker quotas and state financial incentives, all of which come with an economic cost borne by society.

The touchstone for distributing these benefits to companies should be good job creation for Singaporeans and relevant workforce skill development, as these have a direct link to boosting the golden egg of real income for Singaporeans.

An annual economic planning report card quantifying jobs created, defended or enhanced for Singaporeans by sector, preferably against broad targets set, would help guide industrial policy in the right direction.

Productivity

THE main enabler of good-quality growth is productivity. On this front, Singapore seems bogged down in the trenches.

A crucial policy lever is controlling access to low-cost foreign labour, and a great deal has been said on this point.

Beyond that, schemes tend to reward efforts (like the Productivity and Innovation Credit) or some feature of the final outcome (Wage Credit Scheme, which also rewards non-productivity-driven wage rises that would have happened anyway in the course of labour market economics).

Why not go to the heart of the matter by rewarding real achieved productivity increases?

Companies could be rewarded for raising gross profit per employee, which is defined as revenue minus cost of goods sold. This can serve as a proxy for gross value- added, which is used in traditional labour productivity measures.

Gross profit (GP) information is available to the government for companies subject to mandatory audits - meaning not only publicly-listed companies but also many non-listed MNCs and the larger to mid-sized SMEs. This would be the group of companies most able to invest in raising productivity.

Companies that hit a GP per employee growth benchmark could be given a cash award that is split between the companies and their employees.

The size of the award could be calculated on a curve - akin to a competition, where economic actors strive for a pay-off by outperforming their peers.

Companies banded in the top 10 per cent of each industry group where productivity is lagging would receive a certain amount, companies in the next 10 per cent slightly less, while those in the bottom half get nothing.

This is so as not to use taxpayer dollars to reward the laggards in productivity growth, and to provide enough of an incentive to exceed the previous year's performance. A minimum level of productivity growth should be met before anyone gets any cash at all.

Such an incentive would signal to companies how they rank on productivity growth relative to their industry average. This could have a motivational effect. Such rankings could also be used to differentiate access to other state schemes and assistance in future.

One can think of potential abuses of such a scheme - for instance by shifting direct costs into overheads. But audits are there to check the classification of costs. In any case, every scheme can potentially be subject to abuse, gaming or free-riding in some way.

This one has less scope for that than others that have been mooted, including the Wage Credit Scheme.

Spinning the two wheels of productivity growth as well as wage and consumption share through quality job creation should deliver the kind of growth we all seek, not only for the Singapore economy but for all Singaporeans.

stopinion@sph.com.sg

The author is the CEO of an international research and consulting firm and a civil society activist.

This story was first published in The Straits Times on May 21, 2013

To subscribe to The Straits Times, please go to http://www.sphsubscription.com.sg/eshop/