It’s not just babies we have to produce more of

Productivity in Void Decker's world

Productivity in Void Decker’s world (click to see full size)

This is a follow up post to Beware the ageing population false dilemma. Here I elaborate on the two main areas the government should focus on to counter low birth rates and an ageing population.

Raising productivity

Sometimes, it seems like productivity is the ugly step-sister in the family of economic figures that our government is keen to keep locked up in the spare bedroom. At other times, it is an afterthought, or a nice to have. While we boast of years of strong GDP growth, it is important to remind ourselves once again what went into such stellar performance. Or rather, what did not.

Way back in 1994, economist Paul Krugman (who won the Nobel Prize in 2008) poured cold water on the much espoused Asian economic miracle, calling it “perspiration rather than inspiration”. In particular, he wrote this on Singapore:

Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.

Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore’s growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated work force has been replaced by one in which the bulk of workers has high school diplomas; it is unlikely that a generation from now most Singaporeans will have Ph.D.s. And an investment share of 40 percent is amazingly high by any standard; a share of 70 percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past.

What Krugman meant in essence was that Singapore’s growth was not sustainable because it was not due to rise in productivity but through one-time changes in education levels and mobilisation of people into the workforce. But when Krugman asserted that Singapore’s workforce cannot double again, he underestimated the government’s ability to work around the situation. From 1994 to 2012, Singapore’s population exploded by over 50% from 3.4 million to 5.3 million as immigration controls were relaxed and foreigners at all levels were welcomed in a bid to keep the economy growing as it once did.

All this time, though, productivity levels remained abysmal. According to the EnterpriseOne website:

While our economy boomed some 8.2% from 2004 – 2007 and workforce jumped an average 6.5% from 2006 – 2009, productivity growth slowed down to 0.8% per year (emphasis from source) from 1999 – 2009.

In fact it was erratic, as shown in the diagram below, and procyclical following GDP growth. While it’s hard to pin down the reason, one suspects it may be correlated to the fluctuation in foreign labour supply in boom and bust times.

TFP Growth vs GDP Growth

Data: Conference Board Total Economy Database (click to see full size)

Productivity is the best route to sustainable economic growth for maturing economies, and not labour input. The government itself recognises that importing too much cheap foreign labour creates a disincentive to increase productivity. Yet too often the economic ends justify the means, even if at the expense of undesirable side effects such as a widening income gap.

In Singapore, we often hear the most honest and stinging criticism of official policy from long-standing civil servants who have left the establishment. Former Permanent Secretary Ngiam Tong Dow said in a speech earlier this year:

Our total factor productivity should be rising not stagnating. In my view, productivity and real wages of the bottom 20 per cent of our work force have not risen because our labour policies allow employers easy access to low wage foreign labour. In national accounting, low wage foreign labour may not be as low-cost as employers believe. If we add the cost of housing, transportation, health and other social services which employers have to provide for their foreign work force, they may be better off training and equipping their Singaporean employees to raise their productivity. Rising productivity enables workers to be paid more. Inflation sets in only when wages are raised without any increase in productivity.

The economic assumption is that we can increase our GDP if we can accommodate more people. In my view, even doubling our population to 10 million people will not make things better. More likely, a larger population can only make matters worse.

[…]

We have to grow through raising productivity, not higher headcount. We need to be smart enough to produce more with less. Our higher education levels and superior infrastructure enable us to compete in knowledge-based industries and services. We transformed ourselves in the 1970s from a labour to a skill-intensive economy.

There shouldn’t be any doubt that raising productivity has to be the government’s top priority and task at present to keep the economy growing. As the country’s biggest employer through the civil service and armed forces, it has to take the lead and set the example for the private sector. It is a tough challenge, but one that can no longer be sidestepped or left simply to other employers.

Boosting workforce from within resident population

As the MTI Occasional Paper mentioned, another way to counter an ageing population is to raise the Labour Force Participation Rate (LFPR). It highlighted several ways to do so, including implementing flexing working arrangements to help females with children achieve balance between work and family commitments and introducing schemes to encourage workers to stay employed beyond retirement age. These are steps in the right direction and the government should carry on to do more. The civil service should take the lead and offer more job redesign and part time work for fit and healthy older workers.

It is interesting to note that the paper defines the labour force as those aged 25-64. I think we may be leaving out a precious segment of society here – the 18-24 age group. This omission by the paper reflects a mindset that permeates our society that young adults should be pursuing university educations at this stage of their lives. This is especially true now with the addition of the Singapore Institute of Technology (SIT) and the SIM University (UniSIM) as Singapore’s fifth and sixth universities.

The new universities are a good development because no willing Singaporeans should be denied a chance for further education due to a lack of university places. But even as we welcome this, we must be mindful not to inculcate further the paper chase mentality. Alternative choices other than degree qualifications, such as entrepreneurship, must not be discouraged. And in many developed countries around the world today such as the US, UK and Australia, it is not uncommon for high school graduating students to opt for apprenticeships instead of university. Apprenticeships allow these young adults to learn new trades and provide what is typically the difficult first step into their desired industries. I believe this is an area we should explore and there should be no social stigma to it.

It would be a mistake to think of apprenticeships as programmes for those whose grades are not good enough for university entry. Rather, apprenticeships should be promoted as an equally promising and potentially rewarding journey into a chosen career. Many will find that such a programme provides them a head start into the career where good performance and subsequent experience can often make up for the lack of paper qualifications.

Of course, employer mindsets have to move in step as well and this is where the government can do more to encourage the private sector to offer apprenticeship places. Tie-ups with universities can be formalised to offer theoretical education and professional development as part of these programmes. These days, a lot of young people enter university studies without actually knowing if the chosen fields are the ones they are actually keen on. With an apprenticeship, one gets to experience first hand what the job entails, and whether it works out or not, it’s never too late to head back to university and hit the books again at a later stage.