Chasing the economy’s tail


By Charles Tan

dogchasingtailThere’s something special about anniversaries.  They mark an event of significance, such as a birth, death or union; but they are not simply a commemoration of the passage of time, rather, they are an opportunity for reflection and renewal.  And so, with National Day upon us yet again, I feel it is appropriate to pay tribute to our little red dot, in the language to which I am most accustomed: economics.

In the 48 years since independence, Singapore’s economy has experienced an almost 40-fold expansion (inflation adjusted) – a remarkable feat that has few parallels in history.  Our success is due to a combination of luck, hard work and most importantly, foresight and planning, and therefore, rather than rest on our laurels (as is often all too tempting), we need to be thinking ahead to identify the potential threats and opportunities that Singapore should watch out for.

Cynics such as Nobel laureate Paul Krugman will criticise Singapore’s economic miracle as being nothing more than one driven by a sharp increase in the population, higher workforce participation rates, and inflated by significant inflows of foreign capital.  The attempt to trivialise our achievements may seem offensive at first, but the man has a point. Singapore’s total factor productivity (TFP) growth over the years has been very low, and so while our economic progress is undeniable, it would seem that this is because we are working harder, rather than smarter.

To frame the argument in another way, our workers are diligent, highly educated and therefore, easily trained to adopt new technology, but in order for Singapore to continue growing, we need to be designing and inventing these groundbreaking advancements and not just importing them.  This is because there is a physical limit to how many more hours one can put in at the office, how much more of the potential workforce we can mobilise or how big a population (including immigrant workers) our tiny island can support.  There are also diminishing returns to capital investment; for example, the first computer an employee receives may make him much more productive, but a second one would not have nearly the same impact as the first.  The statistics illustrate these issues perfectly, but I suspect the majority of readers will already be convinced: far too many of us spend more time in the office than we do with our loved ones, too many kids are being brought up by their maids rather than their parents (who are both working), and the commute to work each morning is a reminder that our infrastructure is straining under the stress of a burgeoning population.

To be fair, the government has acknowledged that low productivity growth is a problem and has dedicated significant resources to address it.  However, while the policymakers speak passionately about their desire to tackle the issue, none of the proposed solutions strike me as being particularly inspired (or indeed helpful).  This is because their efforts focus too much on areas such as continuing education, re-training and qualifications, which, as explained earlier, are not issues that Singapore has – our workforce is already widely recognised as being among the most hardworking, highly skilled and adaptable in the world.  Therefore, subsidising these activities does not change our productivity materially; it simply puts money back into the pockets of business owners by giving away things they would have paid for anyway (as my mum, a recently retired HR manager will attest), or worse still, it fritters the money away on unnecessary training that adds little value to the company.  Unfortunately, however, ours is a society cursed by the axiom “what gets measured, gets done” and I believe this is the reason the government has adopted the policies they have to date – not so much because they  are effective, but because the results can be quantified.

This needs to change.  Learning from the past and looking ahead to the future, my one key observation is how technology’s forces of creative destruction consistently erode our entrenched comparative advantages, and how we must therefore continually evolve to gain new ones.  Technological advances such as high-speed mobile internet, cheap computing power and smartphone proliferation today mean that information asymmetries are being eliminated; this does not bode well for an economy such as Singapore’s, which still relies too heavily on middleman-type business (perhaps a consequence of our roots in entrepot trade).  More and more customers around the globe, whether retail or wholesale, are buying direct from suppliers thanks to websites such as or, and margins are shrinking for the middlemen still in business because prices can be so easily compared with the touch of a button.

In my view, the global economy of the future will continue moving in this direction because the history of mankind has been characterised by a relentless drive toward greater efficiency.  Advanced telecoms infrastructure and the ubiquity of the internet have enabled services to be delivered across geographic boundaries and time zones, equalising the global market price for such services and bringing into question the need to pay a significant premium for staff physically situated in developed (i.e. more expensive) countries – as the case of the US developer who outsourced his job to China, and was caught earlier this year, illustrates succinctly.  It is no longer sufficient that Singaporeans are skilled number crunchers or IT programmers, because these tasks can be easily and cheaply outsourced to India, China and much of the Eastern Bloc, where workers are equally highly educated, trained and qualified.  Looking even further out, our fortuitous status as a shipping and transport hub may also be under threat with the promise of new transport technologies currently being developed in the US; NASA have recently unveiled a prototype helium airship that would, in time, bring air cargo rates closer in line with the shipping industry’s, and billionaire entrepreneur Elon Musk has floated the idea of establishing a ‘hyperloop’ system which would enable high-speed travel of passengers and cargo between major cities and slash journey times.

I think it is therefore safe to say that the Singapore of the present must change radically, and fairly quickly, if it is to stay relevant in the global economy of the future.  Policies need to focus on driving productivity through the promotion of intangible aspects such as creativity and innovation rather than rote education and training – we need to be inventing the technologies of the future instead of simply learning how to use them, and we should be designing the clothes and buildings of the future instead of simply wearing and living in them – that is where the value-added lies.  However, in order to attract and retain the critical mass of talent and intellectual capital necessary to achieve these productivity gains, we need to be more than just another tax haven with a safe, family-friendly environment.  To build a truly great city along the lines of a New York, London or (dare I say) Hong Kong, we need to be even more free and open than we already are now, by which I mean both at the economic level (e.g. interest rates, capital markets) and at the societal level (e.g. acceptance for homosexuality, alternative lifestyles).

In my opinion, a large part of the reason for Singapore’s lack of productivity gains stems from the fact that interest rates are artificially suppressed.  The low cost of capital sets a shorter hurdle for businesses to clear, meaning they have less incentive to find ways of boosting productivity.  Another significant factor in explaining the productivity shortfall, I believe, comes from our relatively homogenous population mix, not just in terms of race, but also cultural and occupational backgrounds.  Revolutionary innovations come not from an incestuous in-breeding of rehashed ideas, but from a dynamic environment of challenging accepted wisdoms and a cross-pollination of ideas.  For in economics, just as in nature, it is from competition and diversity that we breed strength, and Singapore needs a lot more of both.  Adapting to change is never easy, as many of us can attest to, but if we are to have any hope of extending the economic miracle of the generations past for the generations to come, then change we must.  Happy National Day, Singapore.

Charles Tan works an investment analyst at Cantor Fitzgerald, and is currently based in London.


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