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Growing the economy the smart way

Most media attention on the recent Budget 2014 has been on the generous Pioneer Generation Package.

TODAY FILE PHOTO

TODAY FILE PHOTO

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Most media attention on the recent Budget 2014 has been on the generous Pioneer Generation Package.

While that is a well-intentioned and sizeable initiative, the longer-term narrative remains one focused on restructuring the economy and how we need to move from Budget initiatives to actual impact on the economy.

The Singapore economy seems to be firing on all cylinders — rents are up, we are effectively at full employment and we continue to run a strong dollar.

However, we showed only a nominal 4.1 per cent growth last year. With the exception of the rebound year of 2010, our growth since the global financial crisis has been volatile and lower compared with the immediate pre-crisis period.

Wages in the middle- and lower-income ranges are picking up, but continued inflation eats into purchasing power. So the picture of our economic performance is mixed.

BOOSTING PRODUCTIVITY

Singaporeans have been inundated with the morality tale that we need to be more productive. Being more productive is not about working longer. It is fundamentally about being more efficient — producing more output per unit of factor input, in particular that of labour.

Productivity does not exist in its own state; it is a derivative of both a powerful economic motive — competition — and an economic enabler — innovation. The focus of economic planning should be foremost, not on trying to stimulate the symptom — productivity — but on the trigger factors — competition and innovation.

Businesses, especially small and medium enterprises, may complain that competition is stiff. Rather than assume that this is so, we should consider such feedback as an inversely correlated performance indicator for the economy.

In other words, more such feedback is better for the economy, not worse. Only when competitive pressure is present will businesses find ways to be more efficient. They would also be forced to seek risk and be growth orientated. Standing still is not an option in a competitive space.

We should be on guard to disrupt cartel-like behaviour or anti-competitive cooperative behaviour in niche market segments. Anti-competitive behaviour leads to inefficient allocation of resources, stifled innovation, false economic signals and disequilibrium prices for the consumer.

Improvements in processes may yield marginal gains in efficiency. Only innovation can provide the order of magnitude gains to give a firm sustained competitive advantage. Firms should be pushing the envelope in innovation, rather than playing it safe.

Our heavy investments through the Research, Innovation and Enterprise (RIE) scheme, far exceeding S$5 billion to date, should also be focused on commercialisation of innovative discoveries. While doing fundamental science can be meaningful, it must be commercially translatable for the return on tax dollar to be realised and the opportunity cost of such large commitments justified.

BUILDING ENTREPRENEURSHIP

Vital as policy planners or regulators’ contributions are, the real economic heroes are entrepreneurs. Entrepreneurs come up with new ideas, spot market gaps, develop solutions and take risks to make their dreams happen. The attrition rate among new firms is very high. Hence, entrepreneurs are not only resourceful, but resilient. It is on the back of hundreds of failed projects that we can build up the successful projects that create jobs and push the production frontier outwards.

As consumers, we may enjoy the flowering in recent years of a myriad of food and beverage (F&B) outlets of every description and price point. But they are low value-added and labour-intensive — the worst combination of economic activity.

Another phenomenon often mistaken for a sign of economic well-being is the property sector. An even poorer allocation of scarce labour than a bloated F&B sector is the real estate sector. Thousands of real estate agents toil to help rotate capital, but create nothing of lasting value to the economy. The investment in their education and skills in other areas — most agents are not by original training property specialists — is also largely wasted.

High property prices and a large volume of sales are symptomatic of a mismatch in demand and supply and speculative behaviour, but are not in themselves sources of underlying economic growth.

What we need more of are not bars but stars — high value-added (VA) and capital-intensive enterprises. These are to be found in sectors such as financial services and technology. Only growth of such high VA sectors will create well-paying and professionally upwardly mobile jobs.

In this Budget, it was encouraging to see the shotgun approach of providing financial support to firms through the Productivity and Innovation Credit or PIC, supplemented by a targeted Information and Communications Technology for Productivity and Growth (IPG). The IPG is significant because it rewards firms for adopting or piloting new technology, which can be catalytic for innovation and longer-term economic value-capture.

A NON-PARETO ECONOMY

Our economy is no longer capable of Pareto growth — where expansion of any one sector has no negative consequences on the rest of the economy. With a soured public appetite for aggressive population augmentation, we cannot only grow — we have to grow smarter.

As a non-Pareto economy, we should continue to take corrective policy action to tighten labour supply in the S-Pass and Work Permit categories to force upwards labour productivity, even at the expense of individual firms that cannot adapt.

Conversely, we should keep a keen eye to ensure that the talent flow into high value-added sectors continues to flow. Singaporeans have to come to terms with the correlation between international labour competition and higher wages.

A future of slow growth is not something to welcome. It means fewer jobs and marginal improvements to our standard of living. There is no such thing as prosperity without growth. Only when we have the growth can we have the fiscal space to afford the social investments that will redress the imbalances and inequities that have crept in with past growth.

If we value the modern affluent Singapore — imperfect as it may be — that we live in today, then we have to fight hard to keep it renewed and refreshed.

ABOUT THE AUTHOR:

Devadas Krishnadas is the Managing Director of Future-Moves, a boutique strategic risk consultancy. He is the author of Sensing Singapore: Reflections in a Time of Change.

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