Without subsidy, not much chance for NEA to ensure affordable food, profits for hawkers

National Environment Agency officials working on the review of social enterprise-run hawker centres should take note of the “cost disease” or “Baumol’s disease” (named after the economist who discovered this phenomenon).

For any average rate of productivity growth in the economy, some industries will be above the average and others below.

Not surprisingly, the industries that benefit less from economies of scale and labour-saving technologies — such as hawkers, tailors, barbers, and even teachers and doctors — will see their productivity grow at a slower rate than other industries.

In manufacturing and certain highly skilled services (eg. software, finance, e-commerce), standardisation, automation and scale economies have enabled large productivity gains.

The relatively stagnant industries also tend to be a lot more dependent on human labour, rather than machinery or capital equipment, to ensure quality.

This means that efforts to automate or standardise these relatively stagnant industries often result in (perceived) lower quality. Think central kitchens or factory-produced fried shallots instead of the hawker preparing everything from scratch: productivity improves but quality falls.

A slower-than-average rate of productivity growth also means that the inflation rate in the more stagnant industry (hawkers, in this instance) will be higher than the general inflation rate. That is, we should expect hawker food prices to increase at a rate faster than prices in general.

If prices in the stagnant industries aren’t allowed to increase faster than average prices, these industries would have to cut costs.

And since they are a lot more dependent on labour inputs, this means that incomes in these industries stagnate, that means, they grow slower than incomes in other industries where prices aren’t constrained.

This is why the hawker industry hasn’t been able to attract younger people: hawker prices probably haven’t risen faster than the general inflation rate; as a result, incomes have stagnated.

What all this means is that it was always quite unrealistic for NEA to think that social enterprise-run hawker centres would produce the sort of tech or business model innovations that can “cure” the underlying “cost disease” in the hawker industry.

There was never a realistic chance that such hawker centres would be able to square the circle of ensuring affordable hawker food and profitable hawkers without government subsidy.

When someone says that social enterprise-run hawker centres would come up with innovative practices that would keep prices low and make hawker centres vibrant, while still ensuring that hawkers’ businesses are viable, it is really a reflection of their ignorance or delusional optimism.