How land and people fit in Singapore’s economy

People walk through Raffles Place in Singapore on October 1, 2012. (AFP photo)People walk through Raffles Place in Singapore on October 1, 2012. (AFP photo)

COMMENT

By Linda Lim

The ongoing debate about Singapore’s population policy provides a timely opportunity to reconsider how different pieces of our economic growth model fit—or do not fit—together.

GDP (output) growth in any country comes from either or both increases in inputs (primarily land, labour and capital) or the productivity of those inputs. As noted first in Lee Tsao Yuan’s 1982 Harvard PhD economics dissertation, and continuing to the present day, Singapore’s GDP growth has depended more on input than on productivity increases, as reflected in the high dependence on foreign labour.

This has had the unintended (but predictable) consequence of discouraging increased labour productivity.

Employers could increase output more readily and cheaply by recruiting foreign workers, particularly from lower-income countries, than by investing in capital-labour substitution and upgrading the skills of the domestic labour force. This was and is an entirely rational decision for profit-maximising private enterprises.

But increasing output by increasing inputs eventually runs into the problem of diminishing marginal returns.

In Singapore’s case, this is because the addition of more and more people to an essentially fixed and extremely scarce complementary resource, land, inevitably raises other costs. These include rising residential housing and commercial rental costs, and congestion costs especially in transportation.

Also, both higher housing costs and lengthening commute times effectively lower the real wage of workers (e.g. because it now takes them 10 or 11 hours to earn an 8-hour daily wage).

In a closed labour market, the rising cost of living eventually translates into higher nominal wages. But in an open labour market like Singapore’s, wage increases held down by the increased supply of foreign labour discourages the substitution of capital, higher technology and sophisticated management processes, for labour.

This is why the policy of tightening foreign labour supply and increasing labour productivity is necessary.

Some solutions

One way by which the chronic excess demand for labour that Singapore has long suffered (despite or because of a liberal immigration policy) will be reduced is by some businesses moving out of the country. This is a normal process of adjustment to shifting comparative and competitive advantage.

What is important here to smooth such adjustments and minimise the costs to both employers and workers is commitment to a clear long-term labour market policy that will not vary according to short-term business or electoral cycles.

But the application of such a policy should not be blunt—applied with immediate and equal force across all sectors—but nuanced and gradual, according to the circumstances of individual sectors and businesses.

Economic planning agencies need to be involved in calibrating the demand side of the labour market. For example, they shouldn't provide incentives to businesses whose highly specific manpower needs require a heavy reliance on imported labour and talent, with few jobs for native Singaporeans, or which are highly land-intensive.

Choices and trade-offs must be made—not between growth and foreign labour dependence, but between different sectors that will contribute to growth.

Policy consequences

Given Singapore’s extreme land scarcity, continuation of heavy (if reduced) reliance on foreign labour and immigration has another unintended consequence. It contributes marginally to the low fertility rate and emigration of native Singaporeans, and to labour force participation rates that are lower than they might be for certain demographics.

These are, for example, mothers of young children, and professionals and skilled workers over 50 years of age who in other developed countries would be at the pinnacle of their careers, but in Singapore are too often sidelined in favour of cheaper (or more globally accomplished) imported talent.

High housing costs reduce fertility by delaying the age of marriage (since young couples need to both work for a long time to save enough to afford their own home, especially in the unsubsidised private market where they must compete with large numbers of foreign buyers).

Also, long commutes on congested public transportation reduce time for social interaction and family formation, and make it difficult to transport children for childcare and schooling.

The costs of child-raising are high, including for some the need for (mostly foreign) maids and nannies to enable both parents to work. This again increases population density, including in the ever-shrinking space of home. Competition with foreigners in school and the job market also increases the stress and expense of child-raising.

Emigration to more land-abundant countries also becomes more attractive to young Singaporeans who do not see themselves ever being able to replicate or even approach their parents’ standard of living if they stay home, faced with the ever-increasing costs of living, declining quality of life, increased job market competition and a perception of discrimination vis-à-vis foreign talent and immigrants.

The feeling of being treated as a “second-class citizen in my own home”, and being crowded out by foreigners, adds to the loss of physical markers of “home”—buildings, land, green and wild areas which in every country constitute part of the native’s national patrimony and identity—in discouraging the sojourner’s return to be a “stranger in a strange land”.

The over-representation of foreigners or immigrants in the leadership and even middle ranks of many organisations also suggests that a “glass ceiling” exists for the locally-born, such that upward career mobility may be more limited than in a larger foreign country.

From a purely GDP growth input perspective, it may not matter if emigrating or low-reproducing native Singaporeans are readily replaced in the labour market by immigrants and new citizens. But particularly at the high end of the skill ladder, among the globally-mobile talent that the country wishes to attract, many of the same “push factors” operate to discourage a permanent stay in Singapore—from the cost of living to quality of life—reinforced by lack of the bond of a shared collective national identity.

For those who do stay, sheer numbers (and what some say is the difficulty of making friends with Singaporeans) encourage “clustering among their own” rather than integrating into native Singapore society, and their birth rates will also fall over time for the same reasons this has happened with native Singaporeans.

Distortions

Territorial land is the essence and foundation of a nation. In Singapore, the wisdom of using retirement savings to fund home ownership, including in subsidised public sector housing, has been premised on the assumption of constant asset appreciation. Large-scale immigration contributes to asset appreciation, and thus to the profits of REITS and both private and government-linked property developers.

But asset appreciations based on increased land scarcity are essentially rents that transfer income from buyers to sellers, thus contributing also to rising inequality.

From a long-term growth perspective, they distort incentives to work, save and invest in value-creating activities in favor of rentier wealth or income from property “investments” (or speculation).

Asset inflation also hurts growth by raising the cost of doing business and discouraging entrepreneurship especially by SMEs and local businesses which cannot afford to compete with global multinationals for commercial and retail space.

We should not forget that a major factor in the downfall of the medieval Italian city-state of Venice was the diversion of entrepreneurial capital and energy into property as the small land-area drove rising rentals and land prices, leaving the city with beautiful buildings that today are but a shell for visiting spectators to admire.

Beyond these economic considerations, an increase to the already absolutely and proportionately large numbers of temporary foreign workers and new immigrants has resulted in social pressures and political tensions that threaten to make Singapore less livable and less attractive to foreigners turned off by the perceived hostility of natives, as well as natives who feel their livelihood, lifestyle, electoral impact and nationhood undermined by the overwhelming presence of foreigners.

Land and people together constitute a nation. All of us, new and old Singaporeans alike, and temporary residents, will be better off if our population policy takes a more comprehensive view of both economic growth and social integration in this small but precious piece of land. Fortunately, there are alternative solutions that, together as a nation, we can make work.

The writer, a Singaporean, is professor of strategy at the Stephen M. Ross School of Business at the University of Michigan.

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