The Myth of PAP’s Miracle – Paul Krugman Revisited; Productivity Problem Redux

Singapore has struggled with the issue of productivity growth for a very long time.

As far back as 1972, Singapore set up the National Productivity Board (NPB) to improve individuals' and companies' productivity in all sectors of the economy. The NPB adopted a so-called "total productivity" approach, which emphasized productivity measurement, product quality, worker training, and assistance to small- and medium-sized enterprises (SMEs).

In the 1980s, growth via productivity was a key agenda on policy makers’ minds. In 1981, Singapore set up the Productivity Standards Board (1981). In 1982, NPB launched a nationwide productivity campaign (remember Teamy the Productivity Bee?) to encourage the move from labor-intensive activities to more highly-skilled and technology-driven work. In 1986, then cabinet minister BG Lee Hsien Loong pointed out that Singapore was industrially “still predominantly a manufacturing production base. Products are designed overseas, and then only produced in Singapore factories on our production lines.” The budgets of the 1980s had as part of their objectives, the goal to get out of the cheap-labour trap and to move into high-skill industries. 1980s budgets often created incentives and disincentives for this transformation.

Despite that cognizance of policy makers of the productivity trap, Singapore’s productivity growth was seriously called into question, and the most famous of the critiques was by Paul Krugman. In his 1994 article, “The Myth of Asia’s Miracle”, Krugman argued:

But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore’s growth [between 1966 and 1990] can be explained by increases in measured inputs. There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union growth achieved purely through mobilization of resources. Of course, Singapore today is far more prosperous than the U.S.S.R. ever was–even at its peak in the Brezhnev years–because Singapore is closer to, though still below, the efficiency of Western economies. The point, however, is that Singapore’s economy has always been relatively efficient; it just used to be starved of capital and educated workers.

Needless to say, Lee Kuan Yew was outraged at Krugman’s comments. Krugman had effectively argued that the PAP’s productivity initiatives and campaigns through the 1980s had been a failure, and that Singapore’s economic success under Lee was nothing to be surprised about. This was naturally offensive to Lee Kuan Yew, whose reputation depended mostly on Singapore being seen as an economic miracle which he had orchestrated.

Nevertheless, Krugman had made his point. Lee Hsien Loong, who had been promoted to Deputy Prime Minister and was now chief economic architect of the country,  re-initiated a productivity drive in Singapore in the 1990s. A productivity task force set up in 1994 acknowledged that even by its own calculations, Singapore's Total Factor Productivity (TFP) growth had been "negligible." "Productivity zones" were set up around the island to promote knowledge exchange between companies. Businesses were encouraged to set up worker suggestion programs and to streamline their operations. Street hawkers were roped into the productivity drive, and were encouraged to engage in practices such as franchising.

The results were mixed at best. A paper released by MTI that analysed Singapore’s productivity between 1980 and 2000, noted that Singapore’s productivity growth during the 1990s was generally smaller than the 1980s. Productivity growth in 1996-2000 was dismal, in part due to the Asian financial crisis. Particularly damning was the construction sector, which saw consecutive years of negative productivity growth between 1995 and 2000.  Domestically oriented businesses were also found to post either negative or below average productivity growth, including hotels, restaurants, and financial services sectors.

The PAP Government continued hammering at the productivity problem. In 2001, Lee Hsien Loong noted the following in his budget speech:

48. Studies such as that by the Political & Economic Risk Consultancy Ltd., or PERC have pointed out that one critical area for improvement is the quality of manpower. We recognise that human capital will be our competitive edge for our next phase of economic development. We must develop our human capital pool to the fullest.

49. In order for Singapore to succeed in our next phase of economic development, we will require a different type of workforce-one that is able to acquire, apply and create knowledge in flexible and innovative ways to generate greater value.

67. To raise the performance of local enterprises, the Productivity and Standards Board (PSB) will help firms to modernise management, adopt IT and increase efficiency. It will assist companies in restructuring and moving up the value chain, or moving into growing ones. This will help to rejuvenate the business scene and allow resources to be re-deployed efficiently.

89. In today's environment, the most successful businesses will be those that are able to motivate their employees to greater innovation and enterprise.

Lee’s message was clear. In 2001, the PSB was renamed SPRING (Standards, Productivity and Innovation Board), which would aggressively productivity growth throughout the country. Productivity training, quality circles, work redesign, standard improvements and many other initiatives were started to promote productivity enhancements. Several budgetary subsidies and incentives were implemented to encourage skills upgrading, investments in productivity enhancing equipment and innovation. Subsequent budgets also focused on how to encourage entrepreneurship, and millions of dollars were allocated to encourage startups and technological innovation.

Yet despite the clear statement of intent and implementation of productivity enhancement measures, Singapore’s productivity performance for the 2000’s has been disappointing. Singapore’s productivity growth between 2000 and 2008 was just 1% per annum.

 Source: Straits Times

Following this dismal performance, in February 2009, the Inter-Agency Productivity Taskforce was set up to examine the problem of declining productivity in the services sector. In 2010, a high-level National Productivity and Continuing Education Council (NPCEC), chaired by Deputy Prime Minister Teo Chee Hean, was established to galvanise the nation to step up its efforts to boost skills and enterprise productivity, and develop a comprehensive system for continuing education and training. Lee Kuan Yew was forced to admit in 2010 that “We've grown in the last five years by just importing labour.” According to a report that MM Lee quoted, Singapore scored only 51 out of a productivity score of 100, with 100 being Japan’s benchmark.

Yet, inspite of these efforts, the latest Economic Survey of Singapore revealed that Singapore’s productivity growth in 2011 was a dismal 1%.

If Krugman’s point was debatable when he first made it, then surely he has been conclusively vindicated by Singapore’s productivity performance in the last two decades. In spite of repeated attempts to focus on Singapore’s productivity performance over the last 30 years (!), the PAP’s policies have failed to catalyse any significant performance in this area. Singapore’s productivity remains unimpressive relative to other developed nations, and in some sectors has remained stagnant or even regressed over the past few years.

Our latest budget 2012 seems to be a rehash of the old productivity promoting budgets. DPM Tharman Shanmugaratnam has declared in the budget speech:

B.5. We will therefore take important further steps in this Budget to promote this necessary restructuring. We have to reduce our dependence on foreign labour, and do much more to build an economy driven by higher skills, innovation and productivity, as the basis for achieving higher incomes for Singaporeans.

B.14. However, while the economic growth in these past decades has relied equally on productivity improvements and increases in the labour force, in future, productivity must be the key driver of our growth. In terms of productivity, we still are some distance behind the most advanced economies. Today, the same value of output produced by 10 workers in Singapore takes only 7 workers to produce in the US or 6 in Switzerland

C.19. There is in fact significant scope to improve step up productivity in the services sector, where the labour crunch is most severe. For example, our retail industry lags behind several other global cities – its productivity level is less than half of that in New York, Paris and London and remains behind Hong Kong’s. We will support efforts by our services industry to make the transition to a higher level of quality and skills.

C.32. We introduced a number of major new measures to help businesses address this challenge over the past two years. First, we provided broad-based support through the Productivity and Innovation Credit scheme, or PIC, which I will further enhance in this year’s Budget. Second, we set aside $2 billion for the National Productivity Fund (NPF), which will provide more targeted support for industry efforts to restructure and upgrade over the next decade. Third, we are investing significantly in Continuing Education and Training (CET) to help our workers develop new skills and expertise and increase their versatility.

Tharman's budget also introduced several subsidies to encourage companies to improve productivity, most are rehashes or extensions of ideas implemented in previous budgets.

Given the subpar track record of the PAP’s previous productivity drives, why would anybody think the 2012 productivity budget is going to work this time?

Sources:

• Wijaya, M. (Mar 23, 2010) “In Singapore, Productivity at All Costs”
• Krugman (1994) “The Myth of Asia’s Miracle”
• Singapore Budget Speech 2001, 2012
• Furrybrowndog.wordpress.com (Jan 2010), “Productivity and Singapore’s economic growth model”
• Wall Street Journal (Oct 1996) “Singapore Swing: Krugman Was Right”)
• Vietor, Richard (2007) “How countries compete: strategy, structure, and government in the global economy”
• Ministry of Trade and Industry (?), “Singapore’s Productivity Performance 1980-2000”
• Straits Times (28 Jan 2010), “Fewer foreign workers in five years, says MM”
• Ministry of Trade and Industry (Feb 2012) “Economic Survey of Singapore 2011”