Singapore’s economy has settled into a new normal of slower growth.
Official estimates tip growth of around 2.5 per cent this year (2017) – a sedate pace compared to 7.7 per cent in 2007, and also a far cry from 8.5 per cent two decades ago.
What is behind this slowdown and is there cause for concern?
Forces within and without
Singapore is by no means the only country grappling with a slower economy. Developed economies all over the world are struggling to get back on track in the wake of the global financial crisis.
Almost a decade since the crisis, momentum in the United States is finally picking up but other major economies including Europe and Japan are only just starting to see nascent signs of recovery. Meanwhile, growth in China is slowing – with ripple effects across Asia – as the country's leaders move to rebalance its economy and contain risks in the financial system.
The breakneck pace of technological change is making it even tougher for the global economy to find its footing. Disruptive change has hit almost every industry, with jobs evolving faster than ever and new roles emerging even as existing jobs fall into irrelevance. The punishing pace of change has made it difficult for companies and workers to keep up.
These developments have weighed on Singapore's growth rate over the past decade. Its small, open economy is especially vulnerable to the vagaries of an increasingly uncertain and volatile world.
At the same time, domestic circumstances are also starting to weigh down growth.
Emerging economies such as Brazil, India and China have enjoyed faster growth than developed ones in the past decade. This was the result of playing ‘catch-up’ aided by rising education levels, higher returns on technology adoption and, a young population which translates into a growing and relatively cheap labour force.
Singapore also grew at double digit rates in the early 1960s, as the country embarked on industrialization, and continued to perform strongly for the first 20 years of independence. But as the economy matured, and population growth slowed, the pace of growth started to slow down.
In its 2007 Economic Survey of Singapore, the Ministry of Trade and Industry (MTI) estimated that the economy had an underlying potential growth rate of 4 to 6 per cent. Economic growth averaged 4.6 per cent from 1998 to 2009.
Ten years on, these numbers appear almost stratospheric. The Government now expects the economy to expand 2 to 4 per cent per year until 2020, which means growth of about 3 per cent on average.
Singapore’s stellar record of economic growth can no longer be taken for granted. This is because the nation’s labour force growth – one of the two main pillars of economic growth along with productivity growth – is slowing to a crawl.
Between 2006 and 2010, Singapore’s labour force grew at an average of about 4.5 per cent a year. This slowed to about 2.4 per cent a year between 2011 and 2016.
Low birth rates are partly to blame. Singapore already has a high labour force participation rate and is grappling with an ageing population, further stunting the growth of the resident workforce. Singapore is not alone in facing this challenge. Other developed countries, such as Japan, South Korea and Germany, have also had to deal with slowing growth as a result of falling birth rates and ageing populations.
The slowdown in the growth of the labour force is also a direct result of a bold effort to tighten foreign labour inflows, raise productivity and reshape Singapore's economic future.
An economy in transition
Before the global financial crisis, the availability of labour – both local and foreign - enabled Singapore’s strong economic expansion. However, there were societal impacts with increasing numbers of foreign workers – Singapore residents raised concerns about overcrowded infrastructure, worsening quality of life and shifts in social strains.
At the same time, it became increasingly clear that for sustainable economic growth, Singapore had to move from manpower-driven to productivity-driven growth – essentially to ‘do more with less’, and generate more output for instance via training, technology and digitisation, and innovation.
In 2010, the Government launched an economic restructuring plan to support Singapore’s transition to this new phase of economic growth, and rolled out measures to progressively curb the growth of the foreign workforce.
In addition to helping companies move away from manpower heavy operations, these changes also helped strike a balance between economic growth and social needs.
Construction workers preparing scaffolding in the central business district. Many sectors such as construction have to be weaned off a reliance on workers, in order to improve their productivity.
At the same time, the construction and oil and gas sectors, which rely heavily on foreign workers, have also slowed down, further reducing the number of foreign workers in Singapore.
The result has been a reduction in foreign worker inflows from about 80,000 in 2011 to a third of that, 26,000, in 2014. In 2016, the foreign workforce, excluding domestic workers, contracted by 2,500 people or 0.2 per cent - the first decline since 2009.
For the first half of this decade, the tightening in foreign worker inflows was offset by significant increases in local employment. But this will not continue as the number of working-age citizens is on its way down – older workers are retiring in greater numbers, and new cohorts entering the workforce are smaller than before.
“Achieving even 3 per cent growth on average will be an increasing challenge, as our labour force slows down in the years to come,” Deputy Prime Minister Tharman Shanmugaratnam said in a 2015 May Day speech. Beyond 2020, Singapore’s resident labour force growth rate is expected to be negligible, he added.
Ultimately, this means the only way to avoid a near-stagnant economy is for Singapore to make a breakthrough in productivity growth.
The productivity puzzle
But the push to make companies more productive has been painful and fraught with challenges. Tightening the tap on foreign manpower left many companies – especially small and medium-sized enterprises (SMEs) in labour-intensive sectors – scrambling to adapt.
“In the past, because of the more liberal foreign labour policies, incentives for companies to focus on investing in technology and improving their productivity were not that strong because there was an abundance of foreign workers they could tap on,” says DBS economist Irvin Seah.
The government introduced a range of schemes to encourage companies - especially SMEs - to buy machinery, improve their business processes, train their workers and invest in research and development that could lead to new innovative products and solutions.
The Government has been encouraging companies to upgrade their operations by using more technology, including robotics.
However, despite these efforts, productivity numbers continue to disappoint. Labour productivity growth – measured in terms of the percentage change in value added per worker – was negative or close to zero from 2012 to 2015. It came in at 1 per cent in 2016.
Policy approaches to these challenges are still evolving – for instance, the Government recently moved to make its approach to raising productivity more targeted and sector-specific, rolling out a S$45 billion Industry Transformation Programme in Budget 2016 to develop roadmaps tailored to the needs of 23 industries.
“Much really depends on whether we can succeed in transforming into an innovation-driven economy. It will be a challenging and long process. Success depends on whether companies are able to bite the bullet and make changes to their business strategy,” says Mr Seah.
“The same applies to workers - some industries may fade away and workers could face structural unemployment, so they have to pick up new skill sets.”
It is not the first time Singapore has had to adapt to new challenges, especially on the economic front. Having weathered some of the worst economic crises, the country has always emerged stronger. As long as Singaporeans remain adaptable and open to change, Singapore can continue to thrive.