As we can see from the evolution of Singapore’s economy since its independence, other than the four short recessions which was primarily caused by either slowdown in global demand or external financial crises, the city-state chalked up impressive growth with the economy expanding on an average of about 8% annually.

 

On the flip side, however, the incessant need to move up the value-add ladder to keep ahead of competition posed a great demand on its lean labour force to upgrade its skills and knowledge continuously.[1]

 

To be sure, human resource has been a binding constraint that limits economic growth since as early as the 1970s. The problem is not only the small size of the population. When the labour force was young and adaptable in the 70s and 80s, new skills could be assimilated quickly. However, as the population continues to age in the 90s and after the turn of the century, upgrading became increasingly tedious. New skills required today are also more complex than in yesteryears.

 

Inadvertently, the incessant restructuring produced winners and losers. In time, more and more older workers faced dislocation due to skill obsolescence. This mismatch in supply and demand of skill sets as the economy moves up the value ladder resulted not only in more structural unemployment but also increasing dependence on foreign talent with the skill sets for emerging high-growth economic sectors.

 

 

Emergence of a Two-Speed Dual Economy

 

By the 1990s, as a result of the interminable process of economic restructuring, a divergent pattern of growth had emerged, culminating in the emergence of a two-speed dual-track economy comprising of the “global periphery” and the “domestic core”. [2]

 

The faster “global periphery” track is made up of workers and large businesses (mostly MNCs) serving predominantly regional and global clients involved in subsectors like offshore finance, private banking, asset management, high-end residential market, marine and aviation transport services and equipment, and pharmaceutical products. This segment has not only been able to benefit directly from the recovery of global demand, it also enjoys favourable policies offered by the government to entice foreign investments. Given that a higher level of skills and international exposure are needed to carry out activities in this segment, the number of foreigners and permanent residents here is significantly larger than the national average. Because of the high value-add nature of the activities, the workers in this segment command higher wages and the segment as a whole accounts for a disproportionately larger share of the total GDP even though it employs less than a quarter of the labour force.

 

In contrast to the “global periphery” track’s external orientation, the slower growth “domestic core” track is comprised of businesses and workers serving the domestic market. Their activities cover subsectors including retail trades, construction, the mass residential market, catering trade, transport, public services (e.g. health care), hotels and restaurants, and domestic Singdollar financial activities (e.g. retail banking). In other words, growth of this track depends directly on the state of the domestic economy. Most of the workers in this track are either Singaporeans or unskilled foreign workers. Because the activities have lower value-add, workers here command lower wages than those in the “global periphery” track. The presence of foreign workers willing to work at low wages further depresses wage growth for Singapore workers. Hence, even though the domestic track employs about three-quarters of the total labour force in Singapore, it accounts for a disproportionately smaller share of the country’s overall GDP.

 

The emergence of the two-speed dual-track economy also complicates policymakers’ efforts to drive productivity growth. Generally, companies in the global periphery track are mostly MNCs and large local firms (predominantly the GLCs). They are more capital intensive and hence productive. In contrast, the SMEs, in particular those in the construction, retail, and hospitality industries, either have no incentives and resources to upgrade or do not have the knowledge to redesign their work processes to increase the productivity of their workers. The productivity level of the construction industry in Singapore, for example, is estimated to be only one-third that of Japan’s and half that of Australia’s.[3]

 

The productivity gap between the foreign and the local companies in Singapore is also evident in the falling contribution to GDP by the latter. The share of GDP contributed by resident companies and workers declined from about two-thirds in 1998 to about 54.3% in 2008. In terms of contribution to GDP growth, the figures are even more worrying. In 2004, residents contributed slightly more than half of GDP growth. That figure fell to less than a third by 2008. Finally, while the overall per capita GDP was S$53,192, the resident per capita GDP reached only S$38,372.[4]

 

Similarly, at the firm level, profit margin is comparatively lower in the domestic core track because of high domestic competition and because their prohibitive size excludes them from reaping any benefits from long term investments for economies of scale. Finally, at the industry level, while the global periphery track’s activities enjoy high growth as a result of rising opportunities in regional and global markets, the domestic core segment’s activities remain sluggish because of people’s habits of high saving and low consumption.

 

The net effect of the two-speed dual-track economy is the widening of the wage differentials between workers in the two tracks over the years particularly from the 1990s onward.

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Influx of Foreign Workers and Talents

 

Meanwhile, the situation is aggravated by the influx of foreign workers and talents.

 

To be sure, human resource has been a binding constraint that limits economic growth since as early as the 1970s. By 1970, for example, there were a total of 72,590 foreign workers making up about 11% of the work force. Since then, the number of foreign workers has grown rapidly in tandem with the high economic growth in the 1980s and 1990s. The increasing strain attributable to the ballooning foreign population, however, was masked by the sterling economic data.

 

By the turn of the century, the adverse impacts of Singapore’s overdependence on foreign workers began to show. Even when the economy was expanding prior to the Global Financial Crisis in 2008, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same time. Efforts to position Singapore as a global city and to move into higher-end technologically- and knowledge-intensive industries has led to the shortage of professionals with both the relevant skills and international exposure. On the other hand, the hollowing out of lower value-add manufacturing operations results in an excess of workers with obsolete skillsets.

 

The government had set a target of 6.5 million as the optimal population size that could provide the economy with a critical mass without overstretching the limited natural and social resources. The official rhetoric was that with an ageing population and with fertility rate plunging from 1.60 in 2000 to 1.28 in 2008, far below the 2.1 needed for a population to replace itself, foreign newcomers would make up the bulk of the increase in population and work force over the next few decades. As a result of the influx, the foreign population increased by 70.9% while the number of citizens increased by only 7% between 2000 and 2009. In terms of composition, citizens constituted only 64% of the total population, a decline of 10% over the same period.[5]