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We must move up the Value Chain rather than give up on Manufacturing.



The release of the unemployment statistics two days ago brought home the folly of current policy.

http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_761247.html

While the government prided itself on creating 121 thousand jobs last year two-thirds of these went to foreigners. Manufacturing employment hardly grew while the bulk of job creation was in services and construction, where salaries and productivity are much lower than in manufacturing. The proportion of foreigners in the workforce edged up slightly to 37% of the total. This makes a mockery of the government’s avowed intention to restrict foreign workers to around a third of the workforce.

The figures for manufacturing need a close scrutiny. Policy proposals from some of the contestants in GE 2011 to phase out manufacturing would be a mistake if not disastrous. Rather than depending on cheap foreign labour, we need policies that move us up the value-chain, both in manufacturing and services. This is brought home by the latest statistics. These illustrate the absurdity of current government policies when two-thirds of jobs created last year went to foreigners and were in the service and construction sectors where average wage levels are much lower than in manufacturing.

Recently reading about the Republican primaries put me in mind of some of the more right-wing Tea Party candidates’ crazy ideas. One of the more notable themes has been attacking Obama’s bail-out of the auto industry in 2009 which prevented GM and Chrysler closing down and the loss practically of the whole US auto industry sector with hundreds of thousands of skilled high-paying jobs. Even a simple cost-benefit analysis of the losses in terms of lower taxes and higher welfare payments in the absence of the bailout would have outweighed the costs.

In addition a lot of research has gone into the positive externalities associated with clusters of particular industries in a specific geographic region and that the presence of complementary industries enhances entrepreneurship and start-up activity. If the companies had closed down then it is likely that there would have been a vicious circle of knock-on effects on related industries and the loss of a big part of the skill set to foreign competitors with the result being permanently lower incomes, employment and taxes. Sure there would have been new jobs created in other areas such as services but these would likely have been lower-paying.

If I was being sufficiently Machiavellian, the sheer stupidity of the objections might lead one to conclude that the Republicans advocating this strategy were Japanese, Korean or German agents. Obama’s recent advocacy of a strategy to reward companies manufacturing in the US and negate the advantages of transferring production to tax haven countries by imposing a minimum unitary tax are, besides being electioneering, a deliberate strategy to reverse the loss of high productivity jobs to countries which pursue a more active industrial policy.

In Singapore also there has been some debate about the proper role of manufacturing in the economy. During the GE one of the parties advocated the phasing out of manufacturing in Singapore and concentrating on services instead. The party also pointed out that the proportion of Singaporeans studying engineering is falling while claiming that most young Singaporeans prefer to work in the service industry. Again this is a failure of government policy not a reason for abandoning engineering as a discipline.  Certainly remuneration levels for engineering careers compare favourably with other career areas. Chemical engineers in the US now command the highest starting salaries. Also the preference of young people for service jobs, if correct, is probably the result of the government’s policy of subsidizing low-tech manufacturing through cheap foreign labour which has resulted in wage levels that are unappealing. Engineers are also highly sought after in the financial sector.

One of the more ridiculous ideas involved giving $10 billion to manufacturers to phase out their operations here and relocate them to neighbouring countries. This is worse than the current tax write-offs given in the US for closing down factories that the Democrats have rightly targeted to correct the bias against domestic manufacturing. While we need to stop the subsidies given to low-tech labour-intensive manufacturing which is reliant on cheap foreign labour this is not a reason for give up on manufacturing altogether. We just need to make sure we move up the value chain into high-tech high value-added industries. While the government was rightly critical of the idea of phasing out manufacturing, they of course ignored the fact that the government’s strategy continues to favour low-tech industry by allowing ready access to cheap foreign labour.

The government’s policy has always been of growing GDP in the easiest possible manner while neglecting its primary duty of raising the incomes and living standards of Singaporeans. Even its biggest recent success, in luring a big chunk of global pharmaceutical manufacturing to Singapore through tax breaks and holidays appears opportunistic. It will be interesting to see if it can be sustained in the long-term given the moves in the US to neutralize attempts to lure domestic industry away through tax breaks.

The UK government has also proposed the use of tax incentives to lure domestic industry back to the UK. I wrote back in 2009 about the dangers of a zero-sum game which ended up benefitting no one but the multinational companies (http://theonlinecitizen.com/2009/05/us-tax-rule-changes-and-implications-for-singapore-the-prisoner%E2%80%99s-dilemma/)

The worrying sign is that despite the solemn promises to phase out foreign labour during GE 2011 the PAP government is going the other way.  Just one example is the 26 new hotels slated to open by 2014 with 5,500 new rooms where the vast majority of the jobs will go to foreigners.

The inescapable conclusion is that we do not need this absurd over dependence on foreign labour to create prosperity for Singaporeans. We should not give up on manufacturing either, just ensure that we move up the value chain. It is true that modern manufacturing uses much less labour. Over the last ten years US manufacturing output has expanded by a third while the number of people employed has fallen by a third. However service industries are likely to see a similar “hollowing out” as advances in software permit rapid productivity gains. But do we need so many jobs? By reducing our dependence on foreign labour we could have fewer but higher productivity and higher paying jobs but a larger share for Singaporeans. In manufacturing we should aim to be like Germany rather than attempting to compete with China on labour costs. 

5 Comments »

  1. Upon reflection, while I would broadly agree with you on the need to move up the value chain in manufacturing, I doubt Singapore can model itself on either China or Germany for the simple reason that we have neither the space nor the manpower.

    Singapore’s total land area is 710 sq km with limited possibilities for further reclamation. After removing the reservoirs, central catchments, airports, golf courses, SAF training grounds and other public spaces, we are left with very little. And although the PAP government has short-sightedly boosted the population from 3 m to 5 m over the past 20 years, this is not enough to give it critical mass to create a truly high quality manufacturing economy. Instead, we have created a circular and rather self-defeating cycle: the need to constantly create additional infrastructure to accommodate the new immigrants as well as to impart, in many cases, basic civic education and training to bring the immigrants up to speed (eg many China immigrants have little working knowledge of English). The more people we import, the more we need to create and educate. The cycle will never cease so long as this policy continues.

    I have argued previously that it would be better for Singapore to model itself on Luxembourg. Luxembourg has not felt the need to artificially boost its economy by importing large numbers of people, yet until it was recently overtaken by Qatar, it enjoyed the highest per capita income in the world and a high ranking on the Human Development Index. On the whole, Luxembourg residents have a high quality of life, while enjoying low population density per sq km. This has been achieved by boosting the share of services in the economy. Manufacturing, which once occupied nearly 80% share of the economy was down to 11% value-added by 2001. Services as a whole contributed over 80% of the total value-added, see:

    http://www.portrait.public.lu/en/economic_structures/structure/overview/dominated_economy/index.html and

    http://www.state.gov/r/pa/ei/bgn/3182.htm

    Purely moving up the value-chain without giving up on labour-intensive manufacturing such as rig-building means we are stuck with the need for large numbers of workers. These types of activities must be given up if we are to improve the quality of life of Singaporeans. Less workers means less need for housing, public transport, hospital beds and so on.

    Unfortunately, the PAP appear to be unable to make a radical change in course. In the budget just presented, it found it possible to make only incremental changes to the foreign worker quotas. What we need but are unlikely to see with the present government are bold policy changes including substantial tax breaks for robotics and automated processes and less emphasis on boosting industries such as tourism which also needs large numbers of foreigners to support it.

    We need to make quality of life for Singaporeans and not GDP the primary goal.

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  2. This is off-topic but I feel its important to highlight as it involves the internet, which is vital to the airing of alternative political views here, as it is in other countries.

    ACTA (Anti-Counterfeiting Trade Agreement) has been protested down in Europe for its potential to be even more damaging to internet freedom than the Stop Online Piracy Act (SOPA). I came across an article about protesters against ACTA (http://rt.com/usa/news/anonymous-fff-consumer-acta-609/ ) at paragraph 10-11.

    In this paragraph, Singapore is involved in negotiating the ‘verbiage’ of the bill. Personally I am worried where this will go.

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  3. Singaporeans are generally not against the menial jobs going to foreigners; only against the white-collar jobs going to foreigners; there should be a strict quota on this. Are the local Tertiary Institutions churning out enough Local Talent? why do we need foreign talent for jobs like CEO? The truth is that increasing the population will increase GDP indirectly. But this at the expanse of locally born Singaporeans who are short-changed when looking for jobs as they have to compete with foreigners who settle for lesser pay. The PAP government is really out of ideas as they want to grow the economy further through increasing the population to 6 million. Can our public transportation take the strain? We will see the results in GE2016.

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  4. Although I am not an economist, I too wrote about this in 2009 for the online citizen. (Pasted below)

    I have to confess that I too fell into the trap of suggesting, like the party you mention above, that manufacturing be phased out completely in favour of services, using Luxembourg as a model. With hindsight, I realize what I had meant was that by de-emphasising low value, labour-intensive industries, what would be left would be a rump of high-value, high-quality manufacturing which would move Singapore up the value scale. I omitted to say it. I agree completely with your analysis.

    One question: how would you categorize an activity such as rig-building? It is an area in which Singapore is acknowledged as a world-leader but employs huge numbers of foreign labour. Would you recommend that this type of activity be phased out?

    “The Singapore economy
    In the 1980s Singapore’s policy makers took a conscious decision to transcend the low-cost/low- value economy and move into more higher value activities such as computer chips, semiconductors and services.
    In the 2000s it is attempting to move into still higher-value ‘brain’ work by developing a research and development wing. However, by clinging on to the ‘old economy’ at the same time, the focus appears to be somewhat blurred.
    The catchword should be “quality” not “quantity” but this is something that seems to have eluded our policymakers, judging by their desire to relentlessly pursue growth in every area of the economy.
    The Economic Review Committee, chaired by the then Deputy Prime Minister Lee Hsien Loong, while acknowledging in February 2003 that growth would slow in the future compared with the heady years that preceded it, continued to emphasise the twin engines of manufacturing and services. In particular, the report stated that “manufacturing will continue to be an important growth engine”.
    With the benefit of the insight that the current economic crisis provides and other reasons mentioned here, it is apparent that this reliance on manufacturing is misplaced. For a start, it leads to social pressures and stresses the physical environment owing to the need for both land and large numbers of workers.
    More importantly, manufactured goods have to find markets which increases our reliance on exports, since the domestic market is limited. If there is one thing the current crisis has shown, it is that we need to reduce our dependence upon exports in general and the US market in particular.
    Focus more on services industry, R&D
    I submit it would be a far better proposition to concentrate our efforts on services alone, as the main engine of growth. The government has already identified and recommended the creation of service clusters in areas as diverse as aerospace, medical tourism and tertiary education.
    At the same time, there should be sharper focus on high-value, high-quality research and development in both the pure and applied sciences and engineering. Arguably these, together with the supporting services needed, will provide sufficient grist to keep a reasonable-sized population gainfully employed without the need to import large numbers of people with all its attendant problems and issues[i].
    These kinds of activities will also be, hopefully, less dependent upon external factors and less cyclical in nature.
    Instead, our policymakers seem to be taking us down the value chain again. Casinos (for a casino by any other name is still a casino) are the type of activity that will create pressures of exactly the sort that a country of Singapore’s size doesn’t need.
    In attempting to compete with Genting (land area over 6,000 hectares[ii]), Macau and the cruise ships, we are revving up the economy and creating a circular argument: “We need more people to run the show”. If we didn’t have the activity in the first place, we wouldn’t need these extra people.
    Too much emphasis on low-value jobs
    In fact, it would be interesting to know how many of the myriad jobs that will be created by the integrated resorts, bell-boys, chambermaids, waiters and the like will be filled by Singaporeans? Anecdotal evidence says that the hospitality industry is already stretched to the limit and struggling to fill these low-value positions.
    This opens the government up to the charge that it is creating jobs for foreigners, rather than taking care of its own. The policy of “growth at all costs” also leads to the very real possibility of a bubble being created which, when deflated, can cause enormous headaches (the causes of deflation are often outside our control, as we are witnessing now). In times of trouble, it is easier to manage 3 million people than 5 million.
    And therein lies another fallacy, that of linking government minister’s salaries to the growth in GDP. So long as this policy exists, the incentive for ministers (they are human, after all) will be to keep pumping up the economy.
    As a parallel, recall the events that led to the crisis on Wall Street. Think of the legions of bankers who who were paid enormous sums for creating products that supposedly removed the risk from financial transactions, yet they left the worst mess the world has seen in 80 years. So long as the reward system was tailored to the production of ever more exotic products, the bankers obliged by churning them out in increasingly larger numbers. With hindsight, this proved to be a disaster.
    Do we really need to put the economy on steroids? Is Singapore merely an economic machine and all of us just individual digits, mere cogs in the wheel? Are we still so insecure that we have to hark back to the days when we “fought the communists in the gutters”?
    Let us take a bold look and challenge the status quo in order to safeguard the sustainability of our quality of life.”

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  5. While the government prided itself on creating 121 thousand jobs last year two-thirds of these went to foreigners. …………….. This makes a mockery of the government’s avowed intention to restrict foreign workers to around a third of the workforce.

    I agree with you on this first paragraph. This is one of the biggest problems and
    has not seen any signs of improvements to date.

    The figures for manufacturing need a close scrutiny. Policy proposals from some of the contestants in GE 2011 to phase out manufacturing would be a mistake if not disastrous. Rather than depending on cheap foreign labour, we need policies that move us up the value-chain, both in manufacturing and services. This is brought home by the latest statistics. These illustrate the absurdity of current government policies when two-thirds of jobs created last year went to foreigners and were in the service and construction sectors where average wage levels are much lower than in manufacturing.

    While it is true that we need to shift our over-dependence on cheap foreign labour in the lower valued manufacturing sectors, you have failed to address another problem and that is the growing dependence on foreign workers even in the higher value manufacturing sectors. Infact another inherent problem that is closely linked to the latter one i mentioned is the issue of why should manucfacturing companies even start their business here when there are much cheaper land and labour costs in other countries like China. A good example of this is http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html.

    As an economist you should understand very well the idea of specialising. In Singapore we have neither attractive land, nor labour which is two fundamental pillars of a healthy sustainable manufacturing sector. In order to compensate for this, much govt intervention in the manucfacuturing sector is needed to make up for these disadvantages, but has these policies worked? Is it not true that the idea of moving up the value chain is already old “talk” and PAP have been long ago trying to move up the value chain and the results have been less then promising?
    So if indeed you intent to pursue this course of action what would you do that would be different from PAP’s policy and how would it work?

    Recently reading about the Republican primaries put me in mind of some of the more right-wing Tea Party candidates’ crazy ideas. One of the more notable themes has been attacking Obama’s bail-out of the auto industry in 2009 which prevented GM and Chrysler closing down and the loss practically of the whole US auto industry sector with hundreds of thousands of skilled high-paying jobs. Even a simple cost-benefit analysis of the losses in terms of lower taxes and higher welfare payments in the absence of the bailout would have outweighed the costs.
    In addition a lot of research has gone into the positive externalities associated with clusters of particular industries in a specific geographic region and that the presence of complementary industries enhances entrepreneurship and start-up activity. If the companies had closed down then it is likely that there would have been a vicious circle of knock-on effects on related industries and the loss of a big part of the skill set to foreign competitors with the result being permanently lower incomes, employment and taxes. Sure there would have been new jobs created in other areas such as services but these would likely have been lower-paying.

    First of all i would like to see this simple cost-benefit analysis that you mentioned here. Secondly, i think you are oversimplifying the matter and well, ignoring the elephant in the room. Many opponents of the bailout do so not on the overly simplified nominal terms of bailout vs taxes lost + welfare, they do so on a fundamental theoritical manner and that is the moral hazard involved by bailing out private companies which has far bigger and longer impact in the whole industry. There is enough literature on this subject matter that i do not feel the need to explicate this issue for too long, but it would be nice to see you address this issue and not use a overly simplified analysis in nominal terms.

    The 2nd paragraph which talks about the possible after effects of Not bailing out industries i find to be in-ept in explaining your case of pro-bailouts. It is true that the knock on effects that you mentioned will most likely happen if bailouts did not happen, but the assumptions you made when you said “and the loss of a big part of the skill set to foreign competitors with the result being permanently lower incomes, employment and taxes.” What assumptions are that?first It is that the companies that required bailout out will immediately after being bailed out become sound and profitable again. Only by using this assumption can your point be true. If not it is just as likely that the company even after getting bailied out fall back into dismay again and be out competed by other companies. Second, that foreign companies competition naturally means permanently lower incomes, employment and taxes. Surely you are mistaken in making this assumption? Afterall if that were to be truly the case we have no reason to continue to entice big MNCs to stay here. Ignoring the moral hazard problem for this point it would again be nice to see you explain why you made such assumptions to begin with.

    Another point i would like to mention is the benefits from having clusters of specific industries in specific geographic areas. It is good that you mentioned this since this is one disadvantage that Singapore currently faces, and that is due to our small land mass, the extend to which the clusters can expand is severly limited, and this is indeed an important consideration when companies decide whether to come to Singapore.
    In Singapore also there has been some debate about the proper role of manufacturing in the economy. During the GE one of the parties advocated the phasing out of manufacturing in Singapore and concentrating on services instead. The party also pointed out that the proportion of Singaporeans studying engineering is falling while claiming that most young Singaporeans prefer to work in the service industry. Again this is a failure of government policy not a reason for abandoning engineering as a discipline. Certainly remuneration levels for engineering careers compare favourably with other career areas. Chemical engineers in the US now command the highest starting salaries. Also the preference of young people for service jobs, if correct, is probably the result of the government’s policy of subsidizing low-tech manufacturing through cheap foreign labour which has resulted in wage levels that are unappealing. Engineers are also highly sought after in the financial sector.

    I will say that this point is one of the weaker arguments in the specfic proposal and i will leave it at that. This however does not discredit the arguments of Why we should move out of manufacturing and focus on the service sector which i believe was already mentioned above.

    One of the more ridiculous ideas involved giving $10 billion to manufacturers to phase out their operations here and relocate them to neighbouring countries. This is worse than the current tax write-offs given in the US for closing down factories that the Democrats have rightly targeted to correct the bias against domestic manufacturing. While we need to stop the subsidies given to low-tech labour-intensive manufacturing which is reliant on cheap foreign labour this is not a reason for give up on manufacturing altogether. We just need to make sure we move up the value chain into high-tech high value-added industries. While the government was rightly critical of the idea of phasing out manufacturing, they of course ignored the fact that the government’s strategy continues to favour low-tech industry by allowing ready access to cheap foreign labour.

    Again i agree with the need to move away from the dependence on foreign workers but you have yet to properly address on WHY phasing out manufacturing is such a bad idea and what your plan is and why it would work while PAP’s didnt.

    The inescapable conclusion is that we do not need this absurd over dependence on foreign labour to create prosperity for Singaporeans. We should not give up on manufacturing either, just ensure that we move up the value chain. It is true that modern manufacturing uses much less labour. Over the last ten years US manufacturing output has expanded by a third while the number of people employed has fallen by a third. However service industries are likely to see a similar “hollowing out” as advances in software permit rapid productivity gains. But do we need so many jobs? By reducing our dependence on foreign labour we could have fewer but higher productivity and higher paying jobs but a larger share for Singaporeans. In manufacturing we should aim to be like Germany rather than attempting to compete with China on labour costs.

    Again agreed on the reliance on foreign labour. While aiming to be Germany in terms of manufacturing is indeed a admirable goal we cannot ignore the fact that Singapore has neither attrative land nor labour factors. While aiming to be as productive as Germany is much better then trying to imitate the low labour costs of China, the land factor is not favourable to us when compared to Germany. I will not comment on the issue of increase productivity and the after effects on labour since i find your proposal of carrying on the promotion of value adding manufacturing less then convincing. In conclusion i would say that while i agree with your critique on the over reliance of foreign workers, i do not agree with your proposal of especially supporting the value adding manufacturing sector. We should focus on our advantages and not make up for our disadvantages.

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