Behind Singapore Inc

http://sg.news.yahoo.com/behind-singapore-inc---part-i---the-growing-class-of--working-poor-.html

In a wide-ranging interview with former GIC chief economist Yeoh Lam Keong, Yahoo! Singapore’s JEANETTE TAN finds out what he thinks are the key challenges Singapore faces in its quest for continued economic development. This is the first of a three-part series that dives into some of the country’s key policies and governance.

Could Singapore’s immigration policies over the past 15 years have created a separate, growing class of poor citizens?

Former chief economist to the Government of Singapore Investment Corporation (GIC) Yeoh Lam Keong believes that may be the case.

Using a term he calls “the working poor” — a term he uses to refer to the bottom 10 per cent of working household breadwinners, who hold full-time jobs, but yet find themselves entrenched in the poverty cycle – he said, “In other words, even if you’re fully employed, you may barely earn enough money to bring up a family decently or to improve your children’s economic opportunities.”

“It’s a poverty in work, as opposed to poverty because you don’t have a job,” the 54-year-old said during a recent one-hour interview with Yahoo! Singapore.

A seasoned economist, Yeoh understands more than most the interconnected nature of so many of Singapore’s policies, with the multitude of factors involved in dealing with employment and wages alone.

A former schoolmate of Deputy Prime Minister Tharman Shanmugaratnam’s at the Anglo-Chinese School, and later the London School of Economics, Yeoh spent almost all his adult life working on government economic policies.

Involved in starting up the Economics and Strategy Department at GIC, Yeoh rose through the ranks to become chief economist, enjoying his work there so much that he stayed there for 26 years before leaving in June last year to spend more time with his family and his first love -- nature and the outdoors.

Zooming in on the hot-button point of the country’s immigration policy, Yeoh went on to explain that mass immigration of foreign unskilled workers has depressed the wages of working-class Singaporeans.

Industry-level salaries for these workers have stagnated against rapid inflation over the years as local firms hire more foreign workers who are willing to accept lower pay, and locals are then forced to accept little or no increases in their salaries to keep their jobs.

“Therefore this policy needs to be reversed. What we need to do is be much more stringent on admitting such unskilled labour,” he said. “We’ve really got no excuse to be so relaxed about this kind of immigration.”

Doing so, says Yeoh, will compel companies here to up their productivity levels through mechanisation, automation and re-organisation. This, in turn, will result in them relying more heavily on skilled labour, hence improving cost, productivity and more importantly real wage structures.

Helping the ‘working poor’ get by

Naturally, a process like this requires time — years of it, in fact — and Yeoh says some things can be done to help the working poor in the meantime.

For one, he advocates an immediate hike in Workfare payouts to allow all low-wage workers to take home at least $1,500 a month.

Currently, Workfare supplements are offered in proportions to the amount of income earned and the age range of the worker, ranging from between $360 and $600 annually for people earning $200 a month or less, to between $1,050 and $1,500 a year for those earning $1,000 per month.

The figure decreases as income increases, up to a threshold of $1,600 per month.

“What you can do is raise your Workfare payouts so that everyone takes home at least $1,500 and above (per month), and then gradually you can phase these out as productivity and real wages catch up in the longer run,” he suggests. “So you solve the poverty problem first by the government paying for it, and over time you let employers pay for it when they upgrade productivity and can afford to.”

This, he says, might be a more palatable option which achieves the same objectives set out by former National Wages Council (NWC) chairman Lim Chong Yah, who earlier this year proposed a “wage shock therapy” plan to increase the monthly salaries of low-income workers by 50 per cent over three years (a period that Yeoh feels is a bit too fast) while at the same time freezing wages of those who earn over S$15,000 a month.

Lim’s proposal drew the wage debate sharply into focus, with the government countering that his proposal contained serious hidden risks for the economy such as structural unemployment and higher cost of living due to higher business costs.

Yeoh said the additional cost from increasing the Workfare Income Supplement (WIS) should fall well within the government’s affordability range — a figure he estimates to be below 0.5 per cent of GDP per year.

“In this case, at least there is burden sharing,” he says. “The first instance, between labour and the government, and the second, between labour and company.”

Revisiting the minimum wage debate

This, though, is where Yeoh feels that minimum wage legislation may have to be introduced, to ensure that employers don’t cut back on pay in the wake of the government increasing workfare payouts.

The government has long opposed the imposition of a minimum wage, arguing that it would cause unemployment, although earlier in May, it accepted the NWC's proposal for workers earning less than S$1,000 be given a pay increase of $50. The council had also recommended firms to give a built-in pay rise to all workers this year to help them cope with inflation.

Yeoh, however, said a minimum wage does not necessarily create job loss “if it’s not an aggressive rise”.

“Most countries have a minimum wage, and it has not created unemployment significantly unless you make (the rise) too aggressive,” he said. “But what you’re doing here is not making it aggressive, you’re just making sure the increase in WIS (workfare income supplement) is not taken back by employers cutting wages. So that’s a different angle.”

He acknowledges the immediate challenges this will pose to local small and medium-sized businesses (SMEs) here, however.

“The problem is when you restrict foreign labour, the firms better able to deal with this will tend to be the larger firms — which tend to be foreign ones, and the smaller, local SMEs will tend to lose — so the economy will be hollowed out of SMEs and grow at their expense,” he said.

How to tackle this? Through “intelligent intervention” on the part of the government, Yeoh says.

“It needs to give them tax breaks, capital allowances; it needs to give them technology consultancy in terms of extension services, and setting up different industry centres to disseminate the technologies to them… because large companies have these facilities in-house already.

“This is a major adjustment process, so the government needs to facilitate this,” he says, referring, for instance, to the fact that workers lack unemployment insurance protection when they are transferred out of industries and companies.

“They’re not giving enough workfare so people can get up to that standard before the companies have a chance to adjust (to changing labour immigration policies)… They’re not supporting the workers, (or) the companies (sufficiently) either,” he said.

“So all they’re saying is, ‘Okay, turn off the labour taps!’ and they think that’s it, but that’s not it. There’s a lot more.”

Behind Singapore Inc. (Part I): The growing class of 'working poor'

Why peg public services to market prices?

In a recent hour-long interview with Yahoo! Singapore, former chief economist at the Government of Investment Corporation Yeoh Lam Keong asked this question.

A former schoolmate of Deputy Prime Minister Tharman Shanmugaratnam’s at the Anglo-Chinese School, and later the London School of Economics, Yeoh spent almost all his adult life working on government economic policy, and in that time experienced a social awakening to what he feels are inherent problems in the system.

“(The current model is) essentially relying on individual and family savings to fund these public services,” said the 54-year-old economist, who left GIC last June after 26 years to spend more time with his family.

“At the same time, it pegs the price of these public services to market prices when they don’t have to.”

Acknowledging that the majority of Singaporeans do have access to these three areas through the HDB scheme, subsidised and compulsory primary school education, as well as subsidised hospitalisation wards, he said nonetheless that the current model used in the delivery of these three services in particular needs to be rethought.

‘Lower cost of housing’

Yeoh gave an example of how Build-to-Order (BTO) flats are linked to general market prices by being pegged to the cost of resale housing.

“Once you do that, BTO prices will rise as general property prices rise, and resale prices are already often five to six times that of low to median (annual) incomes, making housing very unaffordable by most conventional housing industry measures,” he says.

Property market prices tend to be pulled up by the cost of upscale, private and landed property, he explains. These are subject to speculative forces and can be bought by people all over the world, so it tends to move toward price levels in other major cities such as Hong Kong and Beijing, where property prices are notoriously sky-high.

“That will then price out everybody else who falls below the top 20 to 30 per cent of households,” he adds.

In light of this, Yeoh, who himself stays with his wife and two children in a five-room flat in Marine Terrace, says BTO flats should be priced at a range of between two and three times of low to median annual incomes instead of between five and six times, where BTO prices currently stand.

This artificially lower subsidised price would be available only to Singapore citizens. In this situation, however, he notes further measures will be needed to prevent excessive speculation, recommending for example that Singaporean buyers should only be permitted to purchase flats at these lower prices once — for their housing needs — and suitably long “no resale” periods should be imposed.

What about the cost of land, an argument frequently used in favour of market pricing? Yeoh notes in response that Singapore’s government owns over 80 per cent of the country’s land area, and had acquired a large portion of it historically at low prices.

“So they have a big land bank at very low values, and they can use this land (more wisely)... for housing,” he adds.

He also said more cooperation and communication between ministries could help free up land space for public housing, however. Using the space taken up by an airbase for a BTO project, for example, would require the Ministry of Defence to work closely with the Ministry of National Development, which he said does not appear to happen very often.

“Although land is indeed a scarce resource for us especially in the long term, if you’re serious enough (to fix the land scarcity problem for housing) you can probably do it,” he says. “They’ve probably got enough land to do it.”

The real cost of education

Turning to Singapore’s education system which is heavily subsidised, Yeoh said the cost of private tuition is skewing matters out of whack.

Currently, a Singaporean child going through government-aided mainstream schools pays roughly $11 per month at primary school level, about $21 at secondary school, and about $27 per month at junior college or at a centralised institute.

Even at university level, Singaporean and permanent resident (PR) students attending local university courses benefit greatly from substantive grants provided by the Ministry of Education.

But these benign fee structures mask the real cost of schooling in Singapore when one takes in the cost of private tuition, says Yeoh.

“If you have a kid who has tuition in two or three subjects, that easily costs close to $1,000 (per month) or often even much more,” he says. “A lot of people also feel that at primary 6, they need to send their kids for tuition in three to four core subjects, so that adds up to more than $1,500 per month, perhaps even $2,000.”

But is private tuition really necessary?

Yeoh argues it is because of two key reasons — first, because of insufficient teaching resources for what is becoming an unnecessarily difficult curriculum and second, because class sizes are too large.

Making matters worse is the various possible paths in primary and secondary education alone — from the gifted programme to the through-train, and a wide range of elective programmes offered at secondary and junior college level.

It is no wonder parents become “kiasu” to ensure their children get the best opportunities and the most choices, said Yeoh.

His solution? Cut down class sizes and do away with unnecessary streaming.

“This would require higher education expenditure, but it will be less stressful for both students and teachers, and (the former) can actually be taught in school instead of at home (through tuition),” he adds, pointing out that the average OECD country spends about 6 per cent of its GDP on education, as compared to Singapore, which spends roughly 3.8 per cent.

‘Make healthcare universally affordable’

Much more can be done when it comes to healthcare, too, says Yeoh.

According to statistics from the World Health Organisation, private expenditure on healthcare in 2010 came up to a hefty 63.7 per cent of Singapore’s total healthcare costs, while the government covered the remaining 37.3 per cent.

This comes up to almost double the industry’s existing recommendations of roughly a third — the threshold for it to be considered “universally affordable”, he adds, especially when citizens of most other South Asian countries including Taiwan and Korea pay between 25 and 35 per cent of healthcare costs.

“But we have chosen to say, ‘No, the government should not pay for such a high share of healthcare costs; instead people should pay closer to the real costs of it themselves.’” he says.

“In doing this, we have made it very difficult to make healthcare universally affordable.”

Yeoh believes that Singapore’s current situation with respect to healthcare puts people at significantly higher risk of being bankrupted by their own illnesses — in particular where they suffer from chronic diseases that are not covered by insurance.

“I think the people shouldn’t have to pay (so much) for healthcare because it’s too much risk to pay for illnesses that could bankrupt them,” he says. “That’s the reason why the government should pay (for it), which is the fundamental rationale for universal healthcare affordability.”

How can this be done? Yeoh says the government should take a leaf from other Asian countries like Taiwan, Korea and Hong Kong and increase its expenditure on healthcare so as to bring down the private out-of-pocket share.

Pointing out that government healthcare expenditure in Singapore has stood at about 1.5 per cent of GDP for roughly the past decade while Taiwan’s government spent 4 per cent of its GDP on healthcare a decade ago, he said, “Why not spend more to make healthcare more affordable universally? We can afford it better than Hong Kong and Taiwan and Korea, so why aren’t we doing it?”

Where will the money come from?

So with his wide-ranging proposals, where will all the money needed to improve Singapore’s provision of housing, healthcare and education come from?

Yeoh says it can be a combination of surpluses and slightly higher taxation.

Noting that the International Monetary Fund estimates our structural budget surplus from the past two years to be about seven per cent of GDP (which amounts to nearly $15 billion), as compared to the figure given by our government: less than 0.1 per cent, Yeoh acknowledges that the government does mean well by its “over-conservative” accounting approach.

“But let’s face it, the IMF is hardly a tax standard,” he says. “We probably have at least four to five per cent of GDP we can use sustainably from the structural budget balance, let alone the full, long-term potential of investment income from reserves.”

He also thinks fiscal resources from Singapore’s reserves are similarly used too conservatively, but understands where the government comes from in its prudence.

“For one, they’re genuinely worried about a big disruption, a crisis or a deep depression, that they may need the money for a rainy day, and also for the needs of future generations,” he says. “But I think you can provision reasonably for that and still have enough to further supplement the needs of current citizens,” he points out.

“After all, these are the people who built modern Singapore with their sweat and tears — without their welfare, support and cohesion, a good society for future generations will not be possible,” he adds.

Another way to compensate tapping on the country’s surplus would be to raise Singapore’s low tax rates, he said.

“Even if you move taxes to 25 or 30 per cent, it is still very low, and you’ll still be able to save for a rainy day,” he says.

But won’t that deter top talent from working in Singapore?

Yeoh disagreed, saying that taxes for annual earned incomes exceeding $320,000 continue to stand at 20 per cent in Singapore, one of the lowest in the developed world.

“If you look at the literature on labour economics, it doesn’t seem to work that way. Talented people from other countries as a whole don’t seem to be unduly put off. But it’s a fear, and a belief they hold strongly perhaps without having looked at the evidence very hard,” he said.

Having said that, even with the additional revenue through taxes and budget surplus, improving these public services requires strategic vision and long-term planning, says Yeoh.

“You have to think five, 10 years out, not just two or three,” said Yeoh.

“To move from 1.5 per cent GDP in healthcare spending to 4 per cent over 10 years, for example, you get there by increasing spending by 0.35 per cent per year. You get there steadily, without inflation, at a rate that helps us absorb without going crazy, but it needs to be planned.”

Former top financial sector economist Yeoh Lam Keong says the government should be more pragmatic in its approach and return to its roots to meet and serve the needs of the ordinary citizen.

The 54-year-old, who was the chief economist at the Government of Singapore Investment Corporation for a decade, said the ruling People’s Action Party succeeded and even exceeded expectations in doing this, from Singapore’s early years right up to the mid-1990s.

“One of its founding values, which is still found in large measure in government today, is pragmatism — ‘I will do what works to get what I need done, done successfully, regardless of ideology, convention or dogma’ — that’s a great strength of our government,” said Yeoh, who left GIC last year to spend more time with his family.

However, during a recent one-hour interview with Yahoo! Singapore, the economist said this innovative pragmatism has been replaced by a rigid mindset of conventional policy and what he terms an over-reliance on market forces as the best basis for social policy design. He singled out the area of social welfare, where the government believes spending should be avoided or minimised.

“It is unrealistic (for example) to expect individuals and families to be able to look after their healthcare needs successfully without hardship in our current system,” he says. “Right now, it needs more systemic government support and active management given actual wage, economic and demographic trends.”

“That kind of systemic policy reform and re-engineering is something they (the government) are very capable of, so they need to go back to being realistic and pragmatic, as opposed to defensive and ideological — assuming things will work out, that the market will adequately provide.”

The need for a change in mindset is pressing, says Yeoh, who warns of a potential backlash from voters in future elections that could hamstring policy should the party fail to tackles current issues head-on.

“They need to be more realistic and return to creating policies for true citizen well-being. If they don’t, they will likely continue to erode public trust in policymaking and government credibility,” said Yeoh, who lives in a five-room HDB flat in Marine Terrace and who still takes public transport.

Beyond that, Yeoh says this could lead to policy paralysis, or worse still, populist policy that sacrifices the long-term good for short-term political success.

“We can’t afford that in Singapore. You need strong public trust in government policy capability, and you need the government to be able to mobilise the public to do what is needed together, even if it is difficult.”

'Start making changes'

How to show a change in mindset? Yeoh says the party simply needs to start making changes — in housing, healthcare, education, social security, unemployment protection and really tackling poverty.

“They need to wake up and smell the coffee, (and) make the serious, far-reaching policy adjustments — they are fully capable of it,” he says. “If they can go back and address those areas, and it’s well within their capability, they will win back a lot of policy credibility; they’ll win back a lot of their original brand.”

Yeoh said he felt encouraged by Prime Minister Lee Hsien Loong’s promise in his recent National Day Rally that his government will engage all Singaporeans in a National Conversation to re-look current government policies.

"I thought that the PM's focus on heart issues and social policy was refreshing and authentic," he said, sensing the government’s serious interest in re-engaging with the public.

He also called the PM's National Conversation "a much needed move" toward genuine dialogue and collaboration on policy issues that matter to citizen well-being, but added his hope that it will not simply be a cosmetic one.

"My dearest hope is that it... will actually be matched by the substance of real policy solutions. Rather than just 're-affirm, recalibrate and refresh', are we also willing to really re-think, reform and co-create a truly national social vision, with a supporting core of social policies that bring citizen well-being to a new, materially higher level?"

It is at this point that Yeoh raises his caveat: these changes need to be made realistically, in a manner suited to current times. They must also be sensitive to circumstances rising from globalisation, wage stagnation, ageing and rising structural unemployment exacerbated by wage restructuring.

“They (the government) just need to get into gear and deal seriously with it,” he adds. “They’re perfectly capable of managing overall policy reform, but they also have to realise that they need to be a lot more consultative and collaborative about it as the issues are a lot more complex than they used to be in the 60s, 70s or even the 80s.”

Yeoh also notes that given the new normal in Singapore, these sweeping reforms need to be designed and implemented in a politically participative and contentious public environment.

And indeed, consultation is key — something the PAP has been gradually doing more of in recent months, and even more so now with Education Minister Heng Swee Keat’s pledge to engage all in a National Conversation.

“They need to get real about facilitation of crowding in and aggregating expertise in co-creating policy,” he says. “Lots of big companies and regional governments are doing it; a lot of governments have done it — why can’t they? I’m sure they can. You need to realise it’s difficult but very, very necessary, and only then can you do it.”

Not counting them out yet

Despite the blunt manner in which Yeoh speaks out about policies and governance, he ultimately does still have faith in the capability of Singapore’s government as an institution.

“I haven’t counted the government out yet — I hope they may yet deliver on a lot of these things (housing, healthcare and education, in particular), and that they may actually move significantly in these areas,” he says.

Despite the wave of anti-government sentiment in Singapore’s online space, Yeoh says he genuinely feels that most Singaporeans want to give the government the benefit of the doubt.

“Most Singaporeans would love to see them deal decisively and pragmatically with these issues as they did long ago, and are rooting for them, but they’re just not giving Singaporeans who are hoping for something to cling to. And as a result their hope is sort of slipping away,” he says.

He adds, “That’s the real pity — the loss of the chance of real policy reform that can really bring the well-being of citizens to a new high that we can afford, and the loss of the leadership opportunity to craft a new social compact for Singapore’s future, by reclaiming our key founding values