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Wednesday, June 25, 2003

On the Non-Adviseability of Wage Reform

Some weeks ago, when I first read one of Eddie Lee's articles in the Straits Times, I let slip the comment that I knew nothing about this guy's views on civilisation and its problems, but that he sure did seem to have understood something about Japan's deflation problem. Now rewinding back several week to the world of today (Harold Wilson once said a week was a long time in politics, well several weeks in the internet can be more like a lifetime), I think I can safely say I have learnt a lot about what Eddie's views on civilisation and it's problems are, and the more I get to learn about them the more I like them. This time he's having a go at the latest set of proposals to restore the Singapore economy to it's former path of glory, they are known as wage-flexibility. BTW, it is worth bearing in mind that Singapore's currency, like the euro, is rising. There is an alternative.

Do we really need additional wage reforms now? NTUC deputy secretary-general Matthias Yao says many companies are lukewarm to the idea of wage reform because "(Some) say their systems are already flexible enough." Indeed, there are few impediments in our labour market. There is no minimum wage law, unions account for only 15 percent of the work force, and many firms have already built an annual variable component into their wage system.

Still, if the National Wage Council (NWC) gets its wish, up to 30 percent of wages will be considered variable. And a third of that can vary on a monthly basis. Now, in principle this sounds like a good idea. Increase wage flexibility so that companies can respond faster to economic conditions in order to save jobs. But things may not be so simple. The question is, how many jobs will the wage reform actually save if the measures only end up increasing Singaporeans' apprehension of the future? In the current climate, the wage reform means even greater uncertainty. The result is that Singaporeans are likely to markdown up to 30 percent of their wages when planning ahead. Lets face it, we are not even sure what's going to happen next year. So it is only prudent to base plans on what you are guaranteed to receive. And that will be just 70 percent of what you thought you were assured previously.

The economic impact will be similar to a reduction in income. Households will reduce their expenditure in order to ensure there's sufficient amount for their fixed commitments. Singaporeans are already struggling to come to grasp with the current environment. Personal savings rate have declined steadily since 1997. Part of the reason appears to be an attempt to restore living standards post Asian crisis. But what's disturbing is that the decline in the savings rate failed to reverse even as the economy slipped back into another recession. Typically, you'd expect savings to rise during an economic downturn. People suppress consumption amidst rising uncertainty.

Yet Singapore's savings rate, based on earned income, fell from over 7 percent in 1997 to under 4 percent in 2000, and is just under 3 percent in 2002. It's likely we will see a further cut back in spending in order to restore the savings rate. If you think that's tough, I shudder to think of the alternative. If the savings rate doesn't reverse, it would suggest that the majority of Singaporeans are finding it hard to sustain a decent standard of living today, rather than have the luxury of thinking of tomorrow. They could find themselves tapping into their assets much earlier than expected in order to stay afloat.

And here's where more problems lie. For many years, Singaporeans have invested in property as part of their retirement plans. The upgrading fiasco at Marine Terrace reminds us of the sorry state of the local property market. One of the failed contractors, Sum Keong Construction was actually named Singapore's 50 best enterprises in 2001. But public housing construction almost came to a standstill last year compared with about 30,000 HDB flats built during the peak. There's hardly a queue if you apply for a new HDB flat these days.

It's seven years since the peak of the property boom. The problem now really isn't so much that we built too many flats in the past; it's anxiety about the future. Property prices are still languishing between 30 to 40 percent below their peak reached in 1996. One way to gauge the outlook for property prices is to check how property stocks are faring in the Singapore Exchange. According to property analyst Tan Cheng Teng from G.K. Goh Research, "investors are valuing property companies' assets, which include their residential land banks, at 20 to 30 percent below prices in the physical market." In fact, Ms Tan says that this discount has been the norm "for the past few years."

Retirement funds sunk in property now looks like lost savings. This comes at a time when returns on other investments are at an all-time low. You can't get an interest rate of more than 1 percent on fixed deposits. A ten-year government bond now yields under 2 percent. And stocks? More Singaporeans have been burnt investing in them than they care to remember. In other words, there is a sharp devaluation of retirement savings, that is now being compounded by a lost in income. And it's a fallacy to say that the wage reform is required to attract foreign investments. Foreign investments have been doing well. There's no noticeable slowdown in recent years. But Singapore attracts capital-intensive projects and these don't create a lot of jobs.

To get a sense of how rapidly the economy is losing employment growth with the type of investments it is attracting, just look at official statistics. In 2000, total investments committed were worth $9.2bn and was estimated to have created 20,700 jobs. Last year, $9bn worth of investments translated to 14,000 jobs. In just 2 years, there was a drop of 32% in job creation for the same amount of money invested. But higher productivity means that Singapore's export sector can still manage even carried to the extreme, it may inadvertently release further downward price pressures at a
time when global deflationary forces are already on the rise. Economic policy, as Charles Kindleberger once pointed out, is all about timing. And this is not the time to use a deflationary tool.

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