The Costs of Adjustment

Eddie's up again on the Straits Times. Maybe the real 'Singapore Issues' seem a bit parochial to some. I think that would be an unwise conclusion: the rest of the OECD have a lot they can learn from what is happening in the 'Asian Tigers' right now, especially Hong Kong, Singapore, Taiwan.

The mixed fruits of growth
By Eddie Lee

THERE is much to cheer about. Last month's 26 per cent leap in non-oil domestic exports was, as the headlines indicated, at boomtime levels.However, one economist expressed reservations. Mr Song Seng Wun, from G.K. Goh Research, told the AFP news agency: 'Our concern is with the quality of the numbers. If they are all coming from the pharmaceuticals sector, how many people will benefit?' There is irony in the observation. It is generally acknowledged that Singapore cannot compete on labour-intensive exports, and has to move up the value chain. This is where the chemicals and chemical products industry matters. In terms of value-added, a worker in the chemicals industry is equivalent to about four in the electronics industry. Last year, value-added per worker in the chemicals sector was a whopping $475,000 compared with just $133,000 in the electronics industry, and $110,000 in the manufacturing sector on average.

So surely rapid growth in the chemicals sector is what we want to see. It didn't disappoint. Shipment of pharmaceutical products last month was truly breathtaking. Exports jumped 144 per cent, led by robust growth in the United States and European Union markets. There is more to come. Merck, the No. 2 US drug maker, opened a new factory in Singapore this month to make a cholesterol-lowering drug. Mr Paul Martino, managing director of its manufacturing operations here, told Bloomberg: 'Our plant is busy producing and we're running at good capacity.' Besides Merck, major players like GlaxoSmithKline, Aventis, Schering-Plough and Pfizer have all based their global manufacturing facilities in Singapore. Weren't we once concerned that the manufacturing industry was too dependent on the electronics industry? That's no longer the case.

The chemicals industry has grown so rapidly, it now accounts for almost a quarter of value-added in the manufacturing sector, up from just 9 per cent in 1995. In contrast, the electronics industry's share of manufacturing dropped to about one-third from about half three years ago. Tomorrow will mark another milestone in the development of the manufacturing sector, with the opening of the $500-million Biopolis to spearhead biomedical research. The Novartis Institute of Tropical Diseases has already booked space there to research tuberculosis and dengue fever. But Mr Song is right to have reservations. He is concerned about the trickle-down effect of last month's figures - or rather the lack of.

Last year, a 40 per cent leap in chemicals output failed to have any sizeable impact on the number of jobs. It sure didn't feel like boomtime. The chemicals sector accounted for a quarter of value-added in manufacturing, but employed just 5 per cent of its workers. Put another way, the chemicals industry can generate $1 million in value-added from employing one worker. That $1 million would require 7.5 workers in the electronics industry. The point to be made here is it is not so much whether growth in the chemicals sector is good or bad - surely it must be good - but who gains and who bears the cost.

For the Biopolis project, the red carpet is being laid out. Mr Philip Yeo, chairman of the Agency for Science, Technology and Research (A*Star), said all resources will be made available to do serious research. There will be libraries, laboratories, state-of-the-art equipment, cafes and shops. To feed Biopolis with talent, A*Star's first batch of local graduate scholars will complete their PhD in 2009. Mr Yeo said: 'We will build a future for them.' However, if you're looking for assembly jobs in the consumer electronics industry, call China. Many of the jobs lost stay lost. Workers may retrain but still face a lack of available jobs.

The unfortunate reality is the workplace is changing, even as investment in education and training increases. For the worker, adjustment costs escalate at a time when his bargaining power in the labour market has diminished. Should displaced workers, for example, bear the full brunt of the loss of income? They can be compensated out of gains from the new growth industries to ensure that they earn a 'decent' living. This would probably involve some form of income distribution, requiring a willingness to be taxed and have transfers made on the part of those who benefit. But care must be made to ensure that the tax system does not overly discourage effort.

The Government may need to resume its role as employer of last resort. The so-called third sector offers the best hope of absorbing seriously displaced workers. These are jobs in largely non-profit activities that range from social services to health care, education and the arts, and civic and religious organisations. If we are to make a smooth transition in response to the inevitable structural changes in the economy, we have to find a way to ensure that benefits from restructuring flow to all. For many workers, adjustment costs are real. They cannot be ignored, for they are large and concentrated on the most vulnerable section of society.
Source: Straits Times
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