Ministers like to point out to the German industrial system (world class SMEs, R&D, apprentice system, productivity, employer union co-operation) as a model that S’pore is folllowing or trying to. After all we are the Prussians of Asia: dour, prickly, and efficent (es SMRT).
Err so why not minimum wages here? The Germans introduced a minimum wage this year, and the economy’s still powering ahead.
Germany’s labour market is defying orthodox economic wisdom. For years, most mainstream economists warned that a proposed minimum wage of 8.50 euros per hour would price up to a million workers out of their jobs. But so far the wage floor, which came into force in January, has not stopped Europe’s largest economy from churning out additional jobs.
Following up on https://atans1.wordpress.com/2014/10/28/improving-productivity-try-this-pm-tharman-possible-reasons-for-peanuts-real-wages-growth/, the latest findings by experts like Stephen Cecchetti, an economist at the Brandeis International Business School, have found that a very large financial sector tends to precede weaker growth in productivity. “When pay on Wall Street is so high relative to the rest of the economy, you’re creating incentives for people to go into that industry that may not be the best for society over all,” Mr. Cecchetti said.
Or as recent paper by him says high-growth financial industries hurt the broader economy by dragging down overall growth and curbing productivity.
But you can have too much of a good thing. The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.
— Domestic credit to private sector (% of GDP) in Singapore was last measured at 112.57 in 2011, according to the World Bank. Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment.
— The financial sector employs about 5% of the total workforce.
No wonder the PAP administration has always wanted to link pay rises to productivity? They know that in an economy where finance is so important, productivity increases are not possible?
More details below*
The u/m is typical of what the PAP admin says about productivity:
Even as the Singapore economy grew moderately well at a “new normal” for 2014, Singapore is falling behind in productivity, said Minister for Trade and Industry Lim Hng Kiang … Singapore is “not achieving the two to three percent (labour productivity) growth rate that we’re aiming for”.
The 10-year annual target set by the Economic Strategies Committee for 2010 to 2020, however, has remained unchanged.
Data released on Tuesday (17th Feb) showed that Singapore’s labour productivity fell by 0.8 percent in 2014 – marking the third consecutive year of decline for productivity. Mr Lim said it reflects a mixed picture, with the externally-oriented sectors doing well, and the domestic sectors faring poorly.
“In some some sectors, the performance is very decent; for example in the financial services and insurance sector, productivity growth is above 2 per cent per year. Because they are facing international competition, they have to restructure quickly”
However, he pointed out that the domestic sector is still not showing “very good results”. This was particularly in the manpower-dependent areas of construction, retail, as well as food and beverage.
… voiced concern about the transport engineering sector ,,,”this is a very cyclical business and now with oil prices coming down, their order book is still good for the next three years. But there will be a down cycle soon, and that will affect their productivity if they don’t restructure fast enough.”
And to help businesses, the Minister said the government has rolled out programmes on a broad scale, such as the Productivity and Innovation Credit scheme, as well as more targeted approachs like SPRING Singapore’s Capability Development Programme where individual companies get advice on their business growth.**
*Really chim stuff. The new paper examines why this might be. One part of the thesis is a familiar complaint, neatly summarised in the 2012 paper
people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers
In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge. On a related note, see our recent Free Exchange on how bank lending has become more focused on residential property.
A property boom then develops. But property is not a sector marked by high productivity growth; it can lead to the misallocation of capital in the form of empty Miami condos or Spanish apartments. In a sense, this echoes the research of Charles Kindleberger who showed that bubbles are formed in the wake of rapid credit expansion or Hyman Minskywho argued that economic stability can lead to financial instability as financiers take more risk. And it reinforces the recent McKinsey report which shows that too much total debt (not just government debt) can be bad.
In specific terms, the authors suggest that
R&D-intensive industries – aircraft, computing and the like – will be disproportionately harmed when the financial sector grows quickly. By contrast, industries such as textiles or iron and steel, which have low R&D intensity, should not be adversely affected
The paper looks at two indicators for finance sector growth – the ratio of bank assets to GDP and that of total private credit to GDP. For industries, they examined financial dependence (the need for outside capital to finance growth rather than retained cashflows) and the R&D intensity. They find quite a large effect.
The productivity of a financially dependent industry located in a country experiencing a financial boom tends to grow 2.5% a year slower than a financially independent industry not experiencing such a boom.
This is highly significant, given that most developed economies would love to gain 2.5 points of productivity especially in a world where demography may be constraining growth.
As the authors conclude
there is a pressing need to reassess the relationship of finance and real growth in modern economic systems
This seems right given the whole focus since 2008 has been about reviving and stabilising the banking sector so it can lend to small businesses. Instead (or at least as well) it should have been about channelling finance to those industries that can expand and employ more workers. On this point, it is encouraging that the European Commission has issued a green paper on capital markets union today, hoping to diversify the financing of small businesses away from banks. But perhaps the last word should be left to Winston Churchill, who spotted this problem nearly 90 years ago when he said that
I would rather see finance less proud and industry more content
**Heck I might as well include what he said about the economy
The usual BS (Since then: On a quarter-on-quarter seasonally-adjusted annualised basis, the economy expanded at a slower pace of 1.1 per cent compared to the 4.9 per cent in the preceding quarter, according to advanced estimates from the Ministry of Trade and Industry.)
Based on advanced estimates, the Republic’s economy grew by 2.1 per cent on a year-on-year basis in the first quarter of 2015, announced the Ministry of Trade and Industry (MTI) in a press release on Tuesday (Apr 14). This is the same rate of growth as achieved in the previous quarter, it added.)
But in February, the MTI minister said:
When asked if the official forecast of 2 to 4 per cent economic growth in 2015 is realistic, Mr Lim said: “This is our typical range going forward, around 2 to 4 per cent … so this is the kind of new normal that we are aiming at and this year we expect growth at about the same rate as last year, because the global environment is still challenging.”
He noted that the US was the main driver of growth for last year, and is likely to remain so this year. “Essentially it’s only the US economy that’s doing well. Europe and Japan are having a big challenge and China is managing to have a soft landing at best. So the external environment is at best slightly better than last year, but not that much better.”
“HIGHER QUALITY GROWTH”
Looking ahead to the Economic Strategies Committee’s target of 3 to 5 per cent annual growth for Singapore between 2010 and 2020, Minister Lim said that “if you look at our performance in the 10 years between 2000 and 2010, the economy grow around 6 per cent per year. But if you look at the last 4 years we are averaging around 3 per cent.”
He added that the government had worked towards slower, but higher quality growth. This included reducing the flow of foreign workers, and growing at half the rate that the country did 10 years ago.
One bright spot for the economy this year could be in oil prices. Mr Lim said the recent monetary easing by the Monetary Authority of Singapore was in response to the drop in commodity prices, and a low inflation environment. As a result, exports should benefit from a lower Singapore dollar.
“Lower oil prices, we think its net plus for the economy, because we are an oil importing country, it’s a net plus for the businesses because electricity prices will come down, transport prices will come down. So businesses will do much better their input costs will come down”
But Mr Lim also cautioned that the low interest rate environment would end soon, “it’s likely that in the US the interest rate will be raised sometime this year…at some point in time, we must adjust to a more normal situation where interest rates have to reflect the cost of people lending you money.” He added that this is the reason why MAS has taken steps in the last few years to ensure personal debt remains healthy.
Amid the uncertainties in the global economy, Mr Lim said the focus for Singapore’s economy as she celebrates her golden jubilee is to perhaps emulate the US economy.
“We are having a more developed economy structure, our demographics are very similar to Japan and Europe – we are ageing very rapidly. So how do we try to have an economy that is more innovative, more dynamic, more like the US economy and less like the European and Japanese economy. That’s our big challenge.”
– 938LIVE/ly in February