[Andy Mukherjee] Aging Singapore tries to avoid Japan trap

Japan has aged; Singapore is aging. Japan’s workforce is shrinking; Singapore’s has plateaued. Japan’s homogeneous society has struggled with immigration; Singapore’s island culture has been welcoming of foreigners, though increasingly less so.

So is the city-state scoring an own-goal by inviting a demographic decline and Japanese-style lost decades?

After Monday’s annual government budget, in which Singaporean Finance Minister Heng Swee Keat announced stronger curbs on immigrants in service industries, questions around his economic strategy have become more urgent. For Singapore’s firms, hiring the right talent in the right quantities and at the right prices is already the No. 1 headache. And yet the bureaucrat-turned-politician, tipped to take over as Singapore’s next prime minister, is inflicting more pain.

So what exactly is Heng’s big idea behind choking off supplies of foreign workers?

Consider the change in the labor composition of Singapore’s service industries since 2013. Back then the dependency ratio ceiling was 45 percent. Hence, a business with 20 full-time locals (citizens or permanent residents) could employ 16 foreigners. In 2015, the ratio was reduced to 40 percent. For the same 20 locals, three foreigners had to be cut.

Now Heng wants to drive the ratio still lower to 35 percent in two steps by January 2021. Two more foreigners need to be let go while keeping the same 20 locals in employment. Since businesses need to grow, they’ll have to make up the difference by hiring more locals instead. It’s a risky strategy because firms can always curb expansion or shut down. But so far at least, the gamble has worked.

Every member of a household with at least one working person has seen inflation-adjusted income from work grow almost 23 percent between 2013 and 2018, compared with less than 10 percent in the previous five years.

Is a permanently anti-immigration stance the right one for a small, open economy (population: 5.6 million)? Contrast again with Japan, but this time focus on the difference in how the countries are responding to their shared demographic challenge of low fertility. Japan, since 2013, has embarked on a bold program of monetary adventurism to beat back deflationary expectations, engineer low or negative real interest rates and coax employers to invest more and raise wages.

Abenomics, as the plan is known, has had only limited success. Singapore, by comparison, has gone deeper into the engine room of the economy, and sought a stronger (rather than weaker, as in Japan’s case) currency. And while Japan has been forced to temper the force of its monetary expansion by raising sales-tax rates, Singapore has used its enviable fiscal resources to throw money at low-wage employees. Heng’s latest budget proposals will see 60-year-old low-income Singaporean workers get 30 percent of their compensation from the state. That’s on top of a new S$8 billion ($5.9 billion) support package for seniors.

Cementing popular support for the ruling People’s Action Party ahead of an election and a leadership change may be part of the motivation. But there’s also economic logic behind the budgetary largesse. The city has systemically attacked pockets of inefficiency and high consumer prices in everything from transport and telecom to media and banking. Singapore has even crossed swords with developers who wanted a Hong Kong-style mania in property prices after a prolonged, policy-induced decline. Instead, they got whacked with new government curbs.

It’s hard to say how this experiment will end. The Singapore dollar may have to stay strong to ensure that an artificially tight labor market doesn’t trigger an inflationary spiral, though there’s no sign of one yet. If anything, real household incomes have grown handsomely over the past five years partly because inflation has been low. A strong currency amid weakening global demand could spill over as frothy asset prices. Hence the property curbs will probably stay. (I was expecting them to be relaxed after the leadership transition, together with a little more impetus for immigration.)

Even as Finance Minister Heng thins down the foreign worker category, he wants to weed out the less experienced among them. Encouraging automation of routine tasks is key to the plan. The past three years of rapid growth in Singapore’s labor productivity must endure. Otherwise, without additional foreign labor, annual GDP expansion can’t be much higher than the long-term productivity growth of 1.5 percent. Singapore will lose out to rivals (unless London suffers badly from a botched-up Brexit and China intrudes too much on Hong Kong’s autonomy).

Singapore is special: Not many global cities get to write their own immigration policies. However, if Hengnomics does succeed, there will at least be a different route to breaking out of the tyranny of demographics than money-printing and negative interest rates.


Andy Mukherjee
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. -- Ed.

(Bloomberg)