Furry Brown Dog

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Productivity and Singapore’s economic growth model

with 15 comments

In 1994, 2008 economics Nobel laureate Paul Krugman penned an article titled The Myth of Asia’s Miracle in Foreign Affairs, an American magazine founded by the CFR.  In the article, Krugman lambasted the East Asian economic growth model, characterising it as input-driven primarily by increasing capital and labour contributions rather than growth in total factor productivity (TFP).  The East Asian nations the Western press was so fond of as hyping as the industrious Asian Tigers, Krugman warned, was at risk of a protracted economic slowdown not unlike what transpired in Japan in 1989.

In particular, Krugman wrote the following of Singapore:

Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per annum, three times as fast as the United States; per capita income grew at a 6.6 percent rate, roughly doubling every decade … Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.

But it is only when one actually does the quantitative accounting that the astonishing result emerges: all of Singapore’s growth can be explained by increases in measured inputs. There is no sign at all of increased efficiency. In this sense, the growth of Lee Kuan Yew’s Singapore is an economic twin of the growth of Stalin’s Soviet Union growth achieved purely through mobilization of resources. Of course, Singapore today is far more prosperous than the U.S.S.R. ever was–even at its peak in the Brezhnev years–because Singapore is closer to, though still below, the efficiency of Western economies. The point, however, is that Singapore’s economy has always been relatively efficient; it just used to be starved of capital and educated workers.

Singapore’s case is admittedly, the most extreme. Other rapidly growing East Asian economics have not increased their labor force participation as much, made such dramatic improvements in educational levels, or raised investment rates quite as far. Nonetheless, the basic conclusion is the same: there is startlingly little evidence of improvements in efficiency. Kim and Lau conclude of the four Asian “tigers” that “the hypothesis that there has been no technical progress during the postwar period cannot be rejected for the four East Asian newly industrialized countries.” Young, more poetically, notes that once one allows for their rapid growth of inputs, the productivity performance of the “Tigers” falls “from the heights of Olympus to the plains of Thessaly.

Understandably, the reaction from then Senior Minister Lee Kuan Yew was furious:

Following the 1994 “Myth” article, Singapore’s senior minister Lee Kuan Yew — particularly incensed over Mr. Krugman’s comparison of Asian economies with that of the old Soviet Union under Joseph Stalin — took to regularly thrashing Mr. Krugman and his argument. Put simply, the argument was that Asia’s growth was almost entirely attributable to mobilization of resources, principally people and foreign investment, and not from value-added in the form of productivity, technology, or quality enhancements. As disingenuous as his argument sounds now, it provoked a storm of controversy among insecure Asian government executives and corporate chieftains ensconced in inefficient, protected companies. Criticism, as usual, was principally spin-based, not factual: Mr. Krugman didn’t understand Asia, Asian values accounted for Asia’s success, his data was wrong. All of this, of course, made Mr. Krugman extraordinarily famous — and a media star — especially in Asia, as the economist who stood up to Mr. Lee. Meanwhile, Mr. Lee quietly began to read and talk quite a lot about productivity and innovation.

Who was right?  No one knew then.  While the Asian financial crisis a mere three years later would vindicate Krugman’s thesis on the vulnerability of the East Asian economies, he seemed to be completely wrong with respect to Singapore which weathered the financial crisis a lot better than its immediate neighbours Malaysia and Indonesia, the latter of which saw its currency depreciate by 67.5% against the US dollar.

Two years later in 1999, economics professors John F Ermisch of Essex and WG Huff of Glasgow, published a paper titled Hypergrowth  in  an  East  Asian  NIC:  Public  Policy  and Capital  Accumulation  in  Singapore, propounding similar arguments but this time developing a concise economic and mathematical model to explain how a system of increasing capital inputs funded by forced savings (CPF) and investment returns from abroad (GIC) pushed by the Singapore government were able to produce the strong economic growth of Singapore to date:

For  the  moment,  the  real “miracle”  of  Singapore  is  the  prolongation  of this  transitional  phase, promoted  through  a combination  of  rising  subsidies  to  investment, capital  stock  and  infrastructure, all  administered by  the  Singapore  government.

In addition, Firmisch & Huff also noted that Singapore was highly reliant on foreign technological capability and served largely as a manufacturing base rather than a design lab (a point which we will return to later):

Unfortunately, so far, as evidenced by low TFP growth, the acquisition of technological capability has remained elusive: Singapore “reached a developed country’ s income level before having become a fully developed economy” (Singapore, Ministry of Trade and Industry, 1986, p. 60). Even in 1986, as cabinet minister BG Lee Hsien Loon pointed out, Singapore was industrially “still predominantly a manufacturing production base. Products are designed overseas, and then only produced in Singapore factories on our production lines” (Lee, 1986, p. 7). Similarly, according to the Minister for Finance, “Our economic structure is very much that of a developing country. WC depend heavily on foreign technology” (Hu, 1994, p. 4).

The transfer of the technology, with accompanying higher TFP growth to drive Singapore’ s economic development, is not ruled out just because the technology is overwhelmingly foreign and the research and development (R&D) associated with it is very largely carried out elsewhere (Singapore, National Science and Technology Board, 1991). Nevertheless, technology transfer has occurred to only a limited extant. Electrical and electronics goods within SITC divisions 75 and 76 which formed the backbone of Singapore’s manufacturing sector illustrate the lack of a local technological base. Although production took on an increasingly high-tech look as multi- national enterprises (MNEs) poured into Singapore and brought expensive capital equipment to make computer components and peripherals, a main attraction of the Republic was still reliable and adaptable labour, especially women, at much lower wages than those paid in developed countries. The speed of technical change emanating from developed country electronics industries meant that often this labour could he retrained and redeployed more cheaply than a new machine could be designed, which afforded MNEs flexibility for short and varying production runs (Lim and Pang, 1984). In 1990, 72% of those in electronics production were female, compared to 43% in the rest of manufacturing (Singapore, Department of Statistics or Economic Development Board, 1991); wages in the electronics industry were below the manufacturing average, itself less than wages in most other industrial groupings (Singapore, Ministry of Labour, 1993a,b). The value-added share of gross output measures technical development in manufacturing. For manufacturing other than electronics this rose from 32.2% in 1978 to 35.5% by 1995 but over the same period in the electronics industry actually fell from 32.2% to 26.2% (Singapore, Department of Statistics or Economic Development Board, 1978, 1997). Although over half of world exports of disk drives now come from Singapore, some 75% of the final product’s content is imported for assembly and other work prior to export from the Republic.

Both Krugman’s theory and that of Ermisch and Huff might have seem particularly absurd in hindsight in the first decade of the new millenium and the later 1990s, when Singapore recorded impressive high single digit GDP growth excluding periods of short-lived recessions:

However, beneath all the rosy GDP numbers, could one envisage problems lurking beneath the surface? Common to all critiques of Singapore’s economic growth is the fact that Singapore’s productivity growth for much the 2000’s was virtually stagnant, clocking at 0.7% for 2000-2008, the second lowest of the 17 countries tracked by the United States BLS (click to enlarge).

Despite the lackluster growth in labour productivity, Singapore’s manufacturing output grew at respectable annualized rate of 4.3% compared to the countries:

From this it is not too difficult to conclude that workers in Singapore have made up the for the lack of productivity by working longer hours to achieve a higher manufacturing output.  This finding is supported by the Global Wage Report 2009 issued by the International Labour Organisation, which found that Singapore workers had the longest work week among the countries surveyed, in addition to the fact that they were the most likely (61% of respondents) to show up for work despite being sick for fear of falling behind their workload:

It is evident that despite the major problems highlighted by the respective economists above in the 1990’s, virtually nothing effective has been done by the Singapore government in addressing the problem.  The government has simply decided to mass import foreign labour in order to grow the economy, with little or non-existent accompanying productivity growth. To emphasise this point, note that the above economic critiques were written in the 1990’s, a time when Singapore’s worker productivity annual increase was still respectable.

Falling productivity is one problem.  The other has been the gradual decrease of the proportion of value-added exports of total exports in Singapore. It was reported in the Singapore Competitiveness Report 2009 that re-exports (defined as “goods that were exported without undergoing any transformation except repacking, sorting, grading, marking, and similar activities”) have made up an increasing proportion of all exports from Singapore since 1990.  This is certainly a worrying trend given that the Singapore government has sought to remake Singapore as a value-added, high tech growth hub.

So how has the government tried to counteract problem of falling productivity?  One might think that since productivity is linked to the worker whose output is often assumed to correlate with skills, the government should have increased spending on education. Sadly the reality is that Singapore spends comparatively little on education relative to GDP (a mere 2.9%) compared to other countries, preferring instead to import foreign workers instead of investing in Singaporeans and nurturing home-grown talent:

Table 4.11 shows that Singapore is spending less of its GDP than other advanced economies on education. This could be the result of higher efficiency. But it is also consistent with a policy that uses migrations as a more cost-effective means to increase the skill stock in the labour force.

Despite Singapore’s lower spending on education, its outcomes in terms of education achievements are strong. Singapore tops the attainment indicators both in terms of math and science scores and in reading scores.

And yet, the report itself also notes that strong performance in standardised tests are governed by rote and uncritical learning rather than innate intellectual capability:

Opinions on how these strong showings on standardized tests should be interpreted vary. There is a concern that Singapore focuses too much on the type of repetitive memorization of knowledge that generates high performance in standardized tests, but is not necessarily the best driver of intellectual capabilities.

At the same time, standardized test have proven to provide better opportunities for children from lower social strata to progress than more comprehensive assessments of intellectual abilities,where social background is a significantly stronger determinant of performance.

Some may argue that as above, that strong performance in standardised tests bode well for a meritocratic education system, but no less than Tharman Shanmugaratnam, Singapore’s education minister from 2003-2008 has admitted that Singapore topping of standardised tests for math and science was more reflective of an exam-based meritocracy than a “talent meritocracy”:

But one thing puzzles me about these oft-made comparisons. I talked to Tharman Shanmugaratnam to understand it better. He’s the minister of Education of Singapore, the country that is No. 1 in the global science and math rankings for schoolchildren. I asked the minister how to explain the fact that even though Singapore’s students do so brilliantly on these tests, when you look at these same students 10 or 20 years later, few of them are worldbeaters anymore. Singapore has few truly top-ranked scientists, entrepreneurs, inventors, business executives or academics. American kids, by contrast, test much worse in the fourth and eighth grades but seem to do better later in life and in the real world. Why?

“We both have meritocracies,” Shanmugaratnam said. “Yours is a talent meritocracy, ours is an exam meritocracy. There are some parts of the intellect that we are not able to test well—like creativity, curiosity, a sense of adventure, ambition. Most of all, America has a culture of learning that challenges conventional wisdom, even if it means challenging authority. These are the areas where Singapore must learn from America.”

Now, some might wonder:  Why is this a worrying trend for Singapore?  So what if Singapore suffers from falling productivity and decreasing value-added manufacturing exports?  Hasn’t the GDP growth of the last decade shown that Singapore often defies conventional economic wisdom?  That might have been an acceptable explanation if it weren’t for the fact that Japan underwent largely the same thing.

The Lesson of Japan’s Lost Decade

For much of the 1990s, Japan’s economy underwent a period of stagnation subsequently named as its Lost Decade. Conventional wisdom held that this was largely caused by a credit boom and subsequent bust in real estate, despite the apparent Austrian undertones (which I should add, is largely unproven).  In a 2001 paper, economists Hayashi and Prescott argued that the quasi-Austrian hypothesis of credit boom and bust did not hold water, arguing instead for an alternate explanation which posited that low productivity growth rates in Japan during the same period was largely responsible for the moribund state of the economy:

The regression result in Table V, which detects a significant association between output and bank loans for 1996-98 but not for other periods, gives us confidence that the “credit crunch” hypothesis, while possibly relevant for output for a few months from late 1997 to early 1998, cannot account for the decade-long stagnation.

There is no evidence of profitable investment opportunities not being exploited due to lack of access to capital markets. Those projects that are funded are on average receiving a low rate of return.

The problem is low productivity growth. If it remains lower in Japan than in the other advanced industrial countries, Japan will fall further behind. We are not predicting that this will happen and would not be surprised if Japanese productivity growth returned to its level in the 1984-89 period.

It is apparent then, from the above discussion that Singapore avoided Japan’s lost decade despite sharing many of the same systemic problem of declining productivity simply by deepening capital (increased capital input per worker) and increased labour inputs (think liberal immigration policies).  In fact, on the productivity front, Singapore fared worse than Japan in the period 2000-2008 (+0.7%) compared to Japan’s productivity slump in the 1990’s (3.3% for 1990-1995, 3.4% for 1995-2000, see above tables for the numbers).  Little wonder then, that Singapore’s Minister Mentor Lee recently advised Japan to import foreign labour to boost its flagging economy, although it is unclear if this apparent “quick-fix mentality” would be helpful to the nation in the long run.

Some may wonder what caused Japan to suffer from low TFP growth rates in the 1990s.  While I do not know the cause for such an occurrence, some economists have provided explanations here.

To illustrate the situation on the ground in Singapore, Seah Chiang Nee of The Star lamented recently on how foreign technology was displacing local talents in the global race for technological innovation:

Singapore not only lacks that but is becoming too hooked on expensive Western products and services at a time when its own innovative competitiveness is dropping. Even IT manufacturing, the mainstay of the economy, is facing possible extinction as factories move to cheaper countries. Among the top 500 fastest growth tech companies in Asia Pacific countries, only two – or 0.4% – are in Singapore, compared with 99 in Taiwan, it was recently reported. The republic appears to be losing some of its technological capacities. For example, Seagate, the world’s largest maker of hard-disk drives, will close one of its factories and move to China by the end of this year. Some 2,000 employees, many of them engineers, will be retrenched. Another giant, Motorola, shut its plant in 2008. Earlier Chartered, the world’s second-largest semiconductor firm with nine chip plants spread across Singapore, Germany and the US, was taken over by an Abu Dhabi company, after years of losses. Three other local tech firms were delisted in the last two years. Many fear the relocations may signal the end of the republic’s role as a supplier of value-added computer parts to the world.

Despite this, it doesn’t take a genius to figure out that GDP growth was inevitable despite falling productivity (and even lower birth rates) as Singapore’s population (and hence workforce) exploded from 4.03 million in 2000 to 4.987 million in 2009. Yet everyone knows that the law of diminishing returns eventually catches up with any input-driven growth. The only question is when such would happen.

The consequences of such an explosive growth in foreigners has led, among other things, to rocketing home prices, as I wrote earlier, depressed wages and in general a rising cost of living.  It has also made the likelihood of a bubble economy stronger as Singapore grows more dependent on foreigners whom have no obligation to Singapore and may leave at a moment’s notice.  Where does Singapore go now from here?

Written by defennder

January 11, 2010 at 5:30 PM

15 Responses

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  1. […] See the original post:  Productivity and Singapore's economic growth model « Furry Brown Dog […]

  2. […] the original post: Productivity and Singapore's economic growth model « Furry Brown Dog Share and […]

  3. […] Discourse – Furry Brown Dog: Productivity and Singapore’s economic growth model – Barnyard Chorus: “the world becomes a nastier place for women” – The Secret Political […]

  4. Hello. This article is a very good read.

    Keep on writing!


    January 12, 2010 at 12:52 PM

  5. Hey that is one heck of an analysis. Good job!
    I would like to do a summary on my blog.

    Can I use your charts and graphs?

    Lucky Tan

    January 12, 2010 at 6:30 PM

  6. Hi Lucky, thanks a lot for reading. You’re free to use any content here in any way you wish. None of it belongs to me anyway, since they were all taken from sources I’ve acknowledged above.

    Despite whatever has been written here, more could have been said on actual government polices which your blog has written insightful and thought-provoking analysis on. I’m certainly eager to see what you think on this issue.

    Best regards,


    January 12, 2010 at 11:02 PM

  7. Hi Ryan,

    Thanks for reading. I’m just sharing what I’ve learned from others whom have commented on this issue.


    January 12, 2010 at 11:05 PM

  8. Can I reproduce this article at The Online Citizen?

    Donaldson Tan

    January 17, 2010 at 5:27 AM

  9. Hi Donaldson,

    You are more than welcome to do so. I’m honoured that prominent bloggers such as Lucky and TOC have requested permission to reproduce part or all of the above post. More people should be made aware that Singapore’s growth model is unsustainable if nothing changes.


    January 18, 2010 at 7:01 PM

  10. wow!!! A great article!!! You wrote this yourself?? Amazing!!! Wonderful!!!


    February 1, 2010 at 10:59 AM

  11. […] with 10 comments […]

  12. Great article and superbly written.

    May I suggest that the reason for the earlier obsession of the govt with GDP growth rather than productivity growth is the incentive structure in the government? The bonuses of the ministers and the senior civil servants are based on absolute GDP growth. Therefore, there was no reason for those devising economic policies to care about *how* GDP growth could be achieved. Growth at all cost would result in performance bonuses for them and thus it became the overriding objective in policy making.


    February 23, 2010 at 1:06 PM

  13. Great piece of writing! Insightful thoughts that changed my perception on Singapore’s economy, thank you!😀


    July 21, 2011 at 7:25 PM

  14. Hi,

    Great article and great thinking. Two things are missing though:
    1. The article focuses on manufacturing and doesn’t mention that manufacturing as a share of GDP went down from 26% in 2000 to 22% in 2010 and will keep declining. Singapore is a service based economy (67% of GDP) and manufacturing will continue to decline (as Singapore will be unable to become an inovation hub like Germany and doesn’t have enough land to entertain manufacturing anyway). The country is producing services not only for itself but for the region, a booming and promissing region (Indonesia, Vietnam, etc.).
    As only the higher value add services will remain offshore (i.e. in Singapore), productivity should increase.

    2. The article does not mention tax and ease of doing business. By being the most easy country to set up and run a business in the world (World bank ranking) and providing one of the most attractive tax system (not the most, Dubai is better), Singapore is likelly to continue to attract both talent and corporates.


    Serge De Coster

    November 1, 2011 at 12:11 PM

  15. Sadly, SG is loooong on the work hours and short on productivity.:-/


    June 4, 2013 at 1:05 AM

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