Furry Brown Dog

Dedicated to the memory of my canine friend…

The dual economy of Singapore

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In early 2007, economist Dr Chua Hak Bin published an essay titled Singapore Economy: The New and the Dual. For many who remember 2007, it was a year of strong economic growth, as well as a year when Singapore’s ministers argued that robust economic growth justified their own outrageous salary hikes. But that would not be the focus of this post, instead it would be on thesis/theory of the dual economy.

What is the dual economy thesis? Why does it matter? In this post, I will argue that the best way to reconcile Singapore’s recent and startling growth with the perceived lack of “trickle-down” effect to the general population would be to accept some form of this theory.

Anyone who has been following the news recently might have been shocked at the rate of economic growth Singapore is projected to achieve for the year. On July 15th, the headlines of the ST screamed the following at its readers:

As most of us probably know by now, such a growth rate is likely to exceed China’s for the year. It certainly left some bloggers scratching their heads as to how Singapore managed to turn around so quickly. But why is it despite the rosy headlines, Singaporeans on the ground do not feel as though they have benefited personally? Dr Chua’s theory goes a long way in explaining this apparent disparity. The full paper may be found here. It is certainly a worthwhile read, and certainly something which I highly recommend.

What is the dual economy thesis? Briefly stated, the theory says that Singapore’s economy comprises of two distinct sectors, the local sector, one largely comprising of small-medium enterprises which caters to the local population and is largely dependent on private consumer spending and the foreign/international sector, which is made up largely of MNCs, foreign labour and depends on exports to other countries.

It is important to note that this distinction between the 2 sectors does not fall within the class distinction of the have and the have-nots, ie. one where income and wealth inequality explains much of the difference between the two classes. This is apparent when we consider the fact that foreign workers employed by the foreign sector typically earn less than Singaporeans. Nevertheless, the dual economy theory goes a long way in explaining the causes of inequality in Singapore.

How does the dual economy explain Singapore’s economic performance over the past 2 years? Think back to early 2009, when exports plunged across the world and Singapore’s economy contracted by double-digits, amidst deepening gloom and uncertainty of the future. Commentators and economists everywhere noted that this was Singapore’s worst recession since independence, and credit de-leveraging in the United States and Europe meant that Singapore could no longer rely on debt-financed consumer spending for export growth.

Yet contradictory signs of economic activity were witnessed in Singapore. Lucky Tan for example, noted that unlike previous recessions, shopping malls were still bustling with people, expensive eateries still packed with customers:

Someone observed and posted in the comments section of my blog that people are still spending, shopping centers seems to be as crowded as before and restaurants appear to be doing well etc like nothing bad is happening. Taxi drivers I spoke to tell me that business is off the high but not catastrophic….in the 2003 recession quite horrible for the taxi business….people just cut back until taxi drivers were better off giving up driving because they can’t overcome the rental. I remember walking around in empty shopping centers, eating in empty restaurants in past recessions.

Lucky attributed this partially to the growth of contract-based jobs in Singapore, where being on a contract means it’s hard to fire you when the economy tanks but which also offers little job security beyond the expected tenure. Analysts at Morgan Stanley at the time attributed it to a supposed time lag between an output decrease and job losses. Yet others, such as the state media and PM Lee credited various government policies such as the Jobs Credit Scheme for reducing job losses:

Mr Lee also cited overall unemployment figures, which improved significantly to 2.1 per cent last month from 3.4 per cent last September, which “is really very low, almost as low as it was before the crisis began”.

He credited this achievement to various government policies, such as the $20.5-billion Resilience Package, which included the Jobs Credit scheme, which offsets part of employers’ wage bills.

All of these explanations are likely true to some extent. But the most likely explanation (in my opinion) for why the recession did not appear to hit employment and consumer spending particularly hard was because the economic slowdown impacted the foreign-oriented sector of Singapore’s economy most, while barely scratching the local sector. Likewise, when the economy rebounded, growth was largely due to to the foreign sector who benefited immensely from the turnaround. Local economist Manu Bhaskaran presciently explained so back in May 2009:

We have one part of the economy that, judging by ownership and employment, is largely foreign and another part largely Singaporean. For example, manufacturing is largely foreign — MNCs produce the bulk of exportable manufactured goods and a huge fraction of the workforce comprises foreign workers. Large parts of the finance sector outside domestic lending and insurance activities have a very large foreign component — wealth management, Asian Dollar Market activity, investment banking and Treasury operations. Of course, Singaporeans are involved, but they are not such a core part of these segments that a downturn would hurt them significantly.

Our back-of-the-envelope estimates suggest that roughly half of the economy is foreign. Interestingly, the parts of the economy that are currently in free fall — manufacturing and key parts of finance — are largely foreign. These activities boomed between 2005 and 2007 and have now collapsed. In the boom, they did not seem to boost the welfare of ordinary Singaporeans as much as the GDP growth numbers implied, and they are not hurting Singaporeans very much on the way down, either.

Compare this with 2007 when Dr Chua noted that private consumption growth was lagging behind GDP growth of the same period and one finds broad similarities:

External demand has been the key growth driver over the last few years, with domestic demand remaining relatively sluggish. Exports as a share of GDP have surged as a result (see Figure 11). This suggests that the changes could be more structural – driven by policies capitalizing on globalization – than just cyclical in nature. This contrasts quite noticeably with the experience of the early 1990s boom when domestic demand played a much more significant role.

Many formerly unexplained things become explicable once we consider this theory. For example, retail sales were down 3.4% compared to a year earlier, likely attributable to a much slower growth in consumer spending (local sector) as compared to export growth (foreign sector). The government’s recent decision to bring in 100,000 foreign workers may be seen as attempt to largely offset the huge exodus of foreign workers back in 2009, which left Singapore’s resident unemployment rate largely untouched. The foreign sector may be viewed as a machine which is now starting to rev up with China assuming the place of export destinations instead of Western nations. And because growth was confined to the foreign sector, Singaporeans are increasingly being left out of strong economic growth as compared to the past.

What are the consequences of such a deep and growing division in the economy? Attributing these change to the government policies on embracing globalisation as a primary driver of economic growth, Dr Chua warned in 2007 that this approach risks leaving the middle class and lower income groups behind:

Embracing globalization has had disproportionate effects on different income groups, particularly in a small open economy where the impact is amplified. Such trends favor the higher income and foreign segment groups – those in the “global periphery” – benefiting from the regional boom. The lower income groups have to face greater competition because of globalization and liberalization, particularly with the emergence and opening up of China and India.

But globalization may be only part of the reason for the dualism. Economic restructuring over the last few years may have also disproportionately compressed the wages of the middle class. The negative impact from the CPF cuts outweighed the gains from the personal income tax cuts for this segment. The high-income segment, on the other hand, benefited from the restructuring as the income tax cuts dominated. The middle-class squeeze may partly help explain the emergence of a dual economy.

Already, signs on the ground are starting to bear Dr Chua’s prediction out. See this for example. But more to the point, such developments are indicative of the government’s longstanding policy of keeping wages low relative to GDP, such that a higher proportion of profits is retained at corporations. This was no doubt formulated to attract and retain foreign corporations in Singapore, but as pointed out by the Economic Society of Singapore in their recommendations to the ESC; a low wage share also implies lower room for private consumption relative to GDP which limits potential growth of SMEs which address the domestic market. This in turn furthers the divide between the local and foreign sectors, and leaves Singaporeans largely out of economic growth.

Furthermore, what’s particularly different about the 100,000 new foreign workers expected in Singapore is that they’re expected to be higher-skilled and more productive:

The 100,000 new workers will differ from the thousands who have entered over the past three to five years: they will be higher-skilled and more productive.

From this we may conclude that these foreign individuals are likely better paid than their predecessors and so better able to afford HDB flats, driving prices skyward as we have seen recently. And as explained in an earlier post (see point 3), economists have fingered rising housing prices as a major reason behind Singapore’s low private consumption relative to GDP, which as explained above, limits the expansion of SMEs catered to private consumer spending. This is clearly a vicious cycle, one to which I see no easy way to break out of.

To sum up, Singapore’s recent stellar economic performance has not necessarily benefited its people because of the dual economy and unless appropriate action is taken to remedy this, Singapore is headed towards a future when higher GDP figures only serve to justify ministerial salary hikes, GST increases, fees and fare increments whilst giving the ruling party even less reason to address an inevitable growing inequality and a growing cost of living.

Other references:

Singapore’s dual economy

Economists point at emergence of dual economy in Singapore

Manu Bhaskaran: Reassessing Singapore’s economic future

World country, but not First World wages?

Update 8th Aug: Further research reveals that the dual economy concept doesn’t appear to be new to Singapore. In his 1997 book on Singapore’s historical economic development , Professor W.G. Huff described Singapore’s economy in the period 1900-1939 under British rule:

Employment in Singapore divided broadly into the international economy, in which approximately one-quarter of the labour force was engaged, and a supporting local economy which employed the remainder. The international economy consisted mainly of activities providing internationally-traded services, and employment concentrated in commerce and finance and in water transport, including wharves and warehouses. Additionally, the international economy had a significant manufacturing component. The local economy consisted of agriculture, local retailing and transport, the majority of those in the professions, entertainment and much of manufacturing industry.

A dual economy emerged in Singapore because successful economic development drew workers in search of employment faster than new ‘modern’ sector jobs absorbed immigrant labour. The result was to create surplus labour and, identified with this, the ‘traditional’ sector of Singapore’s dual economy. A small part of the surplus labour from which this dualism in Singapore arose lodged in its international economy. But surplus labour was largely absorbed through employment in Singapore’s local economy. To some extent this was reflected in a tendency to overmanning: ‘Many operations which in European countries are performed by one man (or one woman) in Singapore required two or more. As a small example, in England a delivery van has one man in it, the driver, in Singapore such a van requires a driver , a clerk and two men to carry the articles for delivery’.

Some striking differences and similarities between the old and new dual economies are apparent here. Overmanning as characterised may have as well described the current problem of low productivity in Singapore. Similarly, the increasing presence of immigrants taking up jobs which could have gone to locals in the local economy is as applicable in today’s Singapore as it was in its colonial past. Personally, I find it somewhat disconcerting to learn that recent economic developments in Singapore are reminiscent of Singapore’s former colonial past. It’s almost as though Singapore progresses economically by regressing.

Written by defennder

July 29, 2010 at 2:22 AM

5 Responses

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  1. […] Singaporeans are fed, up with progress! – Furry Brown Dog: The dual economy of Singapore […]

  2. very good analysis and breakdown of the “dual economy”.

    however the “dualism” idea has limits when you consider that the adverse impact on the quality of life of ordinary singaporeans brought about by the fact that the foreign labourers share the same living space as Singaporeans. they also ultimately compete for jobs in Singapore and hence against singaporeans

    I also would not take Lim Swee Say’s claim at face value that the 100,000 foreigners will be of a ‘higher quality’. A rebound in export-oriented manufacturing, for example, would mean that lower-skilled foreigners would be hired. maybe they might be ‘better quality’ in the sense that they can speak better english’ but they are not better quality in the sense that they are entrepreneurial and innovative and create enterprises and jobs in singapore.

    Uncle Tan

    July 30, 2010 at 5:11 AM

  3. Yes I was somewhat surprised to learn that this was a rather new development. Back in the 1990s and earlier when Singapore prospered, its citizens benefited. But sadly, sometime in the early 2000s, the country has seen a growing and increasing divide ever since the ruling party decided to take in foreign workers of all classes, top, bottom and middle to take advantage of increasing globalisation. It’s somewhat sad that the price Singaporeans pay for insulating the local economy and employment from external shocks is that they don’t get to share in the fruits of success as well.

    But of course, GDP growth is GDP growth. Not that it matters to the middle class, but that it’s often used to justify all sorts of unreasonable fee and charge increases, even when Singaporeans don’t benefit from growth spurts at all.

    defennder

    July 30, 2010 at 11:52 PM

  4. […] – Yours Truly Singapore: Singapore’s well-being goes far beyond GDP – Furry Brown Dog: The dual economy of Singapore [Recommended] – TOC: Why I do not like high GDP […]

  5. […] – Yours Truly Singapore: Singapore’s well-being goes far beyond GDP – Furry Brown Dog: The dual economy of Singapore [Recommended] – TOC: Why I do not like high GDP […]


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