Mr S Iswaran at the 5th MTI Economic Dialogue

SPEECH BY MR S ISWARAN, MINISTER, PRIME MINISTER’S OFFICE AND SECOND MINISTER FOR HOME AFFAIRS AND TRADE & INDUSTRY FOR THE 5th MTI ECONOMIC DIALOGUE, 3 SEPTEMBER 2012, 6PM

POPULATION AND ECONOMY – CHOICES FACING SINGAPORE

Professor Arnoud De Meyer, President, Singapore Management University

Faculty and Students from SMU, NTU and NUS,

Ladies and Gentlemen

I am pleased to join you at the 5th MTI Economic Dialogue.  Let me start by commending the thesis and economics book prize winners on their interesting research and excellence in their studies.

Economist Service Scholarship

I would also like to congratulate the inaugural batch of Economist Service scholars.  The Economist Service scholarship is awarded to students who have demonstrated the aptitude and interest in being public sector economists.  In particular, I would like to congratulate Jeanette Pang, who will be pursuing her studies at the University of Warwick, Wen Jia Ying who will be heading to the London School of Economics, and Afiqah binte Suhaiemi, who will be at the National University of Singapore.  We wish them all the best and look forward to their future contributions to public policy, which as you can well appreciate, is filled with many challenges.

Our Demographic Challenges

Let me now turn to a topical and pertinent issue of the day – the demographic shifts we will witness over the next 20 years, its economic implications, and the policy choices it entails for all of us.

We face three demographic trends in the medium term.  First, our local workforce will shrink.  As you would be aware, our Total Fertility Rate (TFR) has been below the replacement rate since 1976.  Hence, the local workforce will begin to shrink in eight years’ time as our baby boomers begin to retire and fewer young Singaporeans enter the workforce.

Second, our workforce will age.  Between 2011 and 2030, the median age of Singaporeans in the workforce will rise from 39 years to 47 years.  An older workforce brings with it experience and networks that companies must learn to make the most of.  But equally, older workers will have to adapt to new technologies and sustain innovation and the government and employers will need to help workers retrain and upgrade themselves.

Third, Singaporeans will be more highly educated in future.  The government has announced, quite recently, plans to expand university places and, by 2020, 40 per cent of each cohort will enter university, up from 27 per cent today. While more Singaporeans will be able to realise their educational aspirations, we need to ensure that our economy and businesses continue to thrive and create correspondingly good jobs for them.

Growth Creates Opportunities

Our people are the key to our growth.  And these trends mean that growth will be even more difficult to achieve in future, in Singapore’s perspective.  However, to meet the rising aspirations of present and future generations of Singaporeans, we will need growth – not as an end in itself, but rather, as a means to generate opportunities it brings.  In a growing economy, businesses thrive, new and diverse industries are created and they result in jobs that can meet the wide range of interests and capabilities of tomorrow’s Singaporeans.

If opportunities dwindle, the consequences can be quite austere.  Talented and high-skilled Singaporeans are mobile; some will almost certainly seek out opportunities in more vibrant economies and cities.  This will not only be in traditional hubs in the west but also in up and coming cities in Asia and other fast growing regions.  A loss of local talent also means a loss of the opportunities they could have helped to create.

Two examples come to mind - Japan and Taiwan.  Once lauded as an economic miracle, Japan only managed to grow its economy by 0.7 per cent annually from 2000 to 2010.  The lack of job prospects has driven its pool of high skilled engineers to emigrate.  Neighbouring countries, like South Korea, have welcomed Japanese engineers with open arms and generous pay packages.

Taiwan, too, saw economic growth slow from 6.2 per cent annually in the 90s to 3.9 per cent in the past decade or so.  As a result, wage growth slowed significantly.  Taiwan’s inability to remunerate local talent competitively has resulted in a significant brain drain, and their leaders are now putting in place, policies to remedy this.

The impact of such changes is perhaps most deleterious on the lower-skilled who are also the least mobile.  Lower, or worse no growth, means fewer resources to address the needs of those with low incomes, and less fiscal capacity for essential public services such as healthcare and physical infrastructure.  The recent recession in many countries has shown that without economic growth, redistribution programmes can quickly become unsustainable.

While redistribution is undoubtedly important to address the needs of certain segments of our society, it essentially reallocates the wealth generated by economic growth.  Ultimately, we still need to be able to grow the pie for redistribution and that is the only way redistribution policies can be sustainable.  Growth begets opportunities which generates resources - and to fuel growth we will need to address our demographic challenges.

A Multi-Pronged Approach

There is no single solution to these challenges.  And while we may not have all the answers, one thing is clear – the solution entails both locals and foreigners playing a role in our economy. 

Apart from raising our fertility rate, there are broadly three approaches we can take.  First, we can make the most of our own Singaporean core by raising our Labour Force Participation Rate (LFPR).  There is more that we can do to help certain groups, such as stay-at-home mums, older workers and retirees, in order that they can enter or re-enter the workforce.  The Ministry of Manpower (MOM) is doing a significant amount of work on this front – for instance, by encouraging flexible work arrangements and introducing the Retirement and Re-Employment Act, using micro-economic policies to achieve macro-economic outcomes.  Companies too must play their part through enlightened HR policies that allow individuals to balance their work, personal responsibilities and family commitments.

Second, and this is something we are very familiar with, we must boost productivity so that our labour force works smarter. Again, this is evident. In this regard, the National Productivity and Continuing Education Council (NPCEC) has implemented and supported various policies and schemes to address sector-specific productivity issues.  For firms, the Productivity and Innovation Credit (PIC) provides tax rebates for expenditure on machinery, training and other productivity-related measures.  We have also raised the foreign worker levy and tightened the number of foreign workers firms can hire.  This motivates firms to enhance the efficiency of their processes and to lessen their reliance on foreign manpower and labour-intensive methods.

Both older and younger workers will have new avenues to enhance their productivity.  By next year, two training campuses will be set up as hubs where integrated career coaching can be conducted by clusters of trainers.  Adapting to an older workforce requires some mindset shifts in the short run, but firms that can leverage on the strengths of older workers will certainly gain over the longer term.  This includes job re-design and instituting flexible work or part-time work arrangements.  Several local companies have endeavoured in this direction and they are beginning to see significant outcomes, which I think will sustain their long term business strategies.

While raising LFPR and productivity are important, there are limits to these efforts.  Singapore already has a high resident LFPR of 66 per cent, higher than comparable figures amongst OECD countries.  Boosting LFPR by 1 percentage point adds about 30,000 resident workers to our labour force of around 3 million.  Furthermore, it took two decades to improve LFPR by 3 percentage points so gains, on this front, will take time.  Productivity growth will also be hard won.  We are aiming for 2 to 3 per cent productivity growth annually, which is an ambitious target given international experience and our average annual productivity growth of 1.8 per cent from 2000 to 2010.

Given the limits of these two approaches, a third thrust would be to judiciously employ foreign manpower to the benefit of our economy and of course, Singaporeans.  This hinges on the role that foreign manpower plays in supporting our local workforce.

Foreign workers are important in sectors which serve crucial social needs in Singapore, some of these, jobs in these sectors, may not appeal to Singaporeans.  One example is the construction sector, which is essential for our houses, factories, roads and other critical infrastructure.  Another is healthcare services, where frontline integrated care workers or allied health professionals render much needed services to our ill and aged.

As a small open economy, Singapore’s growth is highly dependent on external opportunities which ebb and flow.  We must, therefore, also have the flexibility to take advantage when opportunity presents itself by tapping on higher-skilled foreign workers to complement our local core, so as to anchor promising new industries in Singapore.  As more Singaporeans upgrade or acquire the requisite skills, we will be able to strengthen the local core in these new industries.  This has been our experience, for example, in the interactive digital media sector. Indeed, we can think of many others with the same frame of mind.

Our aim in this endeavour is twofold - a judicious augmentation of our local workforce with foreign manpower in order to fuel growth and opportunities for Singaporeans and on the other hand, a systematic effort to strengthen the local core through education and skills upgrading so that more Singaporeans can benefit from the jobs that are being created. 

We must be cognisant that if we crimp too hard on access to foreign manpower, growth and opportunities will diminish.  If we are too liberal, firms may become less productive and indeed, over-reliant on low cost foreign manpower.  Hence, our manpower policies need to be balanced and flexible to respond to shifting trends.  This must be complemented with the requisite investment in essential infrastructure such as housing and transport.  

Meeting Our Future Aspirations

Let me sum up the perspectives that I have shared with you today.  We will have to ensure that Singapore remains a choice home that meets the aspirations of Singaporeans – as a place to work and as a place to live and raise a family.  Competition for talent will intensify, and we need to ensure that Singapore remains economically vibrant, to continue growing our economy so as to create opportunities for Singaporeans to enjoy better living standards.

We all have a role in shaping the development of our economy over the next 20 years.  In this dialogue, it is an important setting for that, as well as any other conversation. Singaporeans must be ready to learn new skills and adapt to new processes, while foreign workers continue to play a complementary role. Businesses should enhance their productivity, leverage on the experience of our older workers, and adopt flexible work practices so that more women, older workers, can re-enter the workforce.  The Government will support this, through appropriate policies, and by seeking to forge a broad national consensus on the path forward.  Only then can we truly hope that Singapore remains an attractive and vibrant place for this and future generation of Singaporeans.

Thank you

for inviting me and I look forward to this conversation.