Feature Articles
Singapore's Productivity Puzzle: Estimating Singapore's Total Factor Productivity Growth Using the Dual Method
18 November 2010
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Conventional estimates of Singapore’s total factor productivity (TFP) growth point to a “productivity puzzle”. TFP growth in Singapore has been low throughout the past decades, despite an improving education profile for the population, increasing investments in research and development (R&D) and rising capital inflows. Moreover, this phenomenon appears unique to Singapore. Estimates of TFP growth in Hong Kong, another small open economy, are significantly higher.
To shed some light on this puzzle, we calculate TFP growth in Singapore and Hong Kong over the period 1997-2009 using an alternative, “dual” methodology introduced in the East Asian context by Hsieh(2002). This is mathematically equivalent to the primal method used in conventional estimates, butmeasures TFP directly rather than as a residual. We find that in Singapore’s case, dual estimates of TFPgrowth in the 1997-2009 period are higher than corresponding primal estimates. This divergence between dual and primal TFP growth is much smaller in Hong Kong. Also, the improvements in TFP (as measured through the dual method) in both Singapore and Hong Kong have been driven by robust growth in the real rental price of capital. Growth in real wages has been much more sluggish, especially when adjusted for the composition of the labour force.
The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the Ministry of Trade and Industry or the Government of Singapore.