Why Lim Chong Yah is screwing the wrong hole

April 11, 2012

Professor Lim Chong Yah, who was a key architect of the economic restructuring exercise that overhauled Singapore’s wage system in the late 70s, recently proposed a radical plan to fix many of the problems in the Singapore economy – he went on to highlight that the growing income inequality is approaching dangerous levels. Lim went on to highlight over-dependence on cheap foreign labour. He said that Singapore now ‘needs shock therapy to wake up its economy’ and ‘the only way out is to restructure again’, in the area of wages of low earners.

The gist of Lim’s magic bullet to solve many of our woes in Singapore can be summarized a as follows: Lim’s proposal, which he called ‘Economic Restructuring II’, includes substantially increasing wages for the lowest-paid workers and freezing top earners’ salaries for three years.

How sensible is Lim’s suggested solution? Allow me to be candid – in a nutshell what Lim recommeds is the road to perdition rather than salvation. Let me explain why, “substantially increasing wages for lowest paid workers,” arbitarily without regard to paying homage to fundamental laws of supply and demand historically has ALWAYS failed – if anyone can even show me one case study where this has worked, I will undertake to run around the padang naked with my iPad hanging around my neck. I sumpah – in short it is unworkable – the Soviet Union during the 60’s under Khruschev once embarked on precisely such a strategy in the hope of revivifying the income parity of the USSR with the US and Europe – the results were not only devastating, but it had long term effect of encouraging inefficiently run state owned enterprises. This should not come as a surprise to the perceptive reader – as labor market conditions and the laws of demand and supply do not operate in a vacumm.

Rather where the demand of a particular type of labor is more and supply is less then the wages will be higher. On the other hand, if supply of labor is more, demand will lessen and lower wages will be the order of the day. Lim may have failed to factor this equalizing reality into his suggested solution of saving Singapore. The fact that the poor and destitude are currently languishing in the ever diminishing cycle of the poverty trap is never in dispute. ONLY to suggest a sensible long term solution can be crafted to nail income inequality  WITHOUT regard to rudimentary laws of supply and demand can only be a travesty of reason.

Lim should INSTEAD refocus his attention on tempering the Singapore government’s misplaced policy of opening the flood gates of the labor market to low skilled migrant workers – after all, if you happen to run a retail outlet, why even bother paying a higher salary for a native worker, if you can get someone young, cheaper and hungrier from elsewhere? A better solution would be for the government to adopt higher vetting criteria to stem the inflow of foreign workers along with provisioning incentives for firms to hire native workers by either offering attractive tax holidays and provisioning incentives along that direction. The government should also relook at their run away policy of outsourcing their services to the lowest bidder – I have always been critical of mindlessly outsourcing services as I believe this is one of the best way to hollow out fair wages along with the idea of dignity of labor, as since the lowest bid wins the day, this simply means outsourcing firms who are recepients of contracts through tenders will simply pass on these reductions to workers, thereby furthering depressing wages for low skilled jobs.

Bear in mind, I am not against outsourcing per se. As I believe if judiciously pursued it can actually streamline the operations of a firm to help it focus rightly as it should on honing its core competence while divesting itself of extraneous activities that can only distract it from it’s intended mission. Only when outsourcing becomes the only game in town – then all of us know what will happen. As what we usually fail to realize is. Another glorified word of describing outsourcing is privatization and here we see the undesirable effects of how it so often leads to depressed wages but also crappy services along with gaping contradictions. And the reasons for this is simple, since there is now so many rice bowls in the supply chain to the enduser, that can only mean those at the end of the line i.e the coolie, will only get less and less lah (you see I luv you all so much that I have even simplified economics)– as case in point is privatized enterprises that offer public transportation services, healthcare along with supplying power are perhaps the clearest example of outsourcing horror stories. Since the business process of these enterprises are infact public services in essence. It is arguable they can never really be operated like real businesses in the true sense of the word – wonder no more why recently even the government had to step in to purchase of a fleet of new buses to increase the frequency of services for commuters. Such an arrangement is bound to incur the wrath of the public, as whenever governments are called to do more to help the poor, then seem to take refuge in the argument, “we must all take responsibility for our own lifes” or that extending a helping hand may create a “moral hazard.” Yet what riles many along with inflicting pain on the thinking classes is when privatized entities such as SMRT face precisely the same problems, government doesn’t seem to apply the same strict criteria of “you swim or drown.” Instead they adopt a 180 degree policy and bail out these privatized entities.

If Lim is genuine about alleviating many of the problems faced by the poor – he should take a closer look at the how run away privatization and outsourcing is largely responsible for higher living cost whilst depressing wages in Singapore – since privatized entities of public services is really a lousy business model (I am not against privatization per se. I am just against the abuse of it!) firms can do little except automatically pass price hikes to the end user. And here comes the kicker. IF THEY DON’T, THEY GO out of business. Why? Because a privatized firm that serves the interest of shareholders FIRST, can only treat the PUBLIC interest as a side dish. I hope you are all now internally persuaded why public services such as transport, health and utilities must ALWAYS be focussed on the public interest FIRST and only then other interest – Doing otherwise can only translate into one reality price hikes will ALWAYS the order of the day and this is really one of the factors that push up the cost of living in Singapore – wonder no more why price hikes associated with transport, power and even basic services for the upkeep of HDB public spaces are automatically passed on to a grumbling public – this in turn heightens inflation and can only hollow out the real value of what it means to have $50 in your pocket. This in a nutshell is one of many reasons why the poor get poorer while the rich get richer. As when vital public services are privatized, they are really in it to make $, the rest is relative to how much noise we make when things screw up. Through this illustration, it possible to see how privatization of public services leads to a dangerous inversion of logic that takes them away from providing an affordable and fair public service = as a shift for the worse usually happens, where the emphasis on PUBLIC gives way to the PRIVATE, from commuters to shareholders as in the case of our train blues.It is this imperceptible shift that is the tap root of why it is getting more expensive to work, live and play in Singapore.

Consider this working example: a cleaning firm tenders lowest to secure contracts. As government agencies outsourcing will only select the lowest bid, hence bidders have no choice but to hire cheap migrant workers who are not only willing to work for less but for longer hours. And since migrant workers have very little or no fixed cost associated with having to raise a family in Singapore as their standard of living in their respective countries are comparatively lower, wonder no more why they are squeezing out native workers. Hence it is a misrepresentation of fact for the government to keep on insisting that Singaporeans and residents are not interested in certain types of jobs that foreign workers don’t seem any hang up’s in signing for. Truth of the matter is even if these native workers decide to take up the challenge, it is very unlikley they can even make ends meet.

Lim’s second suggestion is to cap the salaries of those earning $15,000 or more for a period of three years – this at first may come across as an egalitarian and even a sensible solution to resolving income inequality. However Lim should understand that wages, even if they are stratospherically high for professionals are once again not dictated by wimps and fancies of the market. Rather they are set by the SAME market forces that account for why many of the poor find themselves increasingly displaced and marginalized these days – to paraphrase, the laws of supply and demand operate equally to both rich and poor. Only Lim should at least appreciate, unlike the lowly educated and poor who have very little to offer that the rich want – the same cannot be said about highly mobile professionals who will have no hesitations in packing up like a travelling circus and leaving out our shore should salaries be arbitarily capped at $15,000. To put it another way, if an engineer is able to command a higher salary beyond $15,000 for his skills and experiencial knowledge in let’s say New York, Tokyo and Paris, then why should he even sink roots in Singapore? And if he decides to go, then how can private enterprises flourish? And if they continue to languish, then in the long run there can only be less firms to hire native workers and that can only depress salaries further.  Globalization plays a preponderant role here as it has led to a convergence of goods, technology, labor, and capital. In a globalized world skills are not only highly mobile, but increasingly wages of highly capable professionals in either New York or even Mumbai are beginning to flatten out where they are not so different – for example, in the 70’s and 80’s expatriates can earn up to 6 to 8 time the salaries of a native worker despite graduating from the same university and having roughly the same working experience. These days, the difference is narrowing to a point where firms have even come to regard expat culture as passe – truth is with globalization the cross-border movement labor have been irresistible and inexorable – the undesirable effects of this trend means demand for highly skilled workers has increased at the expense of less-skilled workers, and the income gap between the two groups has grown. There is no doubt that globalization has coincided with higher unemployment among the less skilled and with widening income inequality. But let us be very clear, capping the salaries of high income earners at $15,000 will not in any way mitigate this on going trend.

In summary the long term solution to rising income inequality and depressed wages is for governments to get off their big backsides and temper the corrosive effects of globalization – no one denies that globalization as a theory and science is here to stay, but whether it is a reliable means to deliver us from salvation remains in question in Singapore. This is the crux of the issue – as so far the Singapore government has been reticent to rein in it’s undesirable effects. To say globalization produces winners and losers is never in dispute – but let us not close our eyes to the reality that so many Singaporeans and residents have already lost in this game while they watch helplessly as foreign knowledge workers beat the curve, that can only sharpen the sense of alienation and scissor the fabric of the spirit of give and take. Singapore policymakers should keep in mind potential dislocations and ensure that those who are displaced do not become terminally marginalized.

My fear is we have left the matter for too long to the vagaries of the free market in the misplaced belief – market forces will sort it all out. It hasn’t. Hence many of the problems we face is still largely unresolved—if anything, the disagreements are becoming more contentious, threatening and louder.

Darkness 2012

(This essay has been written with extensive inputs from the ASDF (The Think Tank of the Brotherhood) – The Brotherhood Press 2012.

“When you screw the right hole, the gates of paradise open. If you screw the wrong hole, you will have to go and see the doctor very often.”

Extracted from the way of the farmer – under the chapter, “get it right the first time!” The Brotherhood Press 2012

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