IT'S an uncomfortable question that's being asked. With heightened costs and yet unclear benefits, whether Singapore's economic restructuring policy is working out is an issue that is increasingly coming to the fore.
The recent weeks have seen preliminary Q3 GDP growth estimates falling short of expectations, the unusual situation of core inflation surpassing headline inflation, and a pointed International Monetary Fund (IMF) report flagging the threat to Singapore's competitiveness. And still, the latest round of economic restructuring, with its stress on lifting productivity and curbing cheap foreign labour, is well into year five without yielding significant countable gains.
As the Monetary Authority of Singapore (MAS) issues its Macroeconomic Review - the central bank's bi-annual report on the economy - on Tuesday, policy watchers will be looking for answers to the conundrum.
The IMF's take on Singapore's "ambitious" restructuring plan is finding resonance with most private sector economists. The policy could usher in a "new era of sustainable growth", but how and when desired productivity gains materialise is unpredictable. For now, growth and competitiveness will fall below potential, with the prospect of higher costs with no productivity gains opening a Pandora's box of risks: business closures, layoffs and a rise in non-performing loans, should unemployment rise, cautioned IMF.
To some, the risks have to be taken. Mizuho Bank economist Vishnu Varathan can see why "anyone taking a hard-nosed finance view of this will argue that the expected present value may not be worth our while" but thinks that calculating "expected returns" applies only when there are options. "The reality of our situation is that of global economies, not just Singapore, running out of options to spur growth via monetary and fiscal policies. Circumventing restructuring is perhaps not an option, if one is serious about lifting growth potential," he says.
Singapore's rapidly ageing population demands a shift in gears, and necessarily one towards higher productivity because of the physical and resource constraints. "It would be short-sighted, if not delusional, to kick the can down the road. There will be precious little runway for productivity to take-off if we choose that path," he adds.
Other reasons put forward for slowing foreign worker inflow, such as reducing social tensions from the strain on public infrastructure, have economic impact too. "Populism certainly did not over-rule economic sense. Fact is, socio-economic factors are aligned with hard-nosed economic needs," says Mr Varathan.
For now though, the pain is showing but not the gains. Labour productivity growth averaged just 0.1 per cent from 2011 to Q2 2014, and 0.4 per cent if construction - often cited as a productivity laggard - is excluded. The target announced in 2010 was for productivity growth of 2-3 per cent a year.
Meanwhile, unit labour costs are still on the rise - no surprise, given the tight foreign labour policy - and have shown up in higher core inflation. In fact, the MAS said in its recent monetary policy statement that some food and other services firms are not done passing on cost increases, so core inflation will keep rising till the second half of 2015.
Then, there was the disappointing Q3 GDP growth performance, which was attributed by the MAS to weaker external demand but has raised questions over whether self-inflicted restructuring pain is compounding external challenges to crimp Singapore's growth further. The central bank noted that manufacturing firms face supply-side constraints and falling product prices, while services firms reliant on labour could see profit margins squeezed.
At a forum last month, Prime Minister Lee Hsien Loong said that achieving 2-3 per cent growth annually over the next decade would be "not bad" for Singapore.
This is under the 3-5 per cent annual growth rate from 2010-2020 set out by the Economic Strategies Committee in 2010 and, assuming labour force growth is kept constant, implies labour productivity growth of less than the 2-3 per cent target, noted UOB economist Francis Tan. The government's aim therefore seems to be to "shape the type of growth - inclusive, productivity-driven - rather than to hit a target number", he says.
Bank of America Merrill Lynch economist Chua Hak Bin, who said in August that restructuring is failing and that "a pause may be in order", welcomed the Prime Minister's comments earlier this month that he does not expect "any further measures to tighten foreign worker numbers".
"We think the pause, and re-assessment of the impact so far from the restructuring, is timely," Mr Chua says, especially since the macro indicators still do not speak of restructuring success.
Even with no further tightening, the schedule of foreign worker levy hikes and stricter Singaporean-foreign worker ratios will continue till next year. These are unlikely to be reversed. The IMF report noted that Singapore's authorities would consider recalibrating macroeconomic policies as part of their normal decision-making processes - for instance, if a rise in G3 demand pushes core inflation out of their comfort zone - but "would be more guarded in reconsidering the implementation pace of the restructuring plans".
To Mr Varathan, the key question is whether there are benefits from slowing the pace of restructuring. He thinks not, given that global demand remains tepid. "In a demand constrained world, the benefits of slower restructuring may not be that compelling. So pressing on with targeted fine-tuning may be a superior alternative, in terms of consistency of messages and medium-term economic outcomes."
Where there is broad agreement is that policy fine-tuning is necessary.
DBS economist Irvin Seah thinks that finer measurements of productivity gains are needed. While the government has pointed out that certain sectors have enjoyed higher productivity figures, these are not immune to the effect of cyclical demand pulling output higher too.
"Perhaps we should develop industry-specific productivity indices, based on indicators relevant to industries, such as table turnover for the F&B sector and man-hours per square foot for the construction industry," he says.
From the business sector too, initial emotive pleas for a reversal or slowdown of foreign manpower policies have been replaced with calls for continual calibration.
Says Singapore Business Federation (SBF) chief executive Ho Meng Kit: "With more feedback, after almost five years of restructuring, on how SMEs in different sectors are responding to restructuring, policies can be more sector-specific."
For instance, Singapore can consider allowing start-ups to hire foreign talent without penalising them through the existing framework which uses salary levels as a criteria for foreign work-pass eligibility. "Start-ups are important shoots of our entrepreneurship and their employees are not remunerated by salary alone," he says.
One encouraging sign is that more companies are tapping on grants to upgrade productivity and improve processes, going by industry surveys. Some 17,000 companies have benefited from productivity initiatives, with 7,000 companies participating in 2013 alone, according to government data. The Productivity and Innovation Credit scheme was tapped on by 40 per cent of all companies in Singapore last year.
But if the restructuring push continues to yield no outcomes, will manpower policies be tightened further, or will more incentives be dished out, asks DBS' Mr Seah. "There is some leakage in giving out incentives. In looking at how to help companies improve productivity, it can't just be about higher utilisation of the PIC. That can be exploited and not actually put to good use."
"From the start, this was a 'short-term pain before long-term gain' kind of policy," he says. "But in this instance, long-term gain is still a question mark. We need to cast aside the mindset that this is about 'no pain, no gain'. If we push the economy over the edge, then whatever gain you get going forward may not justify the short-term pain."
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