Raising productivity only way to manage business costs

[SINGAPORE] The Republic is not going to be a cheap place to do business, and costs will inevitably rise as the economy turns more vibrant. While the government will continue to try to mitigate business cycles by stepping in when the market heats up, the only permanent solution to address climbing costs is to raise productivity, said Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam yesterday.

"Demand in the economy is strong (as seen in) demand for resources, especially (for) labour and space. And that's why costs are ticking up fundamentally. The wrong strategy will be to weaken our economy . . . That's not what our business community wants, and that's not what Singaporeans want.

"We've got to keep this a vibrant place - keep a check on costs to make sure they don't rise consistently, (and) foster business profits for wages. That's our strategy. But accept that we are not going to be a cheap location for business," said Mr Tharman.

He cited Hong Kong and Japan, which tackled the issue of rental pressures differently. The former has let market forces prevail, which pushed retail rents up to the extent that businesses have restructured themselves to shift away from traditional clientele and services to cater to the high-end Chinese market.

"And many Hong Kong residents are not very happy about that," said Mr Tharman, who noted that prime retail rents in Hong Kong are more than seven times the price of those in Singapore.

Japan, on the other hand, through its practice of rental protection, has allowed "charming little ramen shops" and mom-and- pop shops to survive. But that has come with trade- offs: rents may be cheap, but wages are stagnant, and opportunities for Japan's young are limited.

Said Mr Tharman: "Those are two quite different approaches, and I think we should avoid either extreme. Don't just leave it to the market, but neither can we fix rents and keep prices low."

He said the government has "(tried to) mitigate the cycles" by increasing the supply of factory and shop spaces, which should have a "moderating impact on rentals".

"That's our strategy. We don't have perfect foresight, but when we see the market heating up, we take action to boost supply and find other ways to help businesses to mitigate costs."

Still, he said, "the only permanent solution" to address rising business costs is to raise productivity.

"As long as we remain vibrant as an economy, our cost will basically approach that of an advanced country - a little higher in some areas, a little lower in some areas - but basically, we will have advanced country costs.

"And the only way for businesses to survive (in that environment) is to have advanced country capabilities in innovation, in the commercialisation of R&D (research and development), in managerial skills and in investing in employees so that they have deep skills. That's the only way."

While the government has thus far pushed for restructuring via tighter foreign worker policies and schemes to help businesses upgrade, Mr Tharman said the next phase of restructuring will focus on transforming SMEs, jobs and workplace norms. This will include placing greater emphasis on continuing education and developing "obsolescence-proof skills" for a new technology-driven world economy.