Productivity gains key to unlocking wealth creation

ASK any group of economists what the key driver of sustained, long-term economic growth is, and the unanimous response will probably be productivity.

But achieving sustained productivity growth is a challenge everywhere – even more so for advanced economies facing a declining workforce. The irony, therefore, is that as the need for such gains increases, the harder it is to achieve.

Between 2010 and 2024, Singapore sustained productivity growth averaging 2.3 per cent a year – one of the highest rates among all advanced economies. We attribute this to the interplay of three factors: industries, technology and people.

Underpinning the first key factor is Singapore’s ability to stay in sync with global megatrends and, more importantly, to leverage them to boost economic growth. This has been achieved principally through the Republic’s hub industries (63 per cent of its economy) that have managed to post productivity gains above the national average.

Today, the city-state is a major global hub for finance, energy and transportation. Further strengthening its leading role in these hub industries will help it sustain strong productivity gains over the medium term.

In finance, Singapore is already globally important in areas such as foreign exchange and insurance, and it is a major financing and asset-gathering centre. In a multipolar world, it could become even more important for international financial services firms.

In energy, about 20 per cent of the world’s energy and metals trade already takes place in Singapore. There is strong potential for the Republic to develop into a major liquefied natural gas and carbon trading hub.

In transport, investments are already underway, with airport capacity expansion projects and technological enhancements supporting Singapore’s leading position in global aviation.

Early tech adopter

The country will also likely become a data and artificial intelligence (AI) inference hub in due course. Asia is on track to account for more than a third of global data centre capacity by 2027, with US$100 billion in potential investments this decade.

Singapore is set to join Malaysia and Japan as one of the economies in the region projected to enjoy a disproportionate amount of these investments, which are targeted mostly at new data centres and generative AI projects by multinational companies, as well as regional and global hyperscalers.

The second key factor is leveraging new technologies. Singapore’s early adoption of automation, AI and humanoids could sustain its economic transformation.

The Republic has led the way in embracing AI, unveiling its first National AI strategy in 2019 and then updating it in 2023.

It also places among the top 10 AI markets in numerous worldwide rankings, and is home to more than 80 active research faculties, 150 research and development and product teams, and over 1,000 startups dedicated to the technology.

There is strong potential for AI to boost the productivity of Singapore’s professional workers, who make up 48 per cent of the workforce. Humanoids and robotics could supplement the remaining 52 per cent carrying out more manual labour-related tasks.

Sharing gains equitably

The third key factor is people, and policymakers need to prepare and sufficiently skill the workforce for the future.

The first two factors will undoubtedly bring disruptive shifts to the Singapore workforce, and schemes are already underway to train and future-proof workers, as well as mitigate any negative effects of the country’s economic restructuring.

But more still needs to be done on this front, especially given the pace and scale of AI adoption so far.

This confluence of favourable macro and micro factors strongly indicates that real gross domestic product growth could be sustained at 3 per cent over the medium term, with productivity gains a key driver towards that outcome.

The outlook is bright but two key risks to the Singapore economy must be taken into consideration: Firstly, a rise in protectionism leading to a more de-globalised world, impacting Singapore’s ability to benefit from global growth opportunities. Secondly, the rise of other hubs, which may have stronger financial resources or a more natural hinterland.

Furthermore, policymakers will have to ensure that any productivity gains are shared in an equitable fashion between the corporate sector and workers.

Nonetheless, Singapore has already shown solid success economically for some time now. Over the past five years, its rise in GDP per capita has outstripped the rest of the world, and over the next five years, the Republic may enter the top three highest per capita income nations, up from 28th in 1990 and fourth currently.

Singaporean household net assets could also nearly double to US$4 trillion by 2030, with average household net worth potentially rising from US$1.6 million to US$2.5 million by the same year – a tangible sign of real wealth creation.

The writer is Asia economist at Morgan Stanley