STATE OF THE ECONOMY

3.57 pm

Dr Ow Chin Hock (Leng Kee): Mr Deputy Speaker, Sir, I beg to move,

'That this House, noting with concern the present problems with the economy, commends the Trade Unions and the workers for their responsible attitude towards wages; and supports the measures so far taken by the Government and urges the Government to take all further steps necessary for the Nation to adapt to the changing environment, including steps to strengthen the role of local businesses in the economy.'

Sir, let me first deal with the current economic problems, We are facing difficult times. Our economy has slowed down and stagnated. The economic growth rate has declined continuously in the last six quarters - from 9.9% in the first quarter of 1984 to minus 1.4% in the second quarter of 1985. This year, the economic growth rate may turn out to be the lowest since our independence in 1965.

Sir, everywhere we go we hear businessmen, shopkeepers, restaurant owners and other people complaining that business is bad. My CCC members also told me that this year hungry ghosts may stay hungry as Seventh Moon Festival organizers cut back their cost of operations. Some Seventh Moon Festival reduced the number of dinner tables, others decided to do away with wayangs, sing-song and whatever. So restaurant owners, wayang operators and actors have lower income and therefore spend less. Here we observe the multiplier effect working in the grassroots economy, but in a negative sense. I ask myself this question: "Is our economic situation really that bad?" Yes, we are facing difficulties, but we are not facing a crisis. If you read the forecast by Wharton School of Economics, University of Pennsylvania, and the forecast by some American banks, it seems to me that many foreigners have more confidence about us than some of our own people. We Parliamentarians, as elected representatives of the people, must assure our people that we can and will overcome our current economic problems.

The next question I ask myself: "What went wrong? What caused the present economic difficulties?" Let me here offer some of my observations. Basically, there are two causes. Internally, our economy is undergoing structural changes. We are in the transitional period. First, wages increased rapidly in the last few years, In 1979 to 1981, wages increased as a result of the high wage policy. However, wages continued to rise after 1981 because of tight labour market conditions. Productivity did increase in the last five years. However, productivity growth has yet to catch up with the wage increase. As a result, unit labour cost increased. The second internal factor, Sir, was that labour intensive, low-skill, low-value-added industries and other economic activities were phased out by high wages, but new high tech, high-value-added and high-skill industries and economic activities have not been established fast enough or in sufficient number to occupy the central stage of our economy. There is a third internal factor. The construction boom is over. Not only the construction sector itself is affected, but also businessmen who have used their property, either commercial or residential property, as collateral to raise loans, find it difficult to raise sufficient loans. So there is a chain effect. They face a credit squeeze.

Externally, the demand for our goods and services also declined. We are highly dependent on the world market. This is not a result of conscious choice, but it is a matter of economic survival, We have no other options. We have no agricultural base to fall back on. We have no natural resources to exploit. We can only make use of our only resource, namely, human resource, and take advantage of our geographical location and infrastructure which we have painfully built up in the last 25 years to manufacture goods and offer services for the world markets. We also buy from the world markets what are needed by our people and our economy food, raw materials, machinery, equipment and even water. In this way, our economy is plugged into the world economic system. This linkage gives us economic prosperity, but it also makes our economy vulnerable to changes in world economic conditions.

Let me now analyse the three economic external factors which affect our economy. First, the economic slow down of the industrialized nations and the protectionist measures adopted by some of our trading partners have further aggravated our economic situation. Our domestic exports of goods and services in the last few years failed to increase as rapidly as in 1969-1979. In the ten years, 1969-1979, the average growth rate of our domestic exports was 26.9% per annum. In 1981-1984, the growth rate of our domestic exports was only 6.6% per annum. In fact, in 1982, the growth rate of our domestic exports was negative, -1.0%. The second external factor, Sir, is specific to some industries. There are world-wide economic problems specific to some industries. For example, oil refineries and shipbuilding and repairing are suffering from excess capacity, excess supply and change in oil trade. Similarly, electronics and some sector of computer industry is undergoing a shake-out. Our refineries, shipyards, petro-chemical and electronic and computer industries cannot avoid these adverse conditions. A third economic external factor is the restraint imposed by our neighbouring countries on travel and expenditure of their own citizens outside their countries. These restraints have also affected our tourism and retail trade to some extent.

At micro level, the internal and external causes which I have just mentioned would mean two things for most enterprises: (1) higher cost of operation and (2) decline in sales or turnover. Sir, I am going to argue that demand factor is more important than cost factor, both at macro and micro sense. It is true that part of the decline in external demand of some industries may be due to the loss of our competitive edge because of higher cost of operation. However, being a small open economy, decline in external demand is mainly due to exogenous factors over which we have no control. I have already identified some of these exogenous factors just now. Hence, the current economic problems could not be prevented even without higher costs of operation, or without wage increase and CPF increase in the last few years, though higher cost of operation would worsen the situation.

Sir, at enterprise or industry level, decline in demand seems to be more serious than high operating cost. Sir, you are a businessman. I think you understand this. When demand is high, turnover rapid, you and other businessmen have no complaints or less complaints. Costs are not a problem, When demand starts to decline, and wages, rents, interests and other costs fail to decline or fail to decline proportionately, costs begin to bite. Less efficient enterprises find it difficult to carry on, some enterprises may go under.

Sir, let me now turn to the other issue - CPF contribution rates and wages. In May and June, I already sensed there were pressures coming from the business community and other quarters on Government to reduce CPF contribution rates in order, as they argued, to reduce costs of operation. I have pointed out in an interview with Lianhe Zaobao on 18th July, that CPF contribution rate should not be used as an anti-cyclical measure. The CPF is not a levy; it is part of a worker's total wage. Reduction in employer's contribution rate alone will reduce worker's pay and worker's savings. Reduction in employee's contribution rate alone will reduce his savings but not his employer's operating costs. And reduction in CPF from both sides, employer and employee, as the Member for Anson once suggested, will reduce the worker's pay, his saving and his ability to own a flat. So let us not fiddle with CPF contribution rates, unless we are really facing a crisis.

Now let me turn to wages. Wages reflect labour market conditions. We cannot expect wages to remain low when we experience rapid economic growth and labour shortage, Even without wage corrections in 1979-81, wages would have increased. However, we cannot simply look at wages or wage increase alone. Wage increase must be compared with productivity increase. If productivity increase can keep pace with wage increase, total wage cost will not go up. When we talk about wage costs of export industries, we must also compare our wage increase and productivity increase with such increases of our competitors. That is what competition in international market is all about. But here let me sound a word of caution: Competitiveness should not be achieved at the expense of the living standard of our workers. By cutting down wages, our competitiveness will surely improve but workers suffer. Wages must be allowed to increase when productivity increase, workers should be given a share of productivity gains.

Sir, our productivity did increase at an average rate of 4.6% in 1980-84, This is an improvement over the average productivity growth rate of 3.2% in 1975-79 before the wage correction policy was implemented. Moreover, our productivity performance in 1980-84 was better than the productivity performance of other newly industrialized countries in Asia. But the trouble is that this productivity growth rate still fell short of the average wage increase during 1980-84. During this period, total labour cost inclusive of CPF, SDF and payroll tax increased by about 10%. Productivity growth rate was only 4.6% per annum but labour cost increased by about 10%. Why has productivity increase lagged behind wage increase? The reason is simple: it is nearly effortless to increase wages, but to increase productivity, business enterprises must be prepared to invest more in capital, train their workers and upgrade their management systems. All these will take some time before productivity performance can be improved. Under these circumstances, and given our present economic problems, it is sensible to restrain wage increase for the time being until productivity growth catches up. In other words, wages have to increase at a much slower pace in the next two to three years. However, exceptions, as I argued just now, must be made for workers in enterprises whose productivity has increased rapidly.

Trade unions and workers have, in fact, taken the first step towards wage restraint. They have decided to forgo this year's NWC wage increase. Trade unions and workers must be commended for taking this action. Their action will not only help to ease cost pressure on many enterprises but it will also send a strong signal to investors and potential investors that our workers are realistic and are willing to make adjustments in the interests of our nation.

I notice the Opposition Members have tabled a motion to cut Ministers' salaries and MPs' allowances and pensions by 25%. 1 wonder in what way this cut, if implemented, will help reduce operating costs of businesses and stimulate economic recovery.

Mr Jeyaretnam: We will explain.

Dr Ow Chin Hock: The Opposition Members have to prove beyond doubt that the cut of Ministers' pay and MPs' allowances by 25% will revitalize the economy, otherwise, their motion will be rejected and dismissed by the people as another political gimmick. Our people are not that silly. Logically speaking, in order to make wage cuts an effective means for cost reduction, wage cuts must be made across the board. Managers, professionals, (including lawyers, of course), executives, technicians, workers, etc. all will receive lower wages and salaries. But what are the consequences of such a proposal? First, total disposable income of our economy will fall and total consumption expenditure decline. This will further aggravate the economic stagnation. Aggregate demand will fall further. Secondly, wage cuts across-the-board will be taken as a panic move, it will create such adverse psychological effects that people may start to believe that our whole economy is going down the drain. People's confidence and investor's confidence will be undermined. Therefore, wage cut is both unnecessary and undesirable. Let us prepare for the winter, but we need not burn down our house to keep ourselves warm.

Sir, now let me turn to the economic measures and the Government response. Immediately after the last Budget debate, the Government responded quickly. In April, the Economic Committee under the Minister of State for Trade and Industry and Member for Teck Ghee was established. So far, the Government has implemented or announced a number of measures to tackle our current economic difficulties. These measures may be summarized in three categories:

(1) reduction of statutory boards' fees, levies and charges, and property tax. These measures will help reduce costs of operation.

(2) pump-prime construction sector by bringing forward the infrastructural projects and by maintaining high level of public housing construction activities. These measures will help stimulate aggregate demand.

(3) In addition, the Government has also announced specific schemes designed to induce risk-taking in high-tech investment and to assist local businesses.

All these measures deserve our support, as they attempt to tackle the problems at source. The Government may further consider certain fiscal measures, such as (1) lowering company profit tax rate, (2) temporary removal of the 3% cess on restaurants and hotels, and (3) normalize the anomaly in the way petrol duty was imposed. I hope the Minister for Trade and Industry and the Minister for Finance are listening. I am particularly unhappy about the last measure, ie, the way we tax our petrol.

Sir, if you recall, in the last Budget debate, I protested at the way petrol duty was imposed and I argued that the increase in petrol duty would lead to inflation. I was proven right. This is the consumer price index for the month of July 1985. If you compare the consumer price index of July 1984 with July 1985, you will see that the cost of transport and communications has gone up from $104.6 to $110.7, an increase of 5.8 percentage points during this one year period. Fortunately for us, prices of food items have declined. This has more than offset the increase in prices of transport and communications. As a result, our consumer price index increased by only 0.7%. Otherwise, the inflationary pressure would be much greater.

Some quarters blamed the Government for not foreseeing the current economic difficulties, others held the Government responsible for the high costs of operation. These allegations and accusations are irresponsible and misleading. Our economy is a small open economy, just like a small sailing boat in the Pacific Ocean. A powerful wind will propel our economy full steam ahead, but a thunder storm may be enough to capsize our boat. No one can give us accurate weather forecast. This is the problem faced by all small open economies, not just Singapore. To manage such an open and small economy requires delicate skills, and so far the Government has been very successful. That is why we see the living standard going up and there is economic prosperity in the last 25 years. The economic restructuring is like strengthening the structure of our economic boat, so that it can ride the storm better and move faster ahead of our competitors.

Sir, now let me turn to the changing environment and the new challenges we face. Economic measures taken at this point must not aim at solving the current economic problems alone. They must be part of our economic strategies which will enable our economy to respond more rapidly and effectively to the changing economic conditions and technological progress.

In the world economy, the old economic problems, such as slow-down of world trade expansion, protectionism, and the debt problem of the Third World countries and some Eastern European countries, are still hanging there, At the same time, new challenges have emerged: industrialized nations have started a re-industrialization drive, and their large corporations have adopted the strategies of investing behind each other's tariff walls. Some experts, such as Mr Kenichi Ohmae, a Japanese consultant with McKinsey & Co, has warned of the 'Triad power' - the cooperation and linking up of the large corporations in the three economic polars - America, Western Europe and Japan. In the region, probably at the latest by the end of this century, we may see China emerging as an economic power, exporting large volumes of labour-intensive manufactured goods. This will alter the economic balance in the Asia-Pacific region.

In our domestic economy, we must realize the period of low-wage low-rent is over. We are moving up the technological ladder. To stand still is to be left behind; unless we move ahead of other countries in the region and countries with ample labour-supply, like India and China, we will be swamped. But when we enter the era of higher technology, we are confronted with a different set of problems: investors will face greater uncertainty and greater risk. Technological changes may render investment obsolete within a very short time, investors are therefore hesitant. At the same time, the industrialized nations and the NICs are all trying to identify the new growth industries. If too many move into the same industry with similar technological level, all will suffer from excess capacity; a potential growth industry (what the Prime Minister called the winner) may turn out to be a loser.

How do we prepare ourselves for these changing economic and technological environment? A few steps need to be taken:

(1) To encourage research and development activities;

(2) To upgrade workers' training and education;

(3) To provide information on technology, market and management system;

(4) To groom our local entrepreneurs;

(5) To encourage local businesses to link up with MNCs and foreign companies; and

(6) To assist local businesses to improve on their production techniques and management systems,

All these require not only the efforts of the Government but also the full support and cooperation of the people. How do we, as a people and a nation, face the challenges of the new era will determine what kind of future we have for ourselves and for our children.

Sir, let me now turn to the last topic, ie, the local businesses. Small and medium-sized businesses have great disadvantages. They have many handicaps: high labour cost, low productivity, low capital investment, dis-economies of scale due to small size. Let me take some industries in the commerce and service sectors as examples.

First, provision and sundry shops. In 1981, there were 4,625 such shops.

Mr Deputy Speaker: Order. Moment of interruption. Debate to be resumed on what day, Dr Ow?

Dr Ow Chin Hock: Tomorrow, Sir.

Mr Deputy Speaker: So be it.