INCREASE IN BUSINESS COST (Fear of recession)

Mr Choo Wee Khiang asked the Minister for Trade and Industry whether he will comment on the fears expressed by some members of the business community that the increases in the foreign workers levy, the employers' contributions to the Central Provident Fund and road tax may drive up business cost and push the economy into another recession.

The Minister for Trade and Industry (BG Lee Hsien Loong): Mr Speaker, Sir, I have circulated some graphs which I will refer to in my answer.

I am well aware that some members of the business community are worried about the impact of some of the recent cost increases like the foreign workers' levy. It is natural for them to compare the present situation with that before the last recession. But the two are not the same.

Whether our costs are high or low depends on how we compare with others. MTI monitors our position relative to the other NICs, and we compare two particular things: unit labour costs and the profits of firms in the manufacturing sector. The figures show that we are better off today.

The first chart, Chart I (Cols. 455 - 456) shows the relative unit labour cost. It takes into account nominal wages, labour productivity and exchange rates, Singapore on the one hand and the NICs on the other. If you look at the index, we started in 1980, the index of 100 is there. That is the base. We were highly competitive. Labour costs went up steadily reaching 150 in 1985, that was the recession, when we were out of line. Since the recession and after our cost cutting measures, the index has fallen steadily to the current level of 110, where it was in 1981, and where we were highly competitive. Chart I - SINGAPORE'S RELATIVE UNIT LABOUR COST AGAINST THE OTHER NICS IN MANUFACTURING (Cols. 455 - 456)

The estimated effect of a $250 foreign worker levy and employer's CPF increase by 4% points is to raise the index, as you can see, to 115, the dotted line, where we will still be competitive.

Now look at Chart II (Cols. 457 - 458). In terms of profits compared to South Korea and Taiwan, we have also improved. One way to measure profit which we have used is ratio of gross operating surplus to value added in manufacturing; in other words, out of the net output of the industries, what shares goes to profits and depreciation, that is the employer's share, shareholders' share, and what share goes to wages. In 1980 we stared off with about 62%, going to profits and depreciation, about the same as Korea and Taiwan. In 1984 before the recession, you can see the Singapore line at the bottom, we have fallen to 55%, and we fell further to 52% in 1985 during the recession, way below South Korea and Taiwan. Chart II - SHARE OF OPERATING SURPLUS IN VALUE ADDED IN MANUFACTURING SECTOR (Cols. 457 - 458)

We rebounded with the cost cutting measures. In 1987, the most recent years for which figures are available for all three countries, profitability was back to 62%, where it was in 1981, but with a difference. Because by

1987 South Korean and Taiwanese profitability had fallen and we have become more profitable than both. The line for 1988 is conjectural but it shows that we will still be the most profitable of the NICs. I have excluded Hong Kong from this comparison because the data do not seem to be strictly the same. They cannot be interpreted the same way.

In these altered circumstances, we cannot continue blindly with policies which were designed to stimulate a depressed economy to a quick recovery. Now we need to restore CPF contributions, allow more flexible wage settlements, limit the inflow of foreign workers, push for wage reform, and still watch our competitiveness.

The Government can understand why employers affected by these measures may wish they were unnecessary. Nevertheless, I hope that they will see that from a national perspective, the Government really has no alternative but to act.

The effect of these policies will depend on the strength of the economy. If growth is lower, as MTI expects, the labour market should ease, and the number of foreign workers may level off and begin to fall. Since the new measures were announced in November, the labour market has eased a little. The Government will continue to monitor the labour situation closely but so far it sees no reason not to increase the levy to $250 in July.

The Government also announced that it was raising the employer's CPF rate by up to 4% points, to give employers ample warning of this impending change, and to help them to factor it into their wage settlements. I hope that employers will make good use of this early warning.

However, the Government has not yet determined the exact quantum of the CPF increase. It will do so only after the economic results for the first quarter of this year are known. If you will recall, last year we announced our decision just before May Day.

Of course, the Government recognizes the need to be cautious when implementing policies which increase costs. Our most careful forecasts may turn out to be wrong, or the readers may have added the wrong number of percentage points to our forecast. External factors, such as lower OECD growth and worldwide over-capa- city in the disk drive industry may slow us down more than we expect. But as we can never foresee the future perfectly, the present uncertainties do not justify postponing the necessary adjustments.

The Government welcomes feedback and inputs from the business community on economic and labour issues. EDB and TDB keep constantly in touch with the private sector. MTI holds regular dialogue sessions with businessmen, and studies their inputs carefully when making any major policy decisions. I personally hold regular lunches with employers and union leaders from different sectors. We will continue to do so.

One difficulty, however, Mr Speaker, is that even when the economy is prospering, there are always some voices claiming that the recession is just around the corner. Eventually they may be proved right, but alas there is no way to tell in advance when this will be. Fortunately, there are also others who moderate and modulate their comments on the economy, and whose warnings of impending danger have to be taken seriously. The Government will try its best to distinguish the one from the other, in order to adjust its policies sensitively and in good time when the next downturn comes.

Mr Heng Chiang Meng: Sir, I have three supplementary questions for the Minister. The first one is, together with these measures and the strong current external value of the Singapore Dollar, would these affect our export competitivenss? The second question is, since the Minister uses the chart as a means of measurement of relativity to compare with the other NICs, may I ask him on Chart I where he has put other factors remaining constant, whether the multiplier effect of all these changes, of all these increases in cost in the local context, have been taken into consideration in terms of, for example, inflation. The third point, on Chart II: is he aware that the methods of operation of many Taiwanese and Korean companies are such that their operating surpluses or their profits either in Taiwan or in Korea may be very much understated. This is because their currencies are non-convertible and they export at much lower prices and keep their profits abroad in countries like the United States?

BG Lee Hsien Loong: Mr Speaker, Sir, first of all, on the Singapore Dollar. The effect of a strong Singapore Dollar is, in fact, factored into Chart I. It is one of the considerations. I would say that the description of it as a strong dollar may be an over-simplification because although we have appreciated as against the US Dollar, we have depreciated as against the Yen and also as against the Taiwanese and the Korean currencies and this is relevant when we compare competitiveness.

Secondly, on the charts. The first chart indeed has other factors remaining constant. We have not considered inflation, but inflation should not affect the nominal unit labour cost compared to other countries. There is one factor which ought to be considered, but it ought to compensate for the higher cost as a result of these policies. It is this: if we did not follow through with these policies, the economy might continue to be very tight, and wages may be pushed up even more, because there are wage settlements, and our trade union colleagues will tell us that they push for the best settlement they can get. And without the CPF increase, without the gradual slowing down of the economy, they will push harder and rightly receive more than with the CPF increase. So we hope that by implementing these policies we are really moderating the overall cost increase.

Thirdly, whether the operating surpluses are defined the same, the Member is probably right they are not. But the trend should tell us something. From the fact that we are where we were in 1980 in terms of profitability, whereas both the Taiwanese and the Koreans are worse off than they were in 1980, I think that qualitative conclusion can be drawn that we are still competitive.

Mr Choo Wee Khiang: Sir, I would like to ask the Minister to consider whether it is possible to postpone the decision of recommending an increase in foreign workers levy and CPF contribution because profitability does not necessarily mean that it equals to cash surplus.

BG Lee Hsien Loong: Mr Speaker, Sir, it is always possible to consider, and it is always possible to postpone. The question is whether it is ever desirable to do so. If the Member listened to my answer very carefully, let me quote the reply, what I said about the foreign workers levy is that:

'The Government will continue to monitor the labour situation closely, but so far it sees no reason not to increase the Levy to $250.' If you read that carefully, it means that it is still under consideration.

Similarly with the CPF, the Government has not determined the exact quantum of the CPF increase. It will do so only after the economic results for the first quarter of this year are known and I think by that time we will know whether it is desirable or necessary to postpone the increase.