Jun 25, 2010

Productivity: Govt strategy not good enough?

Productivity is Singapore's latest holy grail. But how to attain it, and is Singapore on the right track? Harvard economist Dale Jorgenson shares his concerns with Insight.

By Li Xueying

TWO years ago, the Great Recession struck. In the fallout, some fingers were pointed at economists: Why did they not foresee the worst crisis since the 1929 Great Depression? Within the profession, there was also hand-wringing and soul-searching aplenty. In a New York Times Magazine article last year - headlined How Did Economists Get It So Wrong? - Nobel laureate Paul Krugman castigated his profession for its 'blindness to the very possibility of catastrophic failures in a market economy'. Tough time to be an economist, it seems. Harvard economist and productivity expert Dale Jorgenson has a different take, however. 'No, this is the greatest time in the century to be an economist,' he enthuses, excited at how the turn of events has provided economists with 'a great natural experiment for empirically sorting out what's right and what's wrong'. Speaking to Insight from his book- lined office near the historic Harvard Yard - where students armed with books, an Ivy League education and a youthful sense of derring-do prepare to stroll into the world and try to change it - Professor Jorgenson, 77, has clearly lost none of the energy and intellectual curiosity that garnered him one of the most prestigious prizes in the world of economics. In 1971, at age 38, he received the John Bates Clark Medal, given to the most influential economist in America under age 40, for his research on investment behaviour. Past winners include such notables as Milton Friedman, Krugman, Joseph Stiglitz and Larry Summers (the last two are advisers of United States President Barack Obama). Since then, Prof Jorgenson has pioneered research in areas such as the cost of capital and the role of information technology in economic growth. More recently, he and other colleagues have focused on understanding why US labour productivity boomed from 2000 to 2005, despite an economic slowdown after the dot.com crash. The reason, they found, was a sharp rise in productivity growth in IT-intensive industries, principally in services. The locus of innovation in the US economy, they argued, had shifted from IT- producing industries in manufacturing to IT-using industries in trade and services. Earlier this year, he turned his attention to analysing the potential labour productivity growth rates and gross domestic product (GDP) rates for 122 economies, post-Great Recession. In a paper with Dr Vu Minh Khuong from the Lee Kuan Yew School of Public Policy, they projected that the world's productivity growth rate will decline, sliding from 2.83 per cent (from 1989 to 2008) to 2.61 per cent (2009 to 2019). Meanwhile, GDP growth will fall from 3.77 per cent to 2.96 per cent, owing largely to a slower growth in employment from last year to 2019, they projected. Ask Prof Jorgenson about Singapore's latest holy grail - to boost productivity - and he pronounces himself 'very impressed' by the speedy work done by the Economic Strategies Committee (ESC), a recognition by the Government of the urgent need to take stock of the country's economic strategy after the recession. But he is less sanguine about its goal of attaining productivity growth of 2 to 3 per cent yearly over the next 10 years. This is more than double the 1 per cent rate Singapore achieved in the last decade. Yes, the goal is achievable but only for the next five years, Prof Jorgenson believes. Beyond that, he is doubtful. The recession, he says, has opened a 'big gap between the actual and potential growth of the Singapore economy: the actual growth being what's actually taken place, the potential being in line with investment, labour force growth and the growth of technology'. 'When the gap is closed as it will be, that's not very realistic and it's totally out of line with Singapore's experience since 1995. So where is this productivity growth going to come from?' The low-down on productivity BUT first, a quick lesson on what productivity is about. To begin with, the field is still developing, says Prof Jorgenson. Even in measuring productivity, there are different ways of doing so, he adds. 'Economists haven't standardised a particular way of doing it, so it is not like GDP where we have international standards and people are trained in pretty much the same way around the world. 'In measuring productivity, it's so much closer to the research frontier.' But in professorial fashion, he quickly outlines the big factors that make some countries more productive than others: capital intensity (how much capital - for instance, machinery and equipment - that workers have to work with); quality of workers (mainly their educational attainment plus experience); level of technology. Singapore's productivity problems IN SINGAPORE, it was a slow rise in capital intensity that led to its 'pretty anaemic' productivity growth in the past decade. It slowed from 3.4 per cent in the 1990s to 1.1 per cent from 2000, and lags behind not just productivity leaders such as the US and Japan, but also fellow Asian tigers Hong Kong, South Korea and Taiwan, says the professor. He blames it on 'relatively depressed levels of investment' following the dot.com crash. In its wake, capital intensity accounted for just 29 per cent of productivity growth, down from 73 per cent in the preceding decade. Labour input shot up from 3.2 per cent to 60 per cent. So while Singapore did experience robust economic growth in the last decade, 'it was mainly associated with a huge expansion in the labour force - mainly big increases in the number of foreign workers, and some improvement in the local labour force quality', he observes. Thus, Singapore's liberalised immigration policy and dependence on foreign workers 'slowed down the most important motor for the growth of labour productivity - which is the growth of capital intensity', he argues. A second reason: It is relatively lacking in IT-using industries such as computers and scientific instruments - 'the main motor for productivity growth' in the US and even in Europe after 2000. Singapore's view 'antiquated'? STEPS are being taken to remedy this. The Government has announced it will devote $5.5 billion over five years to raise productivity. Another $1.5 billion goes to research and development, boosting Singapore's R&D expenditure towards a target of 3.5 per cent of the GDP. Key initiatives include tax deductions for companies on investments in innovation, grants to improve efficiency and training to upgrade workers' skills. Prof Jorgenson is more enamoured of some. For instance, he agrees with the emphasis on upgrading enterprises or letting less efficient activities go elsewhere. But he is doubtful about the efficacy of others, saying: 'The emphasis on productivity is well placed, but I do not share the ESC's view that the policy measures suggested so far will change the outlook for Singapore's economic performance.' He elaborates: 'The Singapore Government seems to me to underestimate the role of business investment as the driving force in future economic performance. 'The ESC could have looked a bit more carefully into the deficiencies in Singapore's investment performance over the past decade. While much of this was induced by the dot.com crash and the Great Recession, was Singapore's response entirely satisfactory? How could it have been improved? What lessons does this have for the future?' His answer: 'Something needs to be done to maintain a level of investment at a higher portion of the GDP like it was before the dot.com crash, and the continuing shift to IT has to be encouraged.' In particular, he is concerned about what he feels is the ESC's 'somewhat antiquated view of the process of technological innovation, where Singapore has lagged substantially since 1995'. For instance, R&D spending targets - as proposed in its report - belong to what he calls 'the Old Model for innovation'. Also, initiatives like tax credits for R&D do not 'produce any more innovation'. 'It looks to me like an industrial policy which I think is generally a bad idea.' Instead, he calls for Singapore to look towards 'the New Model', which 'puts much more emphasis on IT-based innovation', he says. This requires a more holistic but 'politically painful' restructuring of companies and industries. 'Where they (the Government) can be productive is to be sure that the industries are open, that people have an opportunity to compete and that it's made as easy as possible for new businesses to start, because a lot of the restructuring comes through the creation of small and middle enterprises. But they've got to encourage people to be entrepreneurial.' On a larger scale, what is critical is for Singapore to 're-orient its economic strategy from interaction with North America and Europe, towards Asia, which is far more challenging'. Also key, he feels, is integration of Asean countries to a stage akin to that of the European Community. Aside from the obvious benefit of having a larger common market, it would allow Singapore - as it kicks into high gear its productivity - to smoothly restructure, and shift its less competitive companies to economies with cheaper labour costs like Vietnam. 'The point is that the Government has to create the framework within which this restructuring of industries, not just enterprises, will take place,' he says. Growing pains ULTIMATELY, the angst is par for the course as Singapore completes its transition to a fully developed economy. Singaporeans will also have to resign themselves to the idea that there is no 'silver bullet', no one model to follow in its economic trajectory, says the professor. Even the US, despite its high productivity rate, is suffering from having its fiscal policies being 'out of whack'. In the final analysis, 'Singapore is going to have to make its own story'.