Monday, August 18, 2003
Singapore tackles wage costs in bid to shore up jobs
Reuters Singapore, August 18
In a dramatic bid to stem jobs losses, Singapore has announced plans for an effective wage cut of six per cent across the board despite a weak domestic economy as it pushes ahead with structural reform.
Economists said on Monday the government's move, when implemented, will cut disposable income at a time when interest rates are rising and the economy has just been through its largest quarterly contraction on record.
But the hope is that by making Singapore a cheaper place to do business, demand for labour should begin to rise again as the economic recovery gathers pace.
"It might mean that Singapore will ultimately emerge from this downturn as a remodelled and reshaped, highly competitive economy," said Desmond Supple, Barclays Capital research head.
"But in the intervening period it is not an economy that is going to be a particularly pleasant place," he said.
Singapore, once one of Asia's fastest growing tiger economies, has been rocked by two recessions since the Asian financial crisis in 1997-98, and was hit this year by Severe Acute Respiratory Syndrome, which led to a sharp 11.4 per cent annualised contraction in the second quarter.
Economists have noted that over the past few years, as Singapore weathered the economic storms, the government has chosen not to ease monetary policy -- the traditional way it has countered cyclical swings in the small $90-billion economy.
It did announce two fiscal stimulus packages to help the recovery from the 2001 recession, but has since decided this was an ineffective means to stimulating activity as the open economy allows much of the money to flow offshore.
"The government has de-emphasised short-term demand management in favour of long-term structural competitiveness," said Supple.
Singapore faces intense pressure for investment from emerging countries in its region and from giants like China and India, as multinational companies re-distribute production and jobs to wherever it is cheapest and most efficient.
FIGHTING THE DRIFT
"For every one manufacturing worker hired in Singapore, a company can hire three in Malaysia, eight in Thailand, 13 in China or 18 in India," Prime Minister Goh Chok Tong said in an address to the nation on the weekend. In the April-June quarter Singapore lost 24,800 jobs, a bigger loss than in all of 1998 after the Asian financial crisis.
Goh said the government was fighting the drift by keeping taxes and fees low and had made efforts to reduce rents and make land costs more competitive. What was left, he said, was wages and the state-run pension scheme called the compulsory Central Provident Fund (CPF).
At present in Singapore, 36 per cent of salaries are paid into the CPF pension scheme, with 16 per cent coming from employers and the remaining 20 per cent from employees.
"CPF is a major part of unit business costs," said Adam Le Mesurier, an economist at Goldman Sachs.
"So push it down, especially the employers' contribution from 16 to 10 per cent, and this cuts the cost of doing business here."
Goh said workers should expect pension contributions to be cut as low as 30 per cent of overall salaries from the current 36 per cent but did not say when any change would take place.
Employer contributions were last cut after the Asian crisis, when they went from 20 per cent to 10 per cent. The employers' contribution was brought back to 16 per cent in January 2001.
But over the years a growing majority of Singaporeans have been using money from the CPF for a deposit when buying a home and to repay monthly installments on their mortgages.
Economists said a cut in the monthly pension contributions from employers is likely to have a direct effect on spending patterns as people have to make up the shortfall on their mortgage repayments and save more for retirement. Joseph Tan, economist at Standard Chartered Bank, said this means that growth could be affected unless the government provides some offsetting package of benefits.
Tan has forecast 2003 GDP growth at 1.5 per cent, while the government's own forecast is for between zero and one per cent.
"I'm going to lower my growth forecast if the offsetting package is not enough," he said.
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