Maintaining Economic Competitiveness as Reliance on Foreign Workers Cut

Er Dr Lee Bee Wah asked the Minister for Trade and Industry in light of IMF's remarks that cutting reliance on foreign workers can reduce Singapore's competitiveness and growth potential while keeping core inflation elevated (a) how is the Government addressing our business competitiveness to maintain our economic momentum; and (b) which sectors of the economy have shown signs of a slowdown during the last two quarters.

The Government's policy of tightening access to foreign manpower is an integral part of our strategy to restructure the economy towards productivity-driven growth. Given Singapore's land constraints, it is not sustainable for us to grow our economy through a continuous increase in foreign manpower. Easy access to low-skilled foreign manpower also blunts the incentive for firms to invest in automation and improve their processes. By tightening firms' access to foreign manpower, our objective is to achieve a more efficient use of labour and raise productivity. Higher productivity will in turn enhance the competitiveness of our economy and translate into higher real wages for Singaporeans over the longer term.

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However, the Government also recognises that firms need time to adjust to tighter labour market conditions. As such, the Government has taken care to tighten foreign manpower policies progressively and gradually. For instance, reductions in the Dependency Ratio Ceilings (DRCs) were announced two years before they take effect fully. This calibrated approach has led to a gradual moderation in foreign workforce growth. In particular, foreign workforce growth slowed from 7.6% in 2011 to 5.9% in 2012 and further to 4.2% in 2013.

At the same time, to help firms raise productivity and enhance their competitiveness, the Government has put in place many assistance schemes. These include the Productivity and Innovation Credit (PIC) scheme and the Innovation and Capability Voucher (ICV) scheme. Significant investments have also been made in Continuing Education and Training programmes to upgrade the skills of our workers.

Apart from sharing the cost of productivity improvements, the Government has also introduced schemes to help businesses, especially SMEs, compete internationally. For instance, the Partnerships for Capability Transformation (PACT) initiative facilitates collaborations between SMEs and large organisations to enable knowledge transfers and capability development among the SMEs. In addition, the Global Company Partnership (GCP) programme, administered by IE Singapore, helps local companies tap overseas opportunities by helping to defray part of the cost of financial and market access studies as well as manpower development.

The take-up rates for these various schemes have increased over the last few years. This is an encouraging sign that more of our SMEs are making a concerted effort to raise productivity to remain competitive. We urge more companies to step forward to tap on these schemes. The Government has also put in place support measures such as the Wage Credit Scheme and corporate tax rebate to help companies cope with higher manpower costs during the transitional period. This will in turn help to mitigate the pass-through of manpower costs to inflation. Notably, core inflation was 1.7% in 2013, lower than the median monthly nominal income growth of 6.5% over the same period.

Er Dr Lee also asked which sectors of the economy have shown signs of growth slowdown in the last two quarters. Based on advance estimates, GDP grew by 2.4% year-on-year in the third quarter of 2014. This was the same pace of growth as that achieved in the second quarter, although slower than the 4.8% growth in the first quarter. The moderation in growth in the last two quarters was due mainly to the slowdown in the manufacturing and construction sectors, as well as selected services sectors.

In particular, the manufacturing sector grew at a slower pace of 1.5% and 1.4% year-on-year in the second and third quarters respectively, compared to 9.9% in the first quarter. The weak performance in manufacturing is partly due to lacklustre global economic conditions. Although economic activity in the US has started to improve, this was offset by anaemic growth in Europe. In addition, China's economic growth has continued to moderate

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amidst ongoing efforts to rebalance the economy.

For the construction sector, growth slowed from 6.8% year-on-year in the first quarter of 2014 to 4.1% in the second quarter, and further to 1.4% in the third quarter. This was due mainly to lower output growth from private sector construction projects, following the cooling measures put in place by the Government to stabilise Singapore’s property market and tighter manpower conditions. Apart from construction, growth in other domestically-oriented, labour-intensive services sectors, such as retail and food and beverage services, has also been weighed down by labour constraints.

In sum, the slowdown in our economy in the last two quarters was due in part to external headwinds, and in part to tighter labour constraints amidst on-going efforts to restructure the economy. However, there are also positive signs that firms in some sectors, especially the export-oriented ones like precision engineering, have adjusted to tighter labour market conditions by moving up the value chain and raising their productivity. MTI and the various agencies are working closely with firms in the domestically-oriented labour-intensive sectors, such as construction and retail, to raise their productivity.

Economic restructuring is a long-term endeavour. It is important that we do not let up on our efforts to steer the economy towards a more sustainable growth path. The Government stands ready to provide further assistance to support our companies as we continue on this journey. We remain confident that we will succeed in our restructuring efforts and that our economy will emerge stronger and more competitive than before.