The question of productivity

Donaldson Tan

According to politicians, Singapore faces productivity problems.

Recently, a new buzzword has emerged in the local media – productivity. It all begun in December 2009 when the Reform Party publicised its economy policy proposals at a party seminar which attracted quite a significant fanfare locally. Productivity gained public prominence again during the current Parliamentary Debate on the Singapore Budget 2010.

At the seminar, the Reform Party highlighted that Singapore has a poor producitivty record. In 2008, labour productivity fell by 8% and continued to declined in 2009. Singapore’s productivty pales in comparison to the countries such as the USA where labour productivity has continued to rise strongly even during recession. However, no political parties have highlighted that productivity growth does not prevent job losses during recession. US unemployment still remains at 10.1%.

It now emerges that productivity was a theme in the past proposals of many political parties such as the People’s Action Party and the Singapore Democratic Party. In the words of Dr Chee Soon Juan, the Secretary-General of the Singapore Democratic Party, “old wine in a new skin”. It is hardly surprising that so many political parties in Singapore have embraced this theme given there is a universal recognition to transform Singapore’s economy, yet all these activities point to a case of missing the forest for the trees.

Productivity is only an economic indicator. By improving productivity, what do we seek to achieve? Is it the well being of individual citizens? Is it enhanced economic security for both employers and employees? This is an unanswered question by various political and economic actors. Productivity is influenced by a large number of factors that are shaped by the collective action of all participants in an economy. And only by knowing the answer, then we can begin to prioritise the various factors that affect productivity.

The debate on productivity is further complicated by the validity of productivity itself. Let’s consider an example whereby a manufacturer begins a business with a capital of $200,000. At the end of three years, he found himself richer by $50,000, i.e. if he were to sold the plant, stock, debates at fair valuation, he would obtain $250,000.

The increment of $50,000 would be his “profit.” If asked to explain what is the origin of profit in general, and of this amount of profit in particular, and, further, why this profit should fall to him, his first answer will probably be that the goods he manufactures meet a demand felt by a certain section of the public, and that, to obtain the goods, buyers are willing to pay a price high enough to allow him, over the whole field of his production for three years, to obtain the profit of $50,000.

Is this $50,000 the result of productivity? Value cannot come from production Capital and labour cannot produce it. What labour does is to produce a quantity of commodities, and what capital co-operating with labour usually does is to increase that quantity and/or the quality of the commodities. These commodities, under certain known conditions, will usually possess value. But the value does not arise in the production, nor is it proportional to the efforts and sacrifices of that production.

Hard Disk Factory

On the contrary, the value of products determines and measures the value of means of production. Value only arises in the relation between human wants and human satisfactions, and, if men do not “value” commodities when made, all the labour and capital expended in the making cannot confer on them the value of the smallest coin. But if neither capital nor labour can create value, how can it be maintained that capital employed in production not only reproduces its own value, but produces a value greater than itself?

So if productivity growth is an invalid pursuit, then what makes a progressive re-alignment of the economy? The ultimate pursuit is to maintain Singapore’s relevance to the global economy, and the foundation to maintain this relevance lies in keeping the Singapores economy competitive while it evolves to meet the demand of an evolving world. There are 2 sets of factors to consider.

The first set of factors, organised under the heading of macroeconomic competitiveness, set the overall context in which companies operate. These factors include the quality of social infrastructure and political institutions as well as of macroeconomic policy. They create the opportunity space in which actions can be taken to enhance competitiveness.

The second set of factors, called microeconomic competitiveness, captures the way companies operate and the external dimensions that have a direct impact on the results of their activities. These factors include the sophistication of companies, the strength of clusters, and the quality of the business environment.

The government’s proposal under Budget 2010 attempts to address these factors. Measures include a one-off tax relief for M&A activities, Productivity & Innovation Credit and the National Productivity Fund. However, does throwing money actually solve any problem? It is not the first time that the Singapore government has attempted to prop up the private sector through grants and industry subsidy.

Existing schemes such as LETAS are already accounted for in every past Budget. The key lies in enabling firms to capture as much value as possible in its commercial activities, whether this means moving up the industry value chain or aggregating specific capacities to boost output. Yet at the same, firms must be interested in capturing as much value across its commercial activities.

In conclusion, the current parliamentary debate on productivity actually addresses competitiveness of Singapore’s economy.