3rd March 2013
By Donald Low, Yeoh Lam Keong, Tan Kim Song, Manu Bhaskaran
The great John Maynard Keynes famously said that "practical men, who
believe themselves to be quite exempt from any intellectual influences,
are usually the slaves of some defunct economist."
The debate on the Population White Paper has surfaced a number of
myths and fallacies that seem to dominate the current discussion on
Singapore's population policies. Economics provides us with a very
useful set of analytical tools to clarify our thinking and to develop
sensible, evidence-based policies. The purpose of this essay is to
examine some of the ways these myths have inadvertently, or even
subconsciously, been used to justify inaccurate thinking about policies.
Myth #1: If we don't have sufficiently large injections of
foreign labour, business costs will rise, some businesses will shut down
or move out of Singapore, and Singaporean workers will be laid off.
The first fallacy is a version of the misguided economic reasoning
behind protectionism. The (flawed) argument for protectionism is that
because our local firms cannot compete globally, they need to be
subsidised by the state. By lowering costs for our firms, protectionism
helps them compete against more efficient and productive foreign firms,
thereby creating employment for citizens. Economists know this reasoning
to be intuitively appealing, but wrong. The protection that is given to
local firms does not raise their productivity; indeed, it explains
their very lack of competitiveness. Meanwhile, the processes of creative
destruction – the main source of dynamism in capitalist economies – are
impeded, and the signals for the economy to adapt, innovate and move up
the value chain are muted.
The business case for a liberal foreign worker policy rests on
similarly flawed arguments. Businesses that rely on cheap foreign labour
receive an implicit subsidy from the government. The low cost of labour
encourages them to persist with low value-added production and
discourages them from upgrading and improving their business processes.
Meanwhile, cheap foreign labour discourages automation and holds down
wages for citizen workers doing the same job.
Economists also know that the danger of protectionist policies comes
not just from the practice of it, but also from the failure to provide
an exit strategy. Countries that have benefited from the practice of
protectionism are those where governments were tough enough to end
protectionist policies that have outlived their usefulness.
If the Singapore government were to tighten foreign worker policies
over a sustained period, there is no doubt some businesses would not be
able to adapt and would have to move out of Singapore or shut down. Is
this a necessarily bad thing? No, in a vibrant capitalist economy, this
is exactly what we would expect. Businesses which cannot adapt should
and would exit the market; the state should not be propping them up with
ever more inputs of cheap labour. Their exit also frees up labour and
capital resources for the growing, more productive parts of the economy.
Such “creative destruction” is a necessary part of the economic
restructuring process. In economic restructuring, there will always be
some firms which are disadvantaged. The economically sensible decision
is not to protect these firms in their existing labour-intensive state
(which imposes high social costs) through easy access to cheap foreign
labour. Instead, the government can help lessen the pain in this
process. For instance, it can help local SMEs by ensuring that they have
access to the cheap credit, new technologies and business restructuring
expertise needed to adjust and adapt to the new environment.
What about workers who are laid off and who lack the skills to move
to other industries (in the same way that getting rid of protectionist
barriers might raise unemployment)? Again, the economically sound answer
is not to artificially prop up employment, but for the state to
intervene directly to help the workers whose livelihoods are affected –
through unemployment protection, higher wage subsidies through the
Workforce Income Supplement, skills retraining and upgrading programmes,
and one-off social transfers. Public policy should be aimed at helping
workers and local firms cope with economic restructuring, not at helping
uncompetitive firms that rely on cheap foreign labour stay afloat.
Myth #2: Economic growth is a zero-sum game
A second fallacy is that with the emergence of fast-growing cities in
Asia, Singapore will need to maintain a certain growth rate or else it
would stagnate and eventually become irrelevant. This is the essence of
the "competitiveness" argument. While competitiveness might be a useful
concept at the firm level, its utility at the level of cities and
countries is highly doubtful. To the extent that economists use the term
at all, they use it to refer to attributes such as comparative
advantage, total business environment, innovation, and the quality of a
country's policies and institutions. The rate of workforce growth,
especially in cheap labour, is not considered a sustainable source of
The argument that Singapore will stagnate if other cities in the
region rise also has little basis in economics. Growth in a fast-growing
and increasingly interdependent region like Asia is not a zero-sum
contest. Just because Jakarta, Bangkok and Shanghai grow at a rate much
faster than Singapore does not make Singaporeans any worse off. It is
not the case that there is a finite amount of GDP growth for the whole
world (or the region) and we must grab as large a share of it as
possible. Indeed, the opposite is true. The growth of other cities in
our region is more likely to raise our growth rate. The larger markets
that their growth generates and the higher incomes their citizens earn
should be viewed as economic opportunities for Singapore, not as
Similarly, the pursuit of foreign direct investments is also not a
zero-sum game. If as a result of a more modest increase in our
workforce, Singapore "loses" some investments that it would have
received had it continued to grow its workforce as rapidly as before,
this is not necessarily a bad thing. First, the marginal investments
that we lose would probably be of the type that requires cheap labour
inputs. So such investments do not raise productivity, and therefore
incomes, by much. Second, such investments in lower-cost locations
benefit Singapore via the standard comparative advantage argument. That
is, as these lower-cost countries raise their output and and incomes,
they can better afford the higher value goods and services that
Singapore produces. Economic growth, rather than being a zero-sum
proposition, is a positive sum one – all the more so in a fast-growing
region where the individual economies are at different (and therefore,
complementary) stages of development.
Myth #3: Denser, larger populations create significant economic benefits for cities
This myth has a strong element of truth to it. It is true that rich
cities with larger populations enjoy something called agglomeration
effects. When skilled workers cluster together, their output increases
by more than the increase in the number of workers. Knowledge expands
and spreads more quickly in dense cities than they do in sparsely
populated ones; innovation tends thrives in denser, more populous
cities. Indeed, this should have been the main argument the government
uses for increasing the population and density of Singapore. So why
The reason is that these agglomeration effects apply only in certain
industries, namely those which require highly skilled knowledge workers
whose concentration generates innovation. Industries such biomedical
science research, higher education, and business services like legal and
management consulting clearly fall into this category. The benefits of
agglomeration do not apply to low-cost, labour-intensive industries like
construction, cleaning or security services. In these industries, more
workers do not lead to larger increases in output per worker.
In the context of the White Paper, much of the projected increase in
our labour force would be to serve our lower-skilled industries. These
are exactly the industries which do not benefit from agglomeration
effects but contribute to the externalities such as congestion and wage
stagnation. Consequently, the argument in favour of a denser city with a
larger population because of agglomeration effects does not really
apply in this context.
Myth #4: Spending on healthcare and social services are costs
which have to be financed by higher taxes, and are therefore a drain on
The final myth is that some parts of the economy – like healthcare
and social services – are a drain on the economy, while others are
productive, “value-creating”, and generate “exciting jobs.” This
characterisation of the economy has no basis in economic theory or
evidence, although it is true that some sectors of the economy
experience persistently lower productivity growth than others.
In the popular imagination, healthcare and social services are a
drain on the productive parts of the economy. They have to be funded by
taxpayers and are therefore seen as a cost that reduces national output.
This is bad economics. Healthcare and social services, like other
industries such as manufacturing, financial services or construction,
also contribute to national output (or GDP) growth. Your spending in
healthcare and social services is someone else’s income and his spending
boosts another person’s income. So raising our spending in these two
areas is not different from increasing spending in other parts of the
economy. There is no economic basis for the common intuition that some
industries are a cost while others are a form of investment.
What about the fact that healthcare and social services have to be
financed by taxation? Doesn’t that mean they are a drag on the economy?
Again, there is little economic basis for that argument. Many other
things are financed by taxation too – MRT lines, public housing, law and
order, security – but we don’t view these as a drag on the economy.
Indeed, we may even see these things as productive investments.
But won’t taxes have to rise sharply to finance our higher spending
on healthcare and social services? Not necessarily. First, Singapore has
large fiscal surpluses which can be used to finance a well-planned
expansion of such services in a sustainable way. Second, if productivity
increases and people’s incomes across-the-board rise, we should be able
to afford the rising costs of healthcare.
The real issue in healthcare spending is how the risks of incurring
high healthcare costs are allocated. Most economists argue that given
the low-frequency, high-impact nature of many medical contingencies, the
most efficient way of financing healthcare would be through some form
of risk-pooling or social insurance. That Singapore lacks a
comprehensive and universal health insurance programme, combined with
the fact that the bulk of healthcare spending currently comes from
out-of-pocket payments, suggests that we can have a more equitable
healthcare financing system without compromising on its efficiency.
With an ageing population, won’t rising health and social care
expenditures hurt our economic dynamism, as it has in Japan and other
rapidly ageing societies? Perhaps, but not for the reasons that are
commonly cited. Health and social care services tend to experience
slower-than-average productivity growth. This is because they are more
dependent on labour, and are much less amenable to automation and other
labour-saving technological improvements. But despite productivity
growth in healthcare and social services being lower than in other
industries (such as manufacturing or ICT), wages in these “stagnant”
sectors rise just as fast as they do in other sectors because if they
did not, workers would leave these sectors. This means costs and prices
rise in healthcare and social services rise faster than they do in other
parts of the economy. Over time, healthcare and other social services
will take up a larger share of our incomes – both individually and
nationally. But this outcome does not spell doom. As long as we sustain
labour productivity growth at historical rates of about 2%, we can
afford more of everything even as the share of healthcare and social
services in our total spending rises.
The real risk of the “cost disease” (a term coined by the economist,
William Baumol) is not that health and social care costs are rising, but
that policymakers misdiagnose the problem and deal with it in a
kneejerk way. For instance, they may shift a larger share of the rising
costs to citizens. This doesn’t solve the underlying problem and may, in
fact, make the problem worse as privatised healthcare is likely to
experience faster cost inflation than socialised healthcare.
These myths exist because they seem to be intuitively correct. They
appeal to our everyday experiences, and are consistent with popular
accounts of the economy. These popular accounts include the idea that
cities or countries are locked in economic competition with one another,
or that jobs must be protected in order for workers to be protected.
Our experience with health and social care as costs we try to avoid also
explains our intuition that at the national level, this must also
apply. But these stories, although consistent and coherent to us, are
neither correct nor valid. As cognitive psychologists have found, people
tend to rely on explanations that are consistent with their own
experiences or with conventional wisdom, rather than on careful
deliberation and reasoned analysis.
Economics is not, and should not be, the only lens through which we
examine, analyse and debate our country’s population policies. But when
we do apply economics analysis, we should try to get it right.
The authors, writing in their personal capacities, are vice-presidents of the Economic Society of Singapore.