A Silver Lining to a Lower GDP?

Loh Chee Kong, Today Online 21 Feb 08;

Yes, if it drives us to a wider perspective of progress

LIKE a Formula One racer dropping several gears to enter a treacherous bend, the projected slowdown in Singapore's economic growth may not be all bad news — not even in a country seemingly obsessed with the Gross Domestic Product (GDP).

From a blistering 7.7-per-cent annual GDP growth, on average, of the past four years, Singapore's economy is forecast to grow between a more muted 4 and 6 per cent this year.

Moderate growth can be a good thing, say economists, if it injects a sense of realism amid inflation that hit historic highs last year.

Said CIMB-GK economist Song Seng Wun: "When the economy is continually expanding, the expectation of strong growth could lead to inflationary pressure when there's too much demand chasing after too few goods."

Here's the rub: If high GDP growth isn't always good news, what does this say about its limitations as a primary gauge of a country's economic progress? And what are the possible chinks in the Singapore armour masked by such headline figures?

Take the nation's low productivity levels last year and some economists' perception that Singapore is taking a shortcut with its aggressive immigration drive.

Former top civil servant Ngiam Tong Dow has argued that our GDP has expanded "largely on infusions of foreign labour" and has identified raising productivity as the "central economic challenge". He questioned if the Government's intention to hit a population size of 6.5 million was a stop-gap measure that could inflict social and economic costs.

Citigroup economist Chua Hak Bin said: "A lot of growth is coming from immigration. It's not certain that income per capita is rising as strongly."

Still, the economists agree, Singapore has to import labour in the short term. And yes, a larger population base could make Singapore more resilient to swings in the global economy.

But if this base comprises a larger fraction of foreigners, who are probably less rooted, "the swings in the labour force will be more dramatic with the economic cycles", said Dr Chua.

What about boosting productivity instead?

HSBC economist Robert Prior-Wandesforde's back-of-the-envelope calculations showed productivity is shrinking by 3 per cent while wages are rising by 7 per cent. "That's clearly unsustainable. It implies Singapore is losing a lot of competitiveness."

But Mr Song thinks productivity levels could be distorted by the growing labour-intensive hospitality and financial sectors, in which output cannot be accurately measured.

"We shouldn't get too hung up about productivity measures at this juncture. It has to be taken into the context of the industry you are talking about, compared to the global figures," he said.

Dr Chua disagreed, citing the example of Hong Kong, which has a similar economic make-up but higher productivity.

Aside from media headlines, Singapore's apparent fixation with GDP extends to the civil service, in which the remuneration of ministers and top civil servants includes a bonus of up to eight months' pay if growth hits 10 per cent or more.

Yet, GDP figures are "at best, a snapshot of the economy", says Mr Song — and increasingly so in a globalised economy, in which capital flows, largely unchecked, and incomes at the top and bottom stretch out.

While the GDP acts as a common yardstick for all countries, it does not capture an economy's peculiarities. In Singapore's case, he points out, its size and openness mean headline numbers tend to "exaggerate" the actual state of the economy.

For instance, the GDP wobbled in the fourth quarter last year due mainly to the volatile pharmaceutical sector, which employs relatively few people, he said.

Apart from not reflecting income distribution, the GDP does not capture negative externalities generated by economic growth, such as environmental degradation.

Elsewhere, policymakers are warming up to the use of alternative measurements. In France, President Nicholas Sarkozy has appointed Nobel Laureate economist Joseph Stiglitz to head a panel to devise a new method of economic calculation that includes quality-of-life factors.

Should other measurements, such as the Gross National Income — which measures the amount of wealth that stays within a country's borders — and the median wage, have bigger roles to play?

"The issue really is, who benefits from GDP growth? A lot of the gains come from capital owners rather than the average worker," said Dr Chua. "If you look at the median wage, there can be years when even though growth was quite strong, the average wage of the low-income can actually fall in absolute terms."