Singapore inflation spike a growing pain to higher productivity

Government's drive to boost productivity single-handedly driving up prices, says RBS.

The silver lining is that these "high transition costs" will only pester the economy for the short term as government imposes a temporary crackdown on imported labor via tightened foreign worker dependency rations and foreign worker levies.

Here's more from RBS:

A multitude of inter-related influences explain the upward shift in Singapore’s cost structure. However, the most important of these has been the government’s strategy to force corporates to reduce reliance on expanding the labour force and focus on enhancing productivity. The specific objective of the government has been to increase nnual productivity growth to 2%-3% from an average of 1% over the past ten years or so. To bring about this productivity growth, the government has been progressively cut the foreign worker dependency ratio and raising levies on employment of low income foreign workers. In Singapore, an employer is required to pay the government a monthly levy for hiring a foreign worker – the objective of the scheme is to control the size of the imported labour force. The authorities intend to increase levies by nearly 80% between 2012 to mid-2013.

The problem with such a strategy is the high transition costs at least, in the short term. Apart from the direct impact of higher labour costs, we need to bear in mind that the restructuring is coming amidst a tight labour market and a changing economic structure. At around 2%, Singapore’s unemployment rate is running below its long ter average and therefore, the pass-through of such policy initiatives tends to be amplified. Moreover, Singapore’s growth is becoming increasingly dependent on services where productivity growth is slower than in manufacturing and scalability of operations via adding capital is limited. This is particularly true for industries such as tourism where personalised services are critical. In this sense, the current restructuring exercise is likely to be more complicated than the previous one in the early 1980s. The previous exercise focused more on moving up the value chain in manufacturing whereas the current challenge is to improve productivity in services.