By Elvin Ong
In an effort to restructure the Singapore economy, the Government has employed a three-pronged approach. First, the inflow of foreign workers has been gradually tightened, so as to ensure that employers do not continue to rely on the easy availability of cheap foreign labour.
Second, the Government has made available a plethora of subsidies and incentive schemes to entice employers to raise productivity through upgrading the skill-sets of their workers or the increased use of technology. They hope that the wages of workers will raise in tandem with the increase in productivity and competitiveness.
Third, there has been a concerted effort to increase the intensity of partnerships between our educational institutions and potential employers, so that ITE, polytechnic and university graduates have the desired skills to immediately enter the workforce. In his National Day Rally speech, PM Lee Hsien Loong announced that the newly recognized Singapore Institute of Technology (SIT) and the Singapore Institute of Management (SIM) would focus on partnering with industries to make sure that their graduates have industry-relevant skills, making them highly sought-after by potential employers. Ultimately, the aim is to maintain or even raise the competitiveness of our local manufacturing industry via continuing innovation.
The German model
The Government’s latter two approaches – incentivising companies to raise productivity and strengthening educational partnerships – is in some part inspired by the German model of vocational training and industrial manufacturing. Mr Wilson Wong, senior lecturer at the SIM University’s School of Business, recently advocated that we should learn from the German model in an op-ed published in The Straits Times [1] . He noted how German school leavers take up apprenticeships that typically last about 3.5 years and subsequently stay with their respective employers for decades. It is no wonder that the quality of German engineering is renowned throughout the world. The overall strength of the German manufacturing sector is also a big reason why the German economy continues to grow and ostensibly appears to be somewhat shielded from the Eurozone crisis.
While this focus on the German model of vocational training and high-quality manufacturing is in the right direction and should be welcomed, a narrow focus on emulating it is akin to pushing on the end of a string. It misses the bigger picture of institutional complementarities that the model is embedded in. Without understanding the overarching framework of institutional incentives that supports it, the effort to emulate the model and raise the competitiveness of our local industries is mere rhetoric and doomed to fail. In fact, there is evidence to suggest that this is already the case.
Peter Hall and David Soskice comprehensively articulated the idea of institutional complementaries in their path-breaking 2001 book, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage [2] . They argue that the advanced economies of the world can be classified into two distinct camps of capitalism – the liberal market economy (LME) versus the coordinated market economy (CME). The institutions existing within both types complement and reinforce each other, thus supporting the prevailing corporate strategies of firms within both systems.
The LME and the CME
In a LME, characterised by countries such as the United States and United Kingdom, firms deal with each other at arms-length, and actively compete with each other via the marginal calculations of supply and demand emphasized by neoclassical economics. The labour market is fluid, as firms try to poach high-performing general-skilled employees from each other. The speed and flexibility required in pursuing business opportunities to generate short-term returns for shareholders mean that decision-making power is concentrated in the senior management. The overarching environment means that firms tend towards pursuing radical innovation in products and services that generate high profits in a relatively short amount of time. Moreover, because of the exponential returns of fluid and high performing general-skilled employees, economic inequality tends to be relatively higher and employee protection tends to be relatively lower.
In contrast, in a CME, characterised by countries such as Germany and Japan, firms are backed by “patient capital” such as cross-shareholding or bank loans. The owners and management of companies strategically coordinate with each other on an informal basis to pursue business opportunities, to eliminate poaching of employees and invest heavily in specific skills in their workers and adopt technology for long-term productivity gains. Because employees often stay with a specific company for decades, firms tend towards pursuing incremental innovation in products and services, valuing long-term returns that are re-invested into the company. Moreover, workers often participate in the company decision-making process through worker representatives on the boards of companies. In addition, because workers are so specialized and highly valued within firms, wage inequality tends to be lower and employer protection tends to be relatively higher.
To be sure, such a dichotomized characterization of the advanced economies of the world has been rightly subject to criticism on a variety of issues. Yet such a conceptualization should be less valued for their precision, but more for the subtle insights we can use to help us understand our own empirical reality.
Conflicting incentives
From this theoretical framework, then, Carney and Loh (2009) argue that Singapore’s overall institutional environment “generate conflicting innovation incentives and ultimately undermine innovative activity.” [3] While conservative company owners tend to pursue low-risk incremental innovation on established products and services backed by patient capital, they have to struggle with high turnover within their companies due to excessive poaching by competitors in a very flexible labour market. Because of this, the “conflicting incentives as a result of incompatible institutions bring neither incremental nor radical innovation to Singapore.” Simply put, despite the plethora of subsidies and incentive schemes to entice employers to raise productivity through upgrading the skill-sets of their workers or the increased use of technology, Singaporean companies were reluctant to train their workers in specific skills because they can easily hand in their resignation letters the next day and join a competitor.
Moreover, when I was studying under Professor David Soskice at the University of Oxford, he cautioned against all countries wishing to emulate the German model. Citing the UK’s languishing experiment to rapidly expand the number of youths in apprenticeship schemes in the country, he argued that the institutional complementarities that supported such initiatives were a product of history and culture. Companies in a CME had to build trust and institutions that facilitated credible commitment to a certain set of informal rules such as coordinating to pursue business and eliminating poaching. But the problem is that both trust and institutions do not magically appear overnight. [4]
Building lasting institutions
Yet having said all that, what are the lessons we can learn to reform our current strategy to strengthen the partnerships between our educational institutions and the respective industries, alongside the strategy of endlessly providing incentives for employers to raise productivity through skill upgrading and adopting new technologies? The above-mentioned narratives suggest that the Government needs to focus less on simple short-term monetary incentives to entice companies to upgrade, but should direct their attention towards building lasting institutions that encourage both employers and employees to invest in specific skills for the long term, rather than general skills for the short term.
For instance, the Government can consider implementing a national unemployment insurance scheme with co-payment from both employee and employers. This can help provide workers with a minimal level of protection should they find themselves retrenched with specific skills that make it difficult for them to find another job, or even make an employer think twice about retrenching a worker because of the disincentive from co-payment.
Another policy worth considering is to encourage senior management in local companies to practice more devolved and inclusive management methodologies, such as empowering front-line workers to make customer decisions or mandate that worker representatives be on the boards of directors. In this way, workers invest their knowledge, interests and loyalty in the company as much as the companies invest in training them to do their jobs.
Ultimately, at the end of the day, the key insight is that we need to make sure that all the incentives in the overarching institutional framework for local companies in Singapore pull in the same direction. Conflicting and short-term incentives only serve to perpetuate the current low productivity conundrum that local companies find themselves entrenched in.
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Notes:
[1] http://justice4workerssingapore.blogspot.sg/2012/11/singapores-manufacturing-sector-moving.html
[2] Hall, Peter and David Soskice. 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press. (http://www.people.fas.harvard.edu/~phall/VofCIntro.pdf)
[3] Carney, Richard W. and Loh Yi Zheng. 2009. “Institutional (Dis)Incentives to Innovate: An Explanation for Singapore’s Innovation Gap.” Journal of East Asian Studies. 9: 291-319
[4] See also, Thelen, Kathleen. 2004. How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States and Japan. New York: Cambridge University Press.
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Elvin Ong holds a Double Degree in Business Management and Social Science from Singapore Management University, and an MPhil in Politics (Comparative Government) from St Antony’s College, University of Oxford. His main research interest is in the comparative political economies of Southeast Asia, particularly Thailand, Philippines and Singapore.