Introduction
Economists argue that Singapore should not be unduly concerned about being overtaken in real GDP per capita, and that the focus should instead be on how improvements in living standards can be sustained. A key determinant of living standards is the ability of citizens to purchase and consume goods and services, which depends largely on real income levels. For real incomes to rise, sustained economic growth is required, driven by both aggregate demand and aggregate supply. However, given Singapore's status as a highly developed economy operating near full employment, future improvements must rely on raising productivity and fostering innovation rather than simply expanding the workforce or aggregate demand. Nonetheless, there are alternative routes, including reducing inequality and improving non-material well-being. This essay analyses the extent to which improving living standards in Singapore relies on productivity and innovation.
Why productivity and innovation are crucial for raising living standards
One of the primary ways to improve material living standards is through sustained growth. Material living standards are commonly measured by the ability of citizens to afford and consume goods and services, which depends on real income. Growth, a continuous increase in output and incomes, is necessary to ensure rising real incomes, and is typically driven by increases in both aggregate demand and aggregate supply. For Singapore to improve living standards, it must therefore sustain growth over the long term.
However, Singapore is already operating at or near full employment, so there is limited scope for growth driven purely by rising employment. Over the past decade Singapore's unemployment rate has ranged from 1.9% to 3.2%, within the range of the natural rate of unemployment. With the economy at full employment, any further increase in aggregate demand must be matched by a corresponding increase in aggregate supply; without an increase in productive capacity, attempts to stimulate demand could cause inflationary pressures rather than real improvements.
Given Singapore's ageing population, one way to sustain growth is by increasing the inflow of foreign labour to supplement the domestic workforce. However, in recent years Singapore has implemented policies to reduce its reliance on cheap foreign labour, such as tightening the Dependency Ratio Ceiling (DRC) and increasing the Foreign Worker Levy (FWL). These measures encourage firms to move away from a labour-intensive growth model and focus on productivity. The most viable way to sustain growth and improve living standards in the long term is therefore by raising productivity and fostering innovation. Productivity improvements and innovation allow growth without a proportional increase in labour input. By raising the efficiency with which labour and capital are used, firms produce more output per unit of input, enhancing productive capacity and increasing aggregate supply. As a result, growth can be sustained and real incomes can rise, improving the material standard of living.
Other factors that can improve living standards
While boosting productivity and innovation is crucial, improving living standards does not depend solely on these factors. One alternative is reducing income inequality. More progressive taxation and redistributive policies can narrow income disparities, ensuring lower-income groups experience improvements even without significant growth. By ensuring a fairer distribution of income, policymakers can enhance the purchasing power of lower-income households and improve overall well-being.
Improvements in non-material living standards can also be achieved through policies that enhance quality of life beyond economic measures. While growth contributes to material well-being, non-material aspects such as environmental quality, work-life balance and access to healthcare and education also matter. Reducing environmental degradation, such as air pollution, can lead to better health outcomes and well-being. Policies that promote shorter working hours and more leisure can improve work-life balance. Increased government spending on healthcare and education can enhance human capital and social well-being, financed through a flexible fiscal policy rather than relying solely on productivity-driven growth.
Evaluative conclusion
Improving Singapore's living standards is significantly dependent on raising productivity and fostering innovation, given that the economy is already near full employment and facing demographic challenges. By enhancing productivity, Singapore can achieve sustained growth without expanding its workforce, raising real incomes and material well-being. However, alternatives such as reducing income inequality and improving non-material well-being also play a crucial role. A balanced approach that incorporates both economic growth and social policies will be most effective in ensuring long-term improvements in Singapore's living standards.