Saturday, 30 March 2013

Should we curb hiring of foreigners?

Republic's open-market policy has served it for half a century and brought down jobless rate
By Ng Yew-Kwang, Published The Business Times, 28 Mar 2013

IN recent months, not only many people have proposed various curbs on the employment of foreigners, from maids to professionals, but even the government has reversed its largely free and open-market policies and adopted various restrictions.

One recent proposal is to require employers to show the "absence of local alternatives" before the employment of foreigners may be permitted, in order to "force employers to develop local talents to replace foreign employees". The government has also declared its intention to explore such measures. Let us consider whether such policies are good for Singapore.

I was a student at Nanyang University over 1962-65. During that period, left-wing forces were very strong. Economic problems including low incomes and high unemployment rates were very serious. In the middle of 1967 came the announcement (subsequently implemented) of the withdrawal of British troops from Singapore.

The political, economic and defence problems then were huge. However, under the strong policies of the government, not only did Singapore avoid a big collapse, it actually achieved strong political stability, spectacular economic development (with a per capita gross domestic product now surpassing that of the United States) and large improvement in defence capabilities.

These successes are closely related to the high quality of people in Singapore and some favourable external factors. However, it cannot be denied that the tremendous successes of Singapore over the past half a century have also largely, if not decisively, depended on the long-term insistence on and efficient execution by the government of a free and open-market policy. This not only has attracted foreign capital, enterprise and talent to come to Singapore to develop, it has also raised the efficiency and international competitiveness of local enterprises.

Why should we now weaken our policy that has served us for half a century? Has our open policy increased our unemployment rate? No, the unemployment rate decreased from around double digits in the 1960s to the current 1.8 per cent, despite significant immigration over the last decade. A rate of 3 per cent is regarded as constituting full employment. So we in fact have "over full" employment!

The adoption of anti-open policies at present will not make Singapore suddenly collapse. However, they will significantly increase costs for enterprises, reduce our ability to attract foreign talent, impair the efficiency and flexibility of our economy and worsen our international competitiveness. Though the latter will remain relatively high, why should we reduce it to 90 per cent if we can maintain it at 95 per cent? True, many Western countries have pursued similar inefficient policies. However, it was such policies and similar other inefficient policies that partly led to the decline of some Western economies, causing them many problems. Why should we copy the mistaken policies of others?

I am not a free-market fundamentalist. Where there are market failures such as in areas of food safety (due to insufficient consumer information), pollution, environmental protection or excessive inequality, we need corrective government action. This is consistent with economic analysis. However, in the employment of foreign versus local employees, I fail to see any important reason to regard the decisions of employers as being contrary to the social interest.

The proposed interventions here will not only increase governmental administrative costs unnecessarily and compliance costs for companies (including unnecessary advertising, and proving "the absence of local alternatives"), it will also lead to less efficient business decisions in some cases.

These interventions have triple costs. This is before including the long-run costs of the current departure, without sufficient justification, from free and open-market principles. It may also foster a slide into further departures from sound economic principles in the future. This slide may take Singapore on the same road as some Western economies which have witnessed a decline. Thus, a small departure from correct principles may lead to huge damage in the long run. I hope that the government will resist this departure. When voters have mistaken views, it may be better to persuade them instead of just conceding to their preferences.

Why do some voters have negative views on employing foreign workers? In many cases, they only see that foreign employees take away jobs that could have gone to locals; they fail to see that new jobs will also be created, as the latter are indirect. If immigrants only took away jobs without creating them, Singapore would now have at least 90 per cent unemployment.

People may also fail to see the important contributions of immigration, including creativity and diversity. Without immigration, Singapore would still be a small fishing village; Melbourne would not have many restaurants serving a great variety of international cuisines at relatively low prices; the US would not be the strongest nation on earth.

The costs of employing a foreign employee are often significantly higher. If an employer still prefers to do so, there must be some offsetting benefits. Employers should be allowed to choose freely; there is no need to "force employers to develop local talents to replace foreign employees".

Had Singapore adopted the policy of curbing foreign employees and similar anti-efficiency policies over the past decades, our employment rate now will not be higher than the current 98.2 per cent, likely much lower. Most certainly, due to the accumulation of lower growth rates due to inefficiency, current average incomes would also be much lower. Thus such policies are actually against the interest of local Singaporeans, at least in the long run.

A more efficient policy to help local employees is to encourage employers to train workers. The rewards of such training partly go to the employees. More qualified employees will have positive effects all around - for their companies and for other employees. Subsidies for training therefore can be justified on social efficiency grounds. But there is no need to otherwise radically interfere with the decisions of employers.

The writer is Winsemius Professor in Economics, Nanyang Technological University


No comments:

Post a Comment