SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

SMU POLITICAL ECONOMIC EXCHANGE

A SMU ECONOMICS INTELLIGENCE CLUB PUBLICATION

In this special edition, we would like to honour the top performers in the SEIC Essay
Competition 2016: winner Sherly Koalitas and 1st runner up Hng Zhan Peng
This issue in brief:
Growth amidst External Challenges: Singapores Foreign Labour
In her award-winning entry, Sherly delves deep into the fairly sensitive and multifaceted issue of foreign labour in Singapore.
BEPS Tempest in a Teapot?
What implications do low corporate taxes and rogue companies looking to make a
quick buck have for Singapores economy? Find out more in Zhan Pengs article,
which discusses the global issue of BEPS from a Singapore perspective.

SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

By Sherly Cendana Koalitas

Recent France bombings and Brussels attack put citizens on a pedestal as social tensions run
high and paranoia lead to increasing xenophobia. Singapore too has her own share with the
212 China Bus Workers strike and 2013 Little India Riots. The economics of foreign labour
has always been an integral theme in the Singapore story. Touted by some as a key enabler of
Singapores industrial development and a catalyser of her growth miracle, workers from
neighbouring countries have allowed Singapores businesses to grow and compete on a costbasis even internationally. But to continue this trajectory in the next fifty years, the Singapore
model will have to be driven more productivity gains from capital and technology
advancements.
To tackle productivity stagnation in recent years, the Ministry of Manpower has
progressively tightened the foreign labour market by decreasing the supply through higher
foreign worker levies and lowering the dependency ratio ceiling. Yet, the lack of significant
improvements to productivity suggests that the current market mechanisms are still a step
away.

A more radical approach bring in the auctions

A more radical approach could be to auction foreign worker permits in the same manner as
how Certificates of Entitlement (COEs) are allocated. Under this mechanism, firms
(individuals) will have to bid successfully for various tiers of permit according to labourers
skills levels (classes of vehicles) before they can employ them legally (buy a vehicle).
Assuming a traditional English Auction, the Ministry will set a reserve price for a
predetermined number of biddable permits and the subsequent bidding mechanism will
allocate these permits to the market. Such auction mechanism is similar in nature to the
market-based reform proposed recently by labour economist Giovanni Peri, where firms in
demand for low-cost labour can bid for work permits tied to a temporary visa. As with how
this reform could deter illegal immigration in the U.S, it could work similarly to decrease the
supply of foreign labour in Singapore.
On the surface, this proposal could seem to mend Singapores social fabric and target
productivity through a three-pronged approach:

SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

Firstly, it causes the demand for local labourers to become more wage inelastic. Through
the bidding mechanism, the auction possibly offsets the cost competitiveness of foreign
workers to a larger extent than the levy system. The uncertainty of permit prices makes it
tougher for firms to profit maximize over the long run should they employ foreign labour. A
larger proportion of revenue spent on foreign labour costs, coupled with equivalent or higher
skill levels offered by their substitutes will change the perception of local workers by
employers to be more of a necessary rather than a luxurious utility in nature. The more wage
elastic demand for foreign labour results in an even greater burden of the levy to fall on
foreign labourers, thus promoting greater surplus for employers. While foreign labourers do
not pay this sum per se, they suffer an economic loss attributing from the decrease in
employment opportunities as local employers employ Singaporeans.
Secondly, the increase in foreign labour costs would result in the substitution with local
labour as a rational response by firms. This would pressure businesses to be more costinnovative in their work processes and employ more technology to decrease labour costs over
the long run. This shifts complacent firms out of their inactivity and further strengthen the
push for productivity growth.
Lastly, should these fixed number of auctioned permits be traded freely in the labour
market, foreign workers could have greater mobility amongst employers. A smaller pool
of foreign labourers with a higher bargaining power will increase competition for them
amongst firms, encouraging employers to improve workplace culture and other non-wage
conditions of employment. This further provides the impetus for productivity growth.

Caveats for this rosy proposal

For all these rosy assumptions, I remain cautiously optimistic if the roots of productivity
stagnation can be addressed. The employment-switching auction system falls short because it
attempts to raise productivity across different sectors through a universal solution of
decreasing reliance on foreign labour and strives that increased competition and behavioural
changes amongst employers will deliver the productivity growth. However, the formula for
productivity growth is different for different industries. For example, less bureaucracy in
service-based companies and more recognition for labourers as social capital rather than
economic agents can better breed productivity gains through intangible social-exchanges.
Technological innovations will contribute less to productivity gains for the same servicebased company as compared to manufacturing-based companies. Furthermore, labour
contribution to overall economic output is different for different sectors. Given that
productivity is defined as output per man-hour, the key to raising productivity lies in areas
other than labour that contribute to overall output as well.

SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

Lingering thoughts
Policies taken to increase productivity ought to help companies lower their information costs
incurred in the process of identifying the sources of productivity stagnation. Given the
complexity and the pluralism of its causes, employers may often suffer from information
asymmetry and be unable to devise actionable steps to target root causes precisely. While the
auction system falls short of contributing to this aspect. But to the extent of supplementing
current models and reshaping organisational culture, we should then auction foreign worker
permits on a sector-specific basis as a pilot test.

SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

By Hng Zhan Peng

Base Erosion and Profit Shifting (BEPS) is a global economic phenomenon where tax
authorities over the world experience loss in tax base due to rigid tax code that are unable to
tackle the current globalized and digitized economy. It was estimated that tax authorities over
the world lose more than US$100 to 240 billion of revenue in terms of corporate income
tax1. In response to the loss in tax revenue, OECD countries and G20 have collectively came
up with an Action Plan on BEPS to counter the phenomenon. The Action Plan layouts 15
measures to tackle the revenue loss and since 2013, G20 and other countries have begun to
endorse the Action Plan.
Singapore is not a member of OECD and G20 and have no obligation to ratify and follow the
Action Plan to tackle BEPS. However, the main objective of the Action Plan is to ensure that
profits generated by companies are taxed fairly and this is done by taxing where economic
value and activities are being generated. Hence, this will cause companies to lose incentives
to venture overseas and invest in countries where there are lower and competitive corporate
tax rates.
Singapore is an example of a country with low corporate tax rate and commonly
misconstrued as tax haven, awarding companies with lucrative tax incentives to attract
investments into Singapore. While this certainly helps in attracting foreign investments, it
may not attract truly productive capital projects into Singapore. Rather, it attracts rogue
companies to capitalize on Singapores tax incentives and low tax rates so as to park their
profits in Singapore while no economic value was being created here. Within the Action Plan,
there are many measures to tackle such a situation and this will definitely lower incentives for
foreign companies to invest in Singapore even with all the available incentives. This will
pose a challenge to companies to direct investment capitals to their productive projects in
countries with competitive tax rates and hence exacerbating problems.
Even if Singapore decides to continue our lucrative tax incentives to attract the most
productive capital into our country, Singapore will face expected retaliation by other
countries to fight for the same investment dollar through BEPS Action Plan and expand their
tax regime to potentially impose additional taxes on companies creating genuine economic
value in Singapore, putting a strain on companies future growth and hence affect Singapore
economic growth in the future. Singapore, being a responsible member of the global
community, has a role to play to ensure tax harmonization takes place to ensure every tax
authority is not unfairly deprived of their tax revenue. Singapore should adopt certain

SEIC Essay Competition 2016 Winners Edition

SMU Economics Intelligence Club

relevant Action Plan measures to counter the most pressing issues to the economy at the
moment. In the long run, Singapore should then adopt all the measures in the Action Plan in
line with global tax measures while ensuring that such measures are aligned with Singapores
objectives and national interests.
To illustrate, the current PIC measure of enhanced tax allowances or cash payback for
qualifying activities such as R&D and acquisition of PIC IT and automation equipment has
been attracting all kinds of undesirable parties to defraud the tax authorities. To reduce
lemons, the tax authority imposes stricter conditions and penalties to ensure only genuine
economically productive companies are rewarded with these tax incentives. This is in line
with Action 5 of the Action Plan: Countering harmful tax practices.
Action 5 proposes a formula to cap the amount of tax allowance based on qualifying income
generated by the IP asset. In the long run, the tax authority should also include the formula or
similar caps on qualifying income to reduce lemons while aligning these tax incentives with
macroeconomic objectives and ensuring efficiency in the capital markets. Action Plan on
BEPS should not be seen as protectionism in restricting growth and preventing the allocation
of investment capital worldwide. Rather, this Action Plan reflects the collective efforts of tax
authorities worldwide to protect their tax bases to ensure the well-functioning of governments
in the economy while ensuring that scarce capital flows to where the greatest value could be
created without compromising on substance.
Singapore should closely monitor the effects of BEPS on the global economy and react
positively to ensure we continue to maintain our competitive advantage in attracting high
value capital projects and creating high value economic growth. Behind every problem lies an
opportunity.

SEIC Essay Competition 2016 Winners Edition

Sreya Sanyal (Director, SPEX)

Undergraduate
School of Business
Singapore Management University
ssanyal.2013@business.smu.edu.sg

Nguyen Duong Thuy Uyen (Creative

SMU Economics Intelligence Club

Sherly Cendana Koalitas (Writer) in

collaboration with Ding Sitong, London
School of Economics
Undergraduate
School of Business
Singapore Management University
sherlyck.2013@business.smu.edu.sg

Director)
Undergraduate

Hng Zhan Peng (Writer)

School of Business

Undergraduate

Singapore Management University

School of Accountancy

dtunguyen.2014@business.smu.edu.sg
Singapore Management University
zphng.2012@accountancy.smu.edu.sg