Singapore’s Productivity Paradox: Decline Masked as Stability

Dr Goh Keng Swee built Singapore’s growth model, then warned in 1972 that it would eventually fail us in three specific ways that have already arrived. So we have an economy that keeps growing while Singaporeans keep feeling worse off. I wrote this to trace how we got here, why GDP has stopped telling us the truth, and what an honest restructuring would actually require.

The Limits of More #

Prime Minister Lawrence Wong has certainly inherited a Singapore with major troubles, ones we knew about some 60 years ago. Cost of living tops the concerns of 72% of Singaporeans polled, young couples wait three to four years for BTO keys and real wages have slowed to a crawl. Although our institutions are working hard at managing each of these crises, they are symptoms of a deeper structural problem. Solving them individually – with better housing policy, wage interventions, cost-of-living support – is not going to be enough if the economic model contributing to these issues remains unchanged. So, Singapore must reconsider the shape of its economy itself.

Singapore’s growth model has long been extensive rather than intensive. Our output rises because our inputs do, rather than because we are using our resources more productively. Foreign labour has been the engine of this expansion for decades with non-residents making up roughly 40% of our workforce and being concentrated most heavily in the low-value-added sectors driving headline growth. For a young nation without natural resources, freshly separated from Malaysia, this was a rational bet. We had cheap labour, an enviable location and an openness to foreign capital so we deployed those assets well, making Singapore a haven through which capital could flow, enriching ourselves in the process. The prosperity this generated became the foundation of the economic and political consensus that has held ever since.

However, a script written for a different Singapore, with different circumstances, cannot carry us forward. Doubling down on it will accelerate the problems it was meant to solve. We are no longer a nation that can grow simply by adding more workers. Low-skilled foreign labour continues to sustain construction, marine services and domestic work which are sectors already notorious for low productivity. Each new worker relieves the pressure to innovate, and firms keep throwing bodies at problems that capital and better processes should be solving. Even as we import more workers to prop up headline GDP, Singaporeans are feeling the squeeze as the cost of housing, transport, and services inflate. HDB resale prices rose 9.6% in 2024 alone, nearly double the previous year, and Singapore has the highest cost of living in Asia. Also, every new worker added shares the same finite resources in our nation-state and our infrastructure is feeling the strain. The paradox is clear: GDP keeps climbing, but Singaporeans are seeing less and less of what that growth is supposed to deliver. The world has moved too. Vietnam, Bangladesh and India now offer cheaper labour at scale as global capital has grown more mobile and less loyal. The advantages that once distinguished us are either being competed away or no longer serving us, and the model we built is quietly reaching its ceiling.

Dr Goh Keng Swee’s Warnings #

Back in 1972 Dr Goh Keng Swee had anticipated the dilemma we now face, in a speech at what was then the University of Singapore. As the architect of Singapore’s extensive growth model, Dr Goh warned that the model he had built would run into three problems. The first warning was about dependence. An economy built on foreign capital is an economy whose direction is set elsewhere. Today, we are heavily exposed to the whims of tariff regimes and investor sentiment in equal measure, whether it is a US administration reweighing global trade, or capital simply moving where labour is cheaper. With cheaper labour available elsewhere in the region, and domestic costs rising, our edge as a low-cost, predictable business hub is already thinning.

Dr Goh’s second warning was about limits. A model that depends on adding workers to grow eventually confronts hard constraints of land, infrastructure and public tolerance. The overcrowding we are experiencing is not merely an inconvenience, it is a symptom of a system that grows by adding instead of improving. Adding labour helps increase headline GDP, but it masks the more urgent need to raise productivity per worker. Non-residents accounted for 83,500 of the 88,400 jobs added in 2023 alone and the marginal foreign worker is often absorbed into low-value-added sectors, where each additional hour of labour contributes less to national output than the last. This is the shape of the problem: rather than investing in the capital and capabilities that would lift living standards, we have used immigration as a substitute for productivity. Each new cohort of workers sustains output without raising output per worker which is precisely the dynamic worsening the problems Singaporeans feel most – wage stagnation, housing scarcity and infrastructure strain.

The third warning focused on distribution. Dependence on foreign investment and advertising our labour as cheap meant that the majority of profits generated in Singapore would flow to companies whose owners were not Singaporean. This is what has happened. Foreign firms have used our land, our infrastructure, and our workforce to generate substantial returns. However, their profits have largely been extracted and repatriated. Singapore has absorbed the congestion, the wage pressure, and the strain on public services, but has not received a proportionate share of the wealth created. Dr Goh expected this and believed the model would “be accompanied by increasing, not diminishing inequalities in the distribution of income. This is not a prospect that we can contemplate with equanimity.”

Why We Kept Going #

And yet the model has continued, in large part because we measure its success by the wrong metric. GDP growth remains the government’s headline indicator, but GDP alone obscures the more important question of who benefits. A foreign firm generating a hundred million dollars in Singapore contributes fully to our GDP, but if those profits leave the country and domestic wages stay compressed, ordinary Singaporeans see little of it. A more honest accounting using median wage growth, real disposable income, labour’s share of national output tells a different story. Labour’s share of GDP stands at 44% which is below the levels seen in most advanced economies, and real wages have lagged productivity for the better part of a decade (though the gap has narrowed in the last year). We seem to be optimising just for GDP, when that number quietly hides the inequalities Dr Goh warned us about.

Lessons from 1985 #

So we find ourselves in a tricky position. We are dependent on foreign capital, unable to keep adding foreign labour without straining our physical and social infrastructure, and unable to distribute the gains of growth to the workers producing them. The response cannot be more of the same. The strategy that served Singapore for six decades has reached the limits of what it can deliver. Dr Goh believed that the solution for our problems would be to cultivate “indigenous entrepreneurship, management, scientific and engineering skills” so Singapore would no longer merely refine other people’s ideas, but generate its own. Founding father Lee Kuan Yew also recognised the need for innovation and attempted to transform Singapore into a high-tech, high-value-adding economy. However, his characteristic iron-fist approach was incompatible with nurturing indigenous entrepreneurship because it fundamentally misunderstood how innovation works. As PJ Tham has argued, and as Joseph Schumpeter observed nearly a century earlier, entrepreneurship is by definition rule-breaking and a state that cannot tolerate rule-breaking cannot cultivate entrepreneurship.

The 1985 recession that followed illustrated this. Against the backdrop of a global electronics downturn, unilateral wage-push policy without regulatory loosening produced the worst of both outcomes. Labour costs surged by 40%, foreign capital withdrew, investment collapsed by 40%, and GDP contracted sharply, and by 1985 the crisis was undeniable. The lesson from this was clear. Innovation cannot simply be commanded into existence because entrepreneurship is inherently a game of failure. Most start-ups and ideas do not succeed and we can only arrive at the few that do by tolerating the churn. The best we can do is to create the conditions for such innovation to emerge.

Loosening the Soil #

Instead of doubling down on our extensive growth model, as Mr Goh Chock Tong did in the 90s, we must move towards an intensive growth model where we achieve growth through increased labour efficiency and better capital utilisation instead of increasing the number of inputs to increase output. This necessary pivot requires three shifts: first, we must deliberately create an environment for indigenous entrepreneurship to thrive by reducing regulatory friction and barriers to entry. This should not be done through massive handouts, but using streamlined permitting, reduced compliance costs and clearer rules of the game. Second, we must accept a period of transition where our growth rate temporarily moderates as we reposition our economy. Our massive reserves should help, since we precisely built them to give us the fiscal capacity to absorb the growing pains of such structural transformation. Third, and most importantly, we must accept that many ventures will fail, and loosen the state’s grip where it currently constrains experimentation, especially when it comes to regulatory friction on new firms, cultural intolerance of failure and the reflex to direct outcomes. To be clear, this is not a call for the state to withdraw from the economy, just to withdraw from specific spaces where its presence makes entrepreneurship harder than it needs to be. There may be some weeds, but the soil must be loosened before seeds grow, and the health of the ecosystem matters more than any single plant.

On Reserves, Stability and Transition Risk #

The most common objection to using our reserves this way is a serious one. Our reserves were built by past generations for future ones, to secure them and help them in dire times, not to fund a transition phase for us in the present. Dipping into our reserves this way can feel almost like we are spending an inheritance that is not ours to spend, and it may be against our values. But it is worth asking what we are actually preserving for future Singaporeans. A hoard of untouched reserves in a stagnating economy is not an inheritance so much as a monument to our unwillingness to act. If we do not tackle this issue now, we will simply be deferring these decisions to our future generations as was done to us, except they will receive the same dilemma with the pressure compounded and even less room to manoeuvre. Using our reserves to restructure our economy as a way of preserving and gifting a better future to our descendants would be a more accurate take.

Another related concern is moral hazard. Loosening control could signal recklessness, and that a state willing to absorb transition costs invites resource wastage and failure. However, I think it is imperative to distinguish between tolerating and rewarding failure. What is being proposed is not a bailout culture where the state cushions bad calls. Entrepreneurs still bear their own losses in the form of their capital, their time, their equity. The only difference is that failure ceases to be structurally prohibited and culturally stigmatised. The state should be focusing on absorbing macro risks related to transition costs, worker retraining, sectoral adjustment and reforms to an education system that has, for good reason, prized certainty over experimentation, not the micro risk from firms’ outcomes. The individual would still bear the cost of their bet. The status quo is not free of the waste we fear would arise from entrepreneurial endeavours either. Capital sits idle in GLC-dominated sectors earning stable yet unremarkable returns and talent flows into risk-averse professions. The real choice is not between waste or no waste. It is which waste we prefer: the visible failure of ventures that tried, or the invisible failure of ventures that were never attempted.

Perhaps the most astute objection is that the transition itself carries risks that could unmake what it aims to protect. Investors dislike uncertainty and talent has options, so capital flight and brain drain become a valid concern. Workers displaced today will not automatically be employed tomorrow either. However, the transition to an intensive growth model need not be a shock on our systems, if it is sequenced, sector-specific and strategically planned. The best course of action would be to begin where indigenous entrepreneurship has the greatest upside and the least disruption in spaces like biotech, fintech, deep tech and sustainability. This way, macro anchors remain untouched. Regulatory sandboxes expand rather than dismantle. We can opt for sunset clauses rather than outright repeal. The existing MNC and GLC infrastructure need not be done away with totally or immediately either, space just needs to be created alongside it for younger, home-grown firms to test their ideas. There is precedent for this too. South Korea and Taiwan restructured over decades and their macro anchors held throughout. Gradualism need not be a lack of courage, it can be the discipline that makes courage productive.

There remains a final concern, and it may be the most important. Singapore’s position in the world rests on stability. To be a small nation-state in an increasingly volatile world is to have no room for institutional experimentation that might rattle global confidence. We are a trusted node in an increasingly untrusting world too, and this position must not be jeopardised. To those concerned that yielding control to allow for indigenous entrepreneurship will rock our boat, it is crucial to understand that there is a distinction between two types of stability that should not be conflated. The stability that makes Singapore valuable to the world is macro-institutional. The strength of our rule of law, the discipline of our currency, our diplomatic neutrality and the integrity of our financial system are the bedrock for the confidence the global economy has in us. We will not be making concessions on these by making it easier to permit a startup to sandbox a new product, or by tolerating a higher rate of small-business failure. What is being proposed is microeconomic dynamism within macroeconomic stability, which are complements, and are possible to achieve. Switzerland is a byword for global trust with a stable currency, neutral diplomacy and a rule of law that anchors half the world’s private banking. Yet it is home to some of the most innovative firms in pharmaceuticals, precision manufacturing and finance. They did not have to trade stability for dynamism and nor do we.

The Choice Ahead #

None of this will be easy. Singapore would have to relinquish habits of control and an addiction to foreign wage inputs that have defined it for half a century. But the alternative is decline masked as stability. A slow, quiet erosion of everything our predecessors built for us. I believe Singapore has a lot more to offer the world than just cheap labour and a convenient location. We have talent, discipline, capital and institutions most nations only dream of. What we need is to be bold enough to use them differently. Only by loosening our grip on the old model can we secure, for the generation to come, the happiness, prosperity and progress we were promised.