27 August 2003

Flashbacks of the Potato Famine

For those who boycott the Straits Times (and rightly so), today's headline screams out "Wage cost burden heavier than in US: Quoting a Perc global survey, Deputy PM Tony Tan tells why it is urgent that costs are brought down through CPF rate cuts".

Everyone knows that Political and Economic Risk Consultancy, Ltd (PERC, for short), is a respected think-tank whose reports are quoted by governments, Alan Greenspan, the International Monetary Fund, and Transparency International. I will prove that this survey should be dismissed with more than a pinch of salt, together with the ministers' mantra about cutting social security.

About Perc

Perc is more known for its studies on international corruption/graft. The organisation conducts surveys on expatriate businesspeople in East and Southeast Asia, and publishes its findings and rankings of countries every half-yearly.

So it's just a survey, you ask? Well, it always looks very scientific and credible if you display the results in numerical form, such as "We give Singapore a 4.2 grade out of 5 on xx aspect of its economy/corruption, etc". Then, everyone gets the impression that there was some quantitative, fact-based measure of corruption in the study, whereas in reality, the study measures the subjective perceptions of a very specific bunch of people.

The right method for the right measure

A perception-based study, i.e. a survey, is appropriate for some measures and not others. Measuring corruption based on 'hard facts' is notoriously difficult. Reports of corruption that has been unearthed are dependent on the resolve of the state to investigate and prosecute corrupt officials. So, relatively 'clean' countries might have more reported cases of corruption than really corrupt countries where graft is already accepted as part of the landscape, and nothing can be done about it...

Hence, corruption is a measure that is best gauged by surveying perceptions of businessmen, especially expatriates, who are alien to the local 'culture of corruption'.

Let's turn to the issue of wage costs. Singapore ranks as 4th highest in 14 countries, in terms of wage costs. Higher than the US and Australia, and only less expensive than Japan, South Korea, and Hong Kong. The nations with the lowest wage cost are India, the Philippines, and China.

Something stinks in the report

It's the appropriateness of using a survey to rank 'wage costs'. Why bother with perceptions when there is concrete, reality-based economic data that is easily available? If we want to ask "Are wage costs too high?", or "Can we rank these countries with respect to wage costs?", the most logical way of finding the answer would be to check the published statistics of each country. What Perc has really found out in their survey, is that Singapore ranks fourth in perception of being a country with high wage costs. NOT that it really has high wage costs.

Let's not get into the issue of whether Perc used expat businessmen from Southeast and East Asia to generate its values for the US and Australia, although it's a legtitimate point to throw at them. If expats in Southeast and East Asia are used to evaluate the region, then the US and Au regions should be evaluated by expats there. Was it done? We have no idea, since unlike other responsible and scholarly think-tanks and journals, Perc does not reveal its methodology or the specifics of its surveys. Hell, even the Straits Times has to reveal some details of its own surveys to look credible!

Getting back on track... While the use of expatriates for a survey on corruption is justiable and logical, we must remember that using them for a survey on wage costs is not reasonable, and it's got to do with the SAME point: being alien to the local culture.

Regardless of the local culture (in the form of the 'culture of corruption), corruption is always wrong. However, the local culture is very important to understanding and properly evaluating wage cost. I suspect Perc has forgotten to take into account the LOCAL cost of living. Wage costs must be adjusted to the cost of living in order to get a true picture of how overpaid a nation's workers are. Not only that, but a respectable cross-national study on wage cost will have to factor in exchange rates and purchasing power parity.

Obviously, Hongkong, Japan, South Korea and Singapore have the highest costs of living in the region. Definitely, the absolute wages will be high. The reverse holds true for China, et al. The question that was NEVER asked was: What is the average wages, expressed in terms of the average cost of living? Yet another question never asked: How do wage costs compare to other costs, like office rent, administration, inventory, investment?

Then, the other question that was NEVER asked was: Is there any currency undervaluation that causes some countries to offer comparatively cheaper wages than others?

Will an expat businessman, an alien, factor all these in, during a simplistic survey? Which, by the way, the question asked was simply "Do you think the wage costs of X country are high?".

Wrong survey, wrong conclusion, wrong remedy

Other economists are starting to complain about the yuan, which they judge to be fixed at 20-40% under its true exchange value.

So, Singapore's ministers want to compete with the low wage costs of China? Adopt an exchange rate devaluation.

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