This is the full trancript of the interview with DPM Tharman Shanmugaratnam on April 12, 2013

The Straits Times: Singaporeans are asking how much more of a tightening will take place in terms of the foreign worker inflow, and how will the Government decide when the goal of restructuring has been achieved? Will it be by looking purely at productivity gains?

DPM Tharman: First, what’s our objective? Our objective is to ensure that the proportion of foreigners in our workforce does not keep going up,  year after year after year. We’ve got to keep it at a steady proportion. And we decided in 2010 to go for one-third, to try and cap it at about one-third the workforce. From year to year you may get some bumps especially when the construction sector is surging, for infrastructural needs, you might get it going a little beyond one-third. But over the long term let’s try and keep it at about one-third.

Now, there are sectors and industries which can’t do without foreign workers. Construction is a very good example. The marine sector to some extent. Even some services industries like health care will need foreigners, will need foreign workers. But it’s important that even in those areas  where you can’t find enough Singaporeans to do the jobs, we reduce reliance on manpower. The raw fact of the matter is that the sectors which are most dependent on foreigners are also the sectors with the lowest levels of productivity compared to global leaders and which have the most scope to catch up, to upgrade, to restructure. And we have to do that, because that’s the only way in which local wages will go up over time on a sustained basis. And in fact the same sectors – construction, F&B, some parts of the retail sector – are the ones with not only relatively low levels of productivity but sectors where local wages haven’t moved up enough. In fact they have been quite stagnant at the lower end of the workforce. So we have to make this move. You won’t find enough Singaporeans to come into construction and several other sectors, but you can reduce manpower reliance, upgrade productivity and then our whole economy moves up. That’s our basic objective. But it’s very important how we go about this. Make sure that at the end of the process we still have an SME sector. We must have an SME sector  because it’s not just for economic reasons but because they’re part of the lifeblood of our society. So we’re providing very strong support for our SMEs during this process. They take some of the pain because of foreign worker levies and dependency ratios being tightened. But we’re providing very strong support for any SME that wants to upgrade, whether it’s equipment or software or training of the workers, or even training of the management. Any form of support. And we have to find ways in which large companies can help small companies in this game.

ST: DPM, we’ve seen several rounds of the tightening of the foreign worker policy. Do you see that continuing in the next few years and when will we reach a point where we can say that it’s time to stop?

A: Well, we don’t plan to tighten further but it depends on whether the ratio of foreigners in the workforce starts rising beyond 33 per cent, beyond one-third, and is rising not just for short-term, cyclical reasons but rising for structural reasons. If it keeps going up, then we will have to tighten further. If we see that productivity is still languishing and that not enough effort is being made to reduce manpower reliance in the sectors where it is possible, then we will have to tighten further. So, we make our objectives very clear – reduce manpower reliance and raise productivity (so we) keep the ratio of foreigners in the workforce to about one-third over the long term. And if we achieve that, we won’t need to tighten further.

ST: Why was the decision to take one-third, why was the percentage chosen?

A: We weren’t deciding from scratch. This was decided as part of the economic strategies committee. And we recommended one-third because the starting point was that we were already getting close to one-third. We were at about 32 per cent. And our basic position is, let’s not let it rise continuously beyond that level. This excludes the foreign maids. Let’s not let it rise beyond that level significantly. So we wanted to basically cap it at where we were. If we can in the very long term reduce it below one-third, well, so much the better, but it’s extremely difficult to achieve that in the economy we have because our SMEs, in particular, are significantly dependant on foreign workers in a whole range of sectors.

ST: On hindsight, do you think this process of restructuring should have begun earlier?

A: I think on hindsight it could have begun earlier. We have to understand what happened in the last decade. The bulk of the growth in the foreign workforce took place between 2005 and 2007. And during the period 2005 -2007, we were recovering from a very rough first half of the decade. Very rough not in terms of GDP growth, but very rough in terms of jobs and wage growth for Singaporeans, particularly at the lower end. So a lot of the policy thinking, a lot of the policy mindset was one of creating jobs, bringing unemployment down. It was close to 5 per cent. We wanted to bring it down and we wanted to get a lift in wages for the average worker and the low income worker. In fact, we achieved that. And we achieved that by allowing firms to get the labour they needed in order to be able to take on orders and thereby create demand for Singaporeans as well. So there was a complementarity when you look at the system. When you look at the economy as a whole, there was a complementarity between the foreign workers coming in and more jobs being created for Singaporeans. But there was a problem, because the ease with which labour was made available gave little incentive for firms to upgrade and improve productivity. That’s the first problem. Second problem is that although jobs were being made available and unemployment was coming down –  which was good for households because in a typical household more people were able to get some work, part-time or full-time, at the lower end – but wage levels at the low end, wage levels at the low end,  stagnated. They stagnated in the first half of the decade especially. There was some lift in the 2nd half of the decade but not enough. So that is a concern. If we carry on with that strategy, productivity will remain weak or stagnant and it will be hard to lift wages at the bottom end. So we have to shift course. But there’s always a context to policies and I think you can’t ignore the context of what happened in the first half of the last decade where there was no significant foreign worker inflow – in fact there was a reduction – but conditions were tough for Singapore workers, especiallyecially our low income workers. And we wanted to improve the situation by creating jobs and that’s why we went for allowing companies to grow. But there’s a limit to that strategy and we now have to shift course.

ST: So at what point do you say that the restructuring has succeeded and can stop? Is there a point?

A: Well, we’re now an upper middle income country together with Hong Kong, to some extent Taiwan and South Korea although their income levels are a little lower. Most Singaporeans, if you ask Singaporeans, any broad-based survey, what they like, they’d like better jobs, they’d like their pay to go up over time more than inflation. We’re not satisfied with our current standard of living and quality of life.

Making sure the average Singaporean is able to move up, a good job, paying well and with a good work-life balance. I think that’s a very important objective. And we’re not near that yet. In this decade we want to make a significant improvement, very significant improvement from productivity levels that are about 70 per cent that of the global leaders on average, in some sectors less than half of the global leaders.  I don’t think we can get to 100 per cent in 10 years. It takes a much longer time but we’ve got to get much closer.

ST: Managing the foreign worker inflow, it’s also taken on a political edge. Can I ask you specifically on the banking sector, there is this perception there’s a lot of foreign talent. And I think last year MAS also introduced a scheme to try and encourage banks to build their own local talent. In the financial sector, what kind of levels do you expect? Have we built up enough expertise in the locals to be able to take on senior management in the banks?

A: I think the financial sector and in fact more broadly in the economy, we’ve seen a bit too much of a bulge at the middle end of the workforce. In other words, not those with the sort of top expertise or specialised expertise but the lower end of Employment Pass holders as well as a significant growth in S-Pass holders. So that middle end has grown rapidly. And that’s not satisfactory, which is why we’ve tightened policy for both S-Pass and Employment Pass holders –  more discriminating in terms of their qualifications and their experience and they’ve also got to be paid well enough so as not to depress the pay of Singaporeans. That’s basically the situation in the financial sector as well. At the top end –  we’re a global financial centre, that’s the way in which we are relevant to the rest of Asia and the rest of the world, and you do need people with a very high degree of expertise, people who’ve cut their teeth in other financial centres and are able to be part of winning teams. That’s very important for the Singaporeans in the financial sector. But we have to ensure a level playing field, a level playing field both at the middle end as well as the more senior levels, make sure that Singaporeans are fairly considered and more than just being considered for new hires and new appointments, that Singaporeans are getting the attention they need by way of career development. In other words, when you’re a young Singaporean, be it in the financial sector or elsewhere, your employer must have their eye on you, to see what experience you need, what are the ways in which you can develop your career, what overseas postings would be in your interest. That should be the attitude. The Singapore core is not just a set of numbers. It’s a Singapore core that has to be developed and has to be developed proactively.

ST: What are your thoughts on how we strike this balance between being fair and not, I guess, being perceived as protectionist? And are you looking at any other countries in particular as a model for us to adopt?

A: MOM  (Ministry of Manpower) is studying this very seriously. We need some form of ‘labour market test’ (for employers), make sure it allows us to get the expertise we need, so that you have the right mix of expertise, local and foreign, in our teams. The real competition is not between Singaporeans and foreigners in Singapore. The much larger competition is the competition we’re having with emerging cities and advanced cities, all of whom are in the same game. Even the Chinese cities who 15, 20 years ago were competing in a lower league are now increasingly in the same league in a range of white collar jobs. So that’s the real competition. Very large numbers of qualified and  aspiring workforces out there in other cities that we’re competing with. So we’ve got to make sure that we’ve got strong teams in Singapore with the right mix of foreigners and Singaporeans, and that foreigners must be people with real expertise. I think it’s possible. I think it’s possible to find the right balance. Stay open but make sure Singaporeans are fairly considered, and very importantly, proactively developed in their careers. MAS is serious about it in the financial sector. MOM is serious about it economy-wide. I think we can find the right balance.