The Happy Civil Servant

By TAN Kee Wee

(MediaCorp 938LIVE’s Money Talks, Thursday, 22 October 2009, 7.50 am and 7.20 pm)

A recent survey reveals that Singapore civil servants are one of the happiest workers. And manufacturing workers here are one of the most unhappy.

It’s not just manufacturing workers. Their bosses are equally unhappy. This was revealed by other surveys which showed that many Singapore manufacturers do not expect business to pick up a lot anytime soon.

Worse, the Sing dollar has appreciated some 11% against the greenback since March this year. It makes Singapore manufactured exports less competitive.

There are many reasons why the US dollar is weaker. One is because US policy makers want it that way. A weaker dollar makes US exports cheaper. And US consumers import less. This improves the terrible US trade balance.

In 1934, in the depths of the Great Depression, the US devalued the dollar by about 60%. The current 15% fall in the US dollar, against a basket of currencies since March this year, could only be the beginning.

The dollar may have weakened against the major currencies, but it has been steady against the Chinese renminbi. This is a sore point for US policy makers.

That’s why they are now targeting the Chinese government. The renminbi is the key because most Asian central banks will only allow their undervalued currencies to strengthen with the renminbi.

So how much does the US want the renminbi to strengthen? In 2005, US policy makers calculated that the renminbi must strengthen about 28% to remove China’s trade surplus. Well, the renminbi has strengthened by 20%. Yet China’s trade surplus has doubled.

Clearly, there is no full-proof way of calculating the exchange rate. But let’s try anyway. One of my favourites is the purchasing power parity used by The Economist magazine to compile their Big Mac Index.

It is based on the theory that exchange rates should equalize the price of a McDonald’s Big Mac hamburger, which is sold worldwide.

For instance, if a Big Mac cost RM10 in Malaysia and US$2.50 in New York, then their exchange rate should be, 10 divide by 2.50, which is 4 ringgit to one US dollar. If not, the ringgit is either undervalued or overvalued.

According to the Big Mac Index, the renminbi is undervalued by 49%. It should strengthen to 3.5 renminbi per US dollar. Of course, China will not allow this to happen because of its massive holdings of US dollars.

And the US is unlikely to put too much pressure on China because it depends on China as a creditor. In the end, we will see some strengthening of the renminbi, but not by 49%.

Where does the Sing dollar stand? According to the Big Mac Index, the Sing dollar is undervalued by 15%. It should strengthen to $1.20 per US dollar. Even if the Sing dollar strengthens half way, it’s bad news for the competitiveness of Singapore manufactured exports.

Going forward, manufacturing wages and jobs could face more cuts as their firms reduce costs. This means that manufacturing workers could remain very unhappy.

For our civil servants, a stronger Sing dollar is good. With their salaries largely intact, the goods they buy from abroad will be cheaper. And their holidays abroad will be cheaper.

It looks likely that in the next survey, civil servants will remain the happiest workers in Singapore. And they don’t even need to go to McDonald’s to buy a Happy Meal to make themselves happy.