By Gita Bhatt*
“Productivity isn’t everything,” Paul Krugman wrote in his 1990 book, The Age of Diminished Expectations, “but in the long run it is almost everything.”
Productivity is a foundation of prosperity. The only way a country can raise its standard of living sustainably is to produce more with existing or fewer resources. You cannot do that without improving productivity. It’s that simple.
Everything else about productivity is surprisingly complex, however. It is difficult to explain, difficult to measure, and, as the past couple decades show, difficult to improve.
We know that productivity must play a more important role in driving sustained growth as our societies age. But there’s no consensus on how to reverse the broad slowdown in productivity growth seen across almost all countries over the past 20 years.
Especially vexing is the sluggish growth of what economists call total factor productivity—a way of measuring how efficiently businesses turn capital and labour into output—the part that basically captures innovation and technology.
Slower gains in total factor productivity account for more than half the deceleration in economic growth since the global financial crisis, IMF analysis shows. Another decade of weak productivity growth could seriously erode living standards and threaten financial and social stability.
Economic dynamism
This issue of Finance & Development magazine brings together leading researchers to help explain the withering of productivity gains, how to counter these trends, and how to spark economic dynamism.
Yale economist Michael Peters sets the stage by delving into the causes of slowing productivity growth in the US. Declining dynamism in the world’s largest economy threatens to reverberate around the globe. Greater immigration to offset a shrinking workforce and stronger competition rules to encourage innovation by smaller, younger, hungrier enterprises could be part of the solution, he concludes.
These small companies can drive productivity gains, writes the University of Chicago’s Ufuk Akcigit, who explores why increased US spending on research and development isn’t necessarily boosting productivity. He shows how small firms are more innovative relative to their size, suggesting that they use R&D resources more efficiently. As companies grow and dominate their markets, they often shift to protecting their market position, rather than fostering innovation.
But while innovation is exactly what’s needed to revive productivity growth, it is not sufficient on its own. New technologies and digital transformation, notably artificial intelligence, have the potential over time to underpin a major surge in productivity, writes Nobel laureate Michael Spence. For AI to achieve its full economic potential, however, it must be accessible to all sectors of the economy, and to companies large and small, he notes.
Policies matter, too. Here our contributors suggest that measures should encourage more effective reallocation of resources away from low-productivity firms and support smaller businesses and start-ups—not just large incumbents. This could include targeted tax credits, grants for early-stage innovation, workforce retraining, and policies that encourage competition and reduce barriers to entry for new players.
Understanding productivity growth more fully is crucial because it plays such an outsize role in economic growth—which, as Daniel Susskind of King’s College London writes, also demands a renewed approach to help improve people’s lives. Ultimately, as Nobel laureate Edmund Phelps writes, a productive society should allow people to enjoy “mass flourishing” from the grassroots up.
There is much more to explore in these pages. I hope these articles stimulate fresh thinking and further the debate.
Gita Bhatt is the Head of Policy Communications at the IMF and Editor-In-Chief of Finance & Development Magazine. This article was originally posted here.
24 Comments
How do you write an entire article on productivity and not mention exports. Long-term productivity and innovation outcomes are well-reflected in the economy's export metrics, particularly for a small country like ours.
The fact that total exports make up only a-fourth of our GDP, which is the second lowest in the OECD and even less than Senegal and Solomon Islands (for reference just in case someone wanted to bring up tyranny of distance as an excuse).
Productivity needn't apply only to exports ... the parlous state of our ailing healthcare sector points to the desperate need for an overhaul to drive productivity ... pure and simple , as a nation we need to introduce true competition : healthcare / energy / kiwirail / Air NZ / banks / construction & supplies / insurance / banking / supermarkets ... we are a nation bereft of competition ... and that would boost productivity , plus give citizens a far better & cheaper cost of living ...
The current lack of GPs would suggest otherwise. Workforce issues in primary health care were being talked about 20 years ago, but nothing was done to support the sector. Over the last five years or so I was advising my students to take the money and working conditions on offer in Australia so they could repay their student loans when they graduated.
Arguably we could allocate our health dollars more effectively, but there is no escaping the fact that we are not paying our health workers enough to attract and retain them. Recent actions by ACC, and the slashing of disability sector funding, for e.g. are only going to exacerbate the issues.
I agree with your theme - competition improving productivity. But squeezing the finances for a service can lead to an inadequate service. There is a reason people who can afford it travel business or first class. Auckland buses would be more productive if they removed seats or replaced the unholstered seats with sheet metal but having endured NY's graffitti, crime and cockroach infested buses 40 years ago I much prefer AT.
Specifically my wife endured and survived cancer - before every chemotherapy session she had a 30 minute talk with the cancer specialist. A time and motion expert would cut the consultation times and they would be wrong. That chat gave my wife the courage to endure aother session. Never let ignorant health administrators decide what is necessary.
Competition between a range of services makes sense. NZ may need more competition in its supermarkets but in Auckland there is a choice of quality -v- price options. That's how it should be.
Here's an idea I find intuitively appealing:
As we have become more productive, more credit is made available, essentially meaning that productivity gains ultimately just go towards more debt servicing.
The futurologists that predicted we would all be working less thanks to increased productivity didn't consider the almost infinite capacity of the finance and real estate industries to soak up all that extra wealth.
For 200 000 years growth with respect to humans was something children did. Then came the fossilised energy burning era and we developed this branch of human social engineering called economics. Perhaps it was a reinvention of theism post enlightenment? Economics told us about the importance of maintaining this now overgrowth in human endeavour that's collapsing life support systems on our planet.
After the burn has run its course and Earth has become a depleted wasteland, maybe we'll read about this obsession with infinite consumption and productivity growth and recognise it for the futile ideology it is? Or maybe we'll have developed warp speed space travel with cosmic radiation shielding?
If were to live long enough to collect a bet, I know which outcome I'd have my money on.
Groan. How do we measure productivity? We measure labour and capital productivity. Multi-factor productivity combines the two.
So, what is labour productivity?
Here's how it works... the stats nz folks measure GDP(P) at the industry level. GDP(P) is basically sales minus non-labour operating costs (surplus). To get labour productivity, you divide that surplus by the total hours worked in that industry.
For example... the NZ construction industry had sales minus non-labour operating costs of $25bn in the year ending June 24. Total hours worked in construction were 422 million. So, labour productivity is $25,000M / 422M hours = $59 per hour. Great stuff. You can see the different industry figures here and our average figure, which is calculated by adding up all the industry surpluses and dividing by total hours worked. Check out our most productive workers (clue: they sell houses).
Capital productivity is similar to the above but is based on investment rather hours worked.
You might be starting to smell a rat here, right? Yes, the numerator used to calculate productivity is basically operating surplus. So, overall productivity goes up when industries overall make bigger profits. Now, what does it take for all companies to make a profit at the same time? Yes, it relies on a surplus amount of cash being available - someone has to be printing new money and pushing it into the economy.
And, that my friends, is why productivity went sky high from 2000 to 2008 across the world - because banks were printing money like crazy as the private sector got into huge debts. All of that juicy bank credit flowed from borrowers, into the economy, and was gathered up as profits. It's also why productivity stalled in most countries from 2009 onwards - most advanced economies had maxed out on private debt. You can see this very clearly in NZ.
Is it just me being a grumpy old dinosaur, or has most of the innovation of the internet age not really contributed much of anything genuinely productive to the world? Mostly it seems to be repackaging the existing stuff to try and squeeze a bit more out of consumers and concentrate the money with the corporates.
Maybe it is classic Karl Marx: Class is determined by who owns the means of production.
Your are a grumpy old dinosaur. I've only lived 20 years in NZ and its productivty has been poor with GDP per capita growth low by international standards. As a nation we are in decline. But on the other hand the entire world has massivley improved. As a retiree I'll live another 4 years longer. I talk to my sister in the UK for nothing but 40 years ago we exchanged aerograms monthly. Even on a pension I can afford to visit family in Europe whereas when I started work in 1970 there was no way an average Briton could afford a trip to NZ just to be a tourist. A hammer costs much the same as it did 50 years ago but average real incomes have multiplied by a factor of maybe five. Happy to dispute that factor of five but for millenia pre-industrial revolution that factor was 1.001 if you were lucky. Save your grumpy old dinosaur remarks for music and art - negative productivity there.
You actually do not need productivity growth to maintain an economy. If you do not have a growing population due to immigration you do not need a growing economy.
Hovering around 40USD per hour. https://figure.nz/chart/yjaFuKVEo3QhdUqF-F2qJZapJzCFlI9zj
One way to increase productivity would be less landlords and more tradesmen. Might I recommend "Georgism".
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