Monday, April 26, 2004
It's all about productivity?
There has never been any dearth of people/agencies offering various recipes to promote rapid economic growth in the poorer regions of the world. From the Marxists to the neo-liberals, everyone has had something to offer, though the results have been varied. Even the Marxists now accept that a watered down version of liberalism is probably what works best based on the evidence at hand. It doesnt help their cause that the Chinese cat keeps killing rats without acknowledging its own colour. The McKinsey Quarterly offers its version of the truth in this interesting piece. They believe the vital ingredients missing in most of the earlier recipes for growth have been an emphasis on productivity and a consumer-centric approach.
GDP per capita is widely regarded as the best single measure of economic well-being.2 That measure is simply labor productivity (how many goods and services a given number of workers can produce) multiplied by the proportion of the population that works. This proportion varies around the world—though, interestingly, not by much.
Productivity, however, varies enormously and explains virtually all of the differences in GDP per capita (Exhibit 2). Thus, to understand what makes countries rich or poor, you must understand what causes productivity to be higher or lower. This understanding is best achieved by evaluating the performance of individual industries, since a country’s productivity is the average of productivity in each industry, weighted by its size. Such a micro approach reveals the important fact that the productivity of industries also varies widely from country to country.
This approach yields two crucial insights. First, to understand why some countries are mired in poverty, it is necessary to look beyond broad macroeconomic policies, such as interest rates and budget deficits, and also consider the myriad zoning laws, investment regulations, tariffs, and tax codes that hold back the productivity of industries and thus a nation’s prosperity. Of course, macroeconomic stability is necessary. MGI’s studies of Brazil, India, and Russia show that without it companies concentrate on making money by exploiting the instability rather than by raising their productivity. Yet a stable economy alone isn’t enough to make countries prosper and grow: Japan has had a stable economy for decades but has suffered from ten years of stagnation.
The second insight is the realization that the income level of a country is determined, above all, by the productivity of its largest industries. High productivity in the unglamorous "old-economy" sectors—retailing, wholesaling, construction—is most important, since more people work in them. The fabled high-tech enclaves and financial markets are less so. MGI’s study of rapid US productivity growth in the 1990s found that it was caused by just six industries, including retailing and wholesaling, not by the vaunted "new economy."3 IT investments played a modest role. In India, the fast-growing IT industry has yet to raise the living standards of more than a minuscule part of the population.
GDP per capita is widely regarded as the best single measure of economic well-being.2 That measure is simply labor productivity (how many goods and services a given number of workers can produce) multiplied by the proportion of the population that works. This proportion varies around the world—though, interestingly, not by much.
Productivity, however, varies enormously and explains virtually all of the differences in GDP per capita (Exhibit 2). Thus, to understand what makes countries rich or poor, you must understand what causes productivity to be higher or lower. This understanding is best achieved by evaluating the performance of individual industries, since a country’s productivity is the average of productivity in each industry, weighted by its size. Such a micro approach reveals the important fact that the productivity of industries also varies widely from country to country.
This approach yields two crucial insights. First, to understand why some countries are mired in poverty, it is necessary to look beyond broad macroeconomic policies, such as interest rates and budget deficits, and also consider the myriad zoning laws, investment regulations, tariffs, and tax codes that hold back the productivity of industries and thus a nation’s prosperity. Of course, macroeconomic stability is necessary. MGI’s studies of Brazil, India, and Russia show that without it companies concentrate on making money by exploiting the instability rather than by raising their productivity. Yet a stable economy alone isn’t enough to make countries prosper and grow: Japan has had a stable economy for decades but has suffered from ten years of stagnation.
The second insight is the realization that the income level of a country is determined, above all, by the productivity of its largest industries. High productivity in the unglamorous "old-economy" sectors—retailing, wholesaling, construction—is most important, since more people work in them. The fabled high-tech enclaves and financial markets are less so. MGI’s study of rapid US productivity growth in the 1990s found that it was caused by just six industries, including retailing and wholesaling, not by the vaunted "new economy."3 IT investments played a modest role. In India, the fast-growing IT industry has yet to raise the living standards of more than a minuscule part of the population.
