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What's Draining Productivity? - Outside View by Nitin Gregory

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What's Draining Productivity?
Feb 6, 2017

We'd all love to increase our productivity- to get more done in the same twenty four hour day. A trick to help eliminate waiting time at ATMs, dentists, and ticket queues would be fantastic! But sometimes we just get stuck in productivity-sucking behavior...like social media (don't get offended just yet).

It is estimated that in the last decade, post the great financial crisis, the world has seen almost no productivity growth. Productivity is the magic sauce that helps create non-linear growth. Without productivity, the journey from hunter-gatherers to mega cities would require multiple 'earth populations' (many more people than currently available). And even then, it might not be possible (internet, space travel etc...). Imagine trying to rebuild a city like New York or Singapore without advanced construction equipment and skilled labour!

We've covered the key components of growth - labour, goods, and capital - earlier. They are necessary for productivity but not sufficient. What models or ideologies have been most successful in history? Is there a silver bullet to encourage productivity? In his audio course, Why Economies Rise or Fall, Peter Rodriguez tries to answer this complex question. The key is to make productivity profitable.

The key to productivity does not lie in a specific ideology or culture but in incentives'. Any system that incentivises productivity will produce good results over the long term. Capitalism and free-markets are tried and tested (The US and western Europe have seen a century of steady productivity increase). But then we also have many examples of 'catch-up growth' in countries that aren't traditionally capitalist - where they have managed a steady increase in their productivity.

A Recipe for Growth

Take the key ingredients - labour, capital, and land. Add a dollop of political stability. Watch the pot. Stir (government regulation) only when necessary to ensure there are no lumps (monopolies, unfair practices, etc). Allow the ingredients to mix into this delicate soup of self-interest and free markets. They will blend together and create the magic sauce of productivity.

Addendum: A gust of wind (recession) is liable to blow out the fire (animal spirits/confidence). Keep a flint in arm's reach.

A Hole in the Pan

The pan may develop holes over time. When that happens, the ingredients will not interact to provide growth. Common causes of holes include corruption, cronyism, speculation, and protectionism.

Let us discuss these further.

If there is corruption, it's usually driven by excessive regulation or lack of enforcement. For example, Mr A provides a TV service, but he is not registered as a company. He avoids the cumbersome and complicated procedure of registering, adhering to standards, and filing taxes. He has also found a way to avoid being caught (bribery). Mr A is competing with the established DTH and digital TV service providers. He can provide a customised channel package at a lower price than the established players.

The established players are trying to win customers through improved productivity. Better products, better customer service, etc. Yet informal player has successfully undercut their efforts. And that's because the established players have to conform to burdensome regulations and procedures. This is a classic case of incentives not working to improve productivity. The focus is on evading the regulations and not investing in products or process improvements. The incentives are driving people to engage in unproductive behaviour. A 1998 IMF working paper on corruption recommended reducing the 'demand for' and 'supply of' corrupt acts.

The behaviour described above would dissuade genuine players from competing. It will prevent free-markets from generating productivity and delivering those benefits to the consumer. The GST bill hopes to create a single tax rate. A simplified and common tax structure has the potential to incentivise producers to become more efficient.

Now, some economies have reached the technological frontier. Here, traditional investments become hard to find and speculation becomes rife. Japan in the late 80s and the US in 2000-07 are examples of economies driven by speculation - which is unproductive. Leveraging to buy and flip a house has no productive output.

More recently we are seeing cases of protectionism and nationalism - like Brexit and the recent US elections. The previous two cases (corruption and speculation) show how certain economic choices can hamper productivity. Protectionism is the outcome of a political choice. It can have far-reaching effects on the productivity growth trend. How do protectionism and nationalism slow productivity? What's their economic impact? What is a possible solution to productivity drains? Coming soon...

This column is authored by Nitin Gregory. Nitin, who graduated from IIM-Calcutta, is currently pursuing a finance role with an automotive major. He has a deep interest in Macroeconomics and pens a blog at Gregonomics.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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