Download Productivity Growth in the Developed Economies

Productivity Growth in the
Developed Economies
David Bartlett
Economic Advisor, RSM
Productivity Growth in the Developed Economies
March 2013
Introduction
RSM’s Prospects for the World Economy (Talking Points, January 2013) offers a sober forecast for GDP growth
in the advanced industrialised countries. The overhang of public/private debt and the imperative of fiscal
consolidation raise the threat of long-term stagnation in the developed economies, whose GDP growth prospects
are far weaker than those of emerging markets.
Productivity and Economic Growth
Economists have long recognised the
pivotal role of productivity in national
economic growth. The neoclassical model
of Robert Solow hypothesizes economic
growth as a function of productive inputs
(capital and labour) and technological
progress (measured as total factor
productivity). According to this model,
growth slows as capital investments yield
diminishing returns and demographic
factors limit expansion of the labour
supply. Sustained growth in mature
economies thus hinges on advances in
technology to raise productivity.
A recent, highly controversial article
by the American economist Robert
Gordon, argues that the advanced
industrialised countries have exhausted
their potential for productivity-led growth
(“Is U.S. Economic Growth Over? Faltering
Innovation Confronts the Six Headwinds”,
Center for Economic Policy Research,
September 2012).
According to Gordon, the historical
trajectory of economic growth is the
product of three industrial revolutions.
The First Industrial Revolution (17501830) created disruptive technologies
(steam engines, cotton spinning, railroads)
that catalysed early industrialisation.
The Second Industrial Revolution
(1870-1900) produced even greater
technological breakthroughs (electricity,
indoor plumbing, internal combustion
engines) that spurred the economic
transformations of the 20th century.
The slowing of growth in the Western
economies in the 1970s reflected the
diminishing productivity gains from
earlier technological innovations. By
that juncture, the global industries
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that resulted from the First and Second
Industrial Revolutions (motor vehicles,
home appliances, etc.) had reached
maturation in the developed economies.
The resumption of economic growth in
the 1980s-1990s reflected the impact
of the Third Industrial Revolution,
which featured advances in Information
Technology (personal computers,
Internet, mobile phones, etc.) While these
IT innovations are clearly important,
Gordon maintains they are not nearly
as transformative as the technological
breakthroughs of the previous industrial
revolutions. While hand-held smart phones
represent a major advance over land
line sets, their economic impact does
not approach that of the automobile
(which eliminated dependence on wasteproducing horses) or indoor plumbing
(which removed the need to carry water by
hand). In contrast to the First and Second
Revolutions (whose productivity gains
lasted well into the 20th century), the
productivity spillover of the IT Revolution
has already dissipated. The developed
countries thus face a combination
of declining returns to technological
innovation and powerful economic
headwinds (high debt, aging population,
rising inequality, etc.) that
foreshadow slow growth
for decades to come.
Productivity Trends
in the Developed
Economies
Trend line data on
productivity growth in the
advanced industrialised
countries generally
support Gordon’s
argument.
Exhibit 1 reports changes in
manufacturing productivity in selected
developed countries between 1979 and
2011. Productivity growth stagnated
in a number of developed economies
(Australia, Spain, United Kingdom)
between 1979 and 2000, then rose in the
early/mid 2000s as the benefits of the IT
Revolution took hold. The United States
and Germany show a different pattern; the
productivity boom in the US began in the
1990s, reflecting that country’s status as
a first mover in computer and Internetrelated technologies. Germany enjoyed
robust productivity growth from 1979
until 2007, illustrating efficiency gains in
that country’s world-class manufacturing
sector. France and Italy display weak
productivity performance throughout the
period, indicating persistent structural
rigidities in those economies.
Manufacturing productivity growth
declined in most developed countries after
2007, demonstrating the impact of the
global downturn that precipitated a sharp
contraction of industrial output. Current
data indicates a productivity rebound
in 2010, 2011, and 2012 as the economic
recovery gained traction and Western
companies launched capital investments
Productivity Growth in the Developed Economies
deferred during the recession. But
productivity growth in the advanced
industrialised countries has still not
returned to levels prevailing in the late
1990s and early/mid 2000s, validating
Gordon’s argument that the spillover of
the IT Revolution has dissipated.
Prospects for Increased Productivity
Growth
The experiences of the developed
economies of East Asia provide valuable
lessons on the prospects for boosting
productivity growth in the West.
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guarantor of sustained economic growth.
Japan, which ranks second to the US in
total R&D spending and boasts an R&D/
GDP ratio matching South Korea’s, has
been mired in economic stagnation
since 1990. But comparative data clearly
demonstrates the economic payoff
of productivity-related investments,
especially in high cost developed
countries facing mounting competition
from emerging markets.
Productivity Potential of New
Technologies
As shown in Exhibit 1, the leading
productivity performers among the
advanced industrialised countries are
Singapore, Taiwan and South Korea.
Those countries did not incur the asset
appreciation and debt accumulation that
afflicted Europe and North America during
the pre-2008 period. This relieves the East
Asian developed economies of the burden
of fiscal consolidation and deleveraging
that restrains economic growth in the
West.
Gordon’s work has prompted a debate
over the productivity effects of new
technologies. While these technologies
do not have the disruptive potential of
early innovations like electricity and
automobiles, they do hold significant
promise for increased productivity growth
in the developed economies. Moreover,
many emerging technologies are derived
from previous advances in Information
Technology, indicating that the
productivity gains of the Third Industrial
Revolution have yet fully to dissipate.
The East Asian countries also enjoy
high savings rates and strong education
systems that facilitate investments in
productivity-enhancing technologies. With
a population of 50 million (25th in the
world), South Korea ranks 6th worldwide
in spending on research and development.
South Korea’s R&D spending/GDP ratio is
3.7 percent, surpassing levels in the West
(U.S. 2.7 percent, Germany 2.3 percent,
France 1.9 percent, UK 1.8 percent, Italy
1.1 percent). Taiwan (50th in population)
ranks 10th in R&D spending. Singapore
is noted for its commitment to science,
technology and engineering to generate
the productivity gains needed to compete
with lower cost Asian economies like
China, Thailand and Vietnam.
Advanced Manufacturing: While
manufacturing represents a declining
share of employment in developed
economies, the manufacturing sector
accounts for dominant shares of business
expenditures on R & D in many countries:
90 percent in Germany, Japan and South
Korea, 86 percent in France and 70 percent
in the United States. Manufacturingrelated productivity improvements
also generate spillover to other sectors
of the economy. Recent advances in
manufacturing technology thus offer
substantial potential for broad-based
productivity growth. Examples include
robotics, industrial automation, process
controls and embedded sensors.
A range of factors (political, economic,
social, culture) hinders emulation of the
East Asian model in Europe and North
America. Furthermore, high spending
on research and development is not a
Biomedical Technology: The Information
Technology Revolution created the
foundation for the rapidly growing field
of bioinformatics, driving advances in
genetic mapping, high throughput DNA
sequencing and related applications.
March 2013
Prior innovations in IT also enabled the
progression of telemedicine and remote
diagnostics that is transforming health
care delivery. These biomedical advances
boost productivity by improving the health
and vitality of the active labour force
and extending the productive work span
of citizens in developed economies with
aging populations.
Energy: Renewable energy technologies
(biofuels, geothermal, solar, wind) have
yet to display the rapid progression
of IT. But advances in enabling
technologies (particularly materials
science) raise hopes for breakthroughs
in renewable energy that will speed the
commercialisation of these alternatives
to hydrocarbons. Parallel advances in
conventional energy technologies also
promise to accelerate productivity
growth in the developed economies.
Improvements in recovery techniques
(hydraulic fracturing, horizontal drilling)
have already transformed the natural
gas industry in the United States and
heightened the competitiveness of
American manufacturers.
Conclusion: Human Capital in the
Developed Economies
Full exploitation of the above-cited
technological advances requires a highly
educated, well trained and strongly
motivated labour force. Increased
productivity growth in the developed
economies thus depends on investments
in human capital.
This entails (1) increased access to higher
education, whose rising costs exceed
the financial means of a rising number
of young people, (2) strengthening of
technical/vocational training of new
entrants in the labour force and midcareer individuals needing retooled skill
sets and (3) expanded support of older
workers displaced by the global recession,
whose exit depressed already low labour
force participation rates and whose reentry demands improved work skills.
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