Productivity, the sum of our ignorance?

Economic content (what the government intends to do) and management content (how does it do) become important factors to be analysed, simultaneously. “Economic Content” should be in tune with the emerging trends in economics to be relevant ; “Management Content” as reflected in micro-economic policies must reinforce the macroeconomic policy of stabilisation of the economy in the short run while fostering a climate for maximum economic growth over the long run.

This takes us back to the pioneering work of Robert Solow, who won Nobel Prize in economics in 1987 for his path-breaking model of economic growth.

Till his work got published, people thought that growth ensued from an accumulation of capital and increase in labour. He introduced “technological progress” as yet another important variable in understanding economic growth – also called ‘Solow’s residual’.

This is now rechristened as the total-factor-productivity growth (TFPG). It encompasses not only the impact of technology changes but also consequences of managerial and organisational innovations. This transition from ‘technological growth’ to TFPG is the first recent emerging trend that has gained currency.

How did the transition materialise?

Management experts posed the question: How do you explain the differences in productivity for the same industry across many developed economies?

How could a French automobile have different productivity levels vis-à-vis American or Japanese automobile manufacturers?

They concluded that the productivity difference was not on account of accumulation of capital (a French car manufacturer was more capital intensive vis-à-vis an American automobile maker), and not due to the paucity of skilled labour or access to technology, but because of managerial/organisational differences. Such differences do account for productivity variations even in an emerging market context.

Both Renault and Suzuki carried out market surveys in India during early 1980s. Suzuki relied on “consumption point” surveys to find that on 90 per cent of the occasions, a car had only one passenger and zeroed on the small car variant while Renault went by the finding that the that the average household size of car owners was around five and zeroed on a “big-car” as the variant .

Maruti Suzuki with its advent of small cars during mid 1980s created history in the Indian automobile sector, confirming the emerging trend of TFPG replacing “technological growth” as the decision variable.

However, macro-economic policies also shape the competitiveness of the nation and their companies. In such a competitive country context, the central/federal government plays an important role in stabilising fluctuations in the economy in the short run and in fostering a climate for maximum economic growth over the long run.

The monetary and fiscal policies are important elements of these short-run stabilisation efforts. Monetary policy stabilises the economy through the adjustment of credit conditions, as reflected in interest rates and credit availability. Fiscal policy, in principle, can use changes in discretionary spending or the tax code to stabilise the economy.

Also, microeconomic policies, often spelt out in budget documents, can reinforce macroeconomic policies. These are policies that support research and development, encourage education and training, or targeted tax incentives for MSMEs and policies designed to make the labour market work more efficiently — such as training programmes or better ITIs to reduce skill gaps are instances of such microeconomic policies. Such spelt out policies give the ‘management content’ of how the government plans to reinforce macroeconomic policies.

Companies compete mostly on the basis of production costs for a certain amount of output. The only way to lower those costs while sustaining and raising workers’ standard of living is to increase productivity, or output per worker. On this cue, let’s check how India’s growth has fared. India’s services sector had been the driver of growth during the last two decades. This lopsided growth model differed from other countries’ experiences where the manufacturing sector absorbed the surplus labour from agriculture sector. In India, only three sub-sectors in the services segment — construction, trade and transport — could absorb the unskilled agriculture labour.

An expansion of the industry sector in the short-term has the maximum ‘output multiplier” effect. Also for an expansion of employment opportunities, the expansion of manufacturing sector is essential.

In the global context, emerging features are summed up by American economist Michael Spence, who won the Nobel Prize in economics in 2001. He summarises the not-so-benign effect of globalisation on developed markets.

Until about a decade ago, advanced economies were moving at a respectable rate of 2.5 per cent and in most of them employment opportunities at various levels of education seemed to be increasing. The last decade, globalisation — the process by which markets integrates worldwide — did not have an equally benign impact. For instance, of the 27 million job opportunities that arose in the US, roughly 98 per cent were in the non-tradable services sector. Germany was the lone exception, which seemed to hold competitiveness edge in the high-end manufacturing spectrum.

Advanced economies are witnessing the jobless growth scenario. Innovation processes seemed to have lost their steam. Advanced economies do not seem to be confident of the full employment situation unless the government expands to absorb the unemployed. Spence laments the loss of competitive edge in semiconductors, IT businesses, pharmaceuticals to India, China and other Asian economies.

Such a lop-sided development has its own flip side. Bigger economies such as India and China would be insulated a bit or may divert themselves to more domestic consumption-oriented economies while others would be adversely affected.

Given the above scenario, economic content of ‘Make in India’ has a high relevance. Are the microeconomic policies in place or being conceived to achieve the above objective? Do they factor in expectations of Indian corporate sector as reflected in pre-budget CII survey? Can Indian corporate managerial and organisational innovations realise the emerging environmental opportunities?

We await answers from the forthcoming government economic policy documents.

The writer is with NCAER. The views are personal

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