Wednesday, July 22, 2015

The US, China and the productivity paradox


JULY 22, 2015

In the late 1980s, there was intense debate about the so-called productivity paradox, which is when massive investments in information technology (IT) do not deliver measurable productivity improvements. That paradox is now back, posing a problem for both the United States and China.

Back in 1987, Nobel laureate Robert Solow famously quipped: “You can see the computer age everywhere except in the productivity statistics.”

The productivity paradox seemed to have been resolved in the 1990s, when the US experienced a spectacular productivity renaissance. Average annual productivity growth in the country’s non-farm business sector accelerated to 2.5 per cent from 1991 to 2007, from the 1.5 per cent trend in the preceding 15 years. The benefits of the Internet Age had finally materialised. Concern about the paradox all but vanished.

But the celebration appears to have been premature. Despite another technological revolution, productivity growth is slumping again. And this time, the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.

Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9 per cent.

It actually fell at a 2.6 per cent annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, the US’ productivity renaissance seems to have run into serious trouble.

China is witnessing a similar pattern. Although its government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 — well in excess of the government’s targeted growth rate of 10million. Moreover, hiring seems to be holding at that brisk pace in early 2015.

At the same time, output growth has slowed from the 10 per cent trend of the 33 years ending in 2011 to around 7 per cent today. That downshift, in the face of sustained rapid job creation, implies an unmistakable deceleration of productivity.

Therein lies the latest paradox. With revolutionary technologies now driving the creation of new markets (digital media and computerised wearables), services (energy management and DNA sequencing), products (smartphones and robotics) and technology companies (Alibaba and Apple), surely productivity growth must be surging. As a modern-day Professor Solow might say, the “Internet of Everything” is everywhere except in the productivity statistics.

But is there really a paradox?


Northwestern University economist Robert Gordon has argued that IT- and Internet-led innovations such as automated high-speed data processing and e-commerce pale in comparison to the breakthroughs of the Industrial Revolution, including the steam engine, electricity and indoor plumbing. He maintains that, although these innovations led to dramatic transformations of the major advanced economies — such as higher female labour-force participation, increased transportation speed, urbanisation and normalised temperature control — these changes will be extremely hard to replicate.

Indeed, as taken as we are with today’s revolutionary technologies — I say this staring at my sleek new Apple Watch — I am sympathetic to Prof Gordon’s argument. If US productivity figures are to be taken at anything close to face value — a persistently sluggish trend interrupted by a 16-year spurt that now appears to have faded — it is possible that all the country has accomplished are transitional efficiency improvements associated with the IT-enabled shift from one technology platform to another.

Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true, especially in light of promising advances in biotechnology and online education. But this overlooks a much more important aspect of the productivity-measurement critique: The undercounting of work time associated with the widespread use of portable information appliances.

In the US, the Bureau of Labor Statistics estimates that the length of the average workweek has held steady at about 34 hours since the advent of the Internet two decades ago. Yet nothing could be further from the truth: Knowledge workers continually toil outside the traditional office, checking their email, updating spreadsheets, writing reports and engaging in collective brainstorming. Indeed, white-collar knowledge workers — that is, most workers in advanced economies — are now tethered to their workplaces essentially 24 hours a day, seven days a week — a reality that is not reflected in the official statistics.

Productivity growth is not about working longer; it is about generating more output per unit of labour input. Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.

China’s productivity slowdown is probably more benign. It is an outgrowth of the Chinese economy’s nascent structural transformation from capital-intensive manufacturing to labour-intensive services. Indeed, it was only in 2013 that services supplanted manufacturing and construction as the economy’s largest sector. Now, the gap is widening, and that is likely to continue. With Chinese services requiring about 30 per cent more workers per unit of output than manufacturing and construction combined, the economy’s structural rebalancing is now shifting growth to China’s lower-productivity services sector.

China has time before this becomes a problem. As Prof Gordon notes, there have been long-lasting productivity dividends associated with urbanisation, a trend that could continue for at least another decade in China. But there will come a time when this tailwind subsides and China begins to converge on the so-called frontier of the advanced economies. At that point, China will face the same productivity challenges that confront the US and others.

Chinese policymakers’ new focus on innovation-led growth seems to recognise this risk. Without powerful innovations, sustaining productivity growth will be an uphill battle. China’s recent shift to a slower-productivity trajectory is an early warning of what may well be one of its most daunting economic challenges.

There is no escaping the key role that productivity growth plays in any country’s economic performance. Yet, for advanced economies, periods of sustained rapid productivity growth have been the exception, not the rule. Recent signs of slowing productivity growth in both the US and China underscore this reality. For a world flirting with secular stagnation, that is disturbing news, to say the least.



Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

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