ADDRESSING PRODUCTIVITY FOR SUSTAINABLE GROWTH

Throwing money about is easy, but does not address any of the problems and isn't going to bring back sustainable growth. That requires painstaking and difficult structural changes

- SATYAJIT DAS

Governments have embraced 'spray and pray' economics, throwing money around—large budget deficits or expansionary monetary policies—to restore growth. But long-term prosperity depends on increasing productivity—GDP per hour worked or output relative to total labor and capital inputs. Productivity performance is driven by several forces. Capital—new equipment—allows more production. A better educated and skilled workforce and innovation can improve output. Entrepreneurship facilitates expansion or entry and exit from markets. Competition and trade improves resource allocation, enhancing productivity.

In advanced economies, productivity growth is now below 1 percent annually, lower than the 3–4 percent in the post–World War 2 era and the more recent 2–2.5 percent. Emerging market productivity growth remains above developed countries but is declining.

The fall reflects shifts in industrial structure. Productivity gains in manufacturing are easier through mechanization, automation, mass production, workforce training and better supply chains. But major gains from economies of scale and experience curves are now not repeatable. Henry Ford's revolutionary assembly line was a 'one-off'.

Unlike manufacturing, services are personal, local, not globally traded and less amenable to automation. The non-routine, non-repetitive dynamics of healthcare and aged care mean productivity gains are not easy to achieve. Management consultants notwithstanding, shortening the time needed to diagnose a disease or undertake a medical procedure is difficult.