By | RAM SHIVAKUMAR | theprint.in
Productivity, economists of all stripes agree, is the single biggest determinant of a nation’s standard of living in the long run. That the world has been in a productivity funk for over a decade does not augur well. In the US, annual productivity growth since 2005 has averaged 1.3 per cent less than half the annual productivity growth of 2.8 per cent from 1995 to 2004. With the exception of Spain, 29 other developed countries have also experienced sharp declines in productivity growth rates.
The productivity funk is at odds with what we read, hear, and see. The smartphone, for instance, has transformed many aspects of everyday life for a few billion people across the world. Bill Gates has pronounced that “innovation is moving at a scarily fast pace” and Vinod Khosla, the venture capitalist, predicted “the beginnings of a very rapid acceleration in the next 10, 15, 20 years.” Academics Erik Brynjolffson, Daniel Rock and Chad Syverson assert that there is no contradiction between the pessimistic facts described by productivity statistics and the optimistic promises of novel technologies. Both views are legitimate when an economy is in the throes of radical structural change.
Numerous studies have shown that India’s productivity problem is reflected by the substantial disparity in productivity across India’s firms. For instance, analysing India’s manufacturing firms, economics professors Chang Tai Hsieh and Peter Klenow find that the 90th percentile firm is five times as productive as the 10th percentile firm—a greater disparity than is the case in the US and China. Other studies have shown that poor infrastructure, (over) regulation, severe capital constraints, and an inadequate supply of highly trained workers have contributed to low productivity within India’s firms.