Tuesday, June 18, 2013

The Power Of Productivity



Conventional wisdom suggests that the poorest countries of the world just need better education and better health to pave the way to a wealthier society, but the evidence would appear to contradict this. Today's wealthy countries did not start out as educated and healthy; instead, these outcomes were the result of having gradually become wealthier countries.

So what does drive wealth? This is where Lewis' in-depth studies of a number of industries across several countries come in. From retail to manufacturing to technology, Lewis examines the rules and states of these industries in countries both rich and poor. Invariably, where competition is weak (mostly through government protection in the form of state monopolies, import tariffs, subsidies etc), productivity stalls.

The productivity variance can be wide even within the same country, with Japan as a great example. Japan's automotive sector, for example, competes globally and therefore has seen (and even led the way in) incredible productivity growth over the decades. On the other hand, Japan's retail sector productivity is a fraction of that in the US. A number of rules protect incumbent mom and pop retailers from competition, including subsidized loans and maximum store sizes. While US productivity growth has at times been led by the retail sector, brutally inefficient retail is part of the reason Japan's economic growth has stalled.

It's also worth pointing out that Lewis found no correlation between education levels and productivity growth. When competition is present, workers appear to be able to learn what they need to learn in order to improve. This is great news, as it suggests poor countries don't have to wait generations to see the fruits of a strong education system. But they do have to change the rules, sometimes counter-intuitively, to allow foreign investment and force their companies to compete (and sometimes fail) against the world's best.

If this topic interests you, I highly recommend the book.

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