Investing in Productivity A Model for Enhancing Competitiveness, Sustainability and Economic Growth Presenter: Charles Douglas, Ph.D.
Presentation Outline 1. The Productivity Imperative 2. Understanding Productivity: Key Issues & Implications 3. Productivity Performance in Jamaica 4. The Productivity-Competitiveness Link 5. Comparative Competitiveness Performance 6. Investing in Critical Productivity Drivers
The Productivity Imperative • Productivity is fundamental for Jamaica to: - Compete in domestic and foreign markets - Attract foreign direct investments (FDI) inflows - Continuously grow its market shares - Sustain reasonable economic (GDP) growth rates - Achieve rising material and social welfare - Combat inflation - Generate employment & Reduce poverty and - Realize the lofty goals of Vision 2030.
The Productivity Imperative – Rising productivity a pre-condition for competitiveness – Leading countries in terms of (GDP/capita) have consistently been the productivity leaders 18 th Century: Britain overtook Netherland with a 0.5 percentage point productivity lead 19 th Century: USA overtook Britain with a 0.8 percentage point lead
The Productivity Imperative • Decomposition of Jamaica’s GDP (2004) indicates the following Contributions: – Labour accumulation = 7% – Labour quality = 8% – ICT capital accumulation = 26% – Non-ICT capital accumulation = 41% – TFP = 18% • Note: For developed economies TFP accounts for 30-50% of GDP growth.
The Productivity Imperative Impact of 1%, 3% and 5% LP Growth Over Time Base LP Level = 2010 18,000 16,000 LP J$000 (2005 = 100) 14,000 12,000 10,000 5% 8,000 6,312 6,000 4,000 1% 1,864 2,413 2,000 1,152 905 706 0 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 2071 2074 2077 2080 2060 2035
The Productivity Imperative Cross-country Relationship: GDP/Capita & TFP 40.00 Chile 35.00 Argentina 30.00 GDP/Capita (% USA) Costa Rica Panama Uruguay 25.00 Mexico Venezuela Dom Rep Colombia 20.00 Brazil Ecuador LAC Jamaica 15.00 Paraguay Peru Nicaragua 10.00 El Salvador Bolivia 5.00 Honduras 0.00 0 10 20 30 40 50 60 70 80 90 TFP (% of US)
Understanding Productivity - Key Issues & Implications • Productivity is the efficiency and effectiveness with which a firm, industry, sector or economy transforms inputs into outputs. • The mechanism by which inputs are transformed into outputs is called a Production Function (PF) . • A simple PF (Robert Solow) can be represented as: Y = f(L, K) A Where: Y = output of goods or services L & K are labour and capital inputs
Understanding Productivity - Key Issues & Implications Several PFP & TFP can be derived from (1): 2. Y/L = Labour Productivity (LP) or output per worker 3. Y/K = Capital Productivity (KP) 4. Y/f(L,K) = A = TFP 3. K/L = Capital/labpour ratio, capital/worker or capital intensity.
Understanding Productivity - Key Issues & Implications • Eqn. 4: Implies, given fixed amounts of inputs (L&K), the amount of output (Y) produced is determined by TFP (technology, innovation, systems, practices, processes, organization, structure, sector shifts, quality of inputs, policy environment, infrastructure, etc). • Recall that TFP can account for as much as 30- 50% of growth in output (Y).
Productivity Performance in Jamaica Sources of Average Real GDP Growth in Jamaica 2001-2010 GDP=0.7% Labour Employment Productivity 1.7% -0.9% Total Factor Capital Intensity Productivity -0.1% -0.8% Quality of Human Quality of Capital Capital Input
Trends in Physical Capital (2001-2010) 120 The trend is for Physical capital stock to grow at 115 1.56% annually y = 1.5596x + 99.353 Low relative to many 110 other countries with growth rates of 4% 105 Physical capital declined since 2008, probably due 100 to uncertainties associated with the global recession. 95 Slowdown in physical capital growth has 90 implications for capital 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 per worker & labour productivity
Trends in Capital per Worker (2001-2010) 102 Capital per worker declined 0.45% annually 100 Jamaica experienced 98 sluggish GDP and LP y = -0.454x + 97.121 growth because each 96 person at work is not equipped with adequate 94 capital to work with. 92 Despite growth in the 90 capital stock, capital per 88 worker declined, indicating that investment 86 rate is too low. 2001 2003 2005 2007 2009
Trends in ICT and Non-ICT Capital (2001-2010) 450 Contribution of ICT capital 400 to GDP growth trending 350 down 7.5% annually. Means y = 13.284x + 150.37 300 Axis Title R² = 0.1396 ICT investment negatively 250 200 impacting GDP growth (A 150 paradox?). 100 y = -7.5315x + 122.81 Contribution of Non-ICT 50 R² = 0.566 Capital trending up 13.3%, 0 annually, despite the sharp decline since 2007. Implies a greater problem ICT Contribution with declining TFP. Could Non-ICT Contribution signal mismatch between Linear (ICT Contribution) physical capital and labour Linear (Non-ICT Contribution) quality.
Trends in TFP Growth (2001-2010) 1.0 TFP growth is a key long- run determinant of LP and 0.5 GDP growth. But TFP growth has been trending 0.0 down (0.05% annually). Signifying that other -0.5 factors are offsetting the -1.0 positive impact of capital y = -0.0497x - 0.3444 investment. -1.5 Examples - macro policy, low spending on -2.0 technology transfer and labour quality. -2.5 -3.0
Trends in Factor Contribution to GDP 6.00 4.00 2.00 - (2.00) (4.00) (6.00) GDP growth TFP Contribution Labour Contribution Labour Quality Contribution Non-ICT Contribution ICT Contribution
Productivity Performance in Jamaica Main Message – Over the decade, sluggish GDP growth recorded (0.7% per annum). – Resulting from underperformance of LP, C/L ratio, labour quality, ICT and Non-ICT capital and TFP. – In particular, capital per worker has been trending in the wrong direction. Therefore, labour productivity has been largely negative. – Not a good performance
Productivity-Competitiveness Link 2 Propositions : • Given the underperformance of Jamaica’s productivity indicators, it should not be a surprise if its competitiveness indicators underperformance also. • Fundamentally, productivity growth is central to competitiveness of the Jamaican economy, its sectors, industries and firms.
Productivity-Competitiveness Link • Competitiveness is concerned with enhancing the capacity of firms, industries, sectors and countries to produce and sell goods and services in domestic and foreign markets at prices and quality that ensure long-run viability and sustainability. • Importantly, countries compete through its firms, industries and sectors. If these are declining, competitiveness is at risk.
Productivity-Competitiveness Link Factor-driven Efficiency-driven Transition Transition Innovation-led Economies Economies Economies economies economies Higher Business education and Institutions sophistication Training Goods Market Infrastructure Innovation Efficiency Macroeconomic Labour market Environment efficiency Health and Financial Primary market Education development Technological readiness
Productivity-Competitiveness Link Analytical Basis 70 60 60 50 50 50 50 40 50 40 42.5 30 30 35 30 20 20 20 10 10 7.5 5 0 Factor-Driven Transition 1-2 Efficiency-Driven Transition 2-3 Innovation-Driven Basic Requirement (%) Efficiency Enhancers (%) Innovation & Sophistication
Competitiveness Performance by Ranking (11/12) Institutions 150 Innovation Infrastructure 100 Business sophistication Macroeconomic Stability 50 Market size Health and Primary Education 0 Technologicla readiness Higher Education and Training Financial market Good market efficiency sophistication Labour market efficiency Barbados Guyana Trinidad and Tobago Jamaica Suriname Dominican Republic
Competitiveness Perform ance by Score (11/12) Institutions 6 Innovation Infrastructure 5 4 Business sophistication Macroeconomic Stability 3 2 1 Health and Primary Market size 0 Education Higher Education and Technologicla readiness Training Financial market Good market efficiency sophistication Labour market efficiency Barbados Guyana Trinidad and Tobago Jamaica Suriname Dominican republic
Competitiveness Performance Main Message • Jamaica’s firms, industries and government need partnership to reach Efficiency Enhancement (stage), while paying attention to exceeding the Basic Requirements. • The strategy must emphasize productivity enhancement with emphasis on technology & innovation as complementary drivers.
Investing in Critical Productivity Drivers Strong complementarities between the following four investments or productivity drivers: 1. Human Capital 2. Physical Capital 3. Technology & Innovation 4. Productivity-Friendly Policy
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