Global Productivity: Drifting into Crisis

Shrinking Productivity Growth Is Defining Challenge for Companies and Countries

News provided by

Jun 18, 2015, 12:00 ET

NEW YORK, June 18, 2015 /PRNewswire/ -- A decade-long global decline in productivity growth threatens future competitiveness, profitability, wages, and living standards in both mature and emerging economies, according to a new report published this week by The Conference Board. Prioritizing Productivity to Drive Growth, Competitiveness, and Profitability tracks the course and impact of this looming crisis, one that has gone largely unnoticed and clearly highlights the many challenges of obtaining productivity gains from the flood of technologies available to organizations.

While exacerbated by the 2008/2009 recession, the roots of the global productivity challenge are deeper and more varied, and the slowdown has accelerated in many economies—including the United States—in recent years. Worldwide, growth in labor productivity (output per worker) has fallen moderately, from an average of 2.6 percent per year in 1999–2006 to 2.4 percent in 2007–2014. This obscures, however, a far more dramatic decline in Total Factor Productivity (TFP) growth—a more precise measure which combines the effects of improvement in efficiency and technology and innovation. Global TFP growth collapsed from an average of 1.3 percent in 1999–2006 to just 0.3 percent in 2007–2014. Over the next ten years, The Conference Board projects TFP growth to average an anemic 0.5 percent annually.

"A detailed analysis of different metrics since the mid-2000s shows the primary problem with productivity is not inefficient workers," said Bart van Ark, The Conference Board chief economist and a co-author of the report. "Rather, companies and countries appear increasingly unable to translate investments in technology and innovation into timely gains in output."

According to the report, productivity growth needs to be strengthened by as much as 60 percent in the next ten years to achieve the same growth levels as before the crisis. "The labor supply in many economies will soon start shrinking—meaning any gains in GDP must come from increased productivity alone," said Abdul Erumban, Senior Economist for Global Outlook and Productivity Research, and a co-author of the report. "If not reversed, today's troubling productivity trends will in the decade ahead grow into a millstone around the necks of global economic growth, living standards, and corporate profits alike."

Putting Productivity First
In addition to surveying macroeconomic impacts on dozens of major economies, Prioritizing Productivity breaks down impacts by industry in the United States and offers a guide for businesses navigating the productivity challenge. Supporting reports present detailed datasets and implications for specific functional roles such as Chief Financial Officers and Chief Human Resources Officers.

"Ultimately, a return to robust global productivity growth must start with decisions made by individual companies seeking to advance their competitive standing," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board and a co-author of the report. "In fact, TFP growth is a key driver of profitability over which firms have the most direct control, in contrast to market size or labor costs. Now more than ever, a focus on productivity will be essential to mitigating cyclical and structural headwinds, and seizing the potential of positive business conditions."

The report outlines a strategy for companies to catch up with and expand the "productivity frontiers" of the businesses they are in, based around four key principles:

Understand that workforce matters most. Human capital advantages—in particular, continuous skills enhancement and high employee engagement—are strongly and positively correlated with productivity.
Realize that innovation isn't free. To translate new technology into enhanced productivity, a company must build an innovation culture. This requires higher investment intensity not only in human capital, but a range of intangible knowledge-based assets: R&D, software and data, business organization, marketing and brand capital.
Let management lead productivity. Research has found a strong relationship between systematic management practices—including clear target-setting, performance tracking, and rewards for high performance—and productivity growth.
Accept that competition will spur productivity. Intense competition fuels investments in productivity-enhancing measures that speed up adoption of technology, innovation, and improved work practices. Companies must avoid complacency and continuously assess their competitive and regulatory environments for changes that can be turned from risks into opportunities.

Local Trends, Global Threat
The drastic downshift in productivity growth in the 2007–2014 period was a worldwide phenomenon experienced in nearly every major economy. But each faces unique challenges in turning around its productivity trends—and positively impacting the global outlook. Among the mature economies:

The United States saw average TFP growth fall from 1% in 1999-2006 to 0.2% in 2007–14, where it is projected to stay through 2025. In terms of output per hour, the U.S. workforce remains by far the world's most productive. But growth in business sector productivity is now at its lowest levels since the 1980s (or 1960s excluding recessions). The U.S. led the world in adopting information and communications technology (ICT) starting in the 1990s; to approach that era's fast TFP growth again will depend on smarter investments in the human capital and related intangible assets needed to best exploit coming innovations.
In Japan, average TFP growth fell from 0.7% in 1999–2006 to 0.1% in 2007–14, but is projected to return to 0.7% in 2015–25. As the aging and shrinking of Japan's labor force accelerates, productivity growth will become increasingly critical, and dependent on investment. Fortunately, the current reform environment points to a restructuring of the weakly performing Japanese services sector that will likely support strengthened TFP growth over the coming decade.
In the Euro Area, average TFP growth fell from 0.4% in 1999–2006 to −0.4% in 2007–14, and is projected to recover to 0.3% in 2015–25. Slow uptick in ICT utilization and labor hoarding in several European economies, led the Euro Area's labor productivity relative to the U.S. to decline from 84% in 1999 to 75% in 2014. The gap is likely to narrow slightly in the next decade as Europe's tighter labor markets encourage investment in technology and innovation. More substantial gains in TFP will depend on further integration of fragmented European markets, as well as improved management and organizational approaches.

Until recently, disappointing productivity growth in the advanced economies might have been offset by explosive gains in less developed countries as they introduced technology already proven and often "borrowed" from elsewhere. However, the limits of this catch-up effect are rapidly being reached; while they still average faster labor productivity growth than their mature counterparts, the major emerging economies are increasingly facing serious impediments of their own:

In China, average TFP growth fell from 4.4% in 1999–2006 to 2% in 2007–14, with a further drop to 0.9% projected for 2015-25. As The Conference Board examined in an earlier report, The Long Soft Fall in Chinese Growth, rapidly declining returns on the use of capital have left China at a crossroads as it begins to transition toward a more consumer- and services-driven economy. Market reforms that encourage a more efficient allocation of investment will be crucial for keeping TFP growth positive over the next decade.
In India, average TFP growth improved from 1.3% in 1999–2006 to 2% in 2007–14, but is projected to retreat to 0.9% in 2015–25. Indian productivity growth has been hampered over the past decade by supply-side constraints, including a rigid labor market and limited infrastructure, as well as the presence of a large informal sector. With China facing growing pains after a generation of headlong state-directed growth, India has the opportunity to step into the breach if it is able to appreciably strengthen manufacturing productivity.
In Brazil, average TFP growth was unchanged at −0.4% in both 1999–2006 and 2007–14, but is projected to turn positive to 1.1% in 2015–25. Productivity has failed to keep up with Brazil's rapid population growth, stymied by high payroll taxes, lack of innovation, and slow improvement in worker skills and management practices. But the future looks brighter, with investment poised to recover and catch up to other major emerging markets.
In Mexico, average TFP growth fell from −0.3% in 1999–2006 to −1.9% in 2007–14, but is projected to turn slightly positive to 0.3% in 2015–25. Like India, Mexico's productivity has been weighed down by a large (and growing) informal sector; like Brazil, its policy environment has been slow in adapting to rapid economic development. A reversal of recent TFP declines is likely, however, as ongoing reforms in major product markets—including energy and telecommunications—begin to pay off.

For complete details:
http://www.conference-board.org/productivity-competitiveness/

Report: Prioritizing Productivity to Drive Growth, Competitiveness, and Profitability
(Research Report R-1580-15)
By Bart van Ark, Ataman Ozyildirim, Elizabeth Crofoot, Abdul Erumban, Prajakta Bhide, and Gad Levanon

For complete analysis of global, regional, and national data, see Productivity Brief 2015.

About The Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

SOURCE The Conference Board