Economic Insights
Solving the Productivity Puzzle
Solving the Productivity Puzzle<br/>

Solving the Productivity Puzzle<br/>

Predictions on the near-term outlook for the global economy have become harder to make these days, as a tweet can change economic sentiment in a split second. In the longer run, economic growth is unlikely to be influenced by a post on social media, but more by productivity growth, which is in turn determined by factors such as technological progress as well as investments in education, machinery and equipment. 

To achieve sustainable economic growth in the long term, simply injecting more labour and other factor inputs into the economy isn’t an ideal solution, due to their diminishing returns. In a small workplace, work can be done much more quickly when the workforce is doubled from one to two, but the margin is small when employing one additional staff member in a big company. 

At the same time, labour supply, like any other factor of production, has its boundaries. According to a projection by the Census and Statistics Department, Hong Kong’s total labour force is expected to reach a plateau during 2019 to 2022 and decline afterwards, whereas the proportion of elderly persons will increase from 17% of the total population in 2016 to 31% in 2036 and 37% in 2066. 

For an economy facing an ageing population and labour shortages like Hong Kong, a continuous improvement in productivity would therefore be very welcome, as it helps relieve the demographic problem. It can only be a good thing if fewer people are required to produce the same level of, or even more, output so as to maintain the overall competitiveness. Unfortunately, the recent release of productivity data by the Conference Board may suggest this is just wishful thinking.

Total factor productivity (TFP) measures the overall productivity of both labour and capital. It tells how efficiently inputs are being used and is a key determinant of the pace of economic growth in the long run. TFP is based on a model developed by Robert Solow, which made him a Nobel laureate in 1987. Innovation, competition within industries, better resources allocation to more productive sectors, and trade liberalization that allows companies in different places to compete, all serve to boost productivity. Without productivity growth, sustainable economic growth can hardly be achieved. 

Growth in TFP in Hong Kong fell to -0.6% in 2018 from 1.1% in 2017, according to the Conference Board’s Productivity Brief 2019. The movement in one single year could be influenced by fluctuations in business cycles. However, even over a longer time frame, TFP growth was also significantly lower compared with the start of the century. Average annual growth was merely 0.2% during 2010-2017, down from 2.0% during 2000-2007.

In fact, Hong Kong is not alone in seeing slower TFP growth. At the global level, average TFP growth was -0.1% in 2018, compared to 0.1% during 2010-2017 and 1% during 2000-2007. This phenomenon can be observed almost universally regardless of the stage of development of an economy, as both mature and developing economies displayed similar trends (Figure 1). 

But why is productivity growth stagnant in both Hong Kong and the global arena? Shouldn’t technological breakthroughs in the past decades have raised productivity to a great extent and improved our living standards? For example, transferring money between bank accounts can now be easily done with only a few clicks on our mobile phones. Travel websites can suggest hotels and airlines and make reservations within seconds, saving time on consulting travel agents and comparing package catalogues. This would not have been possible in the early 2000s. 

Some argue that the apparently lower productivity growth is because “output” is simply being underestimated, as it does not include the value of free online goods such as search engines, mobile messaging applications and online maps. Without accounting for such output, productivity growth is artificially lower than it should be. Nonetheless, Chad Syverson, Professor of the University of Chicago’s Booth School of Business, disputes this view, with his paper in 2016 offering empirical challenges to this “mismeasurement hypothesis.”

There are some others like Robert Gordon at Northwestern University who think that the recent innovations cannot be compared with those in the Industrial Revolution, such as electricity and the combustion engine, and thus have not radically changed how businesses operate.

I tend to support this latter view that the positive impacts of the recent technological advancements on efficiency gains have been overestimated. Obviously, we have more powerful computers and electronic devices than 10 years ago, but spending additional time on social media or surfing websites aimlessly does little to lift productivity and output. 

While many things are being done in much faster ways, a lot of resources are also allocated to things like filtering scam emails and ensuring cybersecurity which could otherwise be used in more productive work. This “dark side of technology” may have offset part of the efficiency gains offered by technological advancements. 

It also makes sense to expect that a time lag exists between innovation and leaps in productivity. It takes time for companies to explore the best ways to realize the benefits of recent technological breakthroughs. A leap in productivity could actually be not far away. As scientist Roy Amara said: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” 

Of course, this productivity revival is only hypothetical. Boosting productivity should remain among the top policy priorities. More investment in R&D can help. The Hong Kong Government aims to double its expenditure on R&D as a percentage of GDP from 0.73% to 1.5% during its five-year term of office. 

Tax reductions for R&D expenditure as an incentive for the private sector would clearly be welcome. But let’s not forget ways to attract high-skilled talent from abroad and upskilling our domestic workforce, who may need a bit more support than the HK$20,000 subsidy for each applicant under the Continuing Education Fund.

 

Wilson Chong is the Chamber’s Senior Economist. 

He can be reached at wilson@chamber.org.hk

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