Investing in Productivity A Model for Enhancing Competitiveness, - - PowerPoint PPT Presentation

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

• 18th Century: Britain overtook Netherland

with a 0.5 percentage point productivity lead

• 19th 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

706 905 1,152 2,413 1,864 6,312 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 2071 2074 2077 2080 LP J$000 (2005 = 100)

Impact of 1%, 3% and 5% LP Growth Over Time Base LP Level = 2010

5% 1% 2060 2035

The Productivity Imperative

Chile Costa Rica Dom Rep Argentina Uruguay El Salvador Mexico Brazil Colombia Panama Venezuela LAC Paraguay Nicaragua Jamaica Ecuador Bolivia Peru Honduras

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 10 20 30 40 50 60 70 80 90

GDP/Capita (% USA) TFP (% of US)

Cross-country Relationship: GDP/Capita & TFP

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

GDP=0.7% Labour Productivity

• 0.9%

Total Factor Productivity

• 0.8%

Quality of Human Capital Quality of Capital Input Capital Intensity

• 0.1%

Employment 1.7%

Sources of Average Real GDP Growth in Jamaica 2001-2010

The trend is for Physical capital stock to grow at 1.56% annually Low relative to many

• ther countries with

growth rates of 4% Physical capital declined since 2008, probably due to uncertainties associated with the global recession. Slowdown in physical capital growth has implications for capital per worker & labour productivity

y = 1.5596x + 99.353 90 95 100 105 110 115 120 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Trends in Physical Capital (2001-2010)

Capital per worker declined 0.45% annually Jamaica experienced sluggish GDP and LP growth because each person at work is not equipped with adequate capital to work with.  Despite growth in the capital stock, capital per worker declined, indicating that investment rate is too low.

y = -0.454x + 97.121 86 88 90 92 94 96 98 100 102 2001 2003 2005 2007 2009

Trends in Capital per Worker (2001-2010)

Contribution of ICT capital to GDP growth trending down 7.5% annually. Means ICT investment negatively impacting GDP growth (A paradox?). Contribution of Non-ICT Capital trending up 13.3%, annually, despite the sharp decline since 2007. Implies a greater problem with declining TFP. Could signal mismatch between physical capital and labour quality.

y = -7.5315x + 122.81 R² = 0.566 y = 13.284x + 150.37 R² = 0.1396 50 100 150 200 250 300 350 400 450 Axis Title

Trends in ICT and Non-ICT Capital (2001-2010)

ICT Contribution Non-ICT Contribution Linear (ICT Contribution) Linear (Non-ICT Contribution)

TFP growth is a key long- run determinant of LP and GDP growth. But TFP growth has been trending down (0.05% annually). Signifying that other factors are offsetting the positive impact of capital investment. Examples - macro policy, low spending on technology transfer and labour quality.

y = -0.0497x - 0.3444

• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0

Trends in TFP Growth (2001-2010)

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 economies Institutions Infrastructure Macroeconomic Environment Health and Primary Education Transition Economies Efficiency-driven economies Higher education and Training Goods Market Efficiency Labour market efficiency Financial market development Technological readiness Transition Economies Innovation-led Economies Business sophistication Innovation

Productivity-Competitiveness Link Analytical Basis

60 50 40 30 20 35 42.5 50 50 50 5 7.5 10 20 30

10 20 30 40 50 60 70

Factor-Driven Transition 1-2 Efficiency-Driven Transition 2-3 Innovation-Driven Basic Requirement (%) Efficiency Enhancers (%) Innovation & Sophistication

Competitiveness Performance by Ranking (11/12)

50 100 150 Institutions Infrastructure Macroeconomic Stability Health and Primary Education Higher Education and Training Good market efficiency Labour market efficiency Financial market sophistication Technologicla readiness Market size Business sophistication Innovation Barbados Guyana Trinidad and Tobago Jamaica Suriname Dominican Republic

Competitiveness Performance by Score (11/12)

1 2 3 4 5 6 Institutions Infrastructure Macroeconomic Stability Health and Primary Education Higher Education and Training Good market efficiency Labour market efficiency Financial market sophistication Technologicla readiness Market size Business sophistication Innovation 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

Investing in Critical Productivity Drivers

• Human Capital Investments

– Increasing the amount of labour is subject to diminishing returns – But increasing labour force quality through training and learning by doing is subject to increasing returns – Skills needed – customer service excellence, problem solving, communication, basic employability, technical expertise and teamwork – Change in overall work ethic.

Investing in Critical Productivity Drivers

• Physical Capital Investments

– Jamaica has a low Capital-to-labour ratio, hence low labour productivity – Capital investments in technology embedded in modern plants, equipment , machinery and IT will raise output per worker (or Capital-to- labour ratio). – IT investments has much greater effect on productivity than other machinery and equipment when properly matched with skills

Investing in Critical Productivity Drivers

Technology and Innovation Investments Objective:

• Increasing TFP by transforming production

systems, processes, methods, structures, etc.

• Focus on things that deliver benefits. Example

total quality management (TQM), Lean, six sigma, clustering and business process reengineering

• Benchmarking and best practices
• The potential for increasing TFP is limitless, even if

factors of production are scarce.

Investing in Critical Productivity Drivers

Productivity-Friendly Policy Investments

• Pay attention to sector shifts from

productive to services – characterized by lower labour productivity.

• Implications for: decent work; wages & living

standards.

• Sector destruction must be creative, a central

planning and resource allocation function

Investing in Critical Productivity Drivers

Productivity-Friendly Policy Investments

• Goods market efficiency – with appropriate

competition policy to ensure: – efficient resource allocation – Responsiveness to supply & demand changes – Sophisticated & demanding buyers – Strong competition among economic actors – Encourages entrepreneurship, innovation & socio-economic progress

Investing in Critical Productivity Drivers

Productivity-Friendly Policy Investments

• Incentives to increase import productivity

(GDP/Import ratio)

• Incentives to encourage complementarity of

physical capital, human capital, technology and innovation

• Incentives to attract FDI inflows that fosters

strong sector linkages as opposed to enclaves