Sunday, November 16, 2014

Productivity gains: A Necessary condition to boost economic growth

The average rate of economic growth in the last 50 years (1964-2014), has been 3,8%, and half of it because of productivity increases, with information technology playing a key role since the mid nineties, to recover productivity trend up from the falling direction since the seventies (McKinsey Global Institute (MGI)September, 2014). The issue of productivity has been a main concern for economist, although not all of them have focus it, beyond the orthodox approach based on good (free markets)economic policies, rules instead of discretionary decisions, strong institutions ,markets flexibility ,market competition and openness to world trade. However, recent research done by the MGI, gives new clues about what It may be missing to improve the understanding about how to get more productive economies, especially when structural forces (lower population rate of growth, and less employees ), may affect the pace of future economic growth, to lower rates, or in the pessimistic side of the matter, stagnation. Beyond macroeconomic variables, productivity gains also arise from microeconomic ones. This is the reason economist usually ask for reforms, aimed at the microeconomic side of the economy. Thus, improving efficiency of public sector organism, logistic and productive services, becomes relevant and necessary. However, management models and its decisions framework, are not considered, given the fact that most of the economic analysis , is based on the assumption that business are always efficient because of markets competition, which leads to optimization and maximization of return in specific sectors, where the benefit are the most related to other alternative ones . Ronald Coase , made this point quite clear when stressed that the transaction cost of organizations, should be lower than any competitor to justify its use of resources , otherwise the firm is out of the market, because other more efficient ones take its place. But, what about management style which is applied on business?.Lack of productivity improvements ,also arise because of low quality management practices. Management take decisions about the use of inputs in the proper time and quantities, it coordinates its use and make possible value added throughout the whole production process. It develops the incentives for innovation and it is the last responsible for efficiency in the organization and the maximization of profits. The problem is that management practices, usually fall short of that requirements , and failure of management decisions, turns out to explain differences in productivity across countries(R Solow, MGI, September 2014).It also follows that whether management do not add up to productivity the way it is expected ,it means that somehow competition may not be the driving force of business practices as a whole ,which instead is focused in making sure some share of the rent arising from imperfect markets. So ,when it comes to productivity gains, it is not only about effective market competition, but also about better management skill, especially in those areas where productivity gap are higher.