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Demystifying the global productivity puzzle

Emerging economies like India are pushing ahead on innovation measures, while advanced economies see productivity declines. World Bank/Flickr

The Conference Board’s latest productivity measure shows efficiency remains a problem for the global economy - and interestingly that innovation, despite occurring, may not be helping.

The business research group’s report found productivity across the world slowed down for the third straight year. Emerging economies contributed 1.8%, a fair share, to the global growth while mature economies contributed 0.4%. Total factor productivity (TFP), that is, how well labour inputs combine with capital inputs to generate output, was also low, dipping below zero in 2013.

Source: Conference Board.

Global labour productivity growth (output per person) softened from 1.8% (2012) to 1.7%, retreating from its highs of almost 4% in 2010. In the US, labour productivity growth was stable at 0.9%, Europe dipped to 0.4% while the emerging economies also saw a dip to 3.3%. Australia saw a moderate improvement of 0.6% in 2013.

Source: Conference Board.

It’s important to remember that the numbers portray only one part of the story. For instance Spain, with a weak output (-1.5%) and reduction in hours worked (-2.8%), reveals a positive productivity growth story (1.4%). Australia’s productivity has steadily improved over the past 24 months by 2.7% but has started to see an uptick in unemployment as well. Hence it is important to be cautious when interpreting a productivity story.

Increased labour intensity (more people and hours worked) in many countries has improved economic demand conditions, although a translation into better output growth figures is yet to be witnessed. This only confirms the global outlook for investment and consumption has been quite cautious, but an improvement in global growth projections from 2.9% to 3.4% is expected in 2014.

The productivity slowdown has been attributed to many things, predominantly weaker demand, a mismatch in resource allocation between labour and capital, and, lesser than optimum innovation outcomes emerging despite technology advancements in mature economies.

The strong consumption patterns in the emerging economies of India and China will continue to add to their output growth. These economies are clearly transitioning from export-orientated growth to domestic-consumption led growth, which means a greater urbanisation trend as well as middle class growth creating more room for international service providers.

Australia’s innovation challenge

Unlike many other countries, Australia has had access to natural resources for decades. In layman’s terms this is what Australia was born with. A country either has this or it doesn’t. As they say, there is only so far one can go with brawn; you need to have the brains and the wit to succeed as well. This is Australia’s challenge.

Australia does possess pockets of innovation excellence that are world-leading. For instance, David Lindeberg suggests Australian businesses are leading innovators and his technology company Scantech is a case-in-point. But can this level of excellence be seen across many industries?

Looking internationally, in India 23% of patents are filed by the public sector in comparison to 8% in Australia and an OECD average of 6%. Despite India’s positioning on the global innovation index at 64 (Australia at 23), India’s share of the world research output is still marginally higher at 3.5% compared to Australia’s 3.2%. It is fair to say the pace of innovation may be slowing in developed economies and that is one detractor from productivity growth.

Alongside the pressure to create new products and services, companies are increasingly focusing on business model innovation (BMI). It is widely accepted that value creation through BMI can further enhance productivity levels. A finding by the Economic Intelligence Unit (EIU) from a global survey it conducted revealed that 54% of 4000 senior managers preferred BMI as a source of competitive advantage rather than new products or services. This finding has been echoed with a similar study conducted by IBM wherein it interviewed over 750 organisational leaders who confirmed that BMI was much higher on the priority list of CEOs, as a consequence of competitive pressures, than what was previously thought.

In the face of weakening commodity and natural resource demand, Australia needs to transition as well. Just as we have seen the mobile phone transition from Nokia in Finland, to Blackberry in Canada, to Apple in the US and now Samsung in Korea – the trend is clear, the shift from the West to the East has started.

For Australia, this means the next wave of economic transformation will come from delivering services that are not necessarily natural-resource driven.

Australia will have to compete with economies from Europe, North America and from Asia in the provision of these services – this is no secret. Sectors such as tourism, education, agriculture will become important and more prominent, but Australia has to recognise that it does not necessarily have an edge in some of these sectors when compared to rest of the world market.

From a monetary and fiscal policy perspective, there is a real risk in relying on lower interest rates to drive demand and long term growth. This approach has its limitations. At the same time getting governments to spend their way out into growth and prosperity does not always yield results.

Collaborator rather than producer?

As cliché as it sounds, a balanced midway strategy needs to be thought of and put into play – one that is less adversarial about the short term and more forward looking.

For Australia to be recognised as a valuable contributor in the region, it needs to enhance its own internal capability and become more aggressive in marketing itself.

It’s also important to recognise what worked in the past may not work in the future. Australia does not necessarily have to be the “producer” in order to sell its wares in the global market. It can realise value even if it has to identify new markets and opportunities by linking a producer in China with a service market in the US.

For example, the agribusiness sector is already investing in such efforts by blending domestically produced grain with that coming out of the Black Sea region and on-selling this grain to parts of Middle East and Asia. Such thinking must extend into other sectors of the economy as well.

In Cleveland in the US, non-traditional partners such as rival universities and hospitals joined up to pool billions of funds to transform the economic situation of its communities. Similarly in Atlanta, ten counties and business organisations joined together to raise regional taxes and issue an US$8 billion bond to promote economic growth.

This ethos of “collaborative competition” must extend internationally allowing innovation and new thinking to breed and for economies to move up the value chain of high-productive activities.

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