I have just read an interesting piece produced by Mary Amiti and Kevin Stiroh at the Federal Reserve Bank of New York, called “Is the United States Losing it Productivity Advantage?”
Although it is not primarily about China, it does lead to some interesting conclusions that may help us to understand long-term growth prospects in China.I have always been worried that the educational, labor and regulatory rigidities in China, an instinctive protectionism and reluctance to see disruptive new entrants to the market, and a cumbersome process of continuous management and manipulation by politically-determined decision-making at both the central and provincial levels, while they may be useful (or at least not too harmful) in the early stage of Chinese economic development, would create serious barriers to groowth as the gap between China and the advanced countries narrowed.
The authors’ explanation of the failure of Japan and Europe to continue narrowing the gap with the US seems to support this theory. Their list of what has hampered further productivity growth in Europe reads, with the exception of “restricted foreign direct investment”, even better as a description of China (and I suspect that it is only a matter of time before FDI becomes an awful lot less welcome in China). Specifically they say:
Why is productivity growth in Europe and Japan slowing? One key reason is that these countries are nearing the end of a “catch-up” phase, after largely closing the technological gap with the United States, the country whose production efficiency defines the world’s technology frontier. Economic theory predicts that economies very far from the frontier with low productivity levels will experience relatively strong productivity growth for two reasons. First, when levels of capital per worker are low, capital is relatively productive, so it has a high marginal product and makes a substantial contribution to labor productivity growth. Second, firms have the ability to imitate the latest technologies and production processes to which they are exposed through foreign direct investment or collaborative ventures. As economies approach the frontier and productivity levels rise, however, the marginal product of capital falls, imitation becomes harder, and achieving relatively fast productivity growth rates proves increasingly difficult. This progression toward the technology frontier helps explain why productivity growth in the 1990s in Europe and Japan was much slower relative to the United States than it was during the 1960s.
A second reason for slower productivity growth in Europe is that the labor and product market frictions that characterize many European economies may have become more binding. In a recent report on European policy reforms, the Organization for Economic Co-operation and Development (OECD 2006) highlighted a number of these frictions: barriers to entry in product markets and other regulations that inhibit competition, administrative burdens on new business formation, widespread public ownership, restricted foreign direct investment, limited financing structures for research and development, weak protection of intellectual property, excess regulation of the financial sector, and agricultural supports.
While these types of labor and product rigidities have long been a feature of many European economies, recent research summarized by Aghion and Howitt (2006) suggests that it is the interaction between an economy’s place in the catch-up process, its use of new technologies, and the flexibility of its markets that determines how fast its productivity will grow relative to the frontier. At low levels of productivity, the positive catch-up effects dominate, and countries may grow fast relative to the frontier. Closer to the frontier, however, market rigidities become more of a constraint, reducing the economy’s ability to innovate, make technological advances, and reallocate resources efficiently. In sum, market rigidities and institutional factors are more of a detriment to productivity growth for those countries that have achieved relatively high levels of productivity and are near the technological frontier.
There is considerable evidence, for example, that European economies have been less able to benefit from the information technology revolution since the mid-1990s. For example, one recent study (Inklaar, Timmer, and van Ark 2007) compares the growth rate of total factor productivity (TFP), a common measure of the overall efficiency of production, in the service industries of major European economies and the United States. The performance of service industries in this respect is particularly revealing because they are intensive users of IT and, in the United States, have played a key role in the recent resurgence of productivity growth. The study shows a stark divergence in TFP growth in the service industries of these countries, with slow growth in European services and much faster growth in the United States. The authors find no single factor, such as product market regulation, that would explain this divergence, but suggest that the difference in performance is linked to organizational structure, management, and workplace practices.
In the very first stage of the "catch up" phase, especially for labor-intense emerging markets, capital is so scarced and empowered with a magical power. Productivity per worker will be tremendously improved even with a moderate rise in capital per worker. But when the capital increases and accumulates, and with the workers skill level remains constant, the marginal product brought by capital will diminish. That's the problem Chinese economy is experiencing now. Although China and India are both enjoying rapid growth rate in labor productivity and TFP. The growth of China's is more capital-and-investment-consuming. Which means the growth of productivity is less efficient.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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) highlighted a number of these frictions: barriers to entry in product markets and other regulations that inhibit competition, administrative burdens on new business formation, widespread public ownership, restricted foreign direct investment, limited financing structures for research and development, weak protection of intellectual property, excess regulation of the financial sector, and agricultural supports.
Comments (1) for "Long-term productivity growth"
January, 2008