Wednesday, February 02, 2011

Defining Real Productivity

I read that again! Someone just said "The productivity of developed market work-force is higher than developing market work-force." And it irritated me again. It is time to refine the concept of productivity. 

Why is it irritating?
Let us imagine two fellows, one out of shape banker who rides a car, while other, a physically fit cyclist Lance Armstrong-like fellow. Now the banker can definitely ride longer, faster than our Lance Armstrong. 

But that does not say anything about physical potential of the two competitors. If we want to choose one of them as a contender for survival course, it would be impossible to choose based on this view. Rather, the only thing it shows us is the difference between availability of productivity enhancing capital investments.

In terms of economies, what such a difference in labour productivity implies is the need for investment. In other words, it shows us that the developing economy in question needs capital infusion for being competitive.

We need to measure Real Productivity
I think we need another variable. Let us call it "real productivity". This variable will be designed to be used while comparing two economies at different points in the development scale. This should help us understand various things including ability of the workforce to adapt to change, ability to deliver variety of work, etc.

Real Productivity will, possibly, refer to volume of various types of work achieved in one day adjusted for capital assistance. It will be profile (distribution) of workforce against predefined job categories. The job categories on one side will be highly knowledge intensive and on the other end will be highly physical oriented. The profile of developing country workforce will be bottom-loaded while that of developed country will be top-loaded. Somewhere between the two extremes of the distribution lies an important threshold. Below this threshold the factor limiting the workforce is external or opportunity related like financial capital in the form of equipment and machinery. In other words by bringing the capital it is possible to improve productivity. Above the threshold, the factors limiting productivity are structural in nature - like education or skills. These factors take long time to change and cannot be resolved easily. At the threshold is a chasm that can be bridged only through proper policy direction and grass-root efforts. Whether a country (i.e. economy) crosses this chasm depends on quality of their government. The differences across the chasm are not easily bridged and hence the competitive advantage is not under threat. However, if an economy has already crossed the chasm it can pose a significant threat as the factors differentiating it with other economies are easily corrected.

The assumptions that most people make is that developing country workforce is still across this chasm. That is where I do not agree with them. If not India, China and Brazil have already crossed the chasm. It is only a matter time before they catch up with other developed economies. Having said that, it is possible to back-track across the chasm as well. A political unrest and upheaval tends to set the nation back.  

In sum
We need a new metric to understand the changing economic landscape of nations. A "real productivity" variable as we discussed should improve our understanding of this economic landscape.