Jun 24th 2015

America, China, and the Productivity Paradox

by Stephen S. Roach

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of a new book Unbalanced: The Codependency of America and China.

NEW HAVEN – In the late 1980s, there was intense debate about the so-called productivity paradox – when massive investments in information technology (IT) were not delivering measureable productivity improvements. That paradox is now back, posing a problem for both the United States and China – one that may well come up in their annual Strategic and Economic Dialogue

Back in 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere except in the productivity statistics.” The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance. Average annual productivity growth in the country’s nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years. The benefits of the Internet Age had finally materialized. Concern about the paradox all but vanished.

But the celebration appears to have been premature. Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all

Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.

China is witnessing a similar pattern. Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million. Moreover, hiring seems to be holding at that brisk pace in early 2015.

At the same time, output growth has slowed from the 10% trend of the 33 years ending in 2011 to around 7% today. That downshift, in the face of sustained rapid job creation, implies an unmistakable deceleration of productivity.

Therein lies the latest paradox. With revolutionary technologies now driving the creation of new markets (digital media and computerized wearables), services (energy management and DNA sequencing), products (smartphones and robotics), and technology companies (Alibaba and Apple), surely productivity growth must be surging. As a modern-day Solow might say, the “Internet of Everything” is everywhere except in the productivity statistics.

But is there really a paradox? Northwestern University’s Robert Gordon has argued that IT- and Internet-led innovations like automated high-speed data processing and e-commerce pale in comparison to the breakthroughs of the Industrial Revolution, including the steam engine, electricity, and indoor plumbing. He maintains that, although these innovations led to dramatic transformations of the major advanced economies – such as higher female labor-force participation, increased transportation speed, urbanization, and normalized temperature control – these changes will be extremely hard to replicate.

Indeed, as taken with today’s revolutionary technologies as we are – I say this staring at my sleek new Apple Watch – I am sympathetic to Gordon’s argument. If US productivity figures are to be taken at anything close to face value – a persistently sluggish trend interrupted by a 16-year spurt that now appears to have faded – it is possible that all America has accomplished are transitional efficiency improvements associated with the IT-enabled shift from one technology platform to another.

Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true, especially in the light of promising advances in biotechnology and online education. But this overlooks a much more important aspect of the productivity-measurement critique: the undercounting of work time associated with the widespread use of portable information appliances.

In the US, the Bureau of Labor Statistics estimates that the length of the average workweek has held steady at about 34 hours since the advent of the Internet two decades ago. Yet nothing could be further from the truth: knowledge workers continually toil outside the traditional office, checking their email, updating spreadsheets, writing reports, and engaging in collective brainstorming. Indeed, white-collar knowledge workers – that is, most workers in advanced economies – are now tethered to their workplaces essentially 24 hours a day, seven days a week, a reality that is not reflected in the official statistics.

Productivity growth is not about working longer; it is about generating more output per unit of labor input. Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.

China’s productivity slowdown is probably more benign. It is an outgrowth of the Chinese economy’s nascent structural transformation from capital-intensive manufacturing to labor-intensive services. Indeed, it was only in 2013 that services supplanted manufacturing and construction as the economy’s largest sector. Now the gap is widening, and that is likely to continue. With Chinese services requiring about 30% more workers per unit of output than manufacturing and construction, combined, the economy’s structural rebalancing is now shifting growth to China’s lower-productivity services sector.

China has time before this becomes a problem. As Gordon notes, there have been long-lasting productivity dividends associated with urbanization – a trend that could continue for at least another decade in China. But there will come a time when this tailwind subsides and China begins to converge on the so-called frontier of the advanced economies.

At that point, China will face the same productivity challenges that confront America and others. Chinese policymakers’ new focus on innovation-led growth seems to recognize this risk. Without powerful innovations, sustaining productivity growth will be an uphill battle. China’s recent shift to a slower-productivity trajectory is an early warning of what may well be one of its most daunting economic challenges.

There is no escaping the key role that productivity growth plays in any country’s economic performance. Yet, for advanced economies, periods of sustained rapid productivity growth have been the exception, not the rule. Recent signs of slowing productivity growth in both the US and China underscore this reality. For a world flirting with secular stagnation, that is disturbing news, to say the least.


Copyright: Project Syndicate, 2015.
www.project-syndicate.org

 


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