The Indian Economy Blog

January 18, 2006

India’s Productivity Performance

Filed under: Business,China,Growth,Human Capital,Labour market — Edward @ 1:01 pm

The US-based Conference Board has a new report out on global productivity (hat tip to New Economist). The core message of the report is the following:

Most countries in the developed world (North America, Europe and developed Asia) experienced a slowdown in productivity growth rates in 2005…Countries at the higher end of the global productivity spectrum are mainly emerging markets, including Eastern and Central European economies – e.g. Poland (7.7%). While Mexico’s productivity growth rate was relatively low at less than 1% per year both in 2004 and 2005, Korea (2.6%) and Turkey (3.7%) remained at the higher end of OECD countries. But India and in particular China showed much faster productivity growth at 4.4% and 8.4% respectively in 2004.”

The rapid growth in productivity in the emerging economies is not too hard to interpret, there is some kind of ‘technological catching-up’ going on. Also as these economies move out of agriculture, through industry and on towards services there is again is a constant productivity bonus.

The India-China comparison is also not too hard to interpret:

India’s slower productivity growth (4.4% in 2004, and 4.1% on average from 2000-2004) should be seen in the perspective of faster employment growth at about 2% during recent years, which is double the growth of labor input in China. China experienced a similar phase of moderate productivity growth during the late 1980s and early 1990s.

This is again exactly what demographic dividend theory would lead you to expect. There are two plusses to changing age structure. The first is a compositional one: as the working age population becomes an increasing part of the population and consequently labour force participation rates rise. The second is a “behavioural one”: as the core of the ‘thickest generations’ move up the age ranges they acquire more experience, in the jargon ‘there are a greater proportion of prime-age workers’, and so naturally productivity rises.

What we are seeing at present is the dominance of the former effect in India, and the dominance of the latter one in China. In terms of the demographic ‘window of opportunity’ India is now where China was in the late 80′s and early 90′s. This can be seen clearly by looking at the respective median ages: China 32.26 (fast approaching the US at 36.27) while India is still only 24.66 (collectively that is).

1 Comment »

  1. This is very interesting toknow that we are presently standing in a station where the Chinese were once standing and hence will be in a position to get into a train as faster.The averege age of working population is bound to increase with the economic growth picking upnow and we shall immensely benefit from the demographic dividends. Thanks for the good news.
    mscrao@gmail.co.in

    Comment by mscrao — January 18, 2006 @ 10:50 pm

  2. Ed

    I know there’s been some discussion in the US about the

    a) slower productivity growth in the services sector vis-a-vis manufacturing and/ or
    b) difficulties in measuring productivity in the services sector

    Are these issues relevant in the Indian context? Both on a stand-alone basis, and on a relative basis vis-a-vis China, given that services forms a much larger chunk of GDP in India?

    Comment by Prashant Kothari — January 19, 2006 @ 8:04 am

  3. I don’t think productivity is an important factor, at least too early to discuss for countries like China and India, which is in the very early stage of industrialization. Infosys cannot employ all indians, can it? For the mass to benefit, you first have to build up a lot in those labor-intensive low-skill indutries.
    Four tigers’s growth was mainly driven by capital deepening, and I think their strategy is still the right way to follow.

    Comment by R-Squared — January 20, 2006 @ 1:22 am

  4. With lower education levels in India and no hint from policy makers of opening up manufacturing for unskilled and semi-skilled workers, I doubt employment growth and so the low 4%+ productivity growth can be sustained. To track China’s growth, even with a 10 year lag, lot of things have to go right beyond wishful thinking.

    Comment by Chandra — January 20, 2006 @ 3:15 am

  5. India has the demographic advantage but seems all set to squander it will lack of infrastructure.

    Demographics alone cant do any good … for eg: Ivory coast may boast a median age of 27 which is not going to alter the macro economic situation a great deal.

    The productivity figures speak for themselves.

    Comment by Navin — January 21, 2006 @ 12:25 am

  6. “Demographics alone can’t do any good”

    I don’t think I’m suggesting that it’s that simple. I think demography opens a window of opportunity, you can take it or leave it. eg Iran right now is in danger of missing the modernisation bus completely, Russia already has.

    But demographics can allow you to open a virtuous circle. India has set out on this process. There are no guarantees. Mistakes can and will be made. Could things be being done better? Of course they could. Read Atanu. In fact India is no exception here, none of us are perfect.

    But all this is not simply an ‘effort of will’. There are things like necessary and sufficient conditions. What the Conference Board is getting at is that even if it wanted to India couldn’t be where China is now, but it can get there. (More education ,and in particular more resources devoted to female education is part of the getting there story). Not only can it get there, it can get there and beyond, since China has many political and cultural disadvanges which India may not have, at least not in the same way. Like excessive conformism :).

    Comment by Edward — January 21, 2006 @ 1:51 am

  7. “slower productivity growth in the services sector vis-a-vis manufacturing”

    Really this is Baumol’s idea, but it is an old one. He was really thinking about labour intensive services like education and health, and of course in situations were labour is inherently expensive, this is not the Indian case. He felt as economies became more services oriented productivity growth would slow. This has not been the case.

    “difficulties in measuring productivity in the services sector”

    This is also true, but again in the former context, especially where there is no ‘marketable’ end product.

    The services sector in India is not so hard to quantify I would have thought, although you continually have the issue of estimating the value of ‘new products’ to make comparisons.

    Comment by Edward — January 21, 2006 @ 1:57 am

  8. “I don’t think productivity is an important factor”

    Well, at the end of the day it is what determines income per capita.

    “For the mass to benefit, you first have to build up a lot in those labor-intensive low-skill industries.”

    Yes, but if you are moving people out from low productivity agriculture to these industries (or from unemployment, or from low-productivity service wallah-work – Prashant, I forgot about all this, this is the low productivity, hard-to-measure part of the Indian economy) then you INCREASE productivity. Productivity change is always relative to something.

    Chandra,

    “To track China’s growth, even with a 10 year lag, lot of things have to go right beyond wishful thinking.”

    Well, let’s think wishfully as hard as we can shall we, and cross our fingers, and tie a knot in our handkerchief :).

    I still buy it. Try and imagine seeing where China is now back in 1996, that is the point.

    Comment by Edward — January 21, 2006 @ 2:05 am

  9. “Well, at the end of the day it is what determines income per capita.”

    income per capita is determined by capital intensity, labor quality, and productivity. Productivity is not the only one factor, and if you examine the history of four tigers, the grwoth of income per capita is mostly credited to capital deepening, not productivity (efficient use of capial and labor)

    Comment by R-Squared — January 21, 2006 @ 2:35 am

  10. Edward, I do have my fingers crossed :) And getting tired of it!

    Almost two years have passed with no major change to reform the economy – blame the commies all you want, but the leaders – PM and FM – sit on their backside holding on that power with nothing to show for (backtrack on fertilizer subsidies provides a hint).

    So this economic tamasha (of talk but no action) will go on for three more years. Did we say 10 years behind China? Make that 15. Hopefully things will change then for the better – fingers crossed :)

    Comment by Chandra — January 21, 2006 @ 5:17 am

  11. Chandra:

    “Almost two years have passed with no major change to reform the economy”

    I understand your frustration. But, since I normally like to look on the brighter side of life, remember this: doing nothing is better than doing something bad. If an economy really is a self-organising system, then the politicians simply sitting on their backsides isn’t 100% bad. More to be feared might be some initiative or other on their part.

    And despite all this India does seem to continue to grow.

    If I was Galileo, I would walk out of the economists’ convention and mutter “Eppure si muove”.

    “R-squared:

    “income per capita is determined by capital intensity, labor quality, and productivity.”

    Well……….. it isn’t really that simple. But then, nothing ever is.

    Capital intensity depends. It depends as you rightly say on how the capital is used. If you look at the old Russian (and to some extent modern Chinese) models of a command economy, then a lot of investment in ‘heavy industry’ did take place. It wasn’t very efficient though, so people largely remained poor.

    China has a huge amount of investment going on at the moment. One day we will be able to see just how much of this has actually been profitable (ie productive) and how much ends up as bad loans in the banking system. I think this is still an open question.

    Incidentally, capital deepening is often assumed to be a solution to the developed OECD economies’ problem of population ageing. Again this is more complicated, since there is also a problem of diminishing returns.

    So capital investment, per se, simply isn’t enough to tell you anything on its own. It may however be a good proxy to indicate that some other very important things are happening. This was the Japanese case, it was the case with the original Tigers (not the Tamil ones), and it is in large part the case now in China, Turkey and Chile.

    This something else is what I am calling the virtuous-circle demographic transition modernisation process. By modernisation I understand a series of changes at the institutional level, and at the individual and cultural levels in terms of how people see things.

    Essentially I am arguing that the modernisation process is endogenous to the demographic transition itself. The most obvious example of this is female emancipation, which arises in large part as women get more education and also get more control over their reproductive lives.

    This has the impact of increasing female participation rates in the economy (which of course sends up per capita incomes), changes the nature of domestic partnership, and leads to an increasing investment in quality over quantity of offspring, which of course indirectly improves the labour quality element you mention.

    “and if you examine the history of four tigers, the grwoth of income per capita is mostly credited to capital deepening, not productivity (efficient use of capial and labor)”

    You would be referring to an old argument of Paul Krugman’s view here. You will also probably be aware that Alwyn Young famously had a differnt opinion. In fact this topic has been widely debated, and their are views to suit all tastes. Here’s a paper which I think gives a good summary of where the issue is now among those who have been giving most thought to the problem:

    http://www.kansascityfed.org/Publicat/sympos/2004/pdf/BloomCanning2004.pdf

    Comment by Edward — January 21, 2006 @ 11:07 am

  12. “Capital intensity depends. It depends as you rightly say on how the capital is used. If you look at the old Russian (and to some extent modern Chinese) models of a command economy, then a lot of investment in ‘heavy industry’ did take place. It wasn’t very efficient though, so people largely remained poor.”

    We always need to think about the conterfactual, that what would had happened had they not invested in heavy industries. Russia and China is certainly poor compared to rich countries, but much better off than India, and much better off than when they started in 1920s and 1950s. It is certainly perfect if you can get productivity growth, but it is easier said than done. And when you cannot get the perfect, doing something is better than doing nothing.

    By the way, when you get bad loans, it doesn’t mean that some wealth is burned away.

    Let me give you an example: I have one apple, and I decide to loan it to you and you promise me to return two apple to me at the end of the peroid. You plant the seed (let’s assume for simplicity that you cannot eat the apple without destroying the seed), and grow an apple tree with four apples in the tree. Then, either (1) you harvest them and run away from me (2) Your neighbors come at night and quietly eat them all. The result is that I have bad loan. But for the society this “project” produce four apples of benefit out of one apple.

    However, if I decide not to loan you the apple, eat it (with the seeds), there will be no bad loans, but no benefit for the society, either. This is what happens in Inida, the banking sector doesn’t lend to any risky (but socially productive) projects. No one invest, and no bad loans. In China, government-owned banks build roads, power plants, steel plants, etc, and somehow borrowers manage not to pay back the loans, but it doesn’t mean that these roads and plants just vanish. It is actually very difficult to create a 100% loss project. you tell me one example.

    Comment by R-Squared — January 27, 2006 @ 1:20 pm

  13. India can achieve similar growth rate as in china if she tackles the problem of unemeployment. The present growth rate is satisfactory as a beginning stage towards growth but istead of maintaining should go ahead by creating political stability. By giving more attention to the agricultural sector by utilizing the technical and industrial know how, India can grow fast to the dream of 21 st centuary within one decade

    Comment by Dr. PM. Kuriachen — March 17, 2006 @ 2:00 am

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