Asian economies and the E.U. newcomers are becoming more efficient and higher efficiency is translating into higher incomes, with China and Poland leading the way, according to the new Conference Board survey, reports the Financial Times.
The strong performance of China and other Asian economies in boosting gross domestic product per hour worked has raised living standards of Asian societies closer to those of the US and some smaller European states…China’s productivity grew by 8.4 per cent in 2004 – the most recent year for which internationally comparable figures were available – the fastest rate of all important world economies. China’s productivity explosion reflects, in part, its extremely low level of output per hour worked, which allows it to catch up with the rest of the world.
But while Asian economies are leading the way, Western Europe is falling behind.
Europe’s problems, were, however, confined to the 15 long-standing members of the EU. Productivity in the 10 new members, mostly in Eastern Europe, grew rapidly last year, rising by 6.2 per cent as they took advantage of EU membership to boost output and employment.
In management and economics courses increased productivity is most often linked to things like technology, management practices, and specialization. Specialization is particularly important – one of the greatest [if not the greatest] contributions of Adam Smith to the field of economics has been his advancement of the division of labor concept. Workers who become experts in their own field, Smith argued, can become more efficient in performing certain tasks, thus increasing output per unit of time. Trade helps facilitate specialization, as it allows people to specialize in producing certain goods (and services) and trade for goods (and services) that others are more efficient in producing.
New institutional economics has provided us with insights into other important aspects of higher productivity – incentives and the enabling environment issues. The overall environment within which companies operate matters a great deal. Corruption is a great example. In countries with weak political and economic institutions, where corruption is rampant, firms (entrepreneurs) have to spend their time and resources on dealing with corrupt government officials. Since time and resources are scarce, they are diverted away from productive activities. Also, high levels of corruption can discourage FDI, which means it can deprive countries of useful technological and managerial know-how which come with foreign investment. Corruption can also distort the incentives in the workplace – in corrupt environments competition between workers is less about “who is more productive” and more about “who do I know,” which means it is not always the most productive person who is hired to do the job. There are many other examples.
So, while things like technology are very important in increasing worker productivity and economic growth we should keep in mind that institutions within which firms that employ workers operate also matter. There is something to be said for why the new members of the E.U. outperform their Latin America counterparts. Another issue to consider, of course, is that it is a lot easier for economies with low worker productivity to post high gains than for economies where productivity levels are already high.
Published Date: January 18, 2006