What does productivity look like?

I tend to think productivity growth in developed economies is so glacial that we’ve lost sight of what it looks like; it’s largely invisible. Indeed, only this morning, I had a conversation with someone who posited that perhaps the internet has not raised productivity at all. While, ultimately he thinks it has, there are clear arguments around time wasted, surfing and gaming, to say it hasn’t. In this sense the problems with internet gaming in Korea are clear negative externalities. I think the internet, however, must explain part of the strong productivity gains made by the US in the last 20 years despite the last 10 years.

Either way, it’s difficult to make the case that productivity improvement is substantial or readily observable to the naked eye, in the develope world. I don’t believe this to be the case in China. There are many ways in which productivity in China is increasing and I plan on demonstrating this; urbanisation, infrastructure and manufacturing. This morning I will focus on manufacturing.

Productivity growth in China
The best illustration of the remarkable impact China has had on global manufacturing markets is this chart: the price of an LCD TV. Unfortunately, the data finished in 2011 and is not being collected anymore. But evidence says price deflation has not stopped.

There are, undoubtedly, a number of drivers of this. These include technology and competition. But at the heart of this price decline is, surely, cheaper and cheaper manufacturing from productivity growth. How do we know it’s productivity growth? Well, wages are up 129% since 2006 while the RMB has appreciated over 35%. China’s ability to produce TVs more productively is extraordinary.

How’s this happened? I believe there are two big drivers: capital broadening, infrastructure, and capital deepening, automation.

Capital Broadening: Infrastructure
Infrastructure, particularly internal transport networks, significantly raises the competitiveness of export industries. For an Australian, a good example of this was used by Infrastructure NSW Chairman, Nick Greiner. He cited an NSW pastoralist who said his export transport costs were 80% getting the sheep to Botany Bay (300km or so) and 20% getting the sheep to the Middle East. By improving China’s domestic transport network, China has lowered the cost of its exported goods.

Capital deepening: Automation
The role of automation in capital deepening in China has been equally important in raising labour’s productivity. A good way of highlighting this is to look at wage outcomes for workers with and without robots.

Back in 2010 I returned from a trip to China to read stories about labour unrest, particularly at Honda sites in Southern China. As this NY Times story relates, Honda workers were earning less than RMB800 per month and were demanding more. Commentators used this to highlight the threat of rising wages to China’s model but missed the real story: Honda was uncompetitive in China but China was competitive globally.

From the start I was surprised and sceptical about the way the story was being reported. I had visited a BYD plant in the same region just a month previously where wages were RMB1,400 per month. If the data was true, I suspected only productivity could explain that difference.

I’d heard one of the key reasons why GM had been selected to partner Shanghai Automotive was the preparedness of GM to put robots into their Chinese factories. Toyota, on the other hand, refused, probably rightly, suspecting the threat of industrial espionage. My guess was that Honda had done the same. By refusing to automate the factory, labour was less productive and so could only be paid RMB800 if Honda was to maintain profitability. Conversely, BYD was more efficient at higher wages.

Last year, I met Honda in Tokyo and asked the question. Sure enough, they had limited automation in China for fear of espionage. As a result, they struggled to remain competitive in the Chinese market and were considering their production strategy. China’s success, in many ways, is down to their aggressive pursuit of productivity improvement through capital investment. This is driving lower costs and higher labour productivity: both of which will ultimately raise household consumption in the economy.

Implications
This is what productivity improvement looks like. There seem to me to be two key implications from this. First, it’s not too bad for the west as discussed in a recent post. Second, it’s going to be difficult for the manufacturing business, anywhere, to make a buck. This fits into the broad idea of this blog – an abundant material world with lots of capital but, with good policy, a labour scarcity.

One response to “What does productivity look like?

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