| by R.M.B
Senanayake
( October 21,
2012, Colombo, Sri Lanka Guardian) Our capacity to produce goods and
services is determined by how much labour we have, how many hours workers work,
the workers’ skills and intensity of work, the amount of capital workers have
with which to work, and technology. Over time, due to changes in all of these,
our real GDP has increased.
Labour force likely
to stagnate
We have a large
population with a large percentage of the labour force at work. But increases in our labour force is now very
low - a mere 0.1% in 2011 from 48.1% in 2010. The labour force in 2011 was 8.24
million. It comprised 7.89 million employed persons and 0.34 million unemployed
persons. We seem to be reaching saturation as regards the availability of
labour and any further increase is likely only from the female participation
rate in the economy, through more women entering employment. We can of course
increase the number of working hours but
it is regulated by law to 45-48 hours per week. During their early development
the workers in Japan and Korea worked for 55 hours per week. We also have far too many holidays and
excessive leave entitlements. These reduced hours of work means lower growth.
Poor savings
growth
The amount of
accumulation of physical capital affects the productivity of the workers. In
other Asian countries the fall in the growth of population has led to an increase
in household savings which could be used to fund more investment. But this has
not happened in Sri Lanka and the increase in domestic savings including the
savings of those employed abroad is
still an abysmal 20% whereas China has 50% and India 35%. Our welfare state
provide for the people, services which eliminate their need to save for
sickness, education and old age. But owing to foreign direct investment and our
openness to the world, the workers have significantly larger amounts of capital
and have adopted new ways of producing and organising production. Increases in
physical capital in the form of machinery, buildings, roads and bridges have
been largely funded by foreign loans and since the country achieved middle
income status, we have seen an increasing share of commercial borrowings and
special bilateral loans from countries such as China. The private sector still
contributes to the bulk of the investment but there is increasing doubts
whether the government investment is producing returns or is wasteful. The
right sort of public infrastructure spending could raise returns to the private
sector. But both types of investment should be governed by market prices and
market returns.
Productivity
matters
Productivity
growth is a crucial source of growth in living standards. Productivity growth
can be defined as the adding of value to
production, meaning more income is available to be distributed. Productivity
also determines the competitiveness of our goods in the world market. Since
trade increases in growth and welfare we must promote free trade and to benefit
from it, we need to be competitive.
Continuous increases in productivity contribute to sustainable growth.
The quantity of labour matters less than work ethics and the quality of labour.
We have put a lot of resources into primary, secondary and university
education. But we have had poor returns to education. What matters most is
primary and secondary education rather than university education. We have
increased the numbers in university education and except for the medical and
engineering education, the returns are dismal. A large number of graduates are
unemployed. More investment in university education is in my view a waste of
resources.
Primary and
secondary education increases the productivity of the mass of workers, which is
what counts in a country whose comparative advantage at best, lies in light
manufacturing and low end services. Today there is a scarcity of workers and
most of the workers are drawn from the estate sector. We have also sadly
neglected the production of skilled workers like carpenters, plumbers,
bricklayers, masons among others. Many of them have gone abroad and we have
failed to train sufficient numbers to take their place. In fact putting more
resources into university education only worsens the income inequality. The
well-off are drawn from the university educated and so why pile on more funds
for university education? Let those who
hanker after it pay for it themselves for they stand to benefit. It is an
investment for them and like all investments they will not always succeed.
Productivity and
relative prices
Economists refer
to productivity in the firm, the industry or the whole economy as a reference
to minimising the use of inputs of labor capital and land to produce a given
unit of output. The individual firm takes the prices of its inputs; labor, raw
materials, land among others from the market. If the productivity of the firm
is to contribute to productivity in the industry or the macro-economy, the relative
pricing of these resources should be based on their relative scarcity in
relation to the demand for them. Where labour is plentiful the wages should be
low in relation to capital. We do not have an optimum pricing of factors of
production. We have distortions arising from government wage legislation such
as minimum wages; tax incentives by way of reduced duties for some capital
goods like machinery and equipment. But this distorts the relative cost of
capital in relation to labour. The over-protective labour laws make it
impossible to terminate contracts of employees who are not adding to
productivity. If a product can be made with less labour it should be legally
possible for the manufacturer to reduce such excess labour.
So it is useless
to talk of improving the productivity of labour in the work place since the
employer cannot make the necessary arrangements to increase productivity. From
the economy’s point of view what counts is the allocative efficiency of labour,
land and capital. It is also necessary that the exchange rate and the interest
rates are market determined to reflect the relative supply and demand
situations. Productivity also determines the competitiveness of our goods in
the world market. Since trade increases growth and welfare we must promote
freer trade with a free exchange rate, and to benefit from it we need to be
competitive. Suppose you buy a new
machine for your factory which is extremely efficient in producing a product
out of raw materials when raw materials
have to be imported ; if there are high tariffs on such import or there are
cumbersome government regulations on such imports then there may not be timely
and adequate raw material for the machine’s capacity which would result in the
operation being unproductive. Thus the
import of raw materials should be liberalised and the tariffs on them should be
low. Our ranking in education on every international indicator is poor.
We have a stiff
labour market which is not conducive to increases in productivity. Our stiff
labour market prevents the adjustment of wages to match productivity. But the
number of hours worked is regulated by law and the intensity of work depends on
the individual worker although norms could be set to be achieved by all
workers. Enforcing standards is difficult
since the ultimate sanction of termination of services is not possible.
There are also
obstacles to starting a business which discourage new entrepreneurs entering
the economic scene. There are inadequate facilities for small and medium scale
enterprises to raise money from a stratified and risk averse banking system.
There is also the ceiling on credit of 18% imposed by the Central Bank which
makes it difficult for SMEs to borrow money.
Measures of
productivity
Every
productivity measure, implicitly or explicitly, relates to a specific producer
unit: an establishment, a firm, an industry, a sector or an entire economy.
Productivity is a measure of the output produced by a unit of input.
Productivity is usually measured as a percentage of a specific unit such as
land or labour. Alternatively it can be expressed as maximising the output in
relation to a given input of resources. Economists talk of the productivity of
capital and labour or total factor productivity, which is really what matters for
sustainable economic growth.
A connected
concept is efficiency. Management efficiency is not the same thing as
productivity efficiency , which is usually measured as a function of all costs
(labour, land, among others) as a percentage of sales. To do a 20-minute job in
10 minutes is productive and efficient. To do a 20-minute job in 20 minutes is
just productive. Efficiency is also important since it affects productivity of
the firm and the industry. It is based on materials spent in production. Lesser
the time, and energy materials are used to produce the product, higher the
efficiency. Efficiency is a measure of waste in a system.
The economic
theory of productivity measurement is based on productivity measures in a
production-function context and linked to the analysis of economic growth. The
field has developed considerably since Tinbergen and now offers a consistent
approach that integrates the theory of the firm, index number theory and
national accounts. Robert Solow’s growth accounting approach identifies the
contributions of different inputs to output growth.
Growth not
sustainable without increase in productivity
There is much
hype about the 8% growth rate for two years in 2010 and 2011. Growth was based
on infrastructure investment. But there is no cost-benefit studies to show how
productive the capital or the labor
employed in such projects is.
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