Why productivity gains remain elusive, for both the US and China

Stephen Roach says there are good reasons for the seeming contradiction of sluggish productivity amid a tech revolution, both in the US and China

PUBLISHED : Friday, 26 June, 2015, 11:33am
UPDATED : Thursday, 30 March, 2017, 3:19pm

In the late 1980s, there was intense debate about the so-called productivity paradox - when massive investments in IT were not delivering measureable productivity improvements in the US. That paradox is now back and this time it is posing a problem for both the US and China.

Despite another technological revolution, over the past five years, annual US productivity growth has fallen to an average of 0.9 per cent, from an average of 2.5 per cent from 1991 to 2007. China is witnessing a similar pattern.

With revolutionary technologies now driving the creation of new markets, services, products and technology companies, surely productivity growth should be surging. But is there really a paradox? Northwestern University's Robert Gordon has argued that IT- and internet-led innovations pale in comparison to the breakthroughs of the Industrial Revolution.

Indeed, as taken with today's revolutionary technologies as we are, if US productivity figures are to be taken at anything close to face value, it is possible that all America has accomplished are transitional efficiency improvements.

Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true. But this overlooks a much more important aspect: the undercounting of work time associated with the use of portable information appliances.

The US Bureau of Labour Statistics estimates the length of the average working week 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, a reality that is not reflected in the statistics. Productivity growth is about generating more output per unit of labour input. Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.

China's productivity slowdown is an outgrowth of the economy's nascent structural transformation from manufacturing to services. Chinese services require about 30 per cent more workers per unit of output than manufacturing and construction combined.

China has time before this becomes a problem. But at some point, China will face the same challenges that confront America and others. Policymakers' new focus on innovation-led growth seems to recognise this risk.

There is no escaping the key role productivity growth plays in economic performance. Yet, for advanced economies, periods of sustained rapid productivity growth are the exception. For a world flirting with "secular stagnation", that is disturbing news.

Stephen S. Roach is a faculty member at Yale University and former chairman of Morgan Stanley Asia. Copyright: Project Syndicate