SPAIN – An election fraught with uncertainty2019/04/23
The productivity enigma (part 2)
Pondering the reasons for the trend slowdown in productivity means asking whether or not future prosperity will be consonant with growth. As we saw in the first of these articles, the exhaustion of productivity gains is a powerful trend in every country and cannot be explained entirely by measurement issues arising from the digital technology boom. So the explanation needs to be found elsewhere, notably by probing the deep scars left by the crisis.
The crisis and its scars
We have already mentioned the chronic lack of demand, partly due to balance sheet adjustments that curbed spending and promoted deleveraging while reducing investment opportunities. More basically, the driver for productivity stems from a process of innovation that is usually initiated by market-leading companies; it then trickles down to the laggards – firms forced to adopt these new, more effective technologies in order to make production processes more efficient and stay competitive, or otherwise go out of business. The technical advances behind this process of creative destruction, a term coined by Joseph Schumpeter in 1942, are driven by investment, which is also the main channel through which they spread. The process described by Schumpeter goes hand in hand with the transfer of labour to the most productive sectors that seek to hire at generally higher wages, thereby raising the overall level of productivity by disseminating skills and expertise.
With the onset of the crisis, however, that process of dissemination and professional mobility was hampered by high unemployment and, in some countries, plummeting real estate prices. In addition, a series of financial shocks between 2008 and 2012 undermined banks’ balance sheets. In particular, the simultaneous bursting of property and credit bubbles, combined with a swingeing recession, triggered a wave of defaults at a time when regulatory requirements were being tightened. This dried up the credit supply, thus making a lasting impact on the ability to finance new investments, particularly by innovative firms, which are deemed riskier. Post-crisis, the lack of customer markets also put a damper on lending and reduced the need for new investments.
And yet central banks were hard at work, taking increasingly unorthodox policy routes to maintain ultra-accommodative monetary and financial conditions and a healthy credit supply. At the same time, keeping interest rates at rock-bottom over an extended period reduced the cost of carrying nonperforming loans. The banks most exposed to these loans were able to prop up inefficient companies, which would otherwise have gone under, in order to postpone the process of loss recognition while betting on a “resurrection”. The omnipresence of so-called zombie companies, which consume scarce resources and squeeze out the most innovative firms, resulted in a mis-allocation of capital, and is probably one of the reasons for the overall drop in productivity. More generally, the combination of increasingly over-cautious banks, which were subject to regulatory constraints, and financially vulnerable companies operating amid a recession and then a sluggish recovery seriously hindered a technological catch-up that could have spurred widespread productivity gains.
Moreover the widening gulf between market-leading companies, which are highly productive and at the cutting edge of technology, and low-productivity laggards has prompted a fresh look at rising inequality, with pay gaps that generally reflect these productivity differentials. This is because higher productivity is quite simply an indicator of a country’s increasing wealth, with wages that rise at the same pace.
These cyclical shortcomings should not be impossible to overcome once the effects of the crisis have abated, although the fact that they have lasted so long has caused hysteresis, the effects of which will take longer to eradicate.
Secular stagnation or secular innovation?
Long-term forces also seem to be at work, centring on a divisive debate that pits supporters of secular stagnation against those who support secular innovation. One group believes the digital era has more to do with a change of habits and a transformation in the way people consume and communicate; they see new concepts and ideas being developed that renew the customer experience but have no power to significantly increase the amount of wealth produced per worker, the wellspring of growth. The other group sees digital technologies as an all-out industrial revolution that is creating waves of innovation at an ever faster pace, with consequences in terms of productivity and growth that could play out for several decades. Implicit in this is a set of questions about the nature and speed of technical progress and the sectoral impacts on employment.
The sharp expansion resulting from the “hardware, software and networks” aspect of the infotech boom has gradually lost momentum, even though digital advances are still accelerating: robotics and the advent of exoskeletons are making factories smarter; 3D printing has revolutionised production methods; artificial intelligence enables chatbots to learn from and converse with human beings, massively increasing the robots’ analytical and prediction capabilities; and the internet of things, with its intelligent and connected sensors, is producing vast amounts of big data that can be used for predictive analysis and operational or strategic decision support.
Even so, these breakthrough technologies may not fulfil all their promises for growth and productivity. The development of Industry 4.0 is bound to raise productivity levels through labour cost savings in industries where machines will replace humans (i.e. the substitution of capital for labour). Yet channelling labour into the services sector, considered less productive, will have a structural effect that could dampen overall productivity, with a large proportion of lower-yielding activities. The process is already underway, and tomorrow’s post-industrial societies could be characterised by hyper-productive industries that are capital-intensive but labour-light, alongside a bloated and labour-intensive services sector. That said, the possibilities for computerising and automating cognitive tasks – including in the tertiary sector – are jeopardising intermediate jobs based on skills that can now be learned by digital technologies. In consequence, the labour market is tending to polarise between, on the one hand, skilled jobs that need non-digitisable capabilities (such as creative flair, relational intelligence or a command of new technologies), which can capture or create value; and, on the other hand, uberisation – the proliferation of casual and underpaid jobs in convenience services with flexible working hours. As a result, income gaps reflecting productivity differences are likely to widen along with technological changes skewed towards capital and skilled labour. In all likelihood, the wealth produced in highly capital-intensive sectors will be largely harnessed in the form of profits, dividends and capital gains by the owners of the physical capital. In the services sector, incomes will be concentrated in the hands of “talents”, a minority with coveted and high valued-added skills, as opposed to the hordes of conventionally skilled workers. The latter, currently representative of the middle classes, will see their wages aligned with low productivity levels, thus adding to a persistent demand shortage because the people with the highest propensity to consume will likely face stagnating or declining wages.
Thus a period of secular innovation does not seem at odds with economic stagnation. This poses a real challenge to societies where growth and productivity have become the be-all and end-all of prosperity in the quantitative sense of the term. If new technologies bring affluence but fail to offset an increase in dispersion and inequality, then feelings of exclusion, malaise and downward social mobility are likely to run rampant through society and ultimately become unbearable. Dreaming of prosperity without growth is tantamount to believing in the romantic vision of futurologists who see the advent of an affluent society freed from growthism and wage-earning, a more environmentally conscious society where people live better and longer lives, and where economic activity is organised around exchanging and sharing.
Isabelle Job-Bazille, Economic Research Department, Crédit Agricole SA